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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission file number   000-30741

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Number of shares of Common Stock outstanding as of April 30, 2003: 141,936,854 shares.

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INDEX

In this Report, the “Company” refers to Occam Networks, Inc., a Delaware corporation.

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PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

OCCAM NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

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

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OCCAM NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

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

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OCCAM NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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

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OCCAM NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All interim information relating to the three-month periods ended
March 31, 2003 and 2002 is unaudited)

1.     BUSINESS AND BASIS OF PRESENTATION

The Company

        Accelerated Networks, Inc. a Delaware corporation (“Accelerated Networks”), acquired Occam Networks Inc., a California corporation (“Occam CA”) on May 14, 2002 (see Note 7 – Merger and Related Events).  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.” (the “Company”).  Occam CA also filed an amendment to its articles of incorporation following the merger to change its name to “Occam Networks (California), 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.

        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. Since inception, the Company has devoted substantial effort and capital resources to developing its products.  In connection with the merger, Occam CA received $10 million from an offering of series C preferred stock, and a $10 million financing commitment from existing Occam CA investors.  During December 2002 and January 2003, the Company sold shares of series A preferred stock to certain existing investors for gross proceeds of $12.2 million and discharged those investors who purchased series A preferred stock from their respective obligations under the $10 million financing commitment. The Company’s viability as a going concern is dependent upon its ability to successfully carry out its business plan. Based on the Company’s current operating plans, management believes existing cash resources, approximately $984,000 of cash available under the remaining portions of the $10 million financing commitment, and anticipated revenues from operations will be sufficient to meet working capital and capital requirements through March 31, 2004. Also, management’s plans to attain profitability and generate additional cash flows include, increasing revenues from new and existing customers, focus on cost reductions, and the launch of additional products. There is no assurance that management will be successful with these plans. However, 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.

Basis of Presentation

        The accompanying consolidated financial statements are unaudited, other than the consolidated balance sheet at December 31, 2002, and reflect all material adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position, results of operations and cash flows for the interim periods.  The results of operations for the current interim periods are not necessarily indicative of results to be expected for the entire year.  Certain prior period amounts previously reported have been reclassified to confirm with the current presentation.

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        These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

        The Company reports quarterly results based on a thirteen-week accounting calendar.  Accordingly, the actual quarter end for the first quarter of fiscal 2003 was March 28. However, for financial presentation purposes, the Company reports its quarterly results as of the last calendar day of the last month within each quarterly period.

Use of Estimates

        In the normal course of preparing financial statements in conformity with generally accepted accounting principles in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2.     INVENTORIES

        Inventories consist of the following (in thousands):

3.     NET LOSS PER SHARE

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

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        The following table presents common stock equivalents (potential common stock) that are not included in the diluted net loss per share calculation above because their effect would be antidilutive for the periods indicated (shares in thousands):

4.     COMMITMENTS AND CONTINGENCIES

        At March 31, 2003, the Company had included in accrued expenses approximately $482,000 in purchase commitments and outstanding payments due to one of its former principal contract manufacturers, which it expects to settle and pay in 2003.

5.     STOCK OPTIONS—FAIR VALUE DISCLOSURES

        Had the Company recognized employee stock option-related compensation expense in accordance with SFAS 123 using the minimum-value method for determining the weighted-average fair value of options granted prior to the merger with Accelerated Networks and using the Black-Scholes option valuation model for determining the weighted-average fair value of options granted subsequent to the merger, its pro forma net loss and net loss per share attributable to common stockholders would not be materially different from reported net loss and net loss per share attributable to common stockholders.

        The effects of applying SFAS 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:

6.     LEGAL PROCEEDINGS

        Securities Litigation

        Following Accelerated Networks’ April 17, 2001 announcement that it would restate its financial results, seven putative securities class action lawsuits were filed in the United States District Court for the Central District of California against the Company and certain of its current and former officers and directors.  The cases were consolidated by the Honorable Judge Ronald S. W. Lew as In Re Accelerated Networks Securities Litigation in a court order dated June 15, 2001.  Plaintiffs filed a consolidated amended complaint on October 30, 2001.  The amended complaint generally alleges that the defendants made materially false and/or misleading statements regarding Accelerated Networks’ financial condition and prospects during the period of June 22, 2000 through April 17, 2001 in violation of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 (“1934 Act”) and that the registration statement and prospectus issued by defendants in connection with the Company’s June 23, 2000 initial public offering contained untrue statements of material fact and omitted to state material facts in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“1933 Act”).  Accelerated Networks previously filed two motions to dismiss the plaintiffs’ amended complaints. The plaintiffs opposed the motions and a

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hearing on each motion took place. At both hearings, the Court granted the motion as to the plaintiffs’ 1934 Act claims, and denied the motion as to plaintiffs’ 1933 Act claims.  In each instance the plaintiffs were given 30 days’ leave to amend their 1934 Act claims.  The plaintiffs filed their third amended complaint and the Company filed a motion to dismiss the third amended complaint. The plaintiffs opposed the motion and a hearing took place on February 3, 2003. At that hearing, the Court denied the motion to dismiss the 1934 Act claims. The Company has filed an answer and intends to defend the litigation vigorously.

        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.  Settlement discussions are ongoing and a memorandum of understanding has been circulated. No date has been set for the Company to respond to the Complaint.  The Company intends to defend the litigation vigorously.  The Company has not recorded any accrual related to this claim.

        Florida IPO Allocation Case

        On February 28, 2003 a stockholder class action lawsuit was filed against Accelerated Networks, certain of its officers and directors and several investment banks that were underwriters of Accelerated Networks’ initial public offering. This case was filed in the United States District Court, Southern District of Florida. The complaint was filed on behalf of investors who purchased Accelerated Networks stock between June 22, 2000 and January 8, 2001 and alleges violations of Section 12(a)(2) and Section 15 of the 1933 Act of Section 10(b) and Section 20(a) and Rule 10b-5 of the 1934 Act and of the Florida Blue Sky Law. The claims are based on allegations that the underwriter defendants and Accelerated Networks effectuated an IPO offering price that was inaccurate based on false expectations about Accelerated Networks’ prospective financial performance, including expected revenues and earnings and make selective inaccurate disclosures of same to the investing public. Plaintiffs allege that these fraudulent disclosures are in violation of the securities laws. There are fifty issuers defendants named in the lawsuit.  No date has been set for the Company to respond. The Company intends to vigorously defend the litigation. The Company has not recorded any accrual related to this claim.

        Supplier Litigation

        On December 3, 2001, a supplier filed a lawsuit against Accelerated Networks in the Los Angeles Superior Court, demanding payment in full of certain amounts alleged to be due and owing under, and in regards to, that certain Value-Added Product Sales Agreement, by and between the supplier and Accelerated Networks, dated March 12, 1999, which agreement was terminated effective as of May 20, 2001. The supplier alleges it is owed approximately $3,000,000. The Company entered into a settlement agreement with the supplier, and on November 5, 2002, the parties filed with the Los Angeles Superior Court a Notice of Settlement and a Stipulation and Proposed Order re: Settlement and a Setting of Order to Show Cause re: Dismissal with Prejudice.  The settlement called for

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the Company to pay the supplier $1,200,000 immediately, and $800,000 on February 15, 2003 in exchange for shipment to the Company of certain inventory held in the supplier’s warehouse.  As a result of this settlement, the trial date of December 17, 2002 was vacated.  All payments have been made and the case has been dismissed.  The Company had previously accrued the amount of the payments.

7.     MERGER AND RELATED EVENTS

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

        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.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This report on Form 10-Q contains forward-looking statements based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by the Company.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “may,” “will” or similar expressions are intended to identify forward-looking statements.  These statements include, but are not limited to, those statements concerning the Company’s beliefs and expectations regarding its financial statements, cost structure and amortization expenses, the Company’s beliefs and expectations regarding its recent merger and the benefits from the acquisition, the Company’s beliefs regarding litigation matters and legal proceedings, its defenses to such matters and its contesting of such matters, and the Company’s beliefs about the telecommunications industry.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.

Overview

        On November 9, 2001, Occam CA entered into a definitive merger agreement with Accelerated Networks pursuant to which the parties agreed to a merger transaction involving the merger of a wholly-owned subsidiary of Accelerated Networks with and into Occam CA, with Occam CA surviving as a wholly-owned subsidiary of Accelerated Networks. The merger agreement was approved by the boards of directors of both Accelerated Networks and Occam CA, and by a special committee of the board of directors of Accelerated Networks.  The

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respective stockholders of each company approved the merger on May 13, 2002.  The transaction, which closed on May 14, 2002, was accounted for using the purchase method of accounting.

        Upon the completion of the merger, stockholders of Occam CA received 2.037 shares of Accelerated Networks common stock for each share of their Occam CA stock, and option holders and warrant holders of Occam CA received options and warrants in Accelerated Networks, collectively representing approximately 64% of the diluted equity of the combined organization.  In connection with the merger, Occam CA received $10 million in cash through the sale of its series C preferred stock and a $10 million financing commitment from certain of Occam CA’s existing investors.

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

        From its inception through March 31, 2003, the Company has incurred cumulative net losses of approximately $71.4 million.  The Company expects to continue to incur substantial operating losses and to experience substantial negative cash flow as it expands its business.  Our financial statements have been prepared on a basis which assumes that the Company 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.

Critical Accounting Policies and Estimates

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

        Our sales are generated from sales arrangements, which require revenue recognition judgments particularly in the area of customer acceptance.  We recognize revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collectibility is reasonably assured. We allow credit for products returned within our policy terms. Such returns are estimated and an allowance is provided, if required, at the time of sale. To date, no such allowance has been required.  We provide customer training and post-sales technical support and maintenance to our customers as needed to assist them in installation or use of our products, and make provisions for these costs in the period of sale.

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

        We record a valuation allowance to reduce our deferred 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.

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        We evaluate our estimated potential financial exposure for loss contingencies, particularly the pending litigation matters discussed in Note 6 to the financial statements.  We accrue an estimated loss related to a contingency if (a) it is probable that a liability had been incurred and future events will occur confirming the fact of the loss at the date of the financial statements; and (b) the amount of the loss can be reasonably estimated.  When a reasonable estimate of the loss is a range and no amount within the range is a better estimate than any other amount, we accrue the minimum amount in the range. As additional information becomes available, we assess the potential liability related to pending litigation and revise our estimates.  Such revisions in the estimated potential liability could materially impact our results of operations and financial position.  We have not recorded an accrual an estimated loss for the securities litigation, IPO allocation cases or the Florida IPO allocation case because the amount of the loss cannot be reasonably estimated.

Results of Operations

Three-Month Periods Ended March 31, 2003 and 2002

        The following discussions exclude the effects of amortization of deferred stock-based compensation in our operating costs and expenses.  The size and amount of such charges will vary from period to period based upon variations in employee terminations from period to period that give rise to the cancellation of options or repurchase of shares and corresponding adjustments to amortization taken in prior periods.  This makes period to period comparisons difficult and, in some cases, not meaningful.  See “Stock-Based Compensation” below.

Sales

        Sales were $1,451,000 and $55,000 for the three-month periods ended March 31, 2003 and 2002, respectively.  Sales for the period ended March 31, 2003 were comprised primarily of shipments of BLC products and related accessories, cabinets and, to a lesser extent, IADs.  Sales for the prior period were comprised of revenue recognized from the acceptance by customers of BLC products previously shipped on a trial or evaluation basis.

Cost of sales

        Cost of sales was $1,187,000 and $137,000 for the three-month periods ended March 31, 2003 and 2002, respectively.  Cost of sales for these periods included the cost of products shipped for which revenue was recognized and the cost of provisions for obsolete inventory.

Research and product development expenses

        Research and product development expenses consist primarily of salaries and other personnel-related costs, prototype component and assembly costs, third-party design services and consulting costs, and other costs related to design, development, and testing of our products.  Research and product development costs are expensed as incurred, except for capital expenditures, which are capitalized and depreciated over their estimated useful lives, generally two to five years.  Research and product development expenses were $3,380,000 for the three-month period ended March 31, 2003, a decrease of 36% from the $5,297,000 for the comparable period in 2002.  The decrease was primarily due to expense reduction actions we took during 2002 and 2003 as we scaled our activities into a sequential product development plan and began using the lower cost software development team in India following our merger with Accelerated Networks.  We expect our research and product development expenditures, excluding amortization of deferred stock-based compensation, to continue to decline during the remainder of the 2003 fiscal year as compared to 2002, due primarily to other expense reduction actions we continue to implement since the merger with Accelerated Networks, and the discontinuation of the IAD product line during 2002.

Sales and marketing expenses

        Sales and marketing expenses consist primarily of salaries and other personnel-related costs, development and distribution of promotional materials, and other costs related to marketing, sales, public relations, and customer support activities. Sales and marketing expenses were $1,645,000 for the three-month period ended March 31, 2003, an increase of 7% over the $1,544,000 for the comparable period in 2002.  The increase is primarily due to

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additional staffing and expenditures required for the expansion of our sales organization, and costs to develop market awareness of our products, and preparation for and attendance at trade shows and other industry events.  We expect our sales and marketing expenditures, excluding amortization of deferred stock-based compensation, to decline slightly during the remainder of the 2003 fiscal year as compared to 2002, due primarily to the discontinuation of the integrated access device product line during 2002 and to other expense reduction actions we have implemented since the merger with Accelerated Networks.

General and administrative expenses

        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, excluding amortization of deferred stock-based compensation and other stock-based compensation expenses, were $694,000 for the three-month period ended March 31, 2003, a decrease of 19% from the $861,000 for the comparable prior year period.  The decrease in the 2003 period was due primarily to a decrease in amortization of deferred stock-based compensation of $155,000 due to the termination of employees and the costs incurred in 2002 related to the separation of a former chief executive officer from the Company, offset partially by an increase in insurance and staffing within the organization to support the costs of being a publicly held company.  We expect our general and administrative expenditures, excluding amortization of deferred stock-based compensation, to decline during the 2003 fiscal year as compared to 2002, due to expense reduction efforts we have implemented.

Stock-based compensation

        Through March 31, 2003, we recorded total deferred stock compensation of approximately $10,528,000, 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 March 31, 2003, we had reversed deferred stock compensation of approximately $4,267,000, resulting from stock option cancellations and repurchase of unvested common shares from employees.  Amortization of deferred stock-based compensation of $320,000 for the three-month period ended March 31, 2003, as compared to $541,000 for the comparable period in 2002, included amortization of deferred stock-based compensation, net of reversals related to expense previously recorded on options which were unvested and subsequently cancelled.  At March 31, 2003, we had $2,855,000 of unamortized deferred stock compensation, which will be amortized over the remaining vesting period of the underlying options.

Interest expense, net

        Interest expense, net was $20,000 for the three-month period ended March 31, 2003 as compared to $62,000 for the comparable period in 2002.  The decrease in interest expense, net was due to the higher average balances of cash and cash equivalents held during 2003 as compared to 2002 as a result of the cash provided from the merger with Accelerated Networks and proceeds of the the issuance of our series C preferred stock in May 2002 and the issuance of our series A preferred stock during December 2002 and January 2003, offset partially by consumption of cash balances for working capital purposes.

Net operating loss carryforwards

        As of March 31, 2003, our net operating loss carryforwards were approximately $179 million for federal tax purposes, expiring commencing in 2021, and $112 million for state tax purposes, expiring commencing in 2006. Under the change in ownership provisions of Section 382 of the Internal Revenue Code, utilization of the net operating loss carryforwards may be limited.

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Interest attributable to common stock potentially subject to rescission

        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 will have a right to rescind their purchases.  In the event a stockholder successfully asserts a rescission right, the combined organization would be 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 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 elapses on May 14, 2003, the amount paid for these shares is presented on the consolidated balance sheet of the Company outside of total stockholders’ equity.  If a claim or claims are brought for a violation of Section 5 by any of the investors in the Occam CA series C preferred stock prior to the expiration of the one year period, the amount paid for those shares represented by such claims will be presented on the consolidated balance sheet of the Company outside of total stockholders’ equity until a final disposition of the claim or claims.  However, we believe that the sale of the Occam CA series C preferred stock was not in violation of Section 5 of the 1933 Act.  Interest of $200,000 has been accrued during the three-month period ended March 31, 2003 relating to this matter.

Liquidity and Capital Resources

        As of March 31, 2003, we had cash and cash equivalents of $12.9 million as compared to $18.5 million as of December 31, 2002.  The decrease in cash and cash equivalents was primarily due to cash used in operations of $6.2 million partially offset by the proceeds from our offering of series A preferred stock of $1.0 million.

        We used $6.1 million of cash in operating activities during the three-month period ended March 31, 2003, a decrease of $1.8 million or 23% from the $7.9 million used during the comparable prior year period.  The decrease was due primarily to a decrease in operating expenses and an increase in gross profit for the three-month period ended March 31, 2003 as compared to the comparable prior year period, offset partially by a payment of $800,000 as a settlement with one of our former contract manufacturers in exchange for a shipment to us of certain inventory held in the supplier’s warehouse (see Note 6—Legal Proceedings—Supplier Litigation in Item 1—Financial Statements).

        We used $264,000 in cash from investing activities during the three-month period ended March 31, 2003, a decrease of $34,000 from the $298,000 used during the comparable prior year period.  The decrease was due to reduced level of purchases of property and equipment during 2003, as compared to 2002.

        We generated $800,000 in cash from financing activities during the three-month period ended March 31, 2003, as compared to $1.9 million for the comparable prior year period.  The cash provided in the three-month period ended March 31, 2003 was from the net proceeds of $1.0 million from our offering of series A preferred stock during January 2003.  The cash provided during the three-month period ended March 31, 2002, was primarily from a loan of $2.0 million from Accelerated Networks to Occam CA prior to the merger.

        As of March 31, 2003, 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 resolve in 2003.

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        We lease our facilities and certain assets under noncancelable leases expiring through 2006, excluding various renewal options. Approximate minimum annual lease commitments under noncancelable operating and capital leases are as follows (in thousands):

        We are party to a note and warrant purchase agreement with certain of our existing investors to (a) finance us through the purchase of unsecured subordinated promissory notes for a committed financing amount in an aggregate amount of approximately $984,000, or (b) guarantee a loan, letter of credit or other similar instrument from a financial institution or other third party.

        Pursuant to the terms of the note and warrant purchase agreement, we may, at any time prior to the fourth anniversary of the completion of the merger with Accelerated Networks, upon an affirmative vote of a majority of our board of directors, provide written notice to the investors demanding that each investor deliver to us the principal amount each investor originally committed to deliver to us as specified in the note and warrant purchase agreement.  Our board of directors has voted to make such demand, and we have made that demand.  Upon execution of this guarantee, the obligation of each investor to provide the committed financing amount to us will be suspended for the period starting on the date the investor signs the guarantee documents and ending on the date the lender ceases to provide the alternative debt financing.  During March 2003 we signed a loan proposal from a bank for an Investor Guaranteed Loan for an amount up to $984,000, guaranteed by certain of our existing investors who elected not to purchase our series A preferred stock, secured by all available assets of the company, at a floating interest rate of prime plus ½ percent, with maturity in one year, subject to certain financial and reporting covenants and final lender approval.

        During March 2003, we signed a loan proposal from a bank for a revolving line of credit for an amount up to $2,500,000, at a floating interest rate of prime plus ¾ percent and a ½ percent per annum unused line fee, with maturity in one year, and an equipment financing facility for an amount up to $500,000, at a floating interest rate of prime plus one percent, to be repaid in 36 monthly payments of principal plus accrued interest.  Both facilities are to be secured by all available assets of the Company, and are subject to certain financial and reporting covenants and final lender approval.

        We expect to continue to devote substantial capital resources to research and development activities, as well as our sales, marketing, and customer service organizations, the enhancement of our information technology infrastructure and other general corporate activities. Our consolidated financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The independent accountants’ report on our financial statements as of and for the fiscal year ended December 31, 2002, included herein, includes an explanatory paragraph which states that since inception we have incurred net operating losses and negative cash flows, and working capital and stockholders’ deficits, that raise substantial doubt about our ability to continue as a going concern.  Despite this report, we believe that cash on hand, cash available under the financing commitment of $984,000 and anticipated revenues from operations will be sufficient to fund our operations through March 31, 2004.  However, there can be no assurance that future cash requirements to fund operations will not require us to seek additional capital sooner than March 31, 2004, or that such additional capital will be available when required on terms acceptable to us.  If events and circumstances occur such that we do not meet our current operating plan and are unable to raise additional financing, we may be required to further reduce spending, which could have a material adverse effect on our ability to achieve our intended business objectives.

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RISK FACTORS

        We have a limited operating history, which makes it difficult or impossible to predict future results of operations and the results of operations.

        We have a very limited operating history.  Accelerated Networks was incorporated in October 1996 and did not begin shipping products in significant volume until September 1999.  Occam CA was incorporated in July 1999 and has not begun shipping products in significant volume.  Due to this limited operating history, it is difficult or impossible to predict future results of operations.

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

        The current market for telecommunications equipment is characterized by a continued drastic reduction in the spending patterns of our current and prospective customers. This reduction in spending has led to an overall decrease in demand for our products and has caused significant shortfalls in our revenues.  In addition, we cannot predict whether there will be a market for our products in the future. As a result, our revenues and the market for our products may not be sufficient to support our ongoing operations in the foreseeable future.

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

        We have incurred significant losses since inception, and expect that we will experience net losses and negative cash flow for the foreseeable future.  As of March 31, 2003, we had an accumulated deficit of approximately $71.4 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 that will continue to incur significant expenses for research and development, sales and marketing, customer support and general and administrative expenses. In particular, given the deteriorating market conditions in the telecommunications equipment industry, our expected significant operating expenses, and the rate at which competition in the telecommunications equipment industry is intensifying, we may be unable to adequately control our costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels.

        Our financial statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The independent accountants’ report on our financial statements as of and for the fiscal year ended December 31, 2002 included an explanatory paragraph which states that since inception we have incurred net operating losses and negative cash flows, and working capital and stockholders’ deficits, that raise substantial doubt about our ability to continue as a going concern.

        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.

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

        A customer’s decision to purchase our products often requires a significant commitment of resources from the customer and usually involves a lengthy product evaluation and qualification process prior to any firm purchase commitment.  As a result, we may incur substantial sales and marketing expenses and expend significant management effort without any guarantee of a sale.  In addition, our sales cycles may be lengthy, the length of which will vary depending on the type of customer to whom we are selling.  Because of the recent economic downturn in the telecommunications market and resulting slowdown in spending for telecommunications equipment, it is currently difficult or impossible to predict the length of a typical sales cycle for any of our prospective customers.  As a result of the above factors, our quarterly revenue and operating results may vary significantly.

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

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

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

        We do not expect our order backlog to be significant at the beginning of 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.

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

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

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

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

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

        Because we will 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.

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

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

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

        Our products have not yet been widely deployed. As a result, we cannot be sure that our products do not contain significant software or hardware errors that could only be detected when deployed in live networks that generate high amounts of voice and/or data traffic. Our customers may discover errors or defects in its products after broad deployment and as the customers’ networks expand and are modified. Any defects or errors in our products discovered in the future, or failures of our customers’ networks, whether caused by our products or those of another vendor, could result in loss of or delay in revenue, loss of market share and negative publicity regarding our products.  Any of these occurrences could have a material adverse effect on our business, results of operations and financial condition.

        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

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technology based on proprietary standards. Furthermore, many of our potential customers will require that our products be designed to interface with such customers’ existing networks, each of which may have different specifications, utilize multiple protocol standards and contain multiple generations of products from different vendors. If our products cannot operate in such an environment, they may not achieve market acceptance and our ability to generate revenue would be seriously impaired.

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

        We depend on our proprietary technology for our success and ability to compete successfully in our market. We currently hold two patents and have 21 patent applications pending.  We will rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing copyright, trademark and trade secret laws will afford us only limited protection.  In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.  Any infringement of our proprietary rights could result in significant litigation costs.  Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenue.

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

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

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

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

        We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future.  We are currently a party to a purported patent infringement claim. While we believe that the resolution of this matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, there are no assurances that we will prevail in any such action, given the complex technical issues and inherent uncertainties of litigation.

        Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.

        Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. In addition, in our agreements, we may agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Any claims asserting that our products infringe or may infringe on proprietary rights of third parties, with or without merit, could be time-consuming, resulting in costly litigation and diverting the efforts of technical and management personnel. These claims could also result in product shipment

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delays or require us to modify our products or enter into royalty or licensing agreements.  Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.

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

        We expect the development and marketing of new products and the expansion of our direct sales operation and associated support personnel to require a significant commitment of resources.  In connection with the merger, some of Occam CA’s existing investors agreed to either (a) finance the combined organization through the purchase of unsecured subordinated promissory notes for a committed financing amount in an aggregate amount of approximately $10 million, and (b) guarantee a loan, letter of credit or other similar instrument from a financial institution or other third party.  We allowed certain of those investors to purchase $12.2 million of equity in the Company.  The remaining investors have agreed to provide the Company with loan guarantees of approximately $900,000.  This additional capital, along with other capital resources available may be insufficient to fund our future operations. If we are unable to obtain additional capital, we may be required to reduce the scope of our planned product development and marketing and sales efforts, which would harm our business and competitive position. Additional capital, if required, may not be available on acceptable terms, if at all.

        To the extent that we raise additional capital through the sale of equity or securities convertible into equity, the issuance of the securities could result in dilution to our existing stockholders. If we raise additional funds through the issuance of senior debt securities, these securities would have rights, preferences and privileges senior to holders of our common stock.

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

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

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

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

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

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

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        Potential economic and political instability in India could adversely affect our product development efforts or financial results.

        We have a subsidiary in India, which as of April 30, 2003, employed approximately 12 individuals representing more than 10% of our workforce. This subsidiary performs product development and testing for our Element Management System, which is utilized for potential applications in products currently in development.  To date, the subsidiary had not generated any revenue for us, and is not expected to generate any revenue in the foreseeable future.  Because of our projected use of this subsidiary, any political or economic instability in India could adversely affect our projected development efforts or the projected expenses for the subsidiary.

        The subsidiary currently receives favorable tax and tariff treatment for its product development activities in India.  However, if this favorable treatment is unavailable to us for any reason, including political instability in India resulting in a government adverse to foreign corporate activity, a number of adverse consequences could occur, including higher tariffs, taxes or export controls, and increased governmental ownership or regulation, any of which would our increase costs of product development.

        In addition, we have historically recorded, and will likely continue to record, expenses for our subsidiary in India denominated in Indian rupees. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and Indian rupee.  While to date our results have not been materially affected by any changes in currency exchange rates, a devaluation of the U.S. dollar against the Indian rupee would adversely affect the expenses for the subsidiary, which in turn could have an adverse effect on our financial results.

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

        We have been delisted from the Nasdaq National Market.  The Company’s 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. Furthermore, the delisting of our shares could damage our general business reputation and impair our ability to raise additional funds.

        We face certain litigation risks that could harm our business.

        We are currently named as a defendant in several securities class action lawsuits.  The results of these lawsuits are difficult to predict.  An unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity, or results of operations and seriously harm our financial condition.  Even if these lawsuits are not resolved against us, the uncertainty and expense could seriously harm our business, financial condition and reputation.  Litigation can be costly, time-consuming and disruptive to normal business operations.  The costs of defending these lawsuits could be significant.  The defense of these lawsuits could also result in continued diversion of management’s time and attention away from business operations, which could harm our business.  (For additional information regarding our current litigation see Note 6—Legal Proceedings in Item 1—Financial Statements.)

        To date, sales of our BLC 1100 and BLC 1200 products have been limited and greater demand may not develop in the future.

        Currently we have few customers for our BLC 1100 and BLC 1200 products and a small number of prospective customers.  We cannot be certain that there will be a demand for its products once our products are more widely available, or that the demand will grow. Demand for our 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.

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

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

        •    significant reductions in demand for any of our products;
        •    delays or cancellations of future customer orders;
        •    reductions of the prices on any of our products; or
        •    increases in our expenses.

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

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

        If we are unable to collect receivables from our customers we may fail to meet our revenue targets.

        Market conditions in the telecommunications equipment industry have deteriorated significantly and many of our customers and potential customers have experienced financial difficulties, including bankruptcy, and we may have significant difficulties in collecting accounts receivables in the future.  Accordingly, we may be required to write off a significant amount of our accounts receivable.

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

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

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

        Our executive officers, directors and their affiliates beneficially own, in the aggregate, in excess of a majority of its common stock.  If they were to act together, these stockholders would have significant influence over most matters

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requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation and certain significant corporate transactions.  In addition, without the consent of these stockholders, we could be delayed or prevented from entering into transactions that could be beneficial to us or our other investors.  These stockholders may take these actions even if our other stockholders oppose them.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

        We have product development activities in India.  We record expenses for our subsidiary in India in Indian rupees. Accordingly, our operating results are exposed to changes in exchange rates between the U.S. dollar and Indian rupee. While to date, our results have not materially been affected by any changes in currency exchange rates, devaluation of the U.S. dollar against the Indian rupee would adversely affect our expenses for this subsidiary.

ITEM 4.     CONTROLS AND PROCEDURES

        Based upon their evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Exchange Act) as of March 31, 2003, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures effectively ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  In addition, there were no changes in our internal controls or in other factors that could have significantly affected those controls subsequent to March 31, 2003.

PART II.  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

        As of the date of this report there have been no material developments to the legal proceedings as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-30741), except as disclosed in Note 6—Legal Proceedings.

ITEM 2.     RECENT SALES OF UNREGISTERED SECURITIES

        In December 2002, a special committee of our board of directors 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, and we sold 1,471,707 shares of series A preferred stock for $7.50 per share for gross proceeds of $11,038,000.  In January 2003, we sold an additional 154,497 shares of series A preferred stock for gross proceeds of $1,159,000.  The purchasers of the series A preferred stock were: New Enterprise Associates 9, L.P., New Enterprise Associates VII, L.P., NEA Partners VII, L.P., NEA General Partners, L.P., NEA Ventures 2000, L.P., U.S. Venture Partners VII, L.P., U.S. Venture Partners V, L.P., USVP V International, L.P., 2180 Associates Fund V, L.P., USVP V Entrepreneur Partners, L.P., 2180 Associates Fund VII LP, USVP Entrepreneur Partners VII-A LP, USVP Entrepreneur Partners VII-B LP, Norwest Venture Partners VIII LP, NVP Entrepreneurs Fund VIII LP, Windward Ventures, L.P., Windward Ventures 2000, L.P., Windward Ventures 2000-A, L.P., each of whom was an accredited investor as such term is defined in the 1933 Act.  The sales of the series A preferred stock was made pursuant to exemptions from the registration requirements of Section 5 of the 1933 Act provided by Regulation D promulgated under Rule 506 of the 1933 Act and Section 4(2) of the 1933 Act.

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        This series A preferred stock is convertible, subject to the approval of our stockholders to increase our authorized shares, into shares of our common stock at a conversion price of $0.0991.  Currently, we do not have a sufficient number of authorized shares of our common stock to permit conversion of the series A preferred stock.  At our 2003 annual stockholders’ meeting, we plan to seek stockholder approval of an amendment to our existing certificate of incorporation to increase the number of authorized shares of common stock.  Certain of our existing stockholders and each of our officers and directors, who collectively beneficially own approximately 52% of the outstanding shares of our common stock, have executed a voting agreement and have agreed to vote their shares of capital stock now held or acquired in the future in favor of such amendment.  Upon receipt of stockholder approval and the filing of the amendment to our certificate of incorporation, all the outstanding shares of series A preferred stock will convert automatically into 123,072,992 shares of our common stock, at the above conversion price.  We may continue to sell the remaining 373,796 shares of unissued series A preferred stock until the time of the 2003 annual stockholders’ meeting.

        Each share of series A preferred stock is entitled to receive an equivalent dividend if we declare and pay a dividend on our common stock.  The series A preferred stock has a liquidation preference in an amount equal to the greater of (i) the initial per share purchase price of the series A preferred stock plus annual interest of 8%, or (ii) the amount to which a holder of series A preferred stock would be entitled for each share of series A preferred stock if immediately prior to the event, such share of series A preferred stock were converted to common stock.  A merger or acquisition of the Company resulting in a change of control, or a sale of all or substantially all of our assets, would trigger the liquidation preference for purposes of this provision. Such liquidation payment shall be in the same form of consideration (with cash, securities and other property in the same proportion) as holders of the common stock are entitled to receive and in no event will the holders of the preferred stock be entitled to cash payment upon liquidation unless the holder of the common stock are entitled to receive cash upon such liquidation.  This preferential right will terminate upon the conversion of the series A preferred stock into common stock.  In addition, the holders of the series A preferred stock have certain participation and registration rights, and rights to prevent us from incurring certain indebtedness.

The terms of the sale of the series A preferred stock are described more fully on our Current Report on Form 8-K, filed with the SEC on December 19, 2002.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:  May 14, 2003

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CERTIFICATION

I, Robert L. Howard-Anderson, certify that:

Date: May 14, 2003

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CERTIFICATION

I, Howard M. Bailey, certify that:

Date: May 14, 2003

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EXHIBIT INDEX

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