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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from              to             

Commission file number 000-30741

OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Common Stock, $0.001 Par Value

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange act):    Yes  ¨    No  x

Based on the closing bid and ask price on June 30, 2003, the aggregate market value of the voting common stock of the registrant held by non-affiliates of the registrant on such date was approximately $13 million. In November 2003, December 2003, and March 2004, the registrant sold shares of its series A-2 preferred stock that are convertible into common stock at a conversion price of $0.11 per share. Using $0.11 per share as the market value of one share, the aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $12.2 million. For purposes of this disclosure, the registrant has excluded shares of common stock held by directors, officers and holders of 5% or more of the registrant’s outstanding common stock at February 24, 2004. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrants, or that such person is controlled or under common control with the registrant.

As of February 24, 2004, the number of shares outstanding of the registrant’s common stock was 267,530,592 (417,613,312 shares including 150,082,720 shares of common stock expected to be issued upon conversion of series A-2 preferred stock).

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OCCAM NETWORKS, INC.

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FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2003

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

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PART I

ITEM 1. BUSINESS

Overview

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

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

Throughout this report, we will refer to “Occam Networks, Inc.” as “Occam” or “Occam Networks.”

Industry Background

Existing Network Infrastructure

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

Limitations of Existing Telecommunications Infrastructure

The communications network has experienced significant growth and change during the past decade as the exponential growth of networks and the Internet, and the accompanying increase in data traffic have increased demand for high bandwidth communications networks. Telecommunications carriers have had difficulty, however, in meeting this increased demand for broadband Internet access and other bandwidth intensive applications and services due to significant constraints of the traditional copper wire communications infrastructure. To begin addressing increased customer demand for higher bandwidth, carriers began deploying high-speed optical networks in the long haul and metro portions of their networks. However, a bottleneck continues to impede effective delivery of high-bandwidth services in the local loop access network. Specifically, the existing local loop infrastructure was originally designed for low-speed analog voice traffic rather than high-speed digital data transmission. As a result, access to the Internet and private communications networks over the local loop has typically been limited to data transmission rates of up to 56 kilobits per second using standard dial-up analog modems. At this rate, several

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minutes may be required to access a media rich website and several hours may be required to transfer or download large files. Access to video over a dial-up modem is nearly impossible. The cost of rewiring individual customer premises with fiber optic cable to deliver higher bandwidth services, however, is not economically viable and is also time consuming. Thus, telecommunications carriers have sought to employ alternative technologies to make more efficient use of the existing copper wire infrastructure in the local loop.

Emergence of DSL for Broadband Access

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

DSL equipment can be located in a central office or in digital loop carriers, which are in remote terminals, placed curbside primarily in residential areas. These remote terminals serve approximately 25% of all telephone customers in the United States. In order to provide DSL service to a customer whose first access point to the telecommunications network is through a remote terminal, the carrier must deploy DSL equipment in the remote terminal.

Carriers have traditionally deployed separate network equipment in the remote terminal to deliver voice and DSL services. Deploying separate network equipment is costly and, because of space constraints at the remote terminal, places significant limitations on the number of customers served. The physical size of the systems necessary to enable DSL service is critical because DSL equipment must fit within the local telephone carrier’s existing remote terminal cabinets or the carrier must spend significantly more money either to expand the remote terminal or install additional remote cabinets to serve the same number of customers. Carriers are seeking an integrated system for the delivery of voice and DSL services in order to deliver broadband access to a larger number of customers while significantly reducing the total costs of DSL deployment and operation.

Increased Competition in Telecommunications Services Market

As cable service providers enter traditional telecommunication markets, carriers are seeking to add additional high-bandwidth, high-margin, services to their networks, such as broadcast video and video on demand. In order to deliver video to residential customers, telecommunications carriers will be required to deploy the next generation of DSL technology, very high speed DSL, or VDSL, or next generation asymmetrical DSL (ADSL2+) to provide enough bandwidth to enable broadband transmission of multiple video streams over the local loop. VDSL, however, requires greater proximity of the customer to the telecommunications carrier’s DSL equipment. In order for telecommunications carriers to deliver VDSL’s full 51 megabits per second, or Mbps, of bandwidth, the telecommunications carrier must deploy equipment within 4,000 feet of the customer. ADSL2+ delivers less total bandwidth than VDSL, but can support two or three video channels to distances of 8,000 to 10,000 feet. The introduction of either of these DSL technologies in the local loop will likely result in broader deployment of remote terminals and an increase in the percentage of telecommunications customers who are delivered access to DSL through these remote terminals. In addition to DSL’s distance limitations, transmission speeds are also limited by the architecture and capabilities of the equipment that is currently deployed in the remote terminals.

Transitioning of the Telecommunications Network

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

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

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

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

Once softswitch technology is fully deployed and the packet switched infrastructure is in place, carriers should be able to offer new voice, data and video services to their customers.

The Occam Networks Solution

Our product lines, the BLC 1200 and the BLC 6000, are equipment systems with components deployed in remote terminals and in central offices. The systems provide connectivity from the residence or business premises to the carrier’s central office. Remote terminals provide the connections to the end customer and aggregate the service traffic for multiple customers for connection to the central office. The central office equipment combines individual user voice and data traffic flows from multiple remote terminals into a format interoperable with existing telephone and data switches. Because the BLC 1200 and BLC 6000 systems convert an ordinary telephone line, or local loop, into a broadband loop, we refer to our products as Broadband Loop Carriers, or BLC.

The BLC 1200 and BLC 6000 systems integrate into single product lines the functionality that is currently provided by separate voice and DSL access products. Designed specifically to fit in existing remote terminal cabinets, the BLC 1200 is compact and yet supports 24 integrated voice and DSL connections per unit. Multiple units can be placed in the same cabinet, allowing carriers to expand their capabilities as needed, up to 1,056 customers per standard seven-foot rack. Remote terminals can house one or more standard racks depending on their size. The BLC 6000 adds video capabilities to the voice and data service mix that is supported. It is a modular system that can be deployed in very high capacity networks, but also proves economical for low capacity sites. It can be deployed with

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as few as 48 ports in a 1 ³/4” high stackable shelf or up to 576 ports in a high capacity chassis. Three high capacity chassis can be deployed in a standard seven-foot rack, supporting as many as 1728 customers. Both BLC systems are environmentally hardened to withstand wide variations in temperature, humidity and other environmental conditions found in telephone company outside plants.

Enable Wide Scale, Cost Effective DSL Deployment

Our BLC systems use state-of-the art semiconductor technology to serve three to four times the number of customers from the same sized remote terminal cabinet than traditional access equipment. This enables carriers to deploy DSL on a wider scale to more customers without the additional capital and non-recurring expense of construction and installation of additional or larger cabinets at the remote terminals, the cost of which can range from tens of thousands to hundreds of thousands of dollars per site.

Lower Cost to Activate DSL Customers

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

Leverage Internet Technologies

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

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

Softswitch Interoperability

The BLC 1200 and BLC 6000 systems also have integrated media gateway functionality, which eliminates the need for a separate media gateway. This results in significant cost and space savings at the remote terminal. The integrated media gateway functionality allows the BLC 1200 and BLC 6000 systems to interoperate with the existing voice switches and softswitches simultaneously and facilitate a smooth transition from one to the other. In addition, the integrated media gateway also allows carriers to start delivering advanced voice, fax and messaging services, like unified messaging and follow-me services.

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

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The Occam Networks Strategy

Our strategy is to become a leading provider of local loop access equipment to telecommunications carriers, such as regional bell operating companies, independent telephone companies and international carriers. We intend to leverage our BLC product lines to establish ourselves as a leader in the advanced generation of local loop equipment. This equipment facilitates the deployment of broadband and telephony services, and has evolved from the Next Generation Digital Loop Carrier, or NGDLC, market. Key elements of Occam’s strategy include:

Drive Packet, Ethernet and IP Technologies into the Local Loop

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

Deliver Ethernet Transport to the DLC Market

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

Facilitate Network Migration from Circuit Switched Architecture to Packet Switched Architecture

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

Deliver a Comprehensive DLC Solution

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

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

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

Aggressively Pursue Innovators in the Carrier Market

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

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Continue Technological Innovation

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

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

Products

Current Products

BLC 6000 System. The BLC 6000 is Occam’s flagship product line. It was announced in May 2003 as a modular BLC system that would be introduced in phases, with new capabilities added throughout its product lifecycle. The first elements of the BLC 6000 became available at the end of Q2 2003 and new elements and capabilities have been added each quarter since its initial shipments. Currently the product line consists of two chassis styles and six blades.

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BLC 1200 System. The BLC 1200 System product line consists of four self-contained products that are generally deployed in a network to create a complete loop carrier system solution. The four products are the BLC 1200, BLC 1210, BCL 1220 and the BLC 1240. The 1.75-inch. vertical profile and environmentally hardened compact chassis allows for easy deployment in smaller remote terminals, and can also be deployed in a central office.

Cabinets. Our broadband loop carrier solution includes a series of remote terminal cabinets for low, medium and high-density deployments in a variety of geographical areas. Our cabinets are environmentally controlled and deliver reliable protection with a high degree of deployment flexibility. Our cabinets are full-featured enclosures that support multiple shelf assemblies with a full complement of fans, protector panels, charger/rectifiers and batteries. Occam cabinets have been configured to support the greater advanced service capacity provided by our Broadband Loop Carriers, meeting the power and heat requirements for maximum DSL, video and other high-bandwidth service take rates. They are available in configurations which support from 48 to 576 ADSL/voice lines, either copper T1 or fiber facilities, and can be deployed in point-to-point, star, ring, or daisy chain topologies. Our first cabinets became available for sale in the second quarter of 2002.

OccamOS. Our embedded operating system creates a highly extensible platform that makes it easy to tailor the Occam BLC product family to the specific requirements of each carrier. OccamOS is modular, highly scalable and provides BLCs with high reliability.

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

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Products in Development

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

Customers

To date, our products are in operation in the networks of more than 40 customers, including four of the top 25 Incumbent Local Exchange Carriers (“ILECs”) in the United States. Our current and target customers include:

Independent Telephone Companies

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

Regional Bell Operating Companies

Regional bell operating companies (“RBOCs”) are the Incumbent Local Exchange Carriers (“ILECs”) in the United States formed by the 1983 divestiture of AT&T and subsequently partially recombined through mergers. The four regional bell operating companies are Qwest Communications, SBC Communications, Verizon Communications Inc. and BellSouth Corporation, accounting for approximately 85% of the total installed telephone lines in the United States.

Competitive Local Exchange Carriers

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

PTTs

PTTs are the governmental agencies and their successors responsible for combined postal, telegraph and telephone services in countries worldwide. Examples include France Telecom in France, Deutsche Telecom in Germany, Telefonica in Spain and Telia in Sweden.

Industry Relationships

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

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Research and Development

We have a team of engineers dedicated to conducting research and developing innovative technologies in specific technology areas that are strategic to our business. The collective talent of the Occam research and development team has knowledge-base and experience covering the full spectrum of technologies, ranging from digital loop carrier, voice signaling, call control, IP networking, Ethernet networking and switching, DSL, optical networking and network management. We have also developed a practice of working with our suppliers of technology, silicon and software to further increase our technological lead over our competitors.

We continue to make substantial investments in research and development. Research and development expenses, including amortization of stock-based compensation, were approximately $12.0 million, $19.2 million and $16.4 million during the fiscal years ended 2003, 2002 and 2001, respectively. Our primary research and development center is based in Santa Barbara, California. We have additional development centers in Simi Valley, California, and Mesa, Arizona.

Patents and Intellectual Property

We currently rely on a combination of patent, copyright and trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights with respect to our technology and proprietary information. We have been granted seven patents, have filed several additional patent applications, and intend to file additional patent applications. These patents expire over the next 15 to 17 years. Our patent strategy is designed to protect corporate technology assets, to create access to additional technology through cross-licensing opportunities and to create opportunities for additional revenue through technology licensing.

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

Sales and Marketing

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

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

Sales during 2003 to our largest three customers, FairPoint Communications, Inc., Comporium Group, and Pineland Telephone Cooperative, Inc., accounted for approximately 15%, 14%, and 8%, respectively, of our revenue for the year ended December 31, 2003. Sales during 2002 to our largest three customers, DTC Communications, Inc., Armstrong Telephone Company, and Pan Dacom Networking AG, accounted for approximately 38%, 25%, and 13%, respectively, of our revenue for the year ended December 31, 2002. While we anticipate that sales to any specific customer will vary from period to period, we expect to continue to have significant customer concentration during 2004. To date, a significant portion of our revenue has been derived from a small number of orders and our sales have been made on the basis of individual purchase orders, rather than long-term commitments.

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Technical Services and Customer Support

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

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

Backlog

Our backlog primarily consists of purchase orders from customers for products to be delivered within the next quarter. Our backlog as of February 29, 2004 was approximately $3.1 million. Due in part to factors such as the timing of product release dates, customer purchase orders, product availability, allowing customers to delay scheduled delivery dates without penalty, or allowing customers to cancel orders within negotiated time frames without significant penalty, our backlog may not be indicative of sales during any subsequent quarter.

Competition

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

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

The strength of our product and solution architecture, we believe, enables us to compete effectively with all of these customer types, and we expect to gain share in the growing broadband local loop market.

Manufacturing

We outsource significant portions of our manufacturing operation to third-party manufacturers and have a signed manufacturing out-sourcing contract with Smtek International, Inc., located in Moorpark, California. This agreement provides for material procurement, board level assembly, testing, purchase commitments and quality control by the manufacturer. Our products are primarily manufactured in the U.S. but we expect to move some of the manufacturing offshore to save costs. We design, specify and monitor all of the tests that are required to meet our internal and customer quality standards. In 2001, Occam received certification to ISO 9001:2000 by TÜV Rheinland of North America. We have several single or limited source suppliers. Although the products could be redesigned to avoid using any sole source supplier, it would be expensive and time consuming to make such a change.

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Geographic Information

Substantially all of our revenue is generated within the United States, and all of our long-lived assets are located within the United States.

Governmental Regulation

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

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

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

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

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

Countries in the European Union, or EU, have also adopted laws relating to the provision of Internet services, the use of the Internet, and Internet-related applications. For example, in the United Kingdom, an Internet service provider, or ISP, may be liable for defamatory material posted on its sites. In Germany, an ISP may be liable for failing to block access to content that is illegal in the country. In addition, the EU has adopted a data protection directive to address privacy issues, impacting the use and transfer of personal data within and outside the EU. The

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application of this directive within the EU and with respect to U.S. companies that may handle personal data from the EU is unsettled. Similarly, countries in Europe restrict the use of encryption technology to varying degrees, making the provision of such technology unclear. Other laws relating to Internet usage are also being considered in the EU.

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

Employees

As of February 29, 2004, we employed 70 full-time employees, including 21 in sales and marketing, eight in manufacturing, 32 in engineering, and nine in finance and administration. All of our employees are located in the United States. None of our employees are represented by collective bargaining agreements. We consider our relations with employees to be good.

ITEM 2. PROPERTIES

Properties

We are a party to lease agreements the following properties:

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

ITEM 3. 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 Honorable Judge Ronald S. W. Lew consolidated the cases 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 and Plaintiffs filed

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various motions over time that resulted in Accelerated Networks filing an answer. The parties subsequently agreed to mediation which hearing was held October 6, 2003. The mediation hearing resulted in a settlement that requires the members of the class of plaintiffs and the court to approve the settlement, which the Company expects to be received by June 2004. The Company has not recorded any accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.

IPO Allocation Cases

In June 2001, three putative stockholder class action lawsuits were filed against Accelerated Networks, certain of its then officers and directors and several investment banks that were underwriters of Accelerated Networks’ initial public offering. The cases, which have now been consolidated, were filed in the United States District Court for the Southern District of New York. The Court appointed a lead plaintiff on April 16, 2002, and plaintiffs filed a Consolidated Amended Class Action Complaint (the “Complaint”) on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleges violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims are based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive “IPO allocation” litigation involving the conduct of underwriters in allocating shares of successful initial public offerings. The Company believes that over three hundred other companies have been named in more than one thousand similar lawsuits that have been filed by some of the same plaintiffs’ law firms. In October 2002 the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 19, 2003 a motion to dismiss filed by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and Rule 10b-5 claims against the Company. On July 31, 2003, the Company agreed, together with over three hundred other companies similarly situated, to settle with the Plaintiffs. A Memorandum of Understanding (“MOU”), along with a separate agreement and a performance bond of $1 billion issued by the insurers, for these companies’ is a guarantee, allocated pro rata amongst all issuer companies, to the plaintiffs as part of an overall recovery against all defendants including the underwriter defendants who are not a signatory to the MOU. Any recovery by the plaintiffs against the underwriter defendants reduces the amount to be paid by the issuer companies. The settlement documents are in process and it is anticipated that the Company will execute the settlement documents on or before June 30, 2004. This settlement will require the members of the class of plaintiffs and the court approval. The Company has not recorded any accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.

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 made 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 issuer defendants named in the lawsuit. The Plaintiffs filed an amended complaint and have dismissed the Company from the lawsuit. 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,

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1999, which agreement was terminated effective as of May 20, 2001. The supplier alleged it was 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 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.

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

None.

PART II

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

Our common stock traded on The Nasdaq National Market under the symbol “ACCL” from June 2000 through May 2002 when we merged with Occam Networks Inc. and adopted the Occam name. Our common stock traded under the symbol “OCCM” from the merger date through the time of its delisting from The Nasdaq National Market on July 24, 2002. Since July 25, 2002, our common stock has traded on the OTC Bulletin Board under the symbol “OCCM”. The following table presents, for the periods indicated, the high and low closing stock price of our common stock during the time period traded as reported by The Nasdaq National Market and the high and low last sale price of our common stock during the time period traded as reported by the OTC Bulletin Board:

On February 24, 2004, the last reported sales price of our common stock was $0.165 and there were 326 stockholders of record.

RECENT SALES OF UNREGISTERED SECURITIES

In November 2003, a special committee of our board of directors approved the sale and issuance of up to 3,000,000 shares of series A-2 preferred stock at a price per share of $10.00, and in November and December 2003, we sold 1,650,910 shares of series A-2 preferred stock for $10.00 per share for gross proceeds of $ 16,509,100 to investment funds affiliated with U.S. Venture Partners, New Enterprise Associates, Norwest Ventures, Hook Partners, and Windward Ventures. In March 2004, we sold an additional 420,000 shares of series A-2 preferred stock for gross proceeds of $4,200,000 to investment funds affiliated with Alta Partners and Windward Ventures. The sales of the series A-2 preferred stock and the common stock issuable upon conversion were made pursuant to exemptions from

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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. In connection with their purchases, each investor represented to Occam that it was an accredited investor within the meaning of Regulation D.

This series A-2 preferred stock is convertible, subject to the approval by our stockholders of an amendment to increase our authorized shares, into shares of our common stock at a conversion price of $0.11 (resulting in a conversion ratio of approximately 90.91 shares of common stock for each share of series A-2 preferred stock). Currently, we do not have a sufficient number of authorized shares of our common stock to permit conversion of the series A-2 preferred stock. At our 2004 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. Upon receipt of stockholder approval, each outstanding share of series A-2 preferred stock will be convertible at a conversion price of $0.11 (subject to potential anti-dilution adjustments) as discussed above. In addition, all outstanding shares of series A-2 preferred stock will automatically convert into common stock upon the written consent of holders of not less than sixty-six and two-thirds percent (66 ²/3%) of the then outstanding shares of series A-2 preferred stock (provided that all other series A-2 preferred investors have agreed that they will not consent to an automatic conversion unless Alta Partners also consents). Existing stockholders associated with U.S. Venture Partners, New Enterprise Associates, and Norwest Venture Partners, each of our officers and directors, and certain other significant stockholders have executed a voting agreement and have agreed to vote their shares of our capital stock now held or hereafter acquired in favor of an amendment to our existing certificate of incorporation to increase the number of authorized shares of common stock that we may issue. The voting agreement generally prohibits the signatories from transferring any shares of our common stock and will terminate upon the approval of the amendment to the certificate of incorporation increasing the authorized shares of common stock. The individuals and entities subject to the voting agreement collectively own of record shares of common stock representing approximately 80.7% of the outstanding common stock (after giving effect to the series A-2 preferred stock financing).

In connection with the sale of our series A-2 preferred stock, we paid Q Advisors, LLC, our financial advisor, a total of $350,000.

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 November 21, 2003.

EQUITY COMPENSATION PLANS

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

DIVIDEND POLICY

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

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ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial information should be read in conjunction with our consolidated financial statements and the related notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. The information as of December 31, 2001, 2000 and 1999, and for the period from July 16, 1999 (date of inception) to December 31, 1999 and the year ended December 31, 2000 has been derived from our audited financial statements, which are not included herein but which have previously been filed with the SEC. The information as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 has been derived from our audited financial statements provided elsewhere in this Annual Report on Form 10-K and should be read in conjunction therewith. Historical results are not necessarily indicative of the results to be obtained in the future.

SUMMARY OF SELECTED FINANCIAL DATA

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SUMMARY OF SELECTED FINANCIAL DATA (CONT’D)

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

Overview

Management discussions and analysis of the financial condition and results of operation should be read in conjunction with the financial statements and may contain forward looking statements. Any achieved results could be different from anticipated results.

From its inception through December 31, 2003, Occam has progressed through the development stage and, while currently reporting increased revenues and decreased net losses, has incurred cumulative net losses of approximately $86.4 million. We expect Occam to continue to incur substantial operating losses and to experience substantial negative cash flow as it expands its business.

We have increased our revenues, particularly during the latter half of the 2003 fiscal year, through new product introductions, particularly the introduction of the BLC 6000 system product line. We have funded our operations primarily through the sale of equity securities and debt borrowings.

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Since the merger with Accelerated Networks, we have implemented a number of expense reduction actions to reduce our operating losses and consumption of cash, including reductions in force, change to a sequential product development plan, and non-renewal of certain facilities leases.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses 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. The terms and conditions of acceptance of the product for each sales arrangement will dictate when revenue will be recognized. 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. In addition, we warrant our products for up to 5 years and record an estimate of warranty costs when revenue is recognized based on actual history and projected returns and failure rates and current repair costs. To the extent that warranty costs exceed our estimates our results of financial operations may be materially impacted.

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. Since the integrated access device line of products acquired from Accelerated Networks had made and was expected to make only a minimal contribution to our net revenue, during the fiscal year ended December 31, 2002, we substantially discontinued the product line and wrote-off $3,135,000 of related excess and obsolete inventory. In addition during the fourth quarter of 2003, we wrote-down our BLC 1200 products by $404,000, based on our estimates of inventories in excess of future sales demand.

We evaluate our estimated potential financial exposure for loss contingencies, particularly the pending litigation matters discussed in Note 12 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

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impact our results of operations and financial position. As of December 31, 2002, we had accrued $800,000 and during February 2003 made such payment as settlement of supplier litigation discussed in Note 12 to the financial statements. We have not recorded an accrual an estimated loss for the securities litigation or IPO allocation cases because we expect any settlement amounts to be covered by our insurance policies that we believe are more than adequate to cover such settlements.

Results of Operations

Fiscal Years ended December 31, 2003, 2002 and 2001

Sales

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

The growth in BLC 6000 system revenues, and Company revenues in general, followed the release of the BLC 6000 system product line during the third quarter of 2003. The BLC 6000 system will in many applications be ordered instead of the BLC 1200 system. We expect revenue for the BLC 1200 to decline as a result. The integrated access device line of products acquired from Accelerated Networks had made only a minimal contribution to our net revenue and, during the third quarter of 2002, we substantially discontinued marketing these products. Net revenue for the fiscal year ended December 31, 2001 was comprised of revenue recognized from the acceptance by customers of products previously shipped on a trial or evaluation basis.

Cost of sales

Cost of sales comprised the cost of products shipped for which revenue was recognized and the costs of manufacturing yield problems, field replacements, rework costs, underabsorption of manufacturing overhead, and provisions for obsolete inventory. Cost of sales for 2003 also included additional costs related to testing and engineering of our new products. We expect these costs to decline in early 2004. We further expect margins to increase as sales increase during 2004 as we receive volume discounts from our suppliers and move some of our manufacturing to lower cost providers. Cost of sales for the fiscal year ended December 31, 2002 included a write-off of $3,135,000 for excess and obsolete inventory of the integrated access device line of products acquired from Accelerated Networks. The integrated access device line of products had made only a minimal contribution to our net revenue, and accordingly, we had substantially discontinued marketing these products and reduced the carrying value of this inventory. Costs of sales for 2003 included write-off of inventory of $404,000 relating to excess inventory of our BLC 1200 product line following the introduction of our BLC 6000 series products.

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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. The 38% decrease in expenses from 2002 to 2003 was due primarily to expense reduction actions we took during 2002 and 2003 as we scaled our activities into a sequential product development plan. The 17% increase in expenses from 2001 to 2002 was due primarily to the addition of the Company’s integrated access device products team in connection with the merger with Accelerated Networks. We expect to incur reduced research and product development expenses during the fiscal year ended December 31, 2004 as compared to 2003, due to the expense reduction actions we implemented during 2003.

Sales and marketing expenses consist primarily of salaries, sales commissions, and other personnel-related costs, development and distribution of promotional materials, and other costs related to marketing, sales, public relations, and customer support activities. The 16% decrease in expenses from 2002 to 2003 was due primarily to the discontinuation of the integrated access device product line during 2002, and to other expense reduction actions we during 2002 and 2003. The 56% increase from 2001 to 2002 was primarily due to additional staffing and expenditures required to develop market awareness of our products, preparation for and attendance at trade shows and other industry events, and the formation of our sales organization, including, for the period subsequent to the merger, the costs of the Accelerated Networks sales and marketing organization. We expect our sales and marketing expenditures to increase during the fiscal year ended December 31, 2004 as compared to 2003, as we hire additional sales resources to further expand our markets.

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. The 34% decrease in expenses from 2002 to 2003 was due primarily to costs incurred in 2002 related to the separation of a former chief executive officer from the Company and expense reduction actions taken in 2002 and 2003, offset partially by an increase in insurance and other costs of being a publicly held company. The 7% decrease in expenses from 2001 to 2002 was due primarily to expense reduction actions taken in 2002. We expect our general and administrative expenditures to decline during the fiscal year ended December 31, 2004 as compared to 2003, due to expense reduction efforts we implemented during 2003. These reductions however are not expected to impact our growth.

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Through December 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 December 31, 2003, we had reversed deferred stock compensation of approximately $4,586,000, resulting from stock option cancellations and repurchase of unvested common shares from employees. Amortization of deferred stock-based compensation is net of reversals related to expense previously recorded on options that were unvested and subsequently cancelled. At December 31, 2003, we had $1,627,000 of unamortized deferred stock compensation, which is expected to be amortized $933,000 in 2004, $665,000 in 2005 and $29,000 in 2006.

Interest income

The decreases in interest income were due to the lower average balances of cash and cash equivalents held during 2003 as compared to 2002, and 2002 as compared to 2001, as a result of consumption of cash balances for working capital purposes, the timing of the issuance of our series A-2 preferred stock in November and December 2003, the timing of the issuance of our series A preferred stock in December 2002 and January 2003, the timing of cash provided from the merger with Accelerated Networks and the issuance of our series C preferred stock in May 2002, and lower interest rates.

The decrease in interest expense from 2002 to 2003 was due to lower average amounts outstanding under capital lease lines of credit during 2003 as compared to 2002, offset partially by borrowings under an equipment loan during 2003. The increase in interest expense from 2001 to 2002 was due to interest on our capital lease lines of credit, which were established during the fourth quarter of 2000.

Our income tax benefit (expense) reflects minimum state taxes, net of refunds. Our effective tax rate for 2003, 2002 and 2001 was 0% due to our net operating losses.

Net operating loss carryforwards

At December 31, 2003, the Company had net operating loss carryforwards of approximately $192.4 million and $98.7 million to offset federal and state future taxable income, respectively. The federal and state net operating loss carryforwards expire through 2023 and 2013, respectively. The availability of the net operating losses to offset future taxable income may be limited as a result of ownership changes in 2003 or prior years or the merger with Accelerated Networks in 2002, pursuant to Internal Revenue Code section 382. In addition, utilization of the net operating loss carryforwards would also be subject to an annual usage limitation, as defined. Net operating loss limitations under section 382 may significantly impact the timing and amount of future income tax obligations, if any. The amount of such limitation, if any, has not yet been determined.

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We recorded beneficial conversion feature charges to net loss attributable to common stockholders of $3,038,000 upon the issuance of our series A-2 preferred stock during 2003 and $541,000 upon the issuance of Occam CA’s series B-1 and series C preferred stock during 2002. These non-cash charges were calculated using the fair value of common stock on date of issuance, subtracting the accounting conversion price and then multiplying the resulting amount by the sum of the number of shares of common stock into which the series A-2, B-1 and C preferred stock were converted.

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

We are aware that the sale of 5,899,755 shares of Occam CA series C preferred stock to 18 Occam CA stockholders may have been in violation of Section 5 of the Securities Act of 1933, as amended (the “1933 Act”). If such a violation did in fact occur, the stockholders who purchased these shares would have had a right to rescind their purchases. In the event a stockholder successfully asserted a rescission right, we 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 had a contingent liability to the Occam CA series C preferred stock investors in the aggregate amount of approximately $10 million plus interest. The 1933 Act requires that any claim brought for a violation of Section 5 be brought within one year of the violation. Until this one-year period elapsed on May 14, 2003, the amount paid for these shares was presented on the consolidated balance sheet of the Company outside of total stockholders’ equity. We believe that the sale of the Occam CA series C preferred stock was not in violation of Section 5 of the 1933 Act and no such claims have been made. Interest of $300,000 and $500,000 was accrued during the fiscal years ended December 31, 2003 and 2002, respectively, relating to this matter. We have reversed $800,000 of interest that had been accrued during the one-year claim period and have reclassified common stock potentially subject to rescission into stockholders’ equity.

Liquidity and Capital Resources

As of December 31, 2003, we had cash and cash equivalents of $14.6 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 $19.5 million partially offset by the proceeds from our offering of series A-2 preferred stock of $16.4 million in November and December 2003 and the proceeds from our offering of series A preferred stock of $1.0 million in January 2003.

We used $19.5 million of cash in operating activities during the fiscal year ended December 31, 2003, a decrease of $9.9 million or 34% over the $29.4 million used during the comparable prior year period. The uses of cash in operating activities in 2003 were primarily from our net loss of $20.4 million and increases in accounts receivable and inventory, offset partially by non-cash expenses for depreciation and amortization of our property and equipment and deferred stock-based compensation and by an increase in accounts payable. The increases during 2003 in accounts receivable, inventory and accounts payable are a result of the timing of our increased sales during 2003 as compared 2002. Cash used in operating activities in 2003 and 2002 also included a payment of $800,000 and $1,200,000, respectively, as a settlement with one of our former contract manufacturers in exchange for a shipment to us of certain inventory which was being held in the supplier’s warehouse.

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We used $2.2 million in cash in investing activities during the fiscal year ended December 31, 2003, as compared to $15.7 million generated during the comparable prior year period. Of the cash used in investing activities during 2003, $935,000 was for cash restrictions imposed from a covenant to our loan and security agreement with a bank for a revolving line of credit and to secure a letter of credit provided by us, and $736,000 was for purchases of property and equipment. In addition, during 2003 we sold our India operations which was comprised primarily of cash balances of approximately $539,000 for $50,000 in cash and a note receivable of $608,000 due in installments through November 2004. Cash provided by investing activities during 2002 was primarily due to the $16.9 million of cash received from the merger with Accelerated Networks, net of costs of acquisition, offset partially by purchases of property and equipment.

We generated $17.8 million in cash from financing activities during the year ended December 31, 2003, as compared to $25.6 million for the comparable prior year period. The cash provided in the fiscal year ended December 31, 2003 was from the proceeds of $16.4 million from our offering of series A-2 preferred stock during November and December 2003, $1.0 million from our offering of series A preferred stock during January 2003, and the proceeds of notes payable of $921,000 during June and July 2003, offset partially by repayments of capital lease obligations and notes payable. The cash provided in the fiscal year ended December 31, 2002 was primarily from the proceeds of a $5.2 million from a loan from Accelerated Networks to Occam CA prior to the merger, $10.0 million from Occam CA’s offering of series C preferred stock during May 2002, and $11.0 million from our offering of series A preferred stock during December 2002. The cash provided during the fiscal year ended December 31, 2001, was primarily from the gross proceeds from Occam CA’s offering of series B preferred stock during the first quarter of 2001, and from the proceeds of Occam CA’s capital lease line of credit. During June 2003, we signed a loan and security agreement with 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 collateralized by all available assets of the Company, and are subject to certain financial and reporting covenants including minimum cash levels. During October 2003 we violated two financial covenants (quick ratio and tangible net worth) under this agreement, and have since received a waiver from the bank for these violations. As of December 31, 2003, no amounts were outstanding under the revolving line of credit, and approximately $377,000 of principal and interest was outstanding under the equipment financing facility. A covenant of this agreement requires the Company to maintain a minimum cash balance of $750,000, which has been classified as restricted cash in the accompanying consolidated balance sheet.

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 $422,000, 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. 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 June 2003, we received $500,000 and issued an unsecured subordinated promissory note payable to one existing investor pursuant to the terms of the original financing commitment, and reduced the remaining amount of the guarantee to $422,000. The note bears interest at the prime rate and principal and accrued interest is due June 2006. During September 2003, we reduced the amount of the financing commitment from the final investor to $254,000. This commitment was discharged in October 2003 as we issued a note payable to the investor in exchange for that investor’s guarantee of a financial commitment of the Company.

During November and December 2003, our existing investors purchased $16.4 million of our series A-2 preferred stock. In March 2004, we sold 420,000 shares of series A-2 preferred stock and a warrant to purchase up to an additional $3.8 million of series A-2 preferred stock raising gross proceeds of $4.2 million. The series A-2 preferred

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stock is convertible into shares of our common stock, subject to stockholder approval of an increase in the number of authorized shares of our common stock, and has been sold at a common-equivalent price of $0.11 per share. We intend to offer holders of all outstanding shares of common stock the right to purchase shares of series A-2 preferred stock on terms substantially similar to the terms under which shares are sold to existing investors. We have not yet determined applicable subscription ratios, record dates, issuance dates, and subscription periods. In connection with the rights offering, we intend to file a registration statement with the Securities and Exchange Commission covering the offer and sale of series A-2 preferred stock to common stockholders pursuant to the rights offering.

We expect to continue to devote substantial capital resources to research and development activities, as well as our sales, marketing, and customer service organizations, 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 auditors’ report on our financial statements as of and for the fiscal year ended December 31, 2003 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. We believe that cash on hand, including cash from a recently completed round of financing and anticipated revenues from operations will be sufficient to fund our operations through December 31, 2004. However, there can be no assurance that if additional capital is required in the future that such additional capital will be available when required or 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.

Commitments and Contingencies

As of December 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 settle and pay in 2004.

We lease our facilities and certain assets under noncancelable leases expiring through 2006, excluding various renewal options, and have notes payable outstanding with a bank and with an investor. The following table summarizes our minimum annual payment commitments as of December 31, 2003 (in thousands):

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The letter of credit has been put in place as a performance bond for a Rural Utility Supplier (RUS) contract being performed by us.

Off balance sheet arrangements

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with its contractors, customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2003 and 2002.

Recent Accounting Pronouncements:

Recent accounting pronouncements are included in Note 2 to the consolidated financial statements.

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Risk Factors

To date, sales of our BLC 1200 and BLC 6000 system products have been limited and greater demand may not develop in the future.

Currently we have few customers for our BLC 1200 and BLC 6000 system 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.

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.

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 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 rapid technological advances, evolving industry standards, changes in end user requirements characterize our products, 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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We may invest a significant amount of our resources to develop, market and sell our products and may not realize any return on this investment.

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

We operate in a market that has experienced a prolonged 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 December 31, 2003, we had an accumulated deficit of approximately $86.4 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, 2003 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.

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.

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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.

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.

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

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

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

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

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.

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

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

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

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 seven issued patents and have several patent applications pending. We will rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing 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.

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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 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 continue to operate at a loss and could require a further infusion of cash in the future. There is no guarantee that we would be able to raise the additional funding if it is required.

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.

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

Our common stock is currently traded on the over the counter market (“OTC”). Trading on the OTC Bulletin Board may adversely impact our stock price and liquidity, and the ability of our stockholders to purchase and sell our shares in an orderly manner.

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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 Item 3 Legal Proceedings.)

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. Primarily manufacturers of legacy digital loop carrier equipment, such as Nortel Networks Corporation, Lucent Technologies Inc., Alcatel SA, and Advanced Fibre Communications, Inc, dominate the market for networking equipment. 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:

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.

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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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Because our portfolio of cash equivalents is of a short-term nature, we are not subject to significant market price risk related to investments. However, our interest income is sensitive to changes in the general level of taxable and short-term U.S. interest rates. We generally invest our surplus cash balances in high credit quality money market funds with 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 our interest rate risk.

ITEM 8. FINANCIAL STATEMENTS

Our consolidated financial statements and schedule(s) required by Regulation S-X are included in this Annual Report on Form 10-K beginning on page F-1.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to our directors and executive officers is set forth below. Information as to the stock ownership of each director and all of our current directors and executive officers as a group is set forth below under “Item 12. Security Ownership of Certain Beneficial Owners and Management.” Information with respect to delinquent filings under Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2004 Annual Meeting of Stockholders.

Directors

Our directors serve until next annual stockholders’ meeting or until their successors are duly elected or appointed and qualified or until their earlier resignation or removal. Our board currently consists of five persons. Their names and certain information about them as of January 31, 2004 are set forth below.

Robert L. Howard-Anderson has served as our president, chief executive officer and senior vice president of product operations since May 2002. Mr. Howard-Anderson was senior vice president of product operations at Occam CA from February 2002 to May 2002. Mr. Howard-Anderson was vice president of product operations at Procket Networks, Inc., a network infrastructure company, from August 2000 to February 2002 and vice president of engineering at Sun Microsystems, Inc., a computer company, from June 1995 to August 2000. Mr. Anderson has a B.S. in electrical engineering from Tufts University.

Steven M. Krausz has served as a director of our company since May 1997 and has served as chairman since May 2002. Mr. Krausz also served as a director of Occam CA from February 2000 to May 2002 and served as its chairman from March 2002 until the closing of the merger, when he become our chairman. Mr. Krausz has been a managing member of several venture capital funds affiliated with U.S. Venture Partners, a venture capital firm, since August 1985. He also serves as a director of Verity, Inc., a provider of knowledge retrieval software products, and several private companies. Mr. Krausz holds an M.B.A. and a B.S. in electrical engineering from Stanford University.

Thomas C. McConnell has served as a director of our company since May 2002. He served as a director of Occam CA from February 2000 until the closing of the merger in May 2002. Mr. McConnell has been with New Enterprise Associates, a venture capital investment firm, since 1985 and has been a general partner since 1989. Previously, he was a product manager in the Lisa Division of Apple Computer, Inc., a computer manufacturer, and a consultant with Boston Consulting Group, Inc., a business consulting firm. Mr. McConnell serves as a director for several private companies. Mr. McConnell received an A.B. in engineering science from Dartmouth College and an M.B.A. from Stanford University.

Robert B. Abbott has served as a director of our company since May 2002. He served as a director of Occam CA from February 2001 to May 2002. Mr. Abbott has been with Norwest Venture Partners, a venture capital firm, since August 1998. He also serves as a director for several private companies. Mr. Abbott received a B.S. in electrical engineering, an M.S. in electrical engineering and an M.B.A. from Stanford University.

Tom Frederick has served as a director of our company since January 2004. Mr. Frederick was a general partner with Venrock Associates, a venture capital firm from May 2000 to December 2003. Previously, he was a Global Leadership Partner, Business Consulting for Arthur Andersen, a business consulting firm, president of Uniplex

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Systems, a technology company and partner of CP Software, an investment company. He also serves as a director for a private company. Mr. Frederick received a B.S. and an M.S. from the University of Illinois and an M.B.A. from Stanford University, and is a certified public accountant. Mr. Frederick has been named as an audit committee member and a financial expert.

Executive Officers

The following table sets forth certain information with respect to our executive officers as of January 31, 2004:

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

Robert L. Howard-Anderson has served as our president, chief executive officer and senior vice president of product operations since May 2002. Mr. Anderson was senior vice president of product operations at Occam CA from February 2002 to May 2002. Mr. Howard-Anderson was vice president of product operations at Procket Networks, Inc., a network infrastructure company, from August 2000 to February 2002 and vice president of engineering at Sun Microsystems, Inc., a computer company, from June 1995 to August 2000. Mr. Anderson has a B.S. in electrical engineering from Tufts University.

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

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

Pete S. Patel has served as our vice president of operations since April 1999. Mr. Patel was our senior vice president of engineering and operations from April 2001 to May 2002. From May 1996 through April 1999, Mr. Patel held various senior management positions at Advanced Fibre Communications, a telecommunications company, including vice president of operations, director of operations, director of design verification and test engineering, and senior test engineering manager. Mr. Patel holds a F.Y.B.Sc. in science from Gujarat University, India and a B.V.Sc. and A.H. from Gujarat Agricultural University, India.

Russell J. Sharer has served as our vice president of sales and marketing since October 2003, and as our vice president of marketing and business development since May 2002, and was the vice president of marketing at Occam CA from July 2000 to May 2002. From December 2001 through May 2002, Mr. Sharer also served as Occam CA’s vice president of sales. From October 1998 until July 2000, Mr. Sharer served in various capacities at Ericsson Datacom, Inc., a networking equipment manufacturer, including vice president of marketing, vice president of product marketing, and director of product marketing. Mr. Sharer received a B.S. in industrial engineering from California Polytechnic State University.

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ITEM 11. EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

The following table provides certain summary information concerning the compensation earned for services rendered during the 2003, 2002 and 2001 fiscal years by our chief executive officer, and for each of our five other most highly compensated executive officers whose salary and bonus for the 2003 fiscal year was in excess of $100,000. Compensation earned for services rendered to Occam CA are included in this table for periods prior to the May 2002 merger. In addition, Mr. Schultz is included in the table because he served as an executive officer during the 2003 fiscal year and would have been included had he not terminated his employment during that year. No other executive officer that would otherwise have been included in this table on the basis of salary and bonus earned for the 2002 fiscal year has been excluded by reason of his or her termination of employment or change in executive status during that year.

SUMMARY COMPENSATION TABLE

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Stock Options and Stock Appreciation Rights

The following table contains information concerning the stock options granted during the 2003 fiscal year to each of our executive officers named above in the summary compensation table. Grants were made under our 2000 Stock Incentive Plan and 1999 Stock Plan. No stock appreciation rights were granted to the named executive officers during the 2003 fiscal year.

OPTION GRANTS IN LAST FISCAL YEAR

The exercise price for each option is equal to the fair value of the common stock on the date of grant; the closing stock price of our common stock.

Aggregated Option Exercises and Fiscal Year-End Value

The following table provides information, with respect to each of our executive officers named above in the summary compensation table, concerning the exercise of options during the 2003 fiscal year and unexercised options held by them at the end of that fiscal year. None of the named executive officers exercised any stock appreciation rights during the 2003 fiscal year and no stock appreciation rights were held by the named executive officers at the end of such year.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES