UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended July 2, 2004

Commission File Number: 000-28562

VERILINK CORPORATION

127 Jetplex Circle, Madison, Alabama 35758-8989
(Address of principal executive offices)

(256) 327-2001
(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Series A Junior Participating Preferred Stock Purchase Rights
(Title of class)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  o   No  x

     The aggregate market value of the common equity held by non-affiliates of the Registrant, based on the closing sale price of the Common Stock on January 2, 2004, as reported by Nasdaq was $56,060,342. Shares of Common Stock held by each officer and director and by each person believed by the Company to own 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

     As of August 27, 2004, the registrant had outstanding 22,696,455 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

     Parts of the following document are incorporated by reference in Part III of this Annual Report on Form 10-K: the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held November 17, 2004 (the “Proxy Statement”).

Table of Contents

PART I

Item 1. Business

Company Overview

     Verilink Corporation (the “Company”) is a leading provider of next-generation broadband access products and services. The Company’s products support the delivery of voice, video and data services over converged access networks and enable the smooth migration from present TDM-based networks to IP-based networking. The Company develops, manufactures, and markets integrated access devices (“IADs”), Optical Ethernet access products, high-speed multi-link routers and bandwidth aggregation solutions. These products are sold to service providers, enterprise customers, and original equipment manufacturer (“OEM”) partners, and are deployed worldwide as targeted solutions for applications involving voice over IP (“VoIP”), voice over ATM (“VoATM”), voice over DSL (“VoDSL”), wireless backhaul aggregation, Frame Relay service transport, point-to-point broadband services, IP/PPP multi-link access routing, service inter-working, and the migration of networks from traditional time-division multiplexing (“TDM”) based access to IP/Ethernet. The Company’s customers include regional bell operating companies (“RBOCs”), Inter-exchange carriers (“IXCs”), incumbent local exchange carriers (“ILECs”), independent operating companies, competitive local exchange carriers (“CLECs”), international post, telephone, and telegraph companies, wireless service providers, equipment vendors, Fortune 500 companies, small to mid-sized business customers, and various local, state, and federal government agencies. The Company was founded in California in 1982 and is incorporated as a Delaware corporation. The Company is traded on the NASDAQ National Market, under the symbol “VRLK”.

Mergers and Acquisitions

     Following the telecommunications market downturn that began in 2000, Verilink initiated a merger and acquisition strategy in the later half of 2002 designed to achieve revenue growth, reduce overall costs through consolidation of operations, gain market share with expanded product offerings, and strengthen its position for the high-growth emerging markets in next generation broadband access including VoIP, routing and optical access. With the communications market having gradually focused on the migration to IP-based networking, the Company developed a strategy to complement its current products and solutions with new generation products and technologies that enable a smooth migration from current, TDM-based networks to packet-based architectures. The Company has since made select acquisitions of businesses as well as product and technology asset acquisitions in related or competitive markets, as follows:

     On July 28, 2004, the Company completed its acquisition of Larscom Incorporated (“Larscom”), a leading provider of high-speed broadband and optical Ethernet access products. The Larscom acquisition brings a broadened product line to address new market opportunities in the carrier and large enterprise markets, and includes the Orion 7400 Optical Ethernet access platform, the Orion 5000 family of optical miniplexers, the eLink family of TDM-based IADs and other related product lines. Additionally, this acquisition brings existing customer contracts and relationships, sales, sales engineering, customer service and support personnel, and an engineering team based in Newark, California. The information presented below in “Our Markets”, “Our Products”, “Manufacturing and Quality”, and “Competition” includes a further discussion of the Larscom products, which will be denoted parenthetically for products and markets related to Larscom.

     On February 5, 2004, the Company acquired XEL Communications, Inc. (“XEL”), a privately-held provider of a full suite of broadband access solutions and professional services that address the RBOC and ILEC market. This acquisition adds the Shark products family, the industry’s first OSMINE-certified IAD, to the Company’s existing IAD product line and extends the Company’s IAD footprint in large-infrastructure environments. Additionally, with this acquisition, the Company adds a professional services capability which complements its broadband solutions offering. These services provide a turnkey solution for the Company’s customers ranging from initial concept, design planning, to product staging, network planning to deployment and service provisioning to support carriers with the deployment of managed bundled services. The Company plans to extend the professional services offering across the Company’s products to help service providers and enterprises minimize the operational complexity and time to market issues associated with bundled services as well as new generation services that include VoIP services and Optical Ethernet.

     On July 22, 2003, the Company acquired the net assets used in and directly relating to Terayon Communication System, Inc.’s Miniplex product line for telecom carriers. This product line gives telephone companies the ability to

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provide multiple plain old telephone services (“POTS”) connections over a single copper pair – a more cost-effective alternative to resolving copper exhaust problems than the installation of new copper cable. Utilization of the Miniplex product as a pair gain solution also saves companies the time and expense involved in the system turn-up of a traditional digital loop carrier (“DLC”) system.

     On January 28, 2003, the Company acquired the net assets used in and directly relating to Polycom, Inc.’s line of NetEngine IADs. This family of IADs and routers enables enterprise customers to access broadband and voice over broadband (“VoB”) services. These IADS support a wide range of broadband transmission standards and end user requirements, and are interoperable with the products of a variety of leading broadband equipment vendors.

State of the Industry

     Both network service providers and telecommunications equipment manufacturers have experienced difficulties over the past several years as a result of numerous factors including economic conditions, excess network capacity, the drive for service profitability and the financial condition of many key industry players. New services driven by advances in IP, specifically VoIP, are beginning to be more commonplace in service provider and enterprise networks. Increasing demand for affordable broadband services has provided service providers with market and financial impetus for network upgrades and investments in xDSL, cable and wireless networks to deliver new packet-based offerings. Recent Federal Communications Commission rulings requiring the RBOCs to unbundle and resell their legacy network to competitors at significant discounts do not apply to their investments in packet-based technologies. Many telecommunications analysts believe that this may compel the RBOCs to invest considerable capital into next generation packet networks.

     The Company has experienced an increase in both Request for Proposals (“RFPs”) and Request for Information (“RFIs”) from network service providers domestically, as well as internationally, although the nature and timing of carrier spending for the next 12 to 18 months remains uncertain. Mergers, acquisitions and strategic partnerships for equipment vendors are expected to remain commonplace as service providers demand tighter product integration and interoperability for deployment in their packet-based networks.

Our Markets

Bandwidth Aggregation

     In the late 1980s, the Company established itself as a market leader in the channel service/data service units (“CSU/DSU”) and bandwidth aggregation market, providing solutions for 56/64kbps services, T1/E1 transport facilities, and multiplexing and inverse multiplexing of T1/E1 and T3/E3 circuits. Demand for stand-alone CSU/DSU equipment has been declining, with market demand shifting towards integrated solutions which incorporates CSU/DSU functionality such as IADs, access routers and new generation multiplexers. With this evolution in the market, the Company’s acquisition program and current product mix positioned the Company to transition from legacy stand-alone CSU/DSUs toward next generation access products.

     In other segments of bandwidth aggregation, the Company has since expanded its offering to extend into advanced digital cross-connect systems intended to drive down infrastructure costs through bandwidth management efficiencies as well as providing a product offering for trans-multiplexing E1 and T1 circuits to serve the requirements of long distance (international) service providers.

     In the Digital Loop Carrier (“DLC”) market, the Miniplex product line allows the Company to offer digital pair gain equipment to ILECs, which enables the delivery of multiple POTS over a single copper pair. The Company provides ILECs a more cost-effective solution to solving the problem of copper exhaust by enabling the delivery of two or four POTS lines over a single pair. Copper exhaust occurs when all of the copper pairs in a telephone cable are either currently in use providing telecommunications services or are defective. In these instances when a new or additional service is requested and no cable pair is available, the Company’s digital channel products can be deployed and the service request fulfilled. This is a cost-effective alternative for ILECs when compared with the cost of placing additional cable or turning up additional expensive digital loop carrier systems.

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Converged Access

     The Company designs, manufactures, and sells products that connect to the Wide Area Network (“WAN”) to provide high-speed connectivity to end user businesses for the delivery of converged voice, video, and data applications. These products are commonly deployed at enterprise locations including main office, branch offices, remote offices, as well as the small office/home office. The converged access applications supported at these locations include both standard TDM and packet based voice calls, facsimile, high speed data, Internet access, or video conferencing capabilities that require access to the public switched network, the Internet, or a private leased line network.

     The Company’s products support the connection of customer equipment such as telephone sets, PBXs, routers, computers, servers, video conferencing equipment and remote terminal equipment to the WAN. This equipment is typically installed in a telephone equipment or terminal room, business wiring closet, the basement of a building, or on an employee desktop, depending on the scale and the scope of the application. As such, this equipment is often referred to as customer premises equipment (“CPE”), if owned by the end user, or customer located equipment (“CLE”), if owned by the service provider, and offered as a component of a bundled service offering.

     The Company’s access device portfolio consists of equipment for 56/64kbps services, xDSL services, T1/E1 facilities, multiplexed T1/E1 circuits, T3/E3 circuits, Ethernet services, Optical (OC-3) SONET transport solutions (Larscom), ATM/FR-to-IP/PPP service inter-working, data security applications, wireless transport services, VoTDM, VoATM, and VoIP. The range of products includes simple CSU/DSUs, channel banks, inverse multiplexers, scalable multiplexers, digital cross connect systems, high-speed routers and intelligent IADs. DSL products consist of ADSL, SDSL and G.SHDSL IADs.

     With many of the larger incumbent carriers (RBOCs, IXCs) embracing T1-based bundled voice and data services as a fully-managed service offering, the Company expects growth in this segment of the market with increasing opportunities in VoIP applications. In responding to economic pressure and increasing competition, many carriers are presently formulating strategies to migrate their network to all packet-based services. As a result, the Company sees longer-term growth opportunities in the market for products and services focused on delivering VoIP-based services.

     The Company offers software-driven IADs that enable service providers and enterprises to affordably converge the delivery of their voice, video and data services while enabling a smooth migration of their legacy networks from TDM to all-IP. Support for software-configurable protocols that include MGCP and SIP over standards-based remote management allows core operations such as configuration, provisioning and trouble-shooting to be performed without truck rolls.

     To simplify and optimize network operations and maintenance procedures, the Company has incorporated extensive alarm and data collection capabilities as well as support for Simple Network Management Protocol (“SNMP”) based element management systems within many of the products. These features and functions provide end users access to key network performance statistics and measurements that allow them to track system uptime and performance, verify that the circuit is properly maintained and utilized, and enforce service level agreements with the service provider. Service providers can use this data to verify network performance and to proactively identify and troubleshoot system and circuit problems.

High-speed Routing

     As demand for data services is estimated to increase over the next several years, enterprises are looking for more advanced yet affordable routing solutions to manage their data traffic. During 2004, Verilink introduced a family of wire-speed routers tailored to the needs of branch offices, small-to-mid sized businesses and corporate locations. With capabilities that include service inter-working, multi-link networking and advanced security, the product’s price/performance, functionality, and small footprint makes it uniquely positioned for applications that include dedicated internet access, virtual private networking and corporate WAN connectivity. The business routing market continues to grow year over year at a healthy rate. However, the small-to-mid sized business segment has been relatively underserved. The Company’s product lines meet these small business requirements.

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Optical Access (Larscom)

     The Company believes Optical Ethernet over SONET (“EoS”) access is an emerging high-growth market with significant growth potential for the Company. As networks transition to a packet-based architecture, Ethernet is becoming widely accepted as the leading protocol to shape the new generation access network. Since most businesses worldwide support Ethernet in their Local Area Network (LAN), and the latest technology developments allow Ethernet to extend seamlessly to the wide area infrastructure, the deployment of solutions such as Ethernet over SONET presents significant capital equipment and operating expense advantages to Service Providers as well as provide service differentiation compared to equivalent TDM-based solutions.

     Through the acquisition of Larscom, the Company enters the Optical Ethernet access market with the Orion 7400^TM family of next-generation SONET multi-service access platforms. These products economically extend the SONET infrastructure to provide cost-effective and efficient delivery of both TDM and Ethernet services for single- or multiple-enterprise sites. The Orion 7400 provides a unique opportunity for Service Providers to generate revenues by providing Ethernet-based services including transparent LAN, Internet access, Ethernet private line and Ethernet virtual private line, while still maintaining revenue from their existing T1/T3 service base.

     The Company is currently involved in a number of large and small carrier trials in North America, and believes there is increasing interest both domestically and internationally (Asia, Europe) in the optical access product market. The Company believes this market offers attractive long-term growth potential. To address the increasing opportunities in the international market, the Company has announced plans to introduce an SDH-version of the Orion 7400.

Products

     The Company develops products and product families to address issues and applications faced by both wireline and wireless communications carriers and enterprises. The Company’s products utilized by wireline carriers are typically deployed in either the last mile of their networks and enable the delivery of telecommunications services to end users, both business and residential customers, or in their internal corporate networks providing the communications connectivity within the corporation. The Company’s products utilized by the enterprise customers typically are deployed as access devices connecting the corporation’s offices to the telecommunications network.

3000 Series IAD Product Family

     The Company’s 3000 Series IAD product family, formerly named Viper, consists of access devices that terminate xDSL-based service and provide the end user the ability to send and receive both voice calls and data transmissions via a single connection. The 3000 Series IAD supports ADSL and SHDSL connections. The 3000 Series models support both 2 and 4 ports POTS or BRI applications with full layer 3 Routing, layer 2 bridging and software security, and are equipped with an Ethernet interface for local area network (LAN) connectivity. Certain models also come equipped with a universal serial interface for connectivity to additional data devices such as external routers. Models support VoDSL today and will be software upgradeable to VoIP. ADSL2+ and four-wire SHDSL models are also available for applications requiring higher speeds for data applications and video services.

8000 Series IAD Product Family

     The Company’s 8000 Series IAD product family, formerly named NetEngine, consists of access devices that terminate a T1 or DSL based service and provides the end user the ability to send and receive both voice calls and data transmissions via a single connection. This connection may be a T1, an ADSL, an SDSL or an SHDSL connection. Models are equipped with 2-, 4-, 8-, 16- or 24-voice ports and an Ethernet interface with integrated routing protocols and functionality. Certain models also come equipped with a universal serial interface for connectivity to additional data devices such as external routers. ADSL and SHDSL models also exist that provide 2 or 4 basic rate ISDN (“BRI”) connections for certain international applications.

     The 8000 Series products support applications utilizing TDM, ATM or Frame Relay protocols. The devices can move from one protocol application to another by simply changing the configuration of the unit.

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Shark Product Family

     The XSP 100 Shark is the industry’s first OSMINE-compliant IAD, terminating up to two T1’s of bandwidth to deliver voice, high-speed data, Internet access and networking connections to end customers over a single network connection. The Shark is equipped with ports for up to 24 FXS lines, includes DSX/CSU functionality, 10/100 Base-T and serial Ethernet interfaces, Frame relay Assembler/Disassembler and a digital cross connect system. The Shark works with a variety of management systems, including HTTP, CLI, SNMP or TL1, and can be configured remotely or through a local craft port on the chassis.

Orion 7400 Product Family (Larscom)

     The Orion 7400 family of next generation SONET multi-service access platform is designed to allow service providers to capitalize on an increasing corporate demand for services based on the Ethernet protocol. The Orion 7400 enables service providers to deliver both Ethernet and TDM services across an existing SONET infrastructure. Standards-based EoS achieves high bandwidth efficiency and enables remote provisioning of bandwidth on demand in increments as small as 1.5 Mbps. The Orion 7400 family can deliver 10/100 Ethernet, Gigabit Ethernet, T1, and T3 services in a compact, one rack unit package. It provides connections to the network using OC-3 (a 155 Mbps service) or STS-1 (a 51.84 Mbps service), and offers the reliability of redundant automatic protection switching (APS). The Orion 7400 features operation, administration, maintenance and provisioning through the data communications channel using industry communications standards including TL-1, SNMP, and HTTP (Internet browsers).

Orion 5000 Product Family (Larscom)

     The Orion 5000 multiplexer is designed for high-density, optical-friendly traffic aggregation. With direct interfaces to TDM and SONET/SDH network architectures, the Orion 5000 is designed to enable the migration to fiber-based transports. Able to house up to seven redundant programmable M13 multiplexers (aggregating up to 196 T1 lines or 147 E1 lines) in a compact two rack unit 23-inch chassis, the Orion 5000 is one of the highest density M13 multiplexers on the market. The M13 multiplexer also has a programmable capability for either DS3 (45 Mbps) or STS-1 (51.84 Mbps) traffic. Taking T1/E1 traffic aggregation to the next evolutionary step, direct optical access is provided by the Orion 5000’s OC-3/ STM-1 interface. The Orion 5000 consolidates up to three DS3s into an OC-3/ STM-1 connection.

     The Orion 5001 provides M13 multiplexing in a compact, efficient form factor. Designed specifically to deliver a cost-effective solution with carrier-class reliability, the Orion 5001 multiplexes 28 T1s into a single T3. The compact Orion 5001 fits well as a replacement for traditional bulky M13 multiplexers wherever rack space is at a premium. While service providers backhaul traffic between central offices on a T3, the Orion 5001 allows the enterprise to seamlessly distribute T1 service across its campus. Where mission critical applications require an always-on connection, the twin M13 modules provide 1:1 redundancy. Rapid, configurable switching between modules minimizes frame loss. We believe that the Orion 5001 M13 multiplexer is among the most power-efficient products in its class. The carrier-class Orion 5001 is NEBS level 3 compliant, making it well-suited for both co-location and carrier deployments.

     A natural extension to the Orion 5000 family of optical multiplexers, the Orion 5003 provides optical-friendly DS3 or STS-1 traffic aggregation. With direct interfaces to TDM and SONET/-SDH network architectures, the Orion 5003 is designed to enable the migration to fiber-based transport. This OC-3/STM-1 multiplexer provides programmable support for DS3 or STS-1 traffic, allowing support of redundant automatic protection switching (APS) optical pairs and multi-node Unidirectional Path-Switching Ring (UPSR) applications. The Orion 5003 multiplexes up to three DS3/STS-1 (channelized or clear channel) data streams. With built-in OC-3/STM-1 module redundancy, a SONET GR-253 standard interface and NEBS compliance, the Orion 5003 provides carrier-class DS3 traffic aggregation in a compact, one-RU, 19-inch chassis, making it well-suited for deployment at the customers premise, or for co-location and carrier deployments.

Access System 2000

     The Company’s Access System 2000™ (“AS2000”) is a flexible network access and management solution that provides cost-effective integrated access to a broad range of network services. AS2000 products are installed at the origination and termination points at which service providers offer communications services to their corporate customers. AS2000 systems provide transmission link management, multiplexing and inverse multiplexing functions for T1, E1,

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multi-T1, multi-E1 and T3 access links. A key feature of the AS2000 is its flexibility and adaptability made possible by a modular architecture that allows customers to access new services or expanded network capacity simply by configuring or changing circuit cards. In a single platform, the AS2000 combines the functions of a T1 CSU/DSU, E1 NTU, inverse multiplexer, cross-connect, T3 CSU/DSU, automatic protection switch and an SNMP management agent. Modular line cards from the WANsuite product family are also available for the AS2000 system for applications involving SCADA, IP routing and CSU/DSU terminations.

Miniplex Product Family

     The Miniplex product line consists of chassis and channel units that allow telecommunications service providers to provide 2 or 4 POTS lines over a single copper pair. Additional plug-in units that are compatible with certain digital loop carrier systems that are widely deployed in wireline telecommunications networks today are also available. This solution provides a cost effective means of addressing situations where an ILEC must provide more services than the copper plant was originally engineered to handle.

WANsuite Product Family

     The Company’s WANsuite product family is a suite of software programmable, intelligent integrated access devices that target customer premises applications for last mile or network edge communications. The WANsuite platform supports copper-based transmission services for 56/64kbps, T1, E1 and SHDSL, and includes software support for TDM, ATM, Frame Relay and IP services and applications. The WANsuite product line combines integrated CSU/DSU, bridging and routing, probe and network monitoring capabilities. WANsuite products also utilize an embedded web server to provide an innovative user interface that aligns with the Internet for ease-of-use by service providers and end users. Among the key WANsuite features are a powerful web interface for simplified configuration, automatic protection switching (“APS”), performance monitoring and diagnostics for all service layers, and access routing, bridging, and switching for Frame Relay, ATM, Ethernet and IP applications.

PRISM Product Family

     The Company’s PRISM product family supports legacy TDM applications at transmission rates ranging from 56/64kbps through T1/E1. Products included in this family are the NEBs compliant 1024 shelf system, 1051 shelf, 3030/3060 intelligent channel bank, 2000 & 2100 CSUs and 3111/3112 CSU/DSUs. These devices provide physical layer performance monitoring and diagnostic functions. Management of the PRISM product family ranges from SNMP through simple DIP switches. The Company’s PRISM products are produced to carrier-grade standards of quality and are typically found deployed in the mission-critical applications used by wireline and wireless carriers, banks, utilities, government and other corporate enterprises.

Professional Services

     With the products offered by the Company in the areas of converged access, optical access, aggregation, and routing, the Company also provides Professional Services tailored to help our customers roll out their networks more efficiently and rapidly. The Company offers a complete turnkey professional services solution to our customers ranging from product staging, network planning to deployment and service provisioning. Our services are characterized as being unique to the access equipment industry and serve as a differentiator compared to other access companies. Our customers consider it as a key enabler in the deployment of managed bundled services.

Sales, Marketing and Customer Support

Sales and Marketing

     The Company sells its products and services in North America to wireline telecommunications services providers, wireless communications providers, and enterprise customers through a direct sales force; indirect channels including distributors, system integrators and value-added resellers; OEM relationships; and private label arrangements with other parties.

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     The domestic direct sales force is located throughout the United States and is supported by an organization of sales engineers that provides the Company’s customers with both pre- and post-sale technical assistance. The joint efforts of these two organizations provide the Company with a greater understanding of our customer’s requirements, needs, and problems that need resolution. The Company believes this knowledge helps it to build long-term relationships and alliances with its key customers.

     The Company utilizes indirect channels to sell its products and services to independent telephone companies; CLECs; large, medium and small enterprise customers; and federal, state and local government agencies. These indirect channels include master-distributor relationships with Interlink Communication Systems and Tech Data, and premier partnerships, which include, Allencom, Graybar, Integrated Communications, Inc., Inter-Tel, Phillips Communications, Primary Telecommunications, Inc., and Nextira One.

     The Company has OEM and private label arrangements with other telecommunications equipment providers. These other companies typically bundle our products with one or more of their own products and sell the bundle as a system solution to service providers.

     Outside of the United States, the Company’s products are sold via strategic relationships with large, multi-national telecommunications equipment providers and in-country distribution and support channels. There are instances in which the Company sells directly to a service provider outside of the United States.

     The field sales organizations, distributors, OEMs, and strategic partners are supported by marketing, sales support, and customer support organizations.

     A small number of customers continue to account for a majority of the Company’s sales. In fiscal 2004, net sales to Nortel Networks and Verizon accounted for 30% and 28%, respectively, of the Company’s net sales, and net sales to the Company’s top five customers accounted for 74% of the Company’s net sales. In fiscal 2003, net sales to Nortel Networks and Interlink Communications Systems accounted for 51% and 11% of the Company’s net sales, respectively, and the Company’s top five customers accounted for 77% of the Company’s net sales. In fiscal 2002, net sales to Nortel Networks and Interlink Communications Systems accounted for 36% and 15% of the Company’s net sales, respectively, and the Company’s top five customers accounted for 71% of the Company’s net sales. Other than Nortel Networks, Verizon and Interlink Communications Systems, no customer accounted for more than 10% of the Company’s net sales in fiscal years 2004, 2003 or 2002.

Customer Service and Support

     The Company maintains 24-hour, 7-day a week telephone support for all of its customers. The Company provides, for a fee, direct installation and service of its products utilizing its own resources or resources available under a Worldwide Equipment Support agreement with Vital Network Services, Inc. The Company provides product training and support to its customers dealing with the installation, operation and maintenance of the Company’s products. Additionally, the Company also offers various levels of maintenance agreements to its customers, for a fee, which provide for on-site service in response to customer reported difficulties.

Research and Development

     The Company’s research and development efforts are focused on developing new products, core technologies and enhancements to existing products. During the past year, product development activities centered around the newly introduced 8000 Series IAD product family while we continued to enhance the existing WANsuite integrated access product family and SHARK integrated access platform with new features and cost reductions. The 8000 Series IAD family was developed for both legacy TDM and emerging Packet (ATM and IP) markets to deliver high quality analog voice and data services over digital media such as T1/E1 and DSL. The WANsuite and SHARK product families both went through modifications to enhance their performance and reduce cost. The Company’s product development strategy has focused on the development of modular software and hardware products that can be integrated and adapted to the changing standards and requirements of the communications and internet working industries.

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     During fiscal 2004, 2003 and 2002, total research and development expenditures were $6,876,000, $3,985,000 and$5,505,000, respectively. All research and development expenses are charged to expense as incurred.

     The markets for the Company’s products have been characterized historically by rapidly changing technology, evolving industry standards, continuing improvements in telecommunication service offerings, and changing demands of the Company’s customer base. During the last two fiscal years, the markets for the Company’s products have slowed their rate in acceptance of newer technologies as capital spending by carriers and enterprises was reduced. However, the Company expects to continue its investment in research and development in fiscal 2005 for product development of specific technologies, such as SONET/-SDH, IP, QoS, xDSL, VoIP, VPN, MPLS, data security and network management, as well as to respond to market demand and new service offerings from service providers. Research and development activities may also include development of new products and markets based on the Company’s expertise in telecommunications network access technologies.

     In September 2004, the Company announced plans to consolidate engineering into two locations focused on the execution of its strategic plan. See “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restructuring Charge.”

Manufacturing and Quality

     The Company does not fully manufacture any of its products. Management resources within the Company are used to provide product planning, purchasing and delivery coordination of products to our customers. In addition, the Company performs final assembly and test on several products prior to shipment. We also utilize both turnkey and consignment subcontractors for product assembly and test services. These subcontractor relationships, combined with our internal global component purchasing strategy, allow us to minimize manufacturing related capital investment, reduce product cost and promote delivery flexibility to our customers. To uphold the quality of our products the Company maintains TL9000 registration including ISO 9001:2000, which the Company achieved initially in 1993. This standard, established by the Quality Excellence for Suppliers of Telecommunications (QuEST) Forum, is an industry-specific standard fostering quality system requirements and metrics for the design, development, production, delivery, installation and service, emphasizing customer/supplier relations, continuous improvement, standardization metrics and cost reduction. As of July 2, 2004 the Company employed 52 people in manufacturing operations.

     Following the acquisitions of XEL and Larscom, the Company has undertaken efforts to consolidate manufacturing operations of the separate organizations to reduce overhead related expenses and achieve incremental purchasing leverage with our suppliers in order to reduce product cost and increase the efficiency of our manufacturing operations. As of July 30, 2004, the Company has completed the consolidation of the XEL manufacturing operations into our Madison, Alabama facility. The Company is now undertaking a similar effort to integrate the Larscom manufacturing operations into the Company. In both XEL and Larscom, the Company seeks to merge duplicate management activity, streamline operating policies and procedures, integrate manufacturing data under one common ERP system, and improve commonality in our supplier base.

Competition

     The market for telecommunications network access equipment can be characterized as highly competitive, with intensive equipment price pressure. The Company’s products that address this market include the Company’s IAD products, namely the eLink, WANsuite and Shark for TDM-based IADs and the 3000 and 8000 Series for VoIP. These products play a key role in enabling convergence in the access network but this product category continues to become more competitive as typically experienced in the lifecycle of Customer Premise Equipment (CPE). With convergence in the first mile becoming a major initiative in the communications industry, this segment of the market is subject to rapid technological change, increasing interoperability requirements, wide-ranging regulatory requirements and the entrance of lower cost manufacturers. The Company believes the primary competitive factors in this market are:

•		Rapid development and introduction of new technologies in accordance to new leading-edge applications and services;
•		New low-cost products due to the advances in chip set reference designs and manufacturing techniques;
•		Evolving product feature requirements;

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•		High voice quality for VoATM and VoIP applications;
•		High product reliability and quality; and
•		High quality customer support.

     The Company’s principal competitors in the market for network access devices include: Adtran, Inc., Carrier Access Corporation, Cisco Systems, Inc., RAD, Kentrox and Telco Systems.

     The market for the Company’s first-generation PRISM and Miniplex wireline transport product lines can be characterized as declining with a small number of highly competitive firms. The technology is mature and the market has remained steady in recent years. The Company believes that the primary competitive factors in this market are:

•		Product delivery time;
•		Competitive price points;
•		Product reliability and quality;
•		Discontinuance of critical product components;
•		Transition to emerging technologies and platforms;
•		Ability of firms to incorporate the functionality of multiple stand alone products into one unit; and
•		Ability of firms to design plug-in modules compatible with existing shelf capacity of competitor products.

     The Company’s principal competitors in this market include: ADC, Adtran, Inc., Charles Industries, General Datacomm Corporation, GoDigital Networks and Kentrox.

     The Company believes the market for its new generation Optical Ethernet access product (Larscom) is in an emergent phase with significant growth opportunities over the next two to three years as demand for affordable high-speed data services increases among SMBs and enterprises. Nevertheless, this market is intensely competitive and the Company expects competition to intensify in the future. The Company believes that the primary competitive factors in this market are:

•		Timely development of new products and features;
•		Product quality and performance;
•		Competitive price points;
•		Product line breadth;
•		Experienced sales, marketing and service organizations; and
•		Evolving industry standards.

     The Company’s principal competitors in this market include: Fujitsu, RAD, Cisco Systems and Lucent Technologies, Inc.

     The broadband routing market is also intensely competitive and can be characterized by rapid change, converging technologies and a migration to networking access solutions that offer superior advantages. The Company believes that its new generation multi-link routers competitively position the Company in the growing broadband routing market. The SLR/MLR/HLR series of wire-speed routers are designed specifically to enable data service inter-working, routing and high-speed (Multilink) connectivity to the wide area network (WAN). These networking capabilities are needed by SMBs. However, the elevated equipment prices commanded by traditional routing equipment have prevented these products from being widely utilized in the SMB market segment. The Company believes that the primary competitive factors in the broadband routing market are:

•		Product performance;
•		Competitive price points;
•		Introduction of new products with price/performance advantages; and
•		The ability to provide value-added features.

     The Company’s principal competitors in this market include: Cisco Systems, Adtran, Kentrox and Quick Eagle Networks.

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     There can be no assurance that the Company’s current products and future products will be able to compete successfully with respect to the competitive factors described for each of the markets above. Many of the Company’s current and potential competitors have substantially greater technical, financial, manufacturing and marketing resources than the Company. Certain competitors have more broadly developed distribution channels and have made greater advances than the Company in certain emerging technologies. There can be no assurance that the Company will have the financial resources, technical expertise, manufacturing, marketing, distribution and support capabilities to compete successfully in the future.

     Additionally, industry consolidation could lead to competition with fewer, but stronger competitors. Furthermore, basic line termination functions are increasingly being integrated by competitors, such as Cisco Systems and Lucent, into other equipment such as routers and switches. To the extent that current or potential competitors can expand their current offerings to include products that have functionality similar to our products and planned products, our business, financial condition and results of operations could be materially adversely affected.

Intellectual Property and Other Proprietary Rights

     The Company relies upon a combination of patent, trade secret, copyright, and trademark laws as well as contractual restrictions to establish and protect proprietary rights in its products and technologies. The Company has been issued certain U.S., Canadian, and European patents with respect to limited aspects of its network access technology. The Company has not yet obtained significant patent protection for its Access System or WANsuite technologies. There can be no assurance that third parties have not, or will not, develop equivalent technologies or products without infringing the Company’s patents or that a court having jurisdiction over a dispute involving such patents would hold the Company’s patents valid, enforceable, and infringed by such other technologies or products. There can be no assurance that these arrangements will deter misappropriation of the Company’s technologies or discourage independent third-party development of similar technologies. In the event such arrangements are insufficient, the Company’s business, financial condition and results of operations could be materially adversely affected.

     The network access and telecommunications equipment industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company has not conducted a formal patent search relating to the technology used in its products, due in part to the high cost and limited benefits of a formal search. Software comprises a substantial portion of the technology in the Company’s products. The scope of protection accorded to patents covering software-related inventions is subject to a degree of uncertainty which may increase the risk and cost to the Company if the Company discovers third party patents related to its software products or if such patents are asserted against the Company in the future. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company’s business, financial condition and results of operations would be materially adversely affected.

     In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of its technical and management personnel. In the event of an adverse ruling in such litigation, the Company might be required to pay damages, discontinue the use and sale of infringing products and expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all.

     The laws of certain foreign countries in which the Company’s products are or may be developed, manufactured or sold may not protect our products or intellectual property rights as effectively as the laws of the U.S., thus making the possibility of misappropriation of our technology and products more likely.

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Employees

     As of July 2, 2004, the Company had 170 full-time and 10 temporary employees worldwide, of whom 35 were employed in engineering, 44 in sales and marketing, 28 in the professional services group and customer support, 52 in manufacturing and 21 in general and administration. All employees are located in the United States except for four employees located in Great Britain and Hong Kong.

Backlog

     The Company manufactures its products based, in part, upon its forecast of customer demand and typically builds finished products in advance of or at the time firm orders are received from its customers. Orders for the Company’s products are generally placed by customers on an as-needed basis and the Company has typically been able to ship these products within 30 days after the customer submits a firm purchase order. Because of the possibility of customer changes in delivery schedules or cancellation of orders, the Company’s backlog as of any particular date may not be indicative of sales in any future period.

Available Information

     Additional information about the Company can be found on our website at www.verilink.com. We also provide on our website the Company’s filings with the SEC, including our annual reports, quarterly reports, and current reports along with any amendments thereto, as soon as reasonably practicable after the Company has electronically filed or furnished such material with the SEC. Information contained on this website is not part of this annual report.

Item 2. Properties

     The Company is headquartered in Madison, Alabama. In July 2002, the Company entered into a three year lease for office and warehouse space containing approximately 43,750 square feet for its headquarters, research and development, and manufacturing personnel. In addition, the Company has a sales office located in Dallas, Texas, a research and development office in Goleta, California, an office and warehouse located in Fremont, California, and an office in Aurora, Colorado, which was the corporate headquarters for XEL Communications, Inc. These properties are occupied under operating leases that expire on various dates through the year 2005, with options to renew in most instances.

     The leases for facilities in Goleta and Fremont expire in November 2004 and August 2004, respectively, and will not be renewed. The Aurora facility lease expires in December 2004, and the Company expects to relocate in the same general area in a smaller facility since the consolidation of the XEL operations and administration into the Madison facility was completed in July 2004.

     In connection with the acquisition of Larscom in July 2004, the Company leases a 40,500 square-foot facility located in Newark, California and a 27,000 square-foot facility in Durham, North Carolina, which Larscom sublet under a lease agreement effective as of February 15, 2002.

     In August 2002, the Company leased a facility owned by the Company located at 950 Explorer Boulevard in Huntsville, Alabama to The Boeing Company under a lease that expires in November 2007. The lease allows the lessee to terminate the lease at the end of the 40^th month, but also includes the option to extend the lease term for five additional two-year periods. During fiscal 2002, this facility was the Company’s headquarters and principal administrative, research and development, and manufacturing facility.

Item 3. Legal Proceedings

     The Company is not currently involved in any legal actions expected to have a material adverse effect on the financial conditions or results of operations of the Company. From time to time, however, the Company may be subject to claims and lawsuits arising in the normal course of business.

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Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of the security holders of the Company during the fourth quarter ended July 2, 2004.

Executive Officers of the Company

     Set forth below is certain information concerning executive officers of the Company. Unless otherwise indicated, the information set forth is as of July 2, 2004.

     Mr. Leigh S. Belden, age 54, co-founded Verilink and has served as its President and Chief Executive Officer since he re-joined Verilink in January 2002 and from its inception in December 1982 until his prior retirement from this position in March 1999. Mr. Belden has served as a Director since its inception in December 1982. From 1980 to 1982, Mr. Belden was Vice President of Marketing for Cushman Electronics, Inc., a manufacturer of telephone central office and two-way radio test equipment. Previously, he held various international and domestic sales and marketing management positions for California Microwave, Inc. Mr. Belden received a B.S. in Electrical Engineering from the University of California at Berkeley and an M.B.A. from Santa Clara University.

     Mr. Sarabjit Gosal, age 36, has served the Company as Vice President of Marketing since April 2004. From October 2000 until joining the Company, Mr. Gosal served as the Senior Director of Product Marketing at Polaris Networks, a metro optical transport switch company. From November 1996 to October 2000, Mr. Gosal served as the Senior Director of Product Marketing of VINA, a broadband access company. Prior to October 2000, Mr. Gosal was the Senior Product Line Manager at Cisco Systems (StrataCom), responsible for their WAN switching platforms, as well as being responsible for marketing optical (SDH) transport systems for Fujitsu Europe. Mr. Gosal has received an MBA from the University of Westminster, London and a Bachelors degree in Electronic Engineering from the University of North Wales, Bangor, UK.

     Ms. Betsy D. Mosgrove, age 42, served the Company as Director of Human Resources and Vice President, Human Resources from October 1999 to April 2002, re-joined the Company in March 2004, and was formally re-appointed to the executive office of Vice President of Human Resources in June 2004. From August 2002 to March 2004, Ms. Mosgrove was employed by Intergraph Mapping and Geospatial Solutions as their Executive Manager of Human Resources. From February 1996 to October 1999, Ms. Mosgrove served as Director of Human Resources for Avex Electronics, Inc. Ms. Mosgrove received a B.S. in Business Administration from the University of Alabama in Huntsville.

     Mr. Larry J. Richards, age 38, served the Company as Vice President of Engineering from March 2004 through August 2004. Prior to joining the Company, Mr. Richards held the position of Vice President of Engineering and Chief Technology Officer at XEL, which was acquired by the Company in February 2004. Mr. Richards joined XEL in April 2000 directing the software development and was promoted to Vice President of Engineering in March 2001. Prior to that, Mr. Richards held several management positions at Raytheon Systems responsible for development of sophisticated communications equipment from November 1997 to April 2000. Mr. Richards holds a BS in Electrical Engineering from California State Polytechnic University, Pomona and a MS in Electrical Engineering from the University of Colorado.

     Mr. David W. Shackelford, age 51, has served the Company as Vice President of Worldwide Sales since October 2003 and is responsible for all domestic and international sales to partners, carriers and service providers. Prior to joining the Company, Mr. Shackelford was self employed as a private rancher from April 2001 until October 2003. Prior to that, Mr. Shackelford held the position of Vice President of Worldwide Sales for Woodwind Communications, Inc. from January 2000 to April 2001. Prior to that, he was Vice President Sales at Newbridge Networks Inc. from August 1996 till December 1999. From May 1972 through August 1996, Mr. Shackelford worked in various sales and business development positions at other organizations including Micom (a division of Nortel Networks), Gandalf Systems Corporation, Infotron Systems and Texaco Inc. Mr. Shackelford studied Business and Computer Science at Louisiana State University and is a member of the American Management Association.

     Mr. C. W. Smith, age 50, has served the Company as Vice President and Chief Financial Officer since November 2001. Mr. Smith joined Verilink in November 1998 as Controller of the Company’s Huntsville operations. In September 1999, Mr. Smith was promoted to the position of Vice President and Corporate Controller. From February 1995 until

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joining the Company, Mr. Smith served as Vice President, Finance for TxPort, Inc. Mr. Smith received a B.S. in Accounting from the University of Alabama and holds a CPA certificate in the state of Alabama.

     Mr. S. Todd Westbrook, age 42, has served the Company as Vice President, Operations since February 2000 and was promoted to Executive Vice President in August 2004. From July 1998 until joining our company, Mr. Westbrook served as the president of ZAE Research, Inc., a firm engaged in electronics design. From April 1987 to July 1998, Mr. Westbrook held several positions at AVEX Electronics, Inc. including Vice President of North America Operations from March 1996 to July 1998. Mr. Westbrook received a B.S. in Industrial Engineering from Auburn University.

     There are no family relationships among any of the directors or executive officers of the Company.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

     Over the past two fiscal years, the Company’s Common Stock has been traded on The Nasdaq National Market and The Nasdaq SmallCap Market (collectively, “Nasdaq”) under the symbol “VRLK.” The Company’s Common Stock returned to The Nasdaq National Market on December 22, 2003 after being traded on The Nasdaq SmallCap Market under the symbol “VRLK” since July 1, 2002. Prior to that date, the Company’s Common Stock traded on The Nasdaq National Market. As of September 15, 2004, the Company had 136 shareholders of record and approximately 3,600 beneficial owners of shares held in street name. The following table shows the high and low sale prices per share for the Common Stock as reported by Nasdaq for the periods indicated:

     The Company has never declared or paid cash dividends on its capital stock and does not intend to pay cash dividends in the foreseeable future. The Company’s revolving line of credit generally prohibits the payment of cash dividends on the Company’s capital stock. See “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data concerning the Company for and as of the end of each of the fiscal years are derived from the audited consolidated financial statements of the Company. The selected financial data are qualified in their entirety by the more detailed information and financial statements, including the notes thereto. The financial statements of the Company as of July 2, 2004 and June 27, 2003, and for each of the three years in the period ended July 2, 2004, and the report of PricewaterhouseCoopers LLP thereon, are included elsewhere in this report. The Company’s recent acquisitions affect the comparability of the information reflected in the selected financial data. For a description of these acquisitions, see “Item 7.— Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions.”

Financial Information by Year
(in thousands, except per share amounts and number of employees)

(1)		Includes restructuring charge of $390.
(2)		Includes in-process research and development charge of $316 related to the acquisition of the NetEngine product line, and cumulative effect of change in accounting principle, related to goodwill of $1,233.
(3)		Includes establishment of an income tax valuation allowance of $(13,381).
(4)		Includes restructuring charges of $7,891 and reversal of the $3,424 income tax valuation allowance established in 1999.
(5)		The Company has never declared or paid dividends on its capital stock and does not intend to pay dividends in the foreseeable future.

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Summarized Quarterly Financial Data (Unaudited)

     The following table presents unaudited quarterly operating results for each of the Company’s last eight fiscal quarters. This information has been prepared by the Company on a basis consistent with the Company’s audited financial statements and includes all adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the data.

Financial Information by Quarter (Unaudited)
(in thousands, except per share amounts)

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the 2004 Consolidated Financial Statements and Notes thereto.

     This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth herein, including those set forth in “Factors Affecting Future Results” below.

     The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest to June 30. Fiscal 2004 consisted of 53 weeks and Fiscal 2003 and 2002 each consisted of 52 weeks.

Overview

     Verilink Corporation (the “Company”) is a leading provider of next-generation broadband access products and services. The Company’s products support the delivery of voice, video and data services over converged access networks and enable the smooth migration from present TDM-based networks to IP-based networking. The Company develops, manufactures, and markets integrated access devices (“IADs”), Optical Ethernet access products, high-speed multi-link routers and bandwidth aggregation solutions. These products are sold to service providers, enterprise customers, and original equipment manufacturer (“OEM”) partners, and are deployed worldwide as targeted solutions for applications involving voice over IP (“VoIP”), voice over ATM (“VoATM”), voice over DSL (“VoDSL”), wireless backhaul aggregation, Frame Relay service transport, point-to-point broadband services, IP/PPP multi-link access routing, service inter-working, and the migration of networks from traditional time-division multiplexing (“TDM”) based access to IP/Ethernet. The Company’s customers include regional bell operating companies (“RBOCs”), Inter-exchange carriers, incumbent local exchange carriers (“ILECs”), independent operating companies, competitive local exchange carriers (“CLECs”), international post, telephone, and telegraph companies, wireless service providers, equipment vendors, Fortune 500 companies, small to mid-sized business customers, and various local, state, and federal government agencies.

     The Company has continued its merger and acquisition strategy initiated in fiscal 2003 in order to drive revenue growth, gain market share with expanded product offerings, and strengthen its position for the high-growth emerging markets in next generation broadband access including VoIP, routing and optical access. The Miniplex product line and XEL acquisitions discussed below were completed during fiscal 2004, which impacted results of operations in fiscal 2004. The Larscom acquisition was completed following the end of fiscal 2004. The Company began implementing plans in March 2004 to consolidate XEL manufacturing and administrative functions and announced plans in September 2004 to consolidate engineering as discussed below under “Restructuring Charges”. Consolida