Occam Networks 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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: 001-33069

OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware	77-0442752
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
6868 Cortona Drive
Santa Barbara, California	93117
(Address of principal executive offices)	(Zip Code))

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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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 May 6, 2009, the number of shares outstanding of the registrant’s common stock was 20,395,070 shares.

INDEX

		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	13
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	21
Item 4.	Controls And Procedures	21
PART II—OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1a.	Risk Factors	26
Item 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Submission Of Matters To A Vote Of Security Holders	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

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PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

OCCAM NETWORKS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31,			December 31,
	2009			2008 (*)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	30,804		$	30,368
Restricted cash	12,626			13,771
Accounts receivable, net	10,653			17,391
Inventories	14,318			16,761
Prepaid and other current assets	2,282			3,290
Total current assets	70,683			81,581
Property and equipment, net	10,210			10,834
Intangibles, net	228			251
Other assets	64			68
Total assets	$	81,185		$	92,734
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,284		$	6,911
Accrued liabilities	6,711			8,687
Deferred revenue	12,680			17,612
Deferred rent	361			394
Capital lease obligations	25			24
Total current liabilities	24,061			33,628
Deferred rent, net of current portion	1,847			1,892
Capital lease obligations, net of current portion	38			43
Total liabilities	25,946			35,563
Commitments and contingencies (See Note 6)
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized; and 20,395,070 shares issued and outstanding at March 31, 2009 and 20,268,488 December 31, 2008, respectively.	289			289
Additional paid-in capital	184,507			183,409
Accumulated deficit	(129,557		)	(126,527		)
Total stockholders’ equity	55,239			57,171
Total liabilities and stockholders’ equity	$	81,185		$	92,734

*Derived from audited consolidated financial statements included in its Annual Report on Form 10-K.

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

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OCCAM NETWORKS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended
	March 31, 2009			March 31, 2008
	(Unaudited)
Revenue	$	19,419		$	19,653
Cost of revenue	11,245			11,220
Gross margin	8,174			8,433
Operating expenses:
Research and product-development	4,389			4,559
Sales and marketing	4,581			4,978
General and administrative	2,366			3,123
Total operating expenses	11,336			12,660
Loss from operations	(3,162		)	(4,227		)
Other income (expense), net	—			(654		)
Interest income, net	145			360
Loss before provision for income taxes	(3,017		)	(4,521		)
Provision for income taxes	13			19
Net loss	$	(3,030	)	$	(4,540	)
Net loss per share attributable to common stockholders:
Basic and diluted net loss per share	$	(0.15	)	$	(0.23	)
Shares used to compute basic and diluted net loss per share	20,149			19,779
Stock-based compensation included in:
Cost of revenue	$	89		$	107
Research and product-development	223			296
Sales and marketing	197			187
General and administrative	234			232
Total stock-based compensation	$	743		$	822

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

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OCCAM NETWORKS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended
	March 31, 2009			March 31, 2008*
	(Unaudited)
Operating activities
Net loss	$	(3,030	)	$	(4,540	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	826			746
Stock-based compensation expense	743			822
Accounts receivable reserves	(79		)	54
Inventory reserves	(145		)	(10		)
Write-off of developed technology and related inventory	—			944
Changes in operating assets and liabilities:
Accounts receivable	6,817			4,689
Inventories	2,588			(50		)
Prepaid Expenses and other assets	1,012			(364		)
Accounts payable	(2,627		)	(2,629		)
Accrued Expenses	(1,976		)	865
Deferred revenue	(4,932		)	(1,876		)
Deferred rent	(78		)	—
Net cash used in operating activities	(881		)	(1,349		)
Investing activities
Purchases of property and equipment	(179		)	(239		)
Decrease in restricted cash	1,145			(2,705		)
Net cash provided by (used in) investing activities	966			(2,944		)
Financing activities
Proceeds from the exercise of stock options	—			64
Proceeds from employee stock purchase plan	355			—
Payments of capital lease obligations	(4		)	(4		)
Net cash provided by financing activities	351			60
Net increase (decrease) in cash and cash equivalents	436			(4,233		)
Cash and cash equivalents, beginning of period	30,368			37,637
Cash and cash equivalents, end of period	$	30,804		$	33,404
Supplemental disclosure of cash flow information:
Income taxes paid	$	144		$	32
Interest paid	$	1		$	19

*Certain amounts have been reclassified to conform to current period’s presentation.

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

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OCCAM NETWORKS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Business and Basis of Presentation

Occam Networks, Inc. (“Occam,” the “Company,” “we” or “us”) develops markets and supports innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and high speed internet, 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.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited.  The condensed consolidated balance sheet at December 31, 2008 is derived from Occam’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2008.  These unaudited condensed consolidated financial statements reflect all material adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the interim periods.  The results of operations for the current interim periods are not necessarily indicative of results to be expected for the entire year.

The unaudited condensed consolidated financial statements include management’s estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates, and material effects on consolidated operating results and consolidated financial position may result.

The unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.  In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair statement of the results for the interim periods have been included in the Company’s financial position as of March 31, 2009, the results of its operations for the three months ended March 31, 2009 and 2008, and its cash flow for the three months ended March 31, 2009 and 2008.

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications had no effect on previously reported net income (loss).

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.

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Revenue Recognition

Occam recognizes 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.  We allow credit for products returned within our policy terms.

In addition to the aforementioned general policy, we enter 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) and delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

If these criteria are not met, then 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, the Company 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, or RUS. The terms of the RUS contracts provide that in certain instances transfer of title of the Company’s products does not occur until customer acceptance, however the Company waited for final cash payment on these contracts before recognizing revenue. Effective January 1, 2009 based on this historical experience, the Company has determined that revenue recognition on RUS contracts is appropriate upon customer acceptance, given the remaining revenue recognition criteria, such as collectability, under SAB 104 have been met. As a result the Company recognized approximately $3.3 million in revenue for the first quarter of fiscal 2009 based on customer acceptance, not final cash payment. We believe the impact of this determination on any annual period is not material.

In certain circumstances, the Company enters into transactions with value-added resellers where the resellers may not have the ability to pay for these sales independent of payment to them by the end-user.  In these cases, the Company does not recognize revenue until payment has been received, provided the remaining revenue recognition criteria are met.

We warrant our products for periods up to five years and record an estimated warranty accrual when shipped.

2.Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), except as it applies to the nonfinancial assets and nonfinancial liabilities subject to Financial Staff Position SFAS 157-2.  SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.  As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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In accordance with SFAS 157, we measure our cash equivalents at fair value.  Our cash equivalents are classified within Level 1.  Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs.  At March 31, 2009, cash equivalents consisted of money market funds measured at fair value on a recurring basis.  Fair value of our money market funds was $29.7 million at March 31, 2009.

3.Inventories

Inventories consist of the following (in thousands):

	March 31, 2009		December 31, 2008
Raw materials	$	962	$	495
Work-in-process	740		4
Finished goods (1)	12,616		16,262
	$	14,318	$	16,761

(1)$6.3 million and $8.1 million of finished goods inventory were shipped to customers as of March 31, 2009 and December 31, 2008, respectively.  The majority were sent to RUS contract customers and value-added resellers.  Revenue and related Cost of revenue were not recognized at the time of shipments as defined by the Company’s revenue recognition policy and therefore were included in inventories.  For more information regarding our revenue recognition policy, see Revenue Recognition under Note 1 to these unaudited condensed consolidated financial statements.

4.Intangibles, net

In October 2007, we purchased certain assets from Terawave Communications, Inc., including a broadband passive optical network (BPON) asset purchase that addressed Metro-Ethernet/Telemetry applications.  We intended to sell this line of business and recorded an intangible asset of approximately $0.8 million as of the asset acquisition date.  During the period ended March 31, 2008, we were unable to secure a feasible offer and therefore decided to terminate the sales efforts and instead focus on bringing new Gigabyte Passive Optical Network (“GPON”) technology to market.  As a result of this decision, we wrote-off both the intangible asset and the related inventory.

In June 2008, we determined the intangible for customer relationships to be fully impaired and wrote-off the remaining unamortized balance of approximately $37,000.  Valuation for the intangible was based on estimated Broadband Passive Optical Network (“BPON”) revenues through 2009 from certain customers of Terawave Communications, Inc.  With final shipments of our last-time-buy promotion of BPON products to former Terawave customers during the period ended June 30, 2008, these customer relationships ceased to have future value for the Company.

5.Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted loss per share required under Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”) (in thousands, except per share data):

	Three Months Ended
	March 31, 2009			March 31, 2008
Numerator
Net loss available to common stockholders	$	(3,030	)	$	(4,540	)
Denominator
Shares used to compute basic and diluted net loss per share	20,149			19,779
Basic and diluted net loss per share	$	(0.15	)	$	(0.23	)

Basic and diluted net loss per share are identical because we had losses from continuing operations and the impact of common equivalent shares was anti-dilutive and therefore excluded. The anti-dilutive weighted average shares that were excluded from the shares used in computing diluted net loss per share for three months ended March 31, 2009 and March 31, 2008, amounted to approximately 3.0 million and 2.4 million shares, respectively.

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6.Commitments and Contingencies

The Company leases its office facilities and certain equipment under non-cancelable operating lease agreements, which expire at various dates through 2015.  Operating leases contain escalation clauses with annual base rent adjustments or a cost of living adjustment.  Total rent expense was $285,704 and $365,464 for the three months ended March 31, 2009 and 2008, respectively.  Minimum annual lease commitments under non-cancelable operating leases are as follows (in thousands):

Remainder of fiscal year,
2009	1,052
Fiscal year ending December 31,
2010	1,433
2011	1,469
2012	1,505
2013	1,543
2014	639
Thereafter	328
Total Minimum Lease Payments	$	7,969

Royalties

From time to time, the Company may license certain technology for incorporation into its products.  Under the terms of these multi-year agreements, royalty payments will be made based on per-unit sales of certain of the Company’s products.  The Company incurred royalty expense of $41,727 and $60,600 for the three months ended March 31, 2009 and 2008, 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 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 promulgated thereunder by making false and misleading statements and omissions relating to our 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. On November 16, 2007, the lead plaintiff filed a consolidated complaint. This consolidated complaint added as defendants certain of our current and former directors and officers, our current and former outside auditors, the lead underwriter of our secondary public offering in November 2006, and two venture capital firms who were early investors in us. The consolidated complaint alleged that defendants violated sections 10(b), 20(a) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, as well as sections 11 and 15 of the Securities Act of 1933, or Securities Act, by making false and misleading statements and omissions relating to our financial statements and internal controls with respect to revenue recognition that required restatement. The consolidated complaint seeks, on behalf of persons who purchased, Occam’s common stock during the period from April 29, 2004 to October 15, 2007, damages of an unspecified amount.

7

On January 25, 2008, defendants filed motions to dismiss the consolidated complaint. On July 1, 2008, Judge Snyder issued an order granting in part and denying in part defendants’ motions. This order dismissed all claims against certain of our current and former directors, the 20A claim in its entirety, the section 10(b) claim against the auditors and venture capital firms, and the section 11 claims against the venture capital firms. On July 16, 2008, lead plaintiff filed an amended complaint to conform to the Court’s July 1, 2008 order. Defendants answered this amended complaint on August 29, 2008. We believe that we have meritorious defenses in this action, and intend to defend ourselves vigorously. Failure by us to obtain a favorable resolution of the claims set forth in the consolidated complaint could have a material adverse effect on our 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 (the “Complaint”) on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive “IPO allocation” litigation involving the conduct of underwriters in allocating shares of successful initial public offerings.

We believe that over three hundred other companies have been named in more than one thousand similar lawsuits that have been filed by some of the same plaintiffs’ law firms. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 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 Occam. 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 has filed a motion to certify a new class and a second amended complaint based on the Second Circuit Appeals Court decision. An opposition brief was filed by both Underwriter Defendants and the Issuer Defendants on December 21, 2007 and a reply brief was filed on January 28, 2008. On March 28, 2008, the plaintiffs filed an amended reply brief in support of their motion to certify the class of plaintiffs. The Underwriter Defendants and the issuer Defendants had until August 31, 2008 to file an answer to the amended complaint. The Court has not ruled on the motion. The insurers, the underwriters and the Plaintiffs subsequently agreed to global mediation in the interest of trying to resolve this case without the further need for litigation. The mediation commenced in late June of 2008 and resulted in current settlement negotiations whereby the parties agreed to a settlement. The settlement is currently being reviewed by the Court.

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, a release of the Company and of the individual defendants for the conduct alleged to be wrongful in the Complaint in exchange for a guarantee from the Company’s insurers regarding recovery from the underwriter defendants and other consideration from the Company regarding its 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 Occam expects any settlement amounts to be covered by its insurance policies.

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IPO Short Swing Profits Litigation

In late 2007, we received a letter from Vanessa Simmonds, a putative shareholder, demanding that we investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), by the underwriter of our initial public offering (“IPO”) and certain unidentified directors, officers and shareholders of us (then known as Accelerated Networks). We evaluated the demand and declined to prosecute the claim. On October 12, 2007, the putative shareholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, the lead underwriter of our IPO, alleging violations of Section 16(b). The complaint alleges that the combined number of shares of our common stock beneficially owned by the lead underwriter and certain unnamed officers, directors, and principal shareholders exceeded ten percent of its outstanding common stock from the date of Occam’s IPO on June 23, 2000, through at least June 22, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriter any “short-swing profits” obtained by it in violation of Section 16(b). We were named as a nominal defendant in the action, but have no liability for the asserted claims. None of our directors or officers of Occam are named as defendants in this action.

On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. The Underwriters and Issuers have filed a motion to dismiss the case and reply briefs have been filed. The Court heard oral argument on January 19, 2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaint against the issuer defendants including Occam on both jurisdictional and statute of limitation grounds. On March 31, 2009, the Plaintiffs filed a Notice of Appeal. Currently all pleadings relative to the appeal must be filed by August 31, 2009. Oral argument will be heard thereafter.

Due to the inherent uncertainties of threatened litigation, we cannot accurately predict the ultimate outcome of the matter, but we believe that the outcome of this litigation will not have a material adverse impact on our consolidated financial position and results of operations. We have not recorded any accruals related to the demand letters or Section 16(b) litigation because we expect any resulting resolution 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, except as described above, 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.

Indemnifications and Guarantees

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its contractors, customers, value-added resellers, and landlords. In connection with its 2006 offering, the Company also agreed to indemnify the underwriters in the offering and certain stockholders who sold shares as part of the offering with respect to certain liabilities arising from the offering. Under these provisions, the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of its activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally unlimited.  As of March 31, 2009, the Company did not have any material accrued liability relating to the defense of lawsuits or settlement of claims related to these indemnification agreements. During fiscal 2008, we reimbursed Norwest Venture Partners for indemnification expenses in the amount of $80,166. During the quarter ended March 31, 2009, we reimbursed U.S. Venture Partners for indemnification expenses incurred in 2008 in the amount of $192,166.

9

Purchase Orders

Under the terms of Occam’s contract manufacturer agreements, Occam is required to place orders with its contract manufacturers to provide inventory to meet its estimated sales demand. Certain contract manufacturer agreements include production forecast change, lead-time and cancellation provisions. At March 31, 2009, open purchase orders with contract manufacturers were $7.9 million.

Warranties

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

	March 31,			December 31,
	2009			2008
Warranty liability at beginning of the year	$	4,326		$	3,470
Accruals for warranty during the period	397			2,340
Warranty utilization	(696		)	(1,484		)
Warranty liability at end of the period	$	4,027		$	4,326

7.Accrued Liabilities

The major components of accrued liabilities are (in thousands):

	March 31, 2009		December 31, 2008
Warranty accruals	$	4,027	$	4,326
Payroll, paid time off and related accruals	1,515		2,727
Commissions	209		316
Royalty accruals	15		41
Other accruals	945		1,277
Total	$	6,711	$	8,687

8.Stock Options, Stock Awards, Employee Stock Purchase Plan, and Share-Based Compensation

Stock option activity, under the Company’s stock option plan for the three months ended March 31, 2009 is summarized as below (shares and intrinsic value in thousands):

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2009	3,015		$	6.71	7.11	$	15
Granted	52		$	3.00	—	—
Exercised	—		$	—	—	—
Forfeited or expired	(37	)	$	5.18	—	—
Outstanding at March 31, 2009	3,030		$	6.66	6.89	$	32
Exercisable at March 31, 2009	1,917		$	7.31	5.83	$	10

The weighted-average fair value of options granted to employees on the date of the grant during the three months ended March 31, 2009 was $1.53 per share.

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The 2006 Equity Incentive Plan, or 2006 Plan, provides for automatic annual increases in the number of shares available for issuance under the 2006 Plan effective as of the first day of each fiscal year equal to the lesser of (a) 3% of the outstanding shares of the common stock on the first day of the applicable fiscal year; (b) 750,000 shares; or (c) such other amount as the Board of Directors or a committee of the board may determine. On April 1, 2009, the Board of Directors approved an increase of 608,055 shares reserved for issuance under the 2006 Plan for fiscal 2009. This represents 3% of the outstanding common shares as of January 1, 2009. In addition the Board of Directors approved an amendment to the 2006 Plan, subject to stockholder approval, to increase the number of shares of common stock reserved for issuance under the Plan by 900,000 shares. On May 7, 2009, the stockholders approved the amendment to the 2006 plan.

Stock Awards

A summary of the Company’s restricted stock unit activities is as follows (in thousands):

	Restricted Stock Units		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2009	180		1.44	$	432
Awarded	—		—	—
Released	—		—	—
Forfeited or expired	(3	)	—	—
Outstanding at March 31, 2009	177		1.20	$	466

Employee Stock Purchase Plan

In March 2008, the Board of Directors approved an amendment to our 2006 Employee Stock Purchase Plan (or the “ESPP”).  The amendment increased the maximum number of shares of the Company’s common stock that an eligible employee may purchase during each offering period from 1,000 shares to 5,000 shares.  In connection with the ESPP, 126,582 shares were issued on February 17, 2009 at a purchase price per share of $2.80.

The ESPP provides for an automatic annual increases in the number of shares available for issuance under the ESPP effective as of the first day of each fiscal year equal to the lesser of (a) 300,000 shares of common stock; (b) 1.5% of the outstanding shares of common stock on the first day of the applicable fiscal year; or (c) an amount determined by the Board of Directors. On April 1, 2009, the Board of Directors approved an increase of 300,000 shares in the number of shares reserved for issuance under the ESPP.

Stock-Based Compensation

The following table summarizes the impact of SFAS 123(R) for all share-based awards to employees and directors, including employee stock options, restricted stock units and employee stock purchase plan based on the estimated fair value on our Consolidated Statements of Operations (in thousands):

	Three Months Ended
	March 31, 2009		March 31, 2008
Employee stock-based compensation in:
Cost of revenue	$	89	$	107
Research and product-development	223		296
Sales and marketing	197		187
General and administrative	234		232
Total SFAS 123(R) stock-based compensation in operating expenses	654		715
Total SFAS 123(R) stock-based compensation	$	743	$	822

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As of March 31, 2009, total unamortized stock-based compensation cost related to non-vested stock options after accounting for estimated forfeitures was $3.3 million, which the Company expects to recognize over the remaining vesting period of each grant, up to the next 48 months.

Upon adoption of SFAS 123(R), we selected the Black-Scholes option pricing model as the most appropriate 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:

	Three Months Ended
	March 31, 2009		March 31, 2008
Risk-free interest rate	1.9	%	2.9	%
Expected term (years)	5.0		4.9
Dividend yield	0	%	0	%
Expected volatility	58.2	%	62	%

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 that estimated by management, additional adjustments to compensation expense may be required in future periods.

9. Subsequent Events

The Company announced in May 2009 that it has undertaken an initiative to reduce its total headcount by approximately 10%, in order to reduce expenses and conserve cash in the current economic environment. The Company expects to record a charge of approximately $0.2 million associated with this initiative in the second quarter of 2009.

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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 Quarterly 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, 2008.  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 this Report 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 Quarterly 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.

Overview

We develop, market and support innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and high speed internet, 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, video-on-demand, or VoD, and high-definition television, or HDTV.  Our platform simultaneously supports traditional voice and data 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 network service offerings.  We market our products through a combination of direct and indirect channels.  Our direct sales efforts are focused on the incumbent local exchange providers, or ILECs, segment of the telecom service provider market.  As of March 31, 2009, we had shipped our BLC platform to over 300 service provider customers.

From our inception through March 31, 2009, we have incurred cumulative net losses of approximately $129.6 million. We realized income from operations and were profitable on a net income basis during the quarters ended December 31, 2008, December 31, 2006, September 24, 2006, and for the year ended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis, excluding the quarter ended December 25, 2005, in which we realized modest operating income of $3,000. We experienced operating and net losses in the first, second and third quarters of fiscal 2008 and for fiscal 2008 as a whole. We do not believe that our return to profitability in the fourth quarter of fiscal 2008 is indicative of future quarterly performance. In the first quarter of 2009, we continued to experience a slowdown in bookings and delays in customer projects. We believe this condition  reflects the macroeconomic weakness as well as the timing effects of the government stimulus programs. We expect the uncertainty surrounding the stimulus funds will resolve itself through the year, however in the short term it will continue to affect our customer bookings activity level.

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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 revenue and expenses during the reporting period.  On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, accounts receivable reserves, sales return reserves, litigation, warranty reserve, stock-based compensation, 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, 2008 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.

In certain circumstances, we enter 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, or RUS. The terms of the RUS contracts provide that in certain instances transfer of title of our products does not occur until customer acceptance, however we waited for final cash payment on these contracts before recognizing revenue.  Effective January 1, 2009 based on this historical experience, we have determined that revenue recognition on RUS contracts is appropriate upon customer acceptance, given the remaining revenue recognition criteria, such as  collectability, under SAB 104 have been met. As a result we recognized approximately $3.3 million in revenue for the first quarter of fiscal 2009 based on customer acceptance, not final cash payment. We believe the impact of this determination on any annual period is not material.

Results of Operations

Three-months ended March 31, 2009 and 2008

Revenue (in thousands, except percentages)

	Three Months Ended
	March 31, 2009		March 31, 2008
Revenue	$	19,419	$	19,653

Our revenue is principally comprised of our BLC 6000 series system product line, cabinets and related accessories.  Revenue decreased by $0.3 million or 1% to $19.4 million for the three months ended March 31, 2009 as compared to revenue of $19.7 million for the three months ended March 31, 2008. Approximately $3.3 million of revenue recognized during the quarter was associated with recognition based on customer acceptance not final cash payment. In the first quarter of 2009 we continued to experience a slow down in customer bookings activity. We believe this slow down is due to overall poor economic conditions as well as the impact of our customers evaluating the timing and availability of the potential government broadband stimulus funds. We expect the uncertainty surrounding the stimulus funds will resolve itself through the year, as more details become available, however in the short term it will continue to affect our customer bookings activity level.

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Cost of revenue and gross margin (in thousands, except percentages)

	Three Months Ended
	March 31, 2009			March 31, 2008
Cost of revenue	$	11,245		$	11,220
Gross margin	$	8,174		$	8,433
Gross margin percentage	42		%	43		%

Cost of revenue includes the cost of products shipped for which revenue was recognized, warranty provision, costs of any manufacturing yield problems, re-work costs, manufacturing overhead, provisions for obsolete inventory and the cost of post-sales support.

Gross margin decreased to 42% of revenue for the three months ended March 31, 2009 compared to gross margin of 43% for the three months ended March 31, 2008. The decrease in the gross margin is primarily due to a decrease in revenue.

We expect that our gross margin will vary from quarter-to-quarter due in part to product mix.  To the extent that cabinets and other lower-margin products represent an increased percentage of our total revenue in any period, it will tend to reduce our gross margin. Additionally, as we introduce new products into the market, we anticipate our gross margin may fluctuate as a function of our product mix.

Research and product- development expenses (in thousands, except percentages)

	Three Months Ended
	March 31, 2009			March 31, 2008
Research and product-development	$	4,389		$	4,559
Research and product-development as a percentage of revenue	23		%	23		%

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 three years.  Research and development expenses decreased by $0.2 million or 4% to $4.4 million for the three months ended March 31, 2009 as compared to $4.6 million for the three months ended March 31, 2008. The decrease in research and product-development expenses was attributable to decreased outside services. Research and product-development expenses for the three months ended March 31, 2008 included expenses attributable to the release of our Gigabit Passive Optical Networks (“GPON”) products. The research and product-development expenses may increase in future periods as we continue to make investments in our products and technologies.

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Sales and marketing expenses (in thousands, except percentages)

	Three Months Ended
	March 31, 2009			March 31, 2008
Sales and marketing	$	4,581		$	4,978
Percentage of revenue	24		%	25		%

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 decreased by $0.4 million or 8% to $4.6 million for the three months ended March 31, 2009 as compared to $5.0 million for the three months ended March 31, 2008. This decrease was primarily due to lower commissions and marketing event expenses.  We currently expect sales and marketing expenses to be largely consistent with current expense levels, but may vary with levels of customer bookings.

General and administrative expenses (in thousands, except percentages)

	Three Months Ended
	March 31, 2009			March 31, 2008
General and administrative	$	2,366		$	3,123
Percentage of sales	12		%	16		%

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 such as rent, legal, utilities and accounting expenses. General and administrative expenses decreased by $0.7 million or 23% to $2.4 million for the three months ended March 31, 2009 as compared to $3.1 million for the three months ended March 31, 2008.  General and administrative expenses decreased primarily due to lower outside services and professional fees, partially offset by an increase in legal fees associated with our ongoing litigation. We currently expect general and administrative expenses to be consistent with current expense levels.

Stock-based compensation (in thousands)

	Three Months Ended
	March 31, 2009		March 31, 2008
Cost of sales	$	89	$	107
Research and development	223		296
Sales and marketing	197		187
General and administrative	234		232
Total stock-based compensation	$	743	$	822

Stock-based compensation expense decreased by approximately $79,000 or 10% to $0.7 million for the three months ended March 31, 2009 as compared to approximately $0.8 million for the three months ended March 31, 2008.  This decrease is primarily attributable to the estimated forfeiture rate change used in our stock-based compensation expense calculations.

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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 (expense), net (in thousands)

	Three Months Ended
	March 31, 2009			March 31, 2008
Interest income	$	146		$	393
Interest expense	(1		)	(33		)
Total other income (expense), net	$	145		$	360

Interest income, net decreased by $215,000 or 60% to $145,000 for the three months ended March 31, 2009, as compared to $360,000 for the three months ended March 31, 2008.  The decrease in interest income was primarily attributable to lower cash balances and lower interest rates.

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 March 31, 2009 and March 31, 2008, we provided $13,000 and $19,000 respectively, for federal and state income taxes.

Subsequent Event

We announced in May 2009 that we have undertaken an initiative to reduce our total headcount by approximately 10%, in order to reduce expenses and conserve cash in the current economic environment. We expect to record a charge of approximately $0.2 million associated with this initiative in the second quarter of 2009.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of $30.8 million, restricted cash of $12.6 million, stockholders’ equity of $55.2 million, and working capital of $46.6 million, compared with cash and cash equivalents of $30.4 million, restricted cash of $13.8 million, stockholders’ equity of $57.2 million, and working capital of $48.0 million as of December 31, 2008.  The decrease in restricted cash at March 31, 2009, was related to performance bonds required for our Rural Utilities Service, or RUS 397 contracts.

Net cash used in operating activities for the three months ended March 31, 2009, was $0.9 million compared to $1.3 million during the same period ended 2008.  The sum of our net loss and certain non-cash expenses, such as stock-based compensation, depreciation and amortization, impairment of intangibles related to developed technology and customer relationships, accounts receivable reserves and inventory reserves resulted in an outflow of $1.7 million in the 2009 period, compared to an outflow of $1.9 million in the 2008 period.  The overall impact of change in certain operating assets and liabilities on total operating cash flows resulted in a cash inflow of $0.8 million in the three months ended March 31, 2009 compared to a cash inflow of $0.6 million in the three months ended March 31, 2008.

Net cash provided by investing activities for the three months ended March 31, 2009, was $1.0 million compared to $2.9 million used in investing activities, during the same period ended March 31, 2008. Cash provided by investing activities for the three months ended March 31, 2009, was primarily due to a decrease of $1.1 million in restricted cash required for performance bonds in connection with our RUS contracts offset by $0.2 million for purchases of property and equipment.

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Net cash provided by financing activities for the three months ended March 31, 2009 was $0.4 million compared to $60,000 for the same period in 2008.  Cash provided by financing activities for the three months ended March 31, 2009, was mainly due to proceeds from the sale of common stock under the ESPP of $0.4 million, as compared to proceeds of approximately $64,000 related to the exercise of options, which was offset by the payment of approximately $4,000 for capital lease obligations for the three months ended March 31, 2008.

Working Capital

Working capital decreased to $46.6 million as of March 31, 2009 compared to $48.0 million as of December 31, 2008.

Our future liquidity and capital requirements will depend on numerous factors, including the:

·collectability of accounts receivable;

·amount and timing of revenue;

·extent to which our existing and new products gain market acceptance;

·extent to which funds are restricted due to performance bonds required in connection with our RUS contracts;

·cost and timing of product development efforts and the success of these development efforts;

·cost and timing of marketing and selling activities; and

·availability of borrowing arrangements and the availability of other means of financing.

We believe that our cash and cash equivalents will be sufficient to finance our operations over the next 12 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

We lease our facilities and certain assets under non-cancelable operating leases expiring through 2015, excluding various renewal options. We lease certain office equipment under capital leases.

The following table summarizes our minimum purchase commitments to our contract manufacturers, our minimum commitments under non-cancelable operating leases,our commitment under capital leases, our commitment under fixed assets and licensing agreements as of March 31, 2009 (in thousands):

	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Contractual Obligations
Purchase commitments (1)	$	7,858	$	7,858	$	—	$	—	$	—
Operating leases	$	7,969	$	1,052	$	4,407	$	2,182	$	328
Capital leases	$	67	$	21	$	46	$		$	—
Licensing agreements	$	240	$	105	$	135	$	—	$	—

(1)Under the terms of our agreement with our contract manufacturers, we issue purchase orders for the production of our products.  We are required to place orders in advance with our contract manufacturer to meet estimated sales demands.  The agreement includes certain lead-time and cancellation provisions.  Future amounts payable to the contract manufacturer will vary based on the level of purchase requirements.

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Off-Balance Sheet Arrangements

As of March 31, 2009, we had no material off-balance sheet arrangements, other than operating leases and certain purchase commitments 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, and landlords.  In connection with our 2006 public offering, we also agreed to indemnify the underwriters in the offering and certain stockholders who sold shares as part of the offering with respect to certain liabilities arising from the offering.  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 March 31, 2009, we did not have any material liability relating to the defense of lawsuits or settlement of claims related to these indemnification agreements. During fiscal 2008, we reimbursed Norwest Venture Partners for indemnification expenses in the amount of $80,166.  During the quarter ended March 31, 2009, we reimbursed U.S. Venture Partners for indemnification expenses incurred in 2008 in the amount of $192,166.

Recent Accounting Pronouncements

In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4, (ii) SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP 115-2 and FSP 124-2, and (iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP 107 and APB 28-1, which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We do not believe that the above staff positions will have a material impact on our financial position, results of operations, and cash flows.

In April 2009, the FASB issued FSP No. 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141R-1. FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We believe the adoption of SFAS 141R will have an impact on accounting for business combinations once adopted, but the effect on us will depend upon our level of acquisition activity.

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In March 2009, FASB unanimously voted for the FASB Accounting Standards Codification (the “Codification”) to be effective beginning on July 1, 2009. Other than resolving certain minor inconsistencies in current United States Generally Accepted Accounting Principles (“GAAP”), the Codification is not supposed to change GAAP, but is intended to make it easier to find and research GAAP applicable to particular transactions or specific accounting issues. The Codification is a new structure which takes accounting pronouncements and organizes them by approximately ninety accounting topics. Once approved, it will become the source of authoritative U.S. GAAP. All guidance included in the Codification will be considered authoritative at that time, even guidance that comes from what is currently deemed to be a non-authoritative section of a standard. Once the Codification becomes effective, all non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. We do not have any non controlling interests in our consolidated financial statements and hence it does not have an impact on our financial position, results of operations, and cash flows.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R changes accounting for acquisitions that close beginning in 2009. More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard. SFAS 141R promotes greater use of fair values in financial reporting. Some of the changes will introduce more volatility into earnings. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 141R will have an impact on accounting for business combinations once adopted, but the effect on us will depend upon our level of acquisition activity.

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.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” and also requires expanded disclosure related to the determination of intangible asset useful lives. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of FAS142-3 did not have a material impact on our consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires issuers of convertible debt instruments that may be settled in cash upon conversion to account separately for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this standard did not have a material effect on our results of operations and financial position.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We have not yet adopted SFAS 162, but we do not expect the adoption of SFAS 162 will have a material impact on our financial position, results of operations, and cash flows.

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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.  We generally invest our surplus cash balances in 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 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 Exchange Act, as of March 31, 2009, 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, (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 that as of March 31, 2009, the same material weakness that was previously reported as of December 31, 2007 continued to exist with respect to revenue recognition policies and procedures. As a result, our Chief Executive Officer and Chief Financial Officer have concluded that 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 deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a more than inconsequential misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is less severe than a material weakness, yet important enough to merit attention by management.

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 our revenue recognition practices 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 2004 and fiscal 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 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.

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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 internal control deficiencies letter 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.

In their October 2007 letter, 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.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2007 and the effectiveness of our internal control over financial reporting as of December 31, 2007, our independent registered public accounting firm identified a material weakness and some significant deficiencies in our internal control over financial reporting in a letter dated March 10, 2008. Specifically, our independent registered public accounting firm noted a continuing material weakness relating to revenue recognition and our policies and procedures to ensure that modifications to, or side agreements associated with, our standard terms of contract were properly approved, documented, tracked and recorded.

In connection with the preparation and related audit of our financial statements for the year ended December 31, 2008, our management again concluded that a material weakness existed with respect to revenue recognition at December 31, 2008. In addition, management identified significant deficiencies relating to (i) approval processes for credit memos and special pricing terms and (ii) segregation of duties in our order management group. Management noted that each of the audit committee’s 2007 recommendations had been completed but determined that a number of these remediation efforts had not been in place or tested for a sufficient period to conclude that they were effective. In particular, we implemented standardized terms and conditions for customer quotes, contracts, and invoices in the fourth quarter of fiscal 2008, but only a small portion of our revenues in 2008 were generated in transactions entered under these standardized terms. In addition, management concluded that the controls implemented to date have largely been focused on error detection and that we need to implement additional preventative controls designed to address potential errors before they occur.

Any failure on our part to remedy identified control deficiencies, or any additional delays or errors in our financial reporting, whether or not resulting from the identified material weakness relating to revenue recognition or any significant deficiencies, would have a material adverse effect on our business, results of operations, or financial condition and could have a substantial adverse impact on the trading price of our common stock.

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. At that time, our board of directors adopted the audit committee’s remediation plan. In the fourth quarter of 2008, we completed implementation of all initial audit committee recommendations.

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

		Implemented as of December 31, 2008
·	adjust our reporting structure so that finance has direct oversight of sales administration and the sales proposal generation management group;	P
·	reorganize our variable compensation plan to ensure that sales personnel are not incentivized to attempt to influence the timing of revenue recognition;	P
·	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;	P
·	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	P
·	a revenue recognition checklist should accompany the financial package for each transaction.	P
·	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;	P
·	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;	P
·	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;	P
·	implement policies and procedures that delineate clear roles, responsibilities, and authorization levels for all positions defined as “key” to the revenue recognition transaction cycle;	P
·	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;	P
·	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;	P
·	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;	P
·	implement procedures to ensure that credit checks are performed and the decision-making process as to the credit limit is documented and maintained.	P
·	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;	P
·	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:	P

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		Implemented as of December 31, 2008
·	standardize 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; and	P
·	establish 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	P

Although we recently completed all remediation steps specifically recommended by our audit committee in 2007, management continues to test the newly implemented controls and has identified additional controls and procedures for implementation in light of our continuing material weakness. In particular, we plan to implement further remedial actions, which have been approved by our audit committee, related to the 2008 material weakness, specifically:

·Monitor and test prior internal control remediation;

·Implement additional controls focused on prevention (in contrast to the detection focus of previously implemented remedial controls); and

·Review and assess current sales process from the time of quote to the collection of receivables in an effort to process  orders in a more controlled environment.

In addition, in the first quarter of 2009, we implemented control changes in our order management group to address identified control deficiencies relating to segregation of duties.  Specifically, we limited individual system access in an effort to ensure that no single individual had the ability to book, invoice, and ship orders.

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 promulgated thereunder by making false and misleading statements and omissions relating to our 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. On November 16, 2007, the lead plaintiff filed a consolidated complaint. This consolidated complaint added as defendants certain of our current and former directors and officers, our current and former outside auditors, the lead underwriter of our secondary public offering in November 2006, and two venture capital firms who were early investors in us. The consolidated complaint alleged that defendants violated sections 10(b), 20(a) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder, as well as sections 11 and 15 of the Securities Act of 1933, or Securities Act, by making false and misleading statements and omissions relating to our financial statements and internal controls with respect to revenue recognition that required restatement. The consolidated complaint seeks, on behalf of persons who purchased, Occam’s common stock during the period from April 29, 2004 to October 15, 2007, damages of an unspecified amount.

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On January 25, 2008, defendants filed motions to dismiss the consolidated complaint. On July 1, 2008, Judge Snyder issued an order granting in part and denying in part defendants’ motions. This order dismissed all claims against certain of our current and former directors, the 20A claim in its entirety, the section 10(b) claim against the auditors and venture capital firms, and the section 11 claims against the venture capital firms. On July 16, 2008, lead plaintiff filed an amended complaint to conform to the Court’s July 1, 2008 order. Defendants answered this amended complaint on August 29, 2008. We believe that we have meritorious defenses in this action, and intend to defend ourselves vigorously. Failure by us to obtain a favorable resolution of the claims set forth in the consolidated complaint could have a material adverse effect on its 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 (the “Complaint”) on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive “IPO allocation” litigation involving the conduct of underwriters in allocating shares of successful initial public offerings.

We believe that over three hundred other companies have been named in more than one thousand similar lawsuits that have been filed by some of the same plaintiffs’ law firms. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 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 Occam. 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 has filed a motion to certify a new class and a second amended complaint based on the Second Circuit Appeals Court decision. An opposition brief was filed by both Underwriter Defendants and the Issuer Defendants on December 21, 2007 and a reply brief was filed on January 28, 2008. On March 28, 2008, the plaintiffs filed an amended reply brief in support of their motion to certify the class of plaintiffs. The Underwriter Defendants and the issuer Defendants had until August 31, 2008 to file an answer to the amended complaint. The Court has not ruled on the motion. The insurers, the underwriters and the Plaintiffs subsequently agreed to global mediation in the interest of trying to resolve this case without the further need for litigation.  The mediation commenced in late June of 2008 and resulted in current settlement negotiations whereby the parties agreed to a settlement.  The settlement is currently being reviewed by the Court.

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, a release of the Company and of the individual defendants for the conduct alleged to be wrongful in the Complaint in exchange for a guarantee from the Company’s insurers regarding recovery from the underwriter defendants and other consideration from the Company regarding its 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 Occam expects any settlement amounts to be covered by its insurance policies.

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IPO Short Swing Profits Litigation

In late 2007, we received a letter from Vanessa Simmonds, a putative shareholder, demanding that we investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), by the underwriter of our initial public offering (“IPO”) and certain unidentified directors, officers and shareholders of us (then known as Accelerated Networks). We evaluated the demand and declined to prosecute the claim. On October 12, 2007, the putative shareholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, the lead underwriter of our IPO, alleging violations of Section 16(b). The complaint alleges that the combined number of shares of our common stock beneficially owned by the lead underwriter and certain unnamed officers, directors, and principal shareholders exceeded ten percent of its outstanding common stock from the date of Occam’s IPO on June 23, 2000, through at least June 22, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriter any “short-swing profits” obtained by it in violation of Section 16(b). We were named as a nominal defendant in the action, but have no liability for the asserted claims. None of our directors or officers of Occam are named as defendants in this action.

On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. The Underwriters and Issuers have filed a motion to dismiss the case and reply briefs have been filed. The Court heard oral argument on January 19, 2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaint against the issuer defendants including Occam on both jurisdictional and statute of limitation grounds. On March 31, 2009, the Plaintiffs filed a Notice of Appeal. Currently all pleadings relative to the appeal must be filed by August 31, 2009. Oral argument will be heard thereafter.

Due to the inherent uncertainties of threatened litigation, we cannot accurately predict the ultimate outcome of the matter, but we believe that the outcome of this litigation will not have a material adverse impact on our consolidated financial position and results of operations. We have not recorded any accruals related to the demand letters or Section 16(b) litigation because we expect any resulting resolution 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, except as described above, 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.  However, 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 our Annual Report on Form 10-K for the year ended December 31, 2008 and in our other public filings.

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Risks Related to Current Economic Environment and Our Future Revenues

Our business is substantially dependent on the capital spending patterns of telecom operators and has recently been adversely affected by reductions and delays in capital spending by our customers.  Any continued reductions or delays in customer orders in response to macroeconomic conditions or otherwise, would adversely affect our business, operating results, and 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.  In the fourth quarter of 2008, we identified a weakening in new order activity that has continued into 2009.  We believe this weakening relates to reductions in capital expenditures and capital equipment investment budgets resulting from the worldwide financial crisis and economic downturn.   In addition, we believe that many of our customers, particularly those that participate in government funding initiatives such as the Department of Agriculture’s Rural Utility Service program, may be delaying investment and purchase activity pending their analysis of the availability of funding under recently announced government economic stimulus programs.  Continued reductions, delays, or cancellations in order activity by our customers would be expected to adversely affect our future revenues by reducing the revenue we recognize in any quarter from orders booked and shipped in that quarter and by reducing the amount of deferred revenues that may become recognizable in future periods upon satisfaction of revenue recognition criteria.

In addition to the impact of macroeconomic factors, we believe capital expenditures among IOCs have also been adversely affected as our customers consider their investment and capital expenditure decisions in light of the industry transition from copper wire to fiber.

Other factors affecting the capital spending patterns of telecom service providers include the following:

·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.

Changes in government funding programs can also affect capital expenditures by IOCs.  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 Federal Communications Commission, or FCC, and some states are considering changes to both intercarrier payments and universal service subsidies, and such changes could reduce IOC revenues, which would be expected to have an adverse impact on capital spending budgets.  Furthermore, many IOCs use government supported loan programs or grants to finance capital spending.  Changes to those programs, such as the Department of Agriculture’s Rural Utilities Service loan program, could reduce the ability of IOCs to access capital.  Any decision by telecom service providers to reduce capital expenditures, whether caused by the economic downturn, 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.

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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.

We have had limited experience selling to larger telecommunication companies, and our ability to recognize revenue, if any, from contracts with these companies may be difficult to predict.

In early 2008, we announced that we had been selected as the lead access equipment provider for a substantial broadband upgrade by Fairpoint Communications, Inc. in its network in Vermont, New Hampshire, and Maine.  Fairpoint recently acquired these networks through its acquisitions of certain assets of Verizon Communications, Inc.  Fairpoint represented our first customer who is considered Tier 1 based on the number of telephone lines serviced.  We have limited experience selling or servicing Tier 1 customers, and our ability to recognize substantial revenue from the Fairpoint relationship or any other relationships we may establish with Tier 1 customers will depend on several factors, including, among others, the timing of orders and the terms and conditions of the orders, which can affect our ability to satisfy revenue recognition criteria.  We cannot currently predict with any accuracy the timing of orders from Fairpoint, and any delays or termination of Fairpoint’s anticipated upgrade of its northern New England network could have a material adverse effect on our future revenues and 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;

·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.

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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 March 31, 2009, we had an accumulated deficit of $129.6 million.  We incurred substantial losses in 2008.  We may expect to continue to incur losses in 2009.  We cannot assure you that we will not continue to incur losses or experience negative cash flow in the future.  We have only generated operating income in the quarters ended December 25, 2005, September 24, 2006, December 31, 2006 and December 31, 2008.  We do not believe our results of operations in the quarter ended December 31, 2008 are indicative of our expected results in future near term quarters.  Our continued 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.

Risks Related to Outstanding Litigation and Internal Controls

An adverse resolution of outstanding litigation resulting from the restatement in October 2007 of our historical financial statements could have a material adverse effect on our business, operating results, or financial condition.

On October 16, 2007, following a seven month review of our historic revenue recognition practices that was led by our audit committee, we filed our Annual Report on Form 10 K for the year ended December 31, 2006, which included our consolidated financial statements for the year ended December 31, 2006 and which restated our financial statements for the years ended December 26, 2004 and December 25, 2005, for each of the interim quarterly periods in fiscal 2004 and 2005, and the first three interim quarterly periods of fiscal 2006.  Following the announcement of the commencement of the audit committee review in March 2007, we, certain of our directors and executive officers and others became defendants in a consolidated federal securities class action.  The consolidated complaint alleges that the various defendants violated sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b 5 promulgated thereunder, as well as sections 11 and 15 of the Securities Act, by making false and misleading statements and omissions relating to our financial statements and internal controls with respect to revenue recognition.  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.  Litigation and any related 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.  In addition, an adverse resolution of the outstanding litigation could have a material adverse effect on our financial condition if we are required to use our available cash resources to settle the litigation or satisfy any judgment.  This litigation is still in the relatively early procedural stages, and we cannot predict its outcome.  In addition, we cannot at this time predict whether our insurance coverage will be sufficient to cover any liability or whether our carriers may seek to rescind or deny coverage.

Potential indemnification obligations set forth in our charter documents or in contracts between us and various officers, directors, and third parties could have a material adverse effect on our business, operating results or financial condition.

Under Delaware law, our bylaws, and indemnification agreements to which we are a party, we may have an obligation to indemnify certain current and former officers and directors, as well as certain underwriters and stockholders, in relation to outstanding litigation or other related matters, and we have recently begun to reimburse certain expenses of some indemnified parties in connection with outstanding litigation.  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, either in whole or part, with respect to pending litigation, 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.

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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.

In connection with the 2007 audit committee review of our revenue recognition practices and our resulting financial restatement, we determined that we did not have adequate internal financial and accounting controls to produce accurate and timely financial statements.  Among weaknesses and deficiencies identified in our review, we determined that we had a material weakness with respect to revenue recognition.  Since the restatement was completed in October 2007, we have implemented new processes and procedures to improve our internal controls and have expanded our finance and accounting staff.  Nevertheless, as of March 31, 2009, our chief executive officer and chief financial officer determined that 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.  Failure on our part to have effective internal financial and accounting controls could cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could adversely affect the trading price of our common stock.

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.  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 internal control deficiencies letter 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.

In their October 2007 letter, 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.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2007 and the effectiveness of our internal control over financial reporting as of December 31, 2007, our independent registered public accounting firm again identified a material weakness and some significant deficiencies in our internal control over financial reporting in a letter dated March 10, 2008.  Specifically, our independent registered public accounting firm noted a continuing material weakness relating to revenue recognition and our policies and procedures to ensure that modifications to, or side agreements associated with, our standard terms of contract were properly approved, documented, tracked and recorded.

In connection with the preparation and related audit of our financial statements for the year ended December 31, 2008, our management concluded that the same material weakness reported on December 31, 2007 continued to exist on December 31, 2008 with respect to revenue recognition policies and procedures.  In addition, management identified significant deficiencies relating to (i) approval processes for credit memos and special pricing terms and (ii) segregation of duties in our order management group.  Management noted that each of the audit committee’s 2007 recommendations had been completed but determined that a number of these remediation efforts had not been in place or tested for a sufficient period to conclude that they were effective.  In particular, we implemented standardized terms and conditions for customer quotes, contracts, and invoices in the fourth quarter of fiscal 2008, but only a small portion of our revenues in 2008 were generated in transactions entered under these standardized terms.  In addition, management concluded that the controls implemented to date have largely been focused on error detection and that we need to implement additional preventative controls designed to address potential errors before they occur.

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Any failure on our part to remedy identified control deficiencies, or any additional delays or errors in our financial reporting, whether or not resulting from the identified material weakness relating to revenue recognition or any significant deficiencies, would have a material adverse effect on our business, results of operations, or financial condition and could have a substantial adverse impact on the trading price of our common stock.

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 our company will have been detected.  As discussed in our Annual Report on Form 10-K and this Quarterly Report on 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 were 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, 2008.  We have expended significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes Oxley Act.  Our management and independent registered public accounting firm concluded that we did not maintain effective control over financial reporting as of December 31, 2008 based on the criteria in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  In this Quarterly Report on Form 10-Q, our management again concluded that we did not maintain effective internal controls as of March 31, 2009.  We cannot be certain that the actions we have taken and 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

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 Alcatel Lucent SA, Motorola, Tellabs and ADTRAN 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 companies, including Calix, 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;

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·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;

·our ability to establish and maintain effective internal financial and accounting controls and procedures and restore confidence in our financial reporting;

·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 with longer operating histories, and have substantially greater financial, technical, marketing or other resources; significantly greater name recognition; and a larger installed base of customers than we do.  Unlike many of our competitors, we do not provide equipment financing to potential customers.  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.

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 achieve 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.

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 recently enhanced our BLC 6000 platform to support active Gigabit Ethernet 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.  The introduction of new products is also 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.

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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 may only be detected when deployed in live networks that generate high amounts of communications traffic.  In addition, defects or other malfunctions or quality control issues may not appear until the equipment has been deployed for an extended period of time.  We also continue to introduce new products that may have undetected software or hardware defects.  Our customers may discover defects in our products at any time after deployment or 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 2007, we experienced higher than average failures of certain assemblies that were fabricated between October 2005 and January 2006 and identified a design issues associated with a transistor that resulted in equipment disruption and that required a rework effort.  As a result, we increased our warranty accruals in 2008.  Recently, we have identified malfunctions or defects that we were required to repair under applicable warranties (or elected to repair for customer relations purposes) related to equipment that had been in service for extended periods of times.  Defects, malfunctions, or other performance issues relating to our products could increase our warranty accruals and operating expenses, could have an adverse effect on market perceptions of our products, and could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.

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.

If we were to experience payment problems with either resellers or customers for whom we are unable to assess creditworthiness, it could have an adverse impact on our business, operating results, or financial condition.

Value added resellers, or VARs, account for a substantial portion of our revenue in a quarter.  Some of these VARs are not well capitalized, making collection of receivables from them uncertain.  In addition, in certain instances, we are limited in our ability to evaluate the creditworthiness of direct customers who decline to provide us with financial information.  In 2007, in connection with the restatement of our consolidated financial statements, we adopted a revenue recognition policy that we would not recognize revenue from those resellers who lacked an independent ability to pay us until we received cash payment.  Sales to VARs for whom we are not able to recognize revenue until we receive cash payment are reflected as deferred revenue.  Any collection problems we may experience with these resellers or direct customers could have an adverse impact on our business, operating results, or financial condition.  In particular, when we sell and ship to resellers and other customers, legal title to the equipment passes to the reseller or customer on shipment, even though we have not recognized revenue and the equipment continues to be reflected as inventory on our balance sheet.  Any material collection issues with resellers or other customers could result in increases in bad debt expense or collection costs, inventory impairments, or adjustments to our reported revenues or deferred revenues, any of which could result in a decline in our stock price.

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We rely on resellers to promote, sell, install and support our products to small customers in North America, and their failure to do so or our inability to recruit or retain resellers may substantially reduce our sales and thus seriously harm our business.

We rely on value added resellers who can provide high quality sales and support services.  We compete with other telecommunications systems providers for our resellers’ business as our resellers generally market competing products.  If a reseller promotes a competitor’s products to the detriment of our products or otherwise fails to market our products and services effectively, we could lose market share.  In addition, the loss of a key reseller or the failure of resellers to provide adequate customer service could have a negative effect on customer satisfaction and could cause harm to our business.  If we do not properly train our resellers to sell, install and service our products, our business, financial condition and results of operations will suffer.

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

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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.

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

We expect to expand our research and development, sales, marketing and support activities, including our activities outside the U.S. depending on future business and economic conditions.  Our historical growth has placed, and is expected to continue to 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 Quarterly Report on Form 10-Q under Part I, Item 4, 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.

A portion of our manufacturing was moved 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.

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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.  We may from time to time enter into original equipment manufacturer (OEM) and/or original design manufacturer (ODM) agreements to manufacture and/or design certain products.  Any of the sole source and limited source suppliers, OEM and ODM 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 and obsolete inventory write downs which impact our cost of revenue.  This may continue in the future, which would have an adverse effect on our gross margins, consolidated financial condition and consolidated 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 decline 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.

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Changes in existing accounting or taxation rules or practices may adversely affect our consolidated results of operations.  In addition, as we expand our business, we could become subject to taxation in new states or jurisdictions, which will require us to incur additional compliance costs and potential taxes and fees associated with complying with such tax laws.

We are subject to numerous tax and accounting requirements, and 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 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 or the way we conduct our business.

In recent years, the geographic scope of our business has expanded, and such expansion requires us to comply with the tax laws and regulations of multiple jurisdictions.  Requirements as to taxation vary substantially among states and other jurisdictions.  We have recently expanded our international sales activity and may become subject to foreign tax laws as well, particularly related to value added taxes.  Complying with the tax laws of these jurisdictions can be time consuming and expensive and could subject us to penalties and fees if we inadvertently fail to comply.  In the United States, tax authorities in states where we believed we were not subject to sales tax could assert jurisdiction and seek to collect sales taxes, which could result in increased compliance expense as well as penalties and could adversely affect our customer relationships if it is determined we need to collect sales taxes for prior transactions.  In the event we fail inadvertently to comply with applicable tax laws, it could have a material adverse effect on our business, results of operations, and financial condition.

The amount of our net operating loss carryforwards, or NOLs, is uncertain, and prior transactions to which we have been a party and future transactions to which we may become a party, including stock issuances and certain shareholder stock transactions may jeopardize our ability to use some or all of our NOLs.  In addition, California and certain states have recently suspended or are considering suspending, the ability to use net operating loss carryforwards in future years and this could adversely affect future operating results.

Based on current tax law, we believe we have certain net operating loss carryforwards, or NOLs, for U.S. federal and state income tax purposes to offset future taxable income.  As of March 31, 2009, we had incurred significant losses in the United States.  Our ability to utilize these NOLs may be subject to significant limitations under Section 382 of the Internal Revenue Code if we have undergone, or undergo in the future, an ownership change.  An ownership change occurs for purposes of Section 382 of the Internal Revenue Code if, among other things, stockholders who own or have owned, directly or indirectly, 5% or more of our common stock (with certain groups of less-than-5% stockholders treated as a single stockholder for this purpose) increase their aggregate percentage ownership of our common stock by more than fifty percentage points above the lowest percentage of the stock owned by these stockholders at any time during the relevant three-year testing period.  In the event of an ownership change, Section 382 imposes an annual limitation, based upon our value at the time of the ownership change, on the amount of taxable income a corporation may offset with NOLs.  Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs.

We believe that past events, such as the merger of Occam CA with Accelerated Networks, our private placements of preferred stock, and other equity transactions (including our 2006 public offering) triggered an ownership change for purposes of Section 382 of the Internal Revenue Code.  Even if certain of these prior transactions did not trigger an ownership change, they increased the likelihood that we may undergo an ownership change in the future.  Any such ownership change would limit, possibly significantly, our ability to use any U.S. federal and state NOLs as described above.

To the extent that these NOLs become significantly limited, we expect to be taxed on our income, if any, at the U.S. federal and state statutory rates.  As a result, any inability to utilize these NOLs would adversely affect future operating results by the amount of the federal or state taxes that would not have otherwise been payable, having an adverse impact on our operating results and financial condition.  In addition, inability to use NOLs would adversely affect our financial condition relative to our financial condition had the NOLs been available.  In addition, California and certain states have suspended use of NOLs,

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and other states are considering similar measures.  As a result, we may incur higher state income tax expense in the future.  Depending on our future tax position, continued suspension of our ability to use state NOLs could have an adverse impact on our operating results and financial condition.

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.  In October 2007, we acquired certain assets and assumed certain liabilities of Terawave Communications and we have evaluated, and expect to continue to evaluate, a wide array of 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.

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.

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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 or the imposition of taxes on Internet access service, 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.

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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 24 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 against us and may assert against us 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.  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 March 31, 2009, our executive officers, directors and their affiliates beneficially owned, in the aggregate, approximately 28.3% of our outstanding common stock, of this 26.9% is collectively owned by investment funds affiliated with U.S. Venture Partners and Norwest Venture Partners.  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.

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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 began trading on The NASDAQ Global Market in November 2006.  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 Annual Report on Form 10-K 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;

·a slowdown in the telecom industry or general economy; and

·continuation of the current economic and credit crisis.

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 the restatement of our consolidated financial statements.  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, 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;

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·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 12 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.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business.  If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted.  If one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline.  If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause or stock price or trading volume to decline.

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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

None

ITEM 6.EXHIBITS

Exhibit Number	Exhibit Title
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.

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SIGNATURES

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

Dated: May 8, 2009	OCCAM NETWORKS, INC.
	(Registrant)
	By:	/s/ JEANNE SEELEY
		Jeanne Seeley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Exhibit Title
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.

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