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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

          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 (the “Act”) 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.

          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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment 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).

          As of June 28, 2002, there were 24,767,216 shares of the Registrant’s common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the Nasdaq National Market on June 28, 2002, the last business day of the second quarter of 2002) was $12,188,175.  Shares of the Registrant’s common stock held by each executive officer and director and by each entity that owns 10% or more of the Registrant’s outstanding common stock have been excluded in that such persons or entities may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

          On March 1, 2003, there were 24,771,498 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Certain sections of the Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

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CARRIER ACCESS CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2002

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FORWARD LOOKING STATEMENTS

          This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of the federal securities laws, including forward-looking statements regarding future sales of our products to our customers, inventory levels, our anticipated product offerings, expectations regarding selling, general and administrative expenses, customer revenue mix, sources of revenue, gross margins, and operating costs and expenses.  In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue”,  or the negative thereof or other comparable terminology. These statements are based on current expectations and projections about our industry and assumptions made by the management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements.  Our future financial condition, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth in the “Risk Factors” section in Item 1 of this report, as well as our other periodic reports on Form 10-Q filed with the Securities and Exchange Commission. Unless required by law, we undertake no obligation to update any forward-looking statements or reasons why actual results may differ in this Report on Form 10-K.

          Unless otherwise indicated, references in this report to specific years and quarters are to our fiscal year and fiscal quarters.

PART I

ITEM 1.      BUSINESS

General

          Founded in 1992, Carrier Access manufactures broadband communications equipment that enables communications companies to accelerate their service revenue, lower operating costs and extend capital budgets. We focus on three segments of the telecommunications industry: wireless infrastructure, enterprise service delivery, and broadband access.

          Our product solutions meet the highest appropriate industry reliability and interoperability standards, including Telcordia TIRKS/OSMINE, NEBS Level-3, and ISO 9001. Depending upon product configuration, the retail list prices of our products range from $995 to $50,000.

          Our principal executive offices are located at 5395 Pearl Parkway, Boulder, Colorado 80301.  Our telephone number at that location is 303-442-5455.  Our web site is www.carrieraccess.com; however, the information in, or that can be accessed through, our web site is not part of this report.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our web site as soon as reasonably practicable after we electronically file or furnish such materials with the Securities and Exchange Commission.  We were incorporated in Colorado in September 1992, reincorporated in Delaware in June 1998, and completed our initial public offering in July 1998.

Principal Products

          Broadband Access: Our products efficiently deliver broadband access from the Central Office (“CO”) to the end-user’s locations, and our digital equipment provides a solution for the distribution and management of high bandwidth services.  Our CO communications solutions enable service providers to reach a large number of voice and high-speed Internet access businesses and consumers.  Our products allow service providers to cost-effectively connect end-user customers to their network platforms, decrease ongoing transmission equipment and maintenance expenses, and, at the same time, increase revenue through new service delivery.

          Enterprise Voice/Data Service Delivery:  As the demand for sophisticated voice and data service delivery increases, national and local service providers are focused on optimizing service margins by decreasing access transport and labor costs.  These costs have proven more difficult to control than other expenditures and directly affect service provider profitability.  Our IP, TDM and ATM solutions integrate multiple voice and data access services that are both easy to install and easy to manage while delivering the quality of services that end-users demand.

          Wireless Infrastructure:  In a relatively short period of time, mobile wireless networks have gone from early analog creation to multiple forms of digital transmissions.  Now wireless providers are focusing inside of their networks to reduce inefficiency and improve service delivery.  Our scalable solutions enable wireless carriers to optimize bandwidth resources, lower operating expenses, cost-effectively deliver new revenue-generating data services, and effectively migrate to 2.5G and 3G networks with features and functionality added to digital cellular phones, such as Internet access and messaging.

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          Access Bank^® Products

          The Access Bank products are a line of multi-service terminals designed to deliver carrier-class voice and data services in a one-rack-unit chassis.  The Access Bank products provide a solution for major services, including voice only, voice and data over T1, and data over symmetrical digital subscriber line. The Access Bank products deliver quality services for Regional Bell Operating Companies (“RBOC”s), Incumbent Local Exchange Carriers (“ILEC”s), Interexchange Carriers (“IXC”s), and Internet service providers (“ISP”s).

          Access Bank I.  Released in June 1995, this product provides a solution for converting T1 digital access services from communications service providers to 12 or 24 individual analog telephone circuits at end user locations.  The Access Bank I incorporates an integrated T1 Channel Service Unit, which allows customers to plug in a T1 line without having to connect other external devices to perform service termination. Six different types of 12-channel telephone line interface circuit cards provide many popular voice service options while also delivering enhanced local services such as caller ID and distinctive ringing. The Access Bank I supports data services such as fax and high-speed modem traffic.  The Access Bank I is principally used by service providers for economical local service delivery, long distance service delivery using T1 access, digital service interconnection to PBXs and key systems, Internet modem pool connections to T1, branch office connectivity to T1, and rapid deployment of temporary telephone services.

          Access Bank II Voice and Data Multiplexer.  Released in November 1996, this product delivers twice the T1 capacity of the Access Bank I in the same size package, enabling service providers to integrate high-speed Internet service with multi-line voice service in a single unit. Each of the two T1 interfaces can accommodate current and future bandwidth requirements for a combination of facsimile, modem, high-speed Internet, voice, and PBX telephone services. The integral V.35 data interface and T1 interfaces offer connectivity for Internet access routers, enterprise routers, frame relay devices, video and other high-speed data applications. Service providers rely on the flexibility of the Access Bank II to deliver multi-line voice plus high-speed Internet connections to enterprise branch offices, small business customers, and medium-sized business locations. The Access Bank II also includes sophisticated management capabilities such as an optional Ethernet Simple Network Management Protocol (“SNMP”) and local area network management connection for configuration and monitoring.

          Access Exchange.  Released in April 1998, this product performs the functions of the Access Bank II and integrates software and digital signal processing capability to provide automatic call routing and number translation on a call-by-call basis. This product allows long distance service providers to combine local voice services with long distance and high-speed Internet access on their existing switch infrastructure while routing calls to the local exchange carrier for local calling, directory, 911, and other lifeline services.

          Wide Bank^® Products

          The Wide Bank DS3 and STS-1 access products were engineered to replace old-generation equipment and significantly reduce the size and power requirements of older communications equipment. In addition, the Wide Bank products utilize new levels of software integration to provide a feature-rich and cost-effective platform supporting full high- and low-speed redundancy, hitless T3 and STS-1 network protection, built-in Network Interface Units and Bit Error Rate Test capabilities. The Wide Bank products also conform to the most popular management schemes used by our service provider customers, including SNMP via Ethernet, local or remote Command Line Interface and Transaction Language 1 (“TL1”). Certification to Network Equipment Building Systems (“NEBS”) enables installation in a wide array of service provider environments including CO and co-location facilities while the modular design permits a platform cost and configuration to be matched exactly to the service provider needs.

          Wide Bank 28/DS3 Multiplexer.  Released in November 1997, this product connects a high bandwidth digital T3 (672 telephone line equivalents) network access line to 28 T1 or 21 E1 service connections. The Wide Bank 28 allows communications service providers (wireline and wireless), ISP, enterprise, and government customers to consolidate multiple T1s or E1s into T3 services to reduce monthly access costs. The Wide Bank 28 also provides redundant T3 service distribution from digital radio connections, T1 service expansion from fiber multiplexers and connections from T3 incumbent local exchange carrier services to ISP remote access servers.  The Wide Bank 28 incorporates T1 Network Interface Unit functionality to eliminate additional equipment and installation labor costs for service providers. A Maintenance Service Option (“MSO”) is available for providing testing and maintenance capabilities without disruption of services by field technicians.

          Wide Bank 28 is NEBS Level 3 certified and offers features and performance in compliance with NEBS Level 3 criteria as outlined by Telcordia Technologies for CO equipment. The NEBS certification allows service providers to install the Wide Bank 28 in CO locations where the product is designed to operate under electrical and physical environmental stresses such as electromagnetic interference, high and low temperature range and earthquake and vibration conditions. The Wide Bank 28 offers multiple management options including Command Line Interface (“CLI”), TL-1 Management Control, and SNMP.  The SNMP interface has a number of customized enterprise MIB objects, and can be used with Valet™, a Java-based graphical user interface; NetworkValet™ Element

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Management System, or other SNMP Network Management Systems, for ease of operations and management on the service providers’ network.

          Wide Bank 28/STS-1 Multiplexer.  Released in June 1999, this product cost-effectively delivers T1 service connections from SONET STS-1 electrical interfaces. This addition to our widely accepted and deployed Wide Bank 28 products offers new capabilities for high-bandwidth network access technology.

          The Wide Bank 28/STS-1 Multiplexer reduces the overall cost of deploying T1 services at service provider Local Digital Switch (“LDS”), collocation, Point-of-Presence (“POP”), Service Access Point (“SAP”) and on-network building locations. Our Wide Bank 28/STS-1 Multiplexer is designed to eliminate the additional expense of transmultiplexing T3 signals over SONET for fiber transport and reduce the amount of stranded bandwidth within the SONET shelf, while greatly decreasing the cost per T1 connection provided to service provider customers. High-capacity SONET add/drop multiplexers and digital radios can be more economically deployed to provide high-capacity T1 services.

          The Wide Bank 28/STS-1 Multiplexer optimizes valuable space in CO, co-location, or digital loop carrier cabinets. Services can be added in scalable quad T1 increments, suiting applications from small outside cabinets to large switching centers.

          The Wide Bank 28/STS-1 Multiplexer offers CLI, SNMP, and TL-1 management options as well as alarm reporting and performance monitoring to the Virtual Tributary 1.5 (VT1.5) tributary-based DSX-1 services, enabling service providers to gain the cost and management advantages of STS-1 interconnections in a very compact, scalable network product.

          Access Navigator^® Products

          The Access Navigator products include the Access Navigator/DCS Service Manager, which provides a cost effective 1/0 cross-connect solution; the Access Navigator/GR-303 + Data Host, which provides an easy to manage GR-303 host solution; and the most recent addition to the product, the Access Navigator GR-303 + P-Phone. With both NEBS and customer premises certifications, Access Navigator products were designed to be located in service provider racks or on end-user customer walls such that they significantly reduce space, power and installation labor requirements as compared to old generation digital cross connect and channel service equipment.  Access Navigator products provide management access via RS-232 and Telnet CLI, Ethernet SNMP, Valet graphical user interface, NetworkValet Element Management System, and GR-303 EOC (for either GR-303 version).

          Access Navigator/ DCS.  Released in January 1999, this product provides a comprehensive solution for managing four to 32 T1 access connections in a highly integrated package. With the functions of a 1/0 digital cross connect system, plus demarcation testing, service providers are able to decrease maintenance costs and labor, while increasing service availability.

          Access Navigator/ GR-303 + Data Host.  Released in January 1999, this productoffers a highly integrated solution for combining multi-line local voice and data services on customer T1 access lines. In addition to the concentration and management of CLASS voice services and ISDN BRI services, the Access Navigator/GR-303 grooms fractional T1 data connections, including Internet traffic, from customer locations.  Its small footprint and low-power requirements open up a wide range of applications from the network core, to the network edge, and even into customer premises.

          Access Navigator/ GR-303 + P-Phone.  Released in March 2003, this product also helps carriers maximize utilization of T1 backhaul facilities and free unused bandwidth in fractional T1 links by combining Telcordia®-compliant GR-303 offer-subscription with 1/0 Digital Cross-connect System (“DCS”) for grooming and concentrating voice and data traffic.  The new capabilities of this product enable carriers to deliver enhanced Centrex services via Nortel Meridian Enhanced Business Sets (P-Phones) at much lower costs compared to traditional deployments.

          Adit^Ò Products

          The Adit products are a line of multi-service digital access terminals that are used in wireless, wireline and enterprise market applications.  The Adit products are designed as a modular, scalable solution to help service providers deliver the technologies and services their customers are demanding.  Currently, the Adit products support features such as analog telephony; ISDN BRI; Centrex Services and high speed Internet and video.

          Adit 600.  First released in December 1999, Adit 600 is a multi-service terminal providing from 1 to 18 T1/E1 digital circuits from 4 to 48 voice channels.  It enables both existing and new voice and data services with a combination of IP and TDM technologies.  The Adit 600 product is designed as a modular, scalable, carrier-grade hardware and software solution with plug-in components for a wide-range of network end-user service options.  Current Adit 600 product offerings include Voice over IP (VoIP) Customer Media Gateway (CMG), 18 T1/E1 digital cross connect, distributed digital ISDN or P-Phone Centrex, Digital Data Service, multi-T1/E1 access routing, IP terminal server router, dual T1/E1 channel bank, ISDN, V.35 synchronous data, RS-232 asynchronous

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data, Ethernet service conversion, in-band IP management, and integrated power back-up protection.  The product is approximately the size of a shoebox and is sold in service-delivery applications at wireless cell sites, customer premises and central office locations.   

          With the introduction of the CMG Service Card in June 2002, the Adit 600 platform can combine IP router functionality with the ability to translate circuit-based services into packet-based VoIP services, using softswitch control.  The Octal P-Phone Card and software, introduced in March 2003, enables service providers to deliver digital Centrex services over T1 access lines with support for Nortel Electronic Business Set (EBS/P-Phone) telephones, in addition to ISDN basic rate and analog Centrex phone support.  This new product offering in combination with software in the Access Navigator CO product, enables digital Centrex service delivery using low-cost T1 access lines to customer premises locations, as an alternative to individual copper lines previously needed for each Centrex telephone user.

          Adit 105.  Released in December 2000, this product is designed to enable deployment of integrated voice and data DSL services.  The Adit 105 supports delivery of up to eight telephone line equivalents of voice services plus Ethernet data over xDSL transport interfaces using ATM.  The Adit 105 works with several standard–based ATM voice gateway platforms. 

          Broadmore^TM Products

          The Broadmore products enable service providers to extend their capital budgets, reduce their operating costs, and accelerate service availability. They provide cost efficient transport of traditional services across ATM Networks.

          Broadmore 1750.  Released in October 2000, this product brings the proven cost-efficiency and high performance of ATM networks to TDM-based DS3 service creation. By encapsulating TDM-based traffic within ATM cells using standards-based Circuit Emulation Service (“CES”), the Broadmore 1750 allows traffic to be transported over Permanent Virtual Circuits (“PVC”s) or Switched Virtual Circuits (“SVC”s). Concurrently, it concentrates lower-speed DS3 circuits onto a single high-speed OC-12c/STM-4c optical ATM circuit. The Broadmore 1750 provides carrier-class reliability in its 17-slot chassis through 1+1 SONET automatic protection switching (“APS”), 1:4 DS3 drop-side protection, fully redundant CPU, common equipment, and power supplies.

          Broadmore 1700.  Released in October 2000, this product offers an economical means of provisioning, grooming, and routing DS3, T1, E1, E3 and high-speed serial data circuits using logical ATM connections. The cost and complexities of equipping and managing SONET and Digital Cross-Connect (“DCS”) circuits are replaced by the speed, capacity, and cost improvements of logical ATM circuit provisioning—leveraging existing SONET optical networks. The Broadmore 1700 converts and aggregates TDM circuits—such as T1, E1, DS3, and E3 — into OC-3c/STM-1c or OC-12c/STM-4c ATM connections. TDM to ATM conversion is accomplished using standards-based ATM CES supporting both PVC’s and SVC’s. The integrity of TDM traffic is maintained, while providing the benefits and efficiency of ATM transport for converged voice and data access networks.

          Broadmore 500.  Released in October 2000, this product offers, in a five slot chassis, an economical means of provisioning common TDM and serial data circuits through an ATM network without incurring the costs typical of large, full-featured ATM core switches.  Simple ATM circuit provisioning replaces the complexities of configuring and managing more complex SONET and Digital Cross-connect Systems (DCS).  Conversion to ATM is performed using standards-based ATM CES with support for both PVC’s and SVC’s. 

          Valet^TM Products

          Valet.  Released in January of 2000, this product is a local configuration and provisioning software tool which increases installer productivity by simplifying the tasks of deployment and maintenance of network elements.  Valet is a Java Ô-based GUI that requires minimal training and technical expertise. 

          Valet supports our following Network Elements:

          Valet resides on the installer’s laptop computer and connects directly to our products through Ethernet management interfaces.  Using the intuitive point-and-click product-specific GUIs allows for quick completion of the installation, configuration and provisioning process.  Valet handles the circuit configuration process for various types of service, system setups and connections

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required by on-site technicians, enabling rapid service deployment. Network operators can manage diverse product configurations through displays of existing configurations.

          NetworkValet^TM.  Released in March 2001, this product is a full-features Element Management System (“EMS”) designed to meet the transport and access-management needs of service providers.  With a user-friendly GUI, NetworkValet is built on a Java^TM framework that is CORBA^®-compliant and Operational Support Systems (“OSS”) capable.  Network managers can remotely monitor our deployed network elements through the most widely employed interfaces, including SNMP, TL1, CLI, and CORBA. The result is a remote management solution that enables productive and cost-effective management, monitoring, configuration, and provisioning of our devices throughout the network.

          With NetworkValet, customers deploying Access Bank II, Access Navigator, Adit 105, Adit 600, and Wide Bank 28 products can decrease the cost of ownership by reducing the number of service callsrequired for routine configuration, maintenance and troubleshooting activities. Remote product configuration and provisioning for carrier-quality voice, high-speed data and broadband Internet access services can be accomplished down to the DS0 level from the Network Operations Center (“NOC”).  NetworkValet automatically detects our new elements, allowing most users to begin managing these elements after completing the basic configuration process. NetworkValet receives alarms associated with line outages, downed links, and failed cards directly from the network elements as they occur in real-time.  The built-in topology view can group elements geographically by region, state, city, building, or sub-network, providing drill-down network views and simplifying troubleshooting and element management. 

          Service providers can count on NetworkValet’s security features to safeguard their valued network elements.  System or network administrators can customize user access based on the functionality they want to assign to users.

          Axxius^TM Products

          Axxius 800.  Released in March 2002, this product was designed to enable wireless carriers to provide additional services and lower costs.  By integrating many different access and bandwidth management functions into a single modular platform, the Axxius 800 delivers transport, edge routing and bandwidth intelligence to the access point of the wireless network which eliminates bandwidth under-utilization and inefficiencies between wireless cell site radios, periphery equipment, and the high-speed carrier edge or core network.

          Voice and high-speed data service can be deployed as needed, and protocol mediation can be provisioned to converge dissimilar service protocols from a variety of cell site assets onto an efficient access network.  To keep pace with evolving wireless access requirements, the Axxius 800, through upgradeable software and replaceable cards, can be configured to deliver an array of service offerings as well as address future needs for ATM, IP and broadband transport.

Customers

          To date, a significant portion of our sales are made to distributors who resell our products to communications service providers, such as ILECs, wireless service providers, competitive carriers, ISPs, independent operating carriers and utilities who provide enhanced voice and high-speed data and Internet services to end-user businesses. In addition, we sell our products through direct sales to this same customer base principally through volume purchase agreements.

          Since 1998, our products have been used; by over 2,500 end users; however, our revenues have historically been concentrated among a small number of distributors and service provider customers that have historically accounted for a majority of our net revenue. For example, with respect to our distributors, Walker & Associates (“Walker”) accounted for 16% of net revenue in 2002. With respect to direct service provider customers, XO Communications, Inc. (“XO”) accounted for 13% of net revenue in 2002.    The loss of any one or more of these distributors or service provider customers could have a material adverse effect on our revenue.

Sales, Marketing and Customer Support

          Sales. We currently use a leveraged sales model consisting of (1) sales to distributors and (2) a direct sales and sales engineering force, which works with strategic accounts and with our distributors to identify potential customers and provide pre- and post-sales support to our service provider customers and other end-users. Sales to distributors accounted for approximately half of our revenue for the year ended December 31, 2002.  We typically ship products soon after receipt of the customers’ orders and, accordingly, backlog has typically not been significant.

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          Marketing. Our marketing organization develops strategies for products and, along with the sales force, develops key account strategies and defines product and service functions and features. Marketing is responsible for sales support, handling requests for information, requests for quotes and requests for proposals, preparing in-depth product presentations, interfacing with operations,

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setting price levels, developing new services and business opportunities and writing proposals in response to customer requests for information or quotations. We engage in a number of marketing activities that include exhibiting products and customer applications at industry trade shows, advertising in selected publications aimed at targeted markets, taking part in public relations activities with trade and business press and distributing sales literature, technical specifications and documentation in order to create awareness, market demand and sales opportunities for our products.

          Customer Service and Support. Based on customer support calls, we believe that ongoing customer support is critical to maintaining and enhancing relationships with service providers, end-users and distributors. The service provider and end-user support group has five functions: new product development that provides for product ideas and enhancements based on customer requirements through the pre- and post-sales support effort; inbound technical support which focuses on pre- and post-sales calls made to us by our customers; outbound application support and response to proposed quotation requests; training, including installation and application development training for customers, sales engineers, and employees; and reporting and analysis based on the automated trouble ticket and returned material systems.

Competition

          There is intense competition in the telecommunications equipment market with a large number of suppliers providing a variety of products to diverse market segments. We believe that the principal competitive factors for products in our markets include:

We believe our product solutions compete favorably with respect to each of these factors.

          Our existing and potential competitors include many large domestic and international companies, including certain companies that have substantially greater financial, manufacturing, technological, sales and marketing, distribution, and other resources.  Our principal competitors for our products include Adtran, Inc., Advanced Fibre Communications, Inc., Alcatel Alsthom Compagnie Generale d’Electricite, Cisco Systems, Inc., Lucent, Paradyne Corporation, Telect, Inc., Tellabs, Inc., VINA Technologies, Zhone Technologies and other small independent systems integrators and small private and public companies.  Most of these companies offer products competitive with one or more of our product lines. We expect that our competitors who currently offer products competitive with only one of our product lines will eventually offer products competitive with all of our products. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets through acquisition, thereby further intensifying competition.

          Many of our current and potential competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing, and other resources and more established channels of distribution.  As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources than we can devote to the development, promotion, and sale of their products.  Such competitors may enter our existing or future markets with solutions that may be less costly, provide higher performance or additional features, or be introduced earlier than our solutions.  Many telecommunications companies have large internal development organizations that develop software solutions and provide services similar to our products and services.  We expect our competitors to continue to improve the performance of their current products and to introduce new products or technologies that provide added functionality and other features.  Successful new product introductions or enhancements by our competitors could cause a significant decline in sales or loss of market acceptance of our products.  Competitive products may also cause continued intense price competition or render our products or technologies obsolete or noncompetitive.

          To be competitive, we must continue to invest significant resources in research and development and sales and marketing.  We may not have sufficient resources to make such investments or be able to make the technological advances necessary to be competitive.  In addition, our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers.  Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.  Increased competition is likely to result in price reductions, reduced gross margins, and loss of market share, any of which would harm our business.

Manufacturing

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          Our manufacturing operations consist of materials planning and procurement, final assembly, product assurance testing, quality control, and packaging and shipping. We currently use several independent manufacturers to provide certain printed circuit boards, chassis and subassemblies. We have developed a manufacturing process that enables us to configure our products to be adapted to different customer hardware and software applications at the final assembly stage. This flexibility is designed to reduce both our manufacturing cycle time and our need to maintain a large inventory of finished goods. We believe that the efficiency of our manufacturing process to date is largely due to our product architecture and our commitment to manufacturing process design. 

          We spend significant engineering resources producing customized software and hardware to assure consistent high product quality. We test every product both during and after the assembly process using internally developed automated product assurance testing procedures. These procedures consist of automated board and automated system testing as well as environmental testing. Although we generally use standard parts and components for our products, many key components are purchased from sole or single source vendors for which alternative sources are not currently available. We caution you that it is possible that we may experience supply problems in the future from any of our manufacturers or vendors. We believe that there may be seasonal fluctuations in the placement of orders that may cause us to experience supply problems.  Any such difficulties could harm our business.

Research and Product Development  

          We focus our development efforts on providing enhanced functionality to our existing products, including total network solutions and performance and the development of additional software-based features and functionality. Extensive product development input is obtained from customers and our monitoring of end-user needs and changes in the marketplace. Our current product development focus has been on developing digital broadband access solutions and completing new products. We believe that our success will depend, in part, on our ability to develop and introduce in a timely fashion new products and enhancements to our existing products. We have in the past made, and intend to continue making, significant investments in product and technological development. Our engineering, research and development expenditures totaled approximately $28.7 million in 2000, $33.2 million in 2001, and $23.5 million in 2002. We perform our research and product development activities at our offices in Boulder, Colorado, Tulsa, Oklahoma, and Roanoke, Virginia.  Our inability to develop new products or enhancements to existing products on a timely basis, or the failure of these new products or enhancements to achieve market acceptance, could have a material adverse effect on our business.

Patents and Proprietary Information

          As of December 31, 2002, we had been issued a total of nine U.S. patents and had 23 U.S. patents pending.  We have 11 U.S. trademark applications pending, and have nine trademarks registered. A large number of patents and frequent litigation based on allegations of patent infringement exist within the telecommunications industry. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to us. If any such claims asserting that our products infringed proprietary rights of third parties were determined adversely to us, it could have a material adverse effect on our business, financial condition or results of operations. 

          We rely upon a combination of patent, copyright, trademark and trade secret laws as well as confidentiality procedures and contractual restrictions to establish and protect our proprietary rights. We have also entered into confidentiality agreements with our employees and consultants and we enter into non-disclosure agreements with our suppliers and distributors so as to limit access to and disclosure of our proprietary information. However, such measures may not be adequate to deter and prevent misappropriation of our technologies or independent third-party development of similar technologies. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely.   Based on the costs of obtaining foreign protection for our intellectual property as contrasted with the potential unenforceability of any such foreign protections, we suspended our activities related to obtaining international trademark and patent registrations.

Employees

          As of February 28, 2003, we employed 188 full-time employees in 26 states. No employees are covered by any collective bargaining agreements and we have never experienced a work stoppage. We believe that our relationships with our employees are good. The loss of any of our key management or technical personnel could harm our business. During 2002, we resized our employee base to focus on the largest opportunities in the ILECs, wireless, and global service provider markets.  This process included reducing our workforce from 453 full time employees at December 31, 2001, to 226 at December 31, 2002.

          Many of our employees are highly skilled, and our continued success depends in part upon our ability to attract and retain such employees.  In an effort to attract and retain such employees, we continue to offer employee benefit programs that we believe are at least equivalent to those offered by our competitors.  Despite these programs, in the past we have experienced difficulties in hiring and retaining certain skilled personnel.  In critical areas, we have utilized consultants and contract personnel to fill these needs until full time employees could be recruited.

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RISK FACTORS

          Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.

We Have a Limited Operating History.

          We did not begin commercial deployment of our broadband digital access equipment until 1995.  Prior to 1997, we recorded only nominal product revenue.  Although we were profitable on an annual basis from 1997 to 2000, we have recently experienced net losses.  For example, in 2002, we had a net loss of $52.7 million.  As of December 31, 2002, we had an accumulated deficit of $19.6 million.  Accordingly, an investor in our common stock must evaluate the risks, uncertainties, and difficulties frequently encountered by early stage companies in rapidly evolving markets such as the communications equipment industry.  Some of these risks include: 

          Due to our limited operating history and experience with respect to these issues, we may not successfully implement any of our strategies or successfully address these risks and uncertainties.

Our Quarterly Results Fluctuate Significantly, and Our Revenue Has Decreased.

          Although our revenues grew from fiscal 1998 to 2000, from 2000 to 2002 our revenues have decreased from $148 million to $50 million, respectively. Additionally, we experienced operating losses in the fourth quarter of 2000 and each quarter of 2001 and 2002.  We caution you that we may have revenue shortfalls again in the future.  Our quarterly and annual operating results have fluctuated in the past and may vary significantly in the future.  Our future operating results will depend on many factors, many of which are outside of our control, and which have affected our results in the past and could again in the future, including the following:

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          A significant portion of our net revenue has been derived from a limited number of large orders, and we believe that this trend will continue in the future, especially if the percentage of direct sales to end-users increases  The timing of these orders and our ability to fulfill them can cause material fluctuations in our operating results, and we anticipate that such fluctuations will occur.  Also, our distribution and purchase agreements generally allow our distributors and direct customers to postpone or cancel orders without penalty until a relatively short period of time prior to shipment.  We have experienced cancellations and delays of orders in the past, and we expect to continue to experience order cancellations and delays from time to time in the future.  Any shortfall in orders would harm our operating income for a quarter or series of quarters, especially because operating expenses in a quarter are relatively fixed.  These fluctuations could affect our profitability and the market price of our common stock.

          Because most of our sales have historically been through indirect distribution channels, our ability to judge the timing and size of individual orders is more limited than for manufacturers who have been selling directly to the end-users of their products for longer periods of time.  Moreover, the current downturn in general economic conditions has led to significant reductions in customer spending for telecommunications equipment, which has resulted in delays or cancellations of orders for our products.  Our operating expenses are based on our expectations of future revenues and are relatively fixed in the short term.  Due to these and other factors, if our quarterly or annual revenues continue to fall below the expectations of securities analysts and investors, the trading price of our common stock could significantly decline, as it has since the third quarter of 2000.

We Depend on Service Providers for Substantially All of Our Business.

          Our historical customers have consisted primarily of competitive carriers and, to a lesser extent, long distance service providers, ISPs, independent operating carriers (“IOCs”), RBOCs and wireless service providers The market for the services provided by the majority of these service providers has been influenced largely by the passage and interpretation of the Telecommunications Act of 1996 (the “1996 Act”). Service providers require substantial capital for the development, construction, and expansion of their networks and the introduction of their services.  The ability of service providers to fund such expenditures often depends on their ability to obtain sufficient financing.  Recently, this financing has not been available to many of these emerging service providers on favorable terms, if at all, particularly due to recent negative market conditions in the United States.  If our current or potential service provider customers cannot successfully raise the necessary funds, or if they experience any other adverse effects with respect to their operating results or profitability, their capital spending programs may be adversely impacted.  If our current or potential service provider customers are forced to defer or curtail their capital spending programs, our sales and operating results will likely be harmed.

          In addition, many of the industries in which the service providers operate have recently experienced financial restructuring, consolidation, or bankruptcy.  In particular, many telecommunication service providers have recently acquired, been acquired, or merged with ISPs or other service providers.  The loss of one or more of our service provider customers, such as occurred during the past three years through industry consolidation or otherwise, could have a material adverse effect on our sales and operating results.

Our Customers are Subject to Heavy Government Regulation in the Telecommunications Industry, and Regulatory Uncertainty May Have a Material Adverse Effect on Our Business.

          Competitive local exchange carriers are allowed to compete with RBOCs in the provisioning of local exchange services primarily as a result of the adoption of regulations under the 1996 Act that impose new duties on ILECs to open their local telephone markets to competition.  Although the 1996 Act was designed to expand competition in the telecommunications industry, the realization of the objectives of the 1996 Act is subject to many uncertainties.  Such uncertainties include actions by the Federal Communications Commission (“FCC”), judicial and administrative proceedings designed to define rights and obligations pursuant to the 1996 Act, actions or inaction by RBOCs or other service providers that affect the pace at which changes contemplated by the 1996 Act occur, resolution of questions concerning which parties will finance such changes, and other regulatory, economic, and political factors.  Any changes to the 1996 Act or the regulations adopted thereunder, the adoption of new regulations by federal or state regulatory authorities apart from or under the 1996 Act, or any legal challenges to the 1996 Act could have a material adverse impact upon the market for our products.

          We are aware of certain litigation challenging the validity of the 1996 Act and local telephone competition rules adopted by the FCC for the purpose of implementing the 1996 Act.  Furthermore, Congress has indicated that it may hold hearings to gauge the competitive impact of the 1996 Act and we cannot assure that Congress will not propose changes to the Act.  This litigation and potential regulatory change may delay further implementation of the 1996 Act, which could negatively impact demand for our products.  Moreover, our distributors or service provider customers may require that we modify our products to address actual or anticipated changes in the regulatory environment.  Furthermore, we may decide to modify our products to meet anticipated changes.  Our inability to modify our products in a timely manner or address such regulatory changes could harm our business.

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Our Markets are Highly Competitive and Have Many Established Competitors.

          The market for our products is intensely competitive, with a large number of equipment suppliers providing a variety of products to diverse market segments within the telecommunications industry.  Our existing and potential competitors include many large domestic and international companies, including certain companies that have substantially greater financial, manufacturing, technological, sales and marketing, distribution, and other resources.  Our principal competitors for our products include Adtran, Inc. Advanced Fibre Communications, Inc, Alcatel Alsthom Compagnie Generale d’Electricite (“Alcatel”), Cisco Systems, Inc. (“Cisco”), Lucent, Paradyne Corporation, Telect, Inc., Tellabs, Inc., VINA Technologies, Zhone Technologies and other small independent systems integrators and small private and public companies.  Most of these companies offer products competitive with one or more of our product lines.  These equipment suppliers either have products or are making an entry into this area.  We expect that our competitors who currently offer products competitive with only one of our products will eventually offer products competitive with all of our products. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets through acquisition, thereby further intensifying competition.

          Many of our current and potential competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing, and other resources and more established channels of distribution. As a result, such competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources than we can devote to the development, promotion, and sale of their products. Such competitors may enter our existing or future markets with solutions that may be less costly, provide higher performance or additional features, or be introduced earlier than our solutions. Many telecommunications companies have large internal development organizations that develop software solutions and provide services similar to our products and services. We expect our competitors to continue to improve the performance of their current products and to introduce new products or technologies that provide added functionality and other features. Successful new product introductions or enhancements by our competitors could cause a significant decline in sales or loss of market acceptance of our products. Competitive products may also cause continued intense price competition or render our products or technologies obsolete or noncompetitive.

          To be competitive, we must continue to invest significant resources in research and development and sales and marketing. We may not have sufficient resources to make such investments or be able to make the technological advances necessary to be competitive. In addition, our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins, and loss of market share, any of which would harm our business.

We Are Substantially Dependent on Our Distribution Channels.

          To date, approximately half of the sales of our products have been made through distributors. Our distributors are responsible for warehousing products and fulfilling product orders as well as servicing potential competitive service provider customers and, in some cases, customizing and integrating our products at end-users’ sites. As a result, our success depends on maintaining good relations with our distributors. Sales of our products historically have been made to a limited number of distributors and other direct customers, as follows:

          We expect that a significant portion of sales of our products will continue to be made to a small number of distributors. Accordingly, if we lose any of our key distributors, or continue to experience reduced sales to such distributors, our business would be harmed.

          We have limited knowledge of the financial condition of certain of our distributors. We are aware, however, that some of our distrubutors have limited financial and other resources that could impair their ability to pay us. For example, we incurred bad debt from one of our distributors, C & L Communications, Inc., because it declared bankruptcy in 2002. Although we have increased our reserves for bad debts, based upon these and other factors, we cannot assure that any future bad debts that we incur will not exceed our reserves or that the financial instability of one or more of our distributors will not continue to harm our business, financial condition, or results of operations.

          We generally provide our distributors with limited stock rotation and price protection rights. Other than limited stock rotation rights and certain limited return rights, we do not provide our distributors with general product return rights. We have limited

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knowledge of the inventory levels of our products carried by our distributors. Distributors have, in the past, reduced planned purchases of our products due to overstocking and such reductions may occur again in the future. Moreover, distributors who have overstocked our products have, in the past, reduced their inventories of our products by selling such products at significantly reduced prices. This may occur again in the future. Any reduction in planned purchases or sales at reduced prices by distributors or in the future could reduce the demand for our products, create conflicts with other distributors, or otherwise harm our business. In addition, three times a year, certain distributors are allowed to exercise stock rotation rights up to a maximum of 15% of our unsold products for an equal dollar amount of new equipment. The products must have been held in stock by such distributor and have been purchased within the four-month period prior to the return date. We cannot assure that we will not experience significant returns in the future or that we will make adequate allowances to offset these returns.

          We are generally required to give our distributors a 60-day notice of price increases. Orders entered by distributors within the 60-day period are filled at the lower product price. In the event of a price decrease, we are sometimes required to credit distributors the difference in price for any stock they have in their inventory. In addition, we grant certain of our distributors “most favored customer” terms, pursuant to which we have agreed to not knowingly grant another distributor the right to resell our products on terms more favorable than those granted to the existing distributor, without offering the more favorable terms to the existing distributor. It is possible that these price protection and “most favored customer” clauses could cause a material decrease in the average selling prices and gross margins of our products, which could in turn have a material adverse effect on distributor inventories, our business, financial condition, or results of operations.

          Our distributors do not have any obligation to purchase additional products, and accordingly, they may terminate their purchasing arrangements with us, or significantly reduce or delay the amount of our products that they order without penalty.  Any such termination, change, reduction, or delay in orders would harm our business.

We are Substantially Dependent on Our Direct Sales to End-User Customers.

          Currently, a significant portion of our product revenue is through direct sales.  Therefore, our continued success depends on building and maintaining good relations with our direct customers.

          We have limited knowledge of the financial condition of certain of our direct customers. We are aware, however, that some of our direct customers have limited financial and other resources that could impair their ability to pay us. For example in 2002, one of our direct customers filed for bankruptcy protection and we incurred bad debt as a result.  Another direct customer which accounted for 13% of our net revenues in 2002, has restructured its operations and experienced financial difficulty, and it may not be in a position in the future to continue its historic purchase levels.  We cannot assure you that any bad debts that we incur in connection with direct sales will not exceed our reserves or that the financial instability of one or more of our direct customers will not continue to harm our business, financial condition, or results of operations.  In addition, it is likely that an increase in sales to our direct customers may increase our accounts receivable and our days sales outstanding.

          Any reduction in planned purchases by direct customers could harm our business.  In addition, we grant certain of our direct customers “most favored customer” terms, pursuant to which we have agreed to not knowingly provide another direct customer with similar terms and conditions or a better price than those provided to the existing direct customer, without offering the more favorable terms, conditions or prices to the existing direct customer.  It is possible that these price protection and “most favored customer” clauses could cause a material decrease in the average selling prices and gross margins of our products, which could, in turn, harm our business.

          Our direct customers do not have any obligation to purchase additional products, and, accordingly, they may terminate their purchasing arrangements with us, or significantly reduce or delay the amount of our products that they order without penalty.  Any such termination, change, reduction, or delay in orders would harm our business.

General Economic Conditions Could Continue to Harm our Business

          We continue to be affected by adverse changes in general economic conditions, which have resulted in, and may continue to result in, reductions in capital expenditures by the end-user customers of our distributors and our direct sales customers, longer sales cycles, deferral or delay of purchase commitments for our products, and increased price competition.  These factors materially impacted our business most severely in the fourth quarter of 2000, and have continued to have an impact throughout 2001 and 2002.  If the current economic slowdown continues or worsens, these factors would continue to adversely affect our business and results of operations.  In addition, in the last two years, some service providers that were among our principal customers experienced capital budget constraints resulting from their financial troubles.  These financial troubles, combined with service delays, slowed the expected growth in this market.  If service providers continue to experience problems, our business may continue to be adversely impacted.

Our Growth is Dependent Upon Successfully Maintaining and Expanding Our Distribution Channels and Direct Sales.

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Our future net revenue growth will depend in large part on the following factors: