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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, 2004



OR



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



For the transition period from  to



Commission file number 000-30741



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OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0442752                          
|(State or other jurisdiction 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 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange act):    Yes ̈No  x



Based on the average bid and asked price on June 30, 2004 (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 $9.5 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 24, 2005, the number of shares outstanding of the
registrants common stock was 268,619,559 ( 571,654,104 shares including 303,034,545 shares 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 2005 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, 2004



|         |  |                                                                                                                  |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                  |  | Page
|PART I   |  | 1                                                                                                               
|         |  |                                                                                                                 
|Item 1.  |  | Business                                                                                                         |  | 1   
|Item 2.  |  | Properties                                                                                                       |  | 13  
|Item 3.  |  | Legal Proceedings                                                                                                |  | 13  
|Item 4.  |  | Submission of Matters to a Vote of Security Holder                                                               |  | 14  
|Item 4A. |  | Executive Officers of the Registrant                                                                             |  | 15  
|         | 
|PART II  |  | 16                                                                                                              
|         |  |                                                                                                                 
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Registered Securities |  | 16  
|Item 6.  |  | Selected Financial Data                                                                                          |  | 17  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 18  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 37  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                      |  | 37  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             |  | 38  
|Item 9A. |  | Controls and Procedures                                                                                          |  | 38  
|Item 9B. |  | Other Information                                                                                                |  | 38  
|         | 
|PART III |  | 38                                                                                                              
|         |  |                                                                                                                 
|Item 10. |  | Directors and Executive Officers of the Registrant                                                               |  | 38  
|Item 11. |  | Executive Compensation                                                                                           |  | 39  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 39  
|Item 13. |  | Certain Relationships and Related Transactions                                                                   |  | 39  
|Item 14. |  | Principal Accountant Fees and Services                                                                           |  | 39  
|         | 
|PART IV  |  | 39                                                                                                              
|         |  |                                                                                                                 
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                       |  | 39  



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 at the end of Part II, Item 7 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 packetized voice, broadband and Internet Protocol (IP)
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.



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 the local loops existing copper wires by converting each customer line into a broadband loop. We believe that our single 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 Delaware in 1996 as Accelerated Networks and in 2002 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 10K.



Throughout this report, we will refer to Occam Networks, Inc. as
Occam or Occam Networks.



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 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



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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 not economically viable and is time consuming. Thus, 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. These remote terminals serve approximately 25% of all telephone customers in the United States. 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.



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 support simultaneous two or three video channels to distances of 8,000 to
10,000 feet. 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.



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



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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 now 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 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.



The BLC 6000 system integrates into a single product line the functionality that is currently provided by separate voice and DSL 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.



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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 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.



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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 there
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, VDSL, Gigabit Ethernet 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.



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 thirteen 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.



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Agreements with Tellabs



In March 24, 2005, we entered 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 addition 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 21, 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.



Technology License Agreement



We also
entered into a Technology License Agreement dated March 21, 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



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.



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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 Q2 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 6208 ADSL Blade. The 6208 ADSL Blade provides 48 ADSL ports for customer data and video services, and multiple Gigabit Ethernet ports for optical fiber
transport and blade interconnection.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6235 ADSL and POTS Blade.The 6235 ADSL and POTS Blade provides 24 combination POTS and ADSL ports, along with four 100Mbps Ethernet ports and four T1 ports. It is
designed to operate with other blades providing the Gigabit Ethernet transport function.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6248 ADSL and POTS Blade. The 6248 ADSL and Lifeline POTS Blade provides 48 combination POTS and ADSL ports for voice, data, and video service delivery and multiple
Gigabit 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6212 ADSL2+ Blade. The 6212 ADSL2+ Blade provides 48 ADSL2+ ports for customer data and video services, and multiple Gigabit Ethernet ports for optical fiber
transport and blade interconnection.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6252 ADSL2+ and POTS Blade. The 6252 ADSL2+ and Lifeline POTS Blade provides 48 combination POTS and ADSL2+ ports for voice, data, and video service delivery and
multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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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, video and other high-bandwidth service take rates. They are available in configurations which support from 48 to 576 ADSL/voice lines, either copper T1 or fiber facilities, and can be deployed in
point-to-point, star, ring, or daisy chain topologies. Our first cabinets became available for sale in the second quarter of 2002.



OccamOS. The OccamOS is not a stand-alone product, but is our embedded operating system, which creates a highly extensible 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 FTTX (fiber to the X location) compatibility to the 6000 family, and
|- |  | -----------------------------------------------------------------------------



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



Customers



To date, our products are in operation in the networks of more than 75 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 offers us the greatest potential for immediate deployment, enabling us to gain short-term revenue while increasing our sales and
support infrastructure.



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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, SBC Communications, Verizon Communications Inc. and BellSouth Corporation,
accounting for approximately 85% of the total installed telephone lines in the United States.



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 long distance telephone
companies such as MCI and AT&T and smaller, less well-known operations have 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.



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, Teklec,
Metaswitch (division of Data Connection), Sonus Networks, Inc., General Bandwidth, 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 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 $7.5 million, $12.0 million and $19.2 million during the fiscal years ended 2004, 2003 and 2002, respectively. Our primary research and development center
is based in Santa Barbara, California. We have additional development centers in Simi Valley, 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 thirteen patents, have filed several additional patent applications, and intend to file additional patent applications. These patents expire over the
next 15 to 17 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.



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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 carriers. 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 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.



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, 2004. For the year ended December 31, 2003, FairPoint Communications, Inc. and Comporium Group accounted for approximately 15% and 14%, respectively, of our revenues for the year. Sales during 2002 to DTC Communications,
Inc., Armstrong Telephone Company, and Pan Dacom Networking AG, accounted for approximately 38%, 25%, and 13%, respectively, of our revenue for the year ended December 31, 2002. With the exception of Pan Dacom, which had been a customer of our
predecessor, Accelerated Networks, our largest customers in 2003 and 2002 continued to buy additional products in 2004. While we anticipate that sales to any specific customer will vary from period to period, we expect to continue to have
significant customer concentration during 2005. To date, 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, rather than long-term commitments.



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, DLCs, Ethernet switches, DSL modems, Integrated Access Devices, and residential gateways.



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Backlog



Our backlog primarily consists of purchase orders from customers for products to be delivered within the next quarter. Our backlog as of
March 1, 2005, and December 31, 2004 was approximately $2.0 million and $9.6 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, Advanced Fibre Communications, Inc.
(now part of Tellabs), 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.



Manufacturing



We outsource significant portions of our manufacturing operation to third-party manufacturers and have a signed manufacturing out-sourcing contract with CTS (formerly
Smtek), located in Moorpark, California. This agreement provides for material procurement, board level assembly, testing, purchase commitments and quality control by the manufacturer. 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. During 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.



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Geographic Information



During our last three fiscal years, substantially all of our revenue was generated within the United States 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 its 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.



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.



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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, 2005, we employed 87 full-time employees, including 32 in sales and marketing, 9 in operations and manufacturing, 36 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 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 9,000 square feet of space in Simi Valley, California, used primarily for manufacturing, research and product development, and general and administrative purposes,
which expires in August 2005; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | approximately 1,700 square feet of space in Mesa, Arizona, used primarily for research and product development purposes, which expires in October 2005.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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) 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



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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. The settlement documents are in process and it is anticipated that we will execute the settlement documents in 2005. This settlement will require approval of the members of the class of plaintiffs and the court. We have
not recorded any accrual related to this proposed settlement because we expect any settlement amounts to be covered by our insurance policies.



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



The Annual Meeting of the Stockholders of Occam Networks was held on October 8, 2004. At the Annual Meeting, our stockholders approved the following matters with the respective vote counts indicated:



|1) | An amendment of our Amended and Restated Certificate of Incorporation to increase the authorized number of shares of common stock of Occam from 400,000,000 shares to 750,000,000
shares, to increase the number of shares of preferred stock designated as Series A-2 preferred stock from 3,000,000 shares to 3,250,000 shares, and to increase the total number of shares Occam is authorized to issue from 405,000,000 shares to
755,000,000 shares;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|            |  |         |  |         |  |                 
|----------- |  | ------- |  | ------- |  | ----------------
|FOR         |  | AGAINST |  | ABSTAIN |  | BROKER NON-VOTES
|179,587,210 |  | 738,638 |  | 24,674  |  | 59,518,257      



|2) | Re-adoption of provisions of our certificate of incorporation that require the approval of at least 662/3% of our outstanding voting stock in order to effect certain amendments to our certificate of incorporation;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|            |  |         |  |         |  |                 
|----------- |  | ------- |  | ------- |  | ----------------
|FOR         |  | AGAINST |  | ABSTAIN |  | BROKER NON-VOTES
|179,748,907 |  | 584,135 |  | 17,480  |  | 59,518,257      



|3) | Election of six directors to serve until our next annual meeting, or in each case until their successors are duly elected or appointed and qualified or until their earlier
resignation or removal;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                          |  |             |  |         
|------------------------- |  | ----------- |  | --------
|Name                      |  | FOR         |  | WITHHELD
|Robert L. Howard-Anderson |  | 239,637,212 |  | 231,867 
|                          |  |            
|Steven M. Krausz          |  | 239,649,769 |  | 219,010 
|                          |  |            
|Thomas C. McConnell       |  | 239,445,766 |  | 423,013 
|                          |  |            
|Robert B. Abbott          |  | 239,650,455 |  | 218,324 
|                          |  |            
|Robert E Bylin            |  | 239,642,455 |  | 226,324 
|                          |  |            
|Thomas E. Pardun          |  | 239,642,455 |  | 226,324 



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|4) | Ratification of the appointment of PricewaterhouseCoopers LLP as our independent accountants for the 2004 fiscal year; and
|-- | --------------------------------------------------------------------------------------------------------------------------



|            |  |         |  |        
|----------- |  | ------- |  | -------
|FOR         |  | AGAINST |  | ABSTAIN
|239,389,145 |  | 471,894 |  | 7,740  



ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT



Information with respect to our executive officers as of December 31, 2004.



|                          |  |     |  |                                                                                    
|------------------------- |  | --- |  | -----------------------------------------------------------------------------------
|Name                      |  | Age |  | Position(s)                                                                        
|Robert L. Howard-Anderson |  | 48  |  | President, Chief Executive Officer, and Senior Vice President of Product Operations
|Howard M. Bailey          |  | 58  |  | Chief Financial Officer and Secretary                                              
|Mark Rumer                |  | 41  |  | Chief Technology Officer                                                           
|Russell J. Sharer         |  | 45  |  | Vice President of Sales and Marketing                                              



The following is a brief description
of the capacities in which each of the executive officers served or has served at our company as well as their other business experience during the past five years.



Robert L. Howard-Anderson has served as our president, chief executive officer and senior vice president of product operations
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. Howard-Anderson has a B.S. in electrical engineering from Tufts University.



Howard M. Bailey has served as our chief financial officer since June 2002.
From May 2001 to June 2002, Mr. Bailey was chief financial officer and vice president of operations of Nishan Systems, a developer and then manufacturer of IP/Ethernet switches for telecommunications service providers. From May 2000 to May 2001, Mr.
Bailey served as senior vice president and chief financial officer at C-Cube Microsystems Inc, a manufacturer of semiconductors. That company was sold to LSI Logic. From May 1998 to May 2000, Mr. Bailey served as chief financial officer of Quantum
Effect Devices, Inc. (now PMC Sierra), a manufacturer of microprocessors. That company went public in February 2000. Mr. Bailey has a B.S. in economics from the University of Maryland and an M.B.A. in finance from the University of Utah.



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 vice president of marketing, vice president of product marketing,
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. Since July 25, 2002, our common
stock has traded on the OTC Bulletin Board under the symbol OCCM. 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:



|                                    |  |      |      |     |   |     
|----------------------------------- |  | ---- | ---- | --- | - | ----
|                                    |  | High |      | Low
|Fiscal year ended December 31, 2004 |  |      |      |     |   |     
|Fourth Quarter                      |  | $    | 0.12 |     | $ | 0.08
|Third Quarter                       |  | $    | 0.12 |     | $ | 0.08
|Second Quarter                      |  | $    | 0.16 |     | $ | 0.09
|First Quarter                       |  | $    | 0.22 |     | $ | 0.11
|Fiscal year ended December 31, 2003 |  |      |      |     |   |     
|Fourth Quarter                      |  | $    | 0.25 |     | $ | 0.10
|Third Quarter                       |  | $    | 0.31 |     | $ | 0.10
|Second Quarter                      |  | $    | 0.31 |     | $ | 0.05
|First Quarter                       |  | $    | 0.08 |     | $ | 0.05



On March 1, 2005, the last reported
sales price of our common stock was $0.145 and there were 308 stockholders of record.



EQUITY COMPENSATION PLANS



The information required by this
item regarding securities authorized for issuance under equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.



DIVIDEND POLICY



We have not declared any cash dividends on our capital stock since inception and do not anticipate the payment of a cash dividend in the foreseeable future.



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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, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000, has been derived from our audited financial statements, which are not
included herein. The information as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003, and 2002 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         |        
|                                                                        |  | (In thousands, except per share data) |        
|                                                                        |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Sales                                                                   |  | $                                     | 17,329  |   |      | $ | 7,982   |      |  | $ | 2,435   |   |  | $    | 80      |   |  | $ |       |  
|Cost of sales                                                           |  |                                       | 15,829  |   |      |   | 7,930   |      |  |   | 5,237   |   |  |      | 95      |   |  |   |       |  
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Gross profit (loss)                                                     |  |                                       | 1,500   |   |      |   | 52      |      |  |   | (2,802  | ) |  |      | (15     | ) |  |   |       |  
|Operating expenses:                                                     |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Research and product development                                        |  |                                       | 7,448   |   |      |   | 12,004  |      |  |   | 19,227  |   |  |      | 16,399  |   |  |   | 6,543  |  
|Sales and marketing                                                     |  |                                       | 6,584   |   |      |   | 5,977   |      |  |   | 7,090   |   |  |      | 4,543   |   |  |   | 1,059  |  
|General and administrative                                              |  |                                       | 2,328   |   |      |   | 2,331   |      |  |   | 3,524   |   |  |      | 3,793   |   |  |   | 1,431  |  
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total operating expenses                                                |  |                                       | 16,360  |   |      |   | 20,312  |      |  |   | 29,841  |   |  |      | 24,735  |   |  |   | 9,033  |  
|Loss from operations                                                    |  |                                       | (14,860 | ) |      |   | (20,260 | )    |  |   | (32,643 | ) |  |      | (24,750 | ) |  |   | (9,033 | )
|Interest income                                                         |  |                                       | 94      |   |      |   | 101     |      |  |   | 197     |   |  |      | 710     |   |  |   | 187    |  
|Interest expense                                                        |  |                                       | (223    | ) |      |   | (284    | )    |  |   | (301    | ) |  |      | (131    | ) |  |   | (15    | )
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Loss before income taxes                                                |  |                                       | (14,989 | ) |      |   | (20,443 | )    |  |   | (32,747 | ) |  |      | (24,171 | ) |  |   | (8,661 | )
|Income tax benefit (expense)                                            |  |                                       |        |   |      |   | 11      |      |  |   |        |   |  |      | (1      | ) |  |   | (1     | )
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net loss                                                                |  |                                       | (14,989 | ) |      |   | (20,432 | )    |  |   | (32,747 | ) |  |      | (24,172 | ) |  |   | (8,862 | )
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Beneficial conversion feature                                           |  |                                       | (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                            |  | $                                     | (18,277 | ) |      | $ | (22,970 | )    |  | $ | (34,043 | ) |  | $    | (24,172 | ) |  | $ | (8,862 | )
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net loss per sharebasic and diluted                                    |  | $                                     | (0.07   | ) |      | $ | (0.11   | )    |  | $ | (0.38   | ) |  | $    | (4.94   | ) |  | $ | (3.84  | )
|Weighted average sharesbasic and diluted                               |  |                                       | 267,800 |   |      |   | 210,732 |      |  |   | 89,657  |   |  |      | 4,891   |   |  |   | 2,310  |  
|                                                                        |  |                                       |         |   |     
|Amortization of stock-based compensation included in:                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Research and product development                                        |  | $                                     | 693     |   |      | $ | 943     |      |  | $ | 1,130   |   |  | $    | 770     |   |  | $ | 294    |  
|Sales and marketing                                                     |  |                                       | 119     |   |      |   | 179     |      |  |   | 252     |   |  |      | 141     |   |  |   | 55     |  
|General and administrative                                              |  |                                       | 40      |   |      |   | 105     |      |  |   | 138     |   |  |      | 431     |   |  |   | 52     |  
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total amortization of stock-based compensation                          |  | $                                     | 852     |   |      | $ | 1,227   |      |  | $ | 1,520   |   |  | $    | 1,342   |   |  | $ | 401    |  
|                                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  



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SUMMARY OF SELECTED FINANCIAL DATA (CONTD)



|                                                                    |  |                                  |         |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------ | ---- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                                                                    |  | As of December 31 (In thousands) |        
|                                                                    |  | 2004                             |         |   | 2003 |   |        | 2002 |  | 2001 |        | 2000 |  
|Consolidated Balance Sheet Data:                                    |  |                                  |         |   |      |   |        |      |  |      |        |      |   |        |  |   |        |  
|Cash and cash equivalents                                           |  | $                                | 4,432   |   |      | $ | 14,586 |      |  | $    | 18,496 |      | $ | 6,639  |  | $ | 409    |  
|Restricted cash                                                     |  |                                  | 2,101   |   |      |   | 935    |      |  |      |       |      |   |       |  |   |       |  
|Working capital (deficit)                                           |  |                                  | 8,685   |   |      |   | 15,108 |      |  |      | 15,061 |      |   | 4,165  |  |   | (3,171 | )
|Total assets                                                        |  |                                  | 21,060  |   |      |   | 23,404 |      |  |      | 24,471 |      |   | 12,591 |  |   | 2,579  |  
|Long-term debt and Capital Lease Obligation, net of current portion |  |                                  | 2,987   |   |      |   | 998    |      |  |      | 853    |      |   | 1,439  |  |   |       |  
|Total liabilities                                                   |  |                                  | 13,457  |   |      |   | 7,084  |      |  |      | 6,662  |      |   | 5,643  |  |   | 3,769  |  
|Common stock potentially subject to rescission                      |  |                                  |        |   |      |   |       |      |  |      | 10,500 |      |   |       |  |   |       |  
|Convertible preferred stock and warrants                            |  |                                  | 21,496  |   |      |   | 16,381 |      |  |      | 10,811 |      |   | 37,699 |  |   | 6,946  |  
|Total stockholders equity (deficit)                                |  | $                                | (13,893 | ) |      | $ | (61    | )    |  | $    | 7,309  |      | $ | 6,948  |  | $ | (1,190 | )



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



Overview



From its inception through December 31, 2004, Occam has incurred cumulative net losses of approximately $101.4 million. Revenues have increased since 2003 and in particular, during 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.



We expect Occam to continue to incur declining but substantial operating losses and to experience substantial negative cash flows as it expands its business. These losses
declined over the last half of 2004, and we expect losses will continue to decline if we can continue to increase our revenues. Our financial statements have been prepared on a basis which assumes that we will continue as a going concern and which
contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have funded our operations primarily through the sale of equity securities and debt borrowings. From November 2003
through the end of 2004, Occam raised gross proceeds of approximately $22.2 million through the issuance of our Series A-2 preferred stock. Occam raised an additional $5.6 million in January 2005 and $4.9 million in March 2005 through additional
issuance of series A-2 preferred stock. In addition, In March 2005, a holder of an outstanding promissory note converted $534,790 of outstanding principal and accrued interest into shares of series A-2 preferred stock. Occam 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 Occam issues 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. Occam cannot predict whether it will be able to obtain additional financing. Any failure
to obtain financing could have an adverse material affect on Occams business, financial condition and results of operations.



During December 2004, we signed a senior loan and security agreement with Hercules Technology Growth Capital, Inc., a specialty finance company, under which we borrowed
$3.0 million, bearing interest at a rate of 11.95% per annum, with a maturity date of December 31, 2007. The agreement provides for seven monthly payments of interest followed by 30 equal monthly installments of principal and interest. Our
obligations under the agreement are collateralized by substantially all our assets. In connection with the loan agreement, we issued the lender warrants to purchase 1,666,667 shares of our common stock and 15,000 shares of our series A-2 preferred
stock. These warrants were valued using the Black-Scholes valuation model and $105,000 of the proceeds was allocated to the investment in common stock warrants and $73,000 of the proceeds was allocated to the A-2 preferred stock warrants. The
amounts allocated to the preferred stock and common stock warrants will be recorded as additional interest expense over the life of the loan. The warrant for common stock is exercisable through December 2011 at an exercise price of $0.09 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



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conversion price of $0.11 per share. At December 31, 2004, the outstanding principal was approximately $2.8 million, net of warrant discount, of which
approximately $438,000 was current. The loan agreement contains numerous covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance and reporting requirements and covenants limiting the ability of
the Company and its subsidiaries, among other things, to incur debt, grant liens, make acquisitions and make certain restricted payments. The events of default under the credit facility include payment defaults, cross defaults with certain other
indebtedness, breaches of covenants, failure to maintain specified revenues or tangible net worth levels on a quarterly basis and bankruptcy events. In particular, an event of default would occur if the Company failed to maintain revenues of at
least $5,000,000 for any fiscal quarter or a tangible net worth, as defined, of at least $5,000,000 for any fiscal quarter ending on or prior to June 30, 2005 and at least $7,000,000 for any fiscal quarter thereafter.



On November 9, 2001, we entered into a definitive merger agreement with Occam Networks Inc.,
a California corporation, pursuant to which we acquired Occam, the California corporation. The transaction closed on May 14, 2002, and we changed our name from Accelerated Networks Inc. to Occam Networks Inc., thereby adopting the acquired
companys name. The merger was accounted for using the purchase method of accounting as a reverse acquisition, pursuant to which Occam CA was treated as the acquirer of Accelerated Networks for financial accounting purposes. As such, following
the consummation of the merger, the historical financial statements of Occam CA serve as the principal historical financial statements of the combined organization.



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.



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. 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 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 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.



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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. Since the integrated
access device line of products acquired from Accelerated Networks had made and was expected to make only a minimal contribution to our net revenue, during the fiscal year ended December 31, 2002, we substantially discontinued the product line and
wrote-off $3.1 million of related excess and obsolete inventory.



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
$61.6 million of valuation allowance for 2002 and $6.2 million for 2003 and $4.0 million for 2004.



Loss Contingencies



Occam evaluates its
estimated potential financial exposure for loss contingencies, particularly the pending litigation matters discussed in Note 11 to the accompanying 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 any
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 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, 2004, 2003 and 2002



|                    |  |                                       |        |      |   |       |  |   |        |  
|------------------- |  | ------------------------------------- | ------ | ---- | - | ----- |  | - | ------ | -
|                    |  | Year ended December 31 (in thousands) |       
|                    |  | 2004                                  |        | 2003 |   | 2002  | 
|Sales               |  | $                                     | 17,329 |      | $ | 7,982 |  | $ | 2,435  |  
|Cost of sales       |  |                                       | 15,829 |      |   | 7,930 |  |   | 5,237  |  
|                    |  |                                       |        |      |   |       |  |   |        |  
|Gross profit (loss) |  | $                                     | 1,500  |      | $ | 52    |  | $ | (2,802 | )



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 |  
|                          |  | 2004                          |   |  | 2003 |   |  | 2002 |  
|BLC 6000 system           |  | 78                            | % |  | 48   | % |  |     |  
|BLC 1200 system           |  | 1                             | % |  | 24   | % |  | 70   | %
|Cabinets                  |  | 17                            | % |  | 12   | % |  | 12   | %
|Integrated Access Devices |  |                              |   |  | 8    | % |  | 16   | %
|Other                     |  | 4                             | % |  | 8    | % |  | 2    | %
|                          |  |                               |   |  |      |   |  |      |  
|Total sales               |  | 100                           | % |  | 100  | % |  | 100  | %



The increase in sales for fiscal year
2004 over the prior years was mainly due to 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, 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 2005.



We discontinued
marketing of Integrated Access Device line of products acquired from Accelerated Networks during the third quarter of 2002.



Cost of sales



Cost of revenue for these periods included the cost of products shipped for which revenue was recognized and the costs of manufacturing yield problems, field
replacements, rework costs, underabsorption of manufacturing overhead, and provisions for obsolete inventory. Cost of revenues 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, 2004, Occam had an accrual of $307,000 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.



Cost of sales for the fiscal year ended December 31, 2002
included a write-off of $3.1 million for excess and obsolete inventory of the Integrated Access Device line of products acquired from Accelerated Networks. In the third quarter of 2002, we discontinued marketing these products and reduced the
carrying value of this inventory.



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We expect gross margins to improve in 2005 as unusual expenses incurred in 2004, like high rework expenses, decline, cost
improvement redesigns begin to have an effect, revenue increases and increasing volumes allow us to reduce our costs per unit sold.



Research and product development expenses



|                                          |  |                                       |       |      |   |        |  |   |       
|----------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ------ |  | - | ------
|                                          |  | Year ended December 31 (in thousands)
|                                          |  | 2004                                  |       | 2003 |   | 2002  
|Research and product development expenses |  | $                                     | 7,448 |      | $ | 12,004 |  | $ | 19,227



Research and product development
expenses consist primarily of salaries and other personnel-related costs, prototype component and assembly costs, third-party design services and consulting costs, and other costs related to design, development, and testing of our products. Research
and product development costs are expensed as incurred, except for capital expenditures, which are capitalized and depreciated over their estimated useful lives, generally two to five years. Research and product development expenses declined by 38%
from 2003 to 2004 primarily to expense reduction actions implemented in 2003 and 2004 and reduced amortization of deferred compensation expense in 2004 compared to 2003. The 38% decrease in expenses from 2002 to 2003 was due primarily to expense
reduction actions we took during 2002 and 2003 as we scaled our activities into a sequential product development plan and lower amortization of deferred compensation expense in 2003 compared to 2002. We expect research and development costs to
increase marginally in 2005 as compared to 2004. Research and product development expenses include deferred compensation expenses of $693,000, 943,000 and $1,130,000, for fiscal years 2004, 2003 and 2002, respectively.



Sales and marketing expenses



|                             |  |                                       |       |      |   |       |  |   |      
|---------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                             |  | Year ended December 31 (in thousands)
|                             |  | 2004                                  |       | 2003 |   | 2002 
|Sales and Marketing Expenses |  | $                                     | 6,584 |      | $ | 5,977 |  | $ | 7,090



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 by 10% from 2003 to 2004 primarily due to increased head count, commissions and other promotional expense incurred to increase revenues and market penetration. Decrease in sales and marketing expenses from 2002 to 2003 was due
primarily to the discontinuation of the integrated access device product line during 2002, and to other expense reduction actions we took during 2002 and 2003. We expect sales and marketing costs to increase in 2005 and we continue to make
expenditures intended to increase sales and expand our business.



General and administrative expenses



|                                    |  |                                       |       |      |   |       |  |   |      
|----------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                    |  | Year ended December 31 (in thousands)
|                                    |  | 2004                                  |       | 2003 |   | 2002 
|General and administrative expenses |  | $                                     | 2,328 |      | $ | 2,331 |  | $ | 3,524



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 remained flat at $2.3 million in 2004 and 2003 compared to $3.5 million for



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2002. The 34% decrease in general and administrative expenses from 2002 to 2003 was due primarily to costs incurred in 2002 related to the separation of a
former chief executive officer from the Company and expense reduction actions taken in 2002 and 2003, offset partially by an increase in insurance and other costs of being a publicly held company. We expect general and administrative expenditures to
increase in 2005 due to additional expenses that we will be incurring 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, (in thousands)
|                                               |  | 2004                                   |     | 2003 |   | 2002 
|Research and product development               |  | $                                      | 693 |      | $ | 943   |  | $ | 1,130
|Sales and marketing                            |  |                                        | 119 |      |   | 179   |  |   | 252  
|General and administrative                     |  |                                        | 40  |      |   | 105   |  |   | 138  
|                                               |  |                                        |     |      |   |       |  |   |      
|Total amortization of stock-based compensation |  | $                                      | 852 |      | $ | 1,227 |  | $ | 1,520
|                                               |  |                                        |     |      |   |       |  |   |      



Through December 31, 2004, we
recorded total deferred stock compensation of approximately $10.5 million, representing the difference between the deemed value of our common stock for accounting purposes and the exercise price of the options at their date of grant. We are
amortizing remaining deferred stock-based compensation over the vesting periods of the applicable options, or repurchase periods for the exercised options, generally over four years. Through December 31, 2004, 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, 2004, we had $0.6 million of unamortized deferred stock compensation, which will be
amortized over the remaining vesting period of the underlying options.



Interest income and expense



|                 |  |                                        |      |   |      |   |      |      |  |   |      |  
|---------------- |  | -------------------------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                 |  | Year ended December 31, (in thousands) |     
|                 |  | 2004                                   |      |   | 2003 |   |      | 2002 | 
|Interest income  |  | $                                      | 94   |   |      | $ | 101  |      |  | $ | 197  |  
|Interest expense |  | $                                      | (223 | ) |      | $ | (284 | )    |  | $ | (301 | )



The decreases in interest income were
due to the lower average balances of cash and cash equivalents held during 2004 as compared to 2003, and 2003 as compared to 2002, as a result of consumption of cash balances for working capital purposes, the timing of the issuance of our series A-2
preferred stock, the timing of the issuance of our series A preferred stock in December 2002 and January 2003, the timing of cash provided from the merger with Accelerated Networks and the issuance of our series C preferred stock in May 2002. In
addition, lower interest rates in 2003 and 2004 adversely affected interest income relative to 2002.



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. The decrease in interest expense from 2002 to 2003 was due to lower average amounts outstanding under capital lease lines of credit during 2003 as compared to 2002, offset partially by borrowings under an
equipment loan during 2003.



Income Tax Benefit
(Expense)



Our effective tax rate for 2004, 2003 and 2002 was
0% due to our operating losses.



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Net operating loss carryforwards



As of December 31, 2004, Occams net operating loss carryforwards were approximately
$216.7 million for federal tax purposes, expiring through 2024, and $142.4 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, (in thousands) |       
|                              |  | 2004                                   |        |   | 2003 |   |        | 2002 | 
|Beneficial Conversion Feature |  | $                                      | (3,288 | ) |      | $ | (3,038 | )    |  | $ | (541 | )



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, $3.0 million upon the issuance of our series A-2 preferred stock during 2003 and $0.5
million upon the issuance of Occam CAs series B-1 and series C preferred stock during 2002. 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, B-1 and C preferred stock were converted.



Warrants issued with series C preferred stock



|                                              |  |                                        |   |      |   |      |  |   |      |  
|--------------------------------------------- |  | -------------------------------------- | - | ---- | - | ---- |  | - | ---- | -
|                                              |  | Year ended December 31, (in thousands) |  
|                                              |  | 2004                                   |   | 2003 |   | 2002 | 
|Warrants issued with series C preferred stock |  | $                                      |  |      | $ |     |  | $ | (255 | )



Upon the issuance of Occam CAs
series B-1 and series C preferred stock during 2002 we recorded $255,000 as a non-cash issuance cost of the series C preferred stock relating to the issuance of warrants to acquire 1,546,294 shares of series C preferred stock (the fair value of
which is calculated using the Black-Scholes valuation model with the following assumptions: risk free interest rate of 5%, a volatility factor of 50%, a contractual life of four years and no dividend yield), issued on the close of the merger with
Occam CA.



Interest attributable to common stock potentially
subject to rescission



|                                                                        |  |                                        |   |      |   |      |  |   |      |  
|----------------------------------------------------------------------- |  | -------------------------------------- | - | ---- | - | ---- |  | - | ---- | -
|                                                                        |  | Year ended December 31, (in thousands) |  
|                                                                        |  | 2004                                   |   | 2003 |   | 2002 | 
|Interest attributable to common stock potentially subject to rescission |  | $                                      |  |      | $ | 500  |  | $ | (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



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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. Interest of $300,000 and $500,000 was accrued during the fiscal years ended December 31, 2003 and
2002, respectively, relating to this matter as required by the SEC. Upon expiration of the statue of limitations for violation of the 1933 Act in 2003, we have reversed $800,000 of interest that had been accrued during the one-year claim period and
have reclassified common stock potentially subject to rescission into stockholders equity.



Liquidity and Capital Resources



As of
December 31, 2004, we had cash and cash equivalents of $4.4 million as compared to $14.6 million as of December 31, 2003. The decrease in cash and cash equivalents was primarily due to cash used in operations of $15.5 million and partially offset by
the gross proceeds from our offering of series A-2 preferred stock of $4.2 million in March 2004, by the gross proceeds from our sale of series A-2 preferred stock of $1.5 million in April 2004 and by the proceeds from our senior debt financing of
$3.0 million in December 2004. The cash and cash equivalents balance at December 31, 2004 excludes $2.1 million of restricted cash, $2.0 million of which was used to obtain a letter of credit to support a performance bond required for us to work on
a RUS funded contract for a customer. Management believes this government funded contract will be completed by the end of 2005 and the letter of credit and cash restriction will then no longer will be required.



We used $15.5 million of cash in operating activities during the fiscal year ended December
31, 2004, a decrease of $4.0 million or 21% over the $19.5 million used during the prior fiscal year. The decrease in cash used in operating activities of $4.0 million from 2004 to 2003 was primarily driven from reduced net losses as a result of
increased gross margins and reductions in our operating expenses, and changes in our receivables, inventories, accounts payable and accrued expenses. Accounts receivables increased by $2.9 million as a result of increased revenues, inventories and
accounts payable increased by $4.7 million and $3.3 million, respectively, as a result additional purchases in anticipation of sales and shipments in 2005 and accrued expenses increased by $1.0 million due to additional payroll, warranty and product
failure accruals.



We used $2.2 million in cash in investing activities during
the fiscal year ended December 31, 2004, as compared to $2.2 million during the comparable prior year period. Of the cash used in investing activities during 2004, $1.2 million represented the change in our restricted cash balance, and $1.0 million
of capital expenditures. Our restricted balance increased by $1.2 million as a result of a restriction of $2.0 million required to secure a letter of credit for support a performance bond for an RUS funded contract offset by a reduction of $0.8
million from the release of restrictions by our bank relating to our line of credit facility which expired during 2004. We used $2.2 million in cash in investing activities during the fiscal year ended December 31, 2003, as compared to $15.7 million
generated during 2002. Of the cash used in investing activities during 2003, $0.9 million represented restricted cash under a loan and security agreement with a bank for a revolving line of credit that is no longer in place and to secure a letter of
credit provided by us, and $0.7 million represented purchases of property and equipment. In addition, during 2003 we sold our India operation, which was comprised primarily of cash balances of approximately $0.5 million. We generated $15.7 million
from cash provided by investing activities in 2002, which consisted primarily of cash received from our merger with Accelerated Networks in May 2002.



We generated $7.5 million in cash from financing activities during the year ended December 31, 2004 as compared to $17.8 million for fiscal 2003. The cash provided from
financing activities in the fiscal year ended December 31, 2004 was from the proceeds of $5.7 million from our offering of series A-2 preferred stock and warrants, less issuance cost of $0.6 million, and the issuance of $3.0 million in senior debt
with attached warrants, offset partially by repayments of $0.7 million of capital lease and other debt obligations. In connection with the senior debt agreement, we issued the lender warrants to purchase 1,666,667 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. The loan
agreement contains numerous covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance and reporting requirements and covenants limiting our ability, among other things, to incur debt, grant liens,
make acquisitions and make certain restricted payments. The events of default under the credit facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, failure to maintain specified revenues or
tangible net worth levels on a quarterly basis and bankruptcy events. In particular, an event of default would occur if we failed to maintain revenues of at least $5,000,000 for any fiscal quarter or a tangible net worth, as defined, of at least
$5,000,000 for any fiscal quarter ending on or prior to June 30, 2005 and at least $7,000,000 for any fiscal quarter thereafter.



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We generated $17.8 million in cash from financing activities during the year ended December 31, 2003, as compared to
$25.6 million for the comparable prior year period. The cash provided in the fiscal year ended December 31, 2002 was from the proceeds of $16.4 million from our offering of series A-2 preferred stock during November and December 2003, $1.0 million
from our offering of series A preferred stock during January 2003, and the proceeds of notes payable of $921,000 during June and July 2003, offset partially by repayments of capital lease obligations and notes payable. The cash provided in the
fiscal year ended December 31, 2002 was primarily from the proceeds of a $5.2 million from a loan from Accelerated Networks to Occam CA prior to the merger, $10.0 million from Occam CAs offering of series C preferred stock during May 2002, and
$11.0 million from our offering of series A preferred stock during December 2002.



In January 2005, we raised additional gross proceeds of $5.6 million through sales of A-2 preferred stock to certain existing investors. In March 2005, existing investors and Tellabs invested an additional $4.9 million in our Series A-2
preferred stock. In addition, In March 2005, a holder of an outstanding promissory note converted $534,790 of outstanding principal and accrued interest into shares of series A-2 preferred stock.



We plan to continue to devote substantial capital resources to research and development
activities, as well as our sales, marketing, customer service and other corporate activities. Our consolidated financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business.



Our
viability as a going concern is dependent upon our ability to successfully carry out our business plan. Since inception, we have devoted substantial effort and capital resources to develop and market its products. Based on our current operating
plans, management believes that the recent debt financing and equity investments, will be sufficient to fund the Company through twelve months from the balance sheet date.



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 attain profitability and generate
additional cash flows include increasing revenues from new and existing customers, focus on cost reductions, and the launch of additional products. However there is no assurance that management 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.



As of December 31, 2004,
we had approximately $482,000 in accrued expenses on our balance sheet for purchase commitments and outstanding payments due to one of our former principal contract manufacturers, which we expect to settle and pay in 2005.



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We lease our facilities and certain assets under non-cancelable operating leases expiring through 2006, excluding various
renewal options, and have a note payable with an investor, capital lease and long-term debt obligations. See Note 5, 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, 2004 (in thousands):



|                                     |  |       |       |                        |   |           |  |           |       |                  |   |   |  |   |  
|------------------------------------ |  | ----- | ----- | ---------------------- | - | --------- |  | --------- | ----- | ---------------- | - | - |  | - | -
|                                     |  |       |       | Payments Due By Period |   |          
|                                     |  | Total |       | Less than1 year        |   | 1-3 years |  | 3-5 years |       | More than5 years
|Contractual Obligations (1)          |  |       |       |                        |   |           |  |           |       |                  |   |   |  |   |  
|Capital leases                       |  | $     | 285   |                        | $ | 285       |  | $         |      |                  | $ |  |  | $ | 
|                                     |  |       |       |                        |  
|Note payable to stockholder (4)      |  |       |      |                        |   |          |  |           |      |                  |   |  |  |   | 
|Note payable to bank                 |  |       | 212   |                        |   | 140       |  |           | 72    |                  |   |  |  |   | 
|Note payable to finance company (3)  |  |       | 3,000 |                        |   | 531       |  |           | 2,469 |                  |   |  |  |   | 
|                                     |  |       |       |                        |  
|Purchase Commitments (2)             |  |       | 4,400 |                        |   | 4,400     |  |           |      |                  |   |  |  |   | 
|Outstanding payments and commitments |  |       | 482   |                        |   |          |  |           |      |                  |   |  |  |   | 
|Operating leases                     |  | $     | 1,168 |                        | $ | 716       |  | $         | 452   |                  | $ |  |  | $ | 

---

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

|(2) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In connection with the senior debt agreement with Hercules, we issued Hercules warrants to purchase 1,666,667 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In March 2005, the principal and accrued interest of $534,790 on an outstanding note payable to one of our stockholders was cancelled and converted into shares of our series A-2
preferred stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                       |  |       |       |                                           |   |           |  |           |   |                  |   |   |  |   |  
|---------------------- |  | ----- | ----- | ----------------------------------------- | - | --------- |  | --------- | - | ---------------- | - | - |  | - | -
|                       |  |       |       | Amount of CommitmentExpiration Per Period |   |          
|Commercial Commitments |  | Total |       | Less than1 year                           |   | 1-3 years |  | 3-5 years |   | More than5 years
|Letter of credit (6)   |  | $     | 1,980 |                                           | $ | 1,980     |  | $         |  |                  | $ |  |  | $ | 

---

|(6) | The letter of credit was put in place to support a performance bond for a Rural Utility Supplier (RUS) contract being performed by us.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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, the we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2004 and 2003.



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Recent Accounting Pronouncements:



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based
Payments, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) will require Occam to measure all employee stock-based compensation awards using a fair-value method and record such expense in
its consolidated financial statements. The adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements.
SFAS No. 123(R) is effective beginning in the quarter ending September 30, 2005. We expect the adoption of SFAS 123(R) to have a material impact on our results of operations. The pro forma impacts of SFAS 123, disclosed in note 2 to our consolidated
financial statements, may not be representative of future stock based compensation charges because we are still considering the method we will use to value our stock options after the adoption of SFAS 123(R) and levels of future option grants, if
any.



In December 2004, the FASB issued SFAS No. 153 Exchanges of
Nonmonetary Assets, an amendment of APBO 29 to address the accounting for nonmonetary exchanges of productive assets. SFAS No. 153 amends APBO 29, Accounting for Nonmonetary Exchanges, which established a narrow exception from
fair-value measurement for nonmonetary exchanges of similar productive assets. SFAS No. 153 eliminates that exception and replaces it with an exception for exchanges that do not have commercial substance. Under SFAS No. 153 nonmonetary exchanges are
required to be accounted for at fair value, recognizing any gains or losses, if their fair value is determinable within reasonable limits and the transaction has commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 apply to nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. Adoption of SFAS No.
153 is not expected to have a material impact on Occams financial position, results of operations or cash flows.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43, chapter 4. SFAS No. 151 requires that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material are to be recognized as current-period charges rather than as components of inventory. The statement also requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production facilities. Occam adopted SFAS No. 151 during the fourth quarter of 2004. The implementation of SFAS No. 151 did not have a material impact on Occams financial position,
results of operations or cash flows.



Risk Factors



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



Currently we have limited
number of customers for our BLC 6000 product line. We cannot be certain that there will be a 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. During 2004, we experienced higher than expected warranty claims relating to
our products. Addressing these claims has had an adverse effect on our operating margins and has increased use of cash in each of the first three quarters of 2004. Management believes these issues have been resolved but if they have not, it would
have an adverse effect on revenues and would impair our financial condition.



We have recently 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.



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



We have incurred
significant losses since inception and expect that we will experience net losses and negative cash flow for the foreseeable future. As of December 31, 2004, we had an accumulated deficit of approximately $101.3 million. We expect our net revenue to
be unpredictable in the near future. Accordingly, there can be no assurances that we will ever generate sufficient net revenue to achieve or sustain profitability.



We have large fixed expenses and 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 financial statements have been prepared on the assumption that we will
continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The independent registered public accounting firms report on our financial statements as of and for the
fiscal year ended December 31, 2004 included an explanatory paragraph which states that since inception we have incurred net operating losses and negative cash flows, that raise substantial doubt about our ability to continue as a going concern.



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 continue to operate at a loss and may require further infusion of cash. In particular, our cash burn rate has been higher in 2004 than previously anticipated because we were required to spend increased
amounts to address product warranty and repair issues. From November 2003 through March 2005, we raised $33 million through the issuance of Series A-2 preferred stock and $3 million under a secured loan facility. In addition, we have announced our
intention to conduct a rights offering of Series A-2 preferred stock in which we would offer holders of our common stock the opportunity to purchase shares of Series A-2 preferred stock, subject to the filing of a registration statement with the
Securities and Exchange Commission and the SECs declaring the registration statement to be effective However, 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%. In connection with obtaining the $3 million secured loan facility, we were required to give the lender a lien in substantially all of our assets.
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.



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 us. As a result, they may also have a substantial advantage over us in developing or acquiring new products and technologies and in creating market awareness for those products, services and technologies. Further, many of
our competitors have built long-standing relationships with some of our



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potential customers, have the ability to provide financing to them and may, therefore, have an inherent advantage in selling network equipment products to
these customers. We expect our competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. To be competitive, we must continue to invest significant resources in research and
development, sales, marketing and customer support. We may not have sufficient resources to make these investments, make the technological advances necessary to be competitive, or be able to effectively sell our products to carriers who have prior
relationships with our competitors.



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



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



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



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



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



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



Our products have only recently been widely deployed. As a result, we cannot be sure that our products do not contain
significant software or hardware errors that could only be detected when deployed in live networks that generate high amounts of voice and/or data traffic. Our customers may discover errors or defects in 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. Any of these occurrences could have a material adverse effect on our business, results of operations and financial condition. During fiscal 2004, we experienced
unanticipated product performance issues, and our costs associated with resolving those issues had an adverse effect on our results of operations for fiscal 2004.



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.



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



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



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



The current market for telecommunications equipment is characterized by continued uncertainty in the spending patterns of
our current and prospective customers. In addition, we cannot predict whether there will be a market for our products in the future. As a result, our revenues and the market for our products may not be sufficient to support our ongoing operations in
the foreseeable future.



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.



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.



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



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



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



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



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.



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



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



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



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



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



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



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



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



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



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



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



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



We may be subject to
intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. 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.



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



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



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



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



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.



We face certain litigation risks that could harm our business.



We are currently named as a defendant in a securities class action lawsuit. We believe this lawsuit will be settled with no expense to Occam. (For
additional information regarding our current litigation, see item 3Legal Proceedings.



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



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



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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 67% of our Series A-2 preferred stock. In particular, investment funds affiliated with U.S. Venture Partners and Norwest
Venture Partners collectively control approximately 57% of the our outstanding voting stock (including 48% of our common stock and 67% 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 19% of Series A-2 preferred stock and 9.2% 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, and each share, if any, sold in our anticipated rights offering will be sold at the same price per share. 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 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. Based on our outstanding shares of Series A-2 preferred, without giving effect to any
additional shares we may issue, our Series A-2 preferred stockholders are presently entitled to receive liquidation proceeds of $67.0 million before any payments may be made to common stockholders.



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



As of December 31, 2004, Occam had incurred significant losses in the United States and had net operating loss (NOL) carryforwards of approximately $216.7
million (for federal tax purposes) and $142.4 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.



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It is possible that our private placements and the anticipated 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.



As of December 31, 2004, Occam had 268.6 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 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, 2004, Occam had 2.2 million shares
of Series A-2 preferred stock outstanding that are convertible into 202.2 million shares of common stock at a conversion price of approximately $0.11 per share. If the share price of the common stock exceeds $0.11 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, subject to our satisfying obligations to register these shares for resale, the
SECs declaring the registration statement effective, and S-1 prospectus delivery requirements. Subsequent to December 31, 2004, Occam sold and issued an additional 1.1 million shares of Series A-2 preferred stock, which are subject to the same
rights and privileges.



As of December 31, 2004, Occam had 60.9
million shares subject to outstanding options under Occams stock option plans, and 555,000 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, 2004, Occam had warrants outstanding to purchase a total of 241,800 shares of Occams Series A-2
preferred stock, convertible into approximately 22.0 million shares of its common stock.



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 10-K.



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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.
|--- | -------------------------------------------------



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



|(b) | Changes in Internal Controls Over Financial Reporting
|--- | -----------------------------------------------------



There were no changes in our internal controls over financial reporting that occurred during the fourth quarter of the fiscal year covered by this report on Form 10-K
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



ITEM 9B. OTHER INFORMATION



|None. | 
|----- | 



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.



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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.



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*        |  | 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).                                                                                                                                    



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|      |  |                                                                                                                                                                                                                                                                                                                                                 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|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).                             
|      | 
|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).                      
|      | 
|4.11  |  | 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).                                                                                                                                                          
|      | 
|4.13  |  | 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).                                                                                                                                     
|      | 
|4.14  |  | 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).                                                                                 



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|10.9   |  | 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).                                                                                                                                                                                                                                                                                                                                          
|       | 
|10.10  |  | 2000 Stock Incentive 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  |  | 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+ |  | 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  |  | 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  |  | 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+ |  | 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).                                                                                                                                                                                                                                                                    
|       | 
|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).



41



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|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 |  | 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 |  | 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 |  | 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 |  | 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 |  | 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 date 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).                                                                                                                                                                                                                                                                                                                            
|      | 
|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).                                                                                                                                                                                                                                                                                                                 



42



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|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** |  | Manufacturing License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                     
|        | 
|10.69** |  | Technology License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                        
|        | 
|10.70** |  | Supply Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                                    
|        | 
|21.1    |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                          
|        | 
|23.1    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                
|        | 
|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.                                                                                                                                       

---

|* | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Confidential treatment has been requested for certain portions of this exhibit.
|-- | -------------------------------------------------------------------------------

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



|(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.



43



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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 31, 2005 |  | By: |  | /s/ Robert L. Howard-Anderson                                            
|                     |  |     |  | Robert L. Howard-Anderson President, Chief Executive
Officer and Director



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 |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 31, 2005
|Robert L. Howard-Anderson     |  |                                                                               | 
|                              |  |                                                                              
|/s/ Howard M. Bailey          |  | Chief Financial Officer (Principal Financial
and Accounting Officer)          |  | March 31, 2005
|Howard M. Bailey              |  |                                                                               | 
|                              |  |                                                                              
|/s/ Steven M. Krausz          |  | Director                                                                      |  | March 31, 2005
|Steven M. Krausz              |  |                                                                               |  |               
|                              |  |                                                                              
|/s/ Robert E. Bylin           |  | Director                                                                      |  | March 31, 2005
|Robert E. Bylin               |  |                                                                               |  |               
|                              |  |                                                                              
|/s/ Robert B. Abbott          |  | Director                                                                      |  | March 31, 2005
|Robert B. Abbott              |  |                                                                               |  |               
|                              |  |                                                                              
|/s/ Thomas E. Pardun          |  | Director                                                                      |  | March 31, 2005
|Thomas E. Pardun              |  |                                                                               |  |               
|                              |  |                                                                              
|/s/ Kenneth Cole              |  | Director                                                                      |  | March 31, 2005
|Kenneth Cole                  |  |                                                                               |  |               



44



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##### Table of Contents

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).                                                        
|            | 
|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).                                                      



45



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                                                                                                                    
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|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).                                         
|       | 
|4.11   |  | 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).                                                                                                                                                                             
|       | 
|4.13   |  | 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).                                                                                                                                                        
|       | 
|4.14   |  | 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).                                                                                                     
|       | 
|10.9   |  | 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).                                                                                                                                                      
|       | 
|10.10  |  | 2000 Stock Incentive 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  |  | 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+ |  | 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  |  | 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  |  | 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+ |  | 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).                           



46



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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|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 |  | 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 |  | 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 |  | 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 |  | 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 |  | 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 date 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).                                                                                                                                                                                                                                                                                                                            
|      | 
|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).                                                                                                                                                                                                                                                                                                      



47



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|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** |  | Manufacturing License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                     
|        | 
|10.69** |  | Technology License Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                        
|        | 
|10.70** |  | Supply Agreement dated as of March 18, 2005, by and between the Registrant and Tellabs Petaluma, Inc.                                                                                                                                                                                    
|        | 
|21.1    |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                          
|        | 
|23.1    |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                 
|        | 
|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.                                                                                                                                       

---

|* | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Confidential treatment has been requested for certain portions of this exhibit.
|-- | -------------------------------------------------------------------------------

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



48



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                          |  |     
|--------------------------------------------------------- |  | ----
|                                                          |  | Page
|Report of Independent Registered Public Accounting Firm   |  | F-2 
|Consolidated Balance Sheets                               |  | F-3 
|Consolidated Statements of Operations                     |  | F-4 
|Consolidated Statements of Stockholders Equity (Deficit) |  | F-5 
|Consolidated Statements of Cash Flows                     |  | F-8 
|Notes to Consolidated Financial Statements                |  | F-9 



F-1



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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 sheets 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 2003, and the results of their operations and their cash flows for each of the three 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, 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. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.



|                        |  |                               
|----------------------- |  | ------------------------------
|                        |  | /s/ PRICEWATERHOUSECOOPERS LLP
|                        | 
|March 25, 2005          |  |                               
|Los Angeles, California |  |                               



F-2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



OCCAM NETWORKS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | - | --------------- | - | ------- | -
|                                                                                                                                                                                                                                                                |  | December 312004 |          |   | December 312003 |  
|ASSETS                                                                                                                                                                                                                                                          |  |                 |          |   |                 |   |         |  
|                                                                                                                                                                                                                                                                |  |                
|Current assets:                                                                                                                                                                                                                                                 |  |                 |          |   |                 |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                       |  | $               | 4,432    |   |                 | $ | 14,586  |  
|Restricted cash                                                                                                                                                                                                                                                 |  |                 | 2,101    |   |                 |   | 935     |  
|Accounts receivable, net                                                                                                                                                                                                                                        |  |                 | 5,217    |   |                 |   | 2,342   |  
|Inventories                                                                                                                                                                                                                                                     |  |                 | 6,611    |   |                 |   | 2,254   |  
|Prepaid and other current assets                                                                                                                                                                                                                                |  |                 | 794      |   |                 |   | 1,077   |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total current assets                                                                                                                                                                                                                                            |  |                 | 19,155   |   |                 |   | 21,194  |  
|                                                                                                                                                                                                                                                                |  |                
|Property and equipment, net                                                                                                                                                                                                                                     |  |                 | 1,692    |   |                 |   | 1,937   |  
|Other assets                                                                                                                                                                                                                                                    |  |                 | 213      |   |                 |   | 273     |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total assets                                                                                                                                                                                                                                                    |  | $               | 21,060   |   |                 | $ | 23,404  |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT                                                                                                                                                                                               |  |                 |          |   |                 |   |         |  
|                                                                                                                                                                                                                                                                |  |                
|Current liabilities:                                                                                                                                                                                                                                            |  |                 |          |   |                 |   |         |  
|Accounts payable                                                                                                                                                                                                                                                |  | $               | 6,277    |   |                 | $ | 3,001   |  
|Accrued expenses                                                                                                                                                                                                                                                |  |                 | 3,330    |   |                 |   | 2,377   |  
|Current portion of long term debt and capital lease obligations                                                                                                                                                                                                 |  |                 | 863      |   |                 |   | 708     |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total current liabilities                                                                                                                                                                                                                                       |  |                 | 10,470   |   |                 |   | 6,086   |  
|                                                                                                                                                                                                                                                                |  |                
|Long term debt and capital lease obligations                                                                                                                                                                                                                    |  |                 | 2,987    |   |                 |   | 998     |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total liabilities                                                                                                                                                                                                                                               |  |                 | 13,457   |   |                 |   | 7,084   |  
|                                                                                                                                                                                                                                                                |  |                
|Commitments and contingencies (note 11)                                                                                                                                                                                                                         |  |                 |          |   |                 |   |         |  
|                                                                                                                                                                                                                                                                |  |                
|Redeemable preferred stock                                                                                                                                                                                                                                      |  |                 |          |   |                 |   |         |  
|Series A-2 convertible preferred stock, $.001 par value, authorized 3,250 shares, 2,224 and 1,651 issued and outstanding at December 31, 2004
and 2003, respectively, liquidation preference of $66,723 and $49,527 at December 31, 2004 and 2003, respectively |  |                 | 20,993   |   |                 |   | 16,381  |  
|Series A-2 convertible preferred stock warrant                                                                                                                                                                                                                  |  |                 | 503      |   |                 |   |        |  
|                                                                                                                                                                                                                                                                |  |                
|Stockholders deficit:                                                                                                                                                                                                                                          |  |                 |          |   |                 |   |         |  
|Common stock, $0.001 par value, 750,000 shares authorized; 268,570 and 266,988 shares issued and outstanding at December 31, 2004 and 2003,
respectively                                                                                                        |  |                 | 269      |   |                 |   | 267     |  
|Additional paid-in capital                                                                                                                                                                                                                                      |  |                 | 87,294   |   |                 |   | 87,238  |  
|Warrants                                                                                                                                                                                                                                                        |  |                 | 559      |   |                 |   | 454     |  
|Deferred stock compensation                                                                                                                                                                                                                                     |  |                 | (633     | ) |                 |   | (1,627  | )
|Accumulated deficit                                                                                                                                                                                                                                             |  |                 | (101,382 | ) |                 |   | (86,393 | )
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total stockholders deficit                                                                                                                                                                                                                                     |  |                 | (13,893  | ) |                 |   | (61     | )
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  
|Total liabilities, redeemable preferred stock and stockholders deficit                                                                                                                                                                                         |  | $               | 21,060   |   |                 | $ | 23,404  |  
|                                                                                                                                                                                                                                                                |  |                 |          |   |                 |   |         |  



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



F-3



---

##### Table of Contents

OCCAM NETWORKS, INC.

STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|----------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                        |  | Year ended December 31 |        
|                                                                        |  | 2004                   |         |   | 2003 |   |         | 2002 | 
|Sales                                                                   |  | $                      | 17,329  |   |      | $ | 7,982   |      |  | $ | 2,435    |  
|Cost of sales                                                           |  |                        | 15,829  |   |      |   | 7,930   |      |  |   | 5,237    |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Gross profit (loss)                                                     |  |                        | 1,500   |   |      |   | 52      |      |  |   | (2,802   | )
|                                                                        |  |                        |        
|Operating expenses:                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Research and product development                                        |  |                        | 7,448   |   |      |   | 12,004  |      |  |   | 19,227   |  
|Sales and marketing                                                     |  |                        | 6,584   |   |      |   | 5,977   |      |  |   | 7,090    |  
|General and administrative                                              |  |                        | 2,328   |   |      |   | 2,331   |      |  |   | 3,524    |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Total operating expenses                                                |  |                        | 16,360  |   |      |   | 20,312  |      |  |   | 29,841   |  
|                                                                        |  |                        |        
|Loss from operations                                                    |  |                        | (14,860 | ) |      |   | (20,260 | )    |  |   | (32,643  | )
|                                                                        |  |                        |        
|Interest income                                                         |  |                        | 94      |   |      |   | 101     |      |  |   | 197      |  
|Interest expense                                                        |  |                        | (223    | ) |      |   | (284    | )    |  |   | (301     | )
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Loss before income taxes                                                |  |                        | (14,989 | ) |      |   | (20,443 | )    |  |   | (32,747  | )
|                                                                        |  |                        |        
|Income tax benefit                                                      |  |                        |        |   |      |   | 11      |      |  |   |         |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Net loss                                                                |  |                        | (14,989 | ) |      |   | (20,432 | )    |  |   | (32,747  | )
|                                                                        |  |                        |        
|Beneficial conversion feature                                           |  |                        | (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                            |  |                        | (18,277 | ) |      |   | (22,970 | )    |  |   | (34,0431 | )
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Net loss per share:                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Basic and diluted                                                       |  | $                      | (0.07   | ) |      | $ | (0.11   | )    |  | $ | (0.38    | )
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Weighted average shares:                                                |  |                        |         |   |      |   |         |      |  |   |          |  
|Basic and diluted                                                       |  |                        | 267,800 |   |      |   | 210,732 |      |  |   | 89,657   |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Amortization of stock-based compensation included in:                   |  |                        |         |   |      |   |         |      |  |   |          |  
|Research and product development                                        |  | $                      | 693     |   |      | $ | 943     |      |  | $ | 1,130    |  
|Sales and marketing                                                     |  |                        | 119     |   |      |   | 179     |      |  |   | 252      |  
|General and administrative                                              |  |                        | 40      |   |      |   | 105     |      |  |   | 138      |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  
|Total amortization of stock-based compensation                          |  | $                      | 852     |   |      | $ | 1,227   |      |  | $ | 1,520    |  
|                                                                        |  |                        |         |   |      |   |         |      |  |   |          |  



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



F-4



---

##### Table of Contents

OCCAM NETWORKS, INC.

STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(In thousands)

Years ended December 31, 2004, 2003, and 2002



|                                                                                                                            |  |                          |   |  |                          |        |   |                          |         |   |              |   |         |          |  |        |                                  |  |   |                                |   |  |                                  |   |                           |   |         |                     |  |   |       |   |  |   |        |   |  |   |     |   |  |   |    |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | - |  | ------------------------ | ------ | - | ------------------------ | ------- | - | ------------ | - | ------- | -------- |  | ------ | -------------------------------- |  | - | ------------------------------ | - |  | -------------------------------- | - | ------------------------- | - | ------- | ------------------- |  | - | ----- | - |  | - | ------ | - |  | - | --- | - |  | - | -- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                            |  | Series A Preferred Stock |   |  | Series B Preferred Stock |        |   | Series C Preferred Stock |         |   | Common Stock |   |         | Warrants |  |        | Deferred stock basedComp-enstion |  |   | NotesReceivablefromStockholder |   |  | Cumulative TranslationAdjustment |   | Additional Paid inCapital |   |         | AccumulativeDeficit |  |   | Total |  
|                                                                                                                            |  | Shares                   |   |  | Amount                   |        |   | Shares                   |         |   | Amount       |   |         | Shares   |  |        | Amount                           |  |   | Shares                         |   |  | Amount                           |   |                           |   |         |                     |  |   |      
|Balance at December 31, 2001                                                                                                |  | 6,975                    |   |  | $                        | 6,946  |   |                          | 18,141  |   |              | $ | 30,753  |          |  |       |                                  |  | $ |                               |   |  | 14,253                           |   |                           | $ | 9,526   |                     |  | $ | 187   |   |  | $ | (7,200 | ) |  | $ | (50 | ) |  | $ |   |  | $ |        |   |  | $ | (33,214 | ) |  | $ | 6,948   |  
|Exercise of stock options                                                                                                   |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  | 419                              |   |                           |   | 20      |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   | 20      |  
|Repurchase of early exercise options                                                                                        |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  | (2,456                           | ) |                           |   | (51     | )                   |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   | (51     | )
|Issuance of series C preferred stock                                                                                        |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  | 5,900  |                                  |  |   | 10,030                         |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   | 10,030  |  
|Issuance of series C preferred stock warrants in connection with issuance of series C preferred stock, at deemed fair value |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   | (255                           | ) |  |                                 |   |                           |   |        |                     |  |   | 255   |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Issuance of series C preferred stock warrants in connection with loan guarantee, at deemed fair value                       |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   | 178   |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   | 178     |  
|Exchange of series A, B and C preferred stock for common stock                                                              |  | (6,975                   | ) |  |                          | (6,946 | ) |                          | (18,141 | ) |              |   | (30,753 | )        |  | (5,900 | )                                |  |   | (9,775                         | ) |  | 77,743                           |   |                           |   | 47,474  |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   |        |  
|Merger with Accelerated Networks                                                                                            |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  | 50,900                           |   |                           |   | (56,828 | )                   |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   | 77,912  |   |  |   |        |   |  |   | 21,084  |  
|Common stock potentially subject to rescission                                                                              |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   | (10,000 | ) |  |   |        |   |  |   | (10,000 | )
|Interest on common stock potentially subject to rescission                                                                  |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   | (500    | ) |  |   |        |   |  |   | (500    | )
|Increase in deemed fair value of stock options issued to consultants in exchange for ongoing professional services          |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   | 188    |   |  |   |    |   |  |   |   |  |   | (188    | ) |  |   |        |   |  |   |        |  
|Deferred stock-based compensation                                                                                           |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   | (1,564 | ) |  |   |    |   |  |   |   |  |   | 1,564   |   |  |   |        |   |  |   |        |  
|Reversal of deferred stock-based compensation on forfeiture of stock options                                                |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   | 3,801  |   |  |   |    |   |  |   |   |  |   | (3,801  | ) |  |   |        |   |  |   |        |  
|Amortization of deferred stock-based compensation                                                                           |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   | 1,343  |   |  |   |    |   |  |   |   |  |   |        |   |  |   |        |   |  |   | 1,343   |  
|Acceleration of stock option vesting                                                                                        |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   | 177     |   |  |   |        |   |  |   | 177     |  
|Cancellation of stockholder note                                                                                            |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   | 50  |   |  |   |   |  |   | (50     | ) |  |   |        |   |  |   |        |  
|Issuance of series A preferred stock, net of issuance costs                                                                 |  | 1,472                    |   |  |                          | 10,811 |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   | (140  | ) |  |   |       |   |  |   |    |   |  |   |   |  |   | 140     |   |  |   |        |   |  |   | 10,811  |  
|Cumulative translation adjustment                                                                                           |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                               |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   | 16 |  |   |        |   |  |   |        |   |  |   | 16      |  
|Net loss                                                                                                                    |  |                         |   |  |                          |       |   |                          |        |   |              |   |        |          |  |       |                                  |  |   |                                |   |  |                                 |   |                           |   |        |                     |  |   |      |   |  |   |       |   |  |   |    |   |  |   |   |  |   |        |   |  |   | (32,747 | ) |  |   | (32,747 | )
|                                                                                                                            |  |                          |   |  |                          |        |   |                          |         |   |              |   |         |          |  |        |                                  |  |   |                                |   |  |                                  |   |                           |   |         |                     |  |   |       |   |  |   |        |   |  |   |     |   |  |   |    |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                                                |  | 1,472                    |   |  | $                        | 10,811 |   |                          |        |   |              | $ |        |          |  |       |                                  |  | $ |                               |   |  | 140,859                          |   |                           | $ | 141     |                     |  | $ | 480   |   |  | $ | (3,432 | ) |  | $ |    |   |  | $ | 16 |  | $ | 65,254  |   |  | $ | (65,961 | ) |  | $ | 7,309   |  
|                                                                                                                            |  |                          |   |  |                          |        |   |                          |         |   |              |   |         |          |  |        |                                  |  |   |                                |   |  |                                  |   |                           |   |         |                     |  |   |       |   |  |   |        |   |  |   |     |   |  |   |    |  |   |         |   |  |   |         |   |  |   |         |  



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



F-5



---

##### Table of Contents

OCCAM NETWORKS, INC.

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

(In
thousands)

Years ended December 31, 2004, 2003, and 2002



|                                                                                                                   |  |                            |  |        |                          |   |        |              |   |          |   |         |                                   |  |         |                                  |  |   |                           |  |   |                       |   |  |       |        |   |  |   |     |   |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------- |  | ------ | ------------------------ | - | ------ | ------------ | - | -------- | - | ------- | --------------------------------- |  | ------- | -------------------------------- |  | - | ------------------------- |  | - | --------------------- | - |  | ----- | ------ | - |  | - | --- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                   |  | Series A-2 Preferred Stock |  |        | Series A Preferred Stock |   |        | Common Stock |   | Warrants |   |         | Deferred Stock BasedComp-ensation |  |         | CumulativeTranslation Adjustment |  |   | AdditionalPaid in Capital |  |   | Accum- ulated Deficit |   |  | Total |       
|                                                                                                                   |  | Shares                     |  | Amount |                          |   | Shares |              |   | Amount   |   |         | Shares                            |  |         | Amount                           |  |   |                           |  |   |                      
|Balance at December 31, 2002                                                                                       |  |                           |  | $      |                         |   |        | 1,472        |   |          | $ | 10,811  |                                   |  | 140,859 |                                  |  | $ | 141                       |  | $ | 480                   |   |  | $     | (3,432 | ) |  | $ | 16  |   |  | $ | 65,254 |   |  | $ | (65,961 | ) |  | $ | 7,309   |  
|Exercise of stock options                                                                                          |  |                           |  |        |                         |   |        |             |   |          |   |        |                                   |  | 3,172   |                                  |  |   | 3                         |  |   |                      |   |  |       |       |   |  |   |    |   |  |   | 252    |   |  |   |        |   |  |   | 255     |  
|Repurchase of early exercise options                                                                               |  |                           |  |        |                         |   |        |             |   |          |   |        |                                   |  | (116    | )                                |  |   |                          |  |   |                      |   |  |       |       |   |  |   |    |   |  |   | (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 | )                                 |  | 123,073 |                                  |  |   | 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                   |   |        |             |   |          | $ |        |                                   |  | 266,988 |                                  |  | $ | 267                       |  | $ | 454                   |   |  | $     | (1,627 | ) |  | $ |    |   |  | $ | 87,238 |   |  | $ | (86,393 | ) |  | $ | (61     | )
|                                                                                                                   |  |                            |  |        |                          |   |        |              |   |          |   |         |                                   |  |         |                                  |  |   |                           |  |   |                       |   |  |       |        |   |  |   |     |   |  |   |        |   |  |   |         |   |  |   |         |  



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



F-6



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERED STOCK AND STOCKHOLDERS DEFICIT

(In thousands)



Years ended December 31, 2004, 2003 and 2002



|                                                                                       |  |                           |  |        |                                   |   |  |              |      |          |        |                      |   |  |                          |     |  |                    |     |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------- |  | ------ | --------------------------------- | - |  | ------------ | ---- | -------- | ------ | -------------------- | - |  | ------------------------ | --- |  | ------------------ | --- |  | ----- | ------ | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                                       |  | Series A-2Preferred 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                            |   |  | $            |     |          |        | 266,988              |   |  | $                        | 267 |  | $                  | 454 |  | $     | (1,627 | ) |  | $ | 87,238 |   |  | $ | (86,393  | ) |  | $ | (61     | )
|Exercise of stock options                                                              |  |                          |  |        |                                  |   |  |              |     |          |        | 1,660                |   |  |                          | 2   |  |                    |    |  |       |       |   |  |   | 113    |   |  |   |         |   |  |   | 115     |  
|Shares repurchased                                                                     |  |                          |  |        |                                  |   |  |              |     |          |        | (78                  | ) |  |                          |    |  |                    |    |  |       |       |   |  |   |       |   |  |   |         |   |  |   |        |  
|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  |          |        | 268,570              |   |  | $                        | 269 |  | $                  | 559 |  | $     | (633   | ) |  | $ | 87,294 |   |  | $ | (101,382 | ) |  | $ | (13,893 | )
|                                                                                       |  |                           |  |        |                                   |   |  |              |      |          |        |                      |   |  |                          |     |  |                    |     |  |       |        |   |  |   |        |   |  |   |          |   |  |   |         |  



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



F-7



---

##### Table of Contents

OCCAM NETWORKS, INC.

STATEMENTS OF CASHFLOWS

(In thousands)



|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                         |  | Year ended December 31 |        
|                                                                                         |  | 2004                   |         |   | 2003 |   |         | 2002 | 
|Operating activities                                                                     |  |                        |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                 |  | $                      | (14,989 | ) |      | $ | (20,432 | )    |  | $ | (32,747 | )
|Adjustments to reconcile net loss to net cash used in operating activities:              |  |                        |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                            |  |                        | 1,296   |   |      |   | 2,084   |      |  |   | 2,225   |  
|Provision for excess and obsolete inventory                                              |  |                        | 389     |   |      |   | 404     |      |  |   | 3,135   |  
|Non cash charges relating to stock options and warrants                                  |  |                        | 936     |   |      |   | 1,300   |      |  |   | 1,542   |  
|Changes in operating assets and liabilities:                                             |  |                        |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                      |  |                        | (2,875  | ) |      |   | (1,346  | )    |  |   | (1,207  | )
|Inventory                                                                                |  |                        | (4,746  | ) |      |   | (1,862  | )    |  |   | (268    | )
|Prepaid expenses and other assets                                                        |  |                        | 261     |   |      |   | (19     | )    |  |   | 633     |  
|Accounts payable                                                                         |  |                        | 3,276   |   |      |   | 1,400   |      |  |   | (2,087  | )
|Accrued expenses                                                                         |  |                        | 953     |   |      |   | (1,030  | )    |  |   | (646    | )
|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash used in operating activities                                                    |  |                        | (15,499 | ) |      |   | (19,501 | )    |  |   | (29,420 | )
|                                                                                         |  |                        |        
|Investing activities                                                                     |  |                        |         |   |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                      |  |                        | (1,052  | ) |      |   | (736    | )    |  |   | (745    | )
|Restricted cash                                                                          |  |                        | (1,166  | ) |      |   | (935    | )    |  |   |        |  
|Cash received from merger, net of transaction costs of $429                              |  |                        |        |   |      |   |        |      |  |   | 16,467  |  
|Sale of India operations                                                                 |  |                        |        |   |      |   | (539    | )    |  |   |        |  
|Other assets                                                                             |  |                        | 59      |   |      |   |        |      |  |   |        |  
|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                        | (2,159  | ) |      |   | (2,210  | )    |  |   | 15,722  |  
|                                                                                         |  |                        |        
|Financing activities                                                                     |  |                        |         |   |      |   |         |      |  |   |         |  
|Proceeds from capital lease obligations and notes payable                                |  |                        |        |   |      |   | 921     |      |  |   |        |  
|Payments of capital lease obligations and notes payable                                  |  |                        | (708    | ) |      |   | (784    | )    |  |   | (595    | )
|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   |      |  |   | 10,951  |  
|Proceeds from issuance of series A-2 preferred stock and warrants, net of issuance costs |  |                        | 5,127   |   |      |   | 16,381  |      |  |   |        |  
|Proceeds from issuance of series C preferred stock                                       |  |                        |        |   |      |   |        |      |  |   | 10,030  |  
|Proceeds from the exercise of stock options                                              |  |                        | 115     |   |      |   | 255     |      |  |   | 20      |  
|Repurchase of common stock                                                               |  |                        |        |   |      |   | (7      | )    |  |   | (51     | )
|Proceeds of loan from Accelerated Networks                                               |  |                        |        |   |      |   |        |      |  |   | 5,200   |  
|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                |  |                        | 7,504   |   |      |   | 17,801  |      |  |   | 25,555  |  
|                                                                                         |  |                        |        
|Net increase (decrease) in cash and cash equivalents                                     |  |                        | (10,154 | ) |      |   | (3,910  | )    |  |   | 11,857  |  
|Cash and cash equivalents, beginning of period                                           |  |                        | 14,586  |   |      |   | 18,496  |      |  |   | 6,639   |  
|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                      | 4,432   |   |      | $ | 14,586  |      |  | $ | 18,496  |  
|                                                                                         |  |                        |         |   |      |   |         |      |  |   |         |  



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



F-8



---

##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS



December 31, 2004



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. In connection with the merger with Accelerated Networks, each shareholder of Occam CA received 2.037 shares of
Accelerated Networks common stock for each share of Occam CA common stock. The share information in the accompanying financial statements and related notes prior to merger have been retroactively restated for the equivalent number of shares received
from the merger by the Occam CA shareholders.



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



During December 2004, the Company raised gross proceeds of $3.0 million through the issuance of a note payable and warrants to a third party
finance company. Occam raised an additional $5.6 million in January 2005 and $4.9 million in March 2005 through additional issuance of Series A-2 preferred stock. In addition, in March 2005, a holder of an outstanding promissory note converted
$534,000 of outstanding principal and accrued interest into shares of series A-2 preferred stock. The Company further intends to offer common stockholders the right to purchase shares of Series A-2 preferred stock on terms substantially similar to
the terms under which Series A-2 preferred shares were sold to existing investors.



The Companys viability as a going concern is dependent upon its ability to successfully carry out its business plan. Since inception, the Company has devoted substantial effort and capital resources to develop and market its products.
Based on the Companys current operating plans, management believes that the recent debt financing and equity investments, will be sufficient to fund the Company through the twelve months from the balance sheet date.



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



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Note 2. Summary of Significant Accounting Policies



Basis of PresentationThe merger of Accelerated Networks and Occam CA was
treated as a reverse acquisition, pursuant to which Occam CA was treated as the acquirer of Accelerated Networks for financial accounting purposes. As such, following the consummation of the merger on May 14, 2002, the historical financial
statements of Occam CA serve as the principal historical financial statements of the combined organization.



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, 2004, 2003 and 2002
were December 26, December 28 and December 27, 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 generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such
differences may be material to the 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
balance sheet approximate their fair value.



Restricted CashRestricted cash consists of a $2.0 million certificate of deposit used to secure a letter of credit that the Companys bank issued to support a performance bond required for a RUS funded contract 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, 2004 and 2003. The carrying value of notes payable and capital leases approximate fair value as they bear interest commensurate with their risk.



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, 2004 and 2003 the allowance for doubtful accounts was $22,000.



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.



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OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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, 2004 |      |   | December 31, 2003 |  
|Warranty liability at beginning of the year |  | $                 | 331  |   |                   | $ | 267  |  
|Accruals for warranty during the year       |  |                   | 497  |   |                   |   | 239  |  
|Warranty utilization                        |  |                   | (153 | ) |                   |   | (175 | )
|                                            |  |                   |      |   |                   |   |      |  
|Warranty liability at end of the year       |  | $                 | 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 collectibility 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.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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, |        
|                                                                           |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Net loss, as reported:                                                     |  | $                       | (14,989 | ) |      | $ | (20,432 | )    |  | $ | (32,747 | )
|Add: Stock-based compensation, intrinsic value method reported in net loss |  |                         | 852     |   |      |   | 1,227   |      |  |   | 1,520   |  
|Deduct: Pro forma stock-based compensation fair value method               |  |                         | 1,381   |   |      |   | 1,661   |      |  |   | 1,599   |  
|                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss, pro forma                                                        |  | $                       | (15,518 | ) |      | $ | (20,866 | )    |  | $ | (32,826 | )
|                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic and diluted loss per share:                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|As reported                                                                |  | $                       | (0.07   | ) |      | $ | (0.11   | )    |  | $ | (0.38   | )
|Pro forma                                                                  |  | $                       | (0.07   | ) |      | $ | (0.11   | )    |  | $ | (0.38   | )



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, |  
|                          |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|Risk free interest rate   |  | 4.0                     | % |  | 3.0  | % |  | 4.0  | %
|Expected lives (in years) |  | 4.0                     |   |  | 5.0  |   |  | 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 $19,000, $15,000 and $35,000 for the years ended December 31, 2004, 2003 and 2002, 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



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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. There were no differences between the Companys net loss and total comprehensive loss, except for cumulative foreign currency translation adjustments of $(16,000) and $16,000 for the years ended December 31, 2003 and 2002,
respectively. During the year ended December 31, 2004 there were no differences between the Companys net loss and total comprehensive loss.



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



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. As of December 31, 2004, $399,000 of the note receivable was outstanding and is included in the Prepaid and Other Current
Assets in the accompanying consolidated balance sheet. Management believes that the debtor will pay the remaining balance on this note in 2005. The Indian operation performed research and development activities related to the Companys
products.



Foreign Currency TranslationPrior to the sale of
the Companys India operation, translation of foreign currency was accounted for using the Indian Rupee as the functional currency of this foreign subsidiary. The Company recorded a cumulative foreign currency translation adjustment of $16,000
thousand for the period ended December 31, 2002. Upon the sales of Companys India operation, the cumulative translation adjustment was eliminated. There were no such gains or losses prior to the merger with Accelerated Networks or subsequent
to the sale of the India operation.



ReclassificationsReclassifications were made to the prior year financial statements to conform to the current year presentation.



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments, that addresses the accounting for
share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may
be settled by the issuance of such equity instruments. SFAS No. 123(R) will require Occam to measure all employee stock-based compensation awards using a fair-value method and record such expense in its consolidated financial statements. The
adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning in the
quarter ending September 30, 2005. Occam expect the adoption of SFAS 123(R) to have a material impact on Occams results of operations. The pro forma impacts of SFAS 123, disclosed above, may not be representative of future stock based
compensation charges because the Company is still considering the method it will use to value its stock options after the adoption of SFAS 123(R) and levels of future option grants, if any.



In December 2004, the FASB issued SFAS No. 153 Exchanges of Nonmonetary Assets, an
amendment of APBO 29 to address the accounting for nonmonetary exchanges of productive assets. SFAS No. 153 amends APBO 29, Accounting for Nonmonetary Exchanges, which established a narrow exception from fair-value measurement for
nonmonetary exchanges of similar productive assets. SFAS No. 153 eliminates that exception and replaces it with an exception for exchanges that do not have commercial substance. Under SFAS No. 153 nonmonetary exchanges are required to be accounted
for at fair value, recognizing any gains or losses, if their fair value is determinable within reasonable limits and the transaction has commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if future cash
flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 apply to nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to
have a material impact on Occams financial position, results of operations or cash flows.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43, chapter
4. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs, and wasted material are to be recognized as current-period charges rather than as components of inventory. The statement also
requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Occam adopted SFAS No. 151 during the fourth quarter of 2004. The implementation of SFAS No. 151 did not
have a material impact on Occams financial position, results of operations or cash flows.



Note 3. Inventories



Inventories
consist of the following (in thousands):



|                |  |              |       |      |   |      
|--------------- |  | ------------ | ----- | ---- | - | -----
|                |  | December 31,
|                |  | 2004         |       | 2003
|Raw materials   |  | $            | 294   |      | $ | 716  
|Work-in-process |  |              | 256   |      |   | 465  
|Finished goods  |  |              | 6,061 |      |   | 1,073
|                |  |              |       |      |   |      
|                |  | $            | 6,611 |      | $ | 2,254



Note 4. Property and Equipment



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



|                                               |  |             |        |   |      |   |        |  
|---------------------------------------------- |  | ----------- | ------ | - | ---- | - | ------ | -
|                                               |  | December31, |       
|                                               |  | 2004        |        |   | 2003 |  
|Computer hardware and software                 |  | $           | 6,046  |   |      | $ | 5,010  |  
|                                               |  |            
|Furniture and fixtures                         |  |             | 342    |   |      |   | 333    |  
|Leasehold improvements                         |  |             | 787    |   |      |   | 787    |  
|                                               |  |             |        |   |      |   |        |  
|                                               |  |             | 7,175  |   |      |   | 6,130  |  
|Less accumulated depreciation and amortization |  |             | (5,483 | ) |      |   | (4,193 | )
|                                               |  |             |        |   |      |   |        |  
|                                               |  | $           | 1,692  |   |      | $ | 1,937  |  



Property and equipment under capital
leases had an original cost of $2,244,000 for 2003 and 2004, and accumulated amortization thereon of $2,119,000 and $1,848,000 at December 31, 2004 and 2003, respectively.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Note 5. Accrued Expenses



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



|                                            |  |             |       |      |   |      
|------------------------------------------- |  | ----------- | ----- | ---- | - | -----
|                                            |  | December31,
|                                            |  | 2004        |       | 2003
|Payroll, paid time off and related accruals |  | $           | 820   |      | $ | 658  
|Warranty accruals                           |  |             | 675   |      |   | 331  
|Loss purchase commitments                   |  |             | 482   |      |   | 482  
|Product failure accrual                     |  |             | 307   |      |   |     
|Royalty accruals                            |  |             | 340   |      |   | 162  
|Other accruals                              |  |             | 706   |      |   | 744  
|                                            |  |             |       |      |   |      
|Total                                       |  | $           | 3,330 |      | $ | 2,377



Note 6. Long Term Debt and Capital
Lease Obligations



At December 31, 2004 and 2003, long term debt and
capital lease obligations consisted of the following (amounts in thousands):



|                                                                     |  |                  |       |   |                  |   |       |  
|-------------------------------------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ----- | -
|                                                                     |  | December 31,2004 |       |   | December 31,2003 |  
|Senior loan and security agreement, net of $178,000 discount         |  | $                | 2,822 |   |                  | $ |      |  
|Capital lease line of credit                                         |  |                  | 285   |   |                  |   | 854   |  
|Revolving line of credit and equipment facility                      |  |                  | 212   |   |                  |   | 352   |  
|Note payable to stockholder, including interest of $31,000 (2004)    |  |                  | 531   |   |                  |   | 500   |  
|                                                                     |  |                  |       |   |                  |   |       |  
|                                                                     |  |                  | 3,850 |   |                  |   | 1,706 |  
|                                                                     |  |                 
|Less current portion of long-term debt and capital lease obligations |  |                  | (863  | ) |                  |   | (708  | )
|                                                                     |  |                  |       |   |                  |   |       |  
|                                                                     |  | $                | 2,987 |   |                  | $ | 998   |  
|                                                                     |  |                  |       |   |                  |   |       |  



Senior Loan and Security Agreement



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 1,666,667
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 balance sheet. The warrant for common stock is exercisable through December 2011 at an exercise price of $0.09 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 $0.11 per share. At December 31, 2004, the outstanding principal was approximately $2.8 million, net of warrant discount
of 178,000, of which approximately $438,000 was current. The loan agreement contains numerous covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance and reporting requirements and covenants
limiting the ability of the Company and its subsidiaries, among other things, to incur debt, grant liens, make acquisitions and make certain restricted payments. The events of default under the credit facility include payment defaults, cross
defaults with certain other indebtedness, breaches of covenants, failure to maintain specified revenues or tangible net worth levels on a quarterly basis and bankruptcy events. In particular, an event of default would occur if the Company failed to
maintain revenues of at least $5,000,000 for any fiscal quarter or a tangible net worth, as defined, of at least $5,000,000 for any fiscal quarter ending on or prior to June 30, 2005 and at least $7,000,000 for any fiscal quarter thereafter.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Capital Lease Lines of Credit



In December 2000, Occam obtained a capital lease line of credit from a financial
institution, which allows 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. At December 31, 2004, the outstanding principal was approximately $285,000 all of which was current.



Revolving Line of Credit and Equipment Financing Facility



During June 2003, the Company signed a loan and security agreement with a bank for a revolving line of credit for an amount up to $2.5
million, at a floating interest rate of prime plus .75 percent (6.25% and 5.25% at December 31, 2004, and 2003, respectively, subject to a floor of 5%) and a 1⁄2 percent 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, 2004 approximately $212,000 was
outstanding under the equipment financing facility, of which $140,000 was current.



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 in to 53,479 shares of Series A-2 preferred stock.



The maturity of the long-term debt and capital lease obligations as of
December 31, 2004, were as follows (amounts in thousands):



|                                  |  |   |      
|--------------------------------- |  | - | -----
|For the years ending December 31, |  |   |      
|2005                              |  | $ | 956  
|2006                              |  |   | 1,233
|2007                              |  |   | 1,839
|                                  |  |   |      
|Total                             |  | $ | 4,028



Note 7. Capital Stock and
Stockholders Deficit



Series A Preferred Stock (2000)



Occam CA issued a total of 6,975,000 shares of series A preferred stock for
$1.00 per share in two separate closings in early 2000 for total gross proceeds of $6,975,000. Total issuance costs amounted to $29,000. In connection with the merger with Accelerated Networks, the series A convertible preferred stock converted to
14,208,075 shares of common stock of the Company.



Series B Preferred
Stock (2001)



Occam CA issued a total of 18,141,177 shares of series B
preferred stock for $1.70 per share in two separate closings in early 2001 for gross proceeds of $29,322,000 plus the conversion of the outstanding convertible promissory notes, including accrued interest. Total issuance costs amounted to $90,000.
In connection with the merger with Accelerated Networks, 982,353 shares of series B convertible preferred stock were converted into 2,001,053 shares of common stock of the Company. In addition, the remaining 17,158,824 shares of series B convertible
preferred stock were converted to 17,158,824 shares of series B-1 preferred stock of the Company, bearing a feature allowing conversion of each share into approximately 1.4167 shares of Occam CA common stock. As a result the 17,158,824 shares of
series B-1 convertible preferred stock were converted into 49,516,070 shares of common stock of the Company.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Series C Preferred Stock (2002)



In May 2002, Occam CA issued a total of 5,899,755 shares of series C preferred stock for $1.70 per share for gross proceeds of $10,030,000.
In connection with the merger with Accelerated Networks, 5,899,755 shares of series C convertible preferred stock were converted into 5,899,755 shares of common stock of Occam CA, which in turn were exchanged for 12,017,801 shares of common stock of
the Company.



The Company became 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. In the event a stockholder successfully asserted a rescission right, the Company 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, thus, may 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, the amount paid for these shares was presented on the consolidated balance sheet of the Company outside of total stockholders equity. As of December 31, 2003, the one-year period had elapsed and no claim was brought. Accordingly, the
Company has reclassified the common stock potentially subject to rescission as additional paid in capital as of December 31, 2003 in the accompanying consolidated balance sheet.



Upon the issuance of Occam CAs series B-1 and series C preferred stock, the Company recorded a beneficial conversion feature (BCF)
charge to net loss attributable to common stockholders of $541,000. The charge was calculated using the deemed value of the common stock on the 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 B-1 and series C preferred stock were converted.



Series A Preferred Stock (2002)



In December 2002, a special committee of the board of directors of the Company approved the sale and issuance of up to 2,000,000 shares of series A preferred stock at a
price per share of $7.50. The Company sold 1,471,707 and 154,495 shares of series A preferred stock for $7.50 per share for gross proceeds of $11,038,000 and $1,158,000 in December 2002 and January 2003, respectively. Following the May 2003
stockholder approval of an amendment to its existing certificate of incorporation to increase the number of authorized shares of common stock, this series A preferred stock was automatically converted into 123,072,781 shares of common stock of the
Company at a conversion price of $0.0991.



Series A-2 Preferred Stock
(2003 and 2004)



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
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. The number of
shares issuable upon exercise of the warrant will be reduced proportionately to the extent that Occam raises in excess of $1.5 million in a proposed rights offering of series A-2 preferred stock. The warrant terminates on September 8, 2005, unless
earlier termination based on the amount of money raised in the rights offering. The series A-2 preferred stock and warrant have been presented in mezzanine equity, outside of stockholders equity (deficit).



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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 $0.11, 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 (66-2/3%) 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.



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 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.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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 our board of directors and are also a holder of over 5% of our outstanding securities.



Series A-2 Preferred Stock Warrants



In connection with the issuance of the March 2004 sale of series A-2 preferred stock and the December 2004 senior loan and security
agreement the Company issued warrants to purchase 226,800 and 15,000 shares of A-2 Preferred stock, respectively. All warrants are immediately exercisable. The following table summarizes the series A-2 preferred warrants outstanding as of December
31, 2004:



|                  |  |                         |  |                                            
|----------------- |  | ----------------------- |  | -------------------------------------------
|Expiration date   |  | Exercise priceper share |  | Number of SeriesA-2 sharesunderlyingwarrant
|September 8, 2005 |  | 10.00                   |  | 226,800                                    
|December 17, 2009 |  | 10.00                   |  | 15,000                                     
|                  |  |                         |  |                                            
|                  |  |                         |  | 241,800                                    
|                  |  |                         |  |                                            



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 |  | 2004         |  | 2003   
|Common Warrants                               |  | 3,412        |  | 1,745  
|Stock Options                                 |  | 61,410       |  | 47,942 
|Convertible Preferred Stock and warrants      |  | 295,455      |  | 272,727
|Employee Stock Purchase Plan                  |  | 4,260        |  | 2,885  
|                                              |  |              |  |        
|                                              |  | 364,537      |  | 325,299
|                                              |  |              |  |        



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, 2004:



|                  |  |                         |      |                                   |          
|----------------- |  | ----------------------- | ---- | --------------------------------- | ---------
|Expiration date   |  | Exercise priceper share |      | Number of sharesunderlyingwarrant
|December 17, 2011 |  | $                       | 0.09 |                                   | 1,666,667
|November 20, 2005 |  | $                       | 0.10 |                                   | 611,100  
|June 16, 2010     |  | $                       | 0.25 |                                   | 500,000  
|December 8, 2005  |  | $                       | 0.49 |                                   | 203,700  
|May 14, 2006      |  | $                       | 0.49 |                                   | 250,775  
|December 8, 2005  |  | $                       | 0.83 |                                   | 179,735  
|                  |  |                         |      |                                   |          
|                  |  |                         |      |                                   | 3,411,977
|                  |  |                         |      |                                   |          



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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, 2004 and 2003 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 refusal in connection with any transfer of vested optioned shares. At December 31, 2004 and 2003, 5,000 and 238,000, respectively, of unvested shares of common stock issued and outstanding under
the 1999 Plan were subject to repurchase by the Company at the related exercise prices. 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 31,2004 there were 61.4 million shares authorized under the
Companys stock option plans of which there were 555,000 shares available under current option plan for future grants. Additional information with respect to the outstanding options as of December 31, 2004 is as follows (shares in thousands):



|                |  |                     |  |                                                    |  |                      |      |        |        |                      |   |     
|--------------- |  | ------------------- |  | -------------------------------------------------- |  | -------------------- | ---- | ------ | ------ | -------------------- | - | ----
|                |  | Options Outstanding |  | Options Exercisable                               
|Exercise Prices |  | Shares              |  | WeightedAverageRemainingContractualLife (in Years) |  | WeightedAveragePrice |      | Shares |        | WeightedAveragePrice
|$0.05 to $0.08  |  | 4,807               |  | 7.09                                               |  | $                    | 0.06 |        | 3,681  |                      | $ | 0.06
|$0.09 to $0.95  |  | 10,538              |  | 7.63                                               |  | $                    | 0.09 |        | 6,061  |                      | $ | 0.09
|$0.10 to $0.50  |  | 41,269              |  | 9.13                                               |  | $                    | 0.13 |        | 9,248  |                      | $ | 0.16
|$0.60 to $50.00 |  | 4,241               |  | 1.52                                               |  | $                    | 2.11 |        | 4,239  |                      | $ | 2.11
|                |  |                     |  |                                                    |  |                      |      |        |        |                      |   |     
|$0.05 to $50.00 |  | 60,855              |  | 8.18                                               |  | $                    | 0.25 |        | 23,229 |                      | $ | 0.48
|                |  |                     |  |                                                    |  |                      |      |        |        |                      |   |     



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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



|                                                                |  |                         |   |      |                      |      |        |         |   |                      |   |        |  |        |                      |  |   |     
|--------------------------------------------------------------- |  | ----------------------- | - | ---- | -------------------- | ---- | ------ | ------- | - | -------------------- | - | ------ |  | ------ | -------------------- |  | - | ----
|                                                                |  | Year Ended December 31,
|                                                                |  | 2004                    |   | 2003 |                      | 2002
|                                                                |  | Shares                  |   |      | WeightedAveragePrice |      | Shares |         |   | WeightedAveragePrice |   | Shares |  |        | WeightedAveragePrice
|Outstanding at beginning of period                              |  | 47,942                  |   |      | $                    | 0.30 |        | 35,567  |   |                      | $ | 0.44   |  | 21,868 |                      |  | $ | 0.07
|Granted where exercise price equals fair value on grant date    |  | 21,808                  |   |      | $                    | 0.10 |        | 26,697  |   |                      |   | 0.12   |  | 6,447  |                      |  |   | 0.12
|Granted where exercise price less than fair value on grant date |  |                        |   |      |                      |     |        |        |   |                      |   |       |  | 4,313  |                      |  |   | 0.09
|Assumed from Accelerated Networks in merger                     |  |                        |   |      |                      |     |        |        |   |                      |   |       |  | 9,155  |                      |  |   | 1.97
|Exercised                                                       |  | (1,660                  | ) |      | $                    | 0.07 |        | (3,172  | ) |                      |   | 0.08   |  | (419   | )                    |  |   | 0.05
|Canceled                                                        |  | (7,235                  | ) |      | $                    | 0.18 |        | (11,150 | ) |                      |   | 0.37   |  | (5,797 | )                    |  |   | 0.93
|                                                                |  |                         |   |      |                      |      |        |         |   |                      |   |        |  |        |                      |  |   |     
|Outstanding at end of period                                    |  | 60,855                  |   |      | $                    | 0.25 |        | 47,942  |   |                      |   | 0.30   |  | 35,567 |                      |  |   | 0.44
|                                                                |  |                         |   |      |                      |      |        |         |   |                      |   |        |  |        |                      |  |   |     
|Exercisable at end of period                                    |  | 23,229                  |   |      | $                    | 0.48 |        | 18,134  |   |                      |   | 0.60   |  | 17,451 |                      |  |   | 0.75
|                                                                |  |                         |   |      |                      |      |        |         |   |                      |   |        |  |        |                      |  |   |     



The weighted-average fair value of
options granted to employees for the years ended December 31, 2004, 2003, and 2002 were $0.07, $0.12 and $0.19 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 expense relating to employee stock options for the years ended December 31, 2004, 2003 and 2002, totaled $852,000,
$1,227,000 and $1,520,000, 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 $0, $1,000 and $120,000 for the years ended December 31, 2004, 2003 and 2002, respectively.



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, 4,260,000 shares have been reserved for issuance. In April 2001, employee contributions
and stock issuances under the ESPP were terminated, but approximately 4,190,000 common shares continue to be reserved for any re-instatement of the ESPP.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Note 9. Income Taxes



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



|                                                  |  |      |    |  |      |    |  |      |   
|------------------------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                                  |  | 2004 |    |  | 2003 |    |  | 2002 |   
|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                                             |  | 4    |    |  | 4    |    |  | 4    |   
|Valuation allowance                               |  | 36   |    |  | 36   |    |  | 36   |   
|                                                  |  |      |    |  |      |    |  |      |   
|                                                  |  |     | %  |  |     | %  |  |     | % 
|                                                  |  |      |    |  |      |    |  |      |   



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



|                                 |  |              |         |   |      |   |       
|-------------------------------- |  | ------------ | ------- | - | ---- | - | ------
|                                 |  | December 31,
|                                 |  | 2004         |         |   | 2003
|Deferred tax assets:             |  |              |         |   |      |   |       
|Net operating loss carryforwards |  | $            | 81,989  |   |      | $ | 71,859
|Tax credit carryforwards         |  |              | 784     |   |      |   | 784   
|Depreciation and amortization    |  |              | 17      |   |      |   | 2,486 
|Other                            |  |              | 2,343   |   |      |   | 5,992 
|                                 |  |              |         |   |      |   |       
|                                 |  |              | 85,133  |   |      |   | 81,121
|Less: valuation allowance        |  |              | (85,133 | ) |      |   | 81,121
|                                 |  |              |         |   |      |   |       
|Net deferred tax assets          |  | $            |        |   |      | $ |      
|                                 |  |              |         |   |      |   |       



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



|                               |  |                              |        |                                |   |                         |  |   |       
|------------------------------ |  | ---------------------------- | ------ | ------------------------------ | - | ----------------------- |  | - | ------
|Description                    |  | Balance atBeginning ofPeriod |        | Deductions andOtherAdjustments |   | Balance at Endof Period
|Income tax valuation allowance |  |                              |        |                                |   |                         |  |   |       
|2002                           |  | $                            | 13,235 |                                | $ | 61,634                  |  | $ | 74,869
|2003                           |  | $                            | 74,869 |                                | $ | 6,252                   |  | $ | 81,121
|2004                           |  | $                            | 81,121 |                                | $ | 4,012                   |  | $ | 85,133



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, 2004, the Company had net operating loss carryforwards of approximately
$216.7 million and $142.4 million to offset federal and state future taxable income, respectively. The federal and state net operating loss carryforwards expire through 2024 and 2014, 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.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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.



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



|           |  |                   |       |                |    |   |                    |   |                         |  |    |  
|---------- |  | ----------------- | ----- | -------------- | -- | - | ------------------ | - | ----------------------- |  | -- | -
|           |  | December 31, 2004 |      
|           |  | Net Revenue       |       | % ofNetRevenue |    |   | 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       |       | % ofNetRevenue |    |   | AccountsReceivable |   | % of AccountsReceivable | 
|Customer D |  | $                 | 1,178 |                | 15 | % |                    | $ | 498                     |  | 21 | %
|Customer E |  | $                 | 1,155 |                | 14 | % |                    | $ | 723                     |  | 31 | %
|           | 
|           |  | December 31, 2002 |      
|           |  | Net Revenue       |       | % ofNetRevenue |    |   | AccountsReceivable |   | % of AccountsReceivable | 
|Customer F |  | $                 | 919   |                | 38 | % |                    | $ | 272                     |  | 27 | %
|Customer G |  | $                 | 609   |                | 25 | % |                    | $ | 405                     |  | 40 | %
|Customer H |  | $                 | 317   |                | 13 | % |                    | $ | 58                      |  | 6  | %



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
$41,000, $573,000 and $348,000 during 2004, 2003 and 2002, respectively. All of the Companys long-lived assets are located in the United States.



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



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 2006. Certain operating leases contain escalation clauses with annual base rent adjustments of 3% or a cost of living adjustment. Total rent expense for the years ended December 31, 2004, 2003 and 2002, was $890,000, $821,000 and
$1,081,000 respectively. Approximate minimum annual lease commitments under non-cancelable operating leases are as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Year Ending December 31,    
|2005                         |  | $ | 716  
|2006                         |  |   | 452  
|                             |  |   |      
|Total minimum lease payments |  | $ | 1,168



Purchase
Commitments



As of December 31, 2004, the Company had $482,000
included in accrued expenses for purchase commitments and outstanding payments due to one of its former principal contract manufacturers, which it expects to resolve in 2005. As of December 31, 2004, the Company had open purchase orders with its
current contract manufacturer of $4.4 million.



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, 2004,
2003 and 2002 were $272,000, $348,000 and $75,000 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. The settlement documents are in process and it is anticipated that the Company will



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##### Table of Contents

OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



execute the settlement documents in 2005. This settlement will require the members of the class of plaintiffs and the court approval. The Company has not
recorded any accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.



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.



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, |        
|                                                                       |  | 2004         |         |   | 2003 |   |         | 2002 | 
|Numerator:                                                             |  |              |         |   |      |   |         |      |  |   |         |  
|                                                                       |  |              |        
|Net loss attributable to common stockholders                           |  | $            | (18,277 | ) |      | $ | (22,970 | )    |  | $ | (34,043 | )
|                                                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Denominator:                                                           |  |              |         |   |      |   |         |      |  |   |         |  
|Weighted-average common shares outstanding                             |  |              | 267,945 |   |      |   | 211,896 |      |  |   | 93,740  |  
|Adjustment for common shares issued subject to repurchase              |  |              | (145    | ) |      |   | (1,164  | )    |  |   | (4,083  | )
|                                                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Denominator for basic and diluted calculations                         |  |              | 267,800 |   |      |   | 210,732 |      |  |   | 89,657  |  
|                                                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share applicable to common stockholders |  | $            | (0.07   | ) |      | $ | (0.11   | )    |  | $ | (0.38   | )
|                                                                       |  |              |         |   |      |   |         |      |  |   |         |  



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



|                                                                                         |  |              |    |      |   |        |  |   |       
|---------------------------------------------------------------------------------------- |  | ------------ | -- | ---- | - | ------ |  | - | ------
|                                                                                         |  | December 31,
|                                                                                         |  | 2004         |    | 2003 |   | 2002  
|Cash paid during year for interest                                                       |  | $            | 93 |      | $ | 211    |  | $ | 306   
|Conversion of common stock potentially subject to rescission to common stock             |  |              |   |      |   | 10,000 |  |   |      
|Conversion of series A preferred stock to common stock                                   |  |              |   |      |   | 11,846 |  |   | 6,946 
|Conversion of series B and B-l preferred stock to common stock                           |  |              |   |      |   |       |  |   | 30,753
|Conversion of series C preferred stock to common stock potentially subject to rescission |  |              |   |      |   |       |  |   | 10,000
|Inception of capital lease                                                               |  |              |   |      |   |       |  |   | 107   
|Interest on notes payable                                                                |  | $            | 31 |      | $ |       |  | $ |      



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OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Note 15. Other Charges



During the third quarter of 2002, the Company recorded a provision of $3.1 million for excess and obsolete inventory of the integrated
access device line of products acquired from Accelerated Networks. The integrated access device line of products had made only a minimal contribution to the Companys net revenue. Accordingly, the Company has substantially discontinued
marketing these products and reduced the carrying value of this inventory.



Note 16. Acquisition of Accelerated Networks



On November 9,
2001, Accelerated Networks entered into a definitive merger agreement with Occam CA pursuant to which the parties agreed to a merger transaction involving the merger of a wholly-owned subsidiary of Accelerated Networks with and into Occam CA, with
Occam CA surviving as a wholly-owned subsidiary of Accelerated Networks. The transaction, which closed on May 14, 2002, has been accounted for using the purchase method of accounting. The results of operations of Accelerated Networks have been
included in the accompanying statement of operations from May 14, 2002.



Under
the terms of the merger agreement, upon completion of the merger, stockholders of Occam CA received shares of Accelerated Networks common stock for their shares of Occam CA stock, and option and warrant holders of Occam CA received options and
warrants in Accelerated Networks, collectively representing approximately 64% of the diluted equity of the combined organization.



The purchase price for accounting purposes was established using the fair market value of 50,900,000 shares of outstanding (as of May 14, 2002) Accelerated Networks
common stock of $0.3879 per share, determined using average stock closing prices beginning four days before and ending four days after the announcement of the merger on November 12, 2001, the fair value of assumed options to acquire 9,155,000 shares
of Accelerated Networks common stock and warrants to acquire 200,000 shares of Accelerated Networks common stock as of May 14, 2002 (calculated using the Black-Scholes valuation model with the following assumptions: risk free interest rate of 4%, a
volatility factor of 80%, a contractual life of four years and no dividend yield) and the Companys acquisition-related costs, as follows (in thousands):



|                                                                |  |   |       
|--------------------------------------------------------------- |  | - | ------
|Fair value of Accelerated Networks common stock                 |  | $ | 19,743
|Fair value of Accelerated Networks options and warrants assumed |  |   | 1,272 
|Acquisition-related costs                                       |  |   | 1,089 
|                                                                |  |   |       
|Purchase price                                                  |  | $ | 22,104
|                                                                |  |   |       



The fair values of the Accelerated
Networks tangible and intangible assets acquired and liabilities assumed were estimated as follows (in thousands):



Total fair value of assets assumed at May 14, 2002:



|                                                                  |  |   |       
|----------------------------------------------------------------- |  | - | ------
|Cash                                                              |  | $ | 16,896
|Inventories                                                       |  |   | 3,318 
|Property and equipment                                            |  |   | 6,009 
|Other assets                                                      |  |   | 5,744 
|                                                                  |  |   | 31,967
|Less: Liabilities assumed at May 14, 2002                         |  |   | 4,190 
|Fair value of net assets acquired                                 |  |   | 27,777
|Less: Negative goodwill adjustment to property and equipment, net |  |   | 5,673 
|                                                                  |  |   |       
|Purchase price                                                    |  | $ | 22,104
|                                                                  |  |   |       



In the above purchase price
allocation, the fair values of the tangible assets acquired and liabilities assumed exceeded the purchase price of Accelerated Networks. In accordance with SFAS No. 141, Business Combinations, the excess fair value of net assets greater
than the purchase price was allocated to reduce non-current assets by $5,673,000.



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OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



The following unaudited pro forma information presents a summary of the consolidated results for 2002 of the combined
organization had the acquisition occurred on January 1, 2002 (in thousands, except per share data):



|                                                                       |  |                   |         |  
|---------------------------------------------------------------------- |  | ----------------- | ------- | -
|                                                                       |  | December 31, 2002 |        
|Net revenue                                                            |  | $                 | 3,209   |  
|Net loss                                                               |  |                   | (37,881 | )
|                                                                       | 
|Net loss attributable to common stockholders                           |  |                   | (39,477 | )
|                                                                       |  |                   |         |  
|Basic and diluted net loss per share applicable to common stockholders |  | $                 | (0.29   | )
|                                                                       |  |                   |         |  



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



Note 17. Subsequent Events



The Company raised an additional $5.6 million in January 2005 from its existing shareholders and $4.9 million in March 2005 through additional issuance of Series A-2
preferred stock to its existing investors and Tellabs, Inc (Tellabs). In addition, In March 2005, a holder of an outstanding promissory note converted $534,000 of outstanding principal and accrued interest into shares of series A-2
preferred stock. The series A-2 preferred stock issued in January 2005 and March 2005 has the same rights and preferences as the series A-2 preferred stock disclosed in Note 7 except these shares of series A-2 preferred stock are not convertible to
shares of common stock until the stockholders of the Company have approved the increase in the number of authorized shares of common stock.



In March 2005, the Company entered into a manufacturing agreement, a technology license agreement and a supply agreement with Tellabs. The manufacturing agreement gives
Tellabs the exclusive right to market the Companys 6000 products under the Tellabs label to 3 of the 4 Regional Bell Operating Companies (RBOC) and 9 large independent Operating companies (IOC). The exclusivity under
the manufacturing agreement is for 3 years for RBOCs and 2 for the IOCs. Tellabs must meet certain goals or make certain payments to maintain the exclusivity for the full period. The technology license agreement gives Tellabs the nonexclusive right
to certain of the Companys technology and the supply agreement provides that the Company will supply certain products for demonstration and testing purposes to Tellabs.



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OCCAM NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)



Note 18. Quarterly Information (unaudited)



Following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 (in thousands, except
per share amounts):



|                                                                         |  |        |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------ | ------ | - | ------ | - | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                         |  | Mar 31 |        |   | Jun 30 |   |        | Sep 30 |  |   | Dec 31 |  
|2004                                                                     |  |        |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|Revenues                                                                 |  | $      | 3,240  |   |        | $ | 3,185  |        |  | $ | 4,424  |   |  | $ | 6,480  |  
|Gross profit (loss)                                                      |  |        | (135   | ) |        |   | (980   | )      |  |   | 738    |   |  |   | 1,877  |  
|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 |  | $      | (0.02  | ) |        | $ | (0.02  | )      |  | $ | (0.01  | ) |  | $ | (0.01  | )
|                                                                         |  |        |        |  
|                                                                         |  | Mar 31 |        |   | Jun 30 |   |        | Sep 30 |  |   | Dec 31 |  
|                                                                         |  |        |        |  
|2003                                                                     |  |        |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|Revenues                                                                 |  | $      | 1,451  |   |        | $ | 1,280  |        |  | $ | 1,476  |   |  | $ | 3,775  |  
|Gross profit (loss)                                                      |  |        | 264    |   |        |   | 9      |        |  |   | (375   | ) |  |   | 154    |  
|Loss from operations                                                     |  |        | (5,455 | ) |        |   | (5,703 | )      |  |   | (5,085 | ) |  |   | (4,017 | )
|Net loss                                                                 |  |        | (5,480 | ) |        |   | (5,735 | )      |  |   | (5,173 | ) |  |   | (4,044 | )
|Net loss attributable to common stockholders                             |  |        | (5,680 | ) |        |   | (5,035 | )      |  |   | (5,173 | ) |  |   | (7,082 | )
|Basic and diluted net loss per share attributable to common stockholders |  | $      | (0.04  | ) |        | $ | (0.03  | )      |  | $ | (0.02  | ) |  | $ | (0.03  | )



F-28