Occam Networks 10Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the three month period ended September 30, 2007

		OR

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

		For the transition period from to

Commission file number: 000-33069

OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware	77-0442752
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6868 Cortona Drive Santa Barbara, California	93117
(Address of principal executive office)	(Zip Code)

(805) 692-2900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

As of September 30, 2007, the number of shares outstanding of the registrant’s common stock was 19,764,927 shares.

INDEX

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OCCAM NETWORKS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	43,262		$	59,219
Restricted cash	9,008			4,378
Accounts receivable, net	13,891			10,736
Inventories, net	10,870			10,435
Prepaid and other current assets	5,912			933
Total current assets	82,943			85,701
Property and equipment, net	8,636			1,766
Other assets	321			291
Total assets	$	91,900		$	87,758
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,552		$	7,687
Accrued expenses	8,743			3,899
Deferred sales	9,288			8,029
Current portion of long-term debt	12			—
Total current liabilities	27,595			19,615
Long-term debt	56			—
Total liabilities	27,651			19,615
Commitments and contingencies (note 5)
Stockholders’ equity:
Common stock, $0.001 par value, 250,000 shares authorized; 19,765 and 19,713 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively	288			288
Additional paid-in capital	178,876			176,947
Warrants	331			331
Accumulated deficit	(115,246		)	(109,423		)
Total stockholders’ equity	64,249			68,143
Total liabilities and stockholders’ equity	$	91,900		$	87,758

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

OCCAM NETWORKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended					Nine Months Ended
	September 30, 2007			September 24, 2006		September 30, 2007			September 24, 2006
				Restated(1)					Restated(1)
	(Unaudited)					(Unaudited)
Sales	$	15,660		$	20,775	$	53,884		$	46,028
Cost of sales	9,959			12,998		34,054			28,676
Gross margin	5,701			7,777		19,830			17,352
Operating expenses:
Research and product development	3,245			2,269		8,985			7,147
Sales and marketing	3,728			2,834		10,779			7,669
General and administrative	4,218			1,118		8,030			3,031
Total operating expenses	11,191			6,221		27,794			17,847
Income (loss) from operations	(5,490		)	1,556		(7,964		)	(495		)
Interest income, net	584			61		2,141			66
Income (loss) before provision for income taxes	(4,906		)	1,617		(5,823		)	(429		)
Provision for income taxes	—			13		—			25
Net income (loss)	(4,906		)	1,604		(5,823		)	(454		)
Beneficial conversion feature	—			—		—			(3,437		)
Net income (loss) attributable to common stockholders	$	(4,906	)	$	1,604	$	(5,823	)	$	(3,891	)
Net income (loss) per share attributable to common stockholders:
Basic	$	(0.25	)	$	0.22	$	(0.29	)	$	(0.55	)
Diluted	$	(0.25	)	$	0.09	$	(0.29	)	$	(0.55	)
Weighted average shares attributable to common stockholders:
Basic	19,765			7,279		19,756			7,104
Diluted	19,765			16,909		19,756			7,104

Stock-based compensation included in:
Cost of sales	$	71		$	65	$	194		$	183
Research and product development	164			198		542			522
Sales and marketing	144			159		422			316
General and administrative	110			118		407			243
Total stock-based compensation	$	489		$	540	$	1,565		$	1,264

(1) See Note 2, “Restatement of Consolidated Financial Statements,” of the notes to consolidated financial statements.

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

OCCAM NETWORKS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
	(Unaudited)
Operating activities
Net loss	$	(5,823	)	$	(454	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,186			1,065
Stock-based compensation expense	1,565			1,264
Provision for excess and obsolete inventory	645			—
Changes in operating assets and liabilities:
Accounts receivable	(3,155		)	(1,595		)
Inventories	(1,080		)	(3,947		)
Prepaid expenses and other current assets	(3,434		)	(244		)
Accounts payable and accrued expenses	6,709			1,252
Deferred sales	1,259			2,796
Net cash provided by (used in) operating activities	(2,128		)	137
Investing activities
Purchases of property and equipment	(7,988		)	(730		)
Restricted cash	(4,630		)	(907		)
Purchase of investment	(1,575		)	—
Net cash used in investing activities	(14,193		)	(1,637		)
Financing activities
Payments of capital lease obligations and long-term debt	—			(2,557		)
Proceeds from issuance of series A-2 preferred stock, net of issuance costs	—			2,723
Proceeds from employee stock purchase plan	245			—
Proceeds from the exercise of stock options	194			420
Common stock issuance costs	(75		)	—
Net cash provided by financing activities	364			586
Net decrease in cash and cash equivalents	(15,957		)	(914		)
Cash and cash equivalents, beginning of period	59,219			6,571
Cash and cash equivalents, end of period	$	43,262		$	5,657
Supplemental disclosure of cash flow information:
Interest paid	$	3		$	66

(1) See Note 2, “Restatement of Consolidated Financial Statements,” of the notes to consolidated financial statements.

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

OCCAM NETWORKS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

1. Business and Basis of Presentation

Occam Networks, Inc. (“Occam” or the “Company”) develops, markets and supports innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and data, or Triple Play, services over both copper and fiber optic networks. The Company’s Broadband Loop Carrier (BLC) is an integrated hardware and software platform that uses Internet Protocol (IP) and Ethernet technologies to increase the capacity of local access networks, enabling the delivery of advanced Triple Play services.

The Company is the successor corporation of the May 2002 merger of Occam Networks, Inc., a private California corporation, with Accelerated Networks, Inc. (“Accelerated”), a publicly-traded Delaware corporation. Occam Networks was incorporated in California in July 1999. Accelerated was incorporated in California in October 1996 under the name “Accelerated Networks, Inc.” and was reincorporated in Delaware in June 2000. The May 2002 merger of these two entities was structured as a reverse merger transaction, in which Accelerated succeeded to the business and assets of Occam Networks. In connection with the merger, Accelerated changed its name to Occam Networks, Inc., a Delaware corporation. Unless the context otherwise requires, references to “Occam Networks,” “Occam” or the “Company” refer to Occam Networks, Inc. as a Delaware corporation and include the predecessor businesses of Occam, the California corporation, and Accelerated. As required by applicable accounting rules, financial statements, data, and information for periods prior to May 2002 are those of Occam, the California corporation. Occam, the California corporation, as a predecessor business or corporation, is sometimes referred to as “Occam CA.”

Basis of Presentation

The accompanying consolidated financial statements are unaudited. The consolidated balance sheet at December 31, 2006 is derived from Occam’s audited consolidated financial statements included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 16, 2007. This financial information reflects all material adjustments, which are, in the opinion of the Company, of a normal and recurring nature and necessary to present fairly the consolidated statements of financial position, results of operations and cash flows for the dates and periods presented. The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the entire year.

These consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Prior to January 1, 2007, Occam prepared its financial statements with the end of each quarter falling on the last Sunday of each calendar quarter. As a result, Occam’s accounting quarters did not necessarily coincide with the last day of the calendar month. The quarter-end dates for fiscal 2006 were March 26, June 25, September 24, and December 31. Effective January 1, 2007, Occam adopted a fiscal reporting schedule based on calendar quarter and year ends.

On February 23, 2006, Occam announced a 1-for-40 reverse stock split which was previously authorized at its annual meeting of stockholders held on June 21, 2005. The record date for the reverse split was March 10, 2006 and Occam began trading on the NASD Electronic Bulletin Board (OTCBB) on a split-adjusted basis on Monday, March 13, 2006 under the new symbol “OCNW.OB.” The share information in the accompanying consolidated financial statements reflects this reverse stock split.

Use of Estimates

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

Revenue Recognition

Occam recognizes sales revenue when persuasive evidence of sales arrangements exist, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Occam allows credit for products returned within its policy terms.

In addition to the aforementioned general policy, Occam enters into transactions that represent multiple-element arrangements, which may include 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 periods of sale. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:

• the delivered item(s) has value to the customer on a stand-alone basis;

• there is objective and reliable evidence of the fair value of the undelivered item(s); and

• the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in Occam’s control.

If these criteria are not met, then sales revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value.

In certain circumstances, Occam enters into arrangements with customers who receive financing support in the form of long-term low interest rate loans from the United States Department of Agriculture’s Rural Utilities Service (“RUS”). The terms of the RUS contracts provide that in certain instances transfer of title of Occam’s products does not occur until customer acceptance. In these cases, Occam does not recognize revenue until payment has been received, assuming the remaining revenue recognition criteria are met. Occam believes payment, which contractually occurs after written customer acceptance, provides superior assurance for revenue recognition purposes.

Occam further warrants its products for periods up to five years and records an estimated warranty accrual when sales revenue is recognized.

2. Restatement of Consolidated Financial Statements

In March 2007, the Company’s chief financial officer notified its audit committee and independent registered public accounting firm that the finance department had discovered a letter, in which the Company had committed to provide a customer with a free third-party product as well as extended software maintenance and free training. In response, the audit committee initiated a review of the transaction, with the assistance of outside legal counsel and a forensic accounting and technology service firm. Subsequently, the audit committee obtained independent legal counsel to review the conduct of persons involved. Upon determining that other similar transactions existed, the audit committee expanded the scope of its investigation to cover numerous transactions from 2003 through the first quarter of fiscal 2007. Among other matters, during the course of the investigation, the audit committee, assisted by its independent forensic accountants and legal advisors, reviewed the Company’s practices relating to the following:

• commitments to provide customers with software, hardware and software maintenance, hardware and software upgrades, training and other services in connection with customers’ purchases of the Company’s network equipment;

• sales to value added resellers; and

• use of intermediate shipping vendors in connection with shipments of products at the end of quarters falling on weekends.

On September 9, 2007, the Company’s board of directors, based on a recommendation of the audit committee, concluded that the Company should restate its financial statements for fiscal years 2004 and 2005, the corresponding interim quarterly periods of fiscal years 2004 and 2005, and the first, second, and third quarters of fiscal year 2006. The board of directors also determined that the Company’s previously filed financial statements for these periods should not be relied on.

On October 16, 2007, the Company filed its Annual Report on Form 10-K with the restated financial statements and issued a press release announcing the final restated financial information and conclusions of the audit committee investigation. The adjustments resulting from the restatement related solely to revenue recognition matters. The restatement adjustments did not affect the Company’s reported cash and cash equivalents balances as of the end of any fiscal period.

The principal accounting issues resulting in the need to restate the Company’s financial statements were derived from (i) commitments to certain customers in connection with sales for features or deliverables that were not available at the time revenue was originally recognized, including commitments to prospectively provide free product, software, training, and installation services; (ii) sales to value-added resellers where the resellers did not have the ability to pay the Company for these sales independent of payment to them by the end-user; and (iii) for certain quarters ending on weekends, the Company’s use of a shipping vendor who picked up product for subsequent delivery to another shipping company where the terms and conditions of the shipments did not appropriately transfer title or risk of loss at the time of shipment.

In determining that a restatement was required, the Company accounted for hardware sales and related cost of sales in accordance with Staff Accounting Bulletin 104 (Revenue Recognition). The Company accounted for software sales in accordance with AICPA Statement of Position No. 97-2 (Software Revenue Recognition). The Company accounted for sales with multiple deliverables in accordance with Emerging Issues Task Force 00-21 (Accounting for Revenue Arrangements with Multiple Deliverables).

Summary of the Restatement Adjustments

The following tables set forth summary restated financial data for the three and nine months ended September 24, 2006 as originally reported and as restated (in thousands, except per share data):

	Three Months Ended		Nine Months Ended
	September 24, 2006	September 24, 2006	September 24, 2006		September 24, 2006
	(As reported)	(As restated)	(As reported)		(As restated)
Sales	$18,066	$20,775	$48,525		$46,028
Cost of sales	11,690	12,998	30,068		28,676
Net income (loss)	203	1,604	649		(454	)
Basic net income (loss) per share attributable to common stockholders(1)	$0.03	$0.22	$(0.39	)	$(0.55	)
Diluted net income (loss) per share attributable to common stockholders(1)	$0.01	$0.09	$(0.39	)	$(0.55	)
Increase in net income (loss) attributable to common stockholders	—	1,401	—		(1,103	)
Increase in basic net income (loss) per share attributable to common stockholders	$—	$0.19	$—		$(0.16	)
Increase in diluted net income (loss) per share attributable to common stockholders	$—	$0.08	$—		$(0.16	)

(1) Per-share amounts computed after consideration of beneficial conversion feature charges to common stockholders. See Note 8 of Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K filed on October 16, 2007.

3. Inventories

Inventories consist of the following (in thousands):

	September 30, 2007		December 31, 2006
Raw materials	$	—	$	4
Work-in-process	7		19
Finished goods	10,863		10,412
	$	10,870	$	10,435

4. Net Income (Loss) Per Share

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

	Three Months Ended					Nine Months Ended
	September 30, 2007			September 24, 2006		September 30, 2007			September 24, 2006
				(Restated)					(Restated)
Net income (loss) attributable to common stockholders	$	(4,906	)	$	1,604	$	(5,823	)	$	(3,891	)
Shares used in computation:
Weighted average common shares outstanding used in computation of basic net income (loss) per share	19,765			7,279		19,756			7,104
Dilutive effect of conversion of Series A-2 Preferred Shares	—			8,590		—			—
Dilutive effect of stock options	—			1,027		—			—
Dilutive effect of common stock warrants	—			13		—			—
Shares used in computation of diluted net income (loss) per share	19,765			16,909		19,756			7,104
Basic net income (loss) per share	$	(0.25	)	$	0.22	$	(0.29	)	$	(0.55	)
Diluted net income (loss) per share	$	(0.25	)	$	0.09	$	(0.29	)	$	(0.55	)

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

	Three Months Ended		Nine Months Ended
	September 30, 2007	September 24, 2006	September 30, 2007	September 24, 2006
		(Restated)		(Restated)
Common stock warrants	13	—	13	13
Common stock equivalents of convertible preferred stock and warrants	—	—	—	8,590
Stock options	673	—	770	1,027
Common stock equivalents	686	—	783	9,630

5. Commitments and Contingencies

At September 30, 2007, the Company had open purchase orders related to our contract manufacturers and other contractual obligations of approximately $8.5 million primarily related to inventory purchases. The Company leases its office facilities and certain equipment under non-cancelable operating lease agreements, which expire at various dates through 2014. Certain operating leases contain escalation clauses with annual base rent adjustments or a cost of living adjustment. Total rent expense for the nine months ended September 30, 2007 and September 24, 2006, was $769,000 and $588,000, respectively. Our contractual obligations as of September 30, 2007 are as follows (in thousands):

Twelve Months Ending September 30,	Minimum Lease Payments		Purchase Commitments
2008	$	947	$	8,491
2009	862		—
2010	884		—
2011	899		—
2012	905		—
Thereafter	1,240		—
Total Payments	$	5,737	$	8,491

Royalties

From time to time, the Company may license certain technology for incorporation into its products. Under the terms of these agreements, royalty payments will be made based on per-unit sales of certain of the Company’s products. The Company incurred $98,000 and $109,000 of royalty expenses for the nine months ended September 30, 2007 and September 24, 2006, respectively.

Legal Proceedings

2007 Class Action Litigation

On April 26, 2007 and May 16, 2007, two putative class action complaints were filed in the United States District Court for the Central District of California against the Company and certain of its officers. The complaints alleged that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, and SEC Rule 10b-5 by making false and misleading statements and omissions relating to the Company’s financial statements and internal controls with respect to revenue recognition. The complaints seek, on behalf of persons who purchased our common stock during the period from May 2, 2006 to April 17, 2007, damages of an unspecified amount.

On July 30, 2007, Judge Christina A. Snyder consolidated these actions into a single action, appointed NECA-IBEW Pension Fund (The Decatur Plan) as lead plaintiff, and approved its selection of lead counsel. The lead plaintiff must file a consolidated complaint no later than November 16, 2007.

Occam believes it has meritorious defenses in this action and intends to defend itself and its officers vigorously. Failure by the Company to obtain a favorable resolution of the claims set forth in the current complaints or the consolidated complaint due November 16, 2007 could have a material adverse effect on the Company’s business, results of operations and financial condition. Currently, the amount of such material adverse effect cannot be reasonably estimated.

IPO Allocation Litigation

In June 2001, three putative stockholder class action lawsuits were filed against Accelerated Networks, certain of its then officers and directors and several investment banks that were underwriters of Accelerated Networks’ initial public offering. The cases, which have since been consolidated, were filed in the United States District Court for the Southern District of New York. The court appointed a lead plaintiff on April 16, 2002, and plaintiffs filed a consolidated amended class action complaint, or consolidated complaint, on April 19, 2002. The consolidated complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive “IPO allocation” litigation involving the conduct of underwriters in allocating shares of successful initial public offerings. 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 1, 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 October 13, 2004 the court certified a class in six of the approximately 300 other nearly identical actions (the “focus” cases) and noted that the decision was intended to provide guidance to all parties regarding class certification in the remaining cases. The underwriter defendants appealed the decision and the Second Circuit Court of Appeals vacated the district court’s decision granting class certification in those six cases on December 5, 2006. Plaintiffs filed a motion for rehearing. On April 6, 2007, the Second Circuit denied the petition but noted that plaintiffs could ask the District Court to certify a more narrow class than the one that was rejected. On October 3, 2007, Plaintiff filed a motion to certify a new class. An opposition brief is due on December 21, 2007, and a reply brief is due on February 15, 2008.

Prior to the Second Circuit’s December 5, 2006 ruling, the Company agreed, together with over three hundred other companies similarly situated, to settle with the plaintiffs. A settlement agreement and related agreements were submitted to the court for approval. The settlement would have provided, among other things, for a release of the Company and the individual defendants for the conduct alleged to be wrongful in the complaint in exchange for a guarantee from the defendants’ insurers regarding recovery from the underwriter defendants and other consideration from defendants regarding the underwriters. In light of the Second Circuit opinion, liaison counsel for the issuers informed the District Court that the settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified. The Company cannot predict whether it will be able to renegotiate a settlement that complies with the Second Circuit’s mandate.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. 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.

Other Matters

From time to time, the Company is subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. The Company believes that there are no currently pending matters that, if determined adversely to it, would have a material effect on its business or that would not be covered by its existing liability insurance maintained by the Company.

Indemnifications and Guarantees

Occam enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its contractors, customers and landlords. Under these provisions, Occam generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of Occam’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. In addition, Occam has entered into indemnification agreements with its officers and directors that indemnify such persons for certain liabilities they may incur in connection with their services as an officer or director, and Occam has agreed to indemnify certain investors for liabilities they may incur in connection with the exercise of registration rights. The maximum potential amount of future payments Occam could be required to make under these indemnification provisions is generally unlimited. As of September 30, 2007, Occam has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. Occam had no liabilities recorded for these agreements as of September 30, 2007 and December 31, 2006.

Purchase Orders

Under the terms of Occam’s contract manufacturer agreements, Occam is required to place orders with its contract manufacturers to meet its estimated sales demand. Certain contract manufacturer agreements include lead-time and cancellation provisions. At September 30, 2007, open purchase orders with contract manufacturers were $8.5 million.

Warranties

Occam provides standard warranties with the sale of products generally for up to five years from date of shipment. The estimated cost of providing the product warranty is recorded at the time revenue is recognized. Occam maintains product quality programs and processes including actively monitoring and evaluating the quality of its suppliers. Occam quantifies and records an estimate for warranty related costs based on Occam’s history, projected return and failure rates and current repair costs. The following table summarizes changes in Occam’s accrued warranty liability that is included in accrued expenses (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2007			September 24, 2006			September 30, 2007			September 24, 2006
				(Restated)						(Restated)
Balance at beginning of period	$	2,772		$	1,412		$	1,862		$	1,093
Warranty provision expensed during period	837			460			2,658			1,488
Warranty utilization	(612		)	(233		)	(1,523		)	(942		)
Balance at end of period	$	2,997		$	1,639		$	2,997		$	1,639

6. Accrued expenses

Accrued expenses consist of the following (in thousands):

	September 30, 2007		December 31, 2006
Accrued expenses	$	2,821	$	1,830
Warranty obligations	2,997		1,862
Deferred rent	2,556		17
Accrued other	369		190
	$	8,743	$	3,899

7. Stock Options—Fair Value Disclosures

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at June 30, 2007	1,990		$	9.55
Granted	—		—
Exercised	—		—
Forfeited or expired	(39	)	14.14
Outstanding at September 30, 2007	1,951		9.45		7.14	$	6,496
Exerciseable at September 30, 2007	1,266		$	7.29	6.59	$	5,327

Stock-Based Compensation

Effective beginning the first fiscal quarter of 2006, the Company adopted SFAS No. 123(R) using the modified prospective method. Under this method, compensation costs for all awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption are measured at estimated fair value and included in cost of sales and operating expenses over the vesting period during which an employee provides service in exchange for the award. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS No. 123(R).

The following table summarizes the impact of the adoption of SFAS 123(R) on stock-based compensation costs for employees on our Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and September 24, 2006 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2007		September 24, 2006		September 30, 2007		September 24, 2006
			(Restated)				(Restated)
Employee stock-based compensation in:
Cost of sales	$	71	$	65	$	194	$		183
Research and product development expense	164		198		542		522
Sales and marketing expense	144		159		422		316
General and administrative expense	110		118		407		243
Total SFAS 123(R) stock-based compensation in operating expenses	418		475		1,371		1,081
Total SFAS 123(R) stock-based compensation	$	489	$	540	$	1,565	$	1,264

As of September 30, 2007, total unamortized stock-based compensation costs related to non-vested stock options was $4.8 million, which is expected to be recognized over the remaining vesting period of each grant, up to 48 months.

Upon adoption of SFAS 123(R), we selected the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, forfeitures, and expected dividends. The assumptions used to value options granted are as follows:

	Nine Months Ended
	September 30, 2007		September 24, 2006
Risk-free interest rate	4	%	5	%
Expected term (years)	4.9		4.9
Dividend yield	0	%	0	%
Expected volatility	51	%	74	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We do not anticipate declaring dividends in the foreseeable future. Expected volatility is based on the annualized weekly historical volatility of our stock price and we believe it is indicative of future volatility. We estimate the expected life of options granted based on historical exercise and post-vesting cancellation patterns with consideration of our industry peers of similar size with similar option vesting periods. Our analysis of stock price volatility and option lives involves management’s best estimates at the time of determination. SFAS 123(R) also requires that we recognize compensation expense for only the portion of options or stock units that are expected to vest. Therefore, we apply an estimated forfeiture rate that is derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

8. Series A-2 Convertible Preferred Stock

On February 1, 2006, the Company concluded a rights offering to eligible stockholders of record as of December 26, 2005. Each subscription right entitled the stockholder to subscribe for and purchase one share of Series A-2 preferred stock for each 2.27275 shares of common stock held on the record date. Each share of Series A-2 preferred stock had a purchase price of $10.00 and was convertible into shares of Occam’s common stock at a conversion price of $4.40, subject to adjustment, representing a conversion ratio of 2.27275 shares of common stock for each share of Series A-2 preferred stock issued. In response to the rights offering, Occam received subscriptions to purchase 343,741 shares of Series A-2 preferred stock for an aggregate purchase price of $3.4 million and net proceeds of $2.7 million

The Company recorded beneficial conversion feature (“BCF”) charges to net loss attributable to common stockholders of $3.4 million relating to the issuance of the Series A-2 preferred stock in February 2006. The BCF was calculated using the fair value of the common stock on the dates of issuance, subtracting the accounting conversion price and then multiplying the resulting amount by the number of shares of common stock into which the Series A-2 preferred stock was convertible.

On November 6, 2006, pursuant to an action by written consent signed by holders of greater than 66.67% of the outstanding shares of Series A-2 preferred stock of Occam, all outstanding shares of Series A-2 preferred stock of the Company were converted to shares of common stock of the Company. The rate of conversion was one share of Series A-2 preferred stock for 2.27275 shares of common stock.

9. Subsequent Event

Terawave Asset Purchase

On October 25, 2007, the Company completed its acquisition of substantially all assets of Terawave Communications, Inc., or Terawave, including its patents, patent applications, trademarks and other intellectual property, certain license agreements and other contracts, equipment, supplies, inventories, work in process, cash and accounts receivable. Terawave’s products include a portfolio of broadband access solutions, incorporating gigabit passive optical network, or GPON, and other technologies. The acquisition was completed pursuant to an asset purchase agreement between the Company and Terawave entered into on September 27, 2007. Pursuant to the asset purchase agreement, the Company assumed certain liabilities of Terawave including liabilities under certain assigned contracts, inventory purchase commitments of approximately $0.4 million, $0.2 million in Terawave’s transaction expenses and one half of the transfer taxes associated with the sale. The purchase price for the acquisition was $5.3 million and included $3.2 million in cash and the assumption of certain liabilities and purchase commitments of Terawave, the cancellation of bridge financing of $1.9 million and payment of Terawave’s legal fees of $0.2 million . Of the $1.9 million in loans cancelled in connection with this purchase, $1.6 million in aggregate principal amount of loans were funded to Terawave in the three months ended September 30, 2007. The Company will also incur transaction and integration-related expenses in connection with the acquisition. In connection with the acquisition of assets from Terawave, the Company hired 29 former employees of Terawave, including 22 in engineering, 3 in operations and 1 in sales and marketing.

SEC Matter

In advance of the Company’s announcement of the audit committee investigation and pending restatement described under Note 2, the Company advised the staff of the Enforcement Division of the United States Securities and Exchange Commission (“SEC”) of these developments. After the conclusion of the investigation, the Company met with the SEC staff. On November 13, 2007, the Company received a letter from the SEC staff stating that the investigation as to Occam Networks, Inc. has been completed and that the SEC staff does not intend to recommend any enforcement action by the SEC.

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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The discussion in this Report contains both historical information and forward-looking statements. A number of factors affect our operating results and could cause our actual future results to differ materially from any forward-looking results discussed below. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “appears,” “believes,” “continue,” “could,” “estimates,” “expects,” “feels,” “goal,” “hope,” “intends,” “may,” “our future success depends,” “plans,” “potential,” “predicts,” “projects,” “reasonably,” “seek to continue,” “should,” “thinks,” “will” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In addition, historical information should not be considered an indicator of future performance. Factors that could cause or contribute to these differences include, but are not limited to, the risks discussed in Part II, Item 1A under the caption “Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we are under no duty to update any of the forward-looking statements after the date of this Report on Form 10-Q to conform these statements to actual results. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995.

Restatement of Consolidated Financial Statements

On October 16, 2007, we announced that the audit committee of our board of directors had completed its previously announced internal review of our revenue recognition practices. As a result of the review, we determined that our previously filed financial statements for the following periods required restatement: (i) our fiscal years ended December 25, 2005 and December 26, 2004; (ii) each of the interim quarterly periods in our fiscal years ended December 25, 2005 and December 26, 2004; and (iii) each of the interim quarterly periods ended March 26, June 25 and September 24, 2006. The adjustments resulting from the restatement relate solely to revenue recognition matters. The restatement adjustments did not affect our reported cash and cash equivalent balances as of the end of any fiscal period.

Specifically, we determined that a restatement was required because we incorrectly accounted for the following categories of transactions: (i) transactions involving commitments to certain customers in connection with sales for features or deliverables that were not available at the time revenue was originally recognized, including commitments to prospectively provide free product, software, training, and installation services, for which we prematurely recognized approximately $9.3 million in revenue from fiscal 2004 to fiscal 2006; (ii) sales to value-added resellers where the resellers did not have the ability to pay us for these sales independent of payment to them by the end-user, for which we prematurely recognized approximately $20.2 million in revenue from fiscal 2004 to fiscal 2006; and (iii) for certain quarters ending on weekends, transactions involving our use of a shipping vendor who picked up product for subsequent delivery to another shipping company where the terms and conditions of the shipments did not appropriately transfer title or risk of loss at the time of shipment, for which we prematurely recognized approximately $2.3 million in revenue from fiscal 2004 to fiscal 2006. In addition, we prematurely recognized approximately $1.1 million of revenue from fiscal 2004 through fiscal 2006 relating principally to errors in accounting for software and software maintenance, customer credits, and undelivered free product.

In determining that a restatement was required, we accounted for hardware sales and related cost of sales in accordance with Staff Accounting Bulletin 104, Revenue Recognition, or SAB 104. We accounted for software sales in accordance with AICPA Statement of Position No. 97-2, Software Revenue Recognition, or SOP 97-2. We accounted for sales with multiple deliverables in accordance with Emerging Issues Task Force 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, or EITF 00-21.

Overview

We develop, market and support innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and data, or Triple Play, services over both copper and fiber optic networks. Our Broadband Loop Carrier, or BLC, is an integrated hardware and software platform that uses Internet Protocol, or IP, and Ethernet technologies to increase the capacity of local access networks, enabling our customers to deliver advanced services, including voice-over-IP, or VoIP, IP-based television, or IPTV, and high-definition television, or HDTV. Our platform simultaneously supports traditional voice services, enabling our customers to leverage their existing networks and migrate to IP without disruption. In addition to providing our customers with increased bandwidth, our products provide incremental value by offering software-based features to improve the quality, resiliency and security of Triple Play services. We market our products through a combination of direct and indirect channels. Our direct sales efforts are focused on the independent operating company, or IOC, segment of the telecom service provider market. We also target larger telecom service providers through strategic reseller relationships. As of September 30, 2007, we had shipped our BLC platform to 258 customers.

From our inception through September 30, 2007, we have incurred cumulative net losses of approximately $115.2 million. We realized income from operations and were profitable on a net income basis during the quarters ended March 26, 2006, September 24, 2006 and December 31, 2006 and for the year ended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis. We have experienced operating losses for each of the first three quarters of

2007 and net losses for the second and third quarters of 2007 and currently expect to experience operating and net losses for the fourth quarter and full year. For the nine months ended September 30, 2007, we recorded a net loss of $5.8 million, with an operating loss for this period of $8.0 million. Beginning in the second quarter of 2007, we began to experience a softening in our business. We believe this softening is attributable in part to adverse trends affecting our target customer markets, in part to delays associated with our customers’ evaluations of strategic investment decisions concerning their movement from copper wire to fiber, and in part to uncertainty surrounding our financial reporting.

Prior to January 1, 2007, when we adopted a calendar year end for fiscal reporting purposes, we prepared our financial statements with the end of each quarter falling on the last Sunday of each calendar quarter. As a result, our accounting quarters did not necessarily coincide with the last day of the calendar quarter. Effective January 1, 2007, we adopted a calendar fiscal-year and quarter-end. The quarter-end dates for fiscal 2006 were March 26, June 25, September 24, and December 31.

On October 25, 2007, we completed our acquisition of substantially all assets of Terawave Communications, Inc., or Terawave, including its patents, patent applications, trademarks and other intellectual property, certain license agreements and other contracts, equipment, supplies, inventories, work in process, cash and accounts receivable. Terawave’s products include a portfolio of broadband access solutions, incorporating gigabit passive optical network, or GPON, and other technologies. The acquisition was completed pursuant to an asset purchase agreement between us and Terawave entered into on September 27, 2007. Pursuant to the asset purchase agreement, we assumed certain liabilities of Terawave including liabilities under certain assigned contracts, inventory purchase commitments of approximately $0.4 million, $0.2 million in Terawave’s transaction expenses and one half of the transfer taxes associated with the sale. The purchase price for the acquisition was $5.3 million and included $3.2 million in cash and the assumption of certain liabilities and purchase commitments of Terawave, the cancellation of bridge financing of $1.9 million and payment of Terawave’s legal fees of $0.2 million. Of the $1.9 million in loans cancelled in connection with this purchase, $1.6 million in aggregate principal amount of loans were funded to Terawave in the three months ended September 30, 2007. We will also incur transaction and integration-related expenses in connection with the acquisition. In connection with the acquisition of assets from Terawave, we hired 29 former employees of Terawave, including 22 in engineering, 3 in operations and 1 in sales and marketing. We expect this acquisition to result in additional transition costs over the next several quarters and our financial performance in future periods will depend in part on our ability to incorporate Terawave’s products into our business.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 sales and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, litigation, warranty reserve 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.

We included in our Annual Report on Form 10-K for the year ended December 31, 2006 a discussion of our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We did not make changes to such critical accounting policies for the three and nine months ended September 30, 2007.

Results of Operations

Three-months ended September 30, 2007 and September 24, 2006

Sales

	Three Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Sales	$	15,660	$	20,775

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Our sales are principally comprised of sales of our BLC 6000 system product line, cabinets and related accessories. Sales decreased by $5.1 million or 25% to $15.7 million for the three months ended September 30, 2007 as compared to sales of $20.8 million for the three months ended September 24, 2006. We believe this decrease in our sales for the three months ended September 30, 2007 was due to a softening in our business attributable to delays associated with our customers’ evaluations of strategic investment decisions concerning their movement from copper wire to fiber, a shift in our customer base toward longer term loan projects funded by the United States Department of Agriculture’s Rural Utilities Service, or RUS, and uncertainty concerning our financial reporting while we were delinquent in our filings with the SEC and subject to a delisting proceeding by the NASDAQ Global Market. Due to these factors, we do not expect our revenues in upcoming periods to grow at the same rates they have grown in past periods and expect revenues in future quarters to grow, if at all, only modestly relative to prior years.

Cost of sales and gross margin

	Three Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
Cost of sales	$	9,959		$	12,998
Gross profit	$	5,701		$	7,777
Gross margin	36		%	37		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Cost of sales includes the cost of products shipped for which sales were recognized, warranty costs, costs of any manufacturing yield problems, field replacements, re-work costs, manufacturing overhead, provisions for obsolete inventory and the cost of post-sales support. Cost of sales decreased by $3.0 million or 23% to $10.0 million for the three months ended September 30, 2007 as compared to $13.0 million for the three months ended September 24, 2006. The decrease in cost of sales during the three months ended September 30, 2007 was attributable primarily to decreased sales of our products.

Gross profits were 36% of sales for three months ended September 30, 2007 compared to gross profits of 37% of sales for the three months ended September 24, 2006. Cost of sales and gross margin in both periods were adversely affected by additional costs arising from repair costs on certain new products. As of September 30, 2007 and September 24, 2006, we had accruals of $3.0 million and $1.6 million, respectively, to cover estimated repair costs of field units. These accruals were based upon our experience with failures of certain parts and estimated repair costs.

We expect that our gross margin will vary from quarter-to-quarter due in part to variations in product mix. To the extent that cabinets and other lower-margin products represent an increased percentage of our total sales in any period, it will tend to reduce our gross margin.

Research and product development expenses

	Three Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
Research and product development expenses	$	3,245		$	2,269
Percentage of sales	21		%	11		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

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 the design, development, and testing of our products. Research and product development costs are expensed as incurred, except for capital expenditures, which are capitalized and depreciated over their estimated useful lives, generally two to five years. Research and product development expenses increased by $1.0 million or 43% to $3.2 million for the three months ended September 30, 2007 as compared to $2.3 million for the three months ended September 24, 2006. The increase in research and product development expenses was attributable to increased salary and personnel-related costs and third-party design costs recorded as non-recurring engineering expenses. We expect research and product development expenses to continue to increase in future periods as a result of our hiring certain former Terawave engineers in October 2007 and continued investments in our products and technologies.

Sales and marketing expenses

	Three Months Ended
	September 30, 2007			September24, 2006
				Restated(1)
Sales and marketing expenses	$	3,728		$	2,834
Percentage of sales	24		%	14		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

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 generating sales and conducting corporate marketing activities. Sales and marketing expenses increased by $0.9 million or 32% to $3.7 million for the three months ended September 30, 2007 as compared to $2.8 million for the three months ended September 24, 2006. This increase was primarily due to increased headcount, commissions and marketing event expenses. We expect sales and marketing costs to increase as a result of our hiring of certain former Terawave sales and marketing employees in October 2007, increasing our domestic sales coverage and establishing an international sales presence.

General and administrative expenses

	Three Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
General and administrative expenses	$	4,218		$	1,118
Percentage of sales	27		%	5		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, finance, human resources, and administrative personnel. Additionally, general and administrative expenses include professional fees, liability insurance and other general corporate costs. General and administrative expenses increased by $3.1 million or 277% to approximately $4.2 million for the three months ended September 30, 2007 as compared to $1.1 million for the three months ended September 24, 2006. General and administrative expenses increased primarily due to professional fees and expenses resulting from the audit committee review of our revenue recognition practices, increased headcount, and the cost of remediating internal control deficiencies identified in connection with the audit committee review. In the third quarter of 2007, we incurred approximately $2.6 million of professional fees related to the audit committee review. We expect to continue to incur significant general and administrative expenses for the remainder of 2007 as we concluded the audit committee investigation in October 2007 and will incur additional expenses associated with remediation of internal control deficiencies and developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act. We also expect to incur significant business and system integration expenses related to our purchase of substantially all assets of Terawave.

Stock-based compensation

	Three Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Cost of sales	$	71	$	65
Research and product development	164		198
Sales and marketing	144		159
General and administrative	110		118
Total stock-based compensation in operating expenses	418		475
Total stock-based compensation	$	489	$	540

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Effective as of the first quarter of fiscal 2006, we began recording the fair value of our stock-based compensation in our consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (Revised 2004). Stock-based compensation expenses remained stable at $0.5 million for the three months ended September 30, 2007 as compared to $0.5 million for the three months ended September 24, 2006. We anticipate that stock-based compensation expense calculated under SFAS No. 123(R) will continue to have a material effect on our consolidated statement of operations.

Interest income, net

	Three Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Interest income, net	$	584	$	61

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Interest income, net increased by $0.5 million or 857% to $0.6 million for the three months ended September 30, 2007, as compared to $61,000 for the three months ended September 24, 2006. This increase in interest income, net was primarily attributable to higher average cash balances, resulting from the completion of our secondary public offering in November 2006.

Income tax expense

For income tax purposes, we consider our projected annual income and the utilization of our net operating loss carryforwards among other factors. For the three months ended September 30, 2007 and September 24, 2006, we provided $0 and $13,000, respectively, for federal and state income taxes.

Nine months ended September 30, 2007 and September 24, 2006

Sales

	Nine Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Sales	$	53,884	$	46,028

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Sales increased by $7.9 million or 17% to $53.9 million for the nine months ended September 30, 2007 as compared to sales of $46.0 million for the nine months ended September 24, 2006. This increase was primarily attributable to an expanded customer base, repeat orders from existing customers and increased sales of BLC 6000 products, related accessories and cabinets. The increase was partially offset by a softening in our business that was attributable to delays associated with our customers’ evaluations of strategic investment decisions concerning their movement from copper wire to fiber, a shift in our customer base toward longer term loan projects funded by RUS, and uncertainty concerning our financial reporting while we were delinquent in our filings with the SEC and subject to a delisting proceeding by the NASDAQ Global Market. Due to these factors, we do not expect our revenues in upcoming periods to grow at the same rates they have grown in past periods and expect revenues in upcoming quarters to grow, if at all, only modestly relative to prior years.

Cost of sales and gross margin

	Nine Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
Cost of sales	$	34,054		$	28,676
Gross profit	$	19,830		$	17,352
Gross margin	37		%	38		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Cost of sales increased by $5.4 million or 19% to $34.1 million for the nine months ended September 30, 2007 as compared to $28.7 million for the nine months ended September 24, 2006. The increase in cost of sales during the nine months ended September 30, 2007 was attributable to increased shipments and sales of our products and increases of approximately $0.5 million related to additional warranty accruals related to design issues associated with a transistor that resulted in potential equipment disruptions and that required a re-engineering effort.

Gross margin was stable at 37% of sales for the nine months ended September 30, 2007 compared to gross margin of 38% of sales for the nine months ended September 24, 2006. Cost of sales and gross margin in both periods were adversely affected by additional costs arising from repair costs on certain new products. As of September 30, 2007 and September 24, 2006, we had accruals of $3.0 million and $1.6 million, respectively, to cover estimated repair costs on field units. These accruals were based upon our experience with failures of certain parts and estimated repair costs.

Research and product development expenses

	Nine Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
Research and product development expenses	$	8,985		$	7,147
Percentage of sales	17		%	16		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Research and product development expenses increased by $1.8 million or 26% to $9.0 million for the nine months ended September 30, 2007 as compared to $7.1 million for the nine months ended September 24, 2006. The increase in research and product development expenses was attributable to increased personnel-related costs and third-party design costs. We expect research and product development expenses to increase in future periods as a result of our hiring of certain former Terawave engineers in October 2007 and as we continue to make investments in our products and technologies.

Sales and marketing expenses

	Nine Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
Sales and marketing expenses	$	10,779		$	7,669
Percentage of sales	20		%	17		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Sales and marketing expenses increased by $3.1 million or 41% to $10.8 million for the nine months ended September 30, 2007 as compared to $7.7 million for the nine months ended September 24, 2006. This increase was primarily due to increased headcount, commissions and marketing events. We expect sales and marketing costs to increase as a result of our hiring of certain former Terawave sales and marketing employees in October 2007, increasing our domestic sales coverage and establishing an international sales presence.

General and administrative expenses

	Nine Months Ended
	September 30, 2007			September 24, 2006
				Restated(1)
General and administrative expenses	$	8,030		$	3,031
Percentage of sales	15		%	7		%

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

General and administrative expenses increased by $5.0 million or 165% to approximately $8.0 million for the nine months ended September 30, 2007 as compared to $3.0 million for the nine months ended September 24, 2006. General and administrative expenses increased primarily due to increased professional fees and expenses resulting from the audit committee review of our revenue recognition practices, increased headcount, and the cost of remediating internal control deficiencies identified in connection with the audit committee review. For the nine months ended September 30, 2007, we incurred approximately $4.2 million of professional fees related to the audit committee review. We expect to continue to incur significant general and administrative expenses for the remainder of 2007 as we concluded the audit committee investigation in October 2007 and will incur additional expenses associated with remediation of internal control deficiencies and developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act. We also expect to incur significant business and system integration expenses over related to our purchase of certain assets of Terawave.

Stock-based compensation

	Nine Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Cost of sales	$	194	$	183
Research and product development	542		522
Sales and marketing	422		316
General and administrative	407		243
Total stock-based compensation in operating expense	$	1,371	$	1,081
Total stock-based compensation	$	1,565	$	1,264

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Stock-based compensation expenses increased by $0.3 million or 24% to $1.6 million for the nine months ended September 30 , 2007 as compared to approximately $1.3 million for the nine months ended September 24, 2006. This increase is primarily attributable to a change in the estimated forfeiture rate used in our stock-based compensation expense calculations and grants of additional options. We anticipate that the stock-based compensation expense calculated under SFAS No. 123(R) will continue to have a material effect on our consolidated statement of operations.

Interest income, net

	Nine Months Ended
	September 30, 2007		September 24, 2006
			Restated(1)
Interest income, net	$	2,141	$	66

(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial Statements, beginning on page 5.

Interest income, net increased by $2.1 million or 3144% to $2.1 million for the nine months ended September 30, 2007, as compared to $66,000 for the nine months ended September 24, 2006. This increase in interest income, net was primarily attributable to higher average cash balances, resulting from the completion of our secondary public offering in November 2006 and, to a lesser extent, higher average interest rates during the first nine months of 2007.

Income tax expense

For income tax purposes, we consider our projected annual income and the utilization of our net operating loss carryforwards among other factors. For the nine months ended September 30, 2007 and September 24, 2006, we provided $0 and $26,000, respectively, for federal and state income taxes.

Liquidity and Capital Resources

As of September 30, 2007, we had cash and cash equivalents of $43.3 million compared with $59.2 million as of December 31, 2006. The decrease in cash and cash equivalents for the nine months ended September 30, 2007 of $16.0 million was primarily due to a $4.6 million increase in restricted cash, a $3.2 million increase in accounts receivable, a $5.0 million increase in prepaid expenses and other current assets, of which $1.6 million increase related to the initial investment activity related to Terawave and $8.0 million in equipment purchases, that were partially offset by a $6.7 million increase in accounts payable and accrued expenses in addition to a $1.3 million increase in deferred sales and non-cash charges to net income.

As of September 30, 2007, we had restricted cash of $9.0 million related to performance bonds we are required to post in connection with our RUS contracts.

Cash used in operating activities was $2.1 million for the nine months ended September 30, 2007 as compared to cash provided by operating activities of $0.1 million for the nine months ended September24, 2006. This decrease in cash provided by operating activities was primarily due to a $3.2 increase in accounts receivable, a $3.4 million increase in prepaid expenses and a $1.1 million increase in inventory, partially offset by a $1.3 million increase in deferred sales and a $6.7 million increase in accounts payable and accrued expenses.

Cash used in investing activities was $14.2 million for the nine months ended September 30, 2007, compared to $1.6 million for the nine months ended September 24, 2006. Cash used in investing activities during the first nine months of 2007 was primarily related to leasehold improvements and purchases of equipment for our new corporate headquarters in Santa Barbara, California as well as increases in our restricted cash. Additionally, $1.6 million of cash was used to fund the purchase of certain assets in Terawave.

Cash provided by financing activities was $0.4 million for the nine months ended September 30, 2007 compared to $0.6 million for the nine months ended September 24, 2006. Cash provided by financing activities during the first nine months of 2007 was the result of proceeds from the exercise of stock options and stock purchases under our employee stock purchase plan. In the first nine months of 2006, we received $2.7 million of net proceeds from our rights offering of Series A-2 preferred stock and $0.4 million in proceeds from stock option exercises, partially offset by $2.6 million in debt repayments.

Working Capital

Working capital decreased to $55.3 million as of September 30, 2007, compared to $66.1 million as of December 31, 2006.

We believe that our cash and cash equivalents will be sufficient to finance our operations over the next 24 months. Although we believe these funds will be sufficient to maintain and expand our operations in accordance with our business strategy, we may need additional funds in the future. If we are unable to raise additional financing when and if needed, we may be required to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives.

Contractual Obligations

A table summarizing our minimum purchase commitments to our contract manufacturers and our minimum commitments under non-cancelable operating leases as of September 30, 2007 (in thousands) is included in Note 5, “Commitments and Contingencies,” in Notes to Consolidated Financial Statements, beginning on page 7.

Off-Balance Sheet Arrangements

As of September 30, 2007, we had no material off-balance sheet arrangements, other than the purchase commitments and operating leases described in the contractual obligations table referenced above.

Indemnification Obligations

We enter into indemnification provisions under our agreements with other companies in our ordinary course of business, typically with our contractors, customers, landlords and our agreements with investors. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited. As of September 30, 2007, we have not incurred material costs to defend lawsuits or settle claims related to these indemnifications agreements. We have no liabilities recorded for these agreements as of September 30, 2007.

Recent Accounting Pronouncements

In May 2007, the FASB issued FSP No. FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48,” (FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should determine whether a tax provision is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statue of limitations remains open. We do not anticipate that the adoption of FSP FIN 48-1 will have a material effect on our results of operations or financial position, although we are continuing to evaluate the full impact of the adoption of FSP FIN 48-1.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide warranty goods or services. If the use of fair value is elected, any upfront cost and fees related to the item must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis even if a company has similar instruments that it elects not to measure at fair value. At the adoption date, unrealized gains and losses on existing items for which the fair value option has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes to fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by Occam in the first quarter of 2008. We are currently determining whether fair value

accounting is appropriate for any of our eligible items and cannot currently estimate the impact, if any, which SFAS 159 may have on our consolidated results of operation and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods of those fiscal years and is required to be adopted by Occam in the first quarter of 2008. We are currently assessing the impact that SFAS No. 157 may have on our results of operations and financial position.

In September 2006, the Securities and Exchange Commission issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the Company’s balance sheets and statement of operations and the related financial statement disclosures. SAB No. 108 permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. We implemented SAB No. 108 effective January 1, 2006 and considered its effect on our financial position, results of operations or cash flows for 2006. See Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Statements for information regarding the restatement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Because our portfolio of cash equivalents is of a short-term nature, we are not subject to significant market price risk related to investments. However, our interest income is sensitive to changes in the general level of taxable and short-term U.S. interest rates. Our exposure to market risk due to changes in the general level of United States interest rates relates primarily to our cash equivalents and short-term and long-term investment portfolios. We generally invest our surplus cash balances in high credit quality money market funds with original or remaining contractual maturities of less than 90 days. The primary objective of our investment activities is the preservation of principal while maximizing investment income and minimizing risk. We do not hold financial instruments for trading or speculative purposes. We do not use any derivatives or similar instruments to manage our interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2007, which we refer to as the Evaluation Date or the end of the period covered by this Quarterly Report on Form 10-Q.

The purpose of this evaluation was to determine whether as of the Evaluation Date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on their evaluation, our chief executive officer and chief financial officer have concluded, as discussed below, that a material weakness existed in our disclosure controls and procedures as of the Evaluation Date, and as a result, our disclosure controls and procedures were not effective as of the Evaluation Date.

An internal control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

A “material weakness” is a control deficiency, or combination of control deficiencies, that results in a more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with accounting principles generally accepted in the United States. In the case of a significant deficiency, a more-than-remote likelihood exists of a misstatement of the company’s annual or interim consolidated financial statements that is more than inconsequential.

As more fully described in Part II, Item 5 of this Quarterly Report on Form 10-Q, in March 2007, our audit committee initiated an internal review of our revenue recognition practices. On September 12, 2007, we announced that our audit committee had identified errors in revenue recognition and that our board of directors, based on the recommendation of our audit committee, had concluded that we should restate our financial statements for fiscal years 2004 and 2005, the corresponding interim quarterly periods of fiscal year 2004 and fiscal year 2005, and the first, second, and third quarters of fiscal 2006. Our board of directors also concluded that our previously filed financial statements for those periods should not be relied on. On October 16, 2007, we announced that our audit committee had concluded its investigation, and we announced the final restated financial information.

Our audit committee concluded that the restatement was required because of errors in our accounting for (i) commitments to certain customers in connection with sales for features or deliverable that were not available at the time revenue was originally recognized, including commitments to prospectively provide free product, software, training, and installation services, for which we prematurely recognized approximately $9.3 million in revenue from fiscal year 2004 to fiscal year 2006; (ii) sales to value-added resellers where the resellers did not have the ability to pay us for these sales independent of payment to them by the end-user, for which we prematurely recognized approximately $20.2 million in revenue from fiscal year 2004 to fiscal year 2006; and (iii) for certain quarters ending on weekends, our use of a shipping vendor who picked up product for subsequent delivery to another shipping company where the terms and conditions of the shipments did not appropriately transfer title or risk of loss at the time of shipment, for which we prematurely recognized approximately $2.3 million in revenue from fiscal year 2004 to fiscal year 2006. In addition, we prematurely recognized approximately $1.1 million of revenue from fiscal year 2004 through fiscal year 2006 relating principally to errors in accounting for software and software maintenance, customer credits, and undelivered free product.

Our audit committee determined that the foregoing errors resulted from deficiencies in our internal controls, in particular resulting from internal communication failures between our finance and sales departments, a lack of clear understanding by, and communication to, sales personnel of technical accounting rules, understaffed finance functions, and on occasion, failure of finance personnel to apply technical revenue recognition rules correctly. As part of its letter of internal control deficiencies dated October 15, 2007, our current independent registered public accounting firm also identified a material weakness relating to revenue recognition. Our independent registered public accounting firm noted that we did not have policies and procedures in place to ensure that modifications to, or side agreements associated with, our standard terms of contract were properly documented and approved. Our independent registered public accounting firm also cited a lack of understanding of the accounting consequences of modifications to standard terms by certain sales employees and a lack of communication among our sales, engineering, and finance departments to ensure that all sales transactions are properly tracked, documented, approved, and recorded.

Our independent registered public accounting firm identified additional control deficiencies that it determined to be significant deficiencies but did not deem to be material weaknesses. In particular, it identified a significant deficiency relating to segregation of duties, noting among other things that in certain instances journal entries and account reconciliations were approved by the preparer of the entry or reconciliation. Our independent registered public accounting firm also noted a significant deficiency relating to post-closing adjusting journal entries and recommended that we reassess the timeline of our financing statement closing process to ensure that we have reasonable time to conclude a thorough financial statement closing process. Finally, our independent registered public accounting firm identified significant deficiencies relating to recording certain purchase transactions, where parts were ordered and accepted by our engineering department without approval or involvement of our finance department and where fixed assets were not properly classified for depreciation purposes.

(b) Changes in Internal Control Over Financial Reporting

On September 28, 2007, our audit committee presented the findings and recommendations of its internal investigation to our board of directors, including a proposed remediation plan regarding internal control over financial reporting. Our board of directors adopted the audit committee’s remediation plan, and we are in the process of implementing it. Remedying the material weakness and other control deficiencies described above will require substantial management time

and attention and will result in our incurring substantial incremental expenses, including increasing the size of our finance organization and retaining outside consultants to assist in the implementation of new internal controls. Any failure on our part to remedy our identified control deficiencies or any additional errors or delays in our financial reporting would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock and our relationships with customers.

Subject to oversight by our board of directors, our chief executive officer and chief financial officer will be responsible for implementing the internal control remediation plan recommended by our audit committee and approved by our board of directors. We also intend to engage an outside consultant in connection with implementing the remediation plan.

Our audit committee’s remediation plan consists of the following modifications and improvements in our internal controls relating to the sales and revenue-recognition transaction cycle:

• adjust our reporting structure so that finance has direct oversight of sales administration and the sales proposal generation management group;

• reorganize our variable compensation plan to ensure that sales personnel are not incentivized to attempt to influence the timing of revenue recognition;

• retain a senior revenue recognition specialist who will report directly to our chief financial officer and will possess the appropriate level of experience, authority, and seniority to independently serve as the liaison between all levels of corporate functions and finance. This individual should have some degree of managerial oversight of other “liaison” areas (e.g., order entry personnel, sales administration, and sales proposals generation) and be responsible for the review and reconciliation of terms given to a customer in the bid/quote process as well as in the final contract.

• the revenue recognition specialist, or employees acting under his or her supervision, should review all documentation relating to a transaction, including purchase orders, special pricing approval forms, customer quotes, letters of intent, emails, etc. to determine whether any of the terms will result in the deferral of revenue; and

• a revenue recognition checklist should accompany the financial package for each transaction.

• engage an outsourced internal audit group to review all significant revenue transactions each quarter to ensure that transactions have been recorded appropriately, to monitor the status of the remediation of control structure, and report to the audit committee the progress achieved;

• implement formal training, which would include a signed acknowledgement of all attendees certifying that they have attended and understood the topics covered, from all finance, executive, sales, and sales administration personnel, to ensure they understand that certain terms impact revenue recognition, as well as understand how to document and receive approval for such terms, as well as report them to finance;

• institute a formal communication process among marketing, engineering, and finance to ensure that all functions understand that any changes have potential accounting implications and to ensure that finance is appropriately advised as to the impact on existing and future transactions;

• implement policies and procedures that delineate clear roles, responsibilities, and authorization levels for all positions defined as “key” to the revenue recognition transaction cycle;

• implement a policies and procedure document that will be provided to all sales and sales administration personnel, including an annual sign off that they have received, read, understood, and complied with the materials, that will ensure that all terms related to any transaction are evidenced in the sales quotes and purchase orders, and that all transaction documentation has been provided to the finance department prior to the recording of revenue. Such policies and procedures may include:

• standardized language on each customer’s quote and invoice, as well as on the standard terms and conditions, stating that only those terms listed by the customer on its purchase order will be deemed part of the final agreement;

• a central, virtual repository for all documentation relating to a transaction, including quotes, emails, letters of intent, volume pricing agreements, special pricing approval forms, and all other transaction documents, which are uploaded by sales and sales administration personnel; and

• compliance with the stated order addendum process, to ensure that all terms agreed upon with a customer following the issuance of the customer quote or purchase order have been captured and provided to finance.

• implement controls required to ensure that no items are shipped or provided to the customer without being entered as separate line items in our systems;

• implement controls required to ensure that all requests for price responses, contract closeout, acceptance documentation, and other delivery information is provided to and reviewed by the finance department and is received prior to recording of revenue;

• implement controls to ensure that single transactions with a customer are not split into various contracts, purchase orders, or shipments, unless these requests are approved by the finance department; and

• implement procedures to ensure that credit checks are performed and the decision-making process as to the credit limit is documented and maintained.

As of November 12, 2007, we have implemented the following aspects of the audit committee remediation plan:

• adjusted our reporting structure so that the finance department has direct oversight of sales administration and the sales proposal generation management group;

• implemented controls required to ensure that all contract closeout, acceptance documentation, and other delivery information is provided to and reviewed by the finance department and is received prior to the recording of revenue;

• implemented procedures to ensure that credit checks are performed and the decision-making process as to the credit limit is documented and maintained;

• created and filled a new position in our finance department, director of technical accounting;

• retained a senior revenue recognition specialist who reports directly to our chief financial officer and who possesses the experience, authority, and seniority to independently serve as the liaison between all levels of corporate functions and finance; and

• implemented controls required to ensure that no items are shipped or provided to the customer without being entered as separate line items in our systems.

Many of the remaining remediation items are in various stages of design and implementation. Over the coming quarters, we expect to invest substantial management time and attention as well as financial resources to complete all of the modifications and improvements necessary to improve our internal controls and related systems.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

2007 Class Action Litigation

On April 26, 2007 and May 16, 2007, two putative class action complaints were filed in the United States District Court for the Central District of California against us and certain of our officers. The complaints allege that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, and SEC Rule 10b-5 by making false and misleading statements and omissions relating to the Company’s financial statements and internal controls with respect to revenue recognition. The complaints seek, on behalf of persons who purchased our common stock during the period from May 2, 2006 and April 17, 2007, damages of an unspecified amount.

We believe that we have meritorious defenses in this action, and intend to defend ourselves vigorously. Failure by the Company to obtain a favorable resolution of the claims set forth in the current complaints or the consolidated complaint due November 16, 2007 could have a material adverse effect on the Company’s business, results of operations and financial condition. Currently, the amount of such material adverse effect cannot be reasonably estimated.

IPO Allocation Litigation

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. Accelerated Networks was our name prior to the 2002 merger with Occam Networks, Inc. a California Corporation. The cases, which have since been consolidated, were filed in the United States District Court for the Southern District of New York. The court appointed a lead plaintiff on April 16, 2002, and plaintiffs filed a consolidated amended class action complaint, or consolidated complaint, on April 19, 2002. The consolidated complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive “IPO allocation” litigation involving the conduct of underwriters in allocating shares of successful initial public offerings. We believe that over three hundred other companies have been named in more than one thousand similar lawsuits that have been filed by some of the same plaintiffs’ law firms. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 1, 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 us.

On October 13, 2004 the court certified a class in six of the approximately 300 other nearly identical actions (the “focus” cases) and noted that the decision was intended to provide guidance to all parties regarding class certification in the remaining cases. The underwriter defendants appealed the decision and the Second Circuit Court of Appeals vacated the District Court’s decision granting class certification in those six cases on December 5, 2006. Plaintiffs filed a motion for rehearing. On April 6, 2007, the Second Circuit denied the petition but noted that plaintiffs could ask the District Court to certify a more narrow class than the one that was rejected. On October 3, 2007, Plaintiff filed a motion to certify a new class. An opposition brief is due on December 21, 2007, and a reply brief is due on February 15, 2008.

Prior to the Second Circuit’s December 5, 2006 ruling, we agreed, together with over three hundred other companies similarly situated, to settle with the plaintiffs. A settlement agreement and related agreements were submitted to the court for approval. The settlement would have provided, among other things, for a release of us and the individual defendants for the conduct alleged to be wrongful in the complaint in exchange for a guarantee from the defendants’ insurers regarding recovery from the underwriter defendants and other consideration from defendants regarding the underwriters. In light of the Second Circuit opinion, liaison counsel for the issuers informed the District Court that the settlement cannot be approved because the defined settlement class, like the litigation class, cannot be certified. We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuit’s mandate.

Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. We have not recorded any accrual related to this proposed settlement because we expect any settlement amounts to be covered by our insurance policies.

Other Matters

From time to time, we are subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. We believe that there are no currently pending matters that, if determined adversely to us, would have a material effect on our business or that would not be covered by our existing liability insurance maintained by us.

ITEM 1A. RISK FACTORS

This Quarterly Report on Form 10-Q, or Form 10-Q, including any information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, referred to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,”

“intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed below in this Item 1A and those discussed elsewhere in this Form 10-Q. We encourage investors to review these factors carefully. We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.

Before you invest in our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition and our results of operations. Before you decide whether to invest in our securities, you should carefully consider these risks and uncertainties, together with all of the other information included in this Quarterly Report on Form 10-Q.

Risks Related to Our Restatement

Matters relating to or arising from our recent restatement, errors in our historic revenue recognition practices, and weaknesses in our internal controls, including adverse publicity and potential concerns from our customers and prospective customers, regulatory inquiries, and litigation matters, could have a material adverse effect on our business, revenues, operating results, or financial condition.

As more fully described in Part II, Item 5 of this Quarterly Report on Form 10-Q, in March 2007, our audit committee initiated a review of our historic revenue recognition practices that resulted in the restatement of our previously filed financial statements for the fiscal years ended December 26, 2004 and December 25, 2005, each of the interim quarterly periods of such fiscal years, and the first, second, and third quarters of the fiscal year ended December 31, 2006. The audit committee conducted its investigation and review with the assistance of independent counsel and an independent forensic accounting advisor. On October 16, 2007, we announced the completion of the investigation and filed our Annual Report on Form 10-K for the year ended December 31, 2006, which we refer to as the Form 10-K and which, includes our consolidated financial statements for the year ended December 31, 2006 and our restated financial statements for the years ended December 26, 2004 and December 25, 2005. The circumstances and findings of the audit committee investigation are more fully described in Part II, Item 5 of this Quarterly Report on Form 10-Q.

The investigation and resulting restatement could have a material adverse effect on our relationships with customers and customer prospects, has already resulted in the initiation of securities class action litigation, and could result in other civil litigation or formal or informal regulatory inquiries or litigation, any of which could have a material adverse effect on our business, revenues, operating results, or financial condition. Under Delaware law, our bylaws, and certain indemnification agreements, we may have an obligation to indemnify certain current and former officers and directors in relation to these matters. Such indemnification may have a material adverse effect on our business, results of operations, and financial condition to the extent insurance does not cover our costs. The insurance carriers that provide our directors’ and officers’ liability policies may seek to rescind or deny coverage with respect to those pending investigations or actions in whole or in part, or we may not have sufficient coverage under such policies, in which case our business, results of operations, and financial condition may be materially and adversely affected.

Impact on our Business

As a result of the investigation, we filed our annual report on Form 10-K approximately six and one-half months late, and we also failed until October 2007 to file our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, which had been due in August 2007 and May 2007, respectively. Our non-compliance with public reporting obligations also subjected us to delisting proceedings from the NASDAQ Global Market. Our prior delinquencies, the restatement, resulting litigation, any regulatory inquiries, and other adverse publicity could continue to affect our relationships with customers and customer prospects and could have a material adverse effect on our business, revenues, operating results, and financial condition. In particular, in the second quarter of fiscal 2007, following the disclosure of our audit committee investigation and after we became subject to NASDAQ delisting proceedings, we identified a softening of our business that has continued into the third quarter of fiscal 2007. We believe this softening has been attributable in part to delays associated with our customers’ evaluations of strategic investment decisions concerning their movement from copper wire to fiber, in part to a shift in our customer base toward longer term loan projects funded by the U.S. Department of Agriculture’s Rural Utilities Service, or RUS, and in part to delays in our financial

reporting. Our customers consist largely of small, conservatively managed telecommunications companies, and we expect that these customers and customer prospects will continue to evaluate the results of the restatement and conclusions of the internal investigation when determining whether to initiate or continue purchasing from us. Moreover, we anticipate that our competitors will seek to leverage the restatement and investigation to raise concerns about us in the minds of our customers and customer prospects. Any adverse publicity or customer uncertainty resulting from our announcement of the restatement, associated litigation, and any regulatory actions could have a material adverse effect on our business, revenues, results of operations, and financial condition.

As a result of the audit committee investigation, we have implemented personnel changes in our sales department that could adversely affect our revenues and results of operations in future periods if we are not successful in managing the transition of relationships with our existing customers and key prospects. In particular, we have terminated two sales personnel, including a senior sales executive who managed a geographic region that generated a substantial portion of our revenues in recent years. In order to manage the customer transition as effectively as possible, we have engaged the former sales executive to consult with us on certain customer prospects. We believe personal relationships between our customers and our sales/customer support personnel are critical factors in winning new customers and maintaining existing customers, and loss of key sales and customer support personnel could have a material adverse effect on our future business, revenues, results of operations, and financial condition.

Litigation and Regulatory Matters

We and certain of our executive officers are defendants in a consolidated federal securities class action. Although a consolidated complaint has not yet been filed, the pre-consolidation complaint alleged that defendants violated sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act by reporting false or misleading revenue from May 2, 2006 through April 17, 2007. This consolidated action is in the preliminary stages. We cannot predict the claims, allegations, class period, or defendants that ultimately will be included in this consolidated complaint. In addition, we cannot provide any assurances that the final outcome of this consolidated securities class action will not have a material adverse effect on our business, results of operations, or financial condition. We may become subject to additional litigation, regulatory inquiries, or other proceedings or actions arising out of the audit committee review and the related restatement of our historic financial statements. Litigation and any potential regulatory actions or proceedings can be time-consuming and expensive and could divert management time and attention from our business, which could have a material adverse effect on our revenues and results of operations. The adverse resolution of any specific lawsuit or potential regulatory action or proceeding could have a material adverse effect on our business, results of operations, and financial condition.

If we fail to establish and maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our consolidated operating results, our ability to operate our business and our stock price.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Failure on our part to have effective internal financial and accounting controls would cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition and could cause the trading price of our common stock to fall dramatically. We and our current and former independent registered public accounting firms have identified control deficiencies in the past, and in connection with its investigation and determination to restate our financial statements, our audit committee, management, and current independent registered public accounting firm have recently identified deficiencies in our internal controls that contributed to the need to restate our historic financial statements. As a result of these identified control deficiencies, our chief executive officer and chief financial officer have determined that, as of September 30, 2007, our internal controls over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting in accordance with generally accepted accounting principles in the United States.

Our audit committee’s investigation of revenue recognition issues identified weaknesses and other control deficiencies relating principally to revenue recognition and the processes and procedures associated with customer transactions and interaction with and review by our finance department. As part of its letter of internal control deficiencies dated October 15, 2007, our current independent registered public accounting firm identified a material weakness relating to revenue recognition. Our independent registered public accounting firm noted that we did not have policies and procedures in place to ensure that modifications to, or side agreements associated with, our standard terms of contract are properly documented and approved. Our independent registered public accounting firm also cited a lack of understanding of the accounting consequences of modifications to standard terms by certain sales employees and a lack of communication among our sales, engineering, and finance departments to ensure that all sales transactions are properly tracked, documented, approved, and recorded.

Our independent registered public accounting firm identified additional control deficiencies that it determined to be significant deficiencies but that it did not deem to be material weaknesses. In particular, it identified a significant deficiency relating to segregation of duties, noting among other things that in certain instances journal entries and account reconciliations were approved by the preparer of the entry or reconciliation. Our independent registered public accounting firm also noted a significant deficiency relating to post-closing adjusting journal entries and recommended that we reassess the timeline of our financial statement process to ensure that we have reasonable time to conclude a thorough financial statement closing process. Finally, our independent registered public accounting firm identified significant deficiencies relating to recording certain purchase transactions, where parts were ordered and accepted by our engineering department, without approval or involvement of our finance department, and where fixed assets were not properly classified for depreciation purposes.

Remedying our material weakness and other control deficiencies will require substantial management time and attention and will result in our incurring substantial incremental expenses, including with respect to increasing the size of our finance organization and retaining outside consultants to assist in the implementation of new internal controls. Any failure to remedy our identified control deficiencies or any additional errors or delays in our financial reporting, whether or not resulting from a failure to remedy the deficiencies that resulted in the current restatement, would have a material adverse effect on our business and results of operations and could have a substantial adverse impact on the trading price of our common stock and our relationships with customers.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company will have been detected. As discussed in the Form 10-K and this Form 10-Q, our audit committee and management, together with our current and former independent registered public accounting firms, have identified numerous control deficiencies in the past and may identify additional deficiencies in the future.

We expect that we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 in connection with our Annual Report on Form 10-K for our year ending December 31, 2007. We are expending significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act. We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

Risks Related to Our Business and Industry

Our focus on independent telephone operating companies limits our sales volume with individual customers and makes our future operating results difficult to predict.

We currently focus our sales efforts on the independent telephone operating companies, or IOCs, in North America. These customers generally operate relatively small networks with limited capital expenditure budgets. Accordingly, we believe the total potential sales volume for our products at any individual IOC is limited, and we must identify and sell products to new IOC customers each quarter to continue to increase our sales. In addition, the spending patterns of many IOCs are characterized by small and sporadic purchases. Moreover, because our sales to IOCs are predominantly based on purchase orders rather than long-term contracts, our customers may stop purchasing equipment from us with little advance notice. As a result, we have limited backlog, our future operating results are difficult to predict and we will likely continue to have limited visibility into future operating results.

Fluctuations in our quarterly and annual operating results may adversely affect our business and prospects.

A number of factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual operating results. These fluctuations may make financial planning and forecasting more difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could limit our growth and delay implementation of our expansion plans. Factors that may cause or contribute to fluctuations in our operating results include:

• fluctuations in demand for our products, including the timing of decisions by our target customers to upgrade their networks and deploy our products;

• delays in customer orders as IOCs evaluate and consider their capital expenditures and investments in light of the industry transition from copper wire to fiber;

• increases in warranty accruals and other costs associated with remedying any performance problems relating to our products, as we experienced in fiscal 2004 and expect to experience in 2007;

• seasonal reductions in field work during the winter months and the impact of annual budgeting cycles;

• the size and timing of orders we receive and products we ship during a given period;

• delays in recognizing revenue under applicable revenue recognition rules, particularly from government-funded contracts, as a result of additional commitments we may be required to make to secure purchase orders, or with respect to sales to value-added resellers where we cannot establish based on our credit analysis that collectability is reasonably assured;

• introductions or enhancements of products, services and technologies by us or our competitors, and market acceptance of these new or enhanced products, services and technologies;

• the amount and timing of our operating costs, including sales, engineering and manufacturing costs and capital expenditures; and

• quarter-to-quarter variations in our operating margins resulting from changes in our product mix.

As a consequence, operating results for a particular future period are difficult to predict and prior results are not necessarily indicative of results to be expected in the future. Any of the foregoing factors may have a material adverse effect on our consolidated results of operations.

We have a history of losses and negative cash flow, and we may not be able to generate positive operating income and cash flows in the future to support the expansion of our operations.

We have incurred significant losses since our inception. As of September 30, 2007, we had an accumulated deficit of $115.2 million. We realized income from operations and were profitable on a net income basis for the year ended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis. Beginning with the quarter ended June 30, 2007, we began to experience a softening in our business. We have experienced operating losses for each of the first three quarters of 2007 and net losses for the second and third quarters of 2007 and currently expect to experience operating and net losses for the fourth quarter and full year. For the nine months ended September 30, 2007, we recorded a net loss of $5.8 million, with an operating loss for this period of $8.0 million. We believe the softening that we have experienced in our markets since the first quarter of 2007 is attributable in part to adverse trends affecting our target customer markets, in part to delays associated with our customers’ evaluations of strategic investment decisions concerning their movement from copper wire to fiber, and in part to uncertainty surrounding our financial reporting. Our inability to generate positive operating income and cash flow would materially and adversely affect our liquidity, consolidated results of operations and consolidated financial condition.

A significant portion of our expenses is fixed, and we expect to continue to incur significant expenses for research and development, sales and marketing, customer support, and general and administrative functions. Given the rate of growth in our customer base, our limited operating history and the intense competitive pressures we face, we may be unable to adequately control our operating costs. In order to achieve and maintain profitability, we must increase our sales while maintaining control over our expense levels.

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

Competition in our market is intense, and we expect competition to increase. The market for broadband access equipment is dominated primarily by large, established suppliers such as ADTRAN, Inc., Alcatel, and Tellabs, Inc. While these suppliers focus primarily on large service providers, they have competed, and may increasingly compete, in the IOC market segment. In addition, a number of emerging companies, including Calix Networks, Inc., have developed, or are developing, products that compete with ours, including within our core IOC segment.

Our ability to compete successfully depends on a number of factors, including:

• the successful identification and development of new products for our core market;

• our ability to timely anticipate customer and market requirements and changes in technology and industry standards;

• our ability to gain access to and use technologies in a cost-effective manner;

• our ability to timely introduce cost-effective new products;

• our ability to differentiate our products from our competitors’ offerings;

• our ability to gain customer acceptance of our products;

• the performance of our products relative to our competitors’ products;

• our ability to market and sell our products through effective sales channels;

• the protection of our intellectual property, including our processes, trade secrets and know-how; and

• our ability to attract and retain qualified technical, executive and sales personnel.

Many of our existing and potential competitors are larger than we are and have greater financial resources and better-established brands and customer relationships. In addition, many of our competitors have broader product lines than we do, so they can offer bundled products, which may appeal to certain customers.

As the market for our products is new and evolving, winning customers early in the growth of this market is critical to our ability to expand our business and increase sales. Because the products that we and our competitors sell require a substantial investment of time and funds to install, customers are typically reluctant to switch equipment suppliers once a particular supplier’s product has been installed. As a result, competition among equipment suppliers to secure contracts with potential customers is particularly intense and will continue to place pressure on product pricing. Some of our competitors have in the past and may in the future resort to offering substantial discounts to win new customers and generate cash flows. If we are forced to reduce prices in order to secure customers, we may be unable to sustain gross margins at desired levels or maintain profitability.

We have relied, and expect to continue to rely, on our BLC 6000 product line for the substantial majority of our sales, and a decline in sales of our BLC 6000 line would cause our overall sales to decline proportionally.

We have derived a substantial majority of our sales in recent years from our BLC 6000 product line. We expect that sales of this product line will continue to account for a substantial majority of our sales for the foreseeable future. Any factors adversely affecting the pricing of, or demand for, our BLC 6000 line, including competition or technological change, could cause our sales to decline materially and our business to suffer. With our acquisition of certain assets of Terawave Communications, Inc. we are seeking to broaden and expand our product line to include Passive Optical Networking, or PON. However, we are early in the integration process and the addition of former Terawave products and technology to our business is not expected to significantly reduce our reliance on our BLC 6000 product line.

If we fail to enhance our existing products and develop new products and features that meet changing customer requirements and support new technological advances, our sales would be materially and adversely affected.

Our market is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and recurring changes in end-user requirements. Our future success will depend significantly on our ability to anticipate and adapt to such changes and to offer, on a timely and cost-effective basis, products and features 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 be able to accurately anticipate market trends or have sufficient resources to successfully manage long development cycles. We may also experience design, manufacturing, marketing and other difficulties that could delay or prevent the 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. If we are unable to develop new products or enhancements to our existing products on a timely and cost-effective basis, or if our new products or enhancements fail to achieve market acceptance, our business, consolidated financial condition and consolidated results of operations would be materially and adversely affected.

We enhanced our BLC 6000 platform to support Gigabit Passive Optical Network (GPON) fiber-to-the-premises, or FTTP, services. Although we have invested significant time and resources to develop this enhancement, these FTTP-enabled products are relatively new, with limited sales to date, and market acceptance of these products may fall below our expectations. We recently announced our acquisition of certain assets of Terawave Communications, Inc., including its portfolio of broadband access solutions incorporating gigabit passive optical network, or GPON, and other technologies. We have since added Terawave’s PON products to our product offering and we intend to continue to integrate former Terawave products and technologies into our product offerings. The introduction of new products is expected to place pressure on our gross margins as most new products require time and increased sales volumes to achieve cost-saving efficiencies in production. To the extent our new products and enhancements do not achieve broad market acceptance, we may not realize expected returns on our investments, and we may lose current and potential customers.

Our efforts to increase our sales and marketing efforts to larger telecom operators, which may require us to broaden our reseller relationships, may be unsuccessful.

To date, our sales and marketing efforts have been focused on small and mid-sized IOCs. A key element of our long-term strategy is to increase sales to large IOCs, competitive local exchange carriers, regional Bell operating companies and international telecom service providers. We may be required to devote substantial technical, marketing and sales resources to the pursuit of these customers, who have lengthy equipment qualification and sales cycles. In particular, sales to these customers may require us to upgrade our products to meet more stringent performance criteria, develop new customer-specific features or adapt our product to meet international standards. We may incur substantial technical, sales and marketing expenses and expend significant management effort without any assurance of generating sales. Because we have limited resources and large telecom operators may be reluctant to purchase products from a relatively small supplier like us, we plan to target these customers in cooperation with strategic resellers. These reseller relationships may not be available to us, and if formed, may include terms, such as exclusivity and non-competition provisions, that restrict our activities or impose onerous requirements on us. Moreover, in connection with these relationships, we may forego direct sales opportunities in favor of forming relationships with strategic resellers. If we are unable to successfully increase our sales to larger telecom operators or expand our reseller relationships, we may be unable to implement our long-term growth strategy.

We may be unable to successfully expand our international operations. In addition, our international expansion plans, if implemented, will subject us to a variety of risks that may adversely affect our business.

We currently generate almost all of our sales from customers in North America and have very limited experience marketing, selling and supporting our products and services outside North America or managing the administrative aspects of a worldwide operation. While we intend to expand our international operations, we may not be able to create or maintain international market demand for our products. In addition, regulations or standards adopted by other countries may require us to redesign our existing products or develop new products suitable for sale in those countries. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business, financial condition and results of operations will suffer.

In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks, including:

• differing regulatory requirements, including tax laws, trade laws, labor regulations, tariffs, export quotas, custom duties or other trade restrictions and changes thereto;

• greater difficulty supporting and localizing our products;

• different or unique competitive pressures as a result of, among other things, the presence of local equipment suppliers;

• challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

• limited or unfavorable intellectual property protection;

• changes in a specific country’s or region’s political or economic conditions; and

• restrictions on the repatriation of earnings.

If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted.

Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing personnel, many of whom are highly-skilled and would be difficult to replace. None of our senior management or key technical or sales personnel is bound by a written employment contract to remain with us for a specified period. In addition, we do not currently maintain key-man life insurance covering our key personnel. If we lose the services of any key personnel, our business, financial condition and results of operations may suffer.

Competition for skilled personnel, particularly those specializing in engineering and sales is intense. We cannot be certain that we will be successful in attracting and retaining qualified personnel, or that newly-hired personnel will function effectively, either individually or as a group. In particular, we must continue to expand our direct sales force, including hiring additional sales managers, to grow our customer base and increase sales. Even if we are successful in hiring additional sales personnel, new sales representatives require up to a year to become effective, and the recent loss of a senior sales executive could have an adverse impact on our ability to recruit and train additional sales personnel. In addition, our industry is characterized by frequent claims relating to unfair hiring practices. We may become subject to such claims and may incur substantial costs in defending ourselves against these claims, regardless of their merits. If we are unable to effectively hire, integrate and utilize new personnel, the execution of our business strategy and our ability to react to changing market conditions may be impeded, and our business, financial condition and results of operations could suffer.

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We may have difficulty managing our growth, which could limit our ability to increase sales and cash flow.

We have experienced significant growth in our sales and operations in recent years. We expect to expand our research and development, sales, marketing and support activities, including our activities outside the U.S. Our historical growth has placed, and any future growth would place, significant demands on our management, as well as our financial and operational resources, as required to:

• implement and maintain effective financial disclosure controls and procedures, including the remediation of internal control deficiencies identified in our audit committee investigation;

• implement appropriate operational and financial systems;

• manage a larger organization;

• expand our manufacturing and distribution capacity;

• increase our sales and marketing efforts; and

• broaden our customer support capabilities.

In addition, as discussed in this Form 10-Q under Part I, Item 3, our internal controls over financial reporting are currently ineffective, and we will need to expand our finance organization and retain outside advisors to implement adequate and effective financial controls. If we cannot grow or manage our business growth effectively, we may not be able to execute our business strategies and our business, consolidated financial condition and consolidated results of operations would suffer.

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

We do not have internal manufacturing capabilities and rely upon a small number of contract manufacturers to build our products. In particular, we rely on Flash Electronics, Inc. for the manufacture of our BLC 6000 blade products. Our reliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs. We do not have long-term supply contracts with our primary contract manufacturers. Consequently, these manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price, except as may be provided by a particular purchase order. If any of our manufacturers were unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would 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, consolidated financial condition and consolidated results of operations.

We recently moved a portion of our manufacturing to the overseas facilities of our primary contract manufacturer. This transition presents a number of risks, including the potential for a supply interruption or a reduction in manufacturing quality or controls, any of which would negatively impact our business, customer relationships and results of operations.

We depend on sole source and limited source suppliers for key components and license technology from third parties. If we are unable to source these components and technologies 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 and limited source suppliers upon which we rely could stop producing our components, cease operations entirely, or be acquired by, or enter into exclusive arrangements with, our competitors. We do not have long-term supply agreements with our suppliers, and our purchase volumes are currently too low for us to be considered a priority customer by most of our suppliers. As a result, these suppliers could stop selling components to us at commercially reasonable prices, or at all. Any such interruption or delay may force us to seek similar components from alternate sources, if available at all. Switching suppliers may require that we redesign our products to accommodate the new component and may potentially require us to re-qualify our products with our customers, which would be costly and time-consuming. Any interruption in the supply of sole source or limited source components would adversely affect our ability to meet scheduled product deliveries to our customers and would materially and adversely affect our business, consolidated financial condition and consolidated results of operations.

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, consolidated financial condition and consolidated results of operations.

If we fail to accurately predict our manufacturing requirements and manage our inventory, we could incur additional costs, experience manufacturing delays, or lose revenue.

Lead times for the materials and components that we order through our contract manufacturers may vary significantly and depend on numerous factors, including the specific supplier, contract terms and market demand for a component at a given time. If we overestimate our production requirements, our contract manufacturers may purchase excess components and build excess inventory. If our contract manufacturers purchase excess components that are unique to our products or build excess products, we could be required to pay for these excess parts or products and recognize related inventory write-down costs. If we underestimate our product requirements, our contract manufacturers may have inadequate component inventory, which could interrupt manufacturing of our products and result in delays or cancellation of sales. In prior periods we have experienced excess inventory write-downs and standard cost revaluations associated with excess or obsolete inventory. This may continue in the future, which would have an adverse effect on our gross margins, consolidated financial condition and consolidated results of operations.

If our products contain undetected defects, including errors and interoperability issues, we could incur significant unexpected expenses to remedy the defects, which could have a material adverse effect on our sales, results of operations or financial condition.

Although our products are tested prior to shipment, they may contain software or hardware errors, defects or interoperability issues (collectively described as “defects”) that can only be detected when deployed in live networks that generate high amounts of communications traffic. We also continue to introduce new products that may have undetected software or hardware defects. Our customers may discover defects in our products after broad deployment and as their networks are expanded and modified. Any defects 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 lost sales and market share and negative publicity regarding our products. For example, during fiscal 2004, we experienced unusually high repair costs related to the effect of lightning strikes on selected BLC 6000 installations. As a result, we experienced higher than anticipated costs of sales, which management believes were necessary to maintain customer satisfaction. In late 2006 and early 2007, we identified design issues associated with a transistor that resulted in potential equipment disruptions and that required a re-engineering effort. As a result, we expect to increase our warranty accruals in fiscal 2007. Any similar occurrences in the future could have a material adverse effect on our business, consolidated financial condition and consolidated results of operations.

Our business is dependent on the capital spending patterns of telecom operators, and any decrease or delay in capital spending by our customers, such as recently appears to have occurred among IOCs evaluating their capital expenditures and investment decisions in light of the industry transition from copper wire to fiber, would adversely affect our consolidated operating results and consolidated financial condition.

Demand for our products depends on the magnitude and timing of capital spending by telecom service providers as they construct, expand and upgrade their networks. The capital spending patterns of telecom service providers are dependent on a variety of factors, including:

• competitive pressures, including pricing pressures;

• consumer demand for new services;

• an emphasis on generating sales from services delivered over existing networks instead of new network construction or upgrades;

• the timing of annual budget approvals;

• evolving industry standards and network architectures;

• free cash flow and access to external sources of capital; and

• completion of major network upgrades.

Beginning in late 2000 and continuing into 2004, the telecom industry experienced a severe downturn, and many telecom service providers filed for bankruptcy. Those companies that survived the downturn substantially reduced their investments in new equipment. In addition, uncertain and volatile capital markets depressed the market values of telecom service providers and restricted their access to capital, resulting in delays or cancellations of certain projects. More recently, we believe capital expenditures among IOCs have been adversely affected as our customers consider their investment and capital expenditure decisions in light of the industry transition from copper wire to fiber. Because many of our customers are IOCs, their revenues are particularly dependent upon intercarrier payments (primarily interstate and intrastate access charges) and federal and state universal service subsidies. The FCC and some states are considering changes to both intercarrier payments and universal service subsidies, and such changes could reduce IOC revenues. Furthermore, many IOCs use government-supported loan programs or grants to finance capital spending. Changes to those programs, such as the United States Department of Agriculture’s Rural Utility Service, could reduce the ability of IOCs to access capital. Any decision by telecom service providers to reduce capital expenditures, whether caused by economic cycles, changes in government regulations and subsidies, or other reasons, would have a material adverse effect on our business, consolidated financial condition and results of operations.

Demand for our products is dependent on the willingness of our customers to deploy new services, the success of our customers in selling new services to their subscribers, and the willingness of our customers to utilize IP and Ethernet technologies in local access networks.

Demand for our products is dependent on the success of our customers in deploying and selling services to their subscribers. Our BLC 6000 platform simultaneously supports IP-based services, such as broadband Internet, VoIP, IPTV and FTTP, and traditional voice services. If end-user demand for IP-based services does not grow as expected or declines and our customers are unable or unwilling to deploy and market these newer services, demand for our products may decrease or fail to grow at rates we anticipate.

Our strategy includes developing products for the local access network that incorporate IP and Ethernet technologies. If these technologies are not widely adopted by telecom service providers for use in local access networks, demand for our products may decrease or not grow. As a result, we may be unable to sell our products to recoup our expenses related to the development of these products and our consolidated results of operations would be harmed.

Changes in existing accounting or taxation rules or practices may adversely affect our consolidated results of operations.

Changes in existing accounting or taxation rules or practices, or varying interpretations of current rules or practices, could have a significant adverse effect on our financial results or the manner in which we conduct our business. For example, prior to fiscal 2006, we accounted for options granted to employees using the intrinsic value method, which, given that we generally granted employee options with exercise prices equal to the fair market value of the underlying stock at the time of grant, resulted in no compensation expense. Beginning in fiscal 2006, we began recording expenses for our stock-based compensation plans, including option grants to employees, using the fair value method, under which we expect our ongoing accounting charges related to equity awards to employees to be significantly greater than those we would have recorded under the intrinsic value method. We expect to continue to use stock-based compensation as a significant component of our compensation package for existing and future employees. Accordingly, changes in accounting for stock-based compensation expense under the newer accounting method are expected to have a material adverse affect on our reported results. Any similar changes in accounting or taxation rules or practices could have a material impact on our consolidated financial results.

We may pursue acquisitions, which may involve a number of risks. If we are unable to address and resolve these risks successfully, such acquisitions could have a material adverse impact to our business, consolidated results of operations and consolidated financial condition.

We may make acquisitions of businesses, products or technologies to expand our product offerings and capabilities, customer base and business. We recently completed the acquisition of certain assets and the assumption of certain liabilities of Terawave Communications and have evaluated, and expect to continue to evaluate, a wide array of other potential strategic transactions. We have limited experience making such acquisitions. Any of these transactions could be material to our consolidated financial condition and results of operations. The anticipated benefit of acquisitions may never materialize. In addition, the process of integrating an acquired business, products or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where we may face acquisition-related risks include:

• diversion of management time and potential business disruptions;

• expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed;

• retaining and integrating employees from any businesses we may acquire;

• issuance of dilutive equity securities or incurrence of debt;

• integrating various accounting, management, information, human resource and other systems to permit effective management;

• incurring possible write-offs, impairment charges, contingent liabilities, amortization expense or write-offs of goodwill;

• difficulties integrating and supporting acquired products or technologies;

• unexpected capital equipment outlays and related costs;

• insufficient revenues to offset increased expenses associated with the acquisition;

• under-performance problems associated with acquisitions;

• opportunity costs associated with committing capital to such acquisitions;, and

• becoming involved in acquisition-related litigation.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We cannot assure that we will be able to address these risks successfully, or at all, without incurring significant costs, delay or other operating problems. Our inability to resolve any of such risks could have a material adverse impact on our business, consolidated financial condition and consolidated results of operations.

If we are not able to effectively integrate and develop the operations of Terawave Communications, Inc., our business may suffer.

In October 2007, we acquired substantially all assets of Terawave Communications, Inc., or Terawave, and hired 29 former employees of Terawave. We are continuing to integrate the products, technology and employees of Terawave into our organizational structure and working towards the effective utilization of the additional technology and workforce. We face various risks as a result of this acquisition including, but not limited to:

• our ability to retain and motivate Terawave’s employees;

• our ability to retain and develop Terawave’s customers;

• the failure or a delay in integrating the technology, operations and workforce of Terawave with our company;

• the failure to realize the potential financial or strategic benefits of the acquisition;

• the incurrence of substantial unanticipated integration costs;

• the diversion of significant management attention and financial resources in assimilating Terawave’s business; or

• the disruption of our ongoing business.

If we are not able to successfully integrate and develop Terawave’s assets and personnel, our business may be negatively affected in future periods, which may cause our stock price to decline. In addition, if the value of intangible assets acquired becomes impaired, we will be required to write down the value of the assets, which would negatively affect our financial results. We may incur liabilities from Terawave including liabilities for intellectual property infringement or indemnification of Terawave’s customers for similar claims that could materially and adversely affect our business. If our efforts to integrate Terawave’s business with our existing business are unsuccessful, our future revenue and operating results could be negatively affected, which could cause our stock price to decline.

Our acquisition of Terawave will make planning and predicting our future growth rates and operating results more difficult.

Our acquisition of Terawave may reduce our revenue growth rate and make prediction of our future revenue, costs and expenses and operating results more difficult. We have begun to offer Terawave’s PON products to our existing customer base. However, we cannot predict the level of demand for Terawave’s products from these customers. If we are unable to expand the existing customer base for these products beyond Terawave’s historical customer base, revenues from these products may not grow. We may also incur additional costs in order to customize the existing Terawave products to meet our customer requirements. We expect our results of operations in future periods will reflect an expanded workforce and product development effort and changed customer base. Due to the acquisition, we may not be able to accurately predict:

• how the combined business will evolve;

• the possible impairment of relationships with employees and customers as a result of the integration of the combined businesses; or

• the impairment of goodwill and other intangible assets resulting from the acquisition.

If we are unable to efficiently manage this integration, we may incur additional expenses and experience delays in our engineering and marketing efforts.

Business combinations and other financial restructurings by telecom service providers or our competitors could adversely affect our business.

In recent years, the telecom service provider market has undergone substantial consolidation, illustrated by the merger of SBC Communications Inc. with AT&T Inc., the merger of SBC Communications (now renamed AT&T) with BellSouth Corporation (now also renamed AT&T), and the merger of Verizon Communications Inc. with MCI, Inc. Transactions such as these generally have negative implications for equipment suppliers like us, including a reduction in the number of potential customers for telecom equipment products, a decrease in aggregate capital spending and greater pricing power by service providers over equipment suppliers. Continued consolidation of the telecom service provider industry, including among IOC customers which we focus on, could make it more difficult for us to grow our customer base, increase sales of our products and maintain adequate gross margins.

The telecommunications equipment industry is also characterized by frequent mergers and acquisitions, as illustrated by the merger of Alcatel with Lucent Technologies and the acquisition of Advanced Fibre Communications, Inc. by Tellabs. An acquisition of one of our competitors, or merger between our competitors, could harm our competitive position or cause our target customers to delay purchases of our products while they assess the impact of the combination. If a larger company with more resources were to acquire a competitor of ours, they may invest additional resources in developing, marketing and supporting competitive products, which would negatively impact our business, consolidated financial condition and consolidated results of operations.

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, or FCC, extends to the entire telecommunications industry, including our customers. Future FCC regulations affecting the broadband access industry, our customers, or the service offerings of our 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 they may charge in such markets. Furthermore, many of our customers are subject to FCC rate regulation of interstate telecommunications services, and are recipients of federal universal service subsidies implemented and administered by the FCC. In addition, many of our customers are subject to state regulation of intrastate telecommunications services, including rates for such services, and may also receive state universal service subsidies. Changes in FCC or state rate regulations or federal or state universal service subsidies could adversely affect our customers’ revenues and capital spending plans. In addition, international regulatory bodies are beginning to adopt standards and regulations for the telecom industry. These domestic and foreign standards, laws and regulations address various aspects of VoIP and broadband use, including issues relating to liability for information retrieved from, or transmitted over, the Internet. Changes in standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against service providers could adversely affect the development of Internet and other IP-based services. This, in turn, could directly or indirectly materially adversely impact the telecom 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, our business, financial condition and results of operations would suffer.

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

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. Our products are required to comply with these laws, regulations and standards, including those promulgated by the FCC. For example, the FCC recently required that all facilities-based providers of broadband Internet access and interconnect VoIP services meet the capability requirements of the Communications Assistance for Law Enforcement Act by May 14, 2007. Subject to certain statutory parameters, we are required to make available to our customers, on a reasonably timely basis and at a reasonable charge, such features or modifications as are necessary to permit our customers to meet those capability requirements. In some cases, we are required to obtain certifications or authorizations before our products can be introduced, marketed or sold. There can be no assurance that we will be able to continue to design our products to comply with all necessary requirements in the future. Accordingly, any of these laws, regulations and standards may directly affect our ability to market or sell our products.

Some of our operations are regulated under various federal, state and local environmental laws. Our planned international expansion will likely subject us to additional environmental and other laws. For example, the European Union Directive 2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive, requires producers of certain electrical and electronic equipment, including telecom equipment, to be financially responsible for the specified collection, recycling, treatment and disposal of past and present covered products placed on the market in the European Union. The European Union Directive 2002/95/EC on the restriction of the use of hazardous substances in electrical and electronic equipment, known as the RoHS Directive, restricts the use of certain hazardous substances, including lead, in covered products. Failure to comply with these and other environmental laws could result in fines and penalties and decreased sales, which could adversely affect our planned international expansion and our consolidated operating results.

We may not be able to protect our intellectual property, which could adversely affect our ability to compete effectively.

We depend on our proprietary technology for our success and ability to compete. We currently hold 16 issued patents and have several patent applications pending. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing patent, copyright, trademark and trade secret laws will afford us only limited protection. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent, as do the laws of the U.S. We cannot assure you that any pending patent applications will result in issued patents, and issued patents could prove unenforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.

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 intellectual property 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, consolidated financial condition and consolidated results of operations.

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

We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. From time to time, third parties have asserted and may assert in the future patent, copyright, trademark or other intellectual property rights to technologies or rights that are important to our business. In addition, we have agreed, and may in the future 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, the proprietary rights of third parties, with or without merit, could be time-consuming, resulting in costly litigation and diverting the efforts of our management. 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.

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

Our business and operations depend on the extent to which our facilities and products are protected against damage from fire, earthquakes, power loss and similar events. Some of our key business activities currently take place in regions considered as high risk for certain types of natural disasters. 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 testing of our product line is currently performed in one location in California, any earthquake, fire, other disaster or power outage at this location would have a material adverse effect on our business, consolidated financial condition and consolidated results of operations. 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 and floods.

Risks Related to Our Common Stock

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

As of September 30, 2007, our executive officers, directors and their affiliates beneficially owned, in the aggregate, approximately 31.6% of our outstanding common stock. Investment funds affiliated with U.S. Venture Partners and Norwest Venture Partners, collectively control approximately 27.7% of our outstanding common stock. Representatives of U.S. Venture Partners and Norwest Venture Partners are directors of Occam. These stockholders have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation and significant corporate transactions.

Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.

Our shares of common stock recently began trading on The NASDAQ Global Market. An active public market for our shares on The NASDAQ Global Market may not be sustained. In particular, limited trading volumes and liquidity may limit the ability of stockholders to purchase or sell our common stock in the amounts and at the times they wish. Trading volume in our common stock tends to be modest relative to our total outstanding shares, and the price of our common stock may fluctuate substantially (particularly in percentage terms) without regard to news about us or general trends in the stock market.

In addition, the trading price of our common stock could become highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this Quarterly Report on Form 10-Q and others such as:

• quarterly variations in our consolidated results of operations or those of our competitors;

• changes in earnings estimates or recommendations by securities analysts;

• announcements by us or our competitors of new products, significant contracts, commercial relationships, acquisitions or capital commitments;

• developments with respect to intellectual property rights;

• our ability to develop and market new and enhanced products on a timely basis;

• commencement of, or involvement in, litigation;

• changes in governmental regulations or in the status of our regulatory approvals; and

• a slowdown in the telecom industry or general economy.

In recent years, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. We are currently a defendant in securities class action litigation arising from our restatement. This litigation or any additional litigation that may be instituted against us could result in substantial costs and a diversion of our management’s attention and resources.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

• our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

• our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors, the chairman of the board, the chief executive officer or the president;

• our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

• stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and

• our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.

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

While we anticipate our cash balances and any cash from operations, will be sufficient to fund our operations for at least the next 24 months, we may need to raise additional capital to fund operations in the future. There is no guarantee that we will be able to raise additional equity or debt funding when or if it is required. The terms of any financing, if available, could be unfavorable to us and our stockholders and could result in substantial dilution to the equity and voting interests of our stockholders. Any failure to obtain financing when and as required would have an adverse and material effect on our business, consolidated financial condition and consolidated results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

We have not amended any of our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q that were filed prior to October 16, 2007. You should not rely on any of these annual or quarterly reports. In addition, you should not rely on any information contained in our registration statements on Form S-1, which were declared effective by the SEC on December 29, 2005, January 31, 2006, and November 1, 2006, respectively.

Restatement of Consolidated Financial Statements

On October 16, 2007, we announced that the audit committee of our board of directors had completed its previously announced internal review of our revenue recognition practices. Among other matters, our audit committee, assisted by independent forensic accountants and legal advisors, reviewed our practices relating to the following:

• sales to value added resellers; and

• use of intermediate shipping vendors in connection with shipments of product at the end of quarters falling on weekends.

As a result of our audit committee’s review, we identified errors in our previous recognition of revenue and determined that we recognized approximately $33.0 million of revenue prematurely during fiscal years 2004 through 2006. The errors identified by our audit committee’s review pertained to the timing of revenue recognition rather than our ability to collect or ultimately realize revenue from the underlying transactions. Our audit committee did not identify any instances where we recognized revenue that was not ultimately collected or realizable. As a result of the restatement, $4.9 million of previously recorded revenue was deferred as of December 31, 2006. On a restated basis, our net losses were $16.7 million and $7.6 million for the years ended December 26, 2004 and December 25, 2005, respectively, and we had net income of $1.2 million for the year ended December 31, 2006. The restatement adjustments did not affect our previously reported cash, cash equivalent and short-term investment balances in any of the years being restated.

Unless otherwise indicated, all financial information in this Form 10-Q gives effect to the restatement. Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 2 of the Notes to Consolidated Financial Statements.

Background of the Restatement

In March 2007, as part of our standard closing procedures, a cost accountant in our finance department discovered a customer invoice indicating that a third-party product had been provided to the customer for free. Finance department personnel subsequently discovered a letter in which we committed to provide the customer with the third-party product as well as with extended software maintenance and free training. Upon learning of the letter, our chief financial officer notified our audit committee and our independent registered public accounting firm.

Our audit committee promptly initiated a review of this transaction. Our audit committee initially retained Wilson Sonsini Goodrich & Rosati, PC, our outside legal counsel, to assist in the internal accounting review and StoneTurn Group LLP to provide forensic accounting and technology services. Subsequently, our audit committee retained independent legal counsel, Irell & Manella LLP, to review the conduct of persons involved.

The scope of the initial investigation was to determine the facts surrounding the transaction discovered by finance department personnel in March 2007 and to determine whether other transactions might exist with similar issues that could affect our accounting and reported financial results. Upon determining that other transactions did exist and required further review, our audit committee expanded its investigation accordingly. The investigation covered numerous transactions from 2003 through the first quarter of fiscal 2007. During the course of the investigation, the audit committee’s legal counsel and forensic accountants collectively examined approximately 285,000 hard copy and electronic documents and conducted 58 interviews of current and former employees, outside counsel, and customers. The information obtained through this review was analyzed in conjunction with transactional documents, which included customer quotes, proposal responses, purchase orders, contracts, volume purchase arrangements, letters of intent, sales orders, customer correspondence, emails, and other electronic documents. The audit committee’s accounting and conduct reviews ultimately focused in particular on a detailed review of our transactions with all value-added resellers, or VARs, shipments of product at or near quarter end, and a comprehensive review of all transactions with 22 significant customers.

On September 9, 2007, our board of directors, based on a recommendation of our audit committee, concluded that we should restate our financial statements for fiscal years 2004 and 2005, the corresponding interim quarterly fiscal periods, and the first, second, and third quarters of fiscal 2006 and that our previously filed financial statements for these periods should not be relied on. On September 12, 2007, we issued a press release announcing the restatement and non-reliance on our previously published financial information for those periods, and we filed a Current Report on Form 8-K with the SEC disclosing equivalent information.

On September 28, 2007, our audit committee presented its findings and recommendations relating to the investigation to our board of directors, and these findings are summarized below. At the meeting, our board of directors adopted the findings and recommendations of the audit committee, including a proposed remediation plan regarding internal controls and certain personnel actions.

On October 16, 2007, we filed the Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2007. We also issued a press release and filed a Current Report on Form 8-K to announce the final restated financial information and conclusions of our audit committee’s investigation. Among other information, we announced that our management had assessed our internal control over financial reporting as of June 30, 2007 and concluded that we had a material weakness and other control deficiencies relating to revenue recognition. As a result, our chief executive officer and chief financial officer have concluded that our internal controls over financial reporting were not effective as of June 30, 2007.

Audit Committee Findings and Recommendations

Our audit committee determined that the revenue adjustments arising from the investigation resulted from a failure in internal controls around the sales and revenue transactional cycles and did not result from fraud. Specifically, all adjustments reflect changes in the timing of revenue recognition; the audit committee determined that the underlying transactions reflected legitimate sales of product or services. The investigation determined that the transactions reflected accurately the sale of goods and services, for which the customers paid, but that a portion of the revenue from these transactions should have been deferred and recognized in a later reporting period when applicable accounting rules governing the recognition of revenue would have permitted the revenue to be recognized. For a number of transactions, the investigation determined that not all terms affecting revenue recognition were properly communicated to, or considered by, our finance department although the audit committee did not conclude that the failure to communicate this information involved fraudulent intent by any person.

Our audit committee concluded that the errors and omissions requiring an adjustment of our prior-period financial statements resulted from (i) weaknesses in internal controls; (ii) a lack of clear understanding by, and communication to, sales personnel of technical accounting rules; (iii) understaffed finance functions, resulting in over-reliance on sales and sales administration personnel to record completely and accurately the terms of sales transactions; and (iv) on occasion, failure of finance personnel to apply technical revenue recognition rules correctly.

The principal accounting issues resulting in the need to restate our financial statements derived from (i) commitments to certain customers in connection with sales for features or deliverables that were not available at the time revenue was originally recognized, including commitments to prospectively provide free product, software, training, and installation services, for which we prematurely recognized approximately $9.3 million in revenue from fiscal 2004 to fiscal 2006; (ii) sales to value-added resellers where the resellers did not have the ability to pay us for these sales independent of payment to them by the end-user, for which we prematurely recognized approximately $20.2 million in revenue from fiscal 2004 to fiscal 2006; and (iii) for certain quarters ending on weekends, our use of a shipping vendor who picked up product for subsequent delivery to another shipping company where the terms and conditions of the shipments did not appropriately transfer title or risk of loss at the time of shipment, for which we prematurely recognized approximately $2.3 million in revenue from fiscal 2004 to fiscal 2006. In addition, we prematurely recognized approximately $1.1 million of revenue from fiscal 2004 through fiscal 2006 relating principally to errors in accounting for software and software maintenance, customer credits, and undelivered free product.

Our audit committee found that individuals involved in sales of our products did not fully appreciate the implications of certain terms and arrangements on revenue recognition and did not receive consistent and clear guidance as to those issues or instructions on communicating with our finance department to ensure a complete communication of all terms that might affect revenue recognition. The audit committee also found that our finance department did not receive sufficient information on all transactions necessary to make appropriate judgments, that it relied too heavily on others to determine the information necessary to make those decisions, and that it relied too heavily on objective tests and measurements, such as days-sales-outstanding and returns data, to determine the risk of revenue recognition issues. The audit committee also concluded that individuals in our finance department failed to appreciate the significance, or were not sufficiently aware, of the impact of certain terms and arrangements on revenue recognition.

Our audit committee determined that one non-officer sales executive had a critical role in negotiating and/or documenting a significant number of the transactions that resulted in adjustments. Our audit committee concluded that the sales executive knew or should have known the importance of fully reflecting and reporting all material terms and commitments made to customers and that he knew or should have known that processes were not in place to ensure timely and complete communication of this information. Our audit committee ultimately recommended, and our board of directors approved, the termination of this individual sales executive, with a transition period during which the former sales executive will consult with us with respect to pending transactions and customer prospects but will not have authority to enter into any binding commitments on our behalf.

�� Our audit committee also recommended, and our board of directors approved, that a sales director be terminated based on the committee’s conclusion that the sales director had not cooperated during the investigation.

Our audit committee also concluded that our former and current chief financial officers bear responsibility for failing to fully and correctly account for all known information, but the committee determined that these oversights and failures resulted from an inadequate control environment and a failure to fully appreciate or understand the proper application of technical rules for recognizing revenue in the context of our contracts and sales. Among other recommendations, our audit committee determined that a new position of revenue recognition director should be created to assume responsibility for assuring that all available information material to revenue recognition determinations is gathered in a centralized location and

properly considered by the finance department. The committee also recommended that the position of chief financial officer be strengthened, including by bringing in senior outside finance and accounting advisors to assist in implementing the control improvements.

Internal Control Weaknesses and Remediation

As further discussed in Part I, Item 4 of this Form 10-Q under the caption “Controls and Procedures,” during the course of its investigation, our audit committee identified internal control weaknesses relating primarily to the approval, documentation, communication and accounting for transactions with non-standard terms or for commitments of future functionality or features of the products sold. Our audit committee determined that we lacked sufficient guidelines or processes concerning approval of non-standard terms and that we had no consistent practice to ensure that non-standard terms and shipping methods were consistently documented. Although our audit committee identified some recent improvements in our internal controls, it found that control deficiencies existed relating to the documentation of the terms of transactions and the internal controls in place to ensure that such terms were accurately and completely communicated for revenue recognition purposes to our finance department. The audit committee also found weaknesses relating to the failure to apply, or misapplication of, technical accounting rules relating to the timing of revenue recognition. Finally, certain of the control weaknesses related to accounting for VAR transactions and the manner in which we assessed and documented our evaluation of the creditworthiness of these resellers.

In addition, our audit committee received a letter dated October 15, 2007 from our current independent registered public accounting firm identifying a material weakness relating to revenue recognition and significant deficiencies relating to segregation of duties, post-closing adjusting journal entries, and accounting for parts and fixed asset purchases. Our chief executive officer and our chief financial officer have further determined that, as of September 30, 2007, our internal controls over financial reporting were not effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States.

Our audit committee, with the assistance of special counsel to the audit committee and reflecting input from our current independent registered public accounting firm, has developed a list of identified goals and directives to enhance our internal control over financial reporting, including development of meaningful and comprehensive training programs and protocols for the communication and enforcement of our recently amended and restated code of ethics and conduct. These recommendations are described in greater detail in the discussion under Part I, Item 4, section (b) relating to changes in internal controls. Our full board of directors has adopted these recommendations, and we are in the process of implementing them, in consultation with our independent registered public accounting firm and an independent outside consultant we have retained in connection with the development of our implementation plan for Section 404 of the Sarbanes-Oxley Act of 2002.

SEC Matter

ITEM 6. EXHIBITS

Exhibit Number		Exhibit Title
10.80		Asset Purchase Agreement by and among Occam Networks, Inc. and Terawave Communications, Inc. dated September 27, 2007.

31.01		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	OCCAM NETWORKS, INC. (Registrant)

	By:	/s/ CHRISTOPHER B. FARRELL
		Christopher B. Farrell
		Chief Financial Officer (Principal Financial and Accounting Officer)
Dated: November 14, 2007

EXHIBIT INDEX

Exhibit Number		Exhibit Title
10.80		Asset Purchase Agreement by and among Occam Networks, Inc. and Terawave Communications, Inc. dated September 27, 2007.

31.01		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Cash Flows	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Submission of Matters to a Vote of Security Holders	40
Item 5.	Other Information	40
Item 6.	Exhibits	43
Signatures
Exhibit Index

Occam Networks Inactive 10-Q2007 Q3 Quarterly report

Content analysis