<PAGE>

                                                                    EXHIBIT 13.3



FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       ADVANCED FIBRE COMMUNICATIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                      ---------------------------
                                                                         2001             2000
                                                                      -----------     -----------
<S>                                                                   <C>             <C>
ASSETS

  Current assets:
    Cash and cash equivalents                                         $    39,528     $     8,368
    Cisco marketable securities and related collars                       670,489         658,961
    Other marketable securities                                           245,725         207,824
    Accounts receivable, less allowances of $952 and $1,948
         in 2001 and 2000, respectively                                    58,528          99,099
    Inventories                                                            29,711          59,356
    Other current assets                                                   35,897          24,059
                                                                      -----------     -----------
             Total current assets                                       1,079,878       1,057,667
  Property and equipment, net                                              56,608          66,699
  Other assets                                                             13,056          10,809
                                                                      -----------     -----------
             Total assets                                             $ 1,149,542     $ 1,135,175
                                                                      ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities:
    Accounts payable                                                  $     9,969     $    19,920
    Accrued liabilities                                                    73,624          48,349
    Deferred tax liabilities                                              222,176         244,675
                                                                      -----------     -----------
             Total current liabilities                                    305,769         312,944
  Long-term liabilities                                                     2,896           2,566

  Commitments and contingencies

  Stockholders' equity:
    Preferred stock, $0.01 par value; 5,000,000 shares authorized;
             no shares issued and outstanding                                  --              --
    Common stock, $0.01 par value; 200,000,000 shares authorized;
             82,113,830 and 80,729,972 shares issued and
             outstanding in 2001 and 2000, respectively                       821             807
    Additional paid-in capital                                            287,937         268,003
    Notes receivable from stockholders                                        (56)            (56)
    Accumulated other comprehensive income                                  1,242         167,774
    Retained earnings                                                     550,933         383,137
                                                                      -----------     -----------
             Total stockholders' equity                                   840,877         819,665
                                                                      -----------     -----------
             Total liabilities and stockholders' equity               $ 1,149,542     $ 1,135,175
                                                                      ===========     ===========
</TABLE>


          See accompanying notes to consolidated financial statements.





<PAGE>

                       ADVANCED FIBRE COMMUNICATIONS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                 ------------------------------------
                                                    2001          2000         1999
                                                 ---------     ---------    ---------
<S>                                              <C>           <C>          <C>
Revenues                                         $ 327,569     $ 416,850    $ 296,611
Cost of revenues                                   215,956       215,303      157,911
                                                 ---------     ---------    ---------
      Gross profit                                 111,613       201,547      138,700
                                                 ---------     ---------    ---------

Operating expenses:
    Research and development                        61,435        58,828       48,343
    Sales and marketing                             49,385        47,463       34,425
    General and administrative                      37,323        29,172       33,947
                                                 ---------     ---------    ---------
      Total operating expenses                     148,143       135,463      116,715
                                                 ---------     ---------    ---------

Operating income (loss)                            (36,530)       66,084       21,985

Other income:
    Unrealized gains on Cisco investment           285,729            --      379,290
    Other income, net                               21,439        51,444        6,154
                                                 ---------     ---------    ---------
      Total other income                           307,168        51,444      385,444
                                                 ---------     ---------    ---------

Income before income taxes                         270,638       117,528      407,429
Income taxes                                       102,842        39,960      158,359
                                                 ---------     ---------    ---------
Net income                                       $ 167,796     $  77,568    $ 249,070
                                                 =========     =========    =========

Basic net income per share                       $    2.06     $    0.97    $    3.20
                                                 ---------     ---------    ---------

Shares used in basic per share computations         81,381        80,201       77,723
                                                 ---------     ---------    ---------

Diluted net income per share                     $    2.01     $    0.91    $    3.05
                                                 ---------     ---------    ---------

Shares used in diluted per share computations       83,638        84,800       81,657
                                                 ---------     ---------    ---------
</TABLE>


          See accompanying notes to consolidated financial statements.





<PAGE>

                       ADVANCED FIBRE COMMUNICATIONS, INC.
        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
              INCOME Years Ended December 31, 2001, 2000, and 1999
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                   DEFERRED               NOTES     ACCUMULATED                 TOTAL
                                   COMMON STOCK      STOCK   ADDITIONAL RECEIVABLE  OTHER COM-                  STOCK-       COM-
                               -------------------  COMPEN-   PAID-IN    STOCK-     PREHENSIVE   RETAINED      HOLDERS'   PREHENSIVE
                                 SHARES     AMOUNT  SATION    CAPITAL    HOLDERS      INCOME     EARNINGS      EQUITY      INCOME
                               ----------   ------  ------   ---------- ----------  ----------   ---------    ---------   ----------
<S>                             <C>         <C>     <C>     <C>        <C>        <C>           <C>         <C>          <C>
Balances as of
  December 31, 1998            76,191,353    $762   $ (84)   $ 211,392    $(730)   $      --    $  56,499    $ 267,839    $  25,853
                                                                                                                          =========
Exercise of common
  stock options and
  warrants                      2,346,136      23      --        8,613       --           --           --        8,636
Issuance of common stock           16,276      --      --            3       --           --           --            3
Employee stock purchase
  plan purchases                  219,318       2      --        2,245       --           --           --        2,247
Inclusion of GVN earnings
  for the period July 1 to
  December 31, 1998                    --      --      --          881       --           --           --          881
Conversion of preferred
  stock into common stock
  in pooling                      239,959       2      --        1,998       --           --           --        2,000
Conversion of debt and
  accrued interest into
  common stock                    106,637       1      --        1,817       --           --           --        1,818
Cancelation of notes
  receivable from
  stockholder                          --      --      --           --      489           --           --          489
Granting of stock options
  below intrinsic value                --      --    (395)         395       --           --           --           --
Vesting of stock options
  below intrinsic value                --      --     308          513       --           --           --          821
Forfeiture of stock options            --      --      75          (75)      --           --           --           --
Repurchase of common stock        (42,287)     --      --          (11)      --           --           --          (11)
Tax benefit from
  option exercises                     --      --      --       10,303       --           --           --       10,303
Net Income                             --      --      --           --       --           --      249,070      249,070    $ 249,070
Other comprehensive income:
  Net unrealized gain on
   available-for-sale
   securities(1)                       --      --      --           --       --      100,968           --      100,968      100,968
                               ----------    ----   -----    ---------    -----    ---------    ---------    ---------    ---------
Balances as of
  December 31, 1999            79,077,392     790     (96)     238,074     (241)     100,968      305,569      645,064    $ 350,038
                               ----------    ----   -----    ---------    -----    ---------    ---------    ---------    =========
Exercise of common stock
  options and warrants          1,388,094      14      --        8,747       --           --           --        8,761
Employee stock purchase
  plan purchases                  213,129       2      --        2,456       --           --           --        2,458
Conversion of preferred
  stock into common stock
  in pooling                       56,240       1      --        1,248       --           --           --        1,249
Forfeiture of stock options            --      --      96          (96)      --           --           --           --
Repurchase of common stock         (4,044)     --      --           (1)      --                        --           (1)
Payments of notes
  receivable from
  stockholders                         --      --      --           --      102           --           --          102
Cancelation of notes
  receivable from
  stockholder                          --      --      --           --       83           --           --           83
Cancelation of common stock          (839)     --      --           --       --           --           --           --
Tax benefit from
  option exercises                     --      --      --       17,575       --           --           --       17,575
Net Income                             --      --      --           --       --           --       77,568       77,568    $  77,568
Other comprehensive income:
  Foreign exchange rate
   translation                         --      --      --           --       --          (12)          --          (12)         (12)
  Net unrealized gain on
   available-for-sale
   securities(1)                       --      --      --           --       --       66,818           --       66,818       66,818
                               ----------    ----   -----    ---------    -----    ---------    ---------    ---------    ---------
Balances as of
  December 31, 2000            80,729,972     807      --      268,003      (56)     167,774      383,137      819,665    $ 144,374
                               ----------    ----   -----    ---------    -----    ---------    ---------    ---------    =========
Exercise of common stock
  options                       1,125,894      11      --        9,931       --           --           --        9,942
Employee stock purchase
  plan purchases                  265,582       3      --        4,249       --           --           --        4,252
Cancelation of common stock        (7,618)     --      --           --       --           --           --           --
Tax benefit from
  option exercises                     --      --      --        5,754       --           --           --        5,754
Net income                             --      --      --           --       --           --      167,796      167,796    $ 167,796
Other comprehensive income:
  Foreign exchange rate
   translation                         --      --      --           --       --           (4)          --           (4)          (4)
  Reclassification of
   unrealized gain on
   trading securities                  --      --      --           --       --     (166,528)          --     (166,528)    (166,528)
                               ----------    ----   -----    ---------    -----    ---------    ---------    ---------    ---------
Balances as of
  December 31, 2001            82,113,830    $821   $  --    $ 287,937    $ (56)   $   1,242    $ 550,933    $ 840,877    $   1,264
                               ==========    ====   =====    =========    =====    =========    =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                         2000        1999
                                                                       --------    --------
<S>                                                                    <C>         <C>
(1) Net unrealized gain on available-for-sale marketable securities    $108,600    $166,178
    Less:  deferred income taxes related to the net unrealized gain      41,782      65,210
                                                                       --------    --------
    Net unrealized gain on available-for-sale securities               $ 66,818    $100,968
                                                                       ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.




<PAGE>

                       ADVANCED FIBRE COMMUNICATIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                         -------------------------------------
                                                                            2001          2000          1999
                                                                         ---------     ---------     ---------
<S>                                                                      <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                             $ 167,796     $  77,568     $ 249,070
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Unrealized gains on Cisco investment                                  (285,729)           --      (379,290)
    Tax related to SFAS No. 133 reclass of Cisco investment                106,776            --            --
    Reserve for inventory write-down and accrued purchase commitments       31,519         1,800            --
    Deferred income taxes                                                  (22,444)         (649)      144,853
    Depreciation and amortization                                           19,422        15,544        13,187
    Allowances for uncollectible accounts and returns                       10,261           600        (1,586)
    Tax benefit from option exercises                                        5,754        17,575        10,303
    Other non-cash adjustments to operating income                           3,704            83           489
    Write-down of impaired investment                                        2,275            --            --
    Stock based compensation                                                    --            --           821
    Changes in operating assets and liabilities:
        Accounts receivable                                                 30,310       (37,688)       14,306
        Inventories                                                         11,538       (23,585)       12,914
        Other current assets                                                (5,366)      (18,777)       (1,451)
        Long-term assets                                                     1,368           927        (5,180)
        Accrued and other liabilities                                       12,193        17,335         1,459
        Accounts payable                                                    (9,951)           52         7,186
                                                                         ---------     ---------     ---------
           NET CASH PROVIDED BY OPERATING ACTIVITIES                        79,426        50,785        67,081
                                                                         ---------     ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of marketable securities                                     (627,140)     (405,243)     (491,534)
   Sales of marketable securities                                          306,406       152,086       124,268
   Maturities of marketable securities                                     283,668       195,177       308,002
   Purchase of property and equipment                                      (12,921)      (23,743)      (15,865)
   Other long term investments                                             (12,473)       (4,635)        3,063
                                                                         ---------     ---------     ---------
           NET CASH USED IN INVESTING ACTIVITIES                           (62,460)      (86,358)      (72,066)
                                                                         ---------     ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of common stock options and warrants, net         14,194         6,578        15,575
                                                                         ---------     ---------     ---------
           NET CASH PROVIDED BY FINANCING ACTIVITIES                        14,194         6,578        15,575
                                                                         ---------     ---------     ---------
EFFECT OF ADJUSTMENT TO CONFORM FISCAL YEAR ENDS
           IN POOLING TRANSACTION                                               --         5,991            --
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            31,160       (23,004)       10,590

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                 8,368        31,372        20,782
                                                                         ---------     ---------     ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                                   $  39,528     $   8,368     $  31,372
                                                                         =========     =========     =========

CASH PAID:
   Income taxes                                                          $   4,784     $  19,093     $   2,399
</TABLE>


          See accompanying notes to consolidated financial statements.





<PAGE>

                       ADVANCED FIBRE COMMUNICATIONS, INC.
                   Notes to Consolidated Financial Statements

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Advanced Fibre Communications, Inc. (AFC) designs, manufactures, and provides a
family of products and services that offer broadband, wideband, and narrowband
solutions for the portion of the telecommunications network between the service
provider's central office and users' businesses and homes, often referred to as
the "local loop," or "last mile." Our OmniMAX(TM) product family is a
multiservice broadband solution providing voice and data services for the
telecommunications industry. Our product line consists of integrated
multiservice access platforms, integrated access devices, optical network access
concentrators, network services, network element management systems,
environmentally hardened outdoor plant cabinets, indoor cabinets, and related
service and transmission technologies. We sell our products primarily to
telecommunications companies who install our equipment as part of their access
networks. Our customers are national local exchange carriers, independent
operating companies, large incumbent local exchange carriers, competitive local
exchange carriers, and international carriers.

FISCAL YEAR

We operate on a 13-week fiscal quarter. In the year 2000, we operated on a
53-week fiscal year, with 14 weeks in the third quarter. We believe the effect
of the additional week was not material to year-to-year comparisons of results
of operations or cash flows.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of AFC and our
subsidiaries. All significant intercompany balances and transactions have been
eliminated.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

REVENUE RECOGNITION, ALLOWANCES AND PRODUCT WARRANTY. In compliance with the
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, and Statement of Financial
Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return
Exists, we recognize revenue when the earnings process is complete. The earnings
process is considered complete when persuasive evidence of an arrangement
between a customer and AFC exists, when delivery and acceptance has occurred or
services have been rendered, when pricing is fixed or determinable, when any
right of return lapses or is reasonably estimable, and when collectibility is
reasonably assured. We follow these same revenue recognition standards for sales
made to our authorized distributors and sales representatives. AICPA Statements
of Position 97-2, Software Revenue Recognition, and 98-9, Modification of SOP
97-2, Software Recognition, With Respect to Certain Transactions, generally
require revenues earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
Revenues allocated to maintenance are recognized ratably over the maintenance
term. Revenues from service activities are generally recognized ratably over the
service period. Allowances for returns are established based on experience. A
provision for estimated warranty costs is established at the time of sale and
adjusted periodically based on experience.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS. We follow SFAS No. 2,
Accounting For Research and Development Costs, and charge all research and
development costs to expense as incurred. We follow SFAS No. 86, Accounting For
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Costs
incurred for the development of computer software and enhancements to existing
software products that will be sold, leased, or otherwise marketed are
capitalized when technological feasibility has been established. These
capitalized costs are subject to an ongoing assessment of recoverability based
on anticipated future revenues and changes in technologies. Costs that are
capitalized include direct labor and related overhead. Amortization of
capitalized software development costs begins when the product is





<PAGE>

available for general release. Amortization is based on the straight-line
method. Unamortized capitalized software development costs determined to be in
excess of net realizable value of the product are expensed immediately.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. We have an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to make payments to
our accounts receivable. We base our allowance on periodic assessment of our
customers' liquidity and financial condition through credit rating agencies,
financial statement review, and historical collection trends. Additional
allowances may be required if the liquidity or financial condition of our
customers were to deteriorate, resulting in an impairment in their ability to
make payments.

INVENTORIES AND RESERVE FOR EXCESS AND OBSOLETE INVENTORIES. Inventories include
material, labor and overhead and are valued at the lower of cost (first-in,
first-out basis) or market. A reserve for excess and obsolete product and an
accrual for purchase commitments have been established; the balances are
assessed continuously, and adjusted on a quarterly basis.

OTHER SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS. We consider all highly liquid investments in debt
instruments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents are generally invested in money market
funds.

MARKETABLE SECURITIES AND INVESTMENTS. Our marketable securities are reported at
fair value, and are classified as trading or available-for-sale. At December 31,
2000, all marketable securities were classified as available-for-sale. On
January 1, 2001, we reclassified our investment in stock of Cisco Systems, Inc.
(Cisco) to trading, and thereafter periodic changes in its fair value are
included in non-operating income or expense.

We have equity investments in non-publicly traded development-stage companies
accounted for under the cost method. Our ownership in each of these companies is
less than 20%. We hold one seat on the board of directors of one of these
companies. However, we do not have significant influence over the operating or
financial policies of that company.

PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost. We compute
depreciation using the straight-line method over the estimated useful lives,
generally three years for computers and internal use software, and seven years
for office and engineering equipment, furniture, and fixtures.

LONG-LIVED ASSETS. We evaluate long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the potential
future income expected to be generated by the asset. If an asset is considered
to be impaired, it is written down to its market value, which is assessed based
on factors specific to the type of asset.

INCOME TAXES. We account for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.

EQUITY-BASED COMPENSATION PLANS. We follow Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and we account for
equity-based compensation plans with employees and non-employees of the board of
directors using the intrinsic value method.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES





<PAGE>

In 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, which require that we recognize all derivatives
as either assets or liabilities in the balance sheet and that we measure those
instruments at fair value. We also use foreign exchange contracts to offset
gains and losses on exchange rate fluctuations against gains and losses on
assets or liabilities hedged.

NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net income per share is computed
using the weighted average number of shares of common stock, and common
equivalent shares from options to purchase common stock and contributions to the
Employee Stock Purchase Plan using the treasury stock method, when dilutive.

FOREIGN CURRENCY TRANSLATION

Operations conducted in our foreign offices are transacted in local currencies.
Assets and liabilities are translated into U.S. dollars using the translation
rate at the balance sheet date, and income and expense amounts are translated at
weighted average exchange rates during the year. Translation adjustments are
recorded to other comprehensive income in the equity section of the balance
sheet.

CERTAIN RISKS AND CONCENTRATIONS

Cash equivalents and trade accounts receivable are the primary financial
instruments exposing us to credit risk. To reduce credit risk, we perform
ongoing credit evaluations of our customers' financial condition. In some cases,
we may require customer prepayment, bank guarantees, or letters of credit and,
if necessary, we put customers on credit limits. We maintain adequate allowances
for potential credit losses. Our customers are concentrated in the public
carrier telecommunications industry. Our five largest customers accounted for
43% and 30% of our gross accounts receivable at December 31, 2001 and 2000,
respectively. Although our largest customers have varied from period to period,
we anticipate that receivables in any given period will continue to be
concentrated to a significant extent among a small number of customers. Recent
severe financial problems affecting the telecommunications industry in general
may continue to result in slower payments or defaults on accounts receivable. To
reduce the currency risk with respect to foreign receivables, we use foreign
exchange hedging contracts in those situations where it is deemed warranted.

Our products are concentrated in the telecommunications equipment market, which
is highly competitive and subject to rapid change. Significant technological
changes in the industry could adversely affect our operating results. Our
inventories include components that may be specialized in nature, and subject to
rapid technological obsolescence. We actively manage our inventory levels, and
we consider technological obsolescence and potential changes in product demand
based on macroeconomic conditions when estimating required allowances to reduce
recorded inventory amounts to market value. Such estimates could change in the
future.

RECLASSIFICATIONS  AND RESTATEMENTS

Certain prior year amounts have been reclassified to conform with the current
year's presentation. All historical financial information was restated to
reflect the acquisition of GVN Technologies, Inc. (GVN) in the second quarter of
fiscal 2000, which was accounted for as a pooling of interests. See Note 10 for
additional information on our acquisition of GVN.

SFAS NO. 133 IMPLEMENTATION IN 2001

On January 1, 2001 we implemented SFAS No. 133, as amended. There was no
transition adjustment upon implementation. Prior to our implementation of SFAS
No. 133, we classified our Cisco investment as available-for-sale, and recorded
unrealized gains and losses on the investment, the costless collar agreements
related to the investment, and the associated tax effects, in accumulated other
comprehensive income on the balance sheet. Upon implementation of SFAS No. 133,
we reclassified these securities from available-for-





<PAGE>

sale to trading securities, and recognized the accumulated gains on the share
value and the collar value in non-operating income. The related tax effects were
recorded as a component of income tax expenses.

The ongoing effects of SFAS No. 133 on the financial statements will depend on
future market conditions. Changes in value of our investment and the costless
collars are, and will continue to be, reported in current period earnings.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and specifies criteria for
recognizing intangible assets acquired in a business combination. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized over
their respective estimated useful lives. SFAS No. 142 became effective for us in
January 2002. Our implementation of these statements will not have a material
impact on our results of operations or financial position.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations, and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 143 requires that the
fair value of an asset retirement obligation be recorded as a liability in the
period in which a legal obligation is incurred. SFAS No. 143 is effective
January 1, 2003. SFAS No. 144 establishes one accounting model to be used for
long-lived assets to be disposed of by sale, and broadens the presentation of
discounted operations to include more disposal transactions. SFAS No. 144
supercedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations. SFAS No.
144 became effective for us in January 2002. We do not expect the implementation
of these statements to have a material impact on our results of operations and
financial position.

NOTE 2. MARKETABLE SECURITIES

Marketable securities are valued at fair market value, and are comprised of the
following (in thousands):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    ----------------------
                                                      2001          2000
                                                    --------      --------
      <S>                                           <C>           <C>
      Corporate equity securities                   $670,489      $658,961
      Municipal debt securities                      241,725       202,334
      Corporate debt securities                        4,000         5,490
                                                    --------      --------
          Total marketable securities               $916,214      $866,785
                                                    ========      ========
</TABLE>

CORPORATE EQUITY SECURITIES

On November 1, 1999, we acquired approximately 10.6 million shares of Cisco
common stock (adjusted for a 2-for-1 stock split) as a result of the completion
of Cisco's acquisition of Cerent Corporation (Cerent) and resulting exchange of
our Cerent stock for Cisco's common stock. We recorded a gain for the step-up in
basis of $379.3 million before taxes at the acquisition date.

In February and May 2000, we entered into hedging transactions structured as
costless collar agreements, with terms of approximately three years, to minimize
the potential market risk on the Cisco stock we own. The collars provide us with
a floor value of approximately $690.0 million for the shares if held to
maturity. We are able to borrow up to the full present value of the floor value
of the collars; we currently do not have any borrowings outstanding against
them. Gains and losses on our investment in Cisco stock will be partially offset
by gains and losses in the costless collar agreements to the extent that the
Cisco stock trades below $65 per share or above $99 per share.





<PAGE>

For the years ended December 31, 2000 and 1999, we deferred unrealized gains on
our Cisco investment of $107.6 million and $166.6 million, respectively, and
reported them in stockholders' equity in accumulated other comprehensive income,
net of deferred income taxes. Upon implementation of SFAS No. 133 in January
2001, we reclassified these securities from available-for-sale to trading
securities, and recognized the accumulated gains of $19.1 million share value
and $255.1 million collar value in non-operating income. The related tax effects
of $106.8 million were recorded as a component of income tax expenses. This
reclassification resulted in a decrease of accumulated other comprehensive
income of $167.4 million, net of taxes.

For additional information with respect to the potential impact of adverse
market price volatility on our Cisco stock, refer to "Quantitative and
Qualitative Disclosures About Market Risk" on page 29 of this Annual Report to
Stockholders.

DEBT SECURITIES

At December 31, 2001, our debt securities portfolio contained a $1.4 million
unrealized gain, compared with a $0.6 million unrealized loss at December 31,
2000. The fair value of securities maturing in one year or less and those
maturing between one year and five years was $145.0 million and $100.7 million,
respectively, as of December 31, 2001.

NOTE  3. INVENTORIES

The major components of inventories are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                      --------------------
                                                        2001        2000
                                                      --------    --------
      <S>                                             <C>         <C>
      Raw materials                                   $ 12,909    $ 23,741
      Work-in-progress                                     993       1,746
      Finished goods                                    15,809      33,869
                                                      --------    --------
          Total inventories                           $ 29,711    $ 59,356
                                                      ========    ========
</TABLE>

NOTE  4. PROPERTY AND EQUIPMENT

A summary of property and equipment follows (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                      --------------------
                                                        2001        2000
                                                      --------    --------
      <S>                                             <C>         <C>
      Furniture and fixtures                          $ 16,529    $ 13,560
      Computer, software, and office equipment          33,117      36,071
      Engineering equipment                             50,221      53,777
                                                      --------    --------
                                                        99,867     103,408
      Less: accumulated depreciation                    43,259      36,709
                                                      --------    --------
      Property and equipment, net                     $ 56,608    $ 66,699
                                                      ========    ========
</TABLE>

At December 31, 2001 engineering equipment included $2.0 million of inventory
that was transferred to fixed assets used to build test equipment for our
operations.

NOTE 5. ACCRUED LIABILITIES

A summary of accrued liabilities follows (in thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                      --------------------
                                                        2001        2000
                                                      --------    --------
      <S>                                             <C>         <C>
      Income and sales taxes                          $ 24,400    $ 11,866
      Accrual for purchase commitments                  14,026       1,800
      Warranty                                          12,639      11,597
      Salaries and benefits                             10,201      11,055
      Other accruals                                     8,416      12,014
      Deferred revenues                                  3,942          17
                                                      --------    --------
      Total accrued liabilities                       $ 73,624    $ 48,349
                                                      ========    ========
</TABLE>





<PAGE>

NOTE 6. INCOME TAXES

A summary of the components of income taxes (benefit) follows (in thousands):

<TABLE>
<CAPTION>
                                                            CHARGE IN
                                                             LIEU OF
                                                             INCOME
                                    CURRENT   DEFERRED(1)    TAXES(2)    TOTAL
                                    -------   -----------    --------   --------
<S>                                 <C>        <C>           <C>        <C>
Year ended December 31, 2001:
Federal                             $ 7,587    $  79,229     $ 5,204    $ 92,020
State                                 5,178        5,094         550      10,822
                                    -------    ---------     -------    --------
Income taxes                        $12,765    $  84,323     $ 5,754    $102,842
                                    =======    =========     =======    ========

Year ended December 31, 2000:
Federal                             $16,080    $   1,334     $15,494    $ 32,908
State                                 6,954       (1,983)      2,081       7,052
                                    -------    ---------     -------    --------
Income taxes (benefit)              $23,034    $    (649)    $17,575    $ 39,960
                                    =======    =========     =======    ========

Year ended December 31, 1999:
Federal                             $ 2,986    $ 121,787     $ 9,175    $133,948
State                                   217       23,066       1,128      24,411
                                    -------    ---------     -------    --------
Income taxes                        $ 3,203    $ 144,853     $10,303    $158,359
                                    =======    =========     =======    ========
</TABLE>

(1)  Deferred tax expenses exclude deferred taxes on the unrealized gains and
     losses on available-for-sale marketable securities that is included in
     equity in accumulated other comprehensive income. For 2001, the deferred
     portion of the tax provision includes $106.8 million that was reclassed
     from accumulated other comprehensive income to tax expenses upon our
     implementation of SFAS No. 133 in January 2001. Excluding this amount, the
     deferred portion of the tax provision would be a benefit, or decrease, of
     $22.4 million.

(2)  The charge in lieu of income taxes results from the tax benefit of stock
     option exercises.

Income taxes differ from the amounts computed by applying the U.S. federal
statutory tax rate of 35% in each of the years ended December 31, 2001, 2000,
and 1999 to income before income taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                             ------------------------------------
                                                2001         2000          1999
                                             ---------     --------     ---------
<S>                                          <C>           <C>          <C>
Income taxes at statutory rate               $  94,724     $ 41,135     $ 142,600
State taxes, net of federal benefit              7,035        4,583        16,050
Current losses and  temporary differences
  for which no benefit was recognized            1,390        1,038           774
Foreign sales corporation benefit                   --         (184)         (114)
Utilization of tax credits                      (1,632)      (2,250)       (1,450)
Tax exempt interest                             (2,044)      (2,761)       (1,400)
Change in valuation allowance                       --           --        (1,668)
Other                                            3,369       (1,601)        3,567
                                             ---------     --------     ---------
Income taxes                                 $ 102,842     $ 39,960     $ 158,359
                                             =========     ========     =========
</TABLE>





<PAGE>

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                  -----------------------
                                                     2001          2000
                                                  ---------     ---------
      <S>                                         <C>           <C>
      Deferred tax assets:
      Allowances and accruals                     $  28,168     $  15,675
      Research tax credit carry-forwards              4,913         1,513
      Net operating loss carry-forwards               5,367            --
      Unrealized loss on marketable securities          595           239
                                                  ---------     ---------
      Gross deferred tax assets                      39,043        17,427
                                                  ---------     ---------

      Deferred tax liabilities:
      Recognized gain on marketable securities     (254,216)     (147,687)
      Unrealized gain on marketable securities         (765)     (107,230)
      Net book value over net tax basis              (6,238)       (7,185)
                                                  ---------     ---------
      Gross deferred tax liabilities               (261,219)     (262,102)
                                                  ---------     ---------
      Net deferred tax liabilities                $(222,176)    $(244,675)
                                                  =========     =========
</TABLE>

As of December 31, 2001, we had research credit carry-forwards for federal
income tax purposes of approximately $1.6 million, and for California income tax
return purposes of approximately $5.0 million. These research tax credits are
available to reduce future income subject to income taxes, and will carry
forward indefinitely until utilized. For the year 2001 we had federal net
operating loss carry-forwards in the amount of approximately $14.0 million. This
net operating loss may be utilized to offset future income tax expenses, and
will expire in 2021.

NOTE 7. BANK BORROWINGS

We maintain an uncommitted bank facility for the issuance of commercial and
standby letters of credit. As of December 31, 2001, we had approximately $2.7
million in letters of credit outstanding under this facility, including $1.0
million issued as a five-year deposit on one of our leased facilities.

We also maintain bank agreements with two banks under which we may enter into
foreign exchange contracts for up to $40.0 million. There are no borrowing
provisions or financial covenants associated with these facilities. At December
31, 2001, there were approximately $1.2 million nominal amount foreign exchange
contracts outstanding.

In February and May 2000, we entered into hedging transactions structured as
costless collar agreements to minimize the impact of potential adverse market
risk on the Cisco shares we own. We are able to borrow up to the full present
value of the floor value of the collars; we currently do not have any borrowings
outstanding against them.

NOTE 8. STOCKHOLDERS' EQUITY

COMMON STOCK OPTIONS

Our 1996 Stock Incentive Plan (the 1996 Plan) is the successor equity incentive
program to our 1993 Stock Option/Stock Issuance Plan (the Predecessor Plan). The
share reserve automatically increases on the first trading day of each calendar
year by an amount equal to 3% of the number of shares of common stock
outstanding on the last trading day of the immediately preceding calendar year.
As of December 31, 2001, 26,178,848 shares of common stock were authorized for
issuance under the 1996 Plan. There are no remaining shares authorized for
issuance under the Predecessor Plan as of December 31, 2001.





<PAGE>

-   Options issued prior to 1997 generally vest 20% on the first anniversary of
    the grant date and ratably over the following 48 months

-   Options issued after 1997 to new employees generally vest 25% on the first
    anniversary of the grant date and ratably over the following 36 months

-   Options issued in 1997 through 1999 to employees with at least one year of
    service generally vest ratably over 48 months from the date of grant

-   Options issued after 1999 to employees with at least one year of service
    generally vest ratably over 36 months from the date of grant

-   Options issued to non-employee directors of AFC's board generally vest 33%
    on the first anniversary of the grant date and ratably over the following 24
    months

-   Options expire ten years from the date of grant and are normally canceled
    three months after termination of employment

A summary of the stock option plan activity is presented below:

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                               ----------------------------------------------------------------------
                                        2001                    2000                    1999
                               ---------------------    ---------------------    --------------------
                                             WEIGHTED                  WEIGHTED               WEIGHTED
                                             AVERAGE                   AVERAGE                AVERAGE
                                             EXERCISE                  EXERCISE               EXERCISE
        OPTIONS                  SHARES       PRICE       SHARES       PRICE      SHARES       PRICE
        -------                ----------     ------    ----------     ------    ---------     ------
<S>                            <C>            <C>        <C>           <C>       <C>           <C>
Outstanding at
  beginning of year            10,629,510     $23.16     9,187,496     $14.53    8,171,547     $ 6.62
Granted                         5,920,899      17.91     4,150,386      36.72    5,148,606      21.11
Exercised                      (1,125,894)      8.89    (1,332,154)      6.51   (1,727,436)      4.96
Canceled                       (1,162,936)     27.57    (1,376,218)     22.57   (2,405,221)      8.48
                               ----------     ------    ----------     ------    ---------     ------
Outstanding at
  end of year                  14,261,579     $21.75    10,629,510     $23.16    9,187,496     $14.53
                               ==========               ==========               =========
Exercisable at
  end of year                   6,100,525     $20.58     3,219,604     $15.11    2,145,102     $ 6.64

Available for grant             1,452,320                3,788,384               6,558,508

Weighted average fair
   value of options
   granted during the year                    $11.61                   $25.20                  $13.27
</TABLE>

The following table summarizes information about stock options outstanding as of
December 31, 2001:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                      --------------------------------------------   ---------------------------
                                        WEIGHTED
                                         AVERAGE        WEIGHTED                      WEIGHTED
                                        REMAINING       AVERAGE                       AVERAGE
 RANGE OF OPTION                       CONTRACTUAL      EXERCISE                      EXERCISE
 EXERCISE PRICES        SHARES        LIFE (YEARS)       PRICE         SHARES          PRICE
-------------------   ------------    --------------   -----------   ------------    -----------
<S>                   <C>             <C>              <C>           <C>             <C>
   $0.01 - $ 7.88      2,086,435           5.9           $  6.71      1,646,006        $  6.48
    8.03 -   9.56        693,566           7.0              8.63        486,909           8.66
    9.69 -  16.31      1,550,651           8.1             15.11      1,046,940          15.75
   16.50 -  16.63      2,404,855           9.3             16.63        528,951          16.62
   16.81 -  19.67      2,084,396           9.8             19.32         88,525          18.09
   19.69 -  22.15        925,532           8.9             20.74        305,635          21.15
   22.44 -  28.63      1,838,726           8.8             24.52        645,251          24.81
   29.13 -  39.75        619,722           8.3             35.40        294,665          35.36
   40.31 -  44.38        933,212           8.1             43.90        581,199          44.01
   45.13 -  81.31      1,124,484           8.4             52.73        476,444          53.15
  ---------------     ----------           ---           -------      ---------        -------
  $ 0.01 - $81.31     14,261,579           8.4           $ 21.75      6,100,525        $ 20.58
                      ==========                                      =========
</TABLE>





<PAGE>

EMPLOYEE STOCK PURCHASE PLAN

Under the 1996 Employee Stock Purchase Plan (the Purchase Plan) we are
authorized to issue up to three million shares of common stock to eligible
employees of AFC and participating subsidiaries. The Purchase Plan has been
implemented in a series of successive offering periods, each with a maximum
duration of 24 months. Eligible employees can enter on the start date of any
offering period or on any subsequent semi-annual entry date. Effective February
1, 2001 the maximum contribution rate allowed under the Purchase Plan was
increased from 10% to 15%. The purchase price of the stock is the lower of 85%
of 1) the fair market value of the common stock on the participant's entry date
(strike price), or 2) the fair market value on the semi-annual purchase date.
Purchase dates are January 31 and July 31 of each year, or the closest business
day preceding those dates when the purchase date falls on a non-business day. If
the fair market value on any purchase date during the existing offering period
is less than the strike price established at the beginning of the offering
period, a new offering period will commence. The current offering period
commenced on February 1, 2002 and is scheduled to continue through January 31,
2004.

A total of 265,582 shares of common stock with a weighted average fair value of
$16.01 per share were purchased in 2001. At December 31, 2001, 1,976,552 shares
remained available for issuance. A total of 133,940 shares with a weighted
average fair value of $14.75 was purchased on January 31, 2002 using
contributions withheld during the period from August 1, 2001 to January 31,
2002.

PRO FORMA FAIR VALUE INFORMATION

We apply the intrinsic value method of accounting prescribed by APB Opinion No.
25 for our stock-based compensation plans. If compensation cost for our
stock-based compensation plans had been determined in accordance with the fair
value approach set forth in SFAS No. 123, Accounting for Stock-Based
Compensation, our net income and earnings per share would have been reduced to
the pro forma amounts as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                        2001        2000        1999
                                      --------    --------    --------
     <S>                              <C>         <C>         <C>
     Net income:
          As reported                 $167,796    $ 77,568    $249,070
          Pro forma                    108,428      31,349     223,576

     Basic net income per share:
          As reported                 $   2.06    $   0.97    $   3.20
          Pro forma                       1.33        0.39        2.88

     Diluted net income per share:
          As reported                 $   2.01    $   0.91    $   3.05
          Pro forma                       1.30        0.37        2.74
</TABLE>

The fair value of option grants in 2001, 2000, and 1999 were estimated on the
date of grant using the Black-Scholes option-pricing model, assuming no dividend
yield, with the following weighted average assumptions:




<PAGE>

<TABLE>
<CAPTION>
                                                RISK-FREE         EXPECTED LIFE
                             VOLATILITY       INTEREST RATE          (YEARS)
                             ----------       -------------       -------------
<S>                          <C>              <C>                 <C>
2001                            100%               4.31%               3
2000                            100                5.89                3
1999                             90                5.81                4
</TABLE>

Pro forma compensation costs related to the Purchase Plan were recognized for
the fair value of the employees' purchase rights, as of the date of purchase
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used, assuming no dividend yield:

<TABLE>
<CAPTION>
     SEMI-ANNUAL                                RISK-FREE       EXPECTED LIFE
   PURCHASE DATES            VOLATILITY       INTEREST RATE        (MONTHS)
   --------------            ----------       -------------     -------------
<S>                          <C>              <C>               <C>
January 2002                    100%               4.8%                13
July 2001                       100                4.8                 13
January 2001                     97                4.9                 17
July 2000                        97                4.9                 17
January 2000                     85                4.9                  8
July 1999                        85                4.9                  8
January 1999                     75                5.8                 14
</TABLE>

STOCKHOLDERS' RIGHTS PLAN

In May 1998, our board of directors adopted a Stockholders' Rights Plan. This
plan is designed to deter any potential coercive or unfair takeover tactics in
the event of an unsolicited takeover attempt. In accordance with the plan,
purchase rights were distributed as a dividend in May 1998 at the rate of one
right for each share of common stock of AFC. Each right entitles stockholders to
buy a unit equal to one one-thousandth of a share of our Series A Junior
Participating Preferred Stock for $225.00 per unit, subject to anti-dilution
adjustments. The rights will be exercisable only if a person or a group
acquires, or announces a tender or exchange offer to acquire, 15% or more of our
common stock.

In the event the rights become exercisable, the rights plan allows for AFC
stockholders to acquire stock of the surviving corporation, whether or not AFC
is the surviving corporation, having a value twice that of the exercise price of
the rights. The rights will expire in May 2008 and are redeemable for $0.001 per
right at the approval of our board of directors.

NET INCOME PER SHARE

The computation of shares and net income amounts used in the calculation of
basic and diluted net income per share are as follows (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                          -------------------------------
                                                            2001        2000       1999
                                                          --------    -------    --------
<S>                                                       <C>         <C>        <C>
Net income                                                $167,796    $77,568    $249,070
                                                          ========    =======    ========

Shares used in basic per share calculations - weighted
  average common shares outstanding for the period          81,381     80,201      77,723
Weighted average number of shares of
  dilutive options and warrants                              2,257      4,599       3,934
                                                          --------    -------    --------
Shares used in diluted per share calculations               83,638     84,800      81,657
                                                          ========    =======    ========

Basic net income per share                                $   2.06    $  0.97    $   3.20
                                                          ========    =======    ========
Diluted net income per share                              $   2.01    $  0.91    $   3.05
                                                          ========    =======    ========
</TABLE>





<PAGE>

Options to purchase 5,504,953, 842,653, and 773,219 shares of common stock which
were outstanding at December 31, 2001, 2000, and 1999, respectively, were
excluded from the computation of diluted net income per share because the
exercise prices for the options were greater than the respective average market
price of the common shares, and their inclusion would be antidilutive.

NOTE 9.  COMMITMENTS AND CONTINGENCIES

LEASES

Office space and certain equipment are leased under operating leases. Future
minimum payments under operating leases with an initial term of more than one
year as of December 31, 2001 are summarized as follows (in thousands):

<TABLE>
            <S>                                           <C>
            2002                                          $ 8,523
            2003                                            8,247
            2004                                            8,328
            2005                                            8,215
            2006                                            7,769
            Thereafter                                     30,054
                                                          --------
              Total minimum lease payments                $71,136
                                                          ========
</TABLE>

We sublease three of our facilities. Total future minimum lease payments have
not been reduced by approximately $8.4 million of future sublease payments to be
received under non-cancelable subleases. Total sublease payments received in
2001 and 2000 were $1.5 million and $0.6 million, respectively. We did not have
sublease income in 1999. Total rent expenses for all operating leases was $8.6
million, $7.9 million, and $6.6 million for the years ended December 31, 2001,
2000, and 1999, respectively.

EMPLOYEE BENEFIT PLAN

We have a 401(k) plan (the Plan) under which employees may contribute a portion
of their compensation on a tax-deferred basis to the Plan. We contributed to the
Plan on a matching basis up to a maximum of $5,250 per employee during 2001.
Participants in the Plan are neither required, nor solicited by us, to elect a
stock fund that contains AFC common stock. We act as the Plan administrator.
During 2001, 2000, and 1999, we contributed $2.6 million, $2.1 million, and $1.8
million respectively, to the Plan.

PURCHASE AGREEMENTS WITH CONTRACT MANUFACTURERS

We have long-term purchase agreements with certain contract manufacturers, or
CMs, which allow us to negotiate volume discounts, and help assure us of a
steady supply of components that fully comply with all applicable specifications
for such components that we need. The agreements require the CMs to purchase
component parts to be used in the manufacture of product to our specifications,
and authorize the CMs to purchase such parts in accordance with agreed upon lead
times. While the agreements do not obligate us to purchase any specified minimum
volume, we provide CMs with forecasts of our expected needs, and we issue
purchase orders covering a certain period of time for specific quantities. In
the event we terminate the manufacturing agreement with a CM, cancel a purchase
order previously issued to and accepted by a CM, or no longer have need for
components which a CM has purchased on our behalf, we agree to compensate the
respective CM as follows:

-   for any materials it has purchased for use in the manufacture of our
    products bought within standard lead times, or otherwise, if we granted
    approval of the purchase

-   for work in process, and

-   for all finished products manufactured for us that are in the CM's
    possession.





<PAGE>

Under such agreements, our maximum liability as of December 31, 2001 was
approximately $26.0 million, of which $14.0 million was accrued on the balance
sheet.

LITIGATION

SECURITIES LITIGATION: Various class action lawsuits were filed in the U.S.
District Court for the Northern District of California against AFC and certain
of our current and former officers and directors between July 2, 1998 and August
17, 1998. On November 2, 1998, these lawsuits were consolidated by the court,
and a Consolidated Amended Class Action Complaint (CAC) was served on January
27, 1999. In addition, on November 2, 1998, this consolidated class action was
coordinated with two individual actions filed by the State Board of
Administration of Florida, and by an individual, John Earnest. These three
complaints allege various federal and state securities law violations for the
period March 25, 1997 through and including June 30, 1998, and seek an
unspecified amount of damages.

Defendants filed motions to dismiss the CAC and the two individual complaints.
On March 24, 2000, the court granted defendants' motions to dismiss with leave
to amend. On June 2, 2000, plaintiffs in the consolidated class action served
their Second Amended Class Action Complaint (SAC). On June 14, 2000, the
individual plaintiffs each respectively filed second amended complaints. On June
30, 2000, defendants moved to dismiss the SAC. By stipulated order, the filing
of motions was stayed in the two individual cases pending resolution of the
defendants' motion to dismiss. On February 15, 2001, the court granted the
motion to dismiss the SAC with leave to amend. On March 19, 2001, plaintiffs in
the consolidated class action served their Third Amended Class Action Complaint
(TAC). Defendants moved to dismiss the TAC, and, on May 29, 2001, the court
granted in part and denied in part this motion with leave to amend. On July 2,
2001, plaintiffs in the consolidated class action served their Fourth Amended
Class Action Complaint (FAC). In addition, on July 12, 2001, the individual
plaintiffs each respectively served third amended complaints. Defendants moved
to dismiss the FAC, and, on August 21, 2001, the court granted in part and
denied in part this motion. On September 13, 2001, defendants filed an answer to
the remaining allegations in the FAC. On October 15, 2001, defendants filed
motions to dismiss the individual third amended complaints, and, on December 19,
2001, the court granted defendants' motions to dismiss with leave to amend. On
or about January 17, 2002, the individual plaintiffs each respectively filed and
served fourth amended complaints. On February 15, 2002, defendants filed motions
to dismiss these fourth amended complaints. Limited discovery has occurred.

Based on current information, we believe the lawsuits are without merit and that
we have meritorious defenses to the actions. Accordingly, we are vigorously
defending the litigation. Depending on the amount and timing, an unfavorable
resolution of this matter could materially affect our future results of
operations or cash flows in a particular period. In addition, although it is
reasonably possible we may incur a loss upon the conclusion of this claim, an
estimate of any loss or range of loss cannot be made. No provision for any
liability that may result upon adjudication has been made in the consolidated
financial statements. In connection with these legal proceedings, we expect to
incur substantial legal and other expenses. Stockholder suits of this kind are
highly complex and can extend for a protracted period of time, which can
substantially increase the cost of such litigation and divert the attention of
management from the operations of AFC.

Statements contained herein that are forward-looking, including statements
regarding the potential impact of pending litigation, reflect our current view
with respect to future events and involve risks and uncertainties. These risks
and uncertainties may cause actual results to be materially different from any
future result that may be suggested, expressed or implied by these
forward-looking statements. Such risks and uncertainties include, but are not
limited to, a change in relevant and applicable law which can affect the outcome
of this litigation, newly discovered information which may support some or all
of the plaintiffs' allegations, and the general risks and uncertainties that
accompany any litigation.





<PAGE>

NOTE 10.  ACQUISITION OF GVN TECHNOLOGIES, INC.

On May 16, 2000, we completed the acquisition of GVN of Largo, Florida, a
developer of integrated access device equipment for the service provider market.
In the acquisition, the former stockholders of GVN received .088 shares of our
common stock in exchange for each share of GVN common stock and preferred stock.
The acquisition was accounted for as a pooling of interests. An aggregate of
894,306 shares of our common stock was issued pursuant to the acquisition, and
we converted an aggregate of 209,794 options to purchase GVN common stock into
options to purchase AFC common stock.

The following information presents certain statement of income data of the
separate companies for 1999, the year preceding the merger (in thousands):

<TABLE>
<CAPTION>
                                             Net            Net income
         Year ended December 31, 1999:     revenues           (loss)
                                           --------         ----------
         <S>                               <C>              <C>
         AFC                               $296,571          $250,297
         GVN                                     40            (1,227)
                                           --------          --------
            Total                          $296,611          $249,070
                                           --------          --------
</TABLE>

There were no material transactions between AFC and GVN prior to the merger. The
effects of conforming GVN's accounting policies to those of AFC were not
material.

NOTE 11.  SEGMENT INFORMATION

We develop, manufacture, and support a family of telecommunications access
products and services that enable telecommunications companies and other service
providers to connect their central office switches to end users for voice and
high-speed data communications. We derive all of our revenues from sales of the
OmniMAX product family. The chief operating decision makers evaluate
performance, make operating decisions, and allocate resources based on
consolidated financial data. Accordingly, we consider AFC to be in a single
industry segment. We do not prepare reports for our individual products, and
accordingly, we do not present revenues, or any other related financial
information by individual product.

We evaluate performance in each geographic region based on revenues only. We do
not assess our performance in geographic regions on other measures of income or
expense, such as depreciation and amortization, operating income, or net income.
Therefore, geographic information is presented only for revenues and long-lived
assets.

The following geographic information is presented for the years ending December
31, 2001, 2000, and 1999 (in thousands):

<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                      ------------------------------------
                                         2001          2000         1999
                                      ----------    ----------    --------
<S>                                   <C>           <C>           <C>
Revenues:
      Domestic                        $  282,004    $  368,904    $265,135
      International                       45,565        47,946      31,476
                                      ----------    ----------    --------
           Total revenues             $  327,569    $  416,850    $296,611
                                      ==========    ==========    ========
Long-lived assets:
      Domestic                        $   69,527    $   76,786    $ 63,145
      International                          137           722       1,058
                                      ----------    ----------    --------
           Total long-lived assets    $   69,664    $   77,508    $ 64,203
                                      ==========    ==========    ========
Total assets                          $1,149,542    $1,135,175    $900,787

Major customers,
percentage of review:
     Customer A                              17%           14%         12%
     Customer B                              --            16%         16%
</TABLE>





<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Advanced Fibre Communications, Inc.:


We have audited the accompanying consolidated balance sheets of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Notes 1 and 2 to the financial statements, in 2001 the Company
changed its method of accounting for derivative financial instruments upon
implementation of Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities.



                                                KPMG LLP


San Francisco, California
January 29, 2002




<PAGE>

                       ADVANCED FIBRE COMMUNICATIONS, INC.
                         QUARTERLY RESULTS OF OPERATIONS

Selected quarterly financial data is summarized below (unaudited) (in thousands)


<TABLE>
<CAPTION>
                                                                           QUARTERS ENDED
                                     --------------------------------------------------------------------------------------------
                                     DEC. 31,    SEPT. 30,   JUNE 30,    MAR. 31,     DEC. 31,   SEPT. 30,    JUNE 30,    MAR. 31,
                                     2001(1)       2001       2001       2001(2)      2000(3)       2000        2000      2000(4)
                                     --------     -------    -------    ---------     --------   ---------    --------    -------
<S>                                  <C>          <C>        <C>        <C>           <C>         <C>         <C>         <C>
Revenues                             $ 82,102     $84,647    $78,609    $  82,211     $116,099    $114,100    $101,232    $85,419

Cost of revenues                       76,281      47,050     43,977       48,648       55,039      60,355      54,005     45,904
                                     --------     -------    -------    ---------     --------    --------    --------    -------
Gross profit                            5,821      37,597     34,632       33,563       61,060      53,745      47,227     39,515
                                     --------     -------    -------    ---------     --------    --------    --------    -------

Operating expenses:

     Research and development          15,572      15,100     14,797       15,966       13,523      16,189      14,444     14,672
     Sales and marketing               11,857      12,459     12,238       12,831       12,791      12,795      12,298      9,579
     General and administrative         7,801       6,655      6,499       16,368        6,269       7,268       8,408      7,227
                                     --------     -------    -------    ---------     --------    --------    --------    -------
         Total operating expenses      35,230      34,214     33,534       45,165       32,583      36,252      35,150     31,478
                                     --------     -------    -------    ---------     --------    --------    --------    -------

Operating income (loss)               (29,409)      3,383      1,098      (11,602)      28,477      17,493      12,077      8,037

Other income, net                      21,799      21,055     10,856      253,458       12,291       2,169       2,034     34,950
                                     --------     -------    -------    ---------     --------    --------    --------    -------

Income (loss) before taxes             (7,610)     24,438     11,954      241,856       40,768      19,662      14,111     42,987

Income taxes (benefit)                 (1,763)      8,610      4,090       91,905       13,861       6,685       4,798     14,616
                                     --------     -------    -------    ---------     --------    --------    --------    -------
Net income (loss)                    $ (5,847)    $15,828    $ 7,864    $ 149,951     $ 26,907    $ 12,977    $  9,313    $28,371
                                     ========     =======    =======    =========     ========    ========    ========    =======

Basic net income (loss) per share    $  (0.07)    $  0.19    $  0.10    $    1.85     $   0.33    $   0.16    $   0.12    $  0.36

Shares used in basic per share
  computations                         82,034      81,699     81,176       80,963       80,688      80,431      80,043     79,624

Diluted net income (loss) per share  $  (0.07)    $  0.19    $  0.09    $    1.80     $   0.32    $   0.15    $   0.11    $  0.33

Shares used in diluted per share
  computations                         82,034      84,371     83,277       83,101       83,999      84,658      85,043     84,968
</TABLE>


(1) In the fourth quarter ending December 31, 2001, gross profit was lower than
    preceding quarters as a result of a write-off of $18.0 million for excess
    and obsolete inventories, and an accrual of $12.0 million for purchase
    commitments. These charges contributed to the $29.4 million operating loss
    for the quarter.

(2) In the first quarter ending March 31, 2001, general and administrative
    expenses included $9.3 million provision for doubtful accounts related to
    receivables from a value-added reseller, or VAR, deemed to be
    uncollectible. This expense, along with non-recognition of $11.9 million in
    revenues for shipments made to Winstar and the VAR, for which product costs
    were recognized, and an increase of $2.2 million in reserve for excess and
    obsolete inventories, contributed to the operating loss of $11.6 million for
    the quarter. In addition, other income and income taxes for the quarter
    included the effects of our implementation of SFAS No. 133 on January 1,
    2001. The deferred gains on our Cisco investment and related collars of
    $274.2 million, and the associated deferred taxes of $106.8 million were
    reclassified from accumulated other comprehensive income to non-operating
    income and tax expenses, respectively.

(3) In the fourth quarter ending December 31, 2000, gross profit was higher than
    preceding quarters as a result of recognition of revenues on the first
    release of our software product, Panorama(TM) element management system,
    which generated higher margins.

(4) In the first quarter ending March 31, 2000, other income included $32.8
    million from Marconi Communications Inc., as a settlement of outstanding
    litigation.

          See accompanying notes to consolidated financial statements.