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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

         (Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR

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

                    For the transition period from                                           to                                         

COMMISSION FILE NUMBER: 000-24597

CARRIER ACCESS CORPORATION

5395 Pearl Parkway, Boulder, CO 80301

(303) 442-5455

         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        No    

         The number of shares outstanding of the issuer’s common stock, par value $0.001, as of June 30, 2002 was 24,767,216 shares.

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CARRIER ACCESS CORPORATION

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PART I. FINANCIAL INFORMATION

CARRIER ACCESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

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

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CARRIER ACCESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)

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

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CARRIER ACCESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

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

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CARRIER ACCESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business and Basis of Presentation

         We manufacture equipment for telecommunications carriers. Our products have delivered more than 2.5 million voice and data lines for customers, including many incumbent carriers and top wireless service providers. We focus on broadband access from the central office to the customer premises, voice and data service creation at end-user locations, and next-generation wireless infrastructure.

         Our Access Bank®, Wide Bank®, Access Navigator®, Adit™, Broadmore™, and Axxius™ products are connected to T1, digital subscriber line, digital radio, T3, and optical access networks to provide enhanced communications services for businesses. Our NetworkValet™ product, an element management system, coordinates the provisioning, monitoring, and maintenance among the products and interfaces with other network management systems.

         The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in our opinion, such condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of interim period results. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.

         The results of operations for the interim periods are not necessarily indicative of results to be expected for the entire year or for other future interim periods.

Note 2. Inventory

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

Note 3. Goodwill

         We first recorded goodwill and other related intangibles and their related amortization in connection with the acquisition of Millennia Systems, Inc. (“Millennia”) in August 2000 and the subsequent acquisition of certain product lines of Litton Network Access Systems, a division of Litton Systems, Inc. (“LNAS”), in October 2000. Goodwill and other related intangibles were amortized on a straight-line basis over the estimated useful lives ranging from three to five years. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill no longer be amortized, but instead be reviewed for impairment on an on-going basis. Accordingly, the amortization of goodwill and other related intangibles ceased upon adoption of the SFAS 142 on January 1, 2002. We have determined that we have one reporting unit. Our initial goodwill impairment test indicates that the fair value of the reporting unit exceeds the goodwill carrying value and therefore, at this time, goodwill is not deemed to be impaired. The reconciliation of reported net loss and reported loss per share with adjusted net loss and adjusted loss per share representing the effect of adopting SFAS 142, is as follows (in thousands, except per share amounts):

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Note 4. Income taxes

         We account for our deferred tax assets pursuant to Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”) “Accounting for Income Taxes.” Under SFAS No. 109, a deferred tax asset is recognized for differences that will result in tax deductions in future years and for tax credit carry forwards. For example, a temporary difference is created when an estimated amount is recorded as an expense for a financial reporting purpose that is not deductible in the current year for income tax purposes (e.g. warranty reserves, sales return reserves, inventory reserves, etc.). A deferred tax asset is recognized in the current year for the reduction in taxes payable in future years when the expenses are actually incurred. A valuation allowance is required if it is more likely than not that the deferred tax asset will be realizable in the near future. We have analyzed the sources and expected reversal periods of our deferred tax assets and have established a valuation allowance for temporary deferred tax assets as of June 30, 2002 of $12.8 million. At June 30, 2002 we had a research and experimentation credit carry forward of approximately $3.6 million which will expire in the year 2022 if not utilized. In addition, we incurred approximately $28.1 million of net operating losses for the period ending June 30, 2002 and it is anticipated that the federal net operating loss will be generated in 2002 and be carried back to obtain a refund on prior taxes paid.

Note 5. Earnings per share

         Earnings per share (EPS) is presented in accordance with Statement of Financial Accounting Standards No. 128 (“SFAS 128”), “Earnings Per Share.” SFAS 128 requires the presentation of basic and diluted EPS. Under SFAS 128, basic EPS excludes dilution for common shares potentially issuable and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and resulted in the issuances of common stock. Diluted income per share excludes the impact of common stock options for the three and six months ended June 30, 2002 and 2001, as the effect of any exercise of stock options would be antidilutive.

Note 6. Commitments and contingencies

         On December 28, 2001, SCI, Inc., one of our manufacturers, filed a breach of contract claim for $4.5 million against us in Alabama Circuit Court based on an inventory-purchasing dispute. We have been in recent discussions to settle this claim for approximately $2.5 million in return for a major portion of the disputed inventory. We estimate that this inventory purchase would have a value, net of allowances, of $700,000 and we have reserved $2.0 million for resolution of this dispute. As of August 31, 2002, we believe that these settlement discussions will not result favorably, and we intend to vigorously defend this lawsuit.

Note 7. Recent accounting pronouncements

         In August 2001, FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS 143 will not have a material impact on our consolidated results of operations and financial position upon adoption. We plan to adopt SFAS 143 effective January 1, 2003.

         In April 2002, FASB issued Statement of Financial Accounting Standard No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Statement 64 amended Statement 4, and is no longer necessary because Statement 4 has been rescinded. Statement 44 was issued to establish accounting requirements for the

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effects of transition to the provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement 44 is no longer necessary. SFAS 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions are accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB’s goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. SFAS 145 is effective for fiscal years beginning after May 15, 2002 with early adoption of the provisions related to the rescission of Statement 4 encouraged. We expect that the provisions of SFAS 145 will not have a material impact on our consolidated results of operations and financial position upon adoption. We plan to adopt SFAS 145 effective January 1, 2003.

Notice Concerning Forward-Looking Statements

         You should read the following discussion in conjunction with our consolidated financial statements. This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including forward-looking statements regarding inventory levels, sales of our Axxius product, expectations regarding expenses over the next few quarters, reliance upon certain customers, customer revenue mix, product mix, level of product orders, gross margins and operating costs, and expected capital expenditures. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. These forward-looking statements are based on current expectations and projections about our industry and assumptions made by the management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including, but not limited to, the factors set forth below and in “Risk Factors” and elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

RESULTS OF OPERATIONS

         Summary

         For the three months ended June 30, 2002, our loss from operations and net loss were $13.8 million and $20.8 respectively, compared to an operating loss and net loss of $4.2 million and $2.1 million, respectively, for the three months ended June 30, 2001. For the six months ended June 30, 2002, our loss from operations and net loss were $28.1 million and $29.8 million, respectively, compared to an operating loss and net loss of $6.6 million and $2.9 million, respectively, for the six months ended June 30, 2001. These losses were primarily caused by a decrease in the sale of existing products due to overall economic weakness and capital market constraints impacting telecommunication service providers, a higher percentage of operating expenses, an increase in allowance for doubtful accounts, an increase in reserves for slow moving inventory, and a lower gross margin. Operating expenses also increased due to a reserve taken related to a proposed settlement for an inventory-purchasing dispute. Gross margins decreased in part due to decreases in the selling price of some of our products, an increase in reserves for slow moving and excess inventory, and low production levels due to our decreased sales and elevated inventory position, which increased overhead expenses in the quarter ended June 30, 2002. Our net loss also increased in the second quarter because of a non-cash charge of approximately $12.8 million as a provision for income taxes due to a valuation allowance related to our net operating loss carry forwards.

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         Following a thorough business plan review, we implemented an expense reduction program in July 2001 to focus on the largest opportunities in incumbent local exchange carrier (“ILEC”), wireless, and cable multi-service operator (“MSO”) markets. This process included reducing our work force by approximately 80 employees in July 2001, 26 employees in January 2002, and 75 employees in March 2002. We continue to monitor expenses through our business plan review process and, as a result of our lower revenue in the June 2002 quarter combined with the continued reductions in spending within the telecommunications industry, we further reduced our work force in July 2002 by approximately 60 positions.

Net Revenue and Cost of Goods Sold

         Net revenue for the three months ended June 30, 2002 decreased to $11.8 million from $29.4 million reported for the three months ended June 30, 2001. Net revenue for the six months ended June 30, 2002 decreased to $28.3 million from $58.3 million reported for the six months ended June 30, 2001. These decreases were attributable to (1) decreases in the sale of existing products through distribution channels, and through direct sales due to capital expenditure reductions by competitive carrier customers, primarily Adelphia Communications, Inc. and Adelphia Business Solutions, Inc. (collectively “Adelphia”) and XO Communications, Inc. (“XO”), and the continued constraints on technology spending and (2) reductions in prices for our products. We believe that our customer base is changing. In the past we relied upon two to five customers in the competitive local exchange carrier (“CLEC”) market for approximately half of our revenue. Currently, however, we rely upon a broader base of end-users in several markets for our revenue. We anticipate that in the future we may again rely upon a small number of end-users primarily in the ILEC and wireless market for the majority of our revenue. Sales for the Wide Bank and Adit products accounted for the majority of revenue in the second quarter of 2002. In order to execute our plan to increase sales substantially into the wireless market in the second half of 2002, the major wireless carriers must accept and deploy our products. A delay in acceptance of our wireless products could have a material adverse effect on our operating results. See “Risk Factors – We Must Maintain and Expand Our Sales into Wireless, ILEC and Cable MSO Markets” and “–Our Growth Is Dependent on Our Introduction of New Products and Enhancements to Existing Products and Failure to Bring New Products to Markets and Any Delay in Customers’ Transition to Our New Products Could Adversely Affect Our Business.” The timing and quantities of orders for our products may continue to vary from quarter to quarter in the future, as they have in the past, due to factors such as demand for our products, economic conditions, and ordering patterns of distributors and direct customers. We believe that variances in orders will continue in the future, especially if the percentage of direct sales to large service provider customers increases.

         During the six month period ended June 30, 2002, approximately half of the sales of our products were made through distributors. Our success depends in part on the continued sales and customer support efforts of our network of distributors and increased sales to our direct customers. In the six months ended June 30, 2002, Walker & Associates, Inc. (“Walker”) and Graybar Electric Company, Inc. (“Graybar”), two of our distributors, each accounted for over 10% of net revenue. We expect that we will continue to sell our products through a small number of distributors. Accordingly, the loss of, or a reduction in sales to, any of our key distributors could have a material adverse effect on our business, as happened in the quarter ended June 30, 2002 when Walker’s sales decreased to below 10% of net revenue for the quarter. In addition to being dependent on a small number of distributors for approximately half of our net revenue, our products are also sold to a limited number of service provider customers. In the six months ended June 30, 2002, two of these competitive carrier end-user customers, XO and Verizon Communications, Inc. (“Verizon”), each accounted for over 10% of our net revenue. In addition, XO is currently restructuring its operations and finances, and may not be in a position in the future to continue its current purchase levels. A decrease in sales to any of these carrier customers could have a significant adverse effect on our operating results, as happened in the quarter ended June 30, 2002 when sales to Adelphia, a 10% customer in our prior quarter, decreased to below 10% of net revenue for the quarter.

         Cost of goods sold for the three months ended June 30, 2002 decreased to $8.3 million compared to $14.4 million for the three months ended June 30, 2001. Costs of goods sold for the six months ended June 30, 2002 decreased to $19.5 million compared to $28.1 million for the six months ended June 30, 2001. This decrease was primarily attributable to decreased product shipments and partially influenced by cost reductions in existing product platforms. The decrease was partially offset by increases in inventory reserves for slow moving and excess inventory as well as overhead expenses allocated over fewer product units due to low production levels.

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Gross Margin

         Our gross margin for the three months ended June 30, 2002 decreased to 30% from 51% reported for the three months ended June 30, 2001. Our gross margin for the six months ended June 30, 2002 decreased to 31% from 52% reported for the six months ended June 30, 2002. This decrease in gross margin was driven primarily by charges taken for slow moving and excess inventory, as well as by changes in production levels. We increased our inventory allowances by $837,000 in the quarter ended March 31, 2002 and by $1.1 million for the quarter ended June 30, 2002. In estimating the reserve for slow moving and excess inventory, we considered the forecast by product for the next twelve months and other known trends and circumstances relating to our inventory. The low production levels resulted in period expenses taken for overhead of $937,000 in the quarter ended March 31, 2002 and $648,000 in the quarter ended June 30, 2002. In addition, we had low production levels due to our decreased sales and high inventory position, which increased overhead expense not capitalizable to inventory. We also decreased the selling price of some of our products. In addition, our gross margins vary among products. The Wide Bank and Navigator products historically have generated higher gross margins than the Adit and Access Bank products, and we sold a greater number of Adit and Access Bank products in the quarter ended June 30, 2002. The decrease in gross margins was partially offset by product cost reductions including reductions in the Adit cost structures.

         We believe that gross margins could continue to decrease if additional pricing reductions occur in our products at a greater rate than anticipated cost reductions, if inventory reserves increase, or if production levels do not increase. New product introductions could also harm gross margins until production volumes increase. For example, sales of the Axxius product in the second and third quarters of 2002 may cause a reduction in gross margins until production levels stabilize. We believe that average selling prices and gross margins for our products will decline as such products mature, as volume price discounts in distributor contracts and direct sales relationships take effect, and as competition intensifies, among other factors. For example, the average selling price for the Wide Bank products and Adit products have decreased in the past two years. These decreases were due to unfavorable general economic conditions and the introduction of competitive products. In addition, discounts to distributors vary among products and are based on volume shipments, each of which affects gross margins. As a result, we believe that our gross margins are likely to fluctuate in the future based on product mix and channel mix. Furthermore, introduction of new products by competitors or us could reduce gross margins.

Research and Development Expenses

         For the three months ended June 30, 2002, research and development expenses were $5.7 million, a decrease from $9.2 million reported for the three months ended June 30, 2001. For the six months ended June 30, 2002, research and development expenses were $14.7 million, a decrease from $17.7 million reported for the six months ended June 30, 2001. These decreases were primarily due to reductions in the research and development workforce and related lower volume trial products and regulatory expenses associated with these decreases. We anticipate that research and development expenses will decrease in the quarter ended September 30, 2002 compared to the quarter ended June 30, 2002 as a result of our reduction in research and development positions and related expenses.

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Selling, General and Administrative Expenses

         Selling, general and administrative expenses were $11.6 million for the three months ended June 30, 2002, up from $10.1 million reported for the three months ended June 30, 2001. Selling, general and administrative expenses were $22.2 million for the six months ended June 30, 2001, up from $19.0 million reported for the six months ended June 30, 2001. Sales and marketing expenses decreased to $4.7 million for the three months ended June 30, 2002, from $6.4 million for the three months ended June 30, 2001. Sales and marketing expenses decreased to $10.0 million for the six months ended June 30, 2002, down from $11.8 million for the six months ended June 30, 2001. The decrease in marketing expenses was a result of a reduction in staff and reduced trade show expenses. The decrease in sales expenses was a result of a reduction in staff and decreases in commission expense due to lower revenues. General and administrative expenses, excluding goodwill amortization, increased to $6.7 million for the three months ended June 30, 2002 from $2.7 million for the three months ended June 30, 2001. For the six months ended June 30, 2002, general and administrative expenses, excluding goodwill amortization, increased to $11.9 million compared to $5.0 million for the six months ended June 30, 2001. The increase was primarily due to an increase in our allowance for doubtful accounts of $5.4 million and a reserve of $2.0 million related to the proposed settlement of an inventory-purchasing dispute. We increased our accounts receivable reserve mainly for receivables due from two of our large CLEC customers, XO and Adelphia, which may become uncollectible due to their current financial situations. Both of these customers have announced plans to financially restructure and have filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. We also increased our accounts receivable reserve for one of our distributors due to an increased risk in its customer base and the aging of its accounts receivable. In estimating the allowance for doubtful accounts, we considered the age of existing accounts and known trends and circumstances that we believe impact our credit risk and subsequent cash collections. As a result of cost control measures, including reductions in staff that began in July of 2001, we anticipate that selling, general and administrative expenses will decrease over the next few quarters. Excluding goodwill amortization, an asset impairment charge from the first quarter of 2002, increases in allowance for bad debt, and an expense related to the proposed settlement of an inventory-purchasing dispute, these cost control measures resulted in a decrease in selling, general and administrative expenses from $9.1 million in the second quarter of 2001 to $6.7 million in the first quarter of 2002.

Other Income, Net

         For the three months ended June 30, 2002, other income, net decreased to $223,000 from $475,000 for the three months ended June 30, 2001. Other income, net decreased to $464,000 for the six months ended June 30, 2002 compared to $1.1 million for the same period in 2001. Both decreases are attributable to a decrease in interest income from decreased cash and marketable securities as well as a decrease in interest rates in the first quarter of 2002 compared to the first quarter of 2001. Cash and marketable securities totaled $30.8 million and $44.2 million for the quarters ending June 30, 2002 and 2001, respectively.

Provision for Income Taxes

         For the three months ended June 30, 2002, we incurred a non-cash charge of $12.8 million as a deferred tax provision to provide for a valuation allowance related to our deferred tax assets, which primarily consist of reserves for bad debts, inventory obsolescence and research and development credits. This valuation allowance was established due to the uncertainty regarding the recognition of such assets. We will continue to monitor the realizability of our deferred tax assets each quarter and make adjustments as necessary.

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LIQUIDITY AND CAPITAL RESOURCES