Occam Networks (OCNW) - Description of business

Overview

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

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

We were incorporated in California in 1996 as Accelerated Networks, Inc. and reincorporated in Delaware in 2000. In 2002 we merged with Occam Networks, Inc., which was incorporated in California in 1999. In connection with the merger, we changed our name to Occam Networks, Inc. Our principal executive offices are located at 77 Robin Hill Road, Santa Barbara, California 93117. Our telephone number at that address is (805) 692-2900. Our website is www.occamnetworks.com . The contents of our website are not incorporated by reference into this Annual Report on Form 10-K.

Throughout this report, we will refer to “Occam Networks, Inc.” as “Occam” or “Occam Networks.” Occam Networks, Inc., the California corporation acquired by Accelerated Networks in 2002 is sometimes referred to as “Occam CA.”

Industry Background

Existing Network Infrastructure

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

Limitations of Existing Telecommunications Infrastructure

The communications network has experienced significant growth and change during the past decade as the exponential growth of networks and the Internet, and the accompanying increase in data traffic, have increased

demand for high bandwidth communications networks. Telecommunications carriers have had difficulty, however, in meeting this increased demand for broadband Internet access and other bandwidth intensive applications and services due to significant constraints of the traditional copper wire communications infrastructure. To begin addressing increased customer demand for higher bandwidth, carriers began deploying high-speed optical networks in the long-haul and metro portions of their networks. However, a bottleneck continues to impede effective delivery of high-bandwidth services in the local-loop access network. Specifically, the existing local loop infrastructure was originally designed for low-speed analog voice traffic rather than high-speed digital data transmission. Access to video over a dial-up modem is nearly impossible. The cost of rewiring individual customer premises with fiber-optic cable to deliver higher bandwidth services, however, is both costly and time consuming. Thus, many telecommunications carriers have sought to employ alternative technologies to make more efficient use of the existing copper wire infrastructure in the local loop.

Emergence of DSL for Broadband Access

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

DSL equipment can be located in a central office or in digital loop carriers, which are in remote terminals, placed curbside primarily in residential areas. In order to provide DSL service to a customer whose first access point to the telecommunications network is through a remote terminal, the carrier must deploy DSL equipment in the remote terminal.

Carriers have traditionally deployed separate network equipment in the remote terminal to deliver voice and DSL services. Deploying separate network equipment is costly and, because of space constraints at the remote terminal, places significant limitations on the number of customers served. Carriers are seeking an integrated system for the delivery of voice and DSL services in order to deliver broadband access to a larger number of customers while significantly reducing the total costs of DSL deployment and operation.

In recent years, carriers are increasingly looking to replace these copper connections in the last mile with fiber optic cable to provide higher speed internet and data services, as well as a variety of entertainment services such as IPTV, video on demand, and gaming services. Depending upon the exact kind of electronics that are connected to this fiber optic cable, the data speeds offered, commonly referred to as “bandwidth”, is 10 to 100 times faster than with copper cable.

Increased Competition in Telecommunications Services Market

As cable service providers enter traditional telecommunication markets, carriers are seeking to add additional high-bandwidth, high-margin services to their networks, such as broadcast video and video on demand. In order to deliver video to residential customers, telecommunications carriers will be required to deploy the latest generation of asymmetrical DSL (ADSL2+) to provide enough bandwidth to enable broadband transmission of multiple video streams over the local loop. ADSL2+ can simultaneously support two or three video channels to distances of 8,000 to 10,000 feet. A new technology, Very High Speed Digital Subscriber Line (“VDSL2”) has been standardized and will offer higher speed services on shorter copper lines. The introduction of either of these DSL technologies in the local loop will likely result in broader deployment of remote terminals and an increase in the percentage of telecommunications customers who are delivered DSL through these remote terminals. In addition to DSL’s distance limitations, transmission speeds are also limited by the architecture and capabilities of the equipment that is currently deployed in the remote terminals.

Transitioning of the Telecommunications Network

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

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

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

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

The Occam Networks Solution

Our BLC 6000 product line is an equipment system with components deployed in remote terminals and in central offices. The system provides connectivity from the residence or business premises to the carrier’s central office. Remote terminals provide the connections to the end customer and aggregate the service traffic for multiple customers for connection to the central office. The central office equipment combines individual user

voice and data traffic flows from multiple remote terminals into a format interoperable with existing telephone and data switches. Because the BLC 6000 system converts an ordinary telephone line, or local loop, into a broadband loop, we refer to our product as a Broadband Loop Carrier, or BLC. It also provides carriers the ability to run optical fibers of Active Gigabit Ethernet from either the central office or remote directly to the end-user residence or business, enabling services of more than 100 times that possible over twisted pair copper telephone lines or other optical technologies such as PON.

The BLC 6000 system integrates into a single product line the functionality that is currently provided by separate voice, DSL access and fiber optic access products. The BLC 6000 adds video capabilities to the voice and data service mix that is supported. It is a modular system that can be deployed in very-high-capacity networks, but also proves economical for low-capacity sites. It can be deployed with as few as 48 ports in a 1  3 / 4 ” high stackable shelf or up to 576 ports in a high capacity 12-slot chassis. Deployed in standard racks in a central office or in large remote terminal cabinets, it can support tens of thousands of customers. Our BLC systems are environmentally hardened to withstand wide variations in temperature, humidity and other environmental conditions found in telephone-company outside plants.

Lower Cost to Activate DSL Customers

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

Leverage Internet Technologies

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

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

Softswitch Interoperability

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

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

The Occam Networks Strategy

Our strategy is to become a leading provider of local-loop access equipment to telecommunications carriers, such as regional bell operating companies, independent telephone companies and international carriers. We

intend to leverage our BLC product lines to establish ourselves as a leader in the advanced generation of local loop equipment. This equipment facilitates the deployment of broadband and telephony services, and has evolved from the Next Generation Digital Loop Carrier, or NGDLC, market. Key elements of Occam’s strategy include:

Drive Packet, Ethernet and IP Technologies into the Local Loop

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

Deliver Ethernet Transport to the DLC Market

We have integrated Ethernet transport into our Broadband Loop Carrier product line, which bridges the local loop to the metro and long haul Ethernet networks resulting in an end-to-end Ethernet service. By significantly reducing the number of network elements, carriers can simplify their networks. We have developed a new approach to building resilient backbone networks using Ethernet, called Ethernet Protection Switching. We believe that our approach of using Ethernet transport as opposed to the current transport methods, such as SONET, will allow carriers to provide greater scalability and greater bandwidth at a fraction of the cost. We will continue to deliver transport solutions that scale from 100 Mbps to 1 Gigabit per second, or Gbps, to 10 Gbps and 40 Gbs by leveraging four different generations of Ethernet semiconductor technology.

Facilitate Network Migration from Circuit Switched Architecture to Packet Switched Architecture

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

Deliver a Comprehensive DLC Solution

We deliver a family of products that represents a comprehensive DLC solution for copper and fiber-based local loop infrastructure. Our products are used as central office terminal and remote terminal platforms and for a variety of other applications, such as fiber-to-the-curb and fiber-to-the-home, through a combination of DSL, Ethernet and optical networking technologies. Our DLC solution enables traditional and softswitch voice access and DSL access. In addition, our DLC solution allows carriers to offer a variety of services, such as voice, data, Internet and video. We have integrated, or intend to integrate a variety of access interfaces, such as voice, ADSL, ADSL2Plus, VDSL2, Active Gigabit Ethernet over fiber optic cable and Ethernet over DSL.

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

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

Aggressively Pursue Innovators in the Carrier Market

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

Continue Technological Innovation

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

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

Agreements with Tellabs

On March 18, 2005, we entered into a strategic alliance with Tellabs, Inc. and certain of its subsidiaries. We believe that this alliance broadens our distribution channels and improves our ability to access large telecommunication companies such as the regional Bell operating companies. Our agreements with Tellabs are described in more detail below. In connection with the alliance, Tellabs made a $2.0 million investment in our Series A-2 Preferred Stock.

Manufacturing License Agreement

We have entered into a Manufacturing License Agreement dated March 18, 2005 with Tellabs Petaluma, Inc. (“TPI”), a subsidiary of Tellabs, Inc. and previously known as Advanced Fibre Communications, Inc. Under the manufacturing license, we have licensed TPI the right to manufacture a specific list of our broadband loop carrier (BLC) products.

TPI may distribute and sell the BLC products that it manufactures only to an identified list of customers to whom we have given TPI exclusive rights, as described below. These customers include companies affiliated with the following three regional Bell operating companies: BellSouth, SBC, and Verizon. In addition, the customer list includes five independent operating companies in the United States, certain regional telecommunications service providers in Canada, and certain Verizon subsidiaries in identified markets in the Caribbean and Latin America. TPI may distribute and sell the BLC products to these customers only for use as part of the customer’s telephone networks in the United States or Canada and, with respect to sales to the Verizon subsidiaries, in the identified markets in the Caribbean and Latin America.

The license rights granted under the manufacturing license are exclusive in that we may not sell the listed BLC products to this list of customers for two to three years, with the time period depending on the potential customer. To maintain exclusivity for each potential customer, TPI must conduct a successful lab trial with each customer within 18 months to two years (depending on the customer) and enter into definitive written agreement to sell a BLC product to that customer within two to three years (again depending on the customer and when the lab trial is completed). TPI can extend the period to achieve these milestones by paying us an extension fee. In exchange for the license, TPI will pay us a royalty for each BLC product sold by TPI. The manufacturing license agreement will expire when the last exclusivity period has expired.

Technology License Agreement

We also entered into a Technology License Agreement dated March 18, 2005 with TPI. Under the technology license agreement, we licensed TPI the right to integrate parts of our gigabit ethernet switching and transport subsystems technology (known as “Blade Technology”) into TPI Fiber to the Curb (FTTC) card products. The license is nonexclusive and is not restricted to a particular set of customers. In exchange for the license, TPI will pay us a royalty for each FTTC card product sold by TPI. TPI will also compensate us for transferring the Blade Technology to TPI and for helping TPI to integrate the Blade Technology into FTTC card products. The term of the technology license agreement is five years, but the license granted is perpetual, subject to the conditions set forth in the agreement.

Supply Agreement

At the same time, we entered into a Supply Agreement with Tellabs North America, Inc. (“TNA”), a subsidiary of Tellabs, Inc. We will supply TNA with BLC products for demonstration and testing purposes associated with the sale of BLC products by TPI to the listed exclusive customers under the Manufacturing License Agreement. TNA will supply us with telecommunication cabinet products and BLC products, which BLC products are manufactured by TPI under the Manufacturing License Agreement. The Supply Agreement will terminate when the Manufacturing License Agreement terminates.

Products

Current Products

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

  •   BLC 6001 Stackable Chassis. The BLC 6001 chassis houses a single BLC 6000 blade. It may be deployed as a standalone unit for low capacity applications or as part of a stack with other units for medium density applications.

  •   BLC 6012 High Capacity Chassis. The BLC 6012 chassis houses up to twelve BLC 6000 blades for deployment in high capacity applications.

  •   6150 Lifeline POTS Blade. The 6150 Lifeline POTS Blade provides 48 Plain Old Telephone Service (POTS) ports for customer telephone service and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection along with multiple T1 ports. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.

  •   6151 Lifeline POTS Blade. The 6151 Lifeline POTS Blade provides 48 Plain Old Telephone Service (POTS) ports for customer telephone service. It is designed to operate with other blades providing the Gigabit Ethernet transport function. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.

  •   6152 Lifeline POTS Blade. The 6152 Lifeline POTS blade provides 48 ports to deliver standard telephony Lifeline POTS services and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection. The blade acts as a line access gateway, converting analog voice traffic to VoIP with MGCP signaling for transport through a BLC 6000 system.

  •   6212 ADSL2Plus Blade. The 6212 ADSL2Plus Blade provides 48 ADSL2Plus ports for customer data and video services, and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.

  •   6214 ADSL2Plus Blade. The 6214 ADSL2Plus Blade provides 48 ADSL2Plus ports with integrated POTS splitters for customer data and video services, and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.

  •   6252 ADSL2Plus and POTS Blade. The 6252 ADSL2Plus and Lifeline POTS Blade provides 48 combination POTS and ADSL2Plus ports for voice, data, and video service delivery and multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.

  •   6312 Optical Line Termination Blade. The 6312 Optical Line Termination Blade provides 20 Gigabit Ethernet ports for customer data and video services, and multiple Gigabit and 10Gigabit Ethernet ports for optical fiber transport and blade interconnection.

  •   6440 Optical Packet Transport Blade. The 6440 Optical Packet Transport Blade provides Gigabit Ethernet ports for optical fiber transport and blade interconnection, and supports up to 8 T1 lines for transport or up to 4 T1 lines for customer service delivery.

  •   6640 Subscriber Trunk Gateway Blade. The 6640 Subscriber Trunk Gateway Blade provides up to 8 T1 connections supporting traditional voice switches using the TR-08 or GR-303 voice interface protocols. It also supports multiple Gigabit Ethernet ports for optical fiber transport and blade interconnection.

  •   6660-01 Emergency Stand-Alone Blade. The 6660-01 Emergency Stand-Alone Blade and BLC 6660-01 Assembly provide for local dialing to Emergency Service facilities and calls between local POTS subscribers during network outages. In ESA enabled networks, a loss of connectivity to the local digital switch does not prevent local calling for POTS subscribers.

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

OccamOS. The OccamOS is not a stand-alone product, but is our embedded operating system, which creates a highly extensible environment to tailor the Occam BLC product family to the specific requirements of each carrier. OccamOS is modular, highly scalable and provides BLCs with high reliability.

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

Products in Development

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

  •   Reducing the overall cost of solutions,

  •   Improving maintainability and ease of deployment for customers,

  •   Adding 10Gigabit transport capabilities to the 6000 family, and

  •   Adding features, like additional IP Layers services and SIP voice switching capacities that have been requested by our customers.

Customers

To date, we have shipped product to more than 125 customers. Our current and target customers include:

Independent Telephone Companies

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

Regional Bell Operating Companies

Regional bell operating companies (“RBOCs”) are the Incumbent Local Exchange Carriers (“ILECs”) in the United States formed by the 1983 divestiture of AT&T and subsequently partially recombined through mergers. The four regional bell operating companies are Qwest Communications, AT&T Communications, Verizon Communications Inc. and BellSouth Corporation, accounting for approximately 85% of the total installed telephone lines in the United States. On March 24, 2005, we entered into a strategic alliance with Tellabs, Inc. and certain of its subsidiaries to improve our ability to access to the RBOC’s. To date, we have not recognized an appreciable amount of revenue from this segment.

Competitive Local Exchange Carriers

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

PTTs

PTTs are the governmental agencies and their successors responsible for combined postal, telegraph and telephone services in countries worldwide. Examples include France Telecom in France, Deutsche Telecom in Germany, Telefonica in Spain and Telia in Sweden. To date, our sales outside of North America have been immaterial.

Industry Relationships

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

Research and Development

We have a team of engineers dedicated to conducting research and developing innovative solutions in specific technology areas that are strategic to our business. The collective talent of the Occam research and

development team has knowledge-base and experience covering the full spectrum of technologies, ranging from digital loop carrier, voice signaling, call control, IP networking, Ethernet networking and switching, DSL, optical networking and network management. We also work with our suppliers of technology, silicon and software to further increase our technological lead over our competitors.

We continue to make substantial investments in research and development. Research and development expenses, including amortization of stock-based compensation, were approximately $7.4 million, $7.4 million and $12.0 million during the fiscal years ended 2005, 2004 and 2003, respectively. Our primary research and development center is based in Santa Barbara, California. We have additional development centers in Camarillo, California and Mesa, Arizona.

Patents and Intellectual Property

We currently rely on a combination of patent, copyright and trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights with respect to our technology and proprietary information. We have been granted sixteen patents, have filed several additional patent applications, and intend to file additional patent applications. These patents expire over the next 13 to 15 years. Our patent strategy is designed to protect corporate technology assets, to create access to additional technology through cross-licensing opportunities and to create opportunities for additional revenue through technology licensing. We cannot provide any assurance that any patents will be issued from pending applications or that any issued patents will adequately protect our intellectual property.

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

Sales and Marketing

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

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

For the year ended December 31, 2005, CT Communications accounted for approximately 11% of our revenue. For the year ended December 31, 2004, Kratz Communications, a value added reseller representing several end users, Palmetto Rural Telephone Coop, and CT Communications, accounted for approximately 17%, 12%, and 11%, respectively, of our revenue. For the year ended December 31, 2003, FairPoint Communications, Inc. and Comporium Group accounted for approximately 15% and 14%, respectively, of our revenues.

Historically, a significant portion of our revenue has been derived from a small number of orders and our sales have been made based on individual purchase orders and certain long-term RUS funded contracts that are

funded by the United States Department of Agriculture’s Rural Utilities Service (RUS). The terms of the RUS contracts provide that in certain instances transfer of title of Occam’s products does not occur until payment has been received.

Technical Services and Customer Support

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

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

Backlog

Our backlog primarily consists of purchase orders from customers for products to be delivered within the next quarter. Our backlog as of March 8, 2006, and December 31, 2005 was approximately $10.5 million and $14.5 million, respectively. Due in part to factors such as the timing of product release dates, customer purchase orders, product availability, allowing customers to delay scheduled delivery dates without penalty, or allowing customers to cancel orders within negotiated time frames without significant penalty, our backlog may not be indicative of sales during any subsequent quarter.

Competition

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

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

  •   support for multiple access technologies and network protocols;

  •   ability to efficiently aggregate different traffic types, such as voice, data, Internet, video;

  •   flexibility and interoperability with existing and future network designs and equipment;

  •   time to market;

  •   cost-effectiveness (both for the equipment and its continuing cost of ownership);

  •   scalability without interruption of service; and

  •   reliability.

The strength of our product and solution architecture, we believe, enables us to compete effectively with all of these customer types.

Manufacturing

We outsource significant portions of our manufacturing operation to third-party manufacturers and have a signed manufacturing out-sourcing contract with Flash Electronics, located in Fremont, California. This relationship supercedes prior manufacturing agreements with CTS (formerly Smtek), located in Moorpark, California, which manufactured our products through October 2005. This agreement provides for material procurement, board level assembly, testing, purchase commitments and quality control by the manufacturer, and delivery to our end customers. Our products are primarily manufactured in the U.S. but we are also exploring offshore manufacturing to save costs. We design, specify and monitor all of the tests that are required to meet our internal and customer quality standards. In 2001, Occam received certification to ISO 9001:2000 by TÜV Rheinland of North America. In 2004, we were audited and certified for another 3 years.

We have several single or limited source suppliers. Although our products could be redesigned to avoid using any sole source supplier, it would be expensive and time consuming to make such a change.

Geographic Information

During our last three fiscal years, substantially all of our revenue was generated within North America and all of our long-lived assets are located within the United States.

Governmental Regulation

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

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

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

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

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

Countries in the European Union, or EU, have also adopted laws relating to the provision of Internet services, the use of the Internet, and Internet-related applications. For example, in the United Kingdom, an Internet service provider, or ISP, may be liable for defamatory material posted on its sites. In Germany, an ISP may be liable for failing to block access to content that is illegal in the country. In addition, the EU has adopted a data protection directive to address privacy issues, impacting the use and transfer of personal data within and outside the EU. The application of this directive within the EU and with respect to U.S. companies that may handle personal data from the EU is unsettled. Similarly, countries in Europe restrict the use of encryption technology to varying degrees, making the provision of such technology unclear. Other laws relating to Internet usage are also being considered in the EU.

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

Employees

As of March 1, 2006, we employed 101 full-time employees, including 43 in sales and marketing, 9 in operations and manufacturing, 39 in engineering, and 10 in finance and administration. All of our employees are located in the United States. None of our employees is represented by collective bargaining agreements. We consider our relations with employees to be good.

ITEM IA. RISK FACTORS

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

Competition in the communications networking equipment market is intense and we expect competition to increase. The market for networking equipment is dominated primarily by manufacturers of legacy digital loop carrier equipment, such as Nortel Networks Corporation, Lucent Technologies Inc., Alcatel SA, and Tellabs Inc. A number of emerging companies have developed or are developing products that may compete with our products. Many of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources than we have. As a result, they may also have a substantial advantage over us in developing or acquiring new products and technologies and in creating market awareness for those products, services and technologies. Further, many of our competitors have built long-standing relationships with some of our potential customers, have the ability to provide financing to them and may, therefore, have an inherent advantage in selling network equipment products to these customers. We expect our

competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. To be competitive, we must continue to invest significant resources in research and development, sales, marketing and customer support. We may not have sufficient resources to make these investments, make the technological advances necessary to be competitive, or be able to effectively sell our products to carriers who have prior relationships with our competitors.

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

  •   significant reductions in demand for any of our products;

  •   delays or cancellations of future customer orders;

  •   reductions of the prices on any of our products; or

  •   increases in our expenses.

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

We have incurred significant losses since inception, and we cannot guarantee that there will not be losses or significant negative cash flows. As of December 31, 2005, we had an accumulated deficit of approximately $108.8 million and we have experienced net losses in each of our prior three fiscal years.

We have large fixed expenses and will continue to incur significant expenses for research and development, sales and marketing, customer support and general and administrative expenses. Given the rate at which competition in the telecommunications equipment industry is intensifying, we may be unable to adequately control our costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels.

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

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

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

We do not expect our order backlog to be significant at the beginning of each quarter for the foreseeable future. Accordingly, in order to achieve our revenue objectives, we will need to obtain additional orders in each quarter for shipment in that quarter. In addition, due in part to factors such as the timing of product release dates, purchase orders and product availability, we may experience delays in our ability to ship our products. We may incur additional costs and expenses if we allow customers to cancel orders within negotiated time frames or delay scheduled delivery dates without significant penalty. If we fail to ship products by the end of a quarter, our operating results would be materially and adversely affected for that quarter.

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

Lead times for the materials and components that we order from our contract manufacturers will vary significantly and depend on numerous factors, including the specific supplier, contract terms and demand for a

component at a given time. If we overestimate our component requirements, our contract manufacturers may purchase excess inventory. If the contract manufacturers purchase excess inventory that is unique to our products, we could be required to pay for these excess parts and recognize related inventory write-down costs. If we underestimate our component requirements, our contract manufacturers may have an inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenue.

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

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

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

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

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

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

Periodically, we may be required to license technology from third parties to develop new products or product enhancements. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to obtain necessary third-party licenses may force us to obtain substitute technology of lower

quality or performance standards or at greater cost, any of which could seriously harm the competitiveness of our products and which would result in a material and adverse effect on our business, financial condition and results of operations.

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

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

If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales or could be required to make unanticipated expenditures to remedy the errors, which could have a material adverse effect on our revenues, results of operations or financial condition.

Although our products have recently been widely deployed we cannot be sure that our products do not contain significant software or hardware errors that could only be detected when deployed in live networks that generate high amounts of voice and/or data traffic. We also continue to introduce new products that may have undetected software or hardware errors. Our customers may discover errors or defects in our products after broad deployment and as the customers’ networks expand and are modified. Any defects or errors in our products discovered in the future, or failures of our customers’ networks, whether caused by our products or those of another vendor, could result in loss of or delay in revenue, loss of market share and negative publicity regarding our products. For example, during fiscal 2004, we experienced yield problems and unusually high repair costs on our new BLC 6000 installations. As a result, we experienced higher than anticipated costs of sales, which management believes were necessary to maintain customer satisfaction. Any of these occurrences could have a material adverse effect on our business, results of operations and financial condition.

We may invest a significant amount of our resources to develop, market and sell our products and may not realize any return on this investment.

We may invest a significant amount of our resources to develop market and sell our products. If our products do not quickly achieve market acceptance, they may become obsolete before enough revenue has been generated from the sales of these products to realize a sufficient return on investment. Furthermore, the rapidly changing technological environment in which we operate can require the frequent introduction of new products, resulting in short product lifecycles. In addition, we may need to write-down inventories to reduced values or

write-off excess and obsolete inventory. If we incur substantial development, sales, marketing and inventory expenses that we are unable to recover, and are unable to compensate for such expenses, our business, financial condition and results of operations could be materially and adversely affected.

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

We cannot predict whether there will be a market for our products in the future. As a result, our revenues and the market for our products may not be sufficient to support our ongoing operations in the foreseeable future.

Beginning in late 2000 and continuing into 2004, the telecommunications industry experienced a severe downturn, and many telecommunications companies that survived the downturn substantially curtailed their investments in new equipment. Although the telecommunications industry has recently demonstrated signs of recovery from the downturn, any decision by telecommunications companies to curtail capital expenditures, whether caused by economic cycles or other reasons, would have a material adverse effect on our business, results of operations and financial condition.

Demand for our products may not continue to develop in the future.

We cannot be certain that there will be continuing demand for our products or that the demand will grow. Demand for Occam’s product will depend on the continued growth of data traffic volume and our prospective customers’ need to expand the capacity of existing local distribution networks. We do not know if the volume of data traffic or the requirement for increased bandwidth in existing local distribution networks will continue to grow, or that the growth will create a demand for our products. It is difficult to predict how the market for our products will develop and at what rate it will grow, if at all.

We have announced a strategic alliance with Tellabs, Inc. under which we gave Tellabs subsidiaries exclusive rights for a limited period to sell certain of our BLC products to identified customers, including three of the four regional Bell operating companies in the United States, five independent operating companies in the United States, and certain regional telecommunication service providers in Canada. We cannot predict what effect, if any, the alliance with Tellabs will have on our revenues in future periods. In particular, we cannot predict whether granting exclusive rights to Tellabs with respect to the identified customers will improve our ability to access and sell into larger telecommunication companies.

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

A customer’s decision to purchase our products often requires a significant commitment of resources from the customer and usually involves a lengthy product evaluation and qualification process prior to any firm purchase commitment. As a result, we may incur substantial sales and marketing expenses and expend significant management effort without any guarantee of a sale. In addition, our sales cycles may be lengthy, the length of which will vary depending on the type of customer to whom we are selling. As a result of the above factors, our quarterly revenue and operating results may vary significantly.

If the development and adoption of relevant industry standards do not occur on a timely basis, our products may not achieve market acceptance.

Our ability to achieve market acceptance for our products will depend in part on the timing and adoption of industry standards for new technologies in our relevant markets. Many technological developments occur prior to the adoption of relevant industry standards. The absence of an industry standard related to a specific technology may prevent widespread market acceptance of products using that technology. The existence of multiple competing standards may also retard or delay the development of a broad market for our products. We may

develop products that use new technologies prior to the adoption of industry standards related to these technologies. Consequently, our products may not comply with eventual industry standards, which could hurt our ability to sell our products and also require us to quickly design and manufacture new products that meet such standards. Even after industry standards are adopted, the future success of our products depends upon widespread market acceptance of our underlying technologies.

Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could harm our business.

The jurisdiction of the Federal Communications Commission (the “FCC”) extends to the entire communications industry, including our customers. Future FCC regulations affecting the broadband access industry, our customers, or the service offerings of these customers, may harm our business. For example, FCC regulatory policies affecting the availability of data and Internet services may impede the penetration of our customers into certain markets or affect the prices that may be charged in such markets. In addition, international regulatory bodies are beginning to adopt standards and regulations for the broadband access industry. These domestic and foreign standards, laws and regulations address various aspects of Internet, telephony and broadband use, including issues relating to liability for information retrieved from or transmitted over the Internet, online context regulation, user privacy, taxation, consumer protection, security of data, access by law enforcement, tariffs, as well as intellectual property ownership, obscenity and libel. Changes in laws, standards and/or regulations, or judgments in favor of plaintiffs in lawsuits against service providers, e-commerce and other Internet companies, could adversely affect the development of e-commerce and other uses of the Internet. This, in turn, could directly or indirectly materially adversely impact the broadband telecommunications and data industry in which our customers operate. To the extent our customers are adversely affected by laws or regulations regarding their business, products or service offerings, this could result in a material and adverse effect on our business, financial condition and results of operations.

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

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

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

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

We depend on our proprietary technology for our success and ability to compete successfully in our market. We currently hold thirteen issued patents and have several patent applications pending. We will rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing 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 United States. We cannot assure investors that any pending patent applications will actually 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, potentially resulting in loss of a competitive advantage and decreased revenue.

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

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

We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. In addition, in our agreements, we may agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Any claims asserting that our products infringe or may infringe on proprietary rights of third parties, with or without merit, could be time-consuming, resulting in costly litigation and diverting the efforts of technical and management personnel. These claims could also result in product shipment delays or require us to modify our products or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.

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

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

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

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

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

Our business and operations depends on the extent to which our facilities and products are protected against damage from fire, earthquakes, power loss, and similar events. Despite precautions we have taken, a natural disaster or other unanticipated problem could, among other things, hinder our research and development efforts, delay the shipment of our products and affect our ability to receive and fulfill orders. For example, because the final assembly and assembled product testing of our product line is performed in one location, any fire or other disaster at this location would have a material adverse effect on our business, results of operations and financial

condition. While we believe that our insurance coverage is comparable to those of similar companies in our industry, it does not cover all natural disasters, in particular, earthquakes or floods.

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

Our common stock is currently traded on the over the counter market (“OTC”). Trading on the OTC Bulletin Board may adversely impact our stock price and liquidity, and the ability of our stockholders to purchase and sell our shares in an orderly manner. In particular, limited trading volumes and liquidity may mean that stockholders are unable to purchase or sell our common stock in the amounts and at the times they wish. Trading volume in the 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 Occam or general trends in the stock market.

Under regulations required by the Sarbanes-Oxley Act of 2002, our auditors could issue a qualified or adverse opinion on our internal controls, and this could have a negative impact on our stock price.

We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our fiscal year ending December 31, 2006. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments.

In connection with the review of our internal controls, our management and independent auditors have observed control deficiencies relating to (i) documentation, assessment, and testing of key controls over financial processes, including revenue recognition; (ii) limitations in financial staffing, with related inadequacies in segregation of duties; (iii) processes for preparation and review of SEC filings, press releases and review of financial schedules; and (iv) documentation and review of the basis of, support for, and considerations surrounding significant accounting estimates. Because Section 404 does not currently apply to us, we have not determined whether any of the control deficiencies identified above constitute a “material weakness” or “significant deficiency” (as defined by the relevant accounting standards) although it is likely that one or more would.

To address these control deficiencies, we have implemented certain remedial actions, including engaging an outside consultant to make recommendations and assist in the remedial process and increasing the staffing of our finance department. We continue to evaluate the status of our internal controls and to take additional actions that are necessary to resolve the control deficiencies identified above.

While we are expending significant resources in developing the necessary documentation and testing procedures required by Section 404, we cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient or that we will be able to implement our planned processes and procedures in a timely manner. If we do not complete our compliance activities under Section 404 or the processes and procedures that we implement for our internal controls over financial reporting are inadequate, our independent auditor may either issue a qualified opinion on the effectiveness of our internal controls or disclaim an opinion altogether as it relates to our internal controls or this could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and such a reaction could also make it more difficult for us to finance our operations

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

Our strategy includes developing products for the local access network, or local loop, that incorporate Ethernet and Internet Protocol technology. If these technologies are not widely adopted by telecommunications

carriers operating in the local loop, demand for our products based on Ethernet and Internet protocol may never develop. As a result, we may be unable to recoup its expenses related to the development of these products and our results of operations would be harmed.

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

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

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

We may need to raise further cash 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 Occam and its stockholders and could result in substantial dilution to the equity and voting interests of Occam’s stockholders. For example, holders of our common stock have experienced substantial dilution as a result of the issuance of the Series A-2 preferred stock, which is entitled to rights and preferences that are senior to the common stock, including a liquidation preference equal to 150% of the original purchase price and the right to participate up to certain caps with the common stocks in distributions in excess of 150%. Any failure to obtain financing when and as required will have an adverse and material effect on Occam’s business, financial condition and results of operations.

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

Our executive officers, directors and their affiliates beneficially own, in the aggregate, in excess of a majority of its common stock and approximately 81.5% of our Series A-2 preferred stock. In particular, investment funds affiliated with U.S. Venture Partners and Norwest Venture Partners collectively control approximately 66.8% of the our outstanding voting stock (including 71.4% of our common stock and 64.1% of our Series A-2 preferred stock). A representative of each of these funds is a director of Occam. These stockholders will be expected to 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. In addition, Alta partners, a venture capital investment firm that currently controls 25.9% of Series A-2 preferred stock and 16.2% of our total outstanding voting stock has a contractual right at any time to designate a director to serve on our board.

In connection with mergers, acquisitions, and similar transactions involving Occam, holders of our Series A-2 preferred stock will be entitled to receive a substantial liquidation preference before any payments or distributions may be made to common stockholders.

Because of the liquidation preference of the Series A-2 preferred stock, holders of common stock, may receive less consideration, if any, in connection with future acquisitions or liquidations of Occam than a holder of shares of Series A-2 preferred stock that are convertible into the same number of shares of common stock held by the common stockholder. Our Series A-2 preferred stock is entitled to a liquidation preference equal to 150% of the original purchase price of the Series A-2 preferred. Each share of outstanding Series A-2 preferred stock was sold for $10. In connection with a liquidation or dissolution of Occam, which includes acquisitions of Occam or sales of all or substantially all of its assets, holders of Series A-2 preferred stock will be entitled to receive $15 for each share of Series A-2 preferred stock they hold before any payments may be made to holders of common stock. If the proceeds, consideration, or assets, as the case may require, available for distribution to stockholders

are not sufficient to pay the full $15 liquidation preference per Series A-2 share, the available proceeds, consideration, or assets will be distributed on a pro-rata basis among holders of Series A-2 preferred stock, and holders of common stock will receive nothing. In addition, after the liquidation preference has been paid, holders of Series A-2 preferred stock will participate on a share-for-share “as-converted” basis with holders of common stock in any additional distributions or payments, until such time as the holders of Series A-2 preferred stock have received 300% of their original purchase price or $30 per share. As a result of the Series A-2 liquidation preference and participation right, a holder of shares of Series A-2 preferred stock may receive a substantially larger distribution or payment than a holder of the same number of shares of common stock into which such holder’s Series A-2 preferred stock is convertible. In addition, the Series A-2 stockholder may receive a distribution in circumstances where the common stockholder receives nothing. As of March 10, 2005, without giving effect to any additional shares we may issue, our Series A-2 preferred stockholders were entitled to receive liquidation proceeds of $58.5 million before any payments may be made to common stockholders.

The Series A-2 private placement and rights offering may jeopardize Occam’s ability to use some or all of its net operating loss carryforwards.

As of December 31, 2005, Occam had incurred significant losses in the United States and had net operating loss (NOL) carryforwards of approximately $227.6 million (for federal tax purposes) and $150.2 million (for state tax purposes) to offset future federal and state taxable income, if any. Occam’s federal and state NOL carryforwards expire through 2024 and 2014, respectively. Occam’s ability to utilize its NOL carryforwards may be subject to significant limitations under Section 382 of the Internal Revenue Code if Occam has or will undergo an ownership change. Occam may undergo an ownership change if, among other things, stockholder who own or have owned, directly or indirectly, 5% or more of Occam’s common stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated there under increase their aggregate percentage ownership of Occam’s common stock by more than 50% over the lowest percentage of the stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.

It is possible that our private placements and the rights offering of Series A-2 preferred stock could trigger an ownership change for purposes of Section 382 of the Internal Revenue Code, which would limit Occam’s ability to use any U.S. federal and state NOL carryforwards as described above and could result in a write-down of those assets on Occam’s consolidated balance sheet and a charge against earnings. Even if the private placement and the rights offering do not trigger an ownership change, they will increase the likelihood that Occam may undergo an ownership change for purposes of Section 382 in the future.

The sale of a substantial number of shares of common stock could cause the market price of Occam’s common stock to decline.

Sales of a substantial number of shares of Occam’s common stock in the public market could adversely affect the market price of Occam’s common stock. The market price of Occam’s common stock could also decline if one or more of its significant stockholders decided for any reason to sell substantial amounts of its common stock in the public market. Occam is contractually obligated to register shares of common stock underlying Series A preferred stock issued as part of the recent private placement financing transactions.

The following capitalization data give effect to a 40-for-1 reverse split that was effective on March 10, 2006.

As of December 31, 2005, Occam had 6.9 million shares of common stock outstanding. Substantially all of these shares are freely tradable in the public market, either without restriction or subject, in some cases, only to

S-3/S-1 or S-8 prospectus delivery requirements, and, in some cases, only to manner of sale, volume, and notice requirements of Rule 144 under the Securities Act of 1933, as amended.

As of December 31, 2005, Occam had 3.6 million shares of Series A-2 preferred stock outstanding that are convertible into 8.1 million shares of common stock at a conversion price of approximately $4.40 per share. If the share price of the common stock exceeds $4.40 per share, the holders of Series A-2 preferred stock may decide to convert some or all of their Series A-2 preferred stock into common stock, and such common stock would be tradable in the public market. Subsequent to December 31, 2005, Occam sold and issued an additional 0.3 million shares of Series A-2 preferred stock, which are subject to the same rights and privileges.

As of December 31, 2005, Occam had 1.8 million shares subject to outstanding options under Occam’s stock option plans, and 709,000 shares were available for future issuance under the plans. Occam has registered the shares of common stock subject to outstanding options and reserved for issuance under Occam’s stock option plans. Accordingly, shares underlying vested options will be eligible for resale in the public market as soon as the options are exercised.

As of December 31, 2005, Occam had warrants outstanding to purchase a total of 15,000 shares of Occam’s Series A-2 preferred stock, convertible into approximately 34,000 shares of its common stock.

ITEM IB. UNRESOLVED STAFF COMMENTS

None.