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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

For the fiscal year ended December 31, 2005

OR



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

For the transition period fromto

Commission file number 000-30741



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OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0442752                          
|(State or other jurisdiction or incorporation or organization) |  | (I.R.S. Employer Identification No.)
|77 Robin Hill Road Santa Barbara, CA                           |  | 93117                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (805) 692-2900



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Securities registered pursuant to
Section 12(b) of the Act: None

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

Common Stock, $0.001 Par Value



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer ̈Accelerated Filer ̈Non-Accelerated Filer  x

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

Based on the average bid and asked price on June 30, 2005 (the last business day of the registrants most recently completed second quarter),
the aggregate market value of the voting common stock held by non-affiliates of the registrant on such date was approximately $13.2 million. For purposes of this disclosure, the registrant has excluded shares of common stock held by directors,
executive officers and holders of 5% or more of the registrants outstanding common stock in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 8, 2006, the number of shares outstanding of the registrants common stock was 6,974,185 shares (15,871,341
shares including, 8,897,158 of common stock issuable upon conversion of outstanding Series A-2 preferred stock).

DOCUMENTS INCORPORATED BY
REFERENCE

Items 10, 11, 12, 13, and 14 of Part III incorporate certain information by reference from our definitive proxy statement to be
filed within 120 days of the end of our fiscal year in connection with our 2006 Annual Meeting of Stockholders (Proxy Statement). Except with respect to the information specifically incorporated by reference, the Proxy Statement is not
deemed to be filed as a part hereof.



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OCCAM NETWORKS, INC.

TABLE OF CONTENTS

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2005



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | PAGE
|         |  | PART I                                                                                                       |  |     
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 1A. |  | Risk Factors                                                                                                 |  | 13  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 23  
|Item 2.  |  | Properties                                                                                                   |  | 23  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 23  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24  
|Item 4A. |  | 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 |  | 26  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 27  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 28  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 36  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 36  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 36  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 36  
|Item 9B. |  | Other Information                                                                                            |  | 37  
|         |  | PART III                                                                                                     |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 38  
|Item 11. |  | Executive Compensation                                                                                       |  | 38  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 38  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 38  
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 38  
|         |  | PART IV                                                                                                      |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 39  
|         |  | Signatures                                                                                                   |  | 45  
|         |  | Index to Financial Statements                                                                                |  | F-1 

This Annual Report on Form 10-K contains forward-looking statements, These forward-looking
statements include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, the need for additional capital, and the outcome of pending litigation. These forward-looking statements are based on
Occams current expectations, estimates and projections about Occams industry, managements beliefs about the status and prospects for Occams business, and certain assumptions made by Occam. Words such as
anticipates, expects, intends, plans, believes, seeks, estimates, may, will and variations of these words or similar expressions are intended
to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These
statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, Occams actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors. The section entitled Risk Factors set forth in Part I, Item 1A. of this report, the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II, Item 7 of this report and similar discussions in Occams other filings with the Securities and Exchange Commission (SEC) discuss some of the important risk factors that may
affect Occams business, results of operations and financial condition. You should carefully consider those risks in addition to the other information in this report and in Occams other filings with the SEC before deciding to invest in
Occam or to maintain or increase your investment. Occam undertakes no obligation to revise or update publicly any forward-looking statements for any reason.



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PART I

ITEM 1. BUSINESS

Overview

We design, develop and market a suite of Broadband Loop Carriers (BLCs), which are Ethernet- and IP-based loop carrier platforms that enable
telecommunications service providers to offer a variety of traditional as well as Voice over Internet Protocol (VoIP) IP Television (IPTV) and Fiber to the Home (FTTH) services from a single, converged, all-packet
access network. In addition, we market a line of remote terminal cabinets to house our products in remote locations. We supply our products to local and regional telecommunications carriers, independent telephone companies and international
telecommunications carriers that deliver or wish to deliver voice, data, Internet access and video services to the residential, small and medium business and large enterprise markets over existing copper telephone lines and fiber-optic cable.

We design our products to alleviate the bottleneck currently experienced by many carriers in delivering voice and broadband
services from their central offices or remote locations to individual customer premisesthe network segment commonly referred to as the last mile or the local loop. We design our products with packet switching
technology, such as Ethernet and Internet Protocol, two of the fundamental components used to build the Internet. These building blocks are used to develop a family of integrated products that deliver voice, data, Internet access and video services
over either the local loops existing copper wires by converting each customer line into a broadband loop or over fiber-optic cable. We believe that our integrated solution to the local loop bottleneck will enable carriers to
consolidate, aggregate and integrate multiple, single-purpose network components, substantially reducing their capital expenditure requirements, streamlining their network, and reducing their operating costs. Deployment of our products could also
enable carriers to generate new revenue streams by delivering a wider variety of voice, data, Internet access and video services by virtue of the increase in available bandwidth.

We were incorporated in California in 1996 as Accelerated Networks, Inc. and reincorporated in Delaware in 2000. In 2002 we merged with Occam Networks,
Inc., which was incorporated in California in 1999. In connection with the merger, we changed our name to Occam Networks, Inc. Our principal executive offices are located at 77 Robin Hill Road, Santa Barbara, California 93117. Our telephone number
at that address is (805) 692-2900. Our website is www.occamnetworks.com. The contents of our website are not incorporated by reference into this Annual Report on Form 10-K.

Throughout this report, we will refer to Occam Networks, Inc. as Occam or Occam Networks. Occam Networks, Inc., the
California corporation acquired by Accelerated Networks in 2002 is sometimes referred to as Occam CA.

Industry Background

Existing Network Infrastructure

Todays wired
telecommunications infrastructure consists of three separate interconnected networks: the long-haul network, which provides long distance service and interconnects regional carrier networks; the metro network, which services a region and
interconnects carrier central offices; and the local-loop access network, which provides connectivity from the carriers offices to the customer. The local-loop access network consists of central offices, which house the carriers
telephone switches, customer premise equipment, and copper wire or fiber-optic cable that interconnects the central office and the customer premise. Some carriers have also deployed remote terminals that reside between the central office and
customer premise to shorten the length of the copper wire or fiber-optic cable between the customer and the carriers equipment.

Limitations of
Existing Telecommunications Infrastructure

The communications network has experienced significant growth and change during the past
decade as the exponential growth of networks and the Internet, and the accompanying increase in data traffic, have increased



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demand for high bandwidth communications networks. Telecommunications carriers have had difficulty, however, in meeting this increased demand for broadband
Internet access and other bandwidth intensive applications and services due to significant constraints of the traditional copper wire communications infrastructure. To begin addressing increased customer demand for higher bandwidth, carriers began
deploying high-speed optical networks in the long-haul and metro portions of their networks. However, a bottleneck continues to impede effective delivery of high-bandwidth services in the local-loop access network. Specifically, the existing local
loop infrastructure was originally designed for low-speed analog voice traffic rather than high-speed digital data transmission. Access to video over a dial-up modem is nearly impossible. The cost of rewiring individual customer premises with
fiber-optic cable to deliver higher bandwidth services, however, is both costly and time consuming. Thus, many telecommunications carriers have sought to employ alternative technologies to make more efficient use of the existing copper wire
infrastructure in the local loop.

Emergence of DSL for Broadband Access

In order to overcome the inherent limitations of copper wire in the local loop and meet the increased demand for broadband service, telecommunications
carriers began deploying new technologies. The most common of these technologies is digital subscriber line, or DSL, technology, which enables broadband access over the existing copper wire in the local loop. The actual amount of bandwidth delivered
to each DSL customer is dependent upon the distance between the customer location and the carriers DSL equipment. For example, for carriers to deliver the bandwidth to a customer with asymmetrical DSL, the customer must be located within
18,000 feet of the carriers DSL equipment.

DSL equipment can be located in a central office or in digital loop carriers, which are
in remote terminals, placed curbside primarily in residential areas. In order to provide DSL service to a customer whose first access point to the telecommunications network is through a remote terminal, the carrier must deploy DSL equipment in the
remote terminal.

Carriers have traditionally deployed separate network equipment in the remote terminal to deliver voice and DSL services.
Deploying separate network equipment is costly and, because of space constraints at the remote terminal, places significant limitations on the number of customers served. Carriers are seeking an integrated system for the delivery of voice and DSL
services in order to deliver broadband access to a larger number of customers while significantly reducing the total costs of DSL deployment and operation.

In recent years, carriers are increasingly looking to replace these copper connections in the last mile with fiber optic cable to provide higher speed internet and data services, as well as a variety of entertainment
services such as IPTV, video on demand, and gaming services. Depending upon the exact kind of electronics that are connected to this fiber optic cable, the data speeds offered, commonly referred to as bandwidth, is 10 to 100 times faster
than with copper cable.

Increased Competition in Telecommunications Services Market

As cable service providers enter traditional telecommunication markets, carriers are seeking to add additional high-bandwidth, high-margin services to
their networks, such as broadcast video and video on demand. In order to deliver video to residential customers, telecommunications carriers will be required to deploy the latest generation of asymmetrical DSL (ADSL2+) to provide enough bandwidth to
enable broadband transmission of multiple video streams over the local loop. ADSL2+ can simultaneously support two or three video channels to distances of 8,000 to 10,000 feet. A new technology, Very High Speed Digital Subscriber Line
(VDSL2) has been standardized and will offer higher speed services on shorter copper lines. The introduction of either of these DSL technologies in the local loop will likely result in broader deployment of remote terminals and an
increase in the percentage of telecommunications customers who are delivered DSL through these remote terminals. In addition to DSLs distance limitations, transmission speeds are also limited by the architecture and capabilities of the
equipment that is currently deployed in the remote terminals.



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Transitioning of the Telecommunications Network

The telecommunications network was developed and optimized for voice traffic using circuit switched technology and large, complex voice switches. As the
demand for broadband services has increased, telecommunications carriers have had to deploy new technologies to overcome the limitations that circuit switch technology and traditional voice switch technologies have imposed on the existing
telecommunications network. Two of the technologies recently developed to overcome these limitations are packet switched technology and soft switches.

Packet switched technology is designed to resolve the inefficiencies in the existing telecommunication network caused by the reliance on circuit switched technology. A circuit switched network establishes a circuit
from end-to-end for the duration of each call, with a fixed amount of allocated bandwidth for delivery of each call. Data and Internet sessions, however, are of varying duration and require varying amounts of bandwidth throughout the course of each
session. Nevertheless, when sent over a circuit switched network, the amount of bandwidth consumed per session is constant, whether or not voice or data is being transmitted at any particular time during the session. As the amount of data and
Internet traffic as a percentage of the total traffic carried over the telecommunications network has grown, the networks reliance on circuit switched technology has rendered it increasingly unable to meet the growing demand for broadband
services. As a result, carriers have had to reexamine the architecture of their network and transition to a packet-switched architecture that handles voice, data and video more efficiently by using bandwidth only when voice or data is actually being
sent. By using bandwidth in this manner, the carrying capacity and efficiency of the existing telecommunications network is greatly increased, thus permitting the network to deliver a greater amount of broadband service to a greater number of
customers. This new architecture is being built on the same technology that is the foundation for the Internet. Packet-based carriers have begun the transition to packet technology in their long-haul and metro networks and are moving toward the same
transition in the local loop.

Softswitches are designed to resolve some of the inefficiencies and cost issues associated with the existing
telecommunications networks reliance on large, complex voice switches. Traditionally, voice switches use circuit switch technology and direct the majority of voice calls in the telecommunications network today. The complexity and proprietary
nature of the technology used in these large switches has increased the operational and capital costs of deploying these products and has also led to long lead times in carriers ability to deliver new voice and other telecommunications
services. A new generation of switches called softswitches, developed by numerous vendors using open standards rather than proprietary technology, offers carriers an attractive alternative at a fraction of the cost of traditional circuit switches. A
softswitch refers to a voice switch, which has been developed using open standards and is capable of acting as a bridge between traditional voice traffic and packet-based data traffic. This reliance on open standards rather than proprietary
technology promotes and facilitates more rapid development and deployment of new services that carriers can offer to customers. Softswitches are a key component of the new packet architecture and enable carriers to maximize the efficiencies of
packet switching.

Softswitches are already being deployed by carriers in the long-haul portion of the network and are being moved out to
the local loop access network. This transition to a softswitch controlled voice network is likely to take several years. To facilitate this transition, carriers are seeking to build a new local-loop infrastructure using the packet-switched
technology described above that will coexist with the existing circuit switch technology. The element of the local-loop infrastructure that allows it to coexist with the voice switches and softswitches is called a media gateway. Carriers are seeking
a solution that integrates the local loop infrastructure with media gateway functionality.

The Occam Networks Solution

Our BLC 6000 product line is an equipment system with components deployed in remote terminals and in central offices. The system provides connectivity
from the residence or business premises to the carriers central office. Remote terminals provide the connections to the end customer and aggregate the service traffic for multiple customers for connection to the central office. The central
office equipment combines individual user



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voice and data traffic flows from multiple remote terminals into a format interoperable with existing telephone and data switches. Because the BLC 6000
system converts an ordinary telephone line, or local loop, into a broadband loop, we refer to our product as a Broadband Loop Carrier, or BLC. It also provides carriers the ability to run optical fibers of Active Gigabit Ethernet from either the
central office or remote directly to the end-user residence or business, enabling services of more than 100 times that possible over twisted pair copper telephone lines or other optical technologies such as PON.

The BLC 6000 system integrates into a single product line the functionality that is currently provided by separate voice, DSL access and fiber optic
access products. The BLC 6000 adds video capabilities to the voice and data service mix that is supported. It is a modular system that can be deployed in very-high-capacity networks, but also proves economical for low-capacity sites. It can be
deployed with as few as 48 ports in a 13/4 high stackable shelf or up to 576 ports in a high capacity
12-slot chassis. Deployed in standard racks in a central office or in large remote terminal cabinets, it can support tens of thousands of customers. Our BLC systems are environmentally hardened to withstand wide variations in temperature, humidity
and other environmental conditions found in telephone-company outside plants.

Lower Cost to Activate DSL Customers

Our BLC systems support DSL and voice for every customer connected to a remote terminal where a BLC has been deployed. This feature enables carriers to
eliminate the need to dispatch technicians to install or configure DSL equipment at the remote terminal, which significantly reduces the carriers cost of activating a new customer. In addition, the carrier can further reduce its cost of
customer acquisition through targeted marketing of its DSL services to specific geographic communities of customers.

Leverage Internet Technologies

Our BLC systems are built using packet switch technologies that enable the carrier to build a scalable local loop infrastructure. These
technologies include Ethernet, which delivers much more network bandwidth than normally available between the remote terminal and the carriers central office at a fraction of the cost.

Our BLC systems employ standards-based packet processing technology to identify, classify and prioritize individual voice, data, Internet and video
traffic streams based on the quality of service required for each stream. Voice streams, for instance, are the most sensitive to transmission delays and are thus always given higher priority than other traffic streams. This ability to classify and
prioritize traffic streams enables carriers to deliver all of these services from a single infrastructure with the assurance that each service will be delivered at the appropriate level of quality.

Softswitch Interoperability

The BLC 6000 system also
has integrated media gateway functionality, which eliminates the need for a separate media gateway. This results in significant cost and space savings at the remote terminal. The integrated media gateway functionality allows the BLC 6000 system to
interoperate with the existing voice switches and softswitches simultaneously and facilitate a smooth transition from one to the other. In addition, the integrated media gateway also allows carriers to start delivering advanced voice, fax and
messaging services, like unified messaging and follow-me services.

We also provide our customers OccamView, a management system that
enables remote activation and troubleshooting of voice and DSL services. OccamView reduces a carriers costs for activating a new customer and providing customer support. By using OccamView, a carrier reduces or eliminates costly installations
by technicians.

The Occam Networks Strategy

Our strategy is to become a leading provider of local-loop access equipment to telecommunications carriers, such as regional bell operating companies, independent telephone companies and international carriers. We



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intend to leverage our BLC product lines to establish ourselves as a leader in the advanced generation of local loop equipment. This equipment facilitates
the deployment of broadband and telephony services, and has evolved from the Next Generation Digital Loop Carrier, or NGDLC, market. Key elements of Occams strategy include:

Drive Packet, Ethernet and IP Technologies into the Local Loop

We intend to leverage Internet
technologies, such as Ethernet and Internet protocol, or IP, in order to facilitate carriers transition to a packet switched local loop infrastructure. We believe that we are the first vendor to leverage the proven scalability and resiliency
of packet technology in building products for the NGDLC market. We have achieved this objective by designing all of the different elements of our products, including access interfaces, backbone interfaces and service aggregation architecture, with
packet technologies.

Deliver Ethernet Transport to the DLC Market

We have integrated Ethernet transport into our Broadband Loop Carrier product line, which bridges the local loop to the metro and long haul Ethernet networks resulting in an end-to-end Ethernet service. By
significantly reducing the number of network elements, carriers can simplify their networks. We have developed a new approach to building resilient backbone networks using Ethernet, called Ethernet Protection Switching. We believe that our approach
of using Ethernet transport as opposed to the current transport methods, such as SONET, will allow carriers to provide greater scalability and greater bandwidth at a fraction of the cost. We will continue to deliver transport solutions that scale
from 100 Mbps to 1 Gigabit per second, or Gbps, to 10 Gbps and 40 Gbs by leveraging four different generations of Ethernet semiconductor technology.

Facilitate Network Migration from Circuit Switched Architecture to Packet Switched Architecture

We have developed a family
of products that enable carriers to build a local loop infrastructure that can coexist with todays voice switching architecture and the new packet switched technology to deliver integrated voice, data and video services. We have integrated
technologies such as TR-08 and GR-303 voice switch interface protocols in our BLC products that communicate with todays circuit switched infrastructure and technologies such as Media Gateway Control Protocol (MGCP) that work with
new softswitch architectures. We believe that carriers can reduce their capital expenditure costs significantly by migrating to a packet switched architecture and softswitches. We believe there is a significant market for our products because these
products facilitate this migration given their relative cost effectiveness and enhanced delivery capabilities.

Deliver a Comprehensive DLC Solution

We deliver a family of products that represents a comprehensive DLC solution for copper and fiber-based local loop infrastructure. Our
products are used as central office terminal and remote terminal platforms and for a variety of other applications, such as fiber-to-the-curb and fiber-to-the-home, through a combination of DSL, Ethernet and optical networking technologies. Our DLC
solution enables traditional and softswitch voice access and DSL access. In addition, our DLC solution allows carriers to offer a variety of services, such as voice, data, Internet and video. We have integrated, or intend to integrate a variety of
access interfaces, such as voice, ADSL, ADSL2Plus, VDSL2, Active Gigabit Ethernet over fiber optic cable and Ethernet over DSL.

Drive the Development
and Deployment of a Comprehensive Packet-based Video Service Delivery System

We combine our products with those of key strategic
partners in the areas of set top boxes, head-end systems and video servers to offer carriers an end-to-end video delivery system. We believe that our innovative architecture, which leverages packet and Internet technologies such as multicasting and
content distribution, offers carriers the ability to provide broadcast and video-on-demand services at a significantly reduced cost, making delivery of video services cost effective for carriers. We are collaborating through our alliances to design
packet switched video delivery architectures and products that solve many of the problems with todays deployments, including scalability and affordability.



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Aggressively Pursue Innovators in the Carrier Market

We leverage our packet switched architecture, integrated voice, data and video capabilities, scalability and lower service delivery costs to facilitate
sales to local telephone carriers. Our initial focus is on innovative carriers that are known to adopt and apply new technologies, have begun to transition to a packet switched architecture and are interested in delivering new softswitch voice,
Ethernet and/or video services. Adoption by these customers has enabled us to enter the market and establish our market awareness and reputation.

Continue Technological Innovation

We currently hold sixteen issued patents and have several additional patent applications
pending. These areas of intellectual property continue to be integrated into our products. We believe that our continued focus and emphasis on innovation will enable us to extend our technology leadership through continual enhancement of existing
products and the development of new products that address the needs of the carrier market for local loop solutions. We believe that our adoption of open standards, such as Ethernet, and open-source software, such as Linux, will allow us to leverage
the knowledge base of the global development community, thereby accelerating the introduction of new products and product enhancements.

Our research and development philosophy is to focus on the integration of technology from industry-leading semiconductor and software vendors with our innovation applied toward specific carrier network problems. We believe that this
approach will continue to enhance our ability to rapidly bring innovative products to market while continuing to build our portfolio of intellectual property.

Agreements with Tellabs

On March 18, 2005, we entered into a strategic alliance with Tellabs, Inc. and certain of its
subsidiaries. We believe that this alliance broadens our distribution channels and improves our ability to access large telecommunication companies such as the regional Bell operating companies. Our agreements with Tellabs are described in more
detail below. In connection with the alliance, Tellabs made a $2.0 million investment in our Series A-2 Preferred Stock.

Manufacturing License
Agreement

We have entered into a Manufacturing License Agreement dated March 18, 2005 with Tellabs Petaluma, Inc.
(TPI), a subsidiary of Tellabs, Inc. and previously known as Advanced Fibre Communications, Inc. Under the manufacturing license, we have licensed TPI the right to manufacture a specific list of our broadband loop carrier (BLC) products.

TPI may distribute and sell the BLC products that it manufactures only to an identified list of customers to whom we have given TPI
exclusive rights, as described below. These customers include companies affiliated with the following three regional Bell operating companies: BellSouth, SBC, and Verizon. In addition, the customer list includes five independent operating companies
in the United States, certain regional telecommunications service providers in Canada, and certain Verizon subsidiaries in identified markets in the Caribbean and Latin America. TPI may distribute and sell the BLC products to these customers only
for use as part of the customers telephone networks in the United States or Canada and, with respect to sales to the Verizon subsidiaries, in the identified markets in the Caribbean and Latin America.

The license rights granted under the manufacturing license are exclusive in that we may not sell the listed BLC products to this list of customers for
two to three years, with the time period depending on the potential customer. To maintain exclusivity for each potential customer, TPI must conduct a successful lab trial with each customer within 18 months to two years (depending on the customer)
and enter into definitive written agreement to sell a BLC product to that customer within two to three years (again depending on the customer and when the lab trial is completed). TPI can extend the period to achieve these milestones by paying us an
extension fee. In exchange for the license, TPI will pay us a royalty for each BLC product sold by TPI. The manufacturing license agreement will expire when the last exclusivity period has expired.



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Technology License Agreement

We also entered into a Technology License Agreement dated March 18, 2005 with TPI. Under the technology license agreement, we licensed TPI the right to integrate parts of our gigabit ethernet switching and
transport subsystems technology (known as Blade Technology) into TPI Fiber to the Curb (FTTC) card products. The license is nonexclusive and is not restricted to a particular set of customers. In exchange for the license, TPI will pay us
a royalty for each FTTC card product sold by TPI. TPI will also compensate us for transferring the Blade Technology to TPI and for helping TPI to integrate the Blade Technology into FTTC card products. The term of the technology license agreement is
five years, but the license granted is perpetual, subject to the conditions set forth in the agreement.

Supply Agreement

At the same time, we entered into a Supply Agreement with Tellabs North America, Inc. (TNA), a subsidiary of Tellabs, Inc. We will supply TNA
with BLC products for demonstration and testing purposes associated with the sale of BLC products by TPI to the listed exclusive customers under the Manufacturing License Agreement. TNA will supply us with telecommunication cabinet products and BLC
products, which BLC products are manufactured by TPI under the Manufacturing License Agreement. The Supply Agreement will terminate when the Manufacturing License Agreement terminates.

Products

Current Products

BLC 6000 System.The BLC 6000 is Occams flagship product line. It was announced in May 2003 as a modular BLC system that would be introduced in phases, with new capabilities added throughout
its product lifecycle. The first elements of the BLC 6000 became available at the end of the second quarter of 2003 and new elements and capabilities have been added each quarter since its initial shipments. Currently the product line consists of
two chassis styles and nine electronics subassemblies, or blades.



| |  |  | BLC 6001 Stackable Chassis. The BLC 6001 chassis houses a single BLC 6000 blade. It may be deployed as a standalone unit for low capacity applications or as part of a
stack with other units for medium density applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | BLC 6012 High Capacity Chassis. The BLC 6012 chassis houses up to twelve BLC 6000 blades for deployment in high capacity applications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6150 Lifeline POTS Blade. The 6150 Lifeline POTS Blade provides 48 Plain Old Telephone Service (POTS) ports for customer telephone service and multiple Gigabit
Ethernet ports for optical fiber transport and blade interconnection along with multiple T1 ports. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6151 Lifeline POTS Blade. The 6151 Lifeline POTS Blade provides 48 Plain Old Telephone Service (POTS) ports for customer telephone service. It is designed to operate
with other blades providing the Gigabit Ethernet transport function. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6152 Lifeline POTS Blade. The 6152 Lifeline POTS blade provides 48 ports to deliver standard telephony Lifeline POTS services and multiple Gigabit Ethernet ports for
optical fiber transport and blade interconnection. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6212 ADSL2Plus Blade. The 6212 ADSL2Plus Blade provides 48 ADSL2Plus ports for customer data and video services, and multiple Gigabit Ethernet ports for optical fiber
transport and blade interconnection.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 6214 ADSL2Plus Blade. The 6214 ADSL2Plus Blade provides 48 ADSL2Plus ports with integrated POTS splitters for customer data and video services, and multiple Gigabit
Ethernet ports for optical fiber transport and blade interconnection.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6252 ADSL2Plus and POTS Blade. The 6252 ADSL2Plus and Lifeline POTS Blade provides 48 combination POTS and ADSL2Plus ports for voice, data, and video service delivery
and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6312 Optical Line Termination Blade. The 6312 Optical Line Termination Blade provides 20 Gigabit Ethernet ports for customer data and video services, and multiple
Gigabit and 10Gigabit Ethernet ports for optical fiber transport and blade interconnection.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6440 Optical Packet Transport Blade. The 6440 Optical Packet Transport Blade provides Gigabit Ethernet ports for optical fiber transport and blade interconnection, and
supports up to 8 T1 lines for transport or up to 4 T1 lines for customer service delivery.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6640 Subscriber Trunk Gateway Blade. The 6640 Subscriber Trunk Gateway Blade provides up to 8 T1 connections supporting traditional voice switches using the TR-08 or
GR-303 voice interface protocols. It also supports multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6660-01 Emergency Stand-Alone Blade. The 6660-01 Emergency Stand-Alone Blade and BLC 6660-01 Assembly provide for local dialing to Emergency Service facilities and
calls between local POTS subscribers during network outages. In ESA enabled networks, a loss of connectivity to the local digital switch does not prevent local calling for POTS subscribers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cabinets. Our broadband loop carrier solution includes a series of remote terminal cabinets for low, medium and high-density deployments in
a variety of geographical areas. Our cabinets are environmentally controlled, and we believe they deliver reliable protection with a high degree of deployment flexibility. Our cabinets are full-featured enclosures that support multiple shelf
assemblies with a full complement of fans, protector panels, charger/rectifiers and batteries. Occam cabinets have been configured to support the greater advanced service capacity provided by our Broadband Loop Carriers, meeting the power and heat
requirements for maximum DSL, FTTH video and other high-bandwidth service take rates. They are available in configurations which support from 48 to 576 data/voice lines, either copper T1 or fiber facilities, and can be deployed in point-to-point,
star, ring, or daisy chain topologies.

OccamOS. The OccamOS is not a stand-alone product, but is our embedded operating
system, which creates a highly extensible environment to tailor the Occam BLC product family to the specific requirements of each carrier. OccamOS is modular, highly scalable and provides BLCs with high reliability.

OccamView. OccamView is a distributed element management system that enables remote management of voice and broadband services via software
from any secure browser. OccamViews open management architecture facilitates the integration of OccamView into a wide variety of operating support systems to ensure interoperability with existing systems.

Products in Development

We currently have under
development products, features and functions that we believe will further enhance our product family. These development activities are generally focused on the following areas:



| |  |  | Reducing the overall cost of solutions,
| | - |  | ---------------------------------------



| |  |  | Improving maintainability and ease of deployment for customers,
| | - |  | ---------------------------------------------------------------



| |  |  | Adding 10Gigabit transport capabilities to the 6000 family, and
| | - |  | ---------------------------------------------------------------



| |  |  | Adding features, like additional IP Layers services and SIP voice switching capacities that have been requested by our customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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Customers

To date, we have shipped product to more than 125 customers. Our current and target customers include:

Independent
Telephone Companies

There are more than 1,100 independent telephone companies providing service in the United States, accounting for
approximately 15% of the total installed telephone lines. These companies vary in size from small, rural companies serving limited geographic areas with a limited number of lines to large independents like Citizens Communications Company,
CenturyTel, Inc., Alltel Corporation and Cincinnati Bell. This market segment has comprised the majority of our revenue base to date and offers us the greatest potential for immediate deployment, enabling us to gain short-term revenue while
increasing our sales and support infrastructure.

Regional Bell Operating Companies

Regional bell operating companies (RBOCs) are the Incumbent Local Exchange Carriers (ILECs) in the United States formed by the
1983 divestiture of AT&T and subsequently partially recombined through mergers. The four regional bell operating companies are Qwest Communications, AT&T Communications, Verizon Communications Inc. and BellSouth Corporation, accounting for
approximately 85% of the total installed telephone lines in the United States. On March 24, 2005, we entered into a strategic alliance with Tellabs, Inc. and certain of its subsidiaries to improve our ability to access to the RBOCs. To date,
we have not recognized an appreciable amount of revenue from this segment.

Competitive Local Exchange Carriers

The 1996 Telecommunications Act opened the way for Competitive Local Exchange Carriers (CLECs) to compete against the ILECs, such as the
RBOCs, using their local loop facilities. As a result, some local and long distance telephone companies initiated CLEC operations. In situations where the CLEC operations are facilities based (that is, where they are actually co-locating
local loop equipment in ILEC central offices) we believe there is an opportunity for Occam BLC equipment.

PTTs

PTTs are the governmental agencies and their successors responsible for combined postal, telegraph and telephone services in countries worldwide. Examples
include France Telecom in France, Deutsche Telecom in Germany, Telefonica in Spain and Telia in Sweden. To date, our sales outside of North America have been immaterial.

Industry Relationships

An
important element in our market strategy is our ability to build strategic relationships with companies who have an established presence in Occams target market segments. We have developed the Occam Packet Access Network Alliance, whereby
independent companies can work with us to define broader solutions, perform interoperability tests, develop solutions business cases and provide cooperative customer support. The Occam Packet Access Network Alliance was announced in October 2001,
and currently includes marketing relationships with companies such as Thomson, Westel, Tekelec, Metaswitch (division of Data Connection), Sonus Networks, Inc., Broadsoft, Inc., Minerva Networks, Inc., Tut Systems, Inc., and Optibase, Ltd.

Research and Development

We have a team of engineers dedicated to conducting research and developing innovative solutions in specific technology areas that are strategic to our business. The collective talent of the Occam research and



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development team has knowledge-base and experience covering the full spectrum of technologies, ranging from digital loop carrier, voice signaling, call
control, IP networking, Ethernet networking and switching, DSL, optical networking and network management. We also work with our suppliers of technology, silicon and software to further increase our technological lead over our competitors.

We continue to make substantial investments in research and development. Research and development expenses, including amortization of
stock-based compensation, were approximately $7.4 million, $7.4 million and $12.0 million during the fiscal years ended 2005, 2004 and 2003, respectively. Our primary research and development center is based in Santa Barbara, California. We have
additional development centers in Camarillo, California and Mesa, Arizona.

Patents and Intellectual Property

We currently rely on a combination of patent, copyright and trademark and trade secret laws, confidentiality procedures and contractual provisions to
protect our proprietary rights with respect to our technology and proprietary information. We have been granted sixteen patents, have filed several additional patent applications, and intend to file additional patent applications. These patents
expire over the next 13 to 15 years. Our patent strategy is designed to protect corporate technology assets, to create access to additional technology through cross-licensing opportunities and to create opportunities for additional revenue through
technology licensing. We cannot provide any assurance that any patents will be issued from pending applications or that any issued patents will adequately protect our intellectual property.

While we rely on patent, copyright, trademark and trade secret laws to protect our technology, we also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. In addition, we continue to license
technologies from third parties when necessary or useful.

Sales and Marketing

We have focused our sales and marketing efforts primarily on the major independent telephone companies. Our marketing efforts are designed to create brand
awareness with these customers and to demonstrate our technological leadership and cost advantages in the digital loop carrier equipment market. We are educating our potential customers about our products and the benefits of our solutions through
industry publications and trade shows. We also conduct education programs that present our products and the benefits of our solutions for senior management of engineering design firms who design networks for independent telephone operating
companies.

We market and sell our products primarily through our direct sales organization, which establishes and maintains direct
relationships with prospective customers. We employ sales engineering personnel in our sales process in order to address prospective customers technical issues. We work with independent engineering and services firms to assist our customers to
design, build, transition, install, and support their networks. In addition, we offer our products through Value Added Resellers (VARs) and systems integrators that, in addition to sourcing products, provide other value-added services such as
integration, test, staging, installation and third-party equipment procurement to their customers.

For the year ended December 31,
2005, CT Communications accounted for approximately 11% of our revenue. For the year ended December 31, 2004, Kratz Communications, a value added reseller representing several end users, Palmetto Rural Telephone Coop, and CT Communications,
accounted for approximately 17%, 12%, and 11%, respectively, of our revenue. For the year ended December 31, 2003, FairPoint Communications, Inc. and Comporium Group accounted for approximately 15% and 14%, respectively, of our revenues.

Historically, a significant portion of our revenue has been derived from a small number of orders and our sales have been made based on
individual purchase orders and certain long-term RUS funded contracts that are



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funded by the United States Department of Agricultures Rural Utilities Service (RUS). The terms of the RUS contracts provide that in certain instances
transfer of title of Occams products does not occur until payment has been received.

Technical Services and
Customer Support

Our technical services and customer support organization is responsible for customer training, post-sales technical
support and maintenance. We have established a technical assistance center and a test and interoperability lab, both of which are designed to allow us to provide effective and timely customer support 24 hours a day, seven days a week. We work with
third party engineering, factoring and installation companies to assist carriers with the design engineering, staging, installation and initial activation of our products.

Interoperability and test engineers conduct compatibility testing in our test and interoperability lab located in Santa Barbara, California. As a
critical part of the Occam solution, this group will ascertain whether our products are interoperable with all standards-based network elements including voice gateways, softswitches, DSLAMs, Ethernet switches, DSL modems, Optical Network Terminals
(ONTs), Integrated Access Devices, and residential gateways.

Backlog

Our backlog primarily consists of purchase orders from customers for products to be delivered within the next quarter. Our backlog as of March 8, 2006,
and December 31, 2005 was approximately $10.5 million and $14.5 million, respectively. Due in part to factors such as the timing of product release dates, customer purchase orders, product availability, allowing customers to delay scheduled
delivery dates without penalty, or allowing customers to cancel orders within negotiated time frames without significant penalty, our backlog may not be indicative of sales during any subsequent quarter.

Competition

The market for
telecommunications equipment is highly competitive and we expect that competition will increase in the future. Many of our competitors are large companies with greater name recognition and technical, financial and marketing resources than we have,
which may give them a substantial advantage in developing and selling their products. Some of our competitors have gained a significant share of the market for local loop carrier equipment and further consolidation of the telecommunications industry
may increase that share. In addition, many of our competitors have long-standing relationships with our prospective customers, which may give them an advantage in selling competing products. Current and potential competitors in the digital loop
carrier market include Alcatel SA, Lucent Technologies, Inc., and Calix, Inc.

We believe that the principal factors that will determine
success in the digital loop carrier market include:



| |  |  | support for multiple access technologies and network protocols;
| | - |  | ---------------------------------------------------------------



| |  |  | ability to efficiently aggregate different traffic types, such as voice, data, Internet, video;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | flexibility and interoperability with existing and future network designs and equipment;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | time to market;
| | - |  | ---------------



| |  |  | cost-effectiveness (both for the equipment and its continuing cost of ownership);
| | - |  | ---------------------------------------------------------------------------------



| |  |  | scalability without interruption of service; and
| | - |  | ------------------------------------------------



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

The strength of our product and solution
architecture, we believe, enables us to compete effectively with all of these customer types.



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Manufacturing

We outsource significant portions of our manufacturing operation to third-party manufacturers and have a signed manufacturing out-sourcing contract with
Flash Electronics, located in Fremont, California. This relationship supercedes prior manufacturing agreements with CTS (formerly Smtek), located in Moorpark, California, which manufactured our products through October 2005. This agreement provides
for material procurement, board level assembly, testing, purchase commitments and quality control by the manufacturer, and delivery to our end customers. Our products are primarily manufactured in the U.S. but we are also exploring offshore
manufacturing to save costs. We design, specify and monitor all of the tests that are required to meet our internal and customer quality standards. In 2001, Occam received certification to ISO 9001:2000 by TÜV Rheinland of North America. In
2004, we were audited and certified for another 3 years.

We have several single or limited source suppliers. Although our products could
be redesigned to avoid using any sole source supplier, it would be expensive and time consuming to make such a change.

Geographic Information

During our last three fiscal years, substantially all of our revenue was generated within North America and
all of our long-lived assets are located within the United States.

Governmental Regulation

The markets for our products are characterized by a significant number of laws, regulations and standards, both domestic and international, some of which
are evolving as new technologies are deployed. Occams products or the deployment of Occams products are required to comply with these laws, regulations and standards, including those promulgated by the Federal Communications Commission,
or FCC, and counterpart foreign agencies. In some cases, we are required to obtain certifications or authorizations before our products can be introduced, marketed, or sold. While we believe that our products comply with all current applicable
governmental laws, regulations and standards, we cannot assure that we will be able to continue to design our products to comply with all necessary requirements in the United States in the future. Accordingly, any of these laws, regulations and
standards may directly affect Occams ability to market or sell its products.

In addition, FCC regulatory policies that affect the
availability of broadband access for data and Internet services may impede the penetration by the customers of Occam into their respective markets, affecting the prices that these customers are able to charge, or otherwise affecting the ability of
these customers to market their products and grow their business. For example, FCC regulations addressing interconnection of competing networks, collocation, unbundling of network elements, and line sharing impact our potential RBOC and CLEC
customer bases.

In addition, the FCC has not clearly defined how or whether some broadband services, as well as voice over IP, should be
regulated. If the FCC decides to regulate these emerging services, our customer base could be impacted. To the extent that our customers are adversely affected by these changes in the regulatory environment, our business, operating results, and
financial condition may be harmed.

State regulation of telecommunications networks and service providers may also affect the regulatory
environment of our marketplace. State regulators, for example, typically settle disputes for competitive access to some incumbent local exchange carrier network elements or collocation in incumbent local exchange carrier offices, which competitive
carriers use to offer various services. State regulators may also regulate and arbitrate disputes concerning interconnection of networks of incumbent local exchange carriers and competitive carriers. To the extent that our customers are adversely
affected by these changes in the regulatory environment, our business, operating results, and financial condition may be harmed.



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In addition to federal and state telecommunications regulations, an increasing number of other domestic
laws and regulations are being adopted to specifically address broadband and telecommunications issues such as liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation, consumer
protection, security of data and access by law enforcement, as well as intellectual property ownership, obscenity and libel. For instance, the FTC has recommended that Congress enact legislation to ensure adequate protection of online privacy and
federal online privacy legislation is currently pending in Congress. The adoption of this or other restrictive legislation could increase the costs of communicating over the Internet or decrease the acceptance of the Internet as a commercial and
advertising medium, thus dampening the growth of the Internet. Because our customers use Occams products to facilitate both commercial and personal uses of the Internet, our business could be harmed if the growth of the Internet were adversely
affected by such regulations or standards.

Countries in the European Union, or EU, have also adopted laws relating to the provision of
Internet services, the use of the Internet, and Internet-related applications. For example, in the United Kingdom, an Internet service provider, or ISP, may be liable for defamatory material posted on its sites. In Germany, an ISP may be liable for
failing to block access to content that is illegal in the country. In addition, the EU has adopted a data protection directive to address privacy issues, impacting the use and transfer of personal data within and outside the EU. The application of
this directive within the EU and with respect to U.S. companies that may handle personal data from the EU is unsettled. Similarly, countries in Europe restrict the use of encryption technology to varying degrees, making the provision of such
technology unclear. Other laws relating to Internet usage are also being considered in the EU.

The applicability of laws, regulations and
standards affecting the voice telephony, broadband telecommunications and data industry in which Occam and our customers operate is continuing to develop, both domestically and internationally. We cannot predict the exact impact that current and
future laws, regulations and standards may have on Occam or our customers. These laws, regulations and standards may directly impact our products and result in a material and adverse effect on our business, financial condition and results of
operations. In addition, should our customers be adversely impacted by such regulation, Occams business, financial condition and results of operations would likely be adversely affected as well.

Employees

As of
March 1, 2006, we employed 101 full-time employees, including 43 in sales and marketing, 9 in operations and manufacturing, 39 in engineering, and 10 in finance and administration. All of our employees are located in the United States. None of
our employees is represented by collective bargaining agreements. We consider our relations with employees to be good.

ITEM IA. RISK FACTORS

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

Competition in the communications networking equipment market is intense and we
expect competition to increase. The market for networking equipment is dominated primarily by manufacturers of legacy digital loop carrier equipment, such as Nortel Networks Corporation, Lucent Technologies Inc., Alcatel SA, and Tellabs Inc. A
number of emerging companies have developed or are developing products that may compete with our products. Many of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources
than we have. As a result, they may also have a substantial advantage over us in developing or acquiring new products and technologies and in creating market awareness for those products, services and technologies. Further, many of our competitors
have built long-standing relationships with some of our potential customers, have the ability to provide financing to them and may, therefore, have an inherent advantage in selling network equipment products to these customers. We expect our



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competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. To be competitive, we
must continue to invest significant resources in research and development, sales, marketing and customer support. We may not have sufficient resources to make these investments, make the technological advances necessary to be competitive, or be able
to effectively sell our products to carriers who have prior relationships with our competitors.

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



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



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



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



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

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

We
have incurred significant losses since inception, and we cannot guarantee that there will not be losses or significant negative cash flows. As of December 31, 2005, we had an accumulated deficit of approximately $108.8 million and we have
experienced net losses in each of our prior three fiscal years.

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

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

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

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

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

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

Lead times for the materials and components that we order from our contract manufacturers will vary significantly and depend on numerous factors,
including the specific supplier, contract terms and demand for a



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component at a given time. If we overestimate our component requirements, our contract manufacturers may purchase excess inventory. If the contract
manufacturers purchase excess inventory that is unique to our products, we could be required to pay for these excess parts and recognize related inventory write-down costs. If we underestimate our component requirements, our contract manufacturers
may have an inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenue.

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

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

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

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

We depend on sole source and limited source suppliers for key components of our
products. Any of the sole source suppliers upon which we rely could stop producing the components, cease operations entirely, or be acquired by, or enter into exclusive arrangements with, our competitors. As a result, these sole source suppliers may
stop selling their products or components to us at commercially reasonable prices, if at all. Any such interruption or delay and the inability to obtain these components from alternate sources at acceptable prices and within a reasonable amount of
time would adversely affect our ability to meet scheduled product deliveries to our customers and would materially adversely affect our business, results of operations and financial condition. Primarily these parts are semiconductor components.
While parts from another vendor could replace any of these components, we would be required to redesign the board and it would cost both time and money, including increased development expense and lost revenues.

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

Periodically, we may be required to license
technology from third parties to develop new products or product enhancements. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to obtain necessary third-party licenses may force us to
obtain substitute technology of lower



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quality or performance standards or at greater cost, any of which could seriously harm the competitiveness of our products and which would result in a
material and adverse effect on our business, financial condition and results of operations.

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

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

If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales or could
be required to make unanticipated expenditures to remedy the errors, which could have a material adverse effect on our revenues, results of operations or financial condition.

Although our products have recently been widely deployed we cannot be sure that our products do not contain significant software or hardware errors that
could only be detected when deployed in live networks that generate high amounts of voice and/or data traffic. We also continue to introduce new products that may have undetected software or hardware errors. Our customers may discover errors or
defects in our products after broad deployment and as the customers networks expand and are modified. Any defects or errors in our products discovered in the future, or failures of our customers networks, whether caused by our products
or those of another vendor, could result in loss of or delay in revenue, loss of market share and negative publicity regarding our products. For example, during fiscal 2004, we experienced yield problems and unusually high repair costs on our new
BLC 6000 installations. As a result, we experienced higher than anticipated costs of sales, which management believes were necessary to maintain customer satisfaction. Any of these occurrences could have a material adverse effect on our business,
results of operations and financial condition.

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

We may invest a significant amount of our resources to develop market and
sell our products. If our products do not quickly achieve market acceptance, they may become obsolete before enough revenue has been generated from the sales of these products to realize a sufficient return on investment. Furthermore, the rapidly
changing technological environment in which we operate can require the frequent introduction of new products, resulting in short product lifecycles. In addition, we may need to write-down inventories to reduced values or



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write-off excess and obsolete inventory. If we incur substantial development, sales, marketing and inventory expenses that we are unable to recover, and are
unable to compensate for such expenses, our business, financial condition and results of operations could be materially and adversely affected.

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

We cannot predict whether there will be a market for our products in the future. As a result, our revenues and the market for our products may not be
sufficient to support our ongoing operations in the foreseeable future.

Beginning in late 2000 and continuing into 2004, the
telecommunications industry experienced a severe downturn, and many telecommunications companies that survived the downturn substantially curtailed their investments in new equipment. Although the telecommunications industry has recently
demonstrated signs of recovery from the downturn, any decision by telecommunications companies to curtail capital expenditures, whether caused by economic cycles or other reasons, would have a material adverse effect on our business, results of
operations and financial condition.

Demand for our products may not continue to develop in the future.

We cannot be certain that there will be continuing demand for our products or that the demand will grow. Demand for Occams product will depend on
the continued growth of data traffic volume and our prospective customers need to expand the capacity of existing local distribution networks. We do not know if the volume of data traffic or the requirement for increased bandwidth in existing
local distribution networks will continue to grow, or that the growth will create a demand for our products. It is difficult to predict how the market for our products will develop and at what rate it will grow, if at all.

We have announced a strategic alliance with Tellabs, Inc. under which we gave Tellabs subsidiaries exclusive rights for a limited period to sell certain
of our BLC products to identified customers, including three of the four regional Bell operating companies in the United States, five independent operating companies in the United States, and certain regional telecommunication service providers in
Canada. We cannot predict what effect, if any, the alliance with Tellabs will have on our revenues in future periods. In particular, we cannot predict whether granting exclusive rights to Tellabs with respect to the identified customers will improve
our ability to access and sell into larger telecommunication companies.

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

A customers decision to purchase our products often requires a
significant commitment of resources from the customer and usually involves a lengthy product evaluation and qualification process prior to any firm purchase commitment. As a result, we may incur substantial sales and marketing expenses and expend
significant management effort without any guarantee of a sale. In addition, our sales cycles may be lengthy, the length of which will vary depending on the type of customer to whom we are selling. As a result of the above factors, our quarterly
revenue and operating results may vary significantly.

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

Our ability to achieve market acceptance for our products will depend in
part on the timing and adoption of industry standards for new technologies in our relevant markets. Many technological developments occur prior to the adoption of relevant industry standards. The absence of an industry standard related to a specific
technology may prevent widespread market acceptance of products using that technology. The existence of multiple competing standards may also retard or delay the development of a broad market for our products. We may



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develop products that use new technologies prior to the adoption of industry standards related to these technologies. Consequently, our products may not
comply with eventual industry standards, which could hurt our ability to sell our products and also require us to quickly design and manufacture new products that meet such standards. Even after industry standards are adopted, the future success of
our products depends upon widespread market acceptance of our underlying technologies.

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

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

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

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

In addition, our key competitors may establish proprietary standards, that may not be made
available to us. As a result, our products may not be interoperable with our customers networks if these networks incorporate technology based on proprietary standards. Furthermore, many of our potential customers will require that our
products be designed to interface with such customers existing networks, each of which may have different specifications, utilize multiple protocol standards and contain multiple generations of products from different vendors. If our products
cannot operate in such an environment, they may not achieve market acceptance and our ability to generate revenue would be seriously impaired.

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

We depend on our proprietary
technology for our success and ability to compete successfully in our market. We currently hold thirteen issued patents and have several patent applications pending. We will rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing patent, copyright, trademark and trade secret laws will afford us only limited protection. In addition, the laws of
some foreign countries do not protect proprietary rights to the same extent, as do the laws of the United States. We cannot assure investors that any pending patent applications will actually result in issued patents, and issued patents could prove
unenforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any



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failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a
competitive advantage and decreased revenue.

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

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

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

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

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

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

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

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

Our business and operations depends on the extent to which our facilities and products are protected against damage from fire, earthquakes, power loss,
and similar events. Despite precautions we have taken, a natural disaster or other unanticipated problem could, among other things, hinder our research and development efforts, delay the shipment of our products and affect our ability to receive and
fulfill orders. For example, because the final assembly and assembled product testing of our product line is performed in one location, any fire or other disaster at this location would have a material adverse effect on our business, results of
operations and financial



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condition. While we believe that our insurance coverage is comparable to those of similar companies in our industry, it does not cover all natural disasters,
in particular, earthquakes or floods.

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

Our common stock is currently traded on the over the counter market (OTC). Trading on the
OTC Bulletin Board may adversely impact our stock price and liquidity, and the ability of our stockholders to purchase and sell our shares in an orderly manner. In particular, limited trading volumes and liquidity may mean that stockholders are
unable to purchase or sell our common stock in the amounts and at the times they wish. Trading volume in the our common stock tends to be modest relative to our total outstanding shares, and the price of our common stock may fluctuate substantially
(particularly in percentage terms) without regard to news about Occam or general trends in the stock market.

Under regulations required
by the Sarbanes-Oxley Act of 2002, our auditors could issue a qualified or adverse opinion on our internal controls, and this could have a negative impact on our stock price.

We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our fiscal year ending
December 31, 2006. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments.

In connection with the review of our internal controls, our management and independent auditors have observed control deficiencies relating to
(i) documentation, assessment, and testing of key controls over financial processes, including revenue recognition; (ii) limitations in financial staffing, with related inadequacies in segregation of duties; (iii) processes for
preparation and review of SEC filings, press releases and review of financial schedules; and (iv) documentation and review of the basis of, support for, and considerations surrounding significant accounting estimates. Because Section 404
does not currently apply to us, we have not determined whether any of the control deficiencies identified above constitute a material weakness or significant deficiency (as defined by the relevant accounting standards)
although it is likely that one or more would.

To address these control deficiencies, we have implemented certain remedial actions,
including engaging an outside consultant to make recommendations and assist in the remedial process and increasing the staffing of our finance department. We continue to evaluate the status of our internal controls and to take additional actions
that are necessary to resolve the control deficiencies identified above.

While we are expending significant resources in developing the
necessary documentation and testing procedures required by Section 404, we cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our
planned processes and procedures in a timely manner. If we do not complete our compliance activities under Section 404 or the processes and procedures that we implement for our internal controls over financial reporting are inadequate, our
independent auditor may either issue a qualified opinion on the effectiveness of our internal controls or disclaim an opinion altogether as it relates to our internal controls or this could result in an adverse reaction in the financial markets due
to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and such a reaction could also make it more difficult for us to finance our operations

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

Our strategy includes developing products for the local access network, or local
loop, that incorporate Ethernet and Internet Protocol technology. If these technologies are not widely adopted by telecommunications



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carriers operating in the local loop, demand for our products based on Ethernet and Internet protocol may never develop. As a result, we may be unable to
recoup its expenses related to the development of these products and our results of operations would be harmed.

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

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

We may be unable to raise additional capital to fund our future operations, and any future financings could result in substantial dilution to existing
stockholders.

We may need to raise further cash to fund operations in the future. There is no guarantee that we will be able to raise
additional equity or debt funding when or if it is required. The terms of any financing, if available, could be unfavorable to Occam and its stockholders and could result in substantial dilution to the equity and voting interests of Occams
stockholders. For example, holders of our common stock have experienced substantial dilution as a result of the issuance of the Series A-2 preferred stock, which is entitled to rights and preferences that are senior to the common stock, including a
liquidation preference equal to 150% of the original purchase price and the right to participate up to certain caps with the common stocks in distributions in excess of 150%. Any failure to obtain financing when and as required will have an adverse
and material effect on Occams business, financial condition and results of operations.

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

Our executive officers,
directors and their affiliates beneficially own, in the aggregate, in excess of a majority of its common stock and approximately 81.5% of our Series A-2 preferred stock. In particular, investment funds affiliated with U.S. Venture Partners and
Norwest Venture Partners collectively control approximately 66.8% of the our outstanding voting stock (including 71.4% of our common stock and 64.1% of our Series A-2 preferred stock). A representative of each of these funds is a director of Occam.
These stockholders will be expected to have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation, and significant corporate transactions.
In addition, Alta partners, a venture capital investment firm that currently controls 25.9% of Series A-2 preferred stock and 16.2% of our total outstanding voting stock has a contractual right at any time to designate a director to serve on our
board.

In connection with mergers, acquisitions, and similar transactions involving Occam, holders of our Series A-2 preferred stock
will be entitled to receive a substantial liquidation preference before any payments or distributions may be made to common stockholders.

Because of the liquidation preference of the Series A-2 preferred stock, holders of common stock, may receive less consideration, if any, in connection with future acquisitions or liquidations of Occam than a holder of shares of Series A-2
preferred stock that are convertible into the same number of shares of common stock held by the common stockholder. Our Series A-2 preferred stock is entitled to a liquidation preference equal to 150% of the original purchase price of the Series A-2
preferred. Each share of outstanding Series A-2 preferred stock was sold for $10. In connection with a liquidation or dissolution of Occam, which includes acquisitions of Occam or sales of all or substantially all of its assets, holders of Series
A-2 preferred stock will be entitled to receive $15 for each share of Series A-2 preferred stock they hold before any payments may be made to holders of common stock. If the proceeds, consideration, or assets, as the case may require, available for
distribution to stockholders



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are not sufficient to pay the full $15 liquidation preference per Series A-2 share, the available proceeds, consideration, or assets will be distributed on a
pro-rata basis among holders of Series A-2 preferred stock, and holders of common stock will receive nothing. In addition, after the liquidation preference has been paid, holders of Series A-2 preferred stock will participate on a share-for-share
as-converted basis with holders of common stock in any additional distributions or payments, until such time as the holders of Series A-2 preferred stock have received 300% of their original purchase price or $30 per share. As a result
of the Series A-2 liquidation preference and participation right, a holder of shares of Series A-2 preferred stock may receive a substantially larger distribution or payment than a holder of the same number of shares of common stock into which such
holders Series A-2 preferred stock is convertible. In addition, the Series A-2 stockholder may receive a distribution in circumstances where the common stockholder receives nothing. As of March 10, 2005, without giving effect to any
additional shares we may issue, our Series A-2 preferred stockholders were entitled to receive liquidation proceeds of $58.5 million before any payments may be made to common stockholders.

The Series A-2 private placement and rights offering may jeopardize Occams ability to use some or all of its net operating loss carryforwards.

As of December 31, 2005, Occam had incurred significant losses in the United States and had net operating loss (NOL)
carryforwards of approximately $227.6 million (for federal tax purposes) and $150.2 million (for state tax purposes) to offset future federal and state taxable income, if any. Occams federal and state NOL carryforwards expire through 2024 and
2014, respectively. Occams ability to utilize its NOL carryforwards may be subject to significant limitations under Section 382 of the Internal Revenue Code if Occam has or will undergo an ownership change. Occam may undergo an ownership
change if, among other things, stockholder who own or have owned, directly or indirectly, 5% or more of Occams common stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated there under increase
their aggregate percentage ownership of Occams common stock by more than 50% over the lowest percentage of the stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the
potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. Any unused annual limitation may be carried over to later
years until the applicable expiration date for the respective NOL carryforwards.

It is possible that our private placements and the rights
offering of Series A-2 preferred stock could trigger an ownership change for purposes of Section 382 of the Internal Revenue Code, which would limit Occams ability to use any U.S. federal and state NOL carryforwards as described above and
could result in a write-down of those assets on Occams consolidated balance sheet and a charge against earnings. Even if the private placement and the rights offering do not trigger an ownership change, they will increase the likelihood that
Occam may undergo an ownership change for purposes of Section 382 in the future.

The sale of a substantial number of shares of
common stock could cause the market price of Occams common stock to decline.

Sales of a substantial number of shares of
Occams common stock in the public market could adversely affect the market price of Occams common stock. The market price of Occams common stock could also decline if one or more of its significant stockholders decided for any
reason to sell substantial amounts of its common stock in the public market. Occam is contractually obligated to register shares of common stock underlying Series A preferred stock issued as part of the recent private placement financing
transactions.

The following capitalization data give effect to a 40-for-1 reverse split that was effective on March 10, 2006.

As of December 31, 2005, Occam had 6.9 million shares of common stock outstanding. Substantially all of these shares are freely tradable in
the public market, either without restriction or subject, in some cases, only to



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S-3/S-1 or S-8 prospectus delivery requirements, and, in some cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities
Act of 1933, as amended.

As of December 31, 2005, Occam had 3.6 million shares of Series A-2 preferred stock outstanding that
are convertible into 8.1 million shares of common stock at a conversion price of approximately $4.40 per share. If the share price of the common stock exceeds $4.40 per share, the holders of Series A-2 preferred stock may decide to convert some
or all of their Series A-2 preferred stock into common stock, and such common stock would be tradable in the public market. Subsequent to December 31, 2005, Occam sold and issued an additional 0.3 million shares of Series A-2 preferred
stock, which are subject to the same rights and privileges.

As of December 31, 2005, Occam had 1.8 million shares subject to
outstanding options under Occams stock option plans, and 709,000 shares were available for future issuance under the plans. Occam has registered the shares of common stock subject to outstanding options and reserved for issuance under
Occams stock option plans. Accordingly, shares underlying vested options will be eligible for resale in the public market as soon as the options are exercised.

As of December 31, 2005, Occam had warrants outstanding to purchase a total of 15,000 shares of Occams Series A-2 preferred stock, convertible into approximately 34,000 shares of its common stock.

ITEM IB. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Properties

We are a party to lease agreements related to the following properties:



| |  |  | Approximately 31,000 square feet of space in Santa Barbara, California, for executive offices and for research and product development, administrative, and sales and marketing
purposes, which expires in October 2006;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately 8,343 square feet of space in Milpitas, California, used primarily for finance and operations purposes, which expires in July 2008;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately 2,928 square feet of space in Camarillo, California, used primarily for research and product development purposes, which expires in November 2008; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approximately 1,700 square feet of space in Mesa, Arizona, used primarily for research and product development purposes, which expires in October 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that our existing facilities are adequate for the near term.

ITEM 3. LEGAL PROCEEDINGS

IPO Allocation Cases

In June 2001, three putative stockholder class action lawsuits were filed against Accelerated Networks, certain of its then officers and directors and
several investment banks that were underwriters of Accelerated Networks initial public offering. The cases, which have since been consolidated, were filed in the United States District Court for the Southern District of New York. The Court
appointed a lead plaintiff on April 16, 2002, and plaintiffs filed a Consolidated Amended Class Action Complaint (the Complaint) on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated
Networks stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a)



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and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the
underwriter defendants agreed to allocate stock in Accelerated Networks initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the
aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These
lawsuits are part of the massive IPO allocation litigation involving the conduct of underwriters in allocating shares of successful initial public offerings. We believe that over three hundred other companies have been named in more than
one thousand similar lawsuits that have been filed by some of the same plaintiffs law firms. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 19, 2003 a motion to dismiss filed
by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and Rule 10b-5 claims against Occam. On July 31, 2003, we agreed, together with over three hundred other companies similarly situated, to settle with the Plaintiffs. A
Memorandum of Understanding (MOU), along with a separate agreement and a performance bond of $1 billion issued by the insurers for these companies is a guarantee, allocated pro rata amongst all issuer companies, to the plaintiffs as part
of an overall recovery against all defendants including the underwriter defendants who are not a signatory to the MOU. Any recovery by the plaintiffs against the underwriter defendants reduces amount to be paid by the issuer companies. There is a
fairness hearing scheduled for April 24, 2006 to obtain final approval of the settlement by the members of the class of plaintiffs and the court. Occam cannot predict whether such approval will be obtained. The company has not recorded any
accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.

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

There were no matters submitted to a vote of
security holders during the fourth quarter of fiscal 2005.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers

Our executive officers and their respective ages as of December 31, 2005 are as set forth below:



|                          |  |     |  |                                                 
|------------------------- |  | --- |  | ------------------------------------------------
|Name                      |  | Age |  | Position(s) with Occam Networks, Inc.           
|Robert L. Howard-Anderson |  | 49  |  | President, Chief Executive Officer, and Director
|Christopher B. Farrell    |  | 34  |  | Chief Financial Officer and Secretary           
|Gregory R. Dion           |  | 52  |  | Vice President of Operations                    
|David C. Mason            |  | 51  |  | Vice President of Engineering                   
|Mark Rumer                |  | 42  |  | Chief Technology Officer                        
|Russell J. Sharer         |  | 46  |  | Vice President of Sales and Marketing           

Robert L. Howard-Anderson has served as our President and Chief Executive Officer
since May 2002. Mr. Howard-Anderson was Senior Vice President of Product Operations at Occam CA from February 2002 to May 2002. Mr. Howard-Anderson was Vice President of Product Operations at Procket Networks, Inc., a network
infrastructure company, from August 2000 to February 2002 and Vice President of Engineering at Sun Microsystems, Inc., a computer company, from June 1995 to August 2000. Mr. Anderson has a B.S. in electrical engineering from Tufts University.

Christopher B. Farrell has served as our Chief Financial Officer since January 2006 and joined Occam in June 2005 as
Director of Finance. Prior to joining Occam, Mr. Farrell served as Chief Financial Officer for a startup design firm from June 2004 to June 2005. From September 2002 to June 2004, Mr. Farrell attended UCLAs Anderson School of
Management and prior to that time he worked as an independent consultant from August 2001 to August 2002. From January 1996 to July 2001, Mr. Farrell worked for C-Cube Microsystems in a



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variety of financial positions, including Corporate Controller. Prior to his employment with C-Cube Microsystems, Mr. Farrell worked for Arthur Andersen
LLP from August 1993 to January 1996 where he earned his CPA license. Mr. Farrell received a B.S. degree in economics from UC Santa Barbara and an M.B.A. from UCLAs Anderson School of Management.

Gregory R. Dion has served as our Vice President of Operations since February 2005. From August 1992 to February 2005, Mr. Dion was at
Sun Microsystems, Inc. where he served as Vice President of Operations as well as a variety of executive and management positions, including Senior Director of Manufacturing, Director of Materials and Director of Corporate Operation Planning. From
1984 to 1992, Mr. Dion held executive and management positions in operations at Wang Laboratories Inc. Mr. Dion holds an M.B.A. from Babson College and a Bachelors Degree in business administration from the University of Massachusetts at
Amherst.

David C. Mason has served as our Vice President of Engineering since July 2004. From May 1995 to June 2004,
Mr. Mason was Vice President of Engineering at Sun Microsystems, Inc. From April 1993 to April 1995, Mr. Mason was Vice President of Engineering and Operations at Statek Corporation, an Orange, California-based crystal oscillator
manufacturer. Mr. Mason holds M.B.A. and B.S. degrees from California State Polytechnic University, Pomona.

Mark Rumer
has served as our Chief Technology Officer since May 2002, and was also Chief Technology Officer of Occam CA since co-founding it in September 1999. From October 1994 to September 1999, Mr. Rumer was a senior engineer at Cisco Systems, Inc., a
networking equipment manufacturer.

Russell J. Sharer has served as our Vice President of Sales and Marketing since October
2003, and as our Vice President of Marketing and Business Development since May 2002, and was the Vice President of Marketing at Occam CA from July 2000 to May 2002. From December 2001 through May 2002, Mr. Sharer also served as Occam CAs
Vice President of Sales. From October 1998 until July 2000, Mr. Sharer served in various capacities at Ericsson Datacom, Inc., a networking equipment manufacturer, including acting Vice President of Marketing, Vice President of Product
Marketing for its Data Networks and IP division, and Director of Product Marketing. Mr. Sharer received a B.S. in industrial engineering from California Polytechnic State University.



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PART II

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

Our common stock traded on The Nasdaq National Market under the symbol ACCL from June 2000 through May 2002 when we merged with Occam Networks Inc., a California Corporation, and adopted the Occam name.
Our common stock traded under the symbol OCCM from the merger date through the date of its delisting from The Nasdaq National Market on July 24, 2002. From July 25, 2002, through March 12, 2006, our common stock traded on
the OTC Bulletin Board under the symbol OCCM. Since March 13, 2006, our common stock has traded on the OTC Bulletin Board under the symbol OCNW. The following table presents, for the periods indicated, the high and low
sales price of our common stock during the two most recent fiscal years as reported by the OTC Bulletin Board (giving effect to a 40-for-1 reverse split of our common stock that was effective on March 10, 2006):



|                                    |  |      |       |     |   |     
|----------------------------------- |  | ---- | ----- | --- | - | ----
|                                    |  | High |       | Low
|Fiscal year ended December 31, 2005 |  |      |       |     |   |     
|Fourth Quarter                      |  | $    | 12.00 |     | $ | 8.80
|Third Quarter                       |  | $    | 15.20 |     | $ | 9.20
|Second Quarter                      |  | $    | 16.80 |     | $ | 8.40
|First Quarter                       |  | $    | 8.40  |     | $ | 3.20
|Fiscal year ended December 31, 2004 |  |      |       |     |   |     
|Fourth Quarter                      |  | $    | 4.80  |     | $ | 3.20
|Third Quarter                       |  | $    | 4.80  |     | $ | 3.20
|Second Quarter                      |  | $    | 6.40  |     | $ | 3.60
|First Quarter                       |  | $    | 8.80  |     | $ | 4.40

On March 8, 2006, the last reported sales price of our common stock was $16.80 and there were
302 record holders of our common stock and 62 record holders of our Series A-2 preferred stock. Our Series A-2 preferred stock is not publicly traded.

DIVIDEND POLICY

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

RIGHTS
OFFERING

We issued to our eligible stockholders of record on December 26, 2005, rights to subscribe for shares of Occams Series
A-2 preferred stock at a purchase price per share of $10. In response to the rights offering, which expired on February 1, 2006, we received subscriptions to purchase 343,741 shares of Series A-2 preferred stock for an aggregate purchase price of
$3,437,000. Each share of Series A-2 preferred stock issued is presently convertible into shares of Occams common stock at a conversion price of $4.40 (giving effect to a 40-for-1 reverse split of our common stock that was effective on March
10, 2006), resulting in a conversion ratio of approximately 2.27 shares of common stock for each share of Series A-2 preferred stock issued.

REVERSE
SPLIT

On March 10, 2006 Occam effected a 40-for-1 reverse stock split and began trading on the NASD Electronic Bulletin Board (OTCBB)
on a split-adjusted basis on Monday, March 13, 2006, under a new symbol: OCNW.OB.



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ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial information should be read in
conjunction with our consolidated financial statements and the related notes thereto and the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on
Form 10-K. The information as of December 31, 2003, 2002, and 2001 and for the years ended December 31, 2002 and 2001 has been derived from our audited financial statements, which are not included herein. The information as of
December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004, and 2003 has been derived from our audited financial statements provided elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily
indicative of the results to be obtained in the future.

SUMMARY OF SELECTED FINANCIAL DATA



|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  | Fiscal year ended December 31                   |       
|                                                                        |  | 2005                                            |        |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                        |  | (In thousands, except share and per share data) |       
|Sales                                                                   |  | $                                               | 39,238 |   |      | $ | 17,329  |      |  | $ | 7,982   |   |  | $    | 2,435   |   |  | $ | 80      |  
|Cost of sales                                                           |  |                                                 | 27,208 |   |      |   | 15,829  |      |  |   | 7,930   |   |  |      | 5,237   |   |  |   | 95      |  
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross profit (loss)                                                     |  |                                                 | 12,030 |   |      |   | 1,500   |      |  |   | 52      |   |  |      | (2,802  | ) |  |   | (15     | )
|Operating expenses:                                                     |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Research and product development                                        |  |                                                 | 7,440  |   |      |   | 7,448   |      |  |   | 12,004  |   |  |      | 19,227  |   |  |   | 16,399  |  
|Sales and marketing                                                     |  |                                                 | 8,349  |   |      |   | 6,584   |      |  |   | 5,977   |   |  |      | 7,090   |   |  |   | 4,543   |  
|General and administrative                                              |  |                                                 | 3,420  |   |      |   | 2,328   |      |  |   | 2,331   |   |  |      | 3,524   |   |  |   | 3,793   |  
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total operating expenses                                                |  |                                                 | 19,209 |   |      |   | 16,360  |      |  |   | 20,312  |   |  |      | 29,841  |   |  |   | 24,735  |  
|Loss from operations                                                    |  |                                                 | (7,179 | ) |      |   | (14,860 | )    |  |   | (20,260 | ) |  |      | (32,643 | ) |  |   | (24,750 | )
|Interest income                                                         |  |                                                 | 249    |   |      |   | 94      |      |  |   | 101     |   |  |      | 197     |   |  |   | 710     |  
|Interest expense                                                        |  |                                                 | (508   | ) |      |   | (223    | )    |  |   | (284    | ) |  |      | (301    | ) |  |   | (131    | )
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loss before income taxes                                                |  |                                                 | (7,438 | ) |      |   | (14,989 | )    |  |   | (20,443 | ) |  |      | (32,747 | ) |  |   | (24,171 | )
|Income tax benefit (expense)                                            |  |                                                 |       |   |      |   |        |      |  |   | 11      |   |  |      |        |   |  |   | (1      | )
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss                                                                |  |                                                 | (7,438 | ) |      |   | (14,989 | )    |  |   | (20,432 | ) |  |      | (32,747 | ) |  |   | (24,172 | )
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Beneficial conversion feature                                           |  |                                                 | (1,822 | ) |      |   | (3,288  | )    |  |   | (3,038  | ) |  |      | (541    | ) |  |   |        |  
|Warrants issued with Series C preferred stock                           |  |                                                 |       |   |      |   |        |      |  |   |        |   |  |      | (255    | ) |  |   |        |  
|Interest attributable to common stock potentially subject to rescission |  |                                                 |       |   |      |   |        |      |  |   | 500     |   |  |      | (500    | ) |  |   |        |  
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss attributable to common stockholders                            |  | $                                               | (9,260 | ) |      | $ | (18,277 | )    |  | $ | (22,970 | ) |  | $    | (34,043 | ) |  | $ | (24,172 | )
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net loss per sharebasic and diluted                                    |  | $                                               | (1.37  | ) |      | $ | (2.73   | )    |  | $ | (4.36   | ) |  | $    | (15.19  | ) |  | $ | (198.13 | )
|Weighted average sharesbasic and diluted                               |  |                                                 | 6,759  |   |      |   | 6,695   |      |  |   | 5,268   |   |  |      | 2,241   |   |  |   | 122     |  
|Amortization of stock-based compensation included in:                   |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Research and product development                                        |  | $                                               | 519    |   |      | $ | 693     |      |  | $ | 943     |   |  | $    | 1,130   |   |  | $ | 770     |  
|Sales and marketing                                                     |  |                                                 | 70     |   |      |   | 119     |      |  |   | 179     |   |  |      | 252     |   |  |   | 141     |  
|General and administrative                                              |  |                                                 | 6      |   |      |   | 40      |      |  |   | 105     |   |  |      | 138     |   |  |   | 431     |  
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total amortization of stock-based compensation                          |  | $                                               | 595    |   |      | $ | 852     |      |  | $ | 1,227   |   |  | $    | 1,520   |   |  | $ | 1,342   |  
|                                                                        |  |                                                 |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



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|                                                                    |  |                   |         |   |      |   |         |      |  |   |        |   |      |   |        |  |   |       
|------------------------------------------------------------------- |  | ----------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - | ---- | - | ------ |  | - | ------
|                                                                    |  | As of December 31
|                                                                    |  | 2005              |         |   | 2004 |   |         | 2003 |  |   | 2002   |   | 2001
|                                                                    |  | (In thousands)   
|Consolidated Balance Sheet Data:                                    |  |                   |         |   |      |   |         |      |  |   |        |   |      |   |        |  |   |       
|Cash and cash equivalents                                           |  | $                 | 6,571   |   |      | $ | 4,432   |      |  | $ | 14,586 |   |      | $ | 18,496 |  | $ | 6,639 
|Restricted cash                                                     |  |                   | 3,749   |   |      |   | 2,101   |      |  |   | 935    |   |      |   |       |  |   |      
|Working capital                                                     |  |                   | 14,063  |   |      |   | 8,685   |      |  |   | 15,108 |   |      |   | 15,061 |  |   | 4,165 
|Total assets                                                        |  |                   | 27,947  |   |      |   | 21,060  |      |  |   | 23,404 |   |      |   | 24,471 |  |   | 12,591
|Total liabilities                                                   |  |                   | 13,116  |   |      |   | 13,457  |      |  |   | 7,084  |   |      |   | 6,662  |  |   | 5,643 
|Long-term debt and Capital lease obligation, net of current portion |  |                   | 1,324   |   |      |   | 2,987   |      |  |   | 998    |   |      |   | 853    |  |   | 1,439 
|Common stock potentially subject to rescission                      |  |                   |        |   |      |   |        |      |  |   |       |   |      |   | 10,500 |  |   |      
|Convertible preferred stock and warrants                            |  |                   | 34,942  |   |      |   | 21,496  |      |  |   | 16,381 |   |      |   | 10,811 |  |   | 37,699
|Total stockholders equity (deficit)                                |  | $                 | (20,111 | ) |      | $ | (13,893 | )    |  | $ | (61    | ) |      | $ | 7,309  |  | $ | 6,948 

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

Overview

From its inception through December 31, 2005, Occam has incurred cumulative net losses of approximately $108.8 million. Revenues
have increased since 2003 and in particular, since the latter half of the 2004 fiscal year, primarily through increased acceptance and market penetration of our new products, primarily our BLC 6000 family of products.

Since the merger with Accelerated Networks, we have implemented a number of expense reduction actions to reduce our operating losses and consumption of
cash, including reductions in force, change to a sequential product development plan, and non-renewal of certain facilities leases. As a result of these activities, we have grown revenues and decreased costs sufficiently to reach profitability in
the fourth quarter of 2005.

Critical Accounting Policies and Estimates

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

Revenue Recognition

Occams sales are generated from sales arrangements, which require revenue recognition judgments, particularly in the area of customer acceptance. The terms and conditions of acceptance of the product for each
sales agreement will dictate when sales revenue will be recognized. Occam recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the buyers price is fixed or
determinable and collectibility is reasonably assured. In certain circumstances, Occam enters into



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arrangements with customers who receive financing support in the form of long-term low interest rate loans from the United States Department of
Agricultures Rural Utilities Service (RUS). The terms of the RUS contracts provide that in certain instances transfer of title of Occams products does not occur until payment has been received. In these cases, Occam does not recognize
revenue until payment has been received, assuming the remaining revenue recognition criteria are met. Occam provides post-sales technical support on a fee basis. Occam provides hardware warranty for its products for five years and makes provisions
for that expense at the time of sale. Occam provides customer support and software maintenance for one year at no cost. Occam records an estimate of warranty costs when revenue is recognized based on projected returns, actual historical failure
rates and repair costs.

Valuation of Inventories

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

Deferred Tax Valuation Allowance

We record a valuation allowance to reduce our deferred income tax
asset to the amount we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should we determine
that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. We recorded $6.2 million of
valuation allowance for 2003, $4.0 million for 2004 and $4.4 million for 2005.

Loss Contingencies

Occam evaluates its estimated potential financial exposure for loss contingencies, particularly the pending litigation matters discussed in Note 11 to the
accompanying consolidated financial statements. Occam accrues an estimated loss related to a contingency if (a) it is probable that a liability had been incurred and future events will occur confirming the fact of the loss at the date of the
financial statements; and (b) the amount of the loss can be reasonably estimated. When a reasonable estimate of the loss is a range and no amount within the range is a better estimate than any other amount, Occam accrues the minimum amount in
the range. As additional information becomes available, Occam assesses the potential liability related to pending litigation and revises its estimates. Such revisions in the estimated potential liability could materially impact Occams results
of operations and financial position. We have not recorded an accrual for an estimated loss for the IPO allocation case because we believe the anticipated settlement amounts are covered by our insurance policies.

Product Warranties

Occam provides standard warranty
with the sale of its products generally for up to 5 years from date of shipment. The estimated cost of providing the product warranty is recorded at the time revenue is recognized. Occam maintains product quality programs and processes, including
actively monitoring and evaluating the quality of its suppliers. Occam quantifies and records an estimate for warranty related costs based on Occams actual history, projected return and failure rates and current repair costs.

Our estimates are based on the actual number of products returned for repairs, an estimate of products that may be returned for warranty repair and
estimated costs of repair depending on the type of service required. These estimates require us to examine past warranty issues and consider their continuing impact in the future. Our accrual is based on consideration of all these factors which are
known as of the preparation of our consolidated financial statements. To the extent that actual warranty repairs are higher than our estimates, our costs will increase.



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Results of Operations

Fiscal Years ended December 31, 2005, 2004 and 2003



|                    |  |                        |        |      |   |        |  |   |      
|------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | -----
|                    |  | Year ended December 31
|                    |  | 2005                   |        | 2004 |   | 2003  
|                    |  | (in thousands)        
|Sales               |  | $                      | 39,238 |      | $ | 17,329 |  | $ | 7,982
|Cost of sales       |  |                        | 27,208 |      |   | 15,829 |  |   | 7,930
|                    |  |                        |        |      |   |        |  |   |      
|Gross profit (loss) |  | $                      | 12,030 |      | $ | 1,500  |  | $ | 52   

Sales

The following sets forth revenue by product for the periods indicated as a percentage of total revenue for that fiscal period:



|                          |  |                               |   |  |      |   |  |      |  
|------------------------- |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                          |  | Fiscal year ended December 31 |  
|                          |  | 2005                          |   |  | 2004 |   |  | 2003 |  
|BLC 6000 system           |  | 82                            | % |  | 78   | % |  | 48   | %
|BLC 1200 system           |  |                              |   |  | 1    | % |  | 24   | %
|Cabinets                  |  | 12                            | % |  | 17   | % |  | 12   | %
|Integrated Access Devices |  |                              |   |  |     |   |  | 8    | %
|Other                     |  | 6                             | % |  | 4    | % |  | 8    | %
|                          |  |                               |   |  |      |   |  |      |  
|Total sales               |  | 100                           | % |  | 100  | % |  | 100  | %

The increase in sales for fiscal year 2005 over the prior years was mainly due to an expanded
customer base, repeat orders from existing customers and increased sales of BLC 6000 products, related accessories and cabinets. The growth in BLC 6000 system revenues, and our revenues in general, followed the release of the BLC 6000 system product
line during the third quarter of 2003. In 2004 and 2005, several enhancements and new features were introduced to the BLC 6000 system, which resulted in even greater acceptance and market penetration. We expect this trend to continue in 2006.

Cost of sales

Cost of sales
for these periods included the cost of products shipped for which revenue was recognized and the costs of manufacturing yield problems, field replacements, rework costs, underabsorption of manufacturing overhead, and provisions for obsolete
inventory. Cost of sales and gross profit for 2004 were adversely affected by additional costs of $2.6 million arising from yield problems and unusually high repair costs on certain new products. Management believes these costs were necessary to
maintain customer satisfaction. As of December 31, 2005, Occam had an accrual of $1,093,000 to cover estimated repair costs on remaining field units. This accrual is based upon experience with failures of certain parts and based on estimated
repair costs. There have been no returns for refunds related to these product issues, and upon delivery, they met customer and industry quality specifications.

Research and product development expenses



|                                          |  |                        |       |      |   |       |  |   |       
|----------------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | - | ------
|                                          |  | Year ended December 31
|                                          |  | 2005                   |       | 2004 |   | 2003 
|                                          |  | (in thousands)        
|Research and product development expenses |  | $                      | 7,440 |      | $ | 7,448 |  | $ | 12,004

Research and product development expenses consist primarily of salaries and other
personnel-related costs, prototype component and assembly costs, third-party design services and consulting costs, and other costs related



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to design, development, and testing of our products. Research and product development costs are expensed as incurred, except for capital expenditures, which
are capitalized and depreciated over their estimated useful lives, generally two to five years. Research and development expenses remained flat from 2004 to 2005. Research and product development expenses declined by 38% from 2003 to 2004 primarily
due to expense reduction actions implemented in 2003 and 2004 and reduced amortization of deferred compensation expense in 2004 compared to 2003. We expect research and development costs to increase marginally in 2006 as compared to 2005. Research
and product development expenses include stock-based compensation expenses of $519,000, $693,000 and $943,000, for fiscal years 2005, 2004 and 2003, respectively.

Sales and marketing expenses



|                             |  |                        |       |      |   |       |  |   |      
|---------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | - | -----
|                             |  | Year ended December 31
|                             |  | 2005                   |       | 2004 |   | 2003 
|                             |  | (in thousands)        
|Sales and marketing expenses |  | $                      | 8,349 |      | $ | 6,584 |  | $ | 5,977

Sales and marketing expenses consist primarily of salaries, sales commissions, and other
personnel-related costs, development and distribution of promotional materials, and other costs related to marketing, sales, public relations, and customer support activities. Sales and marketing expenses increased 27% from 2004 to 2005 because of
increased headcount, increased commission and other sales and promotional costs incurred in an effort to increase revenues and marketing penetration. Sales and marketing expenses increased by 10% from 2003 to 2004 primarily due to increased head
count, commissions and other promotional expense incurred to increase revenues and market penetration. We expect sales and marketing costs to continue to increase in 2006 as we continue to make expenditures intended to increase sales and expand our
business.

General and administrative expenses



|                                    |  |                        |       |      |   |       |  |   |      
|----------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | - | -----
|                                    |  | Year ended December 31
|                                    |  | 2005                   |       | 2004 |   | 2003 
|                                    |  | (in thousands)        
|General and administrative expenses |  | $                      | 3,420 |      | $ | 2,328 |  | $ | 2,331

General and administrative expenses consist primarily of salaries and other personnel-related
costs for executive, information technology, finance, human resources, and administrative personnel. Additionally, general and administrative expenses include professional fees, liability insurance and other costs of a general corporate nature.
General and administrative expenses increased 47% from 2004 to 2005 primarily due to Sarbanes Oxley compliance costs and the writeoff of a $399,000 loan given by the buyer of our subsidiary in India in consideration for the sale. General and
administrative expenses remained flat at $2.3 million in 2004 and 2003. We expect general and administrative expenditures to increase in 2006 due to additional expenses that we expect to incur to prepare and comply with various requirements of the
Sarbanes-Oxley Act, in particular compliance with Section 404 relating to internal controls.

Stock-based compensation



|                                               |  |                         |     |      |   |      |  |   |      
|---------------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | -----
|                                               |  | Year ended December 31,
|                                               |  | 2005                    |     | 2004 |   | 2003
|                                               |  | (in thousands)         
|Research and product development               |  | $                       | 519 |      | $ | 693  |  | $ | 943  
|Sales and marketing                            |  |                         | 70  |      |   | 119  |  |   | 179  
|General and administrative                     |  |                         | 6   |      |   | 40   |  |   | 105  
|                                               |  |                         |     |      |   |      |  |   |      
|Total amortization of stock-based compensation |  | $                       | 595 |      | $ | 852  |  | $ | 1,227
|                                               |  |                         |     |      |   |      |  |   |      



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Through December 31, 2005, we recorded total deferred stock compensation of approximately $10.5
million, representing the difference between the deemed value of our common stock for accounting purposes and the exercise price of the options at their date of grant. We are amortizing remaining deferred stock-based compensation over the vesting
periods of the applicable options, or repurchase periods for the exercised options, generally over four years. Through December 31, 2005, we had reversed deferred stock compensation of approximately $4.7 million, resulting from stock option
cancellations and repurchase of unvested common shares from employees. At December 31, 2005, we had $28,000 of unamortized deferred stock compensation, which will be amortized over the remaining vesting period of the underlying options.

During the first quarter of fiscal 2006, we will begin recording the fair value of our share-based compensation in our consolidated
financial statements in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (Revised 2004). We are currently in process of estimating the effect of SFAS No. 123(R) on our consolidated statement of
operations and we anticipate that the stock based compensation expense calculated under SFAS No. 123 (revised 2004) will have a material adverse effect on our consolidated statement of operations.

Interest income and expense



|                 |  |                         |      |   |      |   |      |      |  |   |      |  
|---------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                 |  | Year ended December 31, |     
|                 |  | 2005                    |      |   | 2004 |   |      | 2003 | 
|                 |  | (in thousands)          |     
|Interest income  |  | $                       | 249  |   |      | $ | 94   |      |  | $ | 101  |  
|Interest expense |  |                         | (508 | ) |      |   | (223 | )    |  |   | (284 | )

In 2005, the increase in interest income was attributable to higher average cash balances,
resulting from borrowings under a line of credit and the issuance of additional shares of A-2 preferred stock and higher prevailing interest rates. In 2004, decreases in interest income were due to the lower average balances of cash and cash
equivalents held as compared to 2003, as a result of consumption of cash balances for working capital purposes. The increase in interest expense in 2005 was attributable to increased debt levels as compared to 2004.

The decrease in interest expense from 2003 to 2004 was due to lower average amounts outstanding under capital lease lines of credit during 2004 as
compared to 2003 as well as the timing and receipt of funds from the senior debt financing in December 2004.

Income tax benefit (expense)

Our effective tax rate for 2005, 2004 and 2003 was 0% due to our operating losses.

Net operating loss carryforwards

As of
December 31, 2005, Occams net operating loss carryforwards were approximately $227.6 million for federal tax purposes, expiring through 2024, and $150.2 million for state tax purposes, expiring through 2014. Under the change in ownership
provisions of Section 382 of the Internal Revenue Code, utilization of the net operating loss carryforwards may be limited. The amount of such limitation, if any, has not been determined.

Beneficial conversion feature



|                              |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                              |  | Year ended December 31, |       
|                              |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                              |  | (in thousands)          |       
|Beneficial conversion feature |  | $                       | (1,822 | ) |      | $ | (3,288 | )    |  | $ | (3,038 | )



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In 2005, we recorded beneficial conversion feature charges to net loss attributable to common
stockholders of $1.7 million related to the issuance of our Series A-2 preferred stock and $85,000 related to the amortization of preferred stock warrants. We recorded beneficial conversion feature charges to net loss attributable to common
stockholders of $3.3 million upon the issuance of our series A-2 preferred stock and warrants during 2004 and $3.0 million upon the issuance of our series A-2 preferred stock during 2003. These non-cash charges were calculated using the deemed value
of common stock on date of issuance, subtracting the accounting conversion price and then multiplying the resulting amount by the sum of the number of shares of common stock into which the series A-2 preferred stock was convertible.

Interest attributable to common stock potentially subject to rescission



|                                                                        |  |                         |   |      |   |      |  |   |    
|----------------------------------------------------------------------- |  | ----------------------- | - | ---- | - | ---- |  | - | ---
|                                                                        |  | Year ended December 31,
|                                                                        |  | 2005                    |   | 2004 |   | 2003
|                                                                        |  | (in thousands)         
|Interest attributable to common stock potentially subject to rescission |  | $                       |  |      | $ |     |  | $ | 500

We are aware that the sale of 5,899,755 shares of Occam CA series C preferred stock to 18 Occam CA
stockholders may have been in violation of Section 5 of the Securities Act of 1933, as amended (the 1933 Act). If such a violation did in fact occur, the stockholders who purchased these shares would have had a right to rescind
their purchases. If a stockholder successfully asserted a rescission right, we would have been obligated to repurchase the common stock into which that stockholders Occam CA series C preferred stock had been converted in connection with the
merger for the full price paid for the Occam CA series C preferred stock purchased by such stockholder, plus interest. The Company may thus have had a contingent liability to the Occam CA series C preferred stock investors in the aggregate amount of
approximately $10 million plus interest. The 1933 Act requires that any claim brought for a violation of Section 5 be brought within one year of the violation. Until this one-year period elapsed on May 14, 2003, the amount paid for these
shares was presented on the consolidated balance sheet of the Company outside of total stockholders equity. We believe that the sale of the Occam CA series C preferred stock was not in violation of Section 5 of the 1933 Act and no such
claims have been made. Upon expiration of the statue of limitations for violation of the 1933 Act in 2003, we have reversed $500,000 of interest that had been accrued during the one-year claim period and have reclassified common stock potentially
subject to rescission into stockholders equity.

Liquidity and Capital Resources

As of December 31, 2005, we had cash and cash equivalents of $6.6 million as compared to $4.4 million as of December 31, 2004. The net increase in cash
and cash equivalents was the result of additional sales of series A-2 preferred stock of $5.6 million in January 2005, $4.9 million in March 2005 and $2.3 million in April 2005, partially offset by cash used in operations of $7.7 million and cash
used in investing activities of $2.9 million.

We used $7.7 million of cash in operating activities during the fiscal year ended December
31, 2005, a decrease of 51% over the $15.5 million used during the prior fiscal year. The $7.8 million decrease in cash used in operating activities from 2004 to 2005 was primarily driven from reduced net losses as a result of increased revenues and
gross margins. Working capital requirements also used cash as receivables increased by $4.2 million. This increase was partially offset by inventory reductions of $1.6 million as a result of lower inventory levels resulting from supply chain
improvements.

We used $2.9 million of cash in investing activities during the fiscal year ended December 31, 2005, as compared to $2.2
million during the comparable prior year period. In 2005, our restricted cash balances increased by $1.6 million as we engaged in a larger volume of RUS contracts that require us to provide performance bonds. Additionally, we purchased $1.2 million
of property and equipment in 2005 as compared to $1.1 million in 2004.

Financing activities generated $12.7 million of cash in 2005 as
compared to $7.5 million in 2004. The cash provided from financing activities in the fiscal year ended December 31, 2005 was from the proceeds of $12.8



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million from our offering of series A-2 preferred stock and $0.6 million received from the employee stock option exercises. These proceeds were partially
offset by $0.8 million of debt payments.

In February 2006 we concluded a rights offering to eligible shareholders of record as of December
26, 2005. Each subscription right entitled the stockholders to subscribe for and purchase one share of Series A-2 preferred stock for each 2.725 shares of common stock held on the record date (giving effect to a 40-for-1 reverse split of our common
stock that was effective on March 10, 2006). The rights offering provided the company with $3.4 million of gross proceeds. We used $2.6 million of the proceeds to retire all of our notes payable.

We may be required to secure additional funding in the future. Such financing, if available, could take the form of additional equity or debt. To the
extent we issue additional equity securities, it could result in substantial dilution to existing stockholders. In addition the terms of any financing whether in the form of debt or equity, could contain restrictive covenants that would limit
managements flexibility. We cannot predict whether we will be able to obtain additional financing if necessary. Any failure to obtain financing could have an adverse material affect on our business, financial condition and results of
operations. Also, managements plans to sustain profitability and generate additional cash flows include increasing revenues from new and existing customers, focus on cost reductions, and the launch of additional products. Although we believe
we have sufficient cash to sustain operations, there is no assurance that we will be successful with these plans. If events and circumstances occur such that we do not meet our current operating plan as expected, and we are unable to raise
additional financing, we may be required to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

We lease our facilities and certain assets under non-cancelable operating leases expiring through 2008, excluding various renewal options. As of December
31, 2005 we also had long-term debt obligations that we retired in 2006. See Note 6 and 11 to the accompanying financial statements.

The
following tables summarize our minimum annual payment commitments under non-cancelable operating leases, capital leases and notes payable as of December 31, 2005 (in thousands):



|                                    |  |       |       |                        |   |           |  |           |       |                  |   |   |  |   |  
|----------------------------------- |  | ----- | ----- | ---------------------- | - | --------- |  | --------- | ----- | ---------------- | - | - |  | - | -
|                                    |  |       |       | Payments Due By Period |   |          
|                                    |  | Total |       | Less than1 year        |   | 1-3 years |  | 3-5 years |       | More than5 years
|Contractual Obligations (1)         |  |       |       |                        |   |           |  |           |       |                  |   |   |  |   |  
|Note payable to bank                |  | $     | 83    |                        | $ | 83        |  | $         |      |                  | $ |  |  | $ | 
|Note payable to finance company (2) |  |       | 2,474 |                        |   | 1,150     |  |           | 1,324 |                  |   |  |  |   | 
|                                    |  |       |       |                        |  
|Purchase Commitments (3)            |  |       | 8,268 |                        |   | 8,268     |  |           |      |                  |   |  |  |   | 
|Operating leases                    |  | $     | 751   |                        | $ | 565       |  | $         | 186   |                  | $ |  |  | $ | 

---

|(1) | Contractual obligations consist of long-term debt, future minimum lease payments under operating leases used in the normal course of business and purchase commitments. In February
2006 we retired this debt.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In connection with the senior debt agreement with Hercules, we issued Hercules warrants to purchase 41,666 shares of our common stock and 15,000 shares of our series A-2 preferred
stock. These warrants were valued using the Black-Scholes option pricing model and relative fair value of the warrants of $178,000 has been treated as a reduction in the carrying amount of the loan. In February 2006 we retired this debt.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Under the terms of our agreement with our contract manufacturer, we issue purchase orders for the production of our products. We are required to place orders in advance with our
contract manufacturer to meet estimated sales demands. The agreement includes certain lead-time and cancellation provisions. Future amounts payable to the contract manufacturer will vary based on the level of purchase requirements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Off balance sheet arrangements

We enter into indemnification provisions under (i) our agreements with other companies in our ordinary course of business, typically with our
contractors, customers, landlords and (ii) our agreements with investors. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our
activities or, in some cases, as a result of the indemnified partys activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we
could be required to make under these indemnification provisions is generally unlimited. We have has not incurred material costs to defend lawsuits or settle claims related to these indemnifications agreements. As a result, we believe the estimated
fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2005 and 2004.

Recent Accounting Pronouncements:

In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43 (SFAS 151), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS
No. 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current period charges. It also requires that allocation of fixed production overheads to the cost of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect this standard to have a material impact on our
consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)) which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of
such expense in our consolidated statements of operations. In March 2005, the SEC released Staff Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107) relating to the adoption of SFAS No. 123(R). Beginning
in the first quarter of 2006, we will adopt SFAS No. 123(R) under the modified prospective transition method using the Black-Scholes pricing model. Under the new standard, our estimate of compensation expense will require a number of complex and
subjective assumptions including our stock price volatility, employee exercise patterns (expected life of the options), future forfeitures and related tax effects. During the first quarter of fiscal 2006, we will begin recording the fair value of
our share-based compensation in our consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (Revised 2004). We are currently in the process of estimating the
effect of SFAS No. 123 on our consolidated statement of operations and we anticipate that the stock based compensation expense calculated under SFAS No. 123 (revised 2004) will have a material adverse effect on our consolidated statements
of operations.

In October 2005, the FASB issued Financial Statement of Position (FSP) FAS 123(R)-2, Practical
Accommodation to the Application of Grant Date as Defined in FAS 123(R) (FSP 123(R)-2). FSP 123(R)-2 provides guidance on the application of grant date as defined in SFAS No.123(R). In accordance with this standard a grant date of
an award exists if a) the award is a unilateral grant and b) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. We will adopt this
standard when it adopts FAS 123(R) beginning in the first quarter of 2006. We do not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.

In November 2005, the FASB issued FSP FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards
(FSP 123(R)-3). FSP 123(R)-3 provides an elective alternative method that establishes a computational component to arrive at the beginning balance of the accumulated paid-in capital pool related to employee compensation and a simplified
method to determine the subsequent impact of



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the accumulated paid-in capital pool employee awards that are fully vested and outstanding upon the adoption of SFAS No. 123(R). We are currently
evaluating this transition method.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
(SFAS No. 154). SFAS No. 154 is a replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply the requirements of SFAS No. 154 on accounting changes made on or after January 1, 2006.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Instruments-an amendment of FASB
Statement No. 133 and 140 (SFAS 155). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 eliminates
the need to bifurcate the derivative from its host, as previously required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedge Accounting (SFAS 133). SFAS 155 also amends SFAS 133 by
establishing a requirement to evaluate interests in securitized financial assets to determine whether they are free standing derivatives or whether they contain embedded derivatives that require bifurcation. SFAS 155 is effective for all hybrid
financial instruments acquired or issued by the Company on or after January 1, 2007. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS 155.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and schedule
required by Regulation S-X are provided in this Annual Report on Form 10-K as listed in item 15(a) of this Form 10-K.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, under the supervision and with the participation of Occams management, including
Occams Chief Executive Officer and Chief Financial Officer, management



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evaluated the effectiveness of Occams disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Occams disclosure controls and procedures were effective as of December 31, 2005.

In making their assessment concerning the effectiveness of Occams disclosure controls and procedures as of December 31, 2005, management considered
the internal control deficiencies described below. In light of the deficiencies described below, Occams management performed additional analysis and other post-closing procedures to ensure that its financial statements are prepared in
accordance with generally accepted accounting principles. Management believes that the financial statements included in this report fairly present in all material respects Occams financial condition, results of operations, and cash flows for
the periods presented. In addition, management believes that remediation efforts put in place to date, including the implementation of a disclosure committee and more active managerial involvement in the preparation of SEC filings, are effective to
ensure that information required to be disclosed by Occam in its periodic reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.

(b) Changes in Internal Controls Over Financial Reporting

During the course of preparation of Occams 2005 year-end and quarterly financial statements, Occams management and independent registered public accounting firm identified internal control deficiencies
that could be deemed to be material weaknesses or significant deficiencies if Section 404 of the Sarbanes-Oxley Act were currently applicable to Occam. Neither Occams management nor its independent auditors has
concluded that any of these control deficiencies in fact constitute material weaknesses but believes it likely that one or more could be deemed a material weakness. An internal control deficiency exists when the design or operation of a
control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the companys ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America.
In the case of a significant deficiency, a more-than-remote likelihood exists of a misstatement of the companys annual or interim financial statements that is more than inconsequential.

Occams identified control deficiencies relate to (i) the documentation, assessment, and testing of key controls over financial processes, including
revenue recognition; (ii) limitations in financial staffing, with related inadequacies in segregation of duties; (iii) processes for preparation and review of SEC filings, press releases and review of financial schedules; and (iv) the documentation
and review of the basis of, support for, and considerations surrounding significant accounting estimates.

To address the observed internal
control deficiencies, Occams management has initiated a remediation process. Occams management believes that remediation is not complete and will continue in future periods. Remedial actions to date include the following: (i) increasing
staffing in Occams finance department; (ii) weekly revenue reviews by the Companys Chief Financial Officer, Chief Executive Officer, and appropriate finance staff; (iii) engaging an outside consultant to review Occams internal
controls and procedures and to recommend and assist in remediation, where applicable; and (iv) implementation of a disclosure committee.

ITEM 9B. OTHER INFORMATION

None.



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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning our directors
required by this Item is incorporated herein by reference from our Proxy Statement under the heading Proposal OneElection of Directors.

Information regarding our executive officers is included in Item 4A, Part I hereof under the caption Executive Officers of the Registrant.

Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from our
Proxy Statement under the heading Section 16(a) Beneficial Ownership Reporting Compliance.

Code of Ethics

We have adopted the Occam Code of Ethics (Code of Ethics). The Code of Ethics is available at our website, located at
http://www.occamnetworks.com. It may be found at our website as follows:

1. From our main web page, click on Company.

2. Next, click on Investor Info.

3. Finally, click on Code of Ethics.

We intend to satisfy disclosure requirements regarding an
amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website, at the address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by
reference from our Proxy Statement under the heading Executive Compensation and Related Information.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference from our Proxy Statement under the headings Ownership of Securities and Equity Compensation Plan Information.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is
incorporated herein by reference from our Proxy Statement under the heading Certain Transactions.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated
herein by reference from our Proxy Statement under the heading Proposal TwoRatification of Appointment of Independent Registered Public Accounting Firm.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements

See index to Consolidated Financial Statements on page F-1.



|(2) | Financial Statement Schedules
|--- | -----------------------------

The financial statement
schedules have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.



|(3) | Exhibits
|--- | --------

The following exhibits are filed herewith or
incorporated by reference.



|            |  |                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                              
|2.1(1)      |  | Agreement and Plan of Merger and Reorganization, dated as of November 9, 2001, by and among Registrant, Odin Acquisition Corp. and Occam Networks Inc. (incorporated by reference to Annex A to
the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                    
|            | 
|2.2         |  | Amendment to Agreement and Plan of Merger and Reorganization, dated as of December 26, 2001, by and among Registrant, Odin Acquisition Corp. and Occam Networks, Inc. (incorporated by
reference to Annex AA to the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).    
|            | 
|2.3         |  | Amendment No. 2 to Agreement and Plan of Merger and Reorganization, dated as of April 16, 2002, by and among Registrant, Odin Acquisition Corp. and Occam Networks, Inc. (incorporated by
reference to Annex AAA to the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).
|            | 
|3.1         |  | Registrants Amended and Restated Certificate of Incorporation (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1
and all amendments, thereto (File No. 333-31732).                                                                                                                                     
|            | 
|3.1.1       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation effective May 14, 2002 (incorporated by reference to Exhibit 3.1.1 of the Registrants
Quarterly Report on Form 10-Q filed on May 14, 2003).                                                                                                                                    
|            | 
|3.1.2       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation effective June 3, 2003 (incorporated by reference to Exhibit 3.1.2 of the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                                                                 
|            | 
|3.1.3       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 11, 2004 (incorporated
by reference to Exhibit 3.1.3 of the Registrants Quarterly Report on Form 10-Q filed on November 15, 2004).                                                                      
|            | 
|3.1.4       |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Occam Networks, Inc. filed with the Secretary of State of the State of Delaware on September 2, 2005.
(Incorporated by reference to Exhibit 3.1.4 of the Registrants Quarterly Report on Form 10-Q filed on November 14, 2005)                                                       
|            | 
|3.2         |  | Registrants Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registrants Quarterly Report on Form 10-Q filed on May 14, 2003).                                                                                                                                                                                                               
|            | 
|4.2         |  | Specimen common stock certificate of Registrant (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments,
thereto (File No. 333-31732).                                                                                                                                                    



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|            |  |                                                                                                                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                   
|4.4         |  | Form of Certificate of Designation of the Series A Preferred Stock filed with the Secretary of State of the State of Delaware (incorporated by reference to Exhibit 4.2 of the
Registrants Current Report on Form 8-K filed on December 19, 2002).                                                                                             
|            | 
|4.4.1       |  | Certificate of Occam Networks, Inc. Eliminating Matters Set Forth in Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 4.4.1 of the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                
|            | 
|4.6         |  | Note and Warrant Purchase Agreement, dated as of November 9, 2001 by and among Occam Networks (California), Inc. and certain existing investors (incorporated by reference to Annex H to the
Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).
|            | 
|4.6.1       |  | First Amendment to Note and Warrant Purchase Agreement, dated as of December 19, 2002 by and among the Occam Networks, Inc., Occam Networks (California), Inc. and certain existing investors
(incorporated by reference to Exhibit 4.4 of the Registrants Current Report on Form 8-K filed on December 19, 2002).                             
|            | 
|4.8         |  | Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among Occam Networks, Inc. and the investors (incorporated by reference to Exhibit 4.3 of the
Registrants Current Report on Form 8-K filed on November 21, 2003).                                                                                           
|            | 
|4.9         |  | Certificate of Designation of the Series A-2 Preferred Stock filed with the Secretary of State of the state of Delaware on November 19, 2003 (incorporated by reference to Exhibit 4.4 of the
Registrants Current Report on Form 8-K filed on November 21, 2003).                                                                              
|            | 
|4.9.1       |  | Certificate Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock filed with the Secretary of State of Delaware on November 11, 2004
(incorporated by reference to Exhibit 4.9.1 of the Registrants Quarterly Report on Form 10-Q filed on November 15, 2004).                               
|            | 
|4.9.2       |  | Certificate of Registrant, Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock, filed with the Secretary of Sate of Delaware on January 7,
2005 (incorporated by reference to Exhibit 4.9.2 of the Registrants Current Report on Form 8-K filed on January 13, 2004).                      
|            | 
|4.9.3       |  | Certificate of Registrant, Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock, filed with the Secretary of Sate of Delaware on May 16,
2005 (incorporated by reference to Exhibit 4.9.3 of the Registrants Current Report on Form 8-K filed on May 17, 2005).                             
|            | 
|4.11        |  | Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among Occam Networks, Inc. and the investors (incorporated by reference to Exhibit 4.6 of
the Registrants Current Report on Form 8-K filed on March 12, 2004).                                                                           
|            | 
|4.12        |  | Series A-2 Preferred Stock Purchase Warrant issued to Alta Partners (incorporated by reference to Exhibit 4.7 of the Registrants Current Report on Form 8-K filed on March 12,
2004).                                                                                                                                                          
|            | 
|4.12.1      |  | Amendment and Notice of Exercise dated April 20, 2005 between Occam Networks, Inc. and Alta California Partners III, L.P. (incorporated by reference to the Registrants Current Report on
Form 8-K filed on April 21, 2005).                                                                                                                   
|            | 
|4.13        |  | Series A-2 Preferred Stock Purchase Warrant issued to Alta Embarcadero Partners III, LLC (incorporated by reference to Exhibit 4.8 of the Registrants Current Report on Form 8-K filed on
March 12, 2004).                                                                                                                                     
|            | 
|4.13.1      |  | Amendment and Notice of Exercise dated April 20, 2005 between Occam Networks, Inc. and Alta Embarcadero Partners III, LLC (incorporated by reference to the Registrants Current Report on
Form 8-K filed on April 21, 2005).                                                                                                                   



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|            |  |                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                      
|4.14        |  | Letter agreement dated March 8, 2004 between Occam Networks, Inc. and Alta Partners relating to board rights (incorporated by reference to Exhibit 4.9 of the Registrants Current Report
on Form 8-K filed on March 12, 2004).                                                                                                                                    
|            | 
|4.15        |  | Management rights agreement dated as of March 8, 2004 between Alta Partners and Occam Networks, Inc. (incorporated by reference to Exhibit 4.9 of the Registrants Current Report on Form
8-K filed on March 12, 2004).                                                                                                                                            
|            | 
|4.16        |  | Amendment No. 2 to Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among the Registrant and the investors (incorporated by reference to Exhibit 4.11 of the
Registrants Current Report on Form 8-K filed on April 9, 2004).                                                                                                    
|            | 
|4.17        |  | Specimen Series A-2 stock certificate of Registrant (incorporated by reference for the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all
amendments thereto (File No. 333-125060)).                                                                                                                                      
|            | 
|10.9(3)     |  | 1997 Stock Option/Stock Issuance Plan (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto
(File No. 333-31732).                                                                                                                                                      
|            | 
|10.11(3)    |  | Employee Stock Purchase Plan (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No.
333-31732).                                                                                                                                                               
|            | 
|10.14(2)    |  | Materials and Manufacturing Agreement Board Assembly Agreement dated as of March 15, 1999, by and between the Registrant and the Semiconductor Group of Arrow Electronics, Inc., as amended
(incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).
|            | 
|10.19       |  | Standard Industrial/Commercial Multi-Tenant Lease dated as of May 6, 1999, between the Registrant and Tyler Pacific III, LLC. (incorporated by reference to the Exhibit with the same number on
the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                              
|            | 
|10.25(3)    |  | Form of Director Indemnification Agreement (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments,
thereto (File No. 333-31732).                                                                                                                                                 
|            | 
|10.26(3)    |  | Form of Indemnification Agreement for all officers and directors appointed on or after May 14, 2003 (incorporated by reference to Exhibit 10.26 of the Registrants Annual Report on Form
10-K filed on March 31, 2003).                                                                                                                                           
|            | 
|10.27       |  | Senior Loan and Security Agreement No. L6244 dated as of May 28, 1999, by and between the Registrant and Phoenix Leasing Incorporated (incorporated by reference to the Exhibit with the same
number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                      
|            | 
|10.29(2)    |  | Standard Industrial/Commercial Multi-Tenant Lease dated as of February 29, 2000, by and between the Registrant and Tyler Pacific III, LLC (incorporated by reference to the Exhibit with the
same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                  
|            | 
|10.35       |  | Retainer Agreement dated as of February 5, 2001 by and between the Registrant and Regent Pacific Management Corporation. (incorporated by reference to Exhibit 10.35 to the Registrants
Annual Report on Form 10-K filed on May 8, 2001).                                                                                                                         
|            | 
|10.38       |  | Form of Voting Agreement dated as of November 9, 2001 between Occam and certain (Registration No. 333-75816) stockholders of Registrant (incorporated by reference to Annex B to the
Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                           



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|            |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.39       |     |  | Form of Voting and Conversion Agreement dated as of November 9, 2001 between Registrant and certain Occam shareholders (incorporated by reference to Annex C to the Registration Statement on
Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                                                                                                                                                                                                                                       
|            |    
|10.42       |     |  | Form of Funding Agreement dated as of November 9,2001 between Registrant and Occam (incorporated by reference to Annex F to the Registration Statement on Form S-4 (Registration No. 333-75816)
which the Securities and Exchange Commission declared effective on April 26, 2002).                                                                                                                                                                                                                                                                           
|            |    
|10.43       |     |  | Guaranteed Promissory Note, dated as of March 18, 2002, issued by Occam in favor of the Registrant (incorporated by reference to Annex K1 to the Registration Statement on Form S-4
(Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                                                                                                                                                                                                                                                          
|            |    
|10.44       |     |  | Secured Guaranty dated as of March 18, 2002, entered into by 2180 Associates Fund VII, L.P., New Enterprise Associates 9, L.P., Norwest Venture Partners VIII, L.P., NVP Entrepreneurs Fund
VIII, L.P., U.S. Venture Partners VII, L.P., USVP Entrepreneur Partners VII-A, L.P. and USVP Entrepreneur Partners VII-B, L.P. in favor of the Registrant (incorporated by reference to Annex K2 to the Registration Statement on Form S-4 (Registration
No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).       
|            |    
|10.45       |     |  | Guarantor Security Agreement, dated as of March 18, entered into by 2180 Associates Fund VII, L.P., New Enterprise Associates 9, L.P., Norwest Venture Partners VIII, L.P., NVP
Entrepreneurs Fund VIII, L.P., U.S. Venture Partners VII, L.P., USVP Entrepreneur Partners VII-A, L.P. and USVP Entrepreneur Partners VII-B, L.P. in favor of the Registrant (incorporated by reference to Annex K3 to the Registration Statement on Form
S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).
|            |    
|10.46       | (3) |  | Employment Agreement dated February 13, 2002 between the Registrant and Robert Howard-Anderson (incorporated by reference to Exhibit 10.46 of the Registrants Quarterly Report on Form
10-Q filed on August 12, 2002).                                                                                                                                                                                                                                                                                                                                       
|            |    
|10.47       | (3) |  | Employment Agreement dated June 17, 2002 between the Registrant and Howard Bailey (incorporated by reference to Exhibit 10.46 of the Registrants Quarterly Report on Form 10-Q filed on
August 12, 2002).                                                                                                                                                                                                                                                                                                                                                    
|            |    
|10.48       | (3) |  | Occam Networks Inc. 1999 Stock Plan (incorporated by reference to Exhibit 4.1 on the Registrants Statement on Form S-8 (File No. 333-91070)).                                                                                                                                                                                                                                                                                                                                                                                                                
|            |    
|10.49       | (3) |  | Occam Networks Inc. 1999 Stock Plan, Form of Stock Option Agreement (incorporated by reference to Exhibit 4.2 on the Registrants Statement on Form S-8 (File No.
333-91070).                                                                                                                                                                                                                                                                                                                                                                                 
|            |    
|10.50       | (3) |  | Occam Networks Inc. 1999 Stock Plan, Form of Stock Option AgreementEarly Exercise (incorporated by reference to Exhibit 4.3 on the Registrants Statement on Form S-8 (File No.
333-91070).                                                                                                                                                                                                                                                                                                                                                                  
|10.51       |     |  | Master Lease Agreement dated December 8, 2000 by and between Comdisco, Inc. and Occam Networks (California), Inc. (incorporated by reference to Exhibit 99.1 of the Registrants Current
Report on Form 8-K filed on October 1, 2002).                                                                                                                                                                                                                                                                                                                        
|            |    
|10.52       |     |  | Standard Industrial/Commercial Multi-Tenant Lease dated March 26, 2001 by and between Applied Magnetics Corporation, a Delaware corporation DBA Innovative Micro Technology, and Occam Networks
(California), Inc., a California corporation (incorporated by reference to Exhibit 99.2 of the Registrants Current Report on Form 8-K filed on October 1, 2002).                                                                                                                                                                                             
|            |    
|10.53       |     |  | Loan and Security Agreement between Silicon Valley Bank and Occam Networks, Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report on
Form 10-Q filed on August 14, 2003).                                                                                                                                                                                                                                                                                                                                



42



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                            
|10.54       |  | Warrant to Purchase Stock, dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                                                  
|            | 
|10.55       |  | Security Agreement between Silicon Valley Bank and Occam Networks (California), Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report
on Form 10-Q filed on August 14, 2003).                                                       
|            | 
|10.56       |  | Intellectual Property Security Agreement between Silicon Valley Bank and Occam Networks (California), Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                 
|            | 
|10.57       |  | Senior Loan and Security Agreement dated December 17, 2004, by and between the Registrant and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.57 of the
Registrants Current Report on Form 8-K filed on December 20, 2004).                           
|            | 
|10.58       |  | Warrant to acquire shares of common stock issued to Hercules Technology Growth Capital, Inc. on December 17, 2004 (incorporated by reference to Exhibit 10.58 of the Registrants Current
Report on Form 8-K filed on December 20, 2004).                                                
|            | 
|10.59       |  | Warrant to acquire shares of Series A-2 preferred stock to Hercules Technology Growth Capital, Inc. on December 17, 2004 (incorporated by reference to Exhibit 10.59 of the Registrants
Current Report on Form 8-K filed on December 20, 2004).                                         
|            | 
|10.61       |  | Series A-2 Preferred Stock Purchased Agreement dated as of January 7, 2005, among the Registrant and certain investors (incorporated by reference to Exhibit 10.61 of the Registrants
Current Report on Form 8-K filed on January 13, 2005).                                            
|            | 
|10.62       |  | Fourth Amended and Restated Investors Rights Agreement dated as of January 7, 2005, among the Registrant and certain holders of its capital stock (incorporated by reference to
Exhibit 10.62 of the Registrants Current Report on Form 8-K filed on January 13, 2005).                
|            | 
|10.63       |  | Letter Amendment Agreement among the Registrant, Occam Networks (California), Inc. and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.63 of the
Registrants Current Report on Form 8-K filed on January 13, 2005).                                   
|            | 
|10.64       |  | Promissory Note between the Registrant and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.64 of the Registrants Current Report on Form 8-K filed on
January 13, 2005).                                                                               
|            | 
|10.65       |  | Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement dated as of January 7, 2005, among the Registrant and certain investors (incorporated by reference to Exhibit 10.65 of the
Registrants Current Report on Form 8-K filed on March 24, 2005).                            
|            | 
|10.66       |  | Amendment No. 1 to Fourth Amended and Restated Investors Rights Agreement dated as of January 7,2005, among the Registrant and certain holders of its capital stock (incorporated by
reference to Exhibit 10.66 of the Registrants Current Report on Form 8-K filed on March 24, 2005).
|            | 
|10.67(2)    |  | Manufacturing License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.67 of the Registrants
Annual Report on Form 10-K filed on March 31, 2005)                                                 
|            | 
|10.67.1     |  | Amendment One to Manufacturing License Agreement dated March 18, 2005 between Tellabs Petaluma, Inc. and the Registrant (incorporated by reference to Exhibit 10.73 of the Registrants
Current Report on Form 8-K filed on May 17, 2005).                                               
|            | 
|10.68(2)    |  | Technology License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.69 of the Registrants Annual
Report on Form 10-K filed on March 31, 2005).                                                   



43



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                  
|10.68.1     |  | Amendment One to Technology License Agreement dated March 18, 2005 between Tellabs Petaluma, Inc. and the Registrant (incorporated by reference to Exhibit 10.74 of the Registrants
Current Report on Form 8-K filed on May 17, 2005).                                        
|            | 
|10.70(2)    |  | Supply Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.70 of the Registrants Annual Report on
Form 10-K filed on March 31, 2005).                                                     
|            | 
|10.71       |  | Form of Director Offer Letter dated September 16, 2004 for Robert Bylin, Thomas Pardun and Kenneth Cole (incorporated by reference to the Exhibit with the same number on the Registrants
Registration Statement on Form S-1 and all amendments thereto (File No. 333-125060)).
|            | 
|10.76(3)    |  | Executive Officer Stock Grant ProgramRestricted Stock Grant Agreement dated September 12, 2005 (incorporated by reference to Exhibit 10.75 of the Registrants Current Report on
Form 8-K filed in September 14, 2005).                                                       
|            | 
|10.77       |  | Standard Form Multi-Tenant Lease dated July 7, 2005, by and between Mission West Properties, L.P. II and the Registrant (incorporated by reference to Exhibit 10.77 of the Registrants
Current Report on Form 8-K filed on March 30, 2006).                                   
|            | 
|10.78(3)    |  | Amended and Restated 2000 Stock Incentive Plan, as amended June 2005.                                                                                                                                                                                                          
|            | 
|21.1        |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                
|            | 
|23.1        |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                          
|            | 
|23.2        |  | Consent of Singer Lewak Greenbaum & Goldstein LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                              
|            | 
|24.1        |  | Power of Attorney (included on page 45)                                                                                                                                                                                                                                        
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                             
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                             

---

|(1) | Schedules omitted pursuant to Regulation S-K Item 601(b)(2) of the Securities Act. Registrant undertakes to furnish such schedules to the Commission upon request.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Confidential treatment has been requested and received for certain portions of this exhibit.
|--- | --------------------------------------------------------------------------------------------

|(3) | Management compensation plan/contract.
|--- | --------------------------------------

(b) Exhibits

The exhibits filed as part of this report are listed in Item 15(a)(3) of this Form 10-K.

(c) Exhibits

The financial
statement schedules required by Regulation S-X and Item 8 of this form are listed in Item 15(a)(2) of this Form 10-K.



44



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OCCAM NETWORKS,
INC.



|                     |  |     |  |                                                                          
|-------------------- |  | --- |  | -------------------------------------------------------------------------
|Date: March 29, 2006 |  | By: |  | /s/    ROBERT L.
HOWARD-ANDERSON                                         
|                     |  |     |  | Robert L. Howard-Anderson President, Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Howard-Anderson and Christopher B.
Farrell, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-facts and agents, or his substitute
or substitutes, or any of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                           |  |                                                                               |  |               
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                                  |  | Title                                                                         |  | Date          
|                                                           |  |                                                                              
|/S/    ROBERT L.
HOWARD-ANDERSON Robert L.
Howard-Anderson |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    CHRISTOPHER B.
FARRELL Christopher B. Farrell       |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    STEVEN M.
KRAUSZ Steven M. Krausz                   |  | Director                                                                      |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    ROBERT E.
BYLIN Robert E. Bylin                     |  | Director                                                                      |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    ROBERT B.
ABBOTT Robert B. Abbott                   |  | Director                                                                      |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    THOMAS E.
PARDUN Thomas E. Pardun                   |  | Director                                                                      |  | March 29, 2006
|                                                           |  |                                                                              
|/S/    KENNETH
COLE Kenneth Cole                           |  | Director                                                                      |  | March 29, 2006



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                              
|2.1*        |  | Agreement and Plan of Merger and Reorganization, dated as of November 9, 2001, by and among Registrant, Odin Acquisition Corp. and Occam Networks Inc. (incorporated by reference to Annex A to
the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                    
|            | 
|2.2         |  | Amendment to Agreement and Plan of Merger and Reorganization, dated as of December 26, 2001, by and among Registrant, Odin Acquisition Corp. and Occam Networks, Inc. (incorporated by
reference to Annex AA to the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).    
|            | 
|2.3         |  | Amendment No. 2 to Agreement and Plan of Merger and Reorganization, dated as of April 16, 2002, by and among Registrant, Odin Acquisition Corp. and Occam Networks, Inc. (incorporated by
reference to Annex AAA to the Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).
|            | 
|3.1         |  | Registrants Amended and Restated Certificate of Incorporation (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1
and all amendments, thereto (File No. 333-31732).                                                                                                                                     
|            | 
|3.1.1       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation effective May 14, 2002 (incorporated by reference to Exhibit 3.1.1 of the Registrants
Quarterly Report on Form 10-Q filed on May 14, 2003).                                                                                                                                    
|            | 
|3.1.2       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation effective June 3, 2003 (incorporated by reference to Exhibit 3.1.2 of the Registrants
Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                                                                 
|            | 
|3.1.3       |  | Registrants Certificate of Amendment of Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 11, 2004 (incorporated
by reference to Exhibit 3.1.3 of the Registrants Quarterly Report on Form 10-Q filed on November 15, 2004).                                                                      
|            | 
|3.2         |  | Registrants Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Registrants Quarterly Report on Form 10-Q filed on May 14, 2003).                                                                                                                                                                                                               
|            | 
|4.2         |  | Specimen common stock certificate of Registrant (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments,
thereto (File No. 333-31732).                                                                                                                                                    
|            | 
|4.4         |  | Form of Certificate of Designation of the Series A Preferred Stock filed with the Secretary of State of the State of Delaware (incorporated by reference to Exhibit 4.2 of the
Registrants Current Report on Form 8-K filed on December 19, 2002).                                                                                                                        
|            | 
|4.4.1       |  | Certificate of Occam Networks, Inc. Eliminating Matters Set Forth in Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 4.4.1 of the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                                           
|            | 
|4.6         |  | Note and Warrant Purchase Agreement, dated as of November 9, 2001 by and among Occam Networks (California), Inc. and certain existing investors (incorporated by reference to Annex H to the
Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                           
|            | 
|4.6.1       |  | First Amendment to Note and Warrant Purchase Agreement, dated as of December 19, 2002 by and among the Occam Networks, Inc., Occam Networks (California), Inc. and certain existing investors
(incorporated by reference to Exhibit 4.4 of the Registrants Current Report on Form 8-K filed on December 19, 2002).                                                        



46



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|            |  |                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                                                             
|4.8         |  | Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among Occam Networks, Inc. and the investors (incorporated by reference to Exhibit 4.3 of the
Registrants Current Report on Form 8-K filed on November 21, 2003).                                                                     
|            | 
|4.9         |  | Certificate of Designation of the Series A-2 Preferred Stock filed with the Secretary of State of the state of Delaware on November 19, 2003 (incorporated by reference to Exhibit 4.4 of the
Registrants Current Report on Form 8-K filed on November 21, 2003).                                                        
|            | 
|4.9.1       |  | Certificate Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock filed with the Secretary of State of Delaware on November 11, 2004
(incorporated by reference to the Exhibit 4.9.1 of the Registrants Quarterly Report on Form 10-Q filed on November 15, 2004).     
|            | 
|4.9.2       |  | Certificate of Registrant, Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock, filed with the Secretary of Sate of Delaware on
January 7, 2005 (incorporated by reference to Exhibit 4.9.2 of the Registrants Current Report on Form 8-K filed on January 13, 2004).
|            | 
|4.9.3       |  | Certificate of Registrant, Increasing the Number of Shares of Preferred Stock Designated as Series A-2 Convertible Preferred Stock, filed with the Secretary of Sate of Delaware on May 16,
2005 (incorporated by reference to Exhibit 4.9.3 of the Registrants Current Report on Form 8-K filed on May 17, 2005).       
|            | 
|4.11        |  | Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among Occam Networks, Inc. and the investors (incorporated by reference to Exhibit 4.6 of
the Registrants Current Report on Form 8-K filed on March 12, 2004).                                                     
|            | 
|4.12        |  | Series A-2 Preferred Stock Purchase Warrant issued to Alta Partners (incorporated by reference to Exhibit 4.7 of the Registrants Current Report on Form 8-K filed on March 12,
2004).                                                                                                                                    
|            | 
|4.12.1      |  | Amendment and Notice of Exercise dated April 20, 2005 between Occam Networks, Inc. and Alta California Partners III, L.P. (incorporated by reference to the Registrants Current Report on
Form 8-K filed on April 21, 2005).                                                                                             
|            | 
|4.13        |  | Series A-2 Preferred Stock Purchase Warrant issued to Alta Embarcadero Partners III, LLC (incorporated by reference to Exhibit 4.8 of the Registrants Current Report on Form 8-K filed on
March 12, 2004).                                                                                                               
|            | 
|4.13.1      |  | Amendment and Notice of Exercise dated April 20, 2005 between Occam Networks, Inc. and Alta Embarcadero Partners III, LLC (incorporated by reference to the Registrants Current Report on
Form 8-K filed on April 21, 2005).                                                                                             
|            | 
|4.14        |  | Letter agreement dated March 8, 2004 between Occam Networks, Inc. and Alta Partners relating to board rights (incorporated by reference to Exhibit 4.9 of the Registrants Current Report
on Form 8-K filed on March 12, 2004).                                                                                           
|            | 
|4.15        |  | Management rights agreement dated as of March 8, 2004 between Alta Partners and Occam Networks, Inc. (incorporated by reference to Exhibit 4.9 of the Registrants Current Report on Form
8-K filed on March 12, 2004).                                                                                                   
|            | 
|4.16        |  | Amendment No.2 to Series A-2 Preferred Stock Purchase Agreement dated as of November 19, 2003 by and among the Registrant and the investors (incorporated by reference to Exhibit 4.11 of the
Registrants Current Report on Form 8-K filed on April 9, 2004).                                                            
|            | 
|4.17        |  | Specimen Series A-2 stock certificate of Registrant (incorporated by reference for the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all
amendments thereto (File No. 333-125060)).                                                                                             



47



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|            |     |  |                                                                                                                                                                                                                                                                                                                                                                    
|----------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                      
|            |    
|10.9        | (3) |  | 1997 Stock Option/Stock Issuance Plan (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto
(File No. 333-31732).                                                                                                                                                      
|            |    
|10.11       | (3) |  | Employee Stock Purchase Plan (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No.
333-31732).                                                                                                                                                               
|            |    
|10.14       | (2) |  | Materials and Manufacturing Agreement Board Assembly Agreement dated as of March 15, 1999, by and between the Registrant and the Semiconductor Group of Arrow Electronics, Inc., as amended
(incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).
|            |    
|10.19       |     |  | Standard Industrial/Commercial Multi-Tenant Lease dated as of May 6, 1999, between the Registrant and Tyler Pacific III, LLC. (incorporated by reference to the Exhibit with the same number on
the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                              
|            |    
|10.25       | (3) |  | Form of Director Indemnification Agreement (incorporated by reference to the Exhibit with the same number on the Registrants Registration Statement on Form S-1 and all amendments,
thereto (File No. 333-31732).                                                                                                                                                 
|            |    
|10.26       | (3) |  | Form of Indemnification Agreement for all officers and directors appointed on or after May 14, 2003 (incorporated by reference to Exhibit 10.26 of the Registrants Annual Report on Form
10-K filed on March 31, 2003).                                                                                                                                           
|            |    
|10.27       |     |  | Senior Loan and Security Agreement No. L6244 dated as of May 28, 1999, by and between the Registrant and Phoenix Leasing Incorporated (incorporated by reference to the Exhibit with the same
number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                      
|            |    
|10.29       | (2) |  | Standard Industrial/Commercial Multi-Tenant Lease dated as of February 29, 2000, by and between the Registrant and Tyler Pacific III, LLC(incorporated by reference to the Exhibit with the
same number on the Registrants Registration Statement on Form S-1 and all amendments, thereto (File No. 333-31732).                                                   
|            |    
|10.35       |     |  | Retainer Agreement dated as of February 5, 2001 by and between the Registrant and Regent Pacific Management Corporation. (incorporated by reference to Exhibit 10.35 to the Registrants
Annual Report on Form 10-K filed on May 8, 2001).                                                                                                                         
|            |    
|10.38       |     |  | Form of Voting Agreement dated as of November 9, 2001 between Occam and certain (Registration No. 333-75816) stockholders of Registrant (incorporated by reference to Annex B to the
Registration Statement on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                           
|            |    
|10.39       |     |  | Form of Voting and Conversion Agreement dated as of November 9, 2001 between Registrant and certain Occam shareholders (incorporated by reference to Annex C to the Registration Statement
on Form S-4 (Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                                            
|            |    
|10.42       |     |  | Form of Funding Agreement dated as of November 9,2001 between Registrant and Occam (incorporated by reference to Annex F to the Registration Statement on Form S-4 (Registration No. 333-75816)
which the Securities and Exchange Commission declared effective on April 26, 2002).                                                                                



48



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|            |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |  | Exhibit Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |    
|10.43       |     |  | Guaranteed Promissory Note, dated as of March 18, 2002, issued by Occam in favor of the Registrant (incorporated by reference to Annex K1 to the Registration Statement on Form S-4
(Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).                                                                                                                                                                                                                                                          
|            |    
|10.44       |     |  | Secured Guaranty dated as of March 18, 2002, entered into by 2180 Associates Fund VII, L.P., New Enterprise Associates 9, L.P., Norwest Venture Partners VIII, L.P., NVP Entrepreneurs Fund
VIII, L.P., U.S. Venture Partners VII, L.P., USVP Entrepreneur Partners VII-A, L.P. and USVP Entrepreneur Partners VII-B, L.P. in favor of the Registrant (incorporated by reference to Annex K2 to the Registration Statement on Form S-4 (Registration
No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).       
|            |    
|10.45       |     |  | Guarantor Security Agreement, dated as of March 18, entered into by 2180 Associates Fund VII, L.P., New Enterprise Associates 9, L.P., Norwest Venture Partners VIII, L.P., NVP Entrepreneurs
Fund VIII, L.P., U.S. Venture Partners VII, L.P., USVP Entrepreneur Partners VII-A, L.P. and USVP Entrepreneur Partners VII-B, L.P. in favor of the Registrant (incorporated by reference to Annex K3 to the Registration Statement on Form S-4
(Registration No. 333-75816) which the Securities and Exchange Commission declared effective on April 26, 2002).
|            |    
|10.46       | (3) |  | Employment Agreement dated February 13, 2002 between the Registrant and Robert Howard-Anderson (incorporated by reference to Exhibit 10.46 of the Registrants Quarterly Report on Form
10-Q filed on August 12, 2002).                                                                                                                                                                                                                                                                                                                                       
|            |    
|10.47       | (3) |  | Employment Agreement dated June 17, 2002 between the Registrant and Howard Bailey (incorporated by reference to Exhibit 10.46 of the Registrants Quarterly Report on Form 10-Q filed on
August 12, 2002).                                                                                                                                                                                                                                                                                                                                                    
|            |    
|10.48       | (3) |  | Occam Networks Inc. 1999 Stock Plan (incorporated by reference to Exhibit 4.1 on the Registrants Statement on Form S-8 (File No. 333-91070)).                                                                                                                                                                                                                                                                                                                                                                                                                
|            |    
|10.49       | (3) |  | Occam Networks Inc. 1999 Stock Plan, Form of Stock Option Agreement (incorporated by reference to Exhibit 4.2 on the Registrants Statement on Form S-8 (File No.
333-91070).                                                                                                                                                                                                                                                                                                                                                                                 
|            |    
|10.50       | (3) |  | Occam Networks Inc. 1999 Stock Plan, Form of Stock Option AgreementEarly Exercise (incorporated by reference to Exhibit 4.3 on the Registrants Statement on Form S-8 (File No.
333-91070).                                                                                                                                                                                                                                                                                                                                                                  
|            |    
|10.51       |     |  | Master Lease Agreement dated December 8, 2000 by and between Comdisco, Inc. and Occam Networks (California), Inc. (incorporated by reference to Exhibit 99.1 of the Registrants Current
Report on Form 8-K filed on October 1, 2002).                                                                                                                                                                                                                                                                                                                        
|            |    
|10.52       |     |  | Standard Industrial/Commercial Multi-Tenant Lease dated March 26, 2001 by and between Applied Magnetics Corporation, a Delaware corporation DBA Innovative Micro Technology, and Occam Networks
(California), Inc., a California corporation (incorporated by reference to Exhibit 99.2 of the Registrants Current Report on Form 8-K filed on October 1, 2002).                                                                                                                                                                                             
|            |    
|10.53       |     |  | Loan and Security Agreement between Silicon Valley Bank and Occam Networks, Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report on
Form 10-Q filed on August 14, 2003).                                                                                                                                                                                                                                                                                                                                
|            |    
|10.54       |     |  | Warrant to Purchase Stock, dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                                                                                                                                                                                                                                                                                                                                                                       
|            |    
|10.55       |     |  | Security Agreement between Silicon Valley Bank and Occam Networks (California), Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the Registrants Quarterly Report
on Form 10-Q filed on August 14, 2003).                                                                                                                                                                                                                                                                                                                            



49



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|            |  |                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                                            
|            | 
|10.56       |  | Intellectual Property Security Agreement between Silicon Valley Bank and Occam Networks (California), Inc., dated June 16, 2003 (incorporated by reference to Exhibit 10.53 of the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2003).                                 
|            | 
|10.57       |  | Senior Loan and Security Agreement dated December 17, 2004, by and between the Registrant and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.57 of the
Registrants Current Report on Form 8-K filed on December 20, 2004).                           
|            | 
|10.58       |  | Warrant to acquire shares of common stock issued to Hercules Technology Growth Capital, Inc. on December 17, 2004 (incorporated by reference to Exhibit 10.58 of the Registrants Current
Report on Form 8-K filed on December 20, 2004).                                                
|            | 
|10.59       |  | Warrant to acquire shares of Series A-2 preferred stock to Hercules Technology Growth Capital, Inc. on December 17, 2004 (incorporated by reference to Exhibit 10.59 of the Registrants
Current Report on Form 8-K filed on December 20, 2004).                                         
|            | 
|10.61       |  | Series A-2 Preferred Stock Purchased Agreement dated as of January 7, 2005, among the Registrant and certain investors (incorporated by reference to Exhibit 10.61 of the Registrants
Current Report on Form 8-K filed on January 13, 2005).                                            
|            | 
|10.62       |  | Fourth Amended and Restated Investors Rights Agreement dated as of January 7, 2005, among the Registrant and certain holders of its capital stock (incorporated by reference to Exhibit
10.62 of the Registrants Current Report on Form 8-K filed on January 13, 2005).                
|            | 
|10.63       |  | Letter Amendment Agreement among the Registrant, Occam Networks (California), Inc. and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.63 of the
Registrants Current Report on Form 8-K filed on January 13, 2005).                                   
|            | 
|10.64       |  | Promissory Note between the Registrant and Hercules Technology Growth Capital, Inc. (incorporated by reference to Exhibit 10.64 of the Registrants Current Report on Form 8-K filed on
January 13, 2005).                                                                               
|            | 
|10.65       |  | Amendment No. 1 to Series A-2 Preferred Stock Purchase Agreement dated as of January 7, 2005, among the Registrant and certain investors (incorporated by reference to Exhibit 10.65 of the
Registrants Current Report on Form 8-K filed on March 24, 2005).                            
|            | 
|10.66       |  | Amendment No. 1 to Fourth Amended and Restated Investors Rights Agreement dated as of January 7,2005, among the Registrant and certain holders of its capital stock (incorporated by
reference to Exhibit 10.66 of the Registrants Current Report on Form 8-K filed on March 24, 2005).
|            | 
|10.67(2)    |  | Manufacturing License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.67 of the Registrants
Annual Report on Form 10-K filed on March 31, 2005)                                                 
|            | 
|10.67.1     |  | Amendment One to Manufacturing License Agreement dated March 18, 2005 between Tellabs Petaluma, Inc. and the Registrant (incorporated by reference to Exhibit 10.73 of the Registrants
Current Report on Form 8-K filed on May 17, 2005).                                               
|            | 
|10.68(2)    |  | Technology License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.68 of the Registrants Annual
Report on Form 10-K filed on March 31, 2005).                                                   
|            | 
|10.68.1     |  | Amendment One to Technology License Agreement dated March 18, 2005 between Tellabs Petaluma, Inc. and the Registrant (incorporated by reference to Exhibit 10.74 of the Registrants
Current Report on Form 8-K filed on May 17, 2005).                                                  



50



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##### Table of Contents

|            |     |  |                                                                                                                                                                                                                                                                                
|----------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |  | Exhibit Title                                                                                                                                                                                                                                                                  
|            |    
|10.70       | (2) |  | Supply Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc. (incorporated by reference to Exhibit 10.70 of the Registrants Annual Report on
Form 10-K filed on March 31, 2005).                                                     
|            |    
|10.71       |     |  | Form of Director Offer Letter dated September 16, 2004 for Robert Bylin, Thomas Pardun and Kenneth Cole (incorporated by reference to the Exhibit with the same number on the Registrants
Registration Statement on Form S-1 and all amendments thereto (File NO. 333-125060)).
|            |    
|10.76       | (3) |  | Executive Officer Stock Grant ProgramRestricted Stock Grant Agreement dated September 12, 2005 (incorporated by reference to Exhibit 10.75 of the Registrants Current Report on
Form 8-K filed in September 14, 2005).                                                       
|            |    
|10.77       |     |  | Standard Form Multi-Tenant Lease dated July 7, 2005, by and between Mission West Properties, L.P. II and the Registrant (incorporated by reference to Exhibit 10.77 of the Registrants
Current Report on Form 8-K filed on March 30, 2006).                                   
|            |    
|10.78       | (3) |  | Amended and Restated 2000 Stock Incentive plan, as amended June 2005.                                                                                                                                                                                                          
|            |    
|21.1        |     |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                
|            |    
|23.1        |     |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                           
|            |    
|23.2        |     |  | Consent of Singer Lewak Greenbaum & Goldstein LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                              
|            |    
|24.1        |     |  | Power of Attorney (included on page 45)                                                                                                                                                                                                                                        
|            |    
|31.1        |     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|            |    
|31.2        |     |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|            |    
|32.1        |     |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                             
|            |    
|32.2        |     |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                             

---

|(1) | Schedules omitted pursuant to Regulation S-K Item 601(b)(2) of the Securities Act. Registrant undertakes to furnish such schedules to the Commission upon request.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Confidential treatment has been requested and received for certain portions of this exhibit.
|--- | --------------------------------------------------------------------------------------------

|(3) | Management compensation plan/contract.
|--- | --------------------------------------



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INDEX TO FINANCIAL STATEMENTS



|                                                                                                |  |     
|----------------------------------------------------------------------------------------------- |  | ----
|                                                                                                |  | Page
|                                                                                                | 
|Report of Singer Lewak Greenbaum & Goldstein LLP, Independent Registered Public Accounting Firm |  | F-2 
|                                                                                                | 
|Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm             |  | F-3 
|                                                                                                | 
|Consolidated Balance Sheets                                                                     |  | F-4 
|                                                                                                | 
|Consolidated Statements of Operations                                                           |  | F-5 
|                                                                                                | 
|Consolidated Statements of Stockholders Deficit                                                |  | F-6 
|                                                                                                | 
|Consolidated Statements of Cash Flows                                                           |  | F-9 
|                                                                                                | 
|Notes to Consolidated Financial Statements                                                      |  | F-10



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders

Occam Networks, Inc. and subsidiary

Santa Barbara, California

We have audited the consolidated balance sheet of Occam Networks, Inc. and subsidiary (collectively, the Company) as of December 31, 2005 and the related consolidated statements of operations, stockholders deficit and cash
flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Occam Networks, Inc. and subsidiary as of December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/    SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

March 10, 2006



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Occam Networks, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements
of operations, stockholders equity (deficit) and cash flows present fairly, in all material respects, the financial position of Occam Networks, Inc. and its subsidiaries (the Company) at December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming the Company will continue
as a going concern. As discussed in Note 1 to the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2004, the Company has incurred significant operating losses and negative cash flows from operations
since inception. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regards to these matters are also described in Note 1 to the financial statements included in the
Annual Report on Form 10-K for the year ended December 31, 2004. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/    PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 25, 2005,
except for the effects

of the reverse stock split discussed in Note 16,

as to which the date is March 10, 2006.



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##### Table of Contents

OCCAM NETWORKS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | - | --------------- | - | -------- | -
|                                                                                                                                                                                                                                                                 |  | December 312005 |          |   | December 312004 |  
|ASSETS                                                                                                                                                                                                                                                           |  |                 |          |   |                 |   |          |  
|Current assets:                                                                                                                                                                                                                                                  |  |                 |          |   |                 |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                        |  | $               | 6,571    |   |                 | $ | 4,432    |  
|Restricted cash                                                                                                                                                                                                                                                  |  |                 | 3,749    |   |                 |   | 2,101    |  
|Accounts receivable, net                                                                                                                                                                                                                                         |  |                 | 9,403    |   |                 |   | 5,217    |  
|Inventories, net                                                                                                                                                                                                                                                 |  |                 | 4,448    |   |                 |   | 6,611    |  
|Prepaid and other current assets                                                                                                                                                                                                                                 |  |                 | 1,684    |   |                 |   | 794      |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total current assets                                                                                                                                                                                                                                             |  |                 | 25,855   |   |                 |   | 19,155   |  
|                                                                                                                                                                                                                                                                 |  |                
|Property and equipment, net                                                                                                                                                                                                                                      |  |                 | 1,889    |   |                 |   | 1,692    |  
|Other assets                                                                                                                                                                                                                                                     |  |                 | 203      |   |                 |   | 213      |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total assets                                                                                                                                                                                                                                                     |  | $               | 27,947   |   |                 | $ | 21,060   |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT                                                                                                                                                                                                |  |                 |          |   |                 |   |          |  
|                                                                                                                                                                                                                                                                 |  |                
|Current liabilities:                                                                                                                                                                                                                                             |  |                 |          |   |                 |   |          |  
|Accounts payable                                                                                                                                                                                                                                                 |  | $               | 4,100    |   |                 | $ | 6,277    |  
|Deferred Revenue                                                                                                                                                                                                                                                 |  |                 | 1,600    |   |                 |   |         |  
|Accrued expenses                                                                                                                                                                                                                                                 |  |                 | 4,859    |   |                 |   | 3,330    |  
|Current portion of long term debt and capital lease obligations                                                                                                                                                                                                  |  |                 | 1,233    |   |                 |   | 863      |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total current liabilities                                                                                                                                                                                                                                        |  |                 | 11,792   |   |                 |   | 10,470   |  
|                                                                                                                                                                                                                                                                 |  |                
|Long term debt and capital lease obligations                                                                                                                                                                                                                     |  |                 | 1,324    |   |                 |   | 2,987    |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total liabilities                                                                                                                                                                                                                                                |  |                 | 13,116   |   |                 |   | 13,457   |  
|                                                                                                                                                                                                                                                                 |  |                
|Commitments and contingencies (note 11)                                                                                                                                                                                                                          |  |                 |          |   |                 |   |          |  
|                                                                                                                                                                                                                                                                 |  |                
|Redeemable preferred stock                                                                                                                                                                                                                                       |  |                 |          |   |                 |   |          |  
|Series A-2 convertible preferred stock, $.001 par value, authorized 4,300 shares, 3,560 and 2,224 issued and outstanding at December 31,
2005 and 2004, respectively, liquidation preference of $106,800 and $66,723 at December 31, 2005 and 2004, respectively |  |                 | 34,869   |   |                 |   | 20,993   |  
|Series A-2 convertible preferred stock warrant                                                                                                                                                                                                                   |  |                 | 73       |   |                 |   | 503      |  
|                                                                                                                                                                                                                                                                 |  |                
|Stockholders deficit:                                                                                                                                                                                                                                           |  |                 |          |   |                 |   |          |  
|Common stock, $0.001 par value, 18,750 shares authorized; 6,871 and 6,714 shares issued and outstanding at December 31, 2005 and 2004,
respectively                                                                                                              |  |                 | 275      |   |                 |   | 269      |  
|Additional paid-in capital                                                                                                                                                                                                                                       |  |                 | 87,903   |   |                 |   | 87,294   |  
|Warrants                                                                                                                                                                                                                                                         |  |                 | 559      |   |                 |   | 559      |  
|Deferred stock compensation                                                                                                                                                                                                                                      |  |                 | (28      | ) |                 |   | (633     | )
|Accumulated deficit                                                                                                                                                                                                                                              |  |                 | (108,820 | ) |                 |   | (101,382 | )
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total stockholders deficit                                                                                                                                                                                                                                      |  |                 | (20,111  | ) |                 |   | (13,893  | )
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  
|Total liabilities, redeemable preferred stock and stockholders deficit                                                                                                                                                                                          |  | $               | 27,947   |   |                 | $ | 21,060   |  
|                                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |          |  

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



F-4



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##### Table of Contents

OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                        |  | Year ended December 31 |       
|                                                                        |  | 2005                   |        |   | 2004 |   |         | 2003 | 
|Sales                                                                   |  | $                      | 39,238 |   |      | $ | 17,329  |      |  | $ | 7,982   |  
|Cost of sales                                                           |  |                        | 27,208 |   |      |   | 15,829  |      |  |   | 7,930   |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Gross profit                                                            |  |                        | 12,030 |   |      |   | 1,500   |      |  |   | 52      |  
|                                                                        |  |                        |       
|Operating expenses:                                                     |  |                        |        |   |      |   |         |      |  |   |         |  
|Research and product development                                        |  |                        | 7,440  |   |      |   | 7,448   |      |  |   | 12,004  |  
|Sales and marketing                                                     |  |                        | 8,349  |   |      |   | 6,584   |      |  |   | 5,977   |  
|General and administrative                                              |  |                        | 3,420  |   |      |   | 2,328   |      |  |   | 2,331   |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                |  |                        | 19,209 |   |      |   | 16,360  |      |  |   | 20,312  |  
|                                                                        |  |                        |       
|Loss from operations                                                    |  |                        | (7,179 | ) |      |   | (14,860 | )    |  |   | (20,260 | )
|                                                                        |  |                        |       
|Interest income                                                         |  |                        | 249    |   |      |   | 94      |      |  |   | 101     |  
|Interest expense                                                        |  |                        | (508   | ) |      |   | (223    | )    |  |   | (284    | )
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Loss before income taxes                                                |  |                        | (7,438 | ) |      |   | (14,989 | )    |  |   | (20,443 | )
|                                                                        |  |                        |       
|Income tax benefit                                                      |  |                        |       |   |      |   |        |      |  |   | 11      |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Net loss                                                                |  |                        | (7,438 | ) |      |   | (14,989 | )    |  |   | (20,432 | )
|                                                                        |  |                        |       
|Beneficial conversion feature                                           |  |                        | (1,822 | ) |      |   | (3,288  | )    |  |   | (3,038  | )
|Interest attributable to common stock potentially subject to rescission |  |                        |       |   |      |   |        |      |  |   | 500     |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Net loss attributable to common stockholders                            |  |                        | (9,260 | ) |      |   | (18,277 | )    |  |   | (22,970 | )
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|                                                                        |  |                        |       
|Net loss per share:                                                     |  |                        |        |   |      |   |         |      |  |   |         |  
|Basic and diluted                                                       |  | $                      | (1.37  | ) |      | $ | (2.73   | )    |  | $ | (4.36   | )
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|                                                                        |  |                        |       
|Weighted average shares:                                                |  |                        |        |   |      |   |         |      |  |   |         |  
|Basic and diluted                                                       |  |                        | 6,759  |   |      |   | 6,695   |      |  |   | 5,268   |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|                                                                        |  |                        |       
|Amortization of stock-based compensation included in:                   |  |                        |        |   |      |   |         |      |  |   |         |  
|Research and product development                                        |  | $                      | 519    |   |      | $ | 693     |      |  | $ | 943     |  
|Sales and marketing                                                     |  |                        | 70     |   |      |   | 119     |      |  |   | 179     |  
|General and administrative                                              |  |                        | 6      |   |      |   | 40      |      |  |   | 105     |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  
|Total amortization of stock-based compensation                          |  | $                      | 595    |   |      | $ | 852     |      |  | $ | 1,227   |  
|                                                                        |  |                        |        |   |      |   |         |      |  |   |         |  

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



F-5



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##### Table of Contents

OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT

(In thousands)

Years ended
December 31, 2005, 2004 and 2003



|                                                                                                     |        |                           |        |   |                                   |   |        |              |        |          |  |                      |  |   |                          |  |   |                     |  |   |       |   |  |   |        |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- | ------ | ------------------------- | ------ | - | --------------------------------- | - | ------ | ------------ | ------ | -------- |  | -------------------- |  | - | ------------------------ |  | - | ------------------- |  | - | ----- | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                                                     |        | Series A-2Preferred Stock |        |   | Series A-2Preferred StockWarrants |   |        | Common Stock |        | Warrants |  | DeferredCompensation |  |   | AdditionalPaid inCapital |  |   | Accumulated Deficit |  |   | Total |  
|                                                                                                     |        |                           |        |   |                                   |   |       
|                                                                                                     |        |                           |        |   |                                   |   |       
|                                                                                                     | Shares |                           | Amount |   |                                   |   | Shares |              | Amount |          |  |                      |  |  
|Balance at December 31, 2004                                                                         |        | 2,224                     |        | $ | 20,993                            |   |        | $            | 503    |          |  | 6,714                |  | $ | 269                      |  | $ | 559                 |  | $ | (633  | ) |  | $ | 87,294 |   |  | $ | (101,382 | ) |  | $ | (13,893 | )
|Issuance of series A-2, redeemable preferred stock net of issuance costs, and conversion of warrants |        | 1,336                     |        |   | 13,876                            |   |        |              | (515   | )        |  |                     |  |   |                         |  |   |                    |  |   |      |   |  |   |       |   |  |   |         |   |  |   |        |  
|Exercise of stock options                                                                            |        |                          |        |   |                                  |   |        |              |       |          |  | 146                  |  |   | 6                        |  |   |                    |  |   |      |   |  |   | 583    |   |  |   |         |   |  |   | 589     |  
|Stock grant to officer, net                                                                          |        |                          |        |   |                                  |   |        |              |       |          |  | 11                   |  |   |                         |  |   |                    |  |   |      |   |  |   | 121    |   |  |   |         |   |  |   | 121     |  
|Amortization of deferred stock-based compensation                                                    |        |                          |        |   |                                  |   |        |              |       |          |  |                     |  |   |                         |  |   |                    |  |   | 605   |   |  |   | (10    | ) |  |   |         |   |  |   | 595     |  
|Record beneficial conversion feature                                                                 |        |                          |        |   | (1,737                            | ) |        |              |       |          |  |                     |  |   |                         |  |   |                    |  |   |      |   |  |   | 1,737  |   |  |   |         |   |  |   | 1,737   |  
|Amortization of beneficial conversion feature                                                        |        |                          |        |   | 1,737                             |   |        |              | 85     |          |  |                     |  |   |                         |  |   |                    |  |   |      |   |  |   | (1,822 | ) |  |   |         |   |  |   | (1,822  | )
|Net loss                                                                                             |        |                          |        |   |                                  |   |        |              |       |          |  |                     |  |   |                         |  |   |                    |  |   |      |   |  |   |       |   |  |   | (7,438   | ) |  |   | (7,438  | )
|                                                                                                     |        |                           |        |   |                                   |   |        |              |        |          |  |                      |  |   |                          |  |   |                     |  |   |       |   |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2005                                                                         |        | 3,560                     |        | $ | 34,869                            |   |        | $            | 73     |          |  | 6,871                |  | $ | 275                      |  | $ | 559                 |  | $ | (28   | ) |  | $ | 87,903 |   |  | $ | (108,820 | ) |  | $ | (20,111 | )
|                                                                                                     |        |                           |        |   |                                   |   |        |              |        |          |  |                      |  |   |                          |  |   |                     |  |   |       |   |  |   |        |   |  |   |          |   |  |   |         |  



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



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##### Table of Contents

OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT

(In thousands)

Years ended December 31, 2005, 2004 and 2003



|                                                                                       |  |                            |  |        |                                   |   |  |              |      |          |        |                      |   |  |                          |     |  |                    |     |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | -------------------------- |  | ------ | --------------------------------- | - |  | ------------ | ---- | -------- | ------ | -------------------- | - |  | ------------------------ | --- |  | ------------------ | --- |  | ----- | ------ | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                                       |  | Series A-2 Preferred Stock |  |        | Series A-2Preferred StockWarrants |   |  | Common Stock |      | Warrants |        | DeferredCompensation |   |  | AdditionalPaid inCapital |     |  | AccumulatedDeficit |     |  | Total |       
|                                                                                       |  | Shares                     |  | Amount |                                   |   |  | Shares       |      |          | Amount |                      |   |  |                          |    
|Balance at December 31, 2003                                                           |  | 1,651                      |  | $      | 16,381                            |   |  | $            |     |          |        | 6,675                |   |  | $                        | 267 |  | $                  | 454 |  | $     | (1,627 | ) |  | $ | 87,238 |   |  | $ | (86,393  | ) |  | $ | (61     | )
|Exercise of stock options                                                              |  |                           |  |        |                                  |   |  |              |     |          |        | 41                   |   |  |                          | 2   |  |                    |    |  |       |       |   |  |   | 113    |   |  |   |         |   |  |   | 115     |  
|Shares repurchased                                                                     |  |                           |  |        |                                  |   |  |              |     |          |        | (2                   | ) |  |                          |    |  |                    |    |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based compensation                                      |  |                           |  |        |                                  |   |  |              |     |          |        |                     |   |  |                          |    |  |                    |    |  |       | 852    |   |  |   |       |   |  |   |         |   |  |   | 852     |  
|Reversal of deferred stock-based compensation on forfeiture of stock options           |  |                           |  |        |                                  |   |  |              |     |          |        |                     |   |  |                          |    |  |                    |    |  |       | 142    |   |  |   | (142   | ) |  |   |         |   |  |   |        |  
|Issuance of series A-2, redeemable preferred stock and warrants, net of issuance costs |  | 573                        |  |        | 4,612                             |   |  |              | 515  |          |        |                     |   |  |                          |    |  |                    |    |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|Record beneficial conversion feature                                                   |  |                           |  |        | (2,893                            | ) |  |              | (480 | )        |        |                     |   |  |                          |    |  |                    |    |  |       |       |   |  |   | 3,373  |   |  |   |         |   |  |   | 3,373   |  
|Amortize beneficial conversion feature                                                 |  |                           |  |        | 2,893                             |   |  |              | 395  |          |        |                     |   |  |                          |    |  |                    |    |  |       |       |   |  |   | (3,288 | ) |  |   |         |   |  |   | (3,288  | )
|Issuance of warrants with long term debt                                               |  |                           |  |        |                                  |   |  |              | 73   |          |        |                     |   |  |                          |    |  |                    | 105 |  |       |       |   |  |   |       |   |  |   |         |   |  |   | 105     |  
|Net loss                                                                               |  |                           |  |        |                                  |   |  |              |     |          |        |                     |   |  |                          |    |  |                    |    |  |       |       |   |  |   |       |   |  |   | (14,989  | ) |  |   | (14,989 | )
|                                                                                       |  |                            |  |        |                                   |   |  |              |      |          |        |                      |   |  |                          |     |  |                    |     |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2004                                                           |  | 2,224                      |  | $      | 20,993                            |   |  | $            | 503  |          |        | 6,714                |   |  | $                        | 269 |  | $                  | 559 |  | $     | (633   | ) |  | $ | 87,294 |   |  | $ | (101,382 | ) |  | $ | (13,893 | )
|                                                                                       |  |                            |  |        |                                   |   |  |              |      |          |        |                      |   |  |                          |     |  |                    |     |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  

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



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##### Table of Contents

OCCAM NETWORKS, INC.

STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)

(In thousands)

Years ended December 31, 2005, 2004, and 2003



|                                                                                                                   |  |                           |  |        |                          |   |        |              |   |          |   |         |                                  |  |       |                                  |  |   |                           |  |   |                     |   |  |       |        |   |  |   |     |   |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ------ | ------------------------ | - | ------ | ------------ | - | -------- | - | ------- | -------------------------------- |  | ----- | -------------------------------- |  | - | ------------------------- |  | - | ------------------- | - |  | ----- | ------ | - |  | - | --- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                   |  | Series A-2Preferred Stock |  |        | Series A Preferred Stock |   |        | Common Stock |   | Warrants |   |         | Deferred Stock BasedCompensation |  |       | CumulativeTranslation Adjustment |  |   | AdditionalPaid in Capital |  |   | Accumulated Deficit |   |  | Total |       
|                                                                                                                   |  | Shares                    |  | Amount |                          |   | Shares |              |   | Amount   |   |         | Shares                           |  |       | Amount                           |  |   |                           |  |   |                    
|Balance at December 31, 2002                                                                                       |  |                          |  | $      |                         |   |        | 1,472        |   |          | $ | 10,811  |                                  |  | 3,522 |                                  |  | $ | 141                       |  | $ | 480                 |   |  | $     | (3,432 | ) |  | $ | 16  |   |  | $ | 65,254 |   |  | $ | (65,961 | ) |  | $ | 7,309   |  
|Exercise of stock options                                                                                          |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  | 79    |                                  |  |   | 3                         |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 252    |   |  |   |        |   |  |   | 255     |  
|Repurchase of early exercise options                                                                               |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  | (3    | )                                |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | (7     | ) |  |   |        |   |  |   | (7      | )
|Increase in deemed fair value of stock options issued to consultants in exchange for ongoing professional
services |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       | 2      |   |  |   |    |   |  |   | (2     | ) |  |   |        |   |  |   |        |  
|Reversal of deferred stock-based compensation on forfeiture of stock options                                       |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       | 576    |   |  |   |    |   |  |   | (576   | ) |  |   |        |   |  |   |        |  
|Amortization of deferred stock-based compensation                                                                  |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       | 1,227  |   |  |   |    |   |  |   |       |   |  |   |        |   |  |   | 1,227   |  
|Issuance of series A-2 redeemable preferred stock, net of issuance costs                                           |  | 1,651                     |  |        | 16,381                   |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   |       |   |  |   |        |   |  |   |        |  
|Record beneficial conversion feature                                                                               |  |                          |  |        | (3,038                   | ) |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 3,038  |   |  |   |        |   |  |   | 3,038   |  
|Amortize beneficial conversion feature                                                                             |  |                          |  |        | 3,038                    |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | (3,038 | ) |  |   |        |   |  |   | (3,038  | )
|Issuance of series A preferred stock, net of issuance costs                                                        |  |                          |  |        |                         |   |        | 154          |   |          |   | 1,035   |                                  |  |      |                                  |  |   |                          |  |   | (26                 | ) |  |       |       |   |  |   |    |   |  |   |       |   |  |   |        |   |  |   | 1,009   |  
|Exchange of series A preferred stock for common stock                                                              |  |                          |  |        |                         |   |        | (1,626       | ) |          |   | (11,846 | )                                |  | 3,077 |                                  |  |   | 123                       |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 11,723 |   |  |   |        |   |  |   |        |  
|Common stock potentially subject to rescission                                                                     |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 10,000 |   |  |   |        |   |  |   | 10,000  |  
|Interest on common stock potentially subject to rescission                                                         |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 500    |   |  |   |        |   |  |   | 500     |  
|Issuance of warrants in connection with issuance of note payable                                                   |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   | 94     |   |  |   |        |   |  |   | 94      |  
|Cumulative translation adjustment                                                                                  |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   | (16 | ) |  |   |       |   |  |   |        |   |  |   | (16     | )
|Net loss                                                                                                           |  |                          |  |        |                         |   |        |             |   |          |   |        |                                  |  |      |                                  |  |   |                          |  |   |                    |   |  |       |       |   |  |   |    |   |  |   |       |   |  |   | (20,432 | ) |  |   | (20,432 | )
|                                                                                                                   |  |                           |  |        |                          |   |        |              |   |          |   |         |                                  |  |       |                                  |  |   |                           |  |   |                     |   |  |       |        |   |  |   |     |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                                                       |  | 1,651                     |  | $      | 16,381                   |   |        |             |   |          | $ |        |                                  |  | 6,675 |                                  |  | $ | 267                       |  | $ | 454                 |   |  | $     | (1,627 | ) |  | $ |    |   |  | $ | 87,238 |   |  | $ | (86,393 | ) |  | $ | (61     | )
|                                                                                                                   |  |                           |  |        |                          |   |        |              |   |          |   |         |                                  |  |       |                                  |  |   |                           |  |   |                     |   |  |       |        |   |  |   |     |   |  |   |        |   |  |   |         |   |  |   |         |  

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



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##### Table of Contents

OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                         |  | Year ended December 31 |       
|                                                                                         |  | 2005                   |        |   | 2004 |   |         | 2003 | 
|Operating activities                                                                     |  |                        |        |   |      |   |         |      |  |   |         |  
|Net loss                                                                                 |  | $                      | (7,438 | ) |      | $ | (14,989 | )    |  | $ | (20,432 | )
|Adjustments to reconcile net loss to net cash used in operating activities:              |  |                        |        |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                            |  |                        | 1,045  |   |      |   | 1,296   |      |  |   | 2,084   |  
|Provision for excess and obsolete inventory                                              |  |                        | 534    |   |      |   | 389     |      |  |   | 404     |  
|Non-cash charges relating to stock options and warrants                                  |  |                        | 716    |   |      |   | 936     |      |  |   | 1,300   |  
|Writeoff of note receivable                                                              |  |                        | 399    |   |      |   |        |      |  |   |        |  
|Changes in operating assets and liabilities:                                             |  |                        |        |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                      |  |                        | (4,186 | ) |      |   | (2,875  | )    |  |   | (1,346  | )
|Inventory                                                                                |  |                        | 1,629  |   |      |   | (4,746  | )    |  |   | (1,862  | )
|Prepaid expenses and other assets                                                        |  |                        | (1,310 | ) |      |   | 261     |      |  |   | (19     | )
|Accounts payable                                                                         |  |                        | (2,177 | ) |      |   | 3,276   |      |  |   | 1,400   |  
|Deferred Revenue                                                                         |  |                        | 1,600  |   |      |   |        |      |  |   |        |  
|Accrued expenses                                                                         |  |                        | 1,529  |   |      |   | 953     |      |  |   | (1,030  | )
|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  
|Net cash used in operating activities                                                    |  |                        | (7,659 | ) |      |   | (15,499 | )    |  |   | (19,501 | )
|                                                                                         |  |                        |       
|Investing activities                                                                     |  |                        |        |   |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                      |  |                        | (1,216 | ) |      |   | (1,052  | )    |  |   | (736    | )
|Restricted cash                                                                          |  |                        | (1,648 | ) |      |   | (1,166  | )    |  |   | (935    | )
|Sale of India operations                                                                 |  |                        |       |   |      |   |        |      |  |   | (539    | )
|Other assets                                                                             |  |                        | 5      |   |      |   | 59      |      |  |   |        |  
|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                    |  |                        | (2,859 | ) |      |   | (2,159  | )    |  |   | (2,210  | )
|                                                                                         |  |                        |       
|Financing activities                                                                     |  |                        |        |   |      |   |         |      |  |   |         |  
|Proceeds from capital lease obligations and notes payable                                |  |                        |       |   |      |   |        |      |  |   | 921     |  
|Payments of capital lease obligations and notes payable                                  |  |                        | (758   | ) |      |   | (708    | )    |  |   | (784    | )
|Proceeds from issuance of long-term debt attached with common stock warrants             |  |                        |       |   |      |   | 2,970   |      |  |   |        |  
|Proceeds from issuance of series A preferred stock, net of issuance costs                |  |                        |       |   |      |   |        |      |  |   | 1,035   |  
|Proceeds from issuance of series A-2 preferred stock and warrants, net of issuance costs |  |                        | 12,826 |   |      |   | 5,127   |      |  |   | 16,381  |  
|Proceeds from the exercise of stock options                                              |  |                        | 589    |   |      |   | 115     |      |  |   | 255     |  
|Repurchase of common stock                                                               |  |                        |       |   |      |   |        |      |  |   | (7      | )
|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                |  |                        | 12,657 |   |      |   | 7,504   |      |  |   | 17,801  |  
|                                                                                         |  |                        |       
|Net increase (decrease) in cash and cash equivalents                                     |  |                        | 2,139  |   |      |   | (10,154 | )    |  |   | (3,910  | )
|Cash and cash equivalents, beginning of period                                           |  |                        | 4,432  |   |      |   | 14,586  |      |  |   | 18,496  |  
|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                      | 6,571  |   |      | $ | 4,432   |      |  | $ | 14,586  |  
|                                                                                         |  |                        |        |   |      |   |         |      |  |   |         |  

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



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

Note 1. Organization, Business
and Basis of Presentation

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

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

On February 23, 2006, the Company announced a 1-for-40 reverse stock split
which was previously authorized at its annual meeting of stockholders held on June 21, 2005. The record date for the reverse split was March 10, 2006 and Occam began trading on the NASD Electronic Bulletin Board (OTCBB) on a split-adjusted
basis on Monday, March 13, 2006 under the new symbol OCNW. As a result of the reverse split, the conversion ratio of Series A-2 preferred stock was proportionately adjusted, decreasing the number of shares of common stock issuable
upon conversion of each share of Series A-2 preferred stock from approximately 90.91 shares of common stock to 2.27275 shares of common stock. The share information in the accompanying financial statements have been retroactively restated to give
effect to the reverse stock split.

Note 2. Summary of Significant Accounting Policies

Fiscal Period EndOccam reports its quarterly results based on a thirteen-week accounting calendar. Accordingly, the actual period end
dates for the years ended December 31, 2005, 2004 and 2003 were December 25, December 26 and December 28, respectively. Also, for financial presentation purposes, Occam reports its quarterly interim results as of the last
calendar day of the last full month within the period.

Use of EstimatesThe preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes.
Actual results could differ from those estimates and such differences may be material to the consolidated financial statements.

Cash
EquivalentsCash equivalents consist of investments with original maturities of three months or less from the date of purchase. Due to the short-term nature of these investments, the carrying amounts of cash equivalents reported in the
consolidated balance sheet approximate their fair value.

Restricted CashAt December 31, 2005, restricted cash consists
of a $3.6 million of bonds used to support performance bonds required for RUS funded contracts and $120,000 in certificate of deposit required for a credit line on Companys credit cards.

Financial InstrumentsDue to their short-term nature and relatively stable interest rate environment the carrying values of financial
instruments, which include accounts receivable, accounts payable and accrued expenses approximate fair values at December 31, 2005 and 2004. The carrying value of notes payable and capital leases approximate fair value as they bear interest
commensurate with their risk.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Accounts Receivable and Allowance for Doubtful AccountsTrade accounts receivable
are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The allowance for doubtful accounts is
determined based on historical write-off experience, current customer information and other relevant data. Occam reviews the allowance for doubtful accounts monthly. Past due balances of 90 days and over are reviewed individually for collectibility.
Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. As of December 31, 2005 and 2004 the allowance for doubtful accounts was $40,000 and $22,000, respectively.

InventoriesInventories are goods held for sales in the normal course of business. Inventories are stated at the lower
of cost (first-in, first-out) or market. The inventory balance is segregated between raw materials, work in process (WIP) and finished goods. Raw materials are low level components, many of which are purchased from vendors, WIP is
partially assembled products and finished goods are products that are ready to be shipped to end customers. Consideration is given to inventory shipped and received near the end of a period and the transaction is recorded when transfer of title
occurs. Management regularly evaluates inventory for obsolescence and adjusts to net realizable value based on inventory that is obsolete or in excess of current demand.

Property and EquipmentProperty and equipment are stated at cost. Expenditures for additions and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years for furniture and fixtures, two to three years for computer hardware and two to five years for software.
Leasehold improvements are amortized over the shorter of the lease term or the remaining useful economic life. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is credited or charged to income.

Long-Lived AssetsOccam reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. Occam has identified no such impairment losses.

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



|                                            |  |                   |       |   |                   |   |      |                  |  |   |      |  
|------------------------------------------- |  | ----------------- | ----- | - | ----------------- | - | ---- | ---------------- |  | - | ---- | -
|                                            |  | December 31, 2005 |       |   | December 31, 2004 |   |      | December 31,2003 | 
|Warranty liability at beginning of the year |  | $                 | 675   |   |                   | $ | 331  |                  |  | $ | 267  |  
|Accruals for warranty during the year       |  |                   | 893   |   |                   |   | 497  |                  |  |   | 239  |  
|Warranty utilization                        |  |                   | (475  | ) |                   |   | (153 | )                |  |   | (175 | )
|                                            |  |                   |       |   |                   |   |      |                  |  |   |      |  
|Warranty liability at end of the year       |  | $                 | 1,093 |   |                   | $ | 675  |                  |  | $ | 331  |  

Revenue RecognitionOccam recognizes revenue when persuasive evidence of a
sales arrangement exists, delivery has occurred or services have been rendered, the buyers price is fixed or determinable and collectability



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



is reasonably assured. Occam provides customer training and post-sales technical support and maintenance to its customers as needed to assist them in
installation or use of its products, and makes provisions for these costs in the period of sale. Occam further warrants its products for periods up to 5 years and records an estimate of warranty costs when revenue is recognized.

In certain circumstances, Occam enters into arrangements with customers who receive financing support in the form of long-term low interest rate loans
from the United States Department of Agricultures Rural Utilities Service (RUS). The terms of the RUS contracts provide that in certain instances transfer of title of Occams products does not occur until payment has been received. In
these cases, Occam does not recognize revenue until payment has been received, assuming the remaining revenue recognition criteria are met.

Net Loss Per ShareBasic and diluted net loss per share was computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding during
the period. The calculation of diluted net loss per share gives effect to potential common shares; however, potential common shares are excluded if their effect is antidilutive. Potential common shares are composed of preferred stock, common stock
subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants.

Accounting for Stock-Based CompensationOccam accounts for stock option grants to employees and directors in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees and the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, compensation expense is based on the difference, if any, on the date of grant between the estimated fair value of
Occams common stock and the stock option exercise price. Compensation expense is recognized ratably over the stock option vesting period.

The following table illustrates the effect on net loss and net loss per share if Occam had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):



|                                                                           |  |                         |        |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                           |  | Year Ended December 31, |       
|                                                                           |  | 2005                    |        |   | 2004 |   |         | 2003 | 
|Net loss, as reported:                                                     |  | $                       | (7,438 | ) |      | $ | (14,989 | )    |  | $ | (20,432 | )
|Add: Stock-based compensation, intrinsic value method reported in net loss |  |                         | 595    |   |      |   | 852     |      |  |   | 1,227   |  
|Deduct: Pro forma stock-based compensation fair value method               |  |                         | 1,643  |   |      |   | 1,381   |      |  |   | 1,661   |  
|                                                                           |  |                         |        |   |      |   |         |      |  |   |         |  
|Net loss, pro forma                                                        |  | $                       | (8,486 | ) |      | $ | (15,518 | )    |  | $ | (20,866 | )
|                                                                           |  |                         |        |   |      |   |         |      |  |   |         |  
|Basic and diluted loss per share attributable to common stockholders:      |  |                         |        |   |      |   |         |      |  |   |         |  
|As reported                                                                |  | $                       | (1.37  | ) |      | $ | (2.73   | )    |  | $ | (4.36   | )
|Pro forma                                                                  |  | $                       | (1.53  | ) |      | $ | (2.81   | )    |  | $ | (4.44   | )



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The effects of applying SFAS No. 123 in the above pro forma disclosure are not indicative of
future amounts, and additional awards in future years are anticipated. For purposes of pro forma disclosures, the estimated fair value of the options was amortized ratably over the options vesting period, and the following assumptions were
used:



|                          |  |                         |   |  |      |   |  |      |  
|------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                          |  | Year ended December 31, |  
|                          |  | 2005                    |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rate   |  | 4.0                     | % |  | 4.0  | % |  | 3.0  | %
|Expected lives (in years) |  | 4.0                     |   |  | 4.0  |   |  | 5.0  |  
|Dividend yield            |  | 0.0                     | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility       |  | 80.0                    | % |  | 80.0 | % |  | 80.0 | %

Warrants issued with notes payable, preferred stock or lines of creditIn
accordance with APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, the Company allocates the proceeds received between the note payable or preferred stock and warrants based on their relative fair
values. The resulting discount recorded on the note payable is accreted to interest expense over the term of the note. The fair value of warrants issued in connection with lines of credit are recorded as other assets and amortized to interest
expense over the term of the line of credit agreement.

Income TaxesIncome taxes are accounted for using the
liability method. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Research and Product DevelopmentResearch and product development costs are expensed as incurred.

Advertising CostsOccam expenses advertising costs as incurred. Advertising expense totaled $55,000, $19,000 and $15,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Segment InformationSFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes
standards for the way companies report information about operating segments in annual financial statements and related disclosures about products and services, geographic areas and major customers. Based on the manner in which management analyzes
its business, Occam has determined that its business consists of one operating segment.

Comprehensive LossSFAS
No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. For the years ended December 31,
2005 and 2004 and 2003, there were no differences between the Companys net loss and total comprehensive loss.

Principles of
ConsolidationThe consolidated financial statements include the accounts of Occam Networks, Inc. and its wholly-owned subsidiary. All inter-company accounts and transactions have been eliminated in consolidation.

Recent Accounting Pronouncements

In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43 (SFAS 151), which is the result of its efforts to converge U.S.



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs and
wasted material (spoilage) costs to be recognized as current period charges. It also requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. SFAS No. 151
will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) which
requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of operations. In March 2005,
the SEC released Staff Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107) relating to the adoption of SFAS 123(R). Beginning in the first quarter of 2006, we will adopt SFAS 123(R) under the modified
prospective transition method using the Black-Scholes pricing model. Under the new standard, our estimate of compensation expense will require a number of complex and subjective assumptions including our stock price volatility, employee exercise
patterns (expected life of the options), future forfeitures and related tax effects. During the first quarter of fiscal 2006, we will begin recording the fair value of our share-based compensation in our consolidated financial statements in
accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (Revised 2004). The Company is currently in the process of estimating the effect of SFAS No. 123 on its consolidated statement of
operations and anticipate that the stock based compensation expense calculated under SFAS No. 123 (revised 2004) will have a material adverse effect on its consolidated statements of operations.

In October 2005, the FASB issued Financial Statement of Position (FSP) FAS 123(R)-2, Practical Accommodation to the Application of
Grant Date as Defined in FAS 123(R) (FSP 123(R)-2). FSP 123(R)-2 provides guidance on the application of grant date as defined in SFAS No. 123(R). In accordance with this standard a grant date of an award exists if a) the
award is a unilateral grant and b) the key terms and conditions of the award are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The Company will adopt this standard when
it adopts FAS 123(R) beginning in the first quarter of 2006. The Company does not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.

In November 2005, the FASB issued FSP FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards
(FSP 123(R)-3). FSP 123(R)-3 provides an elective alternative method that establishes a computational component to arrive at the beginning balance of the accumulated paid-in capital pool related to employee compensation and a simplified
method to determine the subsequent impact of the accumulated paid-in capital pool employee awards that are fully vested and outstanding upon the adoption of SFAS No. 123(R). The Company is currently evaluating this transition method.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154). SFAS
No. 154 is a replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective
application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company will apply the requirements of SFAS No. 154 on accounting changes made on or after January 1, 2006.



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for
Certain Hybrid Instruments-an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 eliminates the need to bifurcate the derivative from its host, as previously required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedge Accounting
(SFAS 133). SFAS 155 also amends SFAS 133 by establishing a requirement to evaluate interests in securitized financial assets to determine whether they are free standing derivatives or whether they contain embedded derivatives that
require bifurcation. SFAS 155 is effective for all hybrid financial instruments acquired or issued by the Company on or after January 1, 2007. The Company does not anticipate any material impact to its financial condition or results of operations as
a result of the adoption of SFAS 155.

Note 3. Inventories

Inventories consist of the following (in thousands):



|                |  |              |       |      |   |      
|--------------- |  | ------------ | ----- | ---- | - | -----
|                |  | December 31,
|                |  | 2005         |       | 2004
|Raw materials   |  | $            | 85    |      | $ | 294  
|Work-in-process |  |              | 30    |      |   | 256  
|Finished goods  |  |              | 4,275 |      |   | 6,061
|                |  |              |       |      |   |      
|                |  | $            | 4,390 |      | $ | 6,611

Note 4. Property and Equipment

The major components of property and equipment are as follows (in thousands):



|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  | 2005         |        |   | 2004 |  
|Computer hardware and software                 |  | $            | 7,113  |   |      | $ | 6,046  |  
|Furniture and fixtures                         |  |              | 223    |   |      |   | 342    |  
|Leasehold improvements                         |  |              | 402    |   |      |   | 787    |  
|                                               |  |              |        |   |      |   |        |  
|                                               |  |              | 7,738  |   |      |   | 7,175  |  
|Less accumulated depreciation and amortization |  |              | (5,849 | ) |      |   | (5,483 | )
|                                               |  |              |        |   |      |   |        |  
|                                               |  | $            | 1,889  |   |      | $ | 1,692  |  

Property and equipment under capital leases had an original cost of $2,244,000 for 2005 and 2004,
and accumulated amortization thereon of $2,194,000 and $2,119,000 at December 31, 2005 and 2004, respectively.



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Note 5. Accrued Expenses

The major components of accrued expenses are as follows (in thousands):



|                                            |  |              |       |      |   |      
|------------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                            |  | December 31,
|                                            |  | 2005         |       | 2004
|Payroll, paid time off and related accruals |  | $            | 1,062 |      | $ | 820  
|Deferred revenue                            |  |              | 1,600 |      |   |     
|Warranty accruals                           |  |              | 1,093 |      |   | 675  
|Loss purchase commitments                   |  |              |      |      |   | 482  
|Product failure accrual                     |  |              | 266   |      |   | 307  
|Royalty accruals                            |  |              | 343   |      |   | 340  
|Other accruals                              |  |              | 495   |      |   | 706  
|                                            |  |              |       |      |   |      
|Total                                       |  | $            | 4,859 |      | $ | 3,330

Note 6. Long-Term Debt and Capital Lease Obligations

At December 31, 2005 and 2004, long term debt and capital lease obligations consisted of the following (amounts in thousands):



|                                                                     |  |                  |        |   |                  |   |       |  
|-------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ----- | -
|                                                                     |  | December 31,2005 |        |   | December 31,2004 |  
|Senior loan and security agreement, net of $178,000 discount         |  | $                | 2,474  |   |                  | $ | 2,822 |  
|Capital lease line of credit                                         |  |                  |       |   |                  |   | 285   |  
|Revolving line of credit and equipment facility                      |  |                  | 83     |   |                  |   | 212   |  
|Note payable to stockholder                                          |  |                  |       |   |                  |   | 531   |  
|                                                                     |  |                  |        |   |                  |   |       |  
|                                                                     |  |                  | 2,557  |   |                  |   | 3,850 |  
|Less current portion of long-term debt and capital lease obligations |  |                  | (1,233 | ) |                  |   | (863  | )
|                                                                     |  |                  |        |   |                  |   |       |  
|                                                                     |  | $                | 1,324  |   |                  | $ | 2,987 |  
|                                                                     |  |                  |        |   |                  |   |       |  

Senior Loan and Security Agreement

In December 2004 Occam borrowed $3.0 million under a senior loan and security agreement with a specialty finance company. The loan bears interest at
11.95% per annum and matures December 31, 2007. The agreement provides for seven monthly payments of interest followed by 30 equal monthly installments of principal and interest. Obligations under the agreement are collateralized by
substantially all of the Companys assets. In connection with the loan agreement, the Company issued the lender warrants to purchase 41,666 shares of our common stock and 15,000 shares of Series A-2 preferred stock. These warrants were valued
using the Black-Scholes option pricing model and relative fair value of the warrants of $178,000 has been treated as a reduction in the carrying amount of the loan and will be amortized as interest expense using the effective interest method over
the life of the loan. The common warrants have been recorded in additional paid in capital and the preferred stock warrants have been recorded within the mezzanine in the accompanying consolidated balance sheet. The warrant for common stock is
exercisable through December 2011 at an exercise price of $3.60 per share. The warrant for the Series A-2 preferred stock is exercisable through December 2009 at an exercise price of $10.00 per share. The Series A-2 preferred stock is convertible
into common stock at a conversion price of $4.40 per share. At



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



December 31, 2005, the outstanding principal was approximately $2.5 million, net of warrant discount of $178,000, of which approximately $1.1 million
was current. In February of 2006, the company retired this loan in full.

Capital Lease Line of Credit

In December 2000, Occam obtained a capital lease line of credit from a financial institution, which allowed financing of up to $2.0 million for certain
equipment, software, and tenant improvements. The capital lease line of credit bears interest of 14.5% or 17.7% based on the type of asset financed, and is collateralized by the purchased equipment. During the year ended December 31, 2005, the
Company paid the outstanding principal of approximately $285,000. As of December 31, 2005, there was no outstanding balance under this capital lease line of credit.

Revolving Line of Credit and Equipment Financing Facility

During June 2003, the Company signed a loan and security agreement with a bank for a revolving line of credit for an amount up to $2.5 million, at a floating interest rate of prime plus .75 percent (8.25% and
6.25% at December 31, 2005, and 2004, respectively, subject to a floor of 5%) and a 1/2percent per
annum unused line fee, and an equipment financing facility for an amount up to $0.5 million at a floating interest rate of prime plus one percent, to be repaid in 36 monthly payments of principal plus accrued interest. Both facilities are
collateralized by all available assets of the Company, and are subject to certain financial and reporting covenants, including a minimum quick ratio and maintenance of tangible net worth as defined in the agreement. The revolving line of credit
expired in June of 2004. As of December 31, 2005 approximately $83,000 was outstanding under the equipment financing facility, all of which was current. In February of 2006, the company retired the debt in full.

Notes Payable to a Stockholder

During June 2003, the Company issued a $500,000 unsecured subordinated promissory note payable to an investor. The note bears interest at the prime rate on the date of issuance (4.0%) and principal and accrued interest is due in June
2006. At December 31, 2004, $31,000 of interest was accrued on the note. In March 2005, this note and accrued interest was converted into 53,479 shares of Series A-2 preferred stock.

The maturity of the long-term debt as of December 31, 2005, were as follows (amounts in thousands):



|                                  |  |   |      
|--------------------------------- |  | - | -----
|For the years ending December 31, |  |   |      
|2006                              |  | $ | 1,233
|2007                              |  |   | 1,324
|                                  |  |   |      
|Total                             |  | $ | 2,557

Note 7. Capital Stock and Stockholders Deficit

Series A-2 Preferred Stock

On
November 18, 2003, a special committee of the Companys board of directors authorized the sale and issuance of up to 3,000,000 shares of Series A-2 preferred stock. During November and December 2003, the Company entered into purchase
agreements with certain existing and new investors to purchase 1,650,910 shares of Series A-2 preferred stock for $10 per share for gross proceeds of $16.5 million. On March 8, 2004, Occam sold an additional 420,000 shares of Series A-2
preferred stock for gross proceeds of $4,200,000 and issued a



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



warrant to purchase up to an additional 380,000 shares of Series A-2 preferred stock to certain investment funds. The net proceeds from the issuance of these
Series A-2 preferred stock and warrant of $3.85 million, was allocated $515,000 and $3,331,000, based on the estimated relative fair market value of the warrant and the Series A-2 preferred stock, respectively. On April 1, 2004, Occam sold
an additional 153,200 shares of the Series A-2 preferred stock raising gross proceeds of $1.5 million. The warrant was reduced to purchase 226,800 of Series A-2 preferred stock in April 2004 as Occam sold an additional $1.5 million in Series
A-2 preferred stock to existing investors in accordance with the terms of the warrant. On April 20, 2005 the warrants were exercised in full for an aggregate purchase price of $2.3 million.

In October 2004, Occams shareholders approved an amendment to Companys Amended and Restated Certificate of Incorporation to increase the
number of preferred stock designated as Series A-2 from 3,000,000 shares to 3,250,000 shares. In March 2005, the number of shares designated as Series A-2 Preferred Stock increased to 4,300,000.

The Series A-2 preferred stock has the following rights and preferences:

ConversionEach share of Series A-2 preferred stock is convertible into shares of the Companys common stock at a conversion price of $4.40, subject to anti-dilution adjustments, as defined.

All outstanding shares of Series A-2 preferred stock will automatically convert into common stock upon the written consent of holders of
not less than sixty-six and two-thirds percent (662/3%) of the then outstanding shares of Series A-2 preferred
stock.

During 2003, the Company recorded a beneficial conversion feature (BCF) charge to net loss attributable to
common stockholders of $3,038,000 relating to the issuance of the Series A-2 preferred stock. The BCF was calculated using the fair value of the common stock on date of issuance, subtracting the accounting conversion price and then multiplying the
resulting amount by the sum of the number of shares of common stock into which the Series A-2 preferred stock is convertible.

During 2004,
the Company recorded a BCF charge to net loss attributable to common stockholders of $2,893,000 relating to the issuance of the series A-2 preferred stock. The BCF was calculated using the fair value of the common stock on date of issuance,
subtracting the accounting conversion price and then multiplying the resulting amount by the sum of the number of shares of common stock into which the series A-2 preferred stock is convertible. The Company also recorded a BCF on the preferred stock
warrant (the warrant BCF) of $480,000 (as an adjustment to the warrant and additional paid in capital) that is being amortized using the interest method over the life of the warrant. During the year ended December 31, 2004, the
Company recorded $395,000 of amortization of the warrant BCF. The warrant BCF of $480,000 was calculated by subtracting the sum of the relative proceeds allocated to the warrant and the exercise price from the fair value of the common stock
underlying the warrant.

During 2005, the Company recorded a BCF charge to net loss attributable to common stockholders of $1,737,000
relating to the issuance of the Series A-2 preferred stock in March 2005. The BCF was calculated using the fair value of the common stock on the dates of issuance, subtracting the accounting conversion price and then multiplying the resulting amount
by the sum of the number of shares of common stock into which the Series A-2 preferred stock is convertible. The company also recorded a BCF on the preferred stock warrant issued to Alta, of $85,000, that was amortized using the interest method over
the life of the warrant.

LiquidationThe Series A-2 preferred stock is entitled to a liquidation preference equal to
150% of the original purchase price of the Series A-2 preferred, or $15 per share of Series A-2 preferred. The liquidation



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



preference will be payable, prior to any payment to holders of common stock, in connection with any liquidation, dissolution, or winding up of Occam
Networks, whether voluntary or involuntary, including (i) reorganizations, consolidations, mergers, or similar transactions where the Companys stockholders immediately prior to the transaction hold, immediately after the transaction, less
than a majority of the outstanding voting securities of the surviving or successor corporation or its parent or (ii) a sale of all or substantially all of the Companys assets. After payment of the original Series A-2 liquidation
preference, any proceeds remaining available for distribution to stockholders will be distributed to the Series A-2 preferred stock until the holders of the Series A-2 preferred stock have received $30 per share and then thereafter all remaining
amounts will be distributed to the common stockholders. However, to the extent that the liquidation preference payable to the Series A-2 preferred holders would have been greater had they converted their preferred stock to common stock, the Series
A-2 preferred holders are entitled to that larger amount, regardless of whether or not they actually converted.

The liquidation provisions
of Series A-2 preferred stock are considered redemption provisions that are not solely within the control of the Company, and therefore the Company has classified the Series A-2 preferred stock outside of stockholders deficit on the
accompanying consolidated balance sheet.

DividendsThe Series A-2 preferred stock is not entitled to receive any
preferential dividend, but the Company is required to pay an equivalent dividend on the Series A-2 preferred stock if it declares and pays a dividend on its common stock.

VotingExcept as otherwise required by law, holders of the Companys Series A-2 preferred stock will be entitled to notice of any stockholders meeting and to vote together with holders of
common stock on any matter submitted to stockholders for a vote. Each share of Series A-2 preferred stock will be entitled to a number of votes equal to the number of shares of common stock then issuable upon conversion thereof.

OtherThe holders of Series A-2 preferred stock have certain participation rights, registration rights and rights to prohibit further
indebtedness of the Company.

Certain investors who have purchased Series A-2 preferred stock are affiliated with members of the
Companys board of directors and are also a holder of over 5% of the Companys outstanding securities.

Series A-2 Preferred Stock Warrants

In connection with the issuance of the December 2004 senior loan and security agreement the Company issued warrants to purchase
15,000 shares of Series A-2 Preferred stock. The warrants have an exercise price of $10 per share and expire on December 17, 2009. All warrants are immediately exercisable.

Common Stock Reserved For Issuance

The following represents the number of common shares
reserved for future issuance (in thousands):



|                                              |  |              |  |      
|--------------------------------------------- |  | ------------ |  | -----
|                                              |  | December 31,
|Number of Common Shares Reserved for Issuance |  | 2005         |  | 2004 
|Common Warrants                               |  | 60           |  | 85   
|Stock Options                                 |  | 1,770        |  | 1,535
|Convertible Preferred Stock and Warrants      |  | 8,125        |  | 7,386
|Employee Stock Purchase Plan                  |  | 105          |  | 107  
|                                              |  |              |  |      
|                                              |  | 10,060       |  | 9,113
|                                              |  |              |  |      



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Common Stock Warrants

From 2000 to 2004, the Company issued warrants to purchase shares of common stock in connection with the issuance of certain financing arrangements. All warrants are immediately exercisable. The following table
summarizes the warrants outstanding as of December 31, 2005:



|                  |  |                         |       |                                   |       
|----------------- |  | ----------------------- | ----- | --------------------------------- | ------
|Expiration date   |  | Exercise priceper share |       | Number of sharesunderlyingwarrant
|December 17, 2011 |  | $                       | 3.60  |                                   | 41,666
|June 16, 2010     |  | $                       | 10.00 |                                   | 12,500
|May 14, 2006      |  | $                       | 19.60 |                                   | 6,269 
|                  |  |                         |       |                                   |       
|                  |  |                         |       |                                   | 60,435
|                  |  |                         |       |                                   |       

Note 8. Stock Options

Stock Options

In April 1997, Accelerated Networks adopted the 1997 Stock Option/Stock Issuance Plan (1997
Plan), which was replaced by the 2000 Stock Incentive Plan (2000 Plan). The 2000 Plan provides for the issuance of non-qualified or incentive stock options to employees, non-employee members of the board and consultants. The
exercise price per share is not to be less than 85% of the fair market value per share of the Companys common stock on the date of grant. Incentive stock options may be granted at no less than 100% of the fair market value of the
Companys common stock on the date of grant (110% if granted to an employee who owns 10% or more of the common stock). The Board of Directors has the discretion to determine the vesting schedule. Options may be either immediately exercisable or
in installments, but generally vest over a four-year period from the date of grant. In the event the holder ceases to be employed by the Company, all unvested options terminate and all vested installment options may be exercised within an
installment period following termination. In general, options expire ten years from the date of grant and any unvested shares acquired related to the immediately exercisable options are subject to repurchase by the Company at the original exercise
price. At December 31, 2005 and 2004, no unvested shares of common stock issued and outstanding under the 2000 Plan were subject to repurchase by the Company.

The 2000 Plan also provides for shares of common stock to be issued directly through either the immediate purchase of shares or as a bonus for services rendered. The purchase price per share is not to be less than 85%
of the fair market value per share of the Companys common stock on the date of grant. The purchase price, if granted to an employee who owns 10% or more of the common stock, must be granted at no less than 110% of the fair market value of the
Companys common stock on the date of grant. Vesting terms are at the discretion of the Plan Administrators and determined at the date of issuance. In the event the holder ceases to be employed by the Company, any unvested shares are subject to
repurchase by the Company at the original purchase price. To date, no such shares of common stock have been issued under the 2000 Plan.

During 2000, Occam CA adopted the 1999 Plan. The 1999 Plan provides for the grant of incentive or nonqualified stock options to officers, employees, directors, and independent contractors or agents of Occam CA. The exercise price of options
for both the incentive and nonqualified stock options may not be less than the deemed fair value of the shares on the date of grant. The Board of Directors is authorized to administer the 1999 Plan and establish the stock option terms, including the
grant price and vesting period. Options granted to employees are generally exercisable upon grant; subject to an ongoing repurchase right of the Company matching the vesting period. The options expire ten years after the date of grant and the
Company holds a right of first



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



refusal in connection with any transfer of vested optioned shares. At December 31, 2004, 125 unvested shares of common stock issued and outstanding
under the 1999 Plan were subject to repurchase by the Company at the related exercise prices. As of December 31, 2005, no shares were subject to repurchase. Pursuant to the terms of the merger agreement, no further stock option grants may be
made from the 1999 Plan subsequent to the May 14, 2002 merger date.

As of December 31, 2005 there were 2.5 million shares
authorized under the Companys stock option plans of which there were 709,000 shares available under current option plan for future grants. Additional information with respect to the outstanding options as of December 31, 2005 is as
follows (shares in thousands):



|                  |  |                     |  |                                                    |  |                      |       |        |     |                      |   |      
|----------------- |  | ------------------- |  | -------------------------------------------------- |  | -------------------- | ----- | ------ | --- | -------------------- | - | -----
|                  |  | Options Outstanding |  | OptionsExercisable                                
|Exercise Prices   |  | Shares              |  | WeightedAverageRemainingContractualLife (in Years) |  | WeightedAveragePrice |       | Shares |     | WeightedAveragePrice
|$2.00 to $3.24    |  | 90                  |  | 6.29                                               |  | $                    | 2.70  |        | 80  |                      | $ | 2.64 
|$3.60 to $3.80    |  | 306                 |  | 7.34                                               |  | $                    | 3.63  |        | 181 |                      | $ | 3.62 
|$4.00 to $4.20    |  | 759                 |  | 8.56                                               |  | $                    | 4.11  |        | 266 |                      | $ | 4.14 
|$4.60 to $14.60   |  | 510                 |  | 8.62                                               |  | $                    | 7.24  |        | 149 |                      | $ | 6.10 
|$15.20 to $925.00 |  | 105                 |  | 0.60                                               |  | $                    | 78.62 |        | 105 |                      | $ | 78.66
|                  |  |                     |  |                                                    |  |                      |       |        |     |                      |   |      
|$2.00 to $925.00  |  | 1,770               |  | 7.78                                               |  | $                    | 9.59  |        | 781 |                      | $ | 14.29
|                  |  |                     |  |                                                    |  |                      |       |        |     |                      |   |      

A summary of the Companys stock option activity is as follows (shares in thousands):



|                                                             |  |                         |   |      |                      |       |        |       |   |                      |   |        |  |       |                      |  |   |      
|------------------------------------------------------------ |  | ----------------------- | - | ---- | -------------------- | ----- | ------ | ----- | - | -------------------- | - | ------ |  | ----- | -------------------- |  | - | -----
|                                                             |  | Year Ended December 31,
|                                                             |  | 2005                    |   | 2004 |                      | 2003 
|                                                             |  | Shares                  |   |      | WeightedAveragePrice |       | Shares |       |   | WeightedAveragePrice |   | Shares |  |       | WeightedAveragePrice
|Outstanding at beginning of period                           |  | 1,521                   |   |      | $                    | 10.00 |        | 1,199 |   |                      | $ | 12.00  |  | 889   |                      |  | $ | 17.60
|Granted where exercise price equals fair value on grant date |  | 478                     |   |      | $                    | 7.32  |        | 545   |   |                      |   | 4.00   |  | 668   |                      |  |   | 4.80 
|Exercised                                                    |  | (143                    | ) |      | $                    | 4.12  |        | (42   | ) |                      |   | 2.80   |  | (79   | )                    |  |   | 3.20 
|Canceled                                                     |  | (86                     | ) |      | $                    | 15.62 |        | (181  | ) |                      |   | 7.20   |  | (279  | )                    |  |   | 14.80
|                                                             |  |                         |   |      |                      |       |        |       |   |                      |   |        |  |       |                      |  |   |      
|Outstanding at end of period                                 |  | 1,770                   |   |      | $                    | 9.59  |        | 1,521 |   |                      |   | 10.00  |  | 1,199 |                      |  |   | 12.00
|                                                             |  |                         |   |      |                      |       |        |       |   |                      |   |        |  |       |                      |  |   |      
|Exercisable at end of period                                 |  | 781                     |   |      | $                    | 14.29 |        | 581   |   |                      | $ | 19.20  |  | 453   |                      |  |   | 24.00
|                                                             |  |                         |   |      |                      |       |        |       |   |                      |   |        |  |       |                      |  |   |      

The weighted-average fair value of options granted to employees for the years ended
December 31, 2005, 2004, and 2003 were $9.59, $2.80 and $4.80 per share, respectively.

Deferred Stock-Based Compensation

In connection with the grant of certain options to purchase common stock to employees during the years ended December 31, 2002 and 2001, Occam CA
recorded deferred stock-based compensation of approximately $1,564,000 and $6,062,000, respectively, for the aggregate differences between the exercise prices of options at their dates of grant and the deemed fair value for accounting purposes of
the common stock subject to such options. Such amounts are being amortized ratably over the vesting period of the related options. Amortization



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



expense relating to employee stock options for the years ended December 31, 2005, 2004 and 2003, totaled $595,000, $852,000 and $1,227,000,
respectively.

During 2000 through 2002, Occam CA issued options to consultants and advisory board members (non-employees).
These options generally vested over the service period. As these stock options require future performance by the recipients, these options are considered variable grants for accounting purposes. The fair value of these options, determined using the
Black-Scholes option pricing model, are re-measured each reporting period until such time that the options become fully vested. The Company recorded expense related to these options to non-employees of $1,000 for the year ended December 31,
2003. No expense was recorded for the years ended 2005 and 2004.

Employee Stock Purchase Plan

In 2000, Accelerated Networks adopted the 2000 Employee Stock Purchase Plan (ESPP). Under the terms of the ESPP, eligible employees may elect
to contribute up to 15% of earnings through payroll deductions. The accumulated deductions are applied to the purchase of common shares on each semi-annual purchase date, as defined. The purchase price per share is equal to 85% of the fair market
value on the participants entry date into the offering period or, if lower, 85% of the fair market value on the semi-annual purchase date. Under the terms of the ESPP, 106,500 shares have been reserved for issuance. In April 2001, employee
contributions and stock issuances under the ESPP were terminated, but approximately 104,750 common shares continue to be reserved for any re-instatement of the ESPP.

Note 9. Income Taxes

The net effective income tax rate differed from the federal statutory income
tax rate as follows:



|                                                  |  |      |    |  |      |    |  |      |   
|------------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                                  |  | 2005 |    |  | 2004 |    |  | 2003 |   
|For the year ended December 31                    |  |      |    |  |      |    |  |      |   
|Statutory federal income tax benefit              |  | (34  | )% |  | (34  | )% |  | (34  | )%
|State income tax benefit (net of federal benefit) |  | (6   | )  |  | (6   | )  |  | (6   | ) 
|Other                                             |  | (20  | )  |  | 4    |    |  | 4    |   
|Valuation allowance                               |  | 60   |    |  | 36   |    |  | 36   |   
|                                                  |  |      |    |  |      |    |  |      |   
|                                                  |  |     | %  |  |     | %  |  |     | % 
|                                                  |  |      |    |  |      |    |  |      |   

The primary components of temporary differences that gave rise to deferred taxes were as follows
(in thousands):



|                                 |  |              |         |   |      |   |         |  
|-------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                 |  | December 31, |        
|                                 |  | 2005         |         |   | 2004 |  
|Deferred tax assets:             |  |              |         |   |      |   |         |  
|Net operating loss carryforwards |  | $            | 86,153  |   |      | $ | 81,989  |  
|Tax credit carryforwards         |  |              | 783     |   |      |   | 784     |  
|Depreciation and amortization    |  |              | 827     |   |      |   | 17      |  
|Other                            |  |              | 1,808   |   |      |   | 2,343   |  
|                                 |  |              |         |   |      |   |         |  
|                                 |  |              | 89,571  |   |      |   | 85,133  |  
|Less: valuation allowance        |  |              | (89,571 | ) |      |   | (85,133 | )
|                                 |  |              |         |   |      |   |         |  
|Net deferred tax assets          |  | $            |        |   |      | $ |        |  
|                                 |  |              |         |   |      |   |         |  



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



The change in the Companys deferred tax valuation allowance is as follows:



|                               |  |                              |        |                               |   |                         |  |   |       
|------------------------------ |  | ---------------------------- | ------ | ----------------------------- | - | ----------------------- |  | - | ------
|Description                    |  | Balance atBeginning ofPeriod |        | Addition toValuationAllowance |   | Balance at Endof Period
|Income tax valuation allowance |  |                              |        |                               |   |                         |  |   |       
|2003                           |  | $                            | 74,869 |                               | $ | 6,252                   |  | $ | 81,121
|2004                           |  | $                            | 81,121 |                               | $ | 4,012                   |  | $ | 85,133
|2005                           |  | $                            | 85,133 |                               | $ | 4,438                   |  | $ | 89,571

The net deferred tax assets have been offset with a full valuation allowance. SFAS No. 109
Accounting for Income Taxes requires that a valuation allowance be established to reduce a deferred tax asset to the extent that it is not more likely than not that the deferred tax asset will be realized. Based on managements
assessment of all available evidence, both positive and negative, the Company has concluded that it is more likely than not that the net deferred tax assets will not be realized.

At December 31, 2005, the Company had net operating loss carryforwards of approximately $227.6 million and $150.2 million to offset federal and
state future taxable income, respectively. The federal and state net operating loss carryforwards will expire in varying amounts beginning in 2011 and 2006, respectively. The availability of the net operating losses to offset future taxable income
may be limited as a result of ownership changes in 2003 or prior years or the merger with Accelerated Networks in 2002, pursuant to Internal Revenue Code section 382. In addition, utilization of the net operating loss carryforwards would also be
subject to an annual usage limitation, as defined. Net operating loss limitations under section 382 may significantly impact the timing and amount of future income tax obligations, if any. The amount of such limitation, if any, has not yet been
determined.

Note 10. Concentration of Credit Risk and Suppliers, Significant Customers and Segment Reporting

Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains its cash and cash equivalents with major financial institutions; at times, such balances with any one financial institution may exceed FDIC insurance limits. The Companys accounts receivable are derived from
revenue earned from customers located primarily in the United States. The Company extends differing levels of credit to customers and generally does not require collateral.

The Company currently relies on a limited number of suppliers to manufacture its products, and does not have a long-term contract with any of these
suppliers. The Company also does not have internal manufacturing capabilities. Management believes that other suppliers could provide similar products on comparable terms.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Net revenue and accounts receivable from significant customers were as follows (in thousands, except
percentages):



|           |  |                   |       |                 |    |   |                    |   |                         |  |    |  
|---------- |  | ----------------- | ----- | --------------- | -- | - | ------------------ | - | ----------------------- |  | -- | -
|           |  | December 31, 2005 |      
|           |  | Net Revenue       |       | % of NetRevenue |    |   | AccountsReceivable |   | % of AccountsReceivable | 
|Customer A |  | $                 | 4,306 |                 | 11 | % |                    | $ | 70                      |  | 1  | %
|Customer B |  | $                 | 3,710 |                 | 9  | % |                    | $ | 2,038                   |  | 16 | %
|           | 
|           |  | December 31, 2004 |      
|           |  | Net Revenue       |       | % of NetRevenue |    |   | AccountsReceivable |   | % of AccountsReceivable | 
|Customer A |  | $                 | 2,995 |                 | 17 | % |                    | $ | 856                     |  | 16 | %
|Customer B |  | $                 | 1,997 |                 | 12 | % |                    | $ | 1,762                   |  | 34 | %
|Customer C |  | $                 | 1,941 |                 | 11 | % |                    | $ | 70                      |  | 1  | %
|           | 
|           |  | December 31, 2003 |      
|           |  | Net Revenue       |       | % of NetRevenue |    |   | AccountsReceivable |   | % of AccountsReceivable | 
|Customer A |  | $                 | 1,178 |                 | 15 | % |                    | $ | 498                     |  | 21 | %
|Customer B |  | $                 | 1,155 |                 | 14 | % |                    | $ | 723                     |  | 31 | %

The Company operates in one industry segment providing Ethernet and IP-based loop carrier
platforms for the telecommunications industry. The Companys business operations are principally based in the United States. Net revenue from products exported from the United States was $874,000, $41,000 and $573,000 during 2005, 2004 and
2003, respectively. All of the Companys long-lived assets are located in the United States.

Note 11. Commitments and Contingencies

The Company leases its office facilities and certain equipment under non-cancelable operating lease agreements, which expire at various
dates through 2008. Certain operating leases contain escalation clauses with annual base rent adjustments or a cost of living adjustment. Total rent expense for the years ended December 31, 2005, 2004 and 2003, was $778,000, $890,000 and
$821,000 respectively. Approximate minimum annual lease commitments under non-cancelable operating leases are as follows (in thousands):



|                             |  |   |     
|---------------------------- |  | - | ----
|Year Ending December 31,    
|2006                         |  | $ | 565 
|2007                         |  |   | 104 
|2008                         |  |   | 82  
|                             |  |   |     
|Total minimum lease payments |  |   | $751

Purchase Commitments

During 2005, the Company reversed a previously accrued purchase commitment of $482,000 due to one of its former principal manufacturers. As of December 31, 2005, the Company had open purchase orders with its
current contract manufacturer of $8.3 million.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Royalties

The Company licenses certain technology for incorporation into its products. Under the terms of these agreements, royalty payments will be made based on per-unit sales of certain of the Companys products.
Royalty expenses incurred for the years ended December 31, 2005, 2004 and 2003 were $0, $272,000 and $348,000 respectively.

Legal Proceedings

IPO Allocation Cases

In June 2001, three putative stockholder class action lawsuits were filed against Accelerated Networks, certain of its then officers and directors and several investment banks that were underwriters of Accelerated
Networks initial public offering. The cases, which have now been consolidated, were filed in the United States District Court for the Southern District of New York. The Court appointed a lead plaintiff on April 16, 2002, and plaintiffs
filed a Consolidated Amended Class Action Complaint (the Complaint) on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated Networks stock between June 22, 2000 and December 6,
2000 and alleges violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims are based on allegations that the
underwriter defendants agreed to allocate stock in Accelerated Networks initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the
aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Accelerated Networks initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These
lawsuits are part of the massive IPO allocation litigation involving the conduct of underwriters in allocating shares of successful initial public offerings. The Company believes that over three hundred other companies have been named in
more than one thousand similar lawsuits that have been filed by some of the same plaintiffs law firms. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 19, 2003 a motion to
dismiss filed by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and Rule 10b-5 claims against the Company. On July 31, 2003, the Company agreed, together with over three hundred other companies similarly situated, to
settle with the Plaintiffs. A Memorandum of Understanding (MOU), along with a separate agreement and a performance bond of $1 billion issued by the insurers, for these companies is a guarantee, allocated pro rata amongst all issuer
companies, to the plaintiffs as part of an overall recovery against all defendants including the underwriter defendants who are not a signatory to the MOU. Any recovery by the plaintiffs against the underwriter defendants reduces the amount to be
paid by the issuer companies. There is a fairness hearing scheduled for April 24, 2006 to obtain final approval of the settlement by the members of the class of plaintiffs and the court. Occam cannot predict whether such approval will be
obtained. The company has not recorded any accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.

Note 12. 401(k) Plan

The Company has defined contribution plans under which employees who are at
least 18 years old and have completed 500 hours of service may defer compensation pursuant to Section 401(k) of the Internal Revenue Code. Participants in the plans may contribute between 1% and 50% of their pay, subject to the limitations
placed by the IRS. The Company, at its discretion, may match a portion of the amounts contributed by the employee. To date, the Company has made no contributions to the 401(k) plan.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Note 13. Net Loss Per Share Attributable to Common Stockholders

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



|                                                                       |  |              |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                       |  | December 31, |       
|                                                                       |  | 2005         |        |   | 2004 |   |         | 2003 | 
|Numerator:                                                             |  |              |        |   |      |   |         |      |  |   |         |  
|Net loss attributable to common stockholders                           |  | $            | (9,260 | ) |      | $ | (18,277 | )    |  | $ | (22,970 | )
|                                                                       |  |              |        |   |      |   |         |      |  |   |         |  
|Denominator:                                                           |  |              |        |   |      |   |         |      |  |   |         |  
|Weighted-average common shares outstanding                             |  |              | 6,759  |   |      |   | 6,699   |      |  |   | 5,297   |  
|Adjustment for common shares issued subject to repurchase              |  |              |       |   |      |   | (4      | )    |  |   | (29     | )
|                                                                       |  |              |        |   |      |   |         |      |  |   |         |  
|Denominator for basic and diluted calculations                         |  |              | 6,759  |   |      |   | 6,695   |      |  |   | 5,268   |  
|                                                                       |  |              |        |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share applicable to common stockholders |  | $            | (1.37  | ) |      | $ | (2.73   | )    |  | $ | (4.36   | )
|                                                                       |  |              |        |   |      |   |         |      |  |   |         |  

Note 14. Supplemental Disclosures of Cash Flow Information (In thousands)



|                                                                             |  |              |     |      |   |      |  |   |       
|---------------------------------------------------------------------------- |  | ------------ | --- | ---- | - | ---- |  | - | ------
|                                                                             |  | December 31,
|                                                                             |  | 2005         |     | 2004 |   | 2003
|Cash paid during year for interest                                           |  | $            | 400 |      | $ | 93   |  | $ | 211   
|Conversion of common stock potentially subject to rescission to common stock |  |              |    |      |   |     |  |   | 10,000
|Conversion of series A preferred stock to common stock                       |  |              |    |      |   |     |  |   | 11,846
|Interest on notes payable                                                    |  | $            | 353 |      | $ | 31   |  | $ |      

Note 15. Other Charges

During December 2003, the Company sold its India operation to a third party for gross proceeds of approximately $658,000 which approximated book value of the India companys net assets, including cash held in the
India company of $539,000. The purchase price included $50,000 in cash and a note receivable of $608,000 originally due in installments through November 2004. In the third quarter of 2005, the purchaser defaulted on the note and the Company wrote
off the remaining loan balance of $399,000. The Indian operation performed research and development activities related to the Companys products.

Note 16. Subsequent Events

Payment of Long-Term Debt

On February 17, 2006, the Company paid down the outstanding balance of $2,474,000 of its long term debt to Hercules. On February 28, 2006, the Company paid down the outstanding balance of $83,000 to Silicon
Valley Bank.



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2005



Rights Offering

On February 1, 2006, the Company concluded a rights offering made to eligible shareholders of record as of December 26, 2005. Each subscription right entitled the stockholders to subscribe for and purchase
one share of Series A-2 preferred stock for each 2.725 shares of common stock held on the record date. Each share of A-2 preferred stock had a purchase price of $10 and was convertible into shares of Occams common stock at a conversion price
of $4.40, resulting in a conversion ratio of 2.27275 shares of common stock for each share of Series A-2 preferred stock issued. In response to the rights offering, we received subscriptions to purchase 343,741 shares of Series A-2 preferred stock
for an aggregate purchase price of $3.4 million.

Reverse Stock Split

On February 23, 2006, the Company announced a 1-for-40 reverse stock split which was previously authorized at its annual meeting of stockholders held on June 21, 2005. The record date for the reverse split
was March 10, 2006 and Occam began trading on the NASD Electronic Bulletin Board (OTCBB) on a split-adjusted basis on Monday, March 13, 2006 under the new symbol OCNW. As a result of the reverse split, the conversion ratio of
Series A-2 preferred stock was proportionately adjusted, decreasing the number of shares of common stock issuable upon conversion of each share of Series A-2 preferred stock from approximately 90.91 shares of common stock to 2.27275 shares of common
stock.

Note 17. Quarterly Information (unaudited)

Following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2005 and 2004 (in thousands, except per share amounts):



|                                                                                  |  |        |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------ | ------ | - | ------ | - | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|2005                                                                              |  | Mar 31 |        |   | Jun 30 |   |        | Sep 30 |  |   | Dec 31 |  
|Revenues                                                                          |  | $      | 6,921  |   |        | $ | 8,740  |        |  | $ | 10,663 |   |  | $ | 12,914 |  
|Gross profit                                                                      |  |        | 1,804  |   |        |   | 1,969  |        |  |   | 2,954  |   |  |   | 5,303  |  
|Profit (loss) from operations                                                     |  |        | (2,266 | ) |        |   | (2,479 | )      |  |   | (2,920 | ) |  |   | 487    |  
|Net profit (loss)                                                                 |  |        | (2,378 | ) |        |   | (2,535 | )      |  |   | (2,967 | ) |  |   | 442    |  
|Net profit (loss) attributable to common stockholders                             |  |        | (4,165 | ) |        |   | (2,570 | )      |  |   | (2,967 | ) |  |   | 442    |  
|Basic and diluted net profit (loss) per share attributable to common stockholders |  | $      | (0.62  | ) |        | $ | (0.38  | )      |  | $ | (0.43  | ) |  | $ | 0.06   |  
|                                                                                  |  |        |        |  
|2004                                                                              |  | Mar 31 |        |   | Jun 30 |   |        | Sep 30 |  |   | Dec 31 |  
|Revenues                                                                          |  | $      | 3,240  |   |        | $ | 3,185  |        |  | $ | 4,424  |   |  | $ | 6,480  |  
|Gross profit (loss)                                                               |  |        | (135   | ) |        |   | (980   | )      |  |   | 738    |   |  |   | 1,877  |  
|Profit (loss) from operations                                                     |  |        | (4,080 | ) |        |   | (5,344 | )      |  |   | (3,195 | ) |  |   | (2,241 | )
|Net loss                                                                          |  |        | (4,115 | ) |        |   | (5,370 | )      |  |   | (3,210 | ) |  |   | (2,294 | )
|Net loss attributable to common stockholders                                      |  |        | (6,625 | ) |        |   | (5,927 | )      |  |   | (3,341 | ) |  |   | (2,384 | )
|Basic and diluted net loss per share attributable to common stockholders          |  | $      | (0.99  | ) |        | $ | (0.88  | )      |  | $ | (0.50  | ) |  | $ | (0.36  | )



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