UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2010

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

For the transition period from to

Commission file number: 001-33069

OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0442752
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

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

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

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

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

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

Large accelerated filer o		Accelerated filer x

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

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

As of ~~July~~October 2318, 2010, the number of shares outstanding of the registrant’s common stock was 21,~~058~~161,~~093~~838 shares.

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INDEX

		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	1213
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	2024
Item 4.	Controls And Procedures	2124
PART II—OTHER INFORMATION		2125
Item 1.	Legal Proceedings	2125
Item 1a.	Risk Factors	2327
Item 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds	3745
Item 3.	Defaults Upon Senior Securities	3745
Item 4.	Removed and Reserved	3745
Item 5.	Other Information	3745
Item 6.	Exhibits	3745

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OCCAM NETWORKS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30,			December 31,
	September 30,			December 31,
	2010			2009 (*)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4144,~~923~~174		$	39,268
Restricted cash	1,804			5,721
Accounts receivable, net	1421,~~308~~189			14,874
Inventories	1013,~~214~~481			12,927
Prepaid and other current assets	~~992~~1,247			1,426
Total current assets	6981,~~241~~895			74,216
Property and equipment, net	8,~~736~~254			8,699
Intangibles, net	~~109~~85			156
Other assets	7371			91
Total assets	$	7890,~~159~~305		$	83,162
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	917,~~360~~231		$	8,274
Accrued liabilities	69,~~275~~816			6,999
Deferred revenue	68,~~411~~131			13,035
Deferred rent	361			361
Capital lease obligations	25—			26
Total current liabilities	2235,~~432~~539			28,695
Deferred rent, net of current portion	1,~~425~~336			1,597
Capital lease obligations, net of current portion	9—			20
Total liabilities	2336,~~866~~875			30,312
Commitments and contingencies (See Note 5)
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized; and 21,058,093 shares issued and outstanding at June 30, 2010 and 20,669,089 shares issued and outstanding at December 31, 2009.	289			289
Common stock, $0.001 par value, 250,000,000 shares authorized; and 21,161,838 shares issued and outstanding at September 30, 2010 and 20,669,089 shares issued and outstanding at December 31, 2009.	289			289
Additional paid-in capital	~~190~~191,~~386~~374			188,013
Accumulated deficit	(~~136~~138,~~382~~233		)	(135,452		)
Total stockholders’ equity	5453,~~293~~430			52,850
Total liabilities and stockholders’ equity	$	7890,~~159~~305		$	83,162

*Derived from audited consolidated financial statements included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.

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~~OCAM~~OCCAM NETWORKS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended						~~Six~~Nine Months Ended
	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
Revenue	$	2329,~~776~~810		$	21,~~028~~673		$	4675,~~120~~930		$	4062,~~447~~120
Cost of revenue	1417,~~007~~878			1312,~~000~~725			2644,~~518~~396			2436,~~245~~970
Gross margin	911,~~769~~932			8,~~028~~948			1931,~~602~~534			1625,~~202~~150
Operating expenses:
Research and product-development	3,~~835~~949			43,~~035~~762			711,~~600~~549			812,~~424~~186
Sales and marketing	45,~~514~~082			4,~~364~~459			914,~~118~~200			813,~~945~~404
General and administrative	1,~~738~~898			21,~~053~~760			35,~~804~~702			46,~~419~~179
Restructuring charges	—			~~213~~—			—			213
Total operating expenses	10,087			10,665			20,522			22,001
Loss on litigation settlement	—			1,700			—			1,700
Loss from operations	(318		)	(2,637		)	(920		)	(5,799		)
Merger related expenses	2,840			—			2,840			—
Other income (expense), net	—			104			—			104
Total operating expenses	13,769			11,681			34,291			33,682
Interest income (expense), net	2			91			6			236
Loss from operations	(1,837		)	(2,733		)	(2,757		)	(8,532		)
Loss before provision for income taxes	(316		)	(2,442		)	(914		)	(5,459		)
Other income (expense), net	—			43			—			147
Provision for (benefit from) income taxes	4			(27		)	16			(14		)
Interest income (expense), net	2			38			8			274
Net loss	$	(320	)	$	(2,415	)	$	(930	)	$	(5,445	)
Loss before benefit from income taxes	(1,835		)	(2,652		)	(2,749		)	(8,111		)
Provision for (benefit from) income taxes	16			(21		)	32			(35		)
Net loss	$	(1,851	)	$	(2,631	)	$	(2,781	)	$	(8,076	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.0209	)	$	(0.1213	)	$	(0.0413	)	$	(0.2740	)
Weighted average shares attributable to common stockholders:
Basic and diluted	20,~~853~~973			20,~~219~~273			20,~~751~~820			20,~~184~~214

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

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OCCAM NETWORKS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	Nine Months Ended
	June 30, 2010			June 30, 2009
	September 30, 2010			September 30, 2009
Operating activities
Net loss	$	(~~930~~2,781	)	$	(58,~~445~~076	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	12,~~490~~032			12,~~634~~685
Depreciation and amortization	12,~~560~~212			12,~~655~~501
Accounts receivable reserves	(3711		)	~~(109~~176		)
Inventory reserves	~~(47~~8		)	~~(358~~160		)
Changes in operating assets and liabilities:
Accounts receivable	~~613~~(6,304		)	21,~~785~~073
Inventories	~~2,750~~(562		)	6,~~684~~428
Prepaid expenses and other current assets	~~452~~199			1,~~475~~710
Accounts payable	18,~~086~~957			~~(1,921~~230		)
Accrued expenses	~~(724~~2,817		)	(~~1,803~~173		)
Deferred revenue	(64,~~624~~904		)	(5,~~196~~415		)
Deferred rent	(~~172~~261		)	(~~161~~244		)
Net cash used in operating activities	(583		)	(760		)
Net cash provided by operating activities	1,402			1,055
Investing activities
Decrease in restricted cash	3,917			4,022
Decrease (increase) in restricted cash	3,917			7,512
Net purchases of property and equipment	(1,~~550~~696		)	(~~455~~707		)
Net cash provided by investing activities	2,~~367~~221			36,~~567~~805
Financing activities
Exercise of stock options	~~909~~1,052			—61
Payments of payroll taxes for vested restricted stock units	(259		)	—
Payments of capital lease obligations	(12		)	(10		)
Capital lease obligations	(46		)	(17		)
Proceeds from employee stock purchase plan	~~233~~536			~~355~~571
Net cash provided by financing activities	~~871~~1,283			~~345~~615
Net increase in cash and cash equivalents	24,~~655~~906			38,~~152~~475
Cash and cash equivalents, beginning of period	39,268			30,368
Cash and cash equivalents, end of period	$	4144,~~923~~174		$	3338,~~520~~843
Supplemental disclosure of cash flow information:
Income taxes paid	$	~~132~~211		$	202
Interest paid	$	23		$	34

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

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OCCAM NETWORKS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

Occam Networks, Inc. (“Occam,” the “Company,” “we” or “us”) develops markets and supports innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and high speed internet, or Triple Play, services over both copper and fiber optic networks. The Company’s core product line is the Broadband Loop Carrier (BLC), an integrated hardware and software platform that uses Internet Protocol (IP) and Ethernet technologies to increase the capacity of local access networks, enabling the delivery of advanced Triple Play services. The Company also offers a family of Optical Network Terminals (ONTs) for fiber optic networks, remote terminal cabinets, and professional services.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2009 is derived from Occam’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2009. These unaudited condensed consolidated financial statements reflect all material entries, consisting only of normal recurring entries, which, in the opinion of management, are necessary to fairly state our financial position, results of operations and cash flows for the interim periods. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the entire year.

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

The unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q ~~and~~ and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. Because all of the disclosures required by GAAP are not included, as permitted by the rules of the Securities and Exchange Commission, or the SEC, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair statement of the results for the interim periods have been included in the Company’s financial position as of ~~June~~ September 30, 2010, the results of its operations for the three and ~~six~~nine months ended ~~June~~ September 30, 2010 and 2009, and its cash flow for the ~~six~~nine months ended ~~June~~September 30, ~~2010~~ 2010 and 2009.

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

The Company warrants its products for periods up to five years and records an estimated warranty accrual when shipped.

Use of Estimates

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

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Revenue Recognition

Occam generally recognizes revenue under Staff Accounting Bulletin Codification Topic 13, Revenue Recognition, in the period when all of the requirements of Staff Accounting Bulletin Codification Topic 13: Revenue Recognition have been met:

· persuasive evidence of sales arrangements,

· delivery has occurred or services have been rendered,

· the buyer’s price is fixed or determinable and

· collection is reasonably assured.

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

The Company sells hardware products that contain embedded operating system software. These tangible products contain software components and non-software components that function together to deliver the product’s essential functionality. Revenue is recognized for these products under Staff Accounting Bulletin Codification Topic 13: Revenue Recognition. The Company has one minor software network management product which is a stand- alone product not essential to the functionality of other products that the Company sells. Revenue is recognized for this product in accordance with FASB Accounting Standard Codification Topic 985, Software. The amount of sales of this product and the related revenue recognized to date by the Company ~~have~~has been immaterial.

In addition to the aforementioned general policy, the Company enters into transactions that represent multiple-element arrangements, which may include training and post-sales technical support and maintenance to our customers as needed to assist them in installation or use of our products, and makes provisions for these costs in the periods of sale. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met:

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

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

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

If these criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. When the Company is unable to establish selling price using vendor specific objective evidence or third party evidence, the Company uses “estimated selling price” (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for new products, and it applies to a small proportion of the Company’s arrangements with multiple deliverables. The Company determines ESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices.

In certain circumstances, the Company enters into arrangements with customers who receive financing support in the form of long-term low interest rate loans from the United States Department of Agriculture’s Rural Utilities Service, or RUS. The terms of the RUS contracts provide that in certain instances transfer of title of the Company’s products does not occur until customer acceptance, The Company recognizes revenue on these RUS contracts upon customer acceptance, given the remaining revenue recognition criteria, such as collectability, under Staff Accounting Bulletin Codification Topic 13: Revenue Recognition have been met.

2. Pending Merger

On September 16, 2010, the Company announced that it had entered into an Agreement and Plan of Merger, which is referred to in this report as the Merger Agreement with Calix, Inc. The Merger agreement provides that, upon the terms and subject to the conditions set forth therein, Calix will acquire Occam and as a result, Occam will become a wholly-owned subsidiary of Calix.

The transaction is valued at approximately $171 million, or approximately $7.75 per share of Occam common stock (based on the closing trading price of Calix’s stock as of September 14, 2010). Subject to the terms and conditions of the Merger Agreement, at the effective time of the first merger, each share of Occam’s common stock issued and outstanding will be converted into the right to receive $3.8337 in cash, without interest plus $0.2925 of a validly issued, fully paid and non-assessable share of Calix common stock. At the closing of the merger, former Occam stockholders will own between 14.1% and 15.9% of the outstanding shares of Calix’s common stock (based on the number of Calix shares outstanding as of September 14, 2010).

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2The completion of the transaction is subject to various closing conditions, including obtaining the approval of our stockholders, registering the shares of Calix common stock to be issued in connection with the merger and receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. ~~Fair~~ The ~~Value~~Company ~~Measurements~~currently expects the transaction to close in the fourth quarter of 2010 or the first quarter of 2011. Both companies will continue to operate their businesses independently until the close of the merger.

The Company has incurred $2.8 million, in merger related expenses for the quarter ended September 30, 2010. The Company expects to incur continuing expenses associated with the merger.

The foregoing description of the Merger Agreement and other references to the Merger Agreement in the Form 10-Q do not purport to be complete and are qualified in their entirety by reference to the full text of the Merger Agreement, a copy of which has been filed with the SEC and the terms of which are incorporated herein by reference to the full text of the Merger Agreement.

3. Fair Value Measurements

Effective January 1, 2008, the Company adopted the authoritative guidance on fair value measurements. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

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

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

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

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

In accordance with this guidance, we measure our cash equivalents at fair value. Our cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. At ~~June~~September 30, 2010, cash equivalents consisted of money market funds measured at fair value on a recurring basis. Fair value of our money market funds was $3835.85 million at ~~June~~ September 30, 2010.

Effective January 1, 2009, the Company adopted, the FASB staff position that delayed the guidance on fair value measurements for non financial assets and non financial liabilities. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

3. Inventories

	June 30, 2010		December 31, 2009
	September 30, 2010		December 31, 2009
Raw materials	$	~~998~~962	$	274
Work-in-process	~~437~~286		56
Finished goods(1)	812,~~779~~233		12,597
Total inventories	$	1013,~~214~~481	$	12,927

(1) $34.57 million and $6.2 million of finished goods inventory were shipped to customers as of ~~June~~ September 30, 2010 and December 31, 2009, respectively. The majority were sent to RUS contract customers and value-added resellers. Revenue and related cost of revenue were not recognized at the time of shipments as defined by the Company’s revenue recognition policy and therefore were included in inventories. For more information regarding our revenue recognition policy, see Revenue Recognition under Note 1 to these unaudited condensed consolidated financial statements.

4. Net Loss Per Share Attributable to Common Stockholders

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

	Three Months Ended						Six Months Ended
	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Net loss attributable to common stockholders	$	(320	)	$	(2,415	)	$	(930	)	$	(5,445	)
Shares used in computation:
Weighted average common shares outstanding used in computation of basic net loss per share	20,853			20,219			20,751			20,184
Dilutive effect of stock options	—			—			—			—
Dilutive effect of common stock warrants	—			—			—			—
Shares used in computation of diluted net income (loss) per share	20,853			20,219			20,751			20,184
Basic and diluted net loss per share	$	(0.02	)	$	(0.12	)	$	(0.04	)	$	(0.27	)

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~~Basic and diluted net loss per share are identical because we had losses from continuing operations and the impact of common equivalent shares was anti-dilutive and therefore excluded~~4. ~~The~~ Net ~~anti-dilutive~~Loss ~~weighted~~Per ~~average~~Share ~~shares~~Attributable ~~that were excluded from the shares used in computing diluted net loss per share for three months ended June 30, 2010 and June 30, 2009, amounted~~ to ~~approximately 0.6~~Common ~~million and 3.1 million shares, respectively and for the six months ended June 30, 2010 and June 30, 2009, amounted to approximately 0.6 million and 3.1 million shares, respectively.~~Stockholders

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

	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009

Net loss attributable to common stockholders	$	(1,851	)	$	(2,631	)	$	(2,781	)	$	(8,076	)
Shares used in computation:
Weighted average common shares outstanding used in computation of basic net loss per share	20,973			20,273			20,820			20,214
Dilutive effect of stock options				—						—
Dilutive effect of common stock warrants				—						—
Shares used in computation of diluted net income (loss) per share	20,973			20,273			20,820			20,214
Basic and diluted net loss per share	$	(0.09	)	$	(0. 13	)	$	(0.13	)	$	(0.40	)

Basic and diluted net loss per share, are identical because we had losses from continuing operations and the impact of common equivalent shares was anti-dilutive and therefore excluded. The anti-dilutive weighted average shares that were excluded from the shares used in computing diluted net loss per share for three months ended September 30, 2010 and September 30, 2009, amounted to approximately 0.7 million and 3.5 million shares, respectively and for the nine months ended September 30, 2010 and September 30, 2009, amounted to approximately 0.6 million and 3.3 million shares, respectively.

5. Commitments and Contingencies

The Company leases its office facilities and certain equipment under non-cancelable operating lease agreements, which expire at various dates through ~~2015~~2016. Operating leases contain escalation clauses with annual base rent adjustments or a cost of living adjustment. Total rent expense was $0.3 million for both the three months ended ~~June~~September 30, 2010 and ~~June~~September 30, 2009, and $0.69 million, for both the ~~six~~nine months ended ~~June~~September 30, 2010 and ~~June~~September 30, 2009 respectively.

Minimum annual lease commitments under non-cancelable operating leases are as follows (in thousands):

Remainder of fiscal year,
2010	$	~~726~~389
Fiscal year ending December 31,
2011	1,~~469~~504
2012	1,~~505~~540
2013	1,~~543~~577
2014	~~639~~674
2015	328
Total Minimum Lease Payments	$	6,~~210~~012

Royalties

From time to time, the Company may license certain technology for incorporation into its products. Under the terms of these multi-year agreements, royalty payments will be made based on per-unit sales of certain of the Company’s products. The ~~Company~~ Company incurred royalty expense of $7585,~~284~~000 and $6763,000 for the three months ~~ended~~ ~~June~~ended September 30, 2010 and ~~June~~September 30, 2009, respectively. The Company incurred $~~129~~215,~~473~~000 and $~~108~~171,000 in royalty expenses for the ~~six~~nine months ended ~~June~~September 30 2010 and ~~June~~September 30, 2009, respectively.

Legal Proceedings

IPO Allocation Litigation

In June 2001, three putative stockholder class action lawsuits were filed against Accelerated Networks, certain of its then officers and directors and several investment banks that were underwriters of Accelerated Networks’ initial public offering. The cases, which were later consolidated, were filed in the United States District Court for the Southern District of New York, and the operative Complaint was filed on April 19, 2002. The Complaint was filed on behalf of investors who purchased Accelerated Networks’ stock between June 22, 2000 and December 6, 2000 and alleged violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against one or both of Accelerated Networks and the individual defendants. The claims were based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks’ initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs alleged that the prospectus for Accelerated Networks’ initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements.

The Company believes that over three hundred other companies have been named in over three hundred similar lawsuits that have been coordinated with the Company’s case. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 1, 2003 a motion to dismiss filed by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and rule 10b-5 claims against Occam. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions (the “focus” cases) and noted that the decision was intended to provide guidance to all parties regarding class certification in the remaining cases. The Second Circuit Court of Appeals vacated the district court’s decision granting class certification in those six cases on December 5, 2006. Plaintiffs filed a motion for rehearing. On April 6, 2007, the Second Circuit denied the petition, but noted that Plaintiffs could ask the District Court to certify a more narrow class than the one that was rejected.

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~~The parties in the~~Legal approximately 300 coordinated cases, including the Company’s, reached a settlement. On October 5, 2009, the Court approved the settlement and certified a settlement class. Six notices of appeal of the Second Circuit of the Court’s approval of the settlement have been filed. Three objectors to the settlement who filed a notice of appeal also filed a permission to file an appeal on the basis that the Court purportedly abused its discretion concerning the class certification on the grounds that it was broader than the class rejected by the Second Circuit Appeals Court. Plaintiffs filed an opposition to the petition. The Court has not yet ruled on the petition and the briefing on the appeals has not yet commenced. The case remains open pending the outcome of the court ruling on the appeals.Proceedings

~~Due to the inherent~~Merger ~~uncertainties~~Transaction ofClass Action litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company has not recorded any accrual related to the settlement because the Company expects any settlement amounts to be covered by its insurance policies.Lawsuits

On September 17, 20, and 21, 2010, three purported class action complaints were filed in the California Superior Court for Santa Barbara County: (1) Kardosh v. Occam Networks, Inc., et al., Case No. 1371748 (“Kardosh Complaint”); (2) Kennedy v. Occam Networks, Inc., et al., Case No. 1371762 (“Kennedy Complaint”); and (3) Moghaddam v. Occam Networks, Inc., et al., Case No. 1371802 (“Moghaddam Complaint”) (together, the “California Complaints”). Each of the California Complaints names Occam, the members of the Occam board, and Calix as defendants. The Kennedy Complaint also names Calix’s merger subsidiaries (Ocean Sub I, Inc. and Ocean Sub II, LLC) as defendants. The California Complaints generally allege that the members of the Occam board breached their fiduciary duties in connection with the proposed acquisition of Occam by Calix, by, among other things, engaging in an allegedly unfair process and agreeing to an allegedly unfair price for the proposed merger transaction. The California Complaints further allege that Occam and the other entity defendants aided and abetted these alleged breaches of fiduciary duty. The plaintiffs seek various forms of relief, including an order certifying a class of Occam shareholders and a preliminary and permanent injunction of the proposed merger.

On October 6, 2010, another purported class action complaint was filed in the Court of Chancery of the State of Delaware: Steinhart, et al. v. Howard-Anderson, et al., Case No. 5878-VCL (the “Delaware Complaint”). Like the California Complaints, the Delaware Complaint names the members of Occam’s board as defendants and generally alleges that the members of the Occam board breached their fiduciary duties in connection with the proposed acquisition of Occam by Calix, by, among other things, engaging in an allegedly unfair process and agreeing to an allegedly unfair price for the proposed merger transaction. Also, like the plaintiffs who filed the California Complaint, the plaintiffs who filed the Delaware Complaint seek various forms of relief, including an order certifying a class of Occam shareholders and a preliminary and permanent injunction of the proposed merger.

Occam is reviewing the complaints and has not yet formally responded to them, but believes the plaintiffs’ allegations are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that Occam’s defense of these actions will be successful. Additional complaints containing substantially similar allegations may be filed in the future.

Atwater Partners of Texas LLC v. AT&T, Inc. et al.

On May 27, 2010, Atwater Partners of Texas LLC filed a complaint in the U.S. District Court for the Eastern District of Texas alleging infringement of certain U.S. Patent Nos. 6,490,296; 7,158,523; 7,161,953; 7,310,310; and 7,349,401 by 25 companies, including Occam. The complaint seeks an injunction, unspecified damages, and other relief. The disclosure of each of the patents in suit relates to the field of digital networks. The Company has answered the complaint and has asserted thirteen affirmative defenses, including invalidity, non-infringement, and patent exhaustion. This case is currently pending.

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

IPO Short Swing Profits Litigation

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

On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. The Underwriters and Issuers have filed a motion to dismiss the case and reply briefs have been filed. The Court heard oral argument on January 19, 2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaint against the issuer defendants including Occam on both jurisdictional and statute of limitation grounds. On March 31, 2009, the Plaintiffs filed a Notice of Appeal and their opening brief on August 26, 2009. The Issuers including Occam and the underwriters filed their responses on October 2, 2009. Each party’s reply briefs have been filed as of November 17, 2009. To date the Appellate Court for the Ninth Circuit has not set a date of oral argument.8

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On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. The Underwriters and Issuers have filed a motion to dismiss the case and reply briefs have been filed. The Court heard oral argument on January 19, 2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaint against the issuer defendants including Occam on both jurisdictional and statute of limitation grounds. On March 31, 2009, the Plaintiffs filed a Notice of Appeal and their opening brief on August 26, 2009. The Issuers including Occam and the underwriters filed their responses on October 2, 2009. Each party’s reply briefs have been filed as of November 17, 2009. The Appellate Court for the Ninth Circuit heard oral argument on October 5, 2010. It is likely that it will be at least until April 2011 before the Court renders a decision on this matter.

Due to the inherent uncertainties of threatened litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company has not recorded any accruals related to the demand letters or Section 16(b) litigation because the Company expects any resulting resolution to be covered by its insurance policies.

IPO Allocation Litigation

The parties in the approximately 300 coordinated cases, including the Company’s, reached a settlement. On October 5, 2009, the Court approved the settlement and certified a settlement class. Six notices of appeal of the Second Circuit of the Court’s approval of the settlement have been filed. As of October 6, 2010, the deadline for filing appellate briefs opposing the settlement, only one brief was filed. On October 8, 2010 the remaining objectors along with Plaintiff filed a stipulation withdrawing their appeals with prejudice. The remainder of the briefing schedule has not been set. Appellees, including the Company, are required to request a date not later than one hundred twenty days from the date of the appellate brief filing to file their brief. The case remains open pending the briefing schedule and the outcome of the court ruling on the appeal.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company has not recorded any accrual related to the settlement because the Company expects any settlement amounts to be covered by its insurance policies.

Other Matters

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

~~Indemnifications and Guarantees~~9

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its contractors, customers, value-added resellers, and landlords. As of June 30, 2010, the Company did not have any material accrued liability related to these indemnification agreements.

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Indemnifications and Guarantees

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its contractors, customers, value-added resellers, and landlords. As of September 30, 2010, the Company did not have any material accrued liability related to these indemnification agreements.

Occam is also a party to indemnification agreements with its officers and directors. Consequently, it has obligations to hold harmless and indemnify each of the directors who are named defendants in the California Complaints and the Delaware Complaint (as described above) against associated judgments, fines, settlements and expenses related to such claims and otherwise to the fullest extent permitted under Delaware law and Occam’s bylaws and certificate of incorporation.

Purchase Orders

Under the terms of Occam’s contract manufacturer agreements and original design manufacturer agreements, Occam is required to place orders with its contract manufacturers and original design manufacturers to provide inventory to meet its estimated sales demand. Certain contract manufacturer agreements include production forecast change, lead-time and cancellation provisions. At ~~June~~ September 30, 2010, open purchase orders with contract manufacturers were $2329.7 0 million.

Warranties

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

	June 30,			December 31,
	September 30,			December 31,
	2010			2009
Warranty liability at beginning of the year	$	4,818		$	4,326
Accruals for warranty during the period	12,~~240~~129			2,830
Warranty utilization	(2,~~405~~979		)	(2,338		)
Warranty liability at end of the period	$	3,~~653~~968		$	4,818

The increased warranty utilization for the ~~six~~nine months ended ~~June~~September 30, 2010, was primarily due to field rework and replacement for specific customer deployments related to capacitor power function failures.

6. Accrued Liabilities

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

	June 30, 2010		December 31, 2009
	September 30, 2010		December 31, 2009
Warranty accruals	$	3,~~653~~968	$	4,818
Payroll, paid time off and related accruals	1,850		1,620
Payroll, paid time off, bonus and related accruals	2,804		1,620
Commissions	304		234
Accrued Legal Expenses	2,112		65
Other accruals	468		327
Commissions	400		234
Total	$	6,275	$	6,999
Other accruals	532		262
Total	$	9,816	$	6,999

~~7. Stock~~As ~~Options,~~of ~~Stock Awards~~September 30, ~~Employee~~2010, ~~Stock~~accrued ~~Purchase~~legal ~~Plan,~~expenses ~~and~~primarily ~~Stock-Based~~consisted ~~Compensation~~of accruals related to the proposed merger transaction.

~~Stock option activity, under the Company’s stock option plan for the six months ended June 30, 2010, is summarized as below (shares and intrinsic value in thousands):~~10

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2010	3,923		$	5.65	7.18	$	6,379
Granted	66
Exercised	(244	)
Forfeited or expired	(33	)
Outstanding at June 30, 2010	3,712		$	5.67	6.71	$	6,379
Exercisable at June 30, 2010	2,552		$	6.75	5.88	$	3,601

The weighted-average fair value of options granted to employees on the date of the grant for the three months ended June 30, 2010 was $2.89 per share and for the six months ended June 30, 2010 was $3.18 per share.

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

Stock option activity, under the Company’s stock option plan for the nine months ended September 30, 2010, is summarized as below (shares and intrinsic value in thousands):

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2010	3,923		$	5.65	7.18	$	6,379
Granted	81
Exercised	(290	)
Forfeited or expired	(47	)
Outstanding at September 30, 2010	3,667		$	5.68	6.51	$	13,254
Exercisable at September 30, 2010	2,628		$	6.63	5.79	$	8,497

The weighted-average fair value of options granted to employees on the date of the grant for the three months ended September 30, 2010 was $2.32 per share and for the nine months ended September 30, 2010 was $3.02 per share.

The 2006 Equity Incentive Plan, or 2006 Plan, provides for automatic annual increases in the number of shares available for issuance under the 2006 Plan effective as of the first day of each fiscal year equal to the lesser of (a) 3% of the outstanding shares of the common stock on the first day of the applicable fiscal year; (b) 750,000 shares; or (c) such other amount as the Board of Directors or a committee of the board may determine. On February 23, 2010, the Board of Directors approved an increase of 620,073 shares reserved for issuance under the 2006 Plan for fiscal 2010. This represented 3% of the outstanding common shares as of January 1, 2010.

Stock Awards

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

	Restricted Stock Units		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2010	315		1.09	$	1,703
Awarded	3
Released	(67	)
Forfeited or expired or cancelled	(4647	)
Outstanding at June 30, 2010	205		1.06	$	1,138
Outstanding at September 30, 2010	204		0.81	$	1,599

Employee Stock Purchase Plan

In March 2008, the Board of Directors approved an amendment to our 2006 Employee Stock Purchase Plan or the ESPP. The amendment increased the maximum number of shares of the Company’s common stock that an eligible employee may purchase during each offering period from 1,000 shares to 5,000 shares. Under the ESPP, 78,320 and 65,518 shares were issued on February 16, 2010 and August 15, 2010, at a purchase price per share of $2.97 and $4.63, respectively.

The ESPP provides for an automatic annual increase in the number of shares available for issuance under the ESPP effective as of the first day of each fiscal year equal to the lesser of (a) 300,000 shares of common stock; (b) 1.5% of the outstanding shares of common stock on the first day of the applicable fiscal year; or (c) an amount determined by the Board of Directors. On February 23, 2010, the Board of Directors approved an increase of 300,000 shares in the number of shares reserved for issuance under the ESPP.

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Stock-Based Compensation

The following table summarizes the stock-based compensation expense, for all stock-based awards to employees and directors, including employee stock options, restricted stock and restricted stock units and shares purchased pursuant to the ESPP based on the estimated fair value on our Consolidated Statements of Operations (in thousands):

Three Months Ended

~~Six~~Nine Months Ended

June 30, 2010

June 30, 2009

June 30, 2010

June 30, 2009

September 30, 2010

September 30, 2009

September 30, 2010

September 30, 2009

Employee stock-based compensation in:

Cost of revenue

8463

~~104~~133

~~171~~234

~~193~~326

Research and product development expense

~~199~~146

~~258~~297

~~448~~594

~~481~~778

Sales and marketing expense

~~186~~156

~~247~~248

~~404~~560

~~444~~692

General and administrative expense

~~238~~177

~~282~~373

~~467~~644

~~516~~889

Total SFAS 123(R) stock-based compensation in operating expenses

~~623~~479

~~787~~918

1,~~319~~798

12,~~441~~359

Total SFAS 123(R) stock-based compensation

~~707~~542

~~891~~1,051

12,~~490~~032

12,~~634~~685

10As of September 30, 2010, total unamortized stock-based compensation cost related to non-vested stock options after accounting for estimated forfeitures was $1.6 million, which the Company expects to recognize over the remaining vesting period of each grant, up to the next 48 months.

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As of June 30, 2010, total unamortized stock-based compensation cost related to non-vested stock options after accounting for estimated forfeitures was $1.8 million, which the Company expects to recognize over the remaining vesting period of each grant, up to the next 48 months.

Upon adoption of the FASB Accounting Standard Codification Topic 718, stock-based compensation, we selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, forfeitures, and expected dividends. The assumptions used to value options granted are as follows:

	Three Months Ended				~~Six~~Nine Months Ended
	June 30, 2010		June 30, 2009		June 30, 2010		June 30, 2009
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009
Risk-free interest rate	21.0438	%	2.9341	%	2.271	%	2.87	%
Expected term (years)	5.0		4.9		4.9		4.9
Dividend yield	0	%	0	%	0	%	0	%
Expected volatility	5455	%	54%-57	%	54	%	54%-57	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. We do not anticipate declaring dividends in the foreseeable future. Expected volatility is based on the annualized weekly historical volatility of our stock price and we believe it is indicative of future volatility. We estimate the expected life of options granted based on historical exercise and post-vesting cancellation patterns with consideration of our industry peers of similar size with similar option vesting periods. Our analysis of stock price volatility and option lives involves management’s best estimates at the time of determination. FASB Accounting Standard Codification Topic 718, stock-based compensation, also requires that we recognize compensation expense for only the portion of options or stock units that are expected to vest. Therefore, we apply an estimated forfeiture rate that is derived from historical employee termination behavior. If the actual number of forfeitures differs from that estimated by management, additional adjustments to compensation expense may be required in future periods.

8. Income Taxes —Final Outcome of Section 382 Analysis

As of December 31, 2009, the Company had net operating loss carry forwards of approximately $109.1 million and $72.1 million to offset federal and state future taxable income, respectively. These amounts have been reduced due to an ownership change which occurred, as defined by Sections 382 of the Internal Revenue Code, resulting in the forfeiture of a portion of the Company’s net operating loss carryforwards. Gross deferred tax assets and related valuation allowance have been reduced by $2.8 million to $54.0 million in the first quarter of 2010 to reflect the conclusions of this analysis.

~~9. FairPoint Communications, Inc. Bankruptcy~~12

On June 1, 2010, the US Bankruptcy Court ordered the payment of $1.7 million by FairPoint Communications in full satisfaction of Occam’s pre-petition claim. On June 18, 2010, Occam received the amount of $1.7 million. As a result we have recognized $1.7 million as revenue in the quarter ended June 30, 2010, previously deferred, since all the criteria of Staff Accounting Bulletin Codification Topic 13: Revenue Recognition have been met. The expense previously recorded for inventory impairment, $138,000, was reversed in the quarter ended June 30, 2010 since the related revenue has been recognized.

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9. FairPoint Communications, Inc. Bankruptcy

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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following discussion contains both historical information and forward-looking statements within the meaning of Section 21E of the Exchange Act. A number of factors affect our operating results and could cause our actual future results to differ materially from any forward-looking results discussed below. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “appears,” “believes,” “continue,” “could,” “estimates,” “expects,” “feels,” “goal,” “hope,” “intends,” “may,” “our future success depends,” “plans,” “potential,” “predicts,” “projects,” “reasonably,” “seek to continue,” “should,” “thinks,” “will” or the negative of these terms or other comparable terminology. These statements are ~~only~~ only predictions. Actual events or results may differ materially. In addition, historical information should not be considered an indicator of future performance. Factors that could cause or contribute to these differences include, but are not limited to, the risks discussed in this Report in Part II, Item 1A under the caption “Risk Factors.” ~~These factors may cause our actual results to differ materially from any forward-looking statements.~~

In addition, the potential merger with Calix presents additional risks and uncertainties that could cause the actual results to differ from those expressed or implied by forward looking statements including the risk that the pending merger with Calix may not be consummated due to a failure to obtain stockholder or regulatory approval or for any other reason; the risk that the closing of the merger will be delayed; uncertainties concerning the effect of the transaction on relationships with customers, employees and suppliers of either or both of the companies; the risk that the two companies will not be integrated successfully and in a timely manner even if the closing occurs as anticipated; and the risk that the transaction may involve unexpected costs or unexpected liabilities.

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

Overview

We develop, market and support innovative broadband access products designed to enable telecom service providers to offer bundled voice, video and high speed internet, or Triple Play, services over both copper and fiber optic networks. Our Broadband Loop Carrier, or BLC, is an integrated hardware and software platform that uses ~~Internet~~ Internet Protocol, or IP, and Ethernet technologies to increase the capacity of ~~local~~ local access networks, enabling our customers to deliver advanced services, ~~including~~ including voice-over-IP, or VoIP, IP-based television, or IPTV, video-on-demand, or VoD, and high-definition television, or HDTV. Our platform simultaneously supports traditional voice and data services, enabling our customers to leverage their existing networks and migrate to IP without disruption. In addition to providing our customers with increased bandwidth, our products provide incremental value by offering software-based features to improve the quality, resiliency and security of network service offerings. We market our products through a combination of direct and indirect channels. Our direct sales efforts are focused on the North American independent operating company, or IOC, segment of the telecom service provider market. As of ~~June~~ September 30, 2010, we had shipped our BLC platform to over ~~350~~380 telecommunications customers.

From our inception through June 30, 2010, we have incurred cumulative net losses of approximately $136.4 million. We realized income from operations and were profitable on a net income basis during the quarters ended December 31, 2008, December 31, 2006 and September 24, 2006, and for the year ended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis, excluding the quarter ended December 25, 2005, in which we realized modest operating income of $3,000. We experienced operating and net losses in all four quarters of fiscal 2009. In the first half of 2010, we experienced an increase in customer bookings activity. We believe this increase was primarily due to a slight improvement in economic conditions. We expect, however, that any continuation of current macroeconomic conditions may have an adverse impact on our business. In the short term, we expect that booking activity may vary depending on our customers’ ability to make capital investments using their own funds, and their access to credit facilities or other loan program funds.13

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From our inception through September 30, 2010, we have incurred cumulative net losses of approximately $138.2 million. We realized income from operations and were profitable on a net income basis during the quarters ended December 31, 2008, December 31, 2006 and September 24, 2006, and for the year ended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis, excluding the quarter ended December 25, 2005, in which we realized modest operating income of $3,000. We experienced operating and net losses in all four quarters of fiscal 2009. During the current quarter, we experienced an increase in customer bookings activity due to certain orders related to the broadband funding initiatives. In the short term, we expect that booking activity may vary depending on our customers’ ability to make capital investments, using their own funds, and their access to credit facilities or other loan program funds.

Recent Development

On September 16, 2010, the Company announced that it had entered into an Agreement and Plan of Merger and Reorganization, or Merger Agreement, with Calix and two wholly owned subsidiaries of Calix. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Calix will acquire Occam by means of a series of mergers involving two wholly owned subsidiaries of Calix. As a result of the merger, Occam will become a wholly-owned subsidiary of Calix.

The transaction is valued at approximately $171 million, or approximately $7.75 per share of Occam common stock (based on the closing trading price of Calix’s stock as of September 14, 2010). Subject to the terms and conditions of the Merger Agreement, at the effective time of the first merger, each share of Occam’s common stock issued and outstanding, will be converted into the right to receive $3.8337 in cash, without interest plus $0.2925 of a validly issued, fully paid and non-assessable share of Calix common stock. At the closing of the merger, former Occam stockholders will own between 14.1% and 15.9% of the outstanding shares of Calix’s common stock (based on the number of Calix shares outstanding as of September 14, 2010).

The completion of the transaction is subject to various closing conditions, including obtaining the approval of our stockholders, registering the shares of Calix common stock to be issued in connection with the merger and receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company currently expects the transaction to close in the fourth quarter of 2010 or the first quarter of 2011. Both companies will continue to operate their businesses independently until the close of the merger.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, accounts receivable reserves, sales return reserves, litigation, warranty reserve, stock-based compensation, and valuation of deferred income tax assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We included in our Annual Report on Form 10-K for the year ended December 31, 2009, a discussion of our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We warrant our products for periods up to five years and the estimated cost of providing the product warranty is recorded at the time of shipment. We maintain product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers. We quantify and record an estimate for warranty-related costs based on a variety of factors including but not limited to our actual history, projected return and failure rates and current repair costs. Our estimates are primarily based on an estimate of products that may be returned for warranty repair, estimated costs of repair, including parts and labor, depending on the type of service required. These estimates require us to examine past and current warranty issues and consider their continuing impact in the future. Our accrual is based on consideration of all these factors which are known as of the preparation of our consolidated financial statements. Our estimates of future warranty liability are based on prediction of future events, conditions and other complicated factors that are difficult to predict. The actual costs we incur may differ materially from our estimates.

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Results of Operations

Three-months ended ~~June~~September 30, 2010 and 2009

Revenue (in thousands, except percentages)

Three Months Ended

Increase (Decrease) 2010 vs. 2009

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

Revenue

2329,~~776~~810

21,~~028~~673

28,~~748~~137

1338

Our revenue is principally comprised of our BLC 6000 series system product line, Optical Network Terminals, cabinets and related accessories. Revenue increased by $2.8 .1 million or 1338% to $2329.8 million for the three months ended, ~~June~~September 30, 2010 as compared to revenue of $21.07 million for the three months ended ~~June~~ September 30, 2009. The increase in revenue iswas primarily due to the recognition of revenue associated with ~~certain~~customer orders related to ~~the~~government broadband funding initiatives, ~~and~~which ~~the~~included ~~recognition~~increased ofvolumes ~~$1.7 million~~ of ~~FairPoint revenue that was deferred in the third quarter of 2009. See note 9 “FairPoint Communications, Inc. Bankruptcy” in the notes to~~ our ~~unaudited~~ONT ~~condensed, consolidated financial statements above for more information regarding FairPoint~~products.

WeAlthough we expect ~~however~~ that ~~any continuation of current macroeconomic conditions may have an adverse impact on our business in the second half of 2010. We believe~~ IOCs will continue to carefully evaluate their capital ~~spending~~investment decisions ~~for~~in ~~the~~light ~~rest~~ of ~~2010,~~continued ~~although~~economic ~~government~~uncertainty, government broadband funding initiatives ~~could~~should have a favorable impact on capital spending trends among telecommunications carriers. for the balance of 2010 and into 2011. In the short term, we expect that booking activity may vary depending on our customers’ ability to make capital investments, using their own funds, and their access to credit facilities or other loan program funds. However, Weour announcement of an agreement to be acquired by Calix could have ~~experienced~~an adverse effect on our revenues and ~~believe~~revenue wegrowth, ~~may~~if ~~continue~~any, toin ~~experience~~the fourth ~~supply~~quarter of 2010 and the first quarter of 2011. In particular, while the transaction remains ~~constraints~~pending, ascustomers ~~demand~~could ~~increases~~defer purchase decisions pending the outcome of the transaction (including obtaining required stockholder and regulatory approval), or ascustomers wecould ~~introduce~~elect ~~our~~to ~~newest~~purchase ~~products~~from other suppliers.

13We have experienced and believe we may continue to experience supply constraints as demand increases or as we introduce our newest products.

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

	Three Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount		Percentage
	September 30, 2010			September 30, 2009			Amount		Percentage
Cost of revenue	$	1417,~~007~~878		$	1312,~~000~~725		$	15,~~007~~153	840	%
Gross margin	$	911,~~769~~932		$	8,~~028~~948		$	12,~~741~~984	2233	%
Gross margin percentage	4140		%	3841		%

Cost of revenue includes the cost of products shipped for which revenue was recognized, warranty costs, costs of any manufacturing yield problems, re-work costs, manufacturing overhead, provisions for obsolete inventory and the cost of post-sales support. The increase in cost of revenue during the three months ended ~~June~~September 30, 2010 from the similar period during the prior year was primarily attributable to increased revenue shipments.

Gross margin was 4140% of revenue for the three months ended ~~June~~September 30, 2010 and 3841% of revenue for the three months ended ~~June~~September 30, 2009. The ~~increase~~decrease in gross margin percent was primarily attributable to product mix ~~and~~related ~~decreased~~to ~~unit~~increased ~~cost~~revenue of our ~~blades and~~lower margin ONT products.

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

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

	Three Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount			Percentage
	September 30, 2010			September 30, 2009			Amount			Percentage
Research and product-development	$	3,~~835~~949		$	43,~~035~~762		$	~~(200~~187	)	(5	)%
Research and product-development as a percentage of revenue	1613		%	1917		%

Research ~~and~~ and product-development expenses consist primarily of salaries and other personnel-related costs, prototype component and assembly costs, third-party design services and consulting costs, and other costs related to the design, development, and testing of our products. Research and product-development costs are expensed as incurred, except for capital expenditures, which are capitalized and depreciated over their estimated useful lives, generally two to three years. Research and development expenses ~~decreased~~increased by $0.2 million or 5% to $34.80 million for the three months ended ~~June~~ September 30, 2010 as compared to $43.08 million for the three months ended ~~June~~ September 30, 2009. ~~The~~ ~~decrease~~This net increase in research and product-development expenses was primarily attributable to ~~the decrease in~~ personnel related costs ~~related~~partially ~~to reduction in~~offset ~~force~~by ~~and~~lower ~~decreased contract product~~stock-~~development~~based ~~expenses~~compensation expense.

We currently expect research and product-development expenses in future periods to be largely consistent with current expense levels but may vary with the introduction of new products ~~or any changes in salary levels~~.

Sales and marketing expenses (in thousands, except percentages)

Three Months Ended

Increase (Decrease) 2010 vs. 2009

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

Sales and marketing

45,~~514~~082

4,~~364~~459

~~150~~623

314

Sales and marketing as a percentage of revenue

1917

Sales and marketing expenses consist primarily of salaries, sales commissions, and other personnel-related costs, development and distribution of promotional materials, and other costs related to generating sales and conducting corporate marketing activities. Sales and marketing expenses increased by $0.16 million or 314% to $4.5.1 million for the three months ended ~~June~~ September 30, 2010 from $4.45 million for the same period in 2009. This net increase was primarily due to higher sales commissions due to an increase in bookings activity and ~~travel~~higher ~~related costs, offset by lower~~ personnel related costs.

14We currently expect sales and marketing expenses in future periods to be consistent with current expense levels but may vary with the level of customer bookings and the level of spending on new or expanded marketing programs.

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We currently expect sales and marketing expenses in future periods to be consistent with current expense levels but may vary with the level of customer bookings and the level of spending on new or expanded marketing programs or any changes to salary levels.

General and administrative expenses (in thousands, except percentages)

Three Months Ended

Increase (Decrease) 2010 vs. 2009

~~Increase (Decrease) 2010 vs. 2009~~

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

General and administrative

1,~~738~~898

$1,760

~~2,053~~

$138

~~(315~~

~~(15~~%

General and administrative as a percentage of revenue

108

General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, finance, human resources, and administrative personnel. Additionally, general and administrative expenses include professional fees, liability insurance and other general corporate costs such as rent, legal, utilities and accounting expenses. General and administrative expenses increased ~~decreased~~ by $0.31 million or 158% to $1.79 million for the three months ended ~~June~~ September 30, 2010 as compared to $21.08 million for the three months ended ~~June~~ September 30, 2009. General and administrative expenses ~~decreased primarily~~increased primarily due to ~~lower~~personnel ~~legal~~related ~~fees~~costs, ~~and~~partially offset by lower ~~personnel~~stock ~~related~~based compensation ~~costs~~expense.

~~We currently expect general and administrative expenses in future periods to be largely consistent with current expense levels but may vary with any changes to salary levels.~~16

~~Restructuring~~Table ~~charges~~of Contents

OnWe ~~May 7,~~currently ~~2009,~~expect wegeneral ~~implemented~~and ~~a reduction-in-force~~administrative ~~that~~expenses ~~resulted~~ in ~~the termination of approximately 10% of our~~ ~~work~~future ~~force.~~periods ~~We substantially completed the reduction-in-force by the end of the second quarter of 2009. The purpose of the workforce reduction was~~ to ~~reduce costs,~~be ~~streamline~~largely ~~operations,~~consistent ~~and~~with ~~improve~~current ~~the~~expense ~~cost structure in light of the economic and operating environment~~levels.

~~During the~~Loss ~~quarter ended June 30, 2009, we recorded approximately $213,000 of~~on ~~restructuring~~litigation ~~charges related to termination benefits in connection with the reduction- in- force. There were no such restructuring charges incurred during the quarter ended June 30, 2010.~~settlement

On September 10, 2009 we entered into a memorandum of understanding regarding the settlement of the April 26th, 2007 stockholder class action lawsuit. On November 2, 2009 the parties signed and submitted a formal binding stipulation of settlement to the court. The court issued its preliminary approval of the settlement on November 13, 2009. On February 22, 2010, the court held a hearing dismissing the litigation with prejudice and entered a final judgment. The total settlement amount of $13.9 million was agreed to by all of the parties, of which we contributed $1.7 million. We recorded a charge of $1.7 million as a loss on settlement for the quarter ended September 30, 2009, associated with this settlement. There was no such loss recorded for the quarter ended September 30, 2010.

Merger related expenses

On September 16, 2010, we announced that we had entered into the Merger Agreement with Calix and two wholly owned subsidiaries of Calix. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Calix will acquire Occam by means of a series of mergers involving two wholly owned subsidiaries of Calix. As a result of the merger, Occam will become a wholly-owned subsidiary of Calix. We have incurred $2.8 million, in merger related expenses for the quarter ended September 30, 2010. We currently expect to incur continuing merger related expenses during the fourth quarter of 2010.

The completion of the transaction is subject to various closing conditions, including obtaining the approval of our stockholders, registering the shares of Calix Common Stock to be issued in connection with the merger and receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We currently expect the transaction to close in the fourth quarter of 2010 or the first quarter of 2011.

Stock-based compensation (in thousands)

	Three Months Ended
	June 30, 2010		June 30, 2009
	September 30, 2010		September 30, 2009
Cost of sales	$	8463	$	~~104~~133
Research and development	~~199~~146		~~258~~297
Sales and marketing	~~186~~156		~~247~~248
General and administrative	~~238~~177		~~282~~373
Total stock-based compensation	$	~~707~~542	$	~~891~~1,051

Stock-based ~~compensation~~ compensation expense decreased by approximately $0.25 million or 2148% to $0.7 6 million for the three months ended ~~June~~September 30, 2010 as compared to approximately $01.9 1 million for the three months ended ~~June~~September 30, 2009. This net decrease was primarily attributable to the completion of four years of vesting of certain higher value grants during the initial months of the last quarter and ~~coupled~~current ~~with~~quarter aand ~~slight~~no ~~increase~~performance inrelated stock based compensation expense when compared to the ~~forfeiture~~stock ~~rate~~based compensation expense for quarter ended September 30, 2009.

We anticipate that the stock-based compensation expense calculated under FASB Accounting Standards Codification Topic 718 will continue to have a material effect on our consolidated statement of operations.

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Interest income (expense), net (in thousands)

	Three Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount			Percentage
	September 30, 2010			September 30, 2009			Amount			Percentage
Interest income	$	42		$	9438		$	(9036	)	(9695	)%
Interest expense	(20		)	(30		)	10			330	%
Total interest income (expense), net	$	2		$	9138		$	(8936	)	(9895	)%

Interest income, net decreased by $8936,000 or 9895% to $2,000 for the three months ended ~~June~~September 30, 2010, as compared to $9138,000 for the three months ended ~~June~~September 30, 2009. The decrease is primarily attributable to lower average restricted cash balances ~~earning~~ earning interest and lower interest rates.

Provision for ~~income taxes~~ (inbenefit ~~thousands~~from) income taxes

For income tax purposes, we consider our projected annual income and the utilization of our net operating loss carry forwards among other factors. For the three months ended ~~June~~ September 30, 2010, we provided for $416,000 for income taxes and for the three months ended ~~June~~September 30, 2009, we recorded a tax benefit of $2721,000, for federal and state income taxes.

~~Six~~ Nine months ended ~~June~~ September 30, 2010 and ~~June~~September 30, 2009

Revenue (in thousands, except percentages)

Six Months Ended

Increase (Decrease) 2010 vs. 2009

Nine Months Ended

Increase (Decrease) 2010 vs. 2009

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

Revenue

4675,~~120~~930

4062,~~447~~120

513,~~673~~810

1422

Revenue increased by $513.78 million or 1422% to $4675.1 9 million for the ~~six~~nine months ended ~~June~~ September 30, 2010 as compared to revenue of $4062.41 million for the ~~six~~ nine months ended ~~June~~September 30, 2009. The increase in revenue is primarily due to the recognition of revenue associated with ~~certain~~customer orders related to ~~the~~government broadband funding initiatives, which included increased volumes of our ONT and BLC 6000 products and the recognition of $1.7 million of FairPoint revenue that was deferred in the third quarter of 2009.

In the first ~~half~~nine months of 2010, we experienced an increase in customer bookings activity., ~~We believe this increase was primarily~~ due to acertain ~~slight~~orders ~~improvement~~related into ~~economic~~government ~~conditions~~broadband funding initiatives. Although Wewe expect ~~however~~ that ~~any~~ ~~continuation of current macroeconomic conditions may have an adverse impact on our business. We believe~~ IOCs will continue to carefully evaluate their ~~spending~~ ~~decisions~~capital ~~for~~investment ~~the~~decisions ~~rest~~in light of ~~2010~~continued ~~although~~economic uncertainty, government broadband funding initiatives ~~could~~should have a favorable impact on capital spending trends among telecommunications carriers for the balance of 2010 and into 2011. In the short term, we expect that booking activity may vary depending on our customers’ ability to make capital investments, using their own funds, and their access to credit facilities or other loan program funds. However, Weour announcement of an agreement to be acquired by Calix could have ~~experienced~~an adverse effect on our revenues and ~~believe~~revenue wegrowth, ~~may~~if ~~continue~~any, toin ~~experience~~the fourth ~~supply~~quarter of 2010 and the first quarter of 2011. In particular, while the transaction remains ~~constraints~~pending, ascustomers ~~demand~~could ~~increases~~defer purchase decisions pending the outcome of the transaction (including obtaining required stockholder and regulatory approval), or ascustomers wecould ~~introduce~~elect ~~our~~to ~~newest~~purchase ~~products~~from other suppliers.

~~Cost~~We have ofexperienced ~~revenue~~ and ~~gross~~believe ~~margin~~we ~~(in~~may continue to experience supply constraints ~~thousands,~~as ~~except~~demand ~~percentages)~~increases or as we introduce our newest products.

	Six Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount		Percentage
Cost of revenue	$	26,518		$	24,245		$	2,273	9	%
Gross margin	$	19,602		$	16,202		$	3,400	21	%
Gross margin percentage	43		%	40		%

Cost of revenue increased by $2.3 million or 9% to $26.5 million for the six months ended June 30, 2010 as compared to $24.2 million for the six months ended June 30, 2009. The increase in cost of revenue during the six months ended June 30, 2010 was primarily attributable to increased revenue shipments.

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~~Gross margin~~Cost ~~increased to 43%~~ of revenue inand ~~the six months ended June 30, 2010 compared to~~ gross margin ~~of 40% of revenue for the six months ended~~(in ~~June 30~~thousands, ~~2009.~~except ~~The increase in gross margin was primarily attributable to product mix and decreased unit cost of our blades and ONT products.~~percentages)

	Nine Months Ended						Increase (Decrease) 2010 vs. 2009
	September 30, 2010			September 30, 2009			Amount		Percentage

Cost of revenue	$	44,396		$	36,970		$	7,426	20	%
Gross margin	$	31,534		$	25,150		$	6,384	25	%
Gross margin percentage	42		%	40		%

Cost of revenue increased by $7.4 million or 20% to $44.4 million for the nine months ended September 30, 2010 as compared to $37.0 million for the nine months ended September 30, 2009. The increase in cost of revenue during the nine months ended September 30, 2010 was primarily attributable to increased revenue shipments.

Gross margin increased to 42% of revenue in the nine months ended September 30, 2010 compared to gross margin of 40% of revenue for the nine months ended September 30, 2009. The increase in gross margin percent was primarily attributable to product mix and decreased unit cost of our blades and ONT products.

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

Six Months Ended

Increase (Decrease) 2010 vs. 2009

Nine Months Ended

Increase (Decrease) 2010 vs. 2009

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

Research and product-development

711,~~600~~549

812,~~424~~186

(~~824~~637

)

(105

Research and product-development as a percentage of revenue

1615

2120

Research ~~and~~ and product-development expenses decreased by $0.86 million or 105% to $711.6 ~~million~~ million for the ~~six~~nine months ended ~~June~~September 30, 2010 as compared to $812.42 million for the ~~six~~nine months ended ~~June~~September 30, 2009. The decrease in research and product-development expenses was primarily attributable to the decrease in personnel related costs, ~~related~~decreased product-development toexpenses ~~the reduction in force~~ and ~~decreased~~ ~~contract~~lower ~~development~~stock-based ~~expenses~~compensation expense.

Sales and marketing expenses (in thousands, except percentages)

Six Months Ended

Increase (Decrease) 2010 vs. 2009

Nine Months Ended

Increase (Decrease) 2010 vs. 2009

June 30, 2010

June 30, 2009

Amount

Percentage

September 30, 2010

September 30, 2009

Amount

Percentage

Sales and marketing

914,~~118~~200

813,~~945~~404

~~173~~796

Sales and marketing as a percentage of revenue

2019

Sales and marketing expenses increased by $0.2 8 million or 26% to $914.12 million for the nine ~~six~~ months ended ~~June~~September 30, 2010 as compared to $813.9 4 million for the nine ~~six~~ months ended ~~June~~September 30, 2009. This increase was primarily due to higher sales commissions due to the increase in bookings activity, partially offset by lower personnel related costs.

General and administrative expenses (in thousands, except percentages)

	Six Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount			Percentage
General and administrative	$	3,804		$	4,419		$	(615	)	(14	)%
General and administrative as a percentage of revenue	8		%	11		%

General and administrative expenses decreased by $0.6 million or 14% to $3.8 million for the six months ended June 30, 2010 as compared to $4.4 million for the six months ended June 30, 2009. General and administrative expenses decreased primarily due to lower legal and professional fees and lower personnel related costs.

We currently expect general and administrative expenses in future periods to be largely consistent with current expense levels but may vary with any changes to salary levels.

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General and administrative expenses (in thousands, except percentages)

	Nine Months Ended						Increase (Decrease) 2010 vs. 2009
	September 30, 2010			September 30, 2009			Amount			Percentage

General and administrative	$	5,702		$	6,179		$	(477	)	(8	)%
General and administrative as a percentage of revenue	8		%	10		%

General and administrative expenses decreased by $0.5 million or 8% to $5.7 million for the nine months ended September 30, 2010 as compared to $6.2 million for the nine months ended September 30, 2009. General and administrative expenses decreased primarily due to lower professional fees and lower stock-based compensation expense, partially offset by an increase in personnel related costs.

We currently expect general and administrative expenses in future periods to be largely consistent with current expense levels.

Restructuring charges

On May 7, 2009, we implemented a reduction-in-force that resulted in the termination of approximately 10% of our work force. We substantially completed the reduction-in-force by the end of the second quarter of 2009. The purpose of the workforce reduction was to reduce costs, streamline operations, and improve the cost structure in light of the economic and operating environment. During the quarter ended June 30, 2009, we recorded approximately $213,000 of restructuring charges related to termination benefits in connection with the reduction- in- force. There were no such restructuring charges incurred during the quarter ended September 30, 2010.

On September 10, 2009 we entered into a memorandum of understanding regarding the settlement of the April 26th, 2007 stockholder class action lawsuit. On November 2, 2009 the parties signed and submitted a formal binding stipulation of settlement to the court. The court issued its preliminary approval of the settlement on November 13, 2009. On February 22, 2010, the court held a hearing dismissing the litigation with prejudice and entered a final judgment. The total settlement amount of $13.9 million had been agreed by all parties, of which we contributed $1.7 million. We recorded a charge of $1.7 million as a loss on settlement for the quarter ended September 30, 2009, associated with this settlement. There was no such loss recorded for the quarter ended September 30, 2010.

Merger Related Expenses

The completion of the transaction is subject to various closing conditions, including obtaining the approval of our stockholders, registering the shares of Calix Common Stock to be issued in connection with the merger and receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We expect the transaction to close in the fourth quarter of 2010 or the first quarter of 2011.

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Stock-based compensation (in thousands)

	Six Months Ended
	Nine Months Ended
	June 30, 2010		June 30, 2009
	September 30, 2010		September 30, 2009
Cost of revenue	$	~~171~~234	$	~~193~~326
Research and development	~~448~~594		~~481~~778
Sales and marketing	~~404~~560		~~444~~692
General and administrative	~~467~~644		~~516~~889
Total stock-based compensation	$	12,~~490~~032	$	12,~~634~~685

Stock-based ~~compensation~~ compensation expenses decreased by approximately $0.17 million or 924% to $12.5 0 million for the nine ~~six~~ months ended ~~June~~September 30, 2010 as compared to approximately $12.6 7 million for the ~~six~~nine months ended ~~June~~September 30, 2009. This net decrease was primarily attributable to the completion of four years of vesting of certain higher value grants during the initial months of the ~~second~~prior quarter and the current quarter ~~coupled~~and ~~with~~no aperformance ~~slight~~related ~~increase~~stock inbased compensation expense when compared to the ~~forfeiture~~stock ~~rate~~based compensation expense for the nine months ended September 30, 2009.

Interest income (expense), net (in thousands, except percentages)

	Six Months Ended						Increase (Decrease) 2010 vs. 2009
	Nine Months Ended						Increase (Decrease) 2010 vs. 2009
	June 30, 2010			June 30, 2009			Amount			Percentage
	September 30, 2010			September 30, 2009			Amount			Percentage
Interest income	$	711		$278	~~240~~		$(267	~~(233~~	)	(9796	)%
Interest expense	(13		)	(4		)	31			7525	%
Total interest income (expense), net	$	68		$	~~236~~274		$	(~~230~~266	)	(97	)%

Interest income and expense, net decreased by $~~230~~266,000 or 97% to $68,000 for the ~~six~~ nine months ended ~~June~~ September 30, 2010, as compared to $~~236~~274,000 for the ~~six~~nine months ended ~~June~~September 30, 2009. The decrease was primarily attributable to lower average restricted cash balances earning interest and lower interest rates.

Provision for ~~income taxes~~ (inbenefit ~~thousands~~from) income taxes

For income tax purposes, we consider our projected annual income and the utilization of our net operating loss ~~carryforwards~~carry forwards among other factors. For the ~~six~~nine months ~~ended~~ ~~June~~ended September 30, 2010 and 2009, we recorded an income tax expense of $1632,000 and an income tax benefit of $1435,000, respectively, for federal and state ~~income~~ income taxes.

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Liquidity and Capital Resources

As of ~~June30~~September 30, 2010, we had cash and cash equivalents of $4144.92 million, restricted cash of of $1.8 million, stockholders’ equity of $5453.34 million, and working capital of $46.84 million, compared with cash and cash equivalents of $39.3 million, restricted cash of $5.7 million, stockholders’ equity of $52.9 million, and working capital of $45.5 million as of December 31, 2009. ~~The increase in our cash and cash equivalents was primarily related to a decrease in restricted cash.~~

Net cash ~~used~~provided inby operating activities for the ~~six~~ nine months ended ~~June~~ September 30, 2010, was $01.64 million compared to $01.81 million during the same period ended ~~June~~September 30, 2009. The sum of our net loss and ~~certain~~ certain non-cash expenses, such as stock-based compensation, depreciation and amortization, accounts receivable reserves and inventory reserves resulted in an inflow of $21.05 million in the 2010 period, compared to an outflow of $2.65 million in the ~~six~~nine months ended ~~June~~September 30, 2009. The overall impact of change in certain operating assets and liabilities on total operating cash flows resulted in a cash outflow of $20.61 million in the ~~six~~nine months ended ~~June~~September 30, 2010 compared to a cash inflow of $13.86 million in the ~~six months~~nine months ended ~~June~~September 30, 2009.

Net cash provided by investing activities for the ~~six~~nine months ended ~~June~~September 30, 2010, was $2.42 million compared to $3.6.8 million ~~provided by investing activities~~, during the same period ended ~~June~~ September 30, 2009. Cash provided by investing activities for the ~~six~~ nine months ended ~~June~~September 30, 2010, was primarily due to a decrease of $3.9 million in restricted cash required for performance bonds in connection with our Rural Utility Service, or RUS, contracts offset by $1.5 7 million for purchases of property and equipment, as compared to a decrease of $47.05 million in restricted cash, offset by $0.47 million for purchases of property and equipment in the ~~six~~nine months ended ~~June~~September 30, 2009.

Net cash provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2010, was $01.93 million compared to $~~0.3~~615,000 ~~million~~ for the same period inended September 30, 2009. Cash provided by financing activities for the ~~six~~nine months ended ~~June~~September 30, 2010, was mainly due to proceeds from the exercise of stock options of $01.91 million and sale of common stock under the ESPP of $0.25 million partially offset by payment of payroll taxes for vested restricted stock units of $0.3 million and payment of capital lease obligations of approximately $1246,000, as compared to proceeds of approximately $~~0.4~~61,000 ~~million~~ related to the exercise of stock options, and sale of common stock under the ESPP of $0.6 million which was offset by the payment of approximately $1017,000 for capital lease obligations for the ~~six~~nine months ended ~~June~~September 30, 2009.

Working Capital

Working capital increased to $46.84 million as of ~~June~~September 30, 2010, as compared to $45.5 million as of December 31, 2009. The increase in the working capital is primarily attributable to ~~a decrease~~an increase in ~~deferred~~accounts receivable ~~revenue~~ and ~~accrued~~inventory ~~liabilities~~balance ~~partially~~and ~~offset by~~ a decrease in ~~inventories~~deferred ~~and~~revenue ~~accounts~~partially offset ~~receivable~~by ~~balances and~~ an increase in accounts payable and accrued expenses balance.

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

· amount and timing of revenue;

· collectability of accounts receivable;

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

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

· cost and timing of marketing and selling activities;

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

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

We believe that our cash and cash equivalents will be sufficient to finance our operations over the next 12 months. Although we believe these funds will be sufficient to maintain and expand our operations in accordance with our business strategy, we may need additional funds in the future. If we are unable to raise additional financing when and if needed, we may be required to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives.

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Contractual Obligations

We lease our facilities and certain assets under non-cancelable operating leases expiring through ~~2015~~2016, excluding various renewal options. We lease certain office equipment under capital leases.

The following table summarizes our minimum purchase commitments to our contract manufacturers, our minimum commitments under non-cancelable operating leases, our commitment under capital leases, our commitment under fixed assets and licensing agreements as of ~~June~~September 30, 2010 (in thousands):

	Payments Due By Period
	Total		Less than 1 year	~~Less than 1 year~~	1-3 years	1-3-5 years		More than 5 years	~~3-5 years~~		~~More than 5 years~~
Contractual Obligations
Purchase commitments (1)	$28,991	~~23,685~~	28,991	$	~~23,685~~—	$—	—	—	$	—	$	—
Operating leases	$6,012	~~6,210~~	389	$	~~726~~4,621	$1,002	~~4,517~~	—	$	~~967~~	$	—
Capital leases	$	34		$	15	$	19		$	—	$
Licensing agreements	41		31		10	—		—
Licensing agreements	$	73		$	63	$	10		$	—	$	—

(1)

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

Of the unrecognized tax benefit liability of approximately $9.3 million, unrecognized tax benefits of only $0.1 million would require a cash settlement and is not included in the table above due to our significant tax net loss and research tax credit carry forward position. If some or all of the unrecognized tax benefit liability became a recognized tax liability, it would generally result in reduction of these net operating losses and tax credits and would not result in the use of cash to satisfy the tax liability.

Off-Balance Sheet Arrangements

As of ~~June~~September 30, 2010, we did not have any material off-balance sheet arrangements, other than operating leases and certain purchase commitments described in the contractual obligations table above.

Indemnification Obligations

We enter into indemnification provisions under our agreements with other companies in our ordinary course of business, typically with our contractors, customers, and landlords. As of ~~the~~September 30, ~~Evaluation Date~~2010, we did not have any material accrued liability related to these indemnification agreements.

We are also a party to indemnification agreements with our officers and directors, consequently, we have obligations, to hold harmless and indemnify each of our directors as defendants in the California Complaints and the Delaware Complaint (as described above) against judgments, fines, settlements and expenses and otherwise to the fullest extent permitted under Delaware law and our bylaws and certificate of incorporation.

Recent Accounting Pronouncements

There were no new accounting updates for the three months ended ~~June~~September 30, 2010, that would have a material impact on our financial position, results of operations and cash flows.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of ~~June~~September 30, 2010, which we refer to as the Evaluation Date or the end of the period covered by this Quarterly Report on Form 10-Q.

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

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the three months ended ~~June~~September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of Internal Control Procedures

Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Merger Transaction Class Action Lawsuits

Atwater Partners of Texas LLC v. AT&T, Inc. et al.

On May 27, 2010, Atwater Partners of Texas LLC filed a complaint in the U.S. District Court for the Eastern District of Texas alleging infringement of certain U.S. Patent Nos. 6,490,296; 7,158,523; 7,161,953; 7,310,310; and 7,349,401 by 25 companies, including Occam. The complaint seeks an injunction, unspecified damages, and other relief. The disclosure of each of the patents in suit relates to the field of digital networks. We have answered the complaint and have asserted thirteen affirmative defenses, including invalidity, non-infringement, and patent exhaustion. This case is currently pending.

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

IPO Short Swing Profits Litigation

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our IPO on June 23, 2000, through at least June 22, 2001. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriter any “short-swing profits” obtained by it in violation of Section 16(b). We were named as a nominal defendant in the action, but have no liability for the asserted claims. None of our directors or officers are named as defendants in this action.

On October 29, 2007, the case was reassigned to Judge James L. Robart along with fifty-four other Section 16(b) cases seeking recovery of short-swing profits from underwriters in connection with various IPOs. The Underwriters and Issuers have filed a motion to dismiss the case and reply briefs have been filed. The Court heard oral argument on January 19, 2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaint against the issuer defendants including Occam on both jurisdictional and statute of limitation grounds. On March 31, 2009, the Plaintiffs filed a Notice of Appeal and their opening brief on August 26, 2009. The Issuers including Occam and the underwriters filed their responses on October 2, 2009. Each party’s reply briefs have been filed as of November 17, 2009. The Appellate Court for the Ninth Circuit heard oral argument on October 5, 2010. It is likely that it will be at least until April 2011 before the Court renders a decision on this matter.

Due to the inherent uncertainties of threatened litigation, we cannot accurately predict the ultimate outcome of the matter. We have not recorded any accruals related to the demand letters or Section 16(b) litigation because we expect any resulting resolution to be covered by our insurance policies.

IPO Allocation Litigation

We believe that over three hundred other companies have been named in over three hundred similar lawsuits that have been coordinated with our case. In October 2002, the plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 1, 2003 a motion to dismiss filed by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and rule 10b-5 claims against Occam. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions (the “focus” cases) and noted that the decision was intended to provide guidance to all parties regarding class certification in the remaining cases. The Second Circuit Court of Appeals vacated the district court’s decision granting class certification in those six cases on December 5, 2006. Plaintiffs filed a motion for rehearing. On April 6, 2007, the Second Circuit denied the petition, but noted that Plaintiffs could ask the District Court to certify a more narrow class than the one that was rejected.

21The parties in the approximately 300 coordinated cases, including ours, reached a settlement. On October 5, 2009, the Court approved the settlement and certified a settlement class. Six notices of appeal of the Second Circuit of the Court’s approval of the settlement have been filed. As of October 6, 2010, the deadline for filing appellate briefs opposing the settlement, only one brief was filed. On October 8, 2010 the remaining objectors along with Plaintiff filed a stipulation withdrawing their appeals with prejudice. The remainder of the briefing schedule has not been set. Appellees, including us, are required to request a date not later than one hundred twenty days from the date of the appellate brief filing to file their brief. The case remains open pending the briefing schedule and the outcome of the court ruling on the appeal.

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

The parties in the approximately 300 coordinated cases, including ours, reached a settlement. On October 5, 2009, the Court approved the settlement and certified a settlement class. Six notices of appeal of the Second Circuit of the Court’s approval of the settlement have been filed. Three objectors to the settlement who filed a notice of appeal also filed a permission to file an appeal on the basis that the Court purportedly abused its discretion concerning the class certification on the grounds that it was broader than the class rejected by the Second Circuit Appeals Court. Plaintiffs filed an opposition to the petition. The Court has not yet ruled on the petition and the briefing on the appeals has not yet commenced. The case remains open pending the outcome of the court ruling on the appeals.

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

IPO Short Swing Profits Litigation

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

Other Matters

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

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ITEM 1A. RISK FACTORS

This Quarterly Report on Form 10-Q, or Form 10-Q, including any information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, referred to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. ~~The~~ These statements are only predictions. Actual events or results may differ materially. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed below in this Item 1A and those discussed elsewhere in this Form 10-Q. We encourage investors to review these factors carefully. We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. However, we do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.

~~Before you~~In ~~invest~~addition, inthe ~~our~~potential ~~securities,~~merger with ~~you~~Calix ~~should~~presents beadditional ~~aware~~risks and uncertainties that ~~our~~could ~~business~~cause ~~faces~~our ~~numerous~~actual ~~financial~~results ~~and~~to ~~market~~differ ~~risks,~~from ~~including~~ those ~~described~~expressed ~~below,~~or asimplied ~~well~~by forward looking asstatements, ~~general~~including ~~economic~~the ~~and~~risk ~~business~~that ~~risks. The~~the ~~following~~pending ~~discussion~~merger ~~provides~~with ~~information~~Calix ~~concerning~~may ~~the~~not ~~material~~be ~~risks~~consummated ~~and~~due ~~uncertainties~~to ~~that~~a wefailure ~~have~~to ~~identified~~obtain ~~and~~stockholder ~~believe~~or ~~may~~regulatory ~~adversely~~approval or ~~affect~~for ~~our~~any ~~business,~~other ~~our~~reason; ~~financial~~the ~~condition~~risk ~~and~~that ~~our~~the ~~results~~closing of ~~operations. Before~~ ~~you~~the ~~decide~~merger ~~whether~~will tobe delayed; ~~invest~~uncertainties inconcerning ~~our~~the ~~securities,~~effect ~~you~~of ~~should~~the ~~carefully~~transaction ~~consider~~on ~~these~~relationships ~~risks and~~with ~~uncertainties~~customers, ~~together~~employees ~~with~~and ~~all~~suppliers of ~~the~~either ~~other~~or ~~information~~both ~~included~~of inthe ~~this~~companies; the risk ~~Quarterly~~that ~~Report~~the ontwo ~~Form 10-Q,~~companies ~~our~~will ~~Annual~~not ~~Report~~be onintegrated ~~Form 10-K~~successfully ~~for~~and ~~the~~in a timely ~~year~~manner ~~ended~~even ~~December 31,~~if ~~2009~~the closing occurs as anticipated; and inthe ~~our~~risk ~~other~~that ~~public~~the transaction ~~filings~~may involve unexpected costs or unexpected liabilities.

We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. However, we do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us. Before you invest in our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition and our results of operations. Before you decide whether to invest in our securities, you should carefully consider these risks and uncertainties, together with all of the other information included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2009 and in our other public filings.

Risks Related to the Pending Merger with Calix

Because the market price of Calix common shares will fluctuate, Occam stockholders cannot be sure of the market value of Calix common shares that they will receive in the merger transaction.

At the effective time, each share of Occam common stock, other than dissenting shares, if any, and shares owned by Calix, Occam or any of their respective subsidiaries (which will be cancelled), will be converted into the right to receive $3.8337 in cash, without interest and 0.2925 shares of Calix common stock. There will be a time lapse between the date on which Occam stockholders vote on the adoption of the merger agreement and the date on which Occam stockholders will actually receive such shares. The market value of Calix common shares will fluctuate during this period. These fluctuations may be caused by changes in the businesses, operations, results and prospects of both Calix and Occam, market expectations of the likelihood that the merger transaction will be completed and the timing of its completion, the effect of any of the conditions or restrictions imposed on or proposed with respect to the merging parties by regulatory agencies, general market and economic conditions or other factors, including those risks discussed elsewhere in this proxy statement/prospectus. The actual market value of Calix common shares, when received by Occam stockholders, will depend on the market value of those shares on that date. This market value may be less than the value used to determine the number of shares to be received, as that determination was made as of September 15, 2010.

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The failure to successfully combine the businesses of Calix and Occam in the expected time frame may adversely affect Calix’s future results, which may adversely affect the value of the Calix common shares that Occam stockholders may receive in the merger transaction.

The success of the merger transaction will depend, in part, on the ability of a post-merger Calix to realize the anticipated benefits from combining the businesses of Calix and Occam, including integrating Occam into Calix’s business. To realize these anticipated benefits, Calix’s business and Occam’s business must be successfully combined. If the combined company is not able to achieve these objectives, the anticipated benefits of the merger transaction may not be realized fully or at all or may take longer to realize than expected. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the merger transaction.

Calix and Occam, including their respective subsidiaries, have operated and, until the completion of the merger transaction, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies. Any or all of those occurrences could adversely affect Calix’s ability to maintain relationships with customers and employees after the merger transaction or to achieve the anticipated benefits of the merger transaction. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on the combined company.

Whether or not the merger is completed, the announcement and pendency of the merger transaction could cause disruptions and materially adversely affect the future business and operations of Calix and Occam or result in a loss of Occam employees.

In connection with the pending announcement or pendency of the merger, it is possible that some customers, suppliers and other persons with whom Calix or Occam have a business relationship may delay or defer certain business decisions, or determine to purchase a competitor’s products. In particular, customers could be reluctant to purchase the products of Calix and/or Occam due to uncertainty about the direction of their respective technology and products, and uncertainty regarding the willingness of the combined company to support and service existing products after the transaction. If Calix’s or Occam’s customers, suppliers or other persons, delay or defer business decisions, or purchase a competitor’s products, it could negatively impact revenues, earnings and cash flows of Calix or Occam, as well as the market prices of Calix common shares or Occam common stock, regardless of whether the merger transaction is completed.

Similarly, current and prospective employees of Occam may experience uncertainty about their future roles with Occam and Calix following completion of the merger transaction. These potential distractions of the merger may adversely affect the ability of Occam to attract, motivate and retain key employees and executives and keep them focused on the strategies and goals of the combined company. Any failure by Occam to retain and motivate executives and key employees during the period prior to the completion of the merger could seriously harm its business, as well as the business of the combined company.

The merger transaction is subject to the receipt of consents and approvals from governmental entities, which may impose conditions on, jeopardize or delay completion of the merger transaction, result in additional expenditures of money and resources or reduce the anticipated benefits of the merger transaction; alternatively, antitrust regulators may preclude the completion of the merger transaction altogether.

Completion of the merger transaction is conditioned upon the making of filings with, and the receipt of required consents, orders, approvals or clearances from, certain governmental entities, including under the Hart-Scott-Rodino Act, or the HSR Act. The Federal Trade Commission, or the FTC, and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions like the merger. At any time before or after the completion of the merger, the FTC or the Antitrust Division could take any action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger or seeking the divestiture of substantial assets of Calix or Occam. In addition, certain private parties, as well as state attorneys general and other antitrust authorities, may challenge the transaction under antitrust laws under certain circumstances. In addition, conditions may be imposed upon the approval of the merger. Such conditions may jeopardize or delay completion of the merger or may reduce the anticipated benefits of the merger. Subject to compliance with the terms of the merger agreement, Calix may not be willing to accept such conditions, and the merger thus may not be consummated. There can be no assurance that these required consents, orders, approvals and clearances will be obtained. If they are obtained, governmental entities may attempt to impose conditions on, or require divestitures relating to, the divisions, operations or assets of Calix or Occam. These conditions or divestitures may jeopardize or delay completion of the merger transaction or reduce the anticipated benefits of the merger transaction or result in additional expenditures of money and resources.

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Directors and executive officers of Occam have interests in the merger transaction that are different from, or in addition to, the interests of Occam stockholders generally, and Occam stockholders should consider these interests in connection with their votes on the merger agreement.

Some of the directors and executive officers of Occam have interests in the merger transaction that are different from, or in addition to, the interests of Occam stockholders generally.

These interests include:

· the vesting and settlement or conversion of Occam equity awards into awards for Calix common shares held by Occam directors and executive officers;

· executive officers’ receipt of specified benefits under their change in control agreements, if certain terminations of employment occur in connection with the merger transaction; and

· Calix’s agreement to indemnify directors and officers against certain claims and liabilities and to continue such indemnification for a period of six years from the effective time of the merger transaction.

· Occam stockholders should consider these interests in connection with their votes on the merger agreement.

Failure to complete the merger transaction could negatively impact the stock prices and future businesses and financial results of Calix and Occam.

If the merger transaction is not completed, neither Calix nor Occam would realize any anticipated benefits from being a part of the combined company. In addition, Calix and/or Occam may experience negative reactions from the financial markets, which could cause a decrease in the market price of their stock, particularly if the market price reflects a market assumption that the merger will be completed. Calix and Occam may also experience negative reactions from their respective customers, employees and dealers. Such reactions may have an adverse effect on Calix’s and/or Occam’s business. Calix and/or Occam also could be subject to litigation related to any failure to complete the merger transaction or to enforcement proceedings commenced against Calix and/or Occam to perform their respective obligations under the merger agreement.

In addition, if the merger transaction is not completed, the ongoing businesses of Calix and Occam may be adversely affected and Calix and Occam will be subject to several risks and consequences, including the following:

· Occam may be required, under certain circumstances, to pay Calix a termination fee of $5.2 million under the merger agreement;

· Calix may be required, under certain circumstances, to pay Occam a termination fee of $5.0 million or $10.0 million under the merger agreement;

· Occam may not be able to find another buyer willing to pay an equivalent or higher price in an alternative transaction than the price that would be paid pursuant to the Merger;

· under the merger agreement, Occam is subject to certain restrictions on the conduct of its business prior to completing the merger transaction which may adversely affect its ability to execute certain of its business strategies; and

· Occam and Calix will be required to pay certain costs relating to the merger transaction, whether or not the merger transaction is completed, such as legal, accounting, financial advisor and printing fees; under the merger agreement, Occam is subject to certain restrictions on the conduct of its business prior to completing the merger transaction which may adversely affect its ability to execute certain of its business strategies; and matters relating to the merger transaction may require substantial commitments of time and resources by Calix and Occam management, which could otherwise have been devoted to other opportunities that may have been beneficial to Calix and Occam as independent companies, as the case may be.

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Occam’s obligation to pay a termination fee under certain circumstances and the restrictions on its ability to solicit other acquisition proposals may discourage other companies from trying to acquire Occam.

Until the merger is completed or the merger agreement is terminated, with limited exceptions, the merger agreement prohibits Occam from entering into or soliciting any acquisition proposal or offer for a merger or other business combination with a party other than Calix. Occam has agreed to pay Calix a termination fee of $5.2 million under specified circumstances. These provisions could discourage other companies from trying to acquire Occam for a higher price.

Occam stockholders will own a smaller percentage of Calix than they currently own in Occam.

After completion of the merger transaction, Occam stockholders will own a smaller percentage of Calix than they currently own in Occam. Occam stockholders, in the aggregate, will own between approximately 14.1% and 15.9% of Calix’s outstanding shares of common stock immediately after completion of the merger transaction (such ownership percentages are based on the number of Calix shares of common stock outstanding as of September 14, 2010 and will vary based upon the actual number of Calix and Occam shares outstanding as of the effective time).

Four purported class action lawsuits have been filed against Occam and its directors challenging the merger, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the consummation of the merger, result in substantial costs or both.

On September 17, 20, and 21, 2010, three purported class action complaints were filed in the California Superior Court for Santa Barbara County:(1) Kardosh v. Occam Networks, Inc., et al., Case No. 1371748 (“Kardosh Complaint”); (2) Kennedy v. Occam Networks, Inc., et al., Case No. 1371762 (“Kennedy Complaint”); and (3) Moghaddam v. Occam Networks, Inc., et al., Case No. 1371802 (“Moghaddam Complaint”) (together, the “California Complaints”). Each of the California Complaints names Occam, the members of the Occam board, and Calix as defendants. The Kennedy Complaint also names Calix’s merger subsidiaries (Ocean Sub I, Inc. and Ocean Sub II, LLC) as defendants. The California Complaints generally allege that the members of the Occam board breached their fiduciary duties in connection with the proposed acquisition of Occam by Calix, by, among other things, engaging in an allegedly unfair process and agreeing to an allegedly unfair price for the proposed merger transaction. The California Complaints further allege that Occam and the other entity defendants aided and abetted these alleged breaches of fiduciary duty. The plaintiffs seek various forms of relief, including an order certifying a class of Occam shareholders and a preliminary and permanent injunction of the proposed merger.

On October 6, 2010, another purported class action complaint was filed in the Court of Chancery of the State of Delaware: Steinhart, et al. v. Howard-Anderson, et al Case No. 5878-VCL (the “Delaware Complaint”). Like the California Complaint, the Delaware Complaint names the members of Occam’s board as defendants and generally alleges that the members of the Occam board breached their fiduciary duties in connection with the proposed acquisition of Occam by Calix, by, among other things, engaging in an allegedly unfair process and agreeing to an allegedly unfair price for the proposed merger transaction. Also, like the plaintiffs who filed the California Complaint, the plaintiffs who filed the Delaware Complaint seek various forms of relief, including an order certifying a class of Occam shareholders and a preliminary and permanent injunction of the proposed merger.

Occam has obligations to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and Occam’s bylaws and certificate of incorporation.

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Risks Related to Current Economic Environment and Our Future Revenues

Our business is substantially dependent on the capital spending patterns of telecom operators and has recently been adversely affected by reductions and delays in capital spending by our customers, primarily due to the economic recession. Any ~~continued~~ reductions in spending or delays in customer orders in response to macroeconomic conditions, availability of funding under government economic stimulus programs, or otherwise, would adversely affect our business, operating results, and financial condition. We cannot predict the financial ~~timing or~~ impact, if any, of government economic stimulus programs on capital spending by telecom operators.

Demand for our products depends on the magnitude and timing of capital spending by telecom service providers as they construct, expand and upgrade their networks. In the fourth quarter of 2008, we identified a weakening in new order activity that continued throughout 2009 and into 2010. We believe this weakening relates to reductions in capital expenditures and capital equipment investment budgets resulting from the worldwide financial crisis and economic downturn. In addition, we believe that many of our customers, particularly those that participate in government funding initiatives such as the United States Department of Agriculture’s RUS loan program, ~~may~~were be delaying investment and purchase activity pending their analysis of the availability of funding under recently announced government economic stimulus programs. WeAlthough we expect that our customers will continue to carefully evaluate their capital investment decisions in light of continued economic uncertainties, governmental broadband funding initiatives should have a favorable impact on capital spending trends among telecommunication carriers for the balance of 2010 and into 2011. However, we cannot accurately predict the timing or the extent of financial impact, if any, that such government economic stimulus programs ~~may~~ may have on our business. In addition, these programs may not result in a net increase in capital spending activity if telecom operators substitute spending under government stimulus programs for capital spending they would otherwise have made or if private capital spending decreases by more than the incremental increase attributable to government programs. ~~Continued reductions~~Reductions, delays, or cancellations in order activity by our customers would be expected to adversely affect our future revenues by reducing the revenue we recognize in any quarter from orders booked and shipped in that quarter and by reducing the amount of deferred revenues that may become recognizable in future periods upon satisfaction of revenue recognition criteria.

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

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

· competitive pressures, including pricing pressures;

· consumer demand for new services;

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

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· the timing of annual budget approvals;

· evolving industry standards and network architectures;

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

· completion of major network upgrades.

Changes in government funding programs can also affect capital expenditures by IOCs. Because many of our customers are IOCs, their revenues are particularly dependent upon intercarrier payments (primarily interstate and intrastate access charges) and federal and state universal service subsidies. The Federal Communications Commission, or FCC, and some states are considering changes to both intercarrier payments and universal service subsidies, and such changes could reduce IOC revenues, which would be expected to have an adverse impact on capital spending budgets. Furthermore, many IOCs use government supported loan programs or grants to finance capital spending. Changes to those programs, such as the Department of Agriculture’s RUS loan program, could reduce the ability of IOCs to access capital. Any decision by telecom service providers to reduce capital expenditures, whether caused by the economic downturn, changes in government regulations and subsidies, or other reasons, would have a material adverse effect on our business, consolidated financial condition and results of operations.

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

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

We have had limited experience selling to larger telecommunication companies, and our ability to recognize revenue, if any, from contracts with these companies may be difficult to predict. In addition, FairPoint Communications, our only Tier-2 customer, recently filed for bankruptcy protection.

In early 2008, we announced that we had been selected as the lead access equipment provider for a substantial broadband upgrade by FairPoint Communications, Inc. in its network in Vermont, New Hampshire, and Maine. FairPoint acquired these networks through its acquisition of certain assets of Verizon Communications, Inc. FairPoint represented our first customer who is considered Tier 2 based on the number of telephone lines serviced. We have limited experience selling or servicing Tier 2 customers, and our ability to recognize substantial revenue from the FairPoint relationship or any other relationships we may establish with Tier 2 customers will depend on several factors, including, among others, the timing of orders and the terms and conditions of the orders, which can affect our ability to satisfy revenue recognition criteria. We cannot currently predict with any accuracy the timing of orders from FairPoint, and any delays or termination of FairPoint’s anticipated upgrade of its northern New England network could have a material adverse effect on our future revenues and operating results.

On October 26, 2009, FairPoint announced that it had filed a bankruptcy petition under chapter 11 of the United States Bankruptcy Code. And on February 7, 2010, FairPoint filed its bankruptcy reorganization plan. Since filing for reorganization on October 26, 2009, FairPoint has operated under the supervision of the bankruptcy court. As of ~~June~~September 30, 2010, we had an outstanding receivable balance from FairPoint of approximately $01.48 million. As of March 31, 2010, we had an outstanding receivable balance from FairPoint of $2.1 million. Of this amount, $1.7 million related to transactions that occurred before FairPoint filed its bankruptcy petition. FairPoint has remitted the entire balance of the $1.7 million pre-bankruptcy petition claims and we have recognized revenue and related cost of revenue in the quarter ended, June 30, 2010.

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

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

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

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

· increases in warranty accruals and other costs associated with remedying any performance problems relating to our products;

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

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

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

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

· our ability to achieve targeted cost reductions;

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

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

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

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

We have incurred significant losses since our inception. As of ~~June30~~September 30, 2010, we had an accumulated deficit of $~~136~~138.42 million. We incurred substantial losses in 2009. We ~~may~~expect to continue to incur losses in 2010. We cannot assure you that we will not continue to incur losses or experience negative cash flow in the future. We have only generated operating income in the quarters ended December 25, 2005, September 24, 2006, December 31, 2006 and December 31, 2008. Our inability to generate positive operating income and cash flow would materially and adversely affect our liquidity, consolidated results of operations and consolidated financial condition.

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

Risks Related to Internal Controls

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

In connection with the 2007 audit committee review of our revenue recognition practices and our resulting financial restatement, we determined that we did not have adequate internal financial and accounting controls to produce accurate and timely financial statements. Among weaknesses and deficiencies identified in our review, we determined that we had a material weakness with respect to revenue recognition. The material weakness continued to exist at December 31, 2008. Since the restatement was completed in October 2007, we have implemented new processes and procedures to improve our internal controls and have expanded our finance and accounting staff. We believe that these actions have remediated the identified weaknesses and deficiencies, including the material weakness. As of December 31, 2009, our chief executive officer and chief financial officer determined that our internal controls over financial reporting were effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting in accordance with generally accepted accounting principles in the United States.

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected. As discussed in our Annual Report on Form 10-K for our 2009 fiscal year and our Quarterly Reports on Form 10-Q for our 2009 fiscal quarters, our audit committee and management, together with our current and former independent registered public accounting firms, have identified numerous control deficiencies in the past and may identify additional deficiencies in the future. Failure on our part to have effective internal financial and accounting controls could cause our financial reporting to be unreliable, could have a material adverse effect on our business, operating results, and financial condition, and could adversely affect the trading price of our common stock.

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

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have taken and are taking to improve our internal controls over financial reporting will be sufficient to maintain effective internal controls over financial reporting in subsequent reporting periods or that we will be able to implement our planned processes and procedures in a timely manner. In addition, we may be unable to produce accurate financial statements on a timely basis. Any of the foregoing could cause investors to lose confidence in the reliability of our consolidated financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.

Risks Related to Our Business and Industry

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

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

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

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

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

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

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

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

· our ability to gain customer acceptance of our products;

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

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

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

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

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

Many of our existing and potential competitors are larger than we are with longer operating histories, and have substantially greater financial, technical, marketing or other resources; significantly greater name recognition; and a larger installed base of customers than we do. Unlike many of our competitors, we do not provide equipment financing to potential customers. In addition, many of our competitors have broader product lines than we do, so they can offer bundled products, which may appeal to certain customers.

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

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

We have derived a substantial majority of our sales in recent years from our BLC 6000 product line. We expect that sales of this product line will continue to account for a substantial majority of our sales for the foreseeable future. Any factors adversely affecting the pricing of, or demand for, our BLC 6000 line, including competition or technological change, could cause our sales to decline materially and our business to suffer.

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

Our market is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and recurring changes in end-user requirements. Our future success will depend significantly on our ability to anticipate and adapt to such changes and to offer, on a timely and cost-effective basis, products and features that meet changing customer demands and industry standards. The timely development of new or enhanced products is a complex and uncertain process, and we may not be able to accurately anticipate market trends or have sufficient resources to successfully manage long development cycles. We may also experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. The introduction of new or enhanced products also requires that we manage the transition from older products to these new or enhanced products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products are available for delivery to meet anticipated customer demand. If we are unable to develop new products or enhancements to our existing products on a timely and cost-effective basis, or if our new products or enhancements fail to achieve market acceptance, our business, consolidated financial condition and consolidated results of operations would be materially and adversely affected.

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We have enhanced our BLC 6000 platform to support active Gigabit Ethernet fiber-to-the-premises, or FTTP, services. Although we have invested significant time and resources to develop this enhancement, these FTTP-enabled products are relatively new, with limited sales to date, and market acceptance of these products may fall below our expectations. The introduction of new products is also expected to place pressure on our gross margins as most new products require time and increased sales volumes to achieve cost-saving efficiencies in production. To the extent our new products and enhancements do not achieve broad market acceptance, we may not realize expected returns on our investments, and we may lose current and potential customers.

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

Although our products are tested prior to shipment, they may contain software or hardware errors, defects or interoperability issues (collectively described as “defects”) that may only be detected when deployed in live networks that generate high amounts of communications traffic. In addition, defects or other malfunctions or quality control issues may not appear until the equipment has been deployed for an extended period of time. We also continue to introduce new products that may have undetected software or hardware defects. Our customers may discover defects in our products at any time after deployment or as their networks are expanded and modified. Any defects in our products discovered in the future, or failures of our customers’ networks, whether caused by our products or those of another vendor, could result in lost sales and market share and negative publicity regarding our products. In 2007, we experienced higher than average failures of certain assemblies that were fabricated between October 2005 and January 2006 and identified design issues associated with a transistor that resulted in equipment disruption and that required a rework effort. Recently, we have identified malfunctions or defects in specific customer deployments related to capacitor power function failures in equipment that had been in service for extended periods of time that we were required to repair under applicable warranties or elected to repair for customer relations purposes.

Defects, malfunctions, or other performance issues relating to our products could increase our warranty accruals and operating expenses, could have an adverse effect on market perceptions of our products, and could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. We quantify and record an estimate for warranty-related costs based on a variety of factors including but not limited to our actual history, projected return and failure rates and current repair costs. Our estimates are primarily based on an estimate of products that may be returned for warranty repair, estimated costs of repair, including parts and labor, depending on the type of service required. These estimates require us to examine past and current warranty issues and consider their continuing impact in the future. Our estimates of future warranty liability are based on prediction of future events, conditions and other complicated factors that are difficult to predict. The actual costs we incur may differ materially from our estimates.

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

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

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

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

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

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

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

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

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

· greater difficulty supporting and localizing our products;

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

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

· limited or unfavorable intellectual property protection;

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

· restrictions on the repatriation of earnings.

We may pursue acquisitions to broaden our product line or address new or larger markets. Acquisitions involve a number of risks. If we are unable to address and resolve these risks successfully, such acquisitions could have a material adverse impact to our business, consolidated results of operations and consolidated financial condition.

We may make acquisitions of businesses, products or technologies to expand our product offerings and capabilities, customer base and business. In October 2007, we acquired certain assets and assumed certain liabilities of Terawave Communications and we have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. We have limited experience making such acquisitions. Any of these transactions could be material to our consolidated financial condition and results of operations. The anticipated benefit of acquisitions may never materialize. In addition, the process of integrating an acquired business, products or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where we may face acquisition related risks include:

· diversion of management time and potential business disruptions;

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

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

· issuance of dilutive equity securities or incurrence of debt;

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

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

· difficulties integrating and supporting acquired products or technologies;

· unexpected capital equipment outlays and related costs;

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

· under performance problems associated with acquisitions;

· opportunity costs associated with committing capital to such acquisitions; and

· becoming involved in acquisition related litigation.

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

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

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

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

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

We expect to expand our research and development, sales, marketing and support activities, including our activities outside the U.S. depending on future business and economic conditions. Our historical growth has placed, and is expected to continue to place, significant demands on our management, as well as our financial and operational resources, as required to:

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

· implement appropriate operational and financial systems;

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· manage a larger organization;

· expand our manufacturing and distribution capacity;

· increase our sales and marketing efforts; and

· broaden our customer support capabilities.

In addition, if we cannot grow or manage our business growth effectively, we may not be able to execute our business strategies and our business, consolidated financial condition and consolidated results of operations would suffer.

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

We do not have internal manufacturing capabilities and rely upon a small number of contract manufacturers to build our products. In particular, we rely on AsteelFlash Group (formerly Flash Electronics), Inc. for the manufacture of our BLC 6000 blade products. Our reliance on a small number of contract manufacturers makes us vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields and costs. We do not have long-term supply contracts with our primary contract manufacturers. Consequently, these manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price, except as may be provided by a particular purchase order. If any of our manufacturers were unable or unwilling to continue manufacturing our products in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative manufacturers. It is possible that an alternate source may not be available to us when needed or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in manufacturing would require us to reduce our supply of products to our customers, which in turn could have a material adverse effect on our customer relations, business, consolidated financial condition and consolidated results of operations.

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

We depend on sole source and limited source suppliers for key components and license technology from third parties. If we are unable to source these components and technologies on a timely basis, we will not be able to deliver our products to our customers.

We depend on sole source and limited source suppliers for key components of our products. We may from time to time enter into original equipment manufacturer (OEM) and/or original design manufacturer (ODM) agreements to manufacture and/or design certain products. Any of the sole source and limited source suppliers, OEM and ODM suppliers upon which we rely could stop producing our components, cease operations entirely, or be acquired by, or enter into exclusive arrangements with, our competitors. We do not have long-term supply agreements with our suppliers, and our purchase volumes are currently too low for us to be considered a priority customer by most of our suppliers. We have recently experienced supply constraints with respect to certain components as demand has increased and expect that we may continue to experience supply constraints in near-term periods. As a result, these suppliers could stop selling components to us at commercially reasonable prices, or at all. Any such interruption or delay may force us to seek similar components from alternate sources, if available at all. Switching suppliers may require that we redesign our products to accommodate the new component and may potentially require us to re-qualify our products with our customers, which would be costly and time-consuming. Any interruption in the supply of sole source or limited source components would adversely affect our ability to meet scheduled product deliveries to our customers and would materially and adversely affect our business, consolidated financial condition and consolidated results of operations.

Periodically, we may be required to license technology from third parties to develop new products or product enhancements. These third party licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to obtain necessary third party licenses may force us to obtain substitute technology of lower quality or performance standards or at greater cost, any of which could seriously harm the competitiveness of our products and which would result in a material and adverse effect on our business, consolidated financial condition and consolidated results of operations.

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

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

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

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

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

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

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

Accordingly, changes in accounting for stock based compensation expense are expected to have a material adverse affect on our reported results. Any similar changes in accounting or taxation rules or practices could have a material impact on our consolidated financial results or the way we conduct our business.

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

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The amount of our net operating loss (NOL) and credit carryforwards is uncertain. Prior transactions to which we or our stockholders or their affiliates have been a party, and future transactions to which we or our stockholders or their affiliates may become a party, including stock issuances and certain shareholder stock transactions could jeopardize our ability to use some or all of our NOLs and tax credits, and the amounts of NOLs or tax credits we would be precluded from using could be material. In addition, California and certain states have recently suspended or are considering suspending, the ability to use net operating loss carryforwards in future years and this could adversely affect future operating results.

Based on current tax law, we believe we have certain NOLs and tax credits for U.S. federal and state income tax purposes to offset future taxable income and related taxes. As of December 31, 2009, we had incurred significant losses and credits in the United States. Our ability to utilize these tax attributes may be subject to significant limitations under Sections 382 and 383 of the Internal Revenue Code if we have undergone, or undergo in the future, an ownership change. An ownership change occurs for purposes of Section 382 of the Internal Revenue Code if, among other things, stockholders who own or have owned, directly or indirectly, 5% or more of our common stock (with certain groups of less-than-5% stockholders treated as a single stockholder for this purpose) increase their aggregate percentage ownership of our common stock by more than fifty percentage points above the lowest percentage of the stock owned by these stockholders at any time during the relevant three-year testing period. In the event of an ownership ~~change,~~ ~~Sections 382 and 383 impose an annual limitation, based upon our company valuation at the time of the ownership~~ change, on the amount of taxable income a corporation may offset with NOLs and credits. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs and credits. In general, the higher our company valuation at the time of such an ownership change, the higher the annual limitation would be, and we could offset a greater amount of taxable income with the NOLs and credits. However, if an ownership change has occurred in a period when our company valuation was low, the annual limitation would be lower, and we could only offset a lesser amount of taxable income with the NOLs and credits.

To the extent that these tax attributes become significantly limited, we expect to be taxed on our income, if any, at the U.S. federal and state statutory rates. As a result, any inability to utilize these tax attributes would adversely affect future operating results by the amount of the federal or state taxes that would not have otherwise been payable, having an adverse impact on our operating results and financial condition. In addition, inability to use NOLs and credits would adversely affect our financial condition relative to our financial condition had these tax attributes been available. In addition, California and certain states have suspended use of NOLs, and other states are considering similar measures. Although the suspension in California does not currently apply for 2010, it is possible the state could reinstitute the suspension as it seeks to address budget challenges. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability to use state NOLs could have an adverse impact on our operating results and financial condition.40

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Sections 382 and 383 impose an annual limitation, based upon our company valuation at the time of the ownership change, on the amount of taxable income a corporation may offset with NOLs and credits. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs and credits. In general, the higher our company valuation at the time of such an ownership change, the higher the annual limitation would be, and we could offset a greater amount of taxable income with the NOLs and credits. However, if an ownership change has occurred in a period when our company valuation was low, the annual limitation would be lower, and we could only offset a lesser amount of taxable income with the NOLs and credits.

To the extent that these tax attributes become significantly limited, we expect to be taxed on our income, if any, at the U.S. federal and state statutory rates. As a result, any inability to utilize these tax attributes would adversely affect future operating results by the amount of the federal or state taxes that would not have otherwise been payable, having an adverse impact on our operating results and financial condition. In addition, inability to use NOLs and credits would adversely affect our financial condition relative to our financial condition had these tax attributes been available. In addition, California and certain states have suspended use of NOLs, and other states are considering similar measures. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability to use state NOLs could have an adverse impact on our operating results and financial condition.

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

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

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

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

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

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Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from revenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation might also be harmed. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

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

We depend on our proprietary technology for our success and ability to compete. We currently hold 27 issued patents and have several patent applications pending. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing patent, copyright, trademark and trade secret laws will afford us only limited protection. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent, as do the laws of the U.S. We cannot assure you that any pending patent applications will result in issued patents, and issued patents could prove unenforceable. Any infringement of our proprietary rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.

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

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

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

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

Our business and operations depend on the extent to which our facilities and products are protected against damage from fire, earthquakes, power loss and similar events. Some of our key business activities currently take place in regions considered as high risk for certain types of natural disasters. Despite precautions we have taken, a natural disaster or other unanticipated problem could, among other things, hinder our research and development efforts, delay the shipment of our products and affect our ability to receive and fulfill orders. While we believe that our insurance coverage is comparable to those of similar companies in our industry, it does not cover all natural disasters, in particular, earthquakes and floods.

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Risks Related to Our Common Stock

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

As of ~~June~~September 30, 2010, our executive officers, directors and their affiliates beneficially owned, in the aggregate, approximately 27% of our outstanding common stock, of this 25% is collectively owned by investment funds affiliated with U.S. Venture Partners and Norwest Venture Partners. Representatives of U.S. Venture Partners and Norwest Venture Partners are directors of Occam. These stockholders have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation and significant corporate transactions.

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

Our shares of common stock began trading on The NASDAQ Global Market in November 2006. An active public market for our shares on The NASDAQ Global Market may not be sustained. In particular, limited trading volumes and liquidity may limit the ability of stockholders to purchase or sell our common stock in the amounts and at the times they wish. Trading volume in our common stock tends to be modest relative to our total outstanding shares, and the price of our common stock may fluctuate substantially (particularly in percentage terms) without regard to news about us or general trends in the stock market.

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

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

· changes in earnings estimates or recommendations by securities analysts;

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

· developments with respect to intellectual property rights;

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

· commencement of, or involvement in, litigation;

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· general market volatility;

· lack of capital to invest in Occam;

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

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

· continuation of the current economic and credit crisis.

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

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

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

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

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

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

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

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

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

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

While we anticipate our cash balances and any cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future. There is no guarantee that we will be able to raise additional equity or debt funding when or if it is required. The terms of any financing, if available, could be unfavorable to us and our stockholders and could result in substantial dilution to the equity and voting interests of our stockholders. Any failure to obtain financing when and as required would have an adverse and material effect on our business, consolidated financial condition and consolidated results of operations.

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

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

		Exhibit Title
2.1		Agreement and Plan of Merger and Reorganization, dated as of September 16, 2010, by and among Occam Networks, Inc. and Calix, Inc., Ocean Sub I, Inc. and Ocean Sub II, LLC (which is incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
10.21		Form of Amendment to Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.21 of the Registrant’s Current Report on Form 8-K filed on August 13, 2010).
10.22		Support Agreement dated as of September 16, 2010, by and among Calix, Inc., Ocean Sub I, Inc., Ocean Sub II, LLC and certain stockholders of Occam Networks, Inc. (which is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
10.23		Form of Amendment to Change of Control Severance Agreement (which is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
31.01		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

Dated: July 30, 2010	OCCAM NETWORKS, INC.
Dated: October 28, 2010	OCCAM NETWORKS, INC.
	By:	/s/ JEANNE SEELEY
		Jeanne Seeley
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number		Exhibit Title
2.1		Agreement and Plan of Merger and Reorganization, dated as of September 16, 2010, by and among Occam Networks, Inc. and Calix, Inc., Ocean Sub I, Inc. and Ocean Sub II, LLC (which is incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
10.21		Form of Amendment to Indemnification Agreement (which is incorporated herein by reference to Exhibit 10.21 of the Registrant’s Current Report on Form 8-K filed on August 13, 2010).
10.22		Support Agreement dated as of September 16, 2010, by and among Calix, Inc., Ocean Sub I, Inc., Ocean Sub II, LLC and certain stockholders of Occam Networks, Inc. (which is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
10.23		Form of Amendment to Change of Control Severance Agreement (which is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on September 16, 2010).
31.01		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Filing Compare · OCCAM NETWORKS INC/DE