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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

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

       FOR THE TRANSITION PERIOD FROM                TO                 .

                        COMMISSION FILE NUMBER: 0-28734

                      ADVANCED FIBRE COMMUNICATIONS, INC.

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                      A DELAWARE                                               I.R.S. EMPLOYER
                      CORPORATION                                            IDENTIFICATION NO.
                                                                                 68-0277743
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                             ONE WILLOW BROOK COURT
                           PETALUMA, CALIFORNIA 94954
                           TELEPHONE: (707) 794-7700

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE

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

    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.  [ ]

    As of March 13, 2000, 78,999,803 shares of Advanced Fibre Communications,
Inc. common stock were outstanding, and the aggregate market price of shares
held by non-affiliates was approximately $5,414,727,109. (Solely for the purpose
of calculating the preceding amount, all directors and officers of the
registrant are deemed to be affiliates.)

                      DOCUMENTS INCORPORATED BY REFERENCE

    Certain portions of the Annual Report to Stockholders for the year ended
December 31, 1999 and the Proxy Statement issued in connection with the 2000
Annual Meeting of Stockholders to be held on May 25, 2000, are incorporated by
reference in Parts II and III of this report.
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                      ADVANCED FIBRE COMMUNICATIONS, INC.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

                               TABLE OF CONTENTS

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                                  PART I.
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   18
Item 3.   Legal Proceedings...........................................   19
Item 4.   Submission of Matters to a Vote of Security Holders.........   19

                                  PART II.
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................   20
Item 6.   Selected Consolidated Financial Data........................   20
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   20
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   20
Item 8.   Financial Statements and Supplementary Data.................   21
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   21

                                 PART III.
Item 10.  Directors, Executive Officers and Key Employees of the
          Registrant..................................................   22
Item 11.  Executive Compensation......................................   25
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   25
Item 13.  Certain Relationships and Related Transactions..............   25

                                  PART IV.
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   26
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                                    PART I.

     Except for the historical financial information contained herein, the
following discussion may contain "forward-looking statements" that have been
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995. Such statements include declarations regarding the intent, belief,
estimates, current plans, or expectations of Advanced Fibre Communications, Inc.
(AFC) and its management. Any such forward-looking statements are not guarantees
of future performance and involve a number of risks and uncertainties. Actual
results could differ materially from those indicated by such forward-looking
statements. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are
those set forth beginning on page 10 in "Certain Factors That Might Affect
Future Operating Results," as well as those noted in the documents incorporated
herein by reference. Unless required by law, we undertake no obligations to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the risk factors set forth in other reports or documents we file from
time to time with the Securities and Exchange Commission, particularly the
Quarterly Reports on Form 10-Q and any current reports on Form 8-K.

ITEM 1. BUSINESS

OVERVIEW

     AFC designs and manufactures end-to-end distributed multi-service access
solutions for the portion of the telecommunications network between the
carrier's central office and its subscribers, often referred to as the "local
loop." Our Universal Modular Carrier 1000(TM) (UMC1000) is a global product
family consisting of a variety of multi-service access platforms with integrated
optics and intelligent customer premises equipment. The platform utilizes a
hybrid asynchronous transfer mode/time division multiplexing (ATM/TDM)
architecture which provides a variety of loop interfaces for narrowband analog
and digital services including plain old telephone service (POTS), integrated
services digital network (ISDN), 1.544/2.048 million bits per second
point-to-point dedicated digital circuit (T-1/E-1), high bit rate digital
subscriber line (HDSL/HDSL2), and asymmetric digital subscriber line (ADSL)
services. This platform also enables the delivery of broadband digital
subscriber line (DSL) technologies including discrete multitone (G.DMT), ADSL,
G.Lite, HDSL, HDSL2, symmetrical digital subscriber line (SDSL), and very high
data rate digital subscriber line (VDSL) (collectively referred to as "xDSL")
services to end users not served directly from a central office. These services
are supported over various feeder transmission technologies including copper,
fiber, and wireless. We also design and manufacture environmentally hardened
outside plant cabinets and technology ranging from 48 to 2,000 lines, as well as
indoor cabinets ranging from 48 to 480 lines. We believe we were the first
vendor to ship ADSL modules that integrate ADSL circuits, POTS circuits, and
splitters onto a single ADSL x+y(TM) line card for environmentally hardened
multi-service access systems.

     Telephone companies, cable TV operators, wireless network providers and
other communications service providers are building the infrastructure required
to offer high-speed Internet access, data, video, telephony, and other
interactive multimedia services to residential and business customers. The last
mile, or local loop, of the communications network has been forecasted to be the
fastest growing area for future communications equipment spending by
communications service providers. We develop, market, and support products that
enable telecommunications companies and other service providers to connect
subscribers to the central office switch for voice and data communications.

     We have deployed more than 3 million POTS/POTS equivalent access lines and
over 4.5 million DS0 equivalents in over 25 countries worldwide. DS0 is a
worldwide standard speed of 64,000 bps for digitizing voice conversation using
pulse code modulation. In the United States, Sprint, WinStar, and SBC, among
others, deploy the UMC1000 product family. The UMC1000 product family has also
been deployed in South Africa, France, Canada, Venezuela, Mexico, Brazil,
Panama, the Caribbean, China, Hong Kong, and Japan, among other countries. The
UMC1000 product family is distributed and serviced through a direct sales force,
and to a lesser extent distributors, in the United States, and through direct
sales, distributors and sales representatives in international markets. This
multiple-channel distribution approach allows customers to

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select the channel that best addresses their specific needs and provides AFC
with broad coverage of global markets.

     AFC was incorporated in California in May 1992 and reincorporated in
Delaware in September 1995. We completed an initial public offering on October
1, 1996 and a secondary offering on February 12, 1997. Our principal executive
offices are located at One Willow Brook Court, Petaluma, California 94954, and
the telephone number at that address is (707) 794-7700. We can also be reached
through our world wide web site at http://www.afc.com. Information on our
website is not part of this report.

     We operate on a 13-week fiscal quarter, comprised of four, four and five
week months ending on the last Saturday of the last week of the five-week month.
For presentation purposes only, the first three fiscal quarters are shown as
ending on March 31, June 30, and September 30, and the fourth fiscal quarter and
fiscal year are shown as ending on December 31. As used in this report, 1999,
1998, and 1997 refer to the fiscal years ending December 31, 1999, 1998 and
1997, respectively, unless the context indicates otherwise.

INDUSTRY BACKGROUND

     Over the past twenty years, the telecommunications industry has experienced
significant advances both technologically and architecturally. These changes
have been prompted by the demand for new and expanded services, increased
competition among telecom providers, and the need to leverage existing networks
and reduce operating costs.

     The Telecommunications Act of 1996 opened the telecom markets to new
entrants and created an environment in which telecom providers began offering
expanded services. Growth in the Internet, electronic commerce, and
telecommuting increased pressure on telecom providers to supply a broader range
of voice and data services over faster networks. Today, over 7,500 registered
Internet service providers (ISPs) in the U.S. have helped drive the demand for
faster transmission and higher broadband capacity. Networks are increasingly
required to transmit large volumes of data and video for communicating
information, conducting business, and delivering entertainment.

     In addition, both public and private network customers are requesting the
convergence of voice, Internet/ data and video traffic into integrated
multimedia services transmitted over one network. These demands have prompted
the development and use of broadband networks, which feature the improved
reliability and increased speed of transmission generally required for data and
video service over the network.

     Specifically, the industry term "broadband" refers to all transmission
speeds of T-1 and higher. Growth in broadband network applications has resulted
in increased infrastructure investment by network operators in order to expand
network capacity and provide new applications and services to meet users' needs.
However, the broadband capacity of the access network has not kept pace with the
growth in broadband network applications, particularly in the local loop portion
between the central office and the subscriber. For the most part, standard
analog modems have reached their data-carrying capacity in the existing local
loop network and telecom providers are seeking solutions to ease the congestion
in this portion of the network.

E.VOLVING ACCESS SOLUTIONS

     We use the term "e.volving" to describe the evolutionary process occurring
in today's networks and the need to adapt to the capabilities and requirements
of tomorrow's networks.

     The UMC1000 product family provides both narrowband and broadband services
to customers. In 1996, in response to the predicted growth in demand for
high-speed Internet access and other broadband services, we engineered a next
generation digital loop carrier with a chassis equipped with a three-bus
backplane architecture consisting of a TDM bus, a 520 Mbps ATM high speed cell
bus, and a 5.3 Gbps synchronous optical network/synchronous digital hierarchy
bus (SONET/SDH). This system began shipping in the first quarter of 1997.

     This hybrid voice and data architecture allows the UMC1000 product family
to transition between TDM, Frame Relay, and ATM networks. We believe the system
is economically scalable up to 2,000 lines and can

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transition from a narrowband to broadband access system. Because of this
flexibility, the UMC1000 product family offers a cost-effective multi-access
service solution with a wide variety of features and advanced services that can
be added or changed as a customer's network grows.

     We have invested extensive engineering resources in the development of
custom ASICs, such as the narrowband gate array and broadband gate array. We
have finalized the design and testing of the Cellennia(TM) Cell Bus Gate Array.
This custom ASIC consists of over 1.5 million gates and is the largest ASIC AFC
has ever designed. Cellennia is the key technology that activates the high-speed
cell bus, providing a fully distributed broadband architecture. This distributed
broadband architecture allows AFC to continue to offer its "pay as you grow"
philosophy into the deployment of broadband services. Cellennia allows traffic
to move smoothly between the TDM domain and the ATM Cell domain, and integrates
ATM/TDM internetworking, cell switching, cell bus arbitration, cell mapping, and
baseline quality of service onto a single chip. The integration of these
functions substantially reduces power consumption, and we anticipate will cut
the cost by more than 50% over that of a discrete chip design.

EXPANDING PRODUCT PORTFOLIO

     Our product platform consists of a wide range of products:

     THE UMC1000 MULTI-SERVICE ACCESS PLATFORM

     The UMC1000 product family consists of the UMC1000 120-line unit and the
UMC1048 48-line unit. Both units can be installed in a variety of network
configurations to support the varying geographic distribution of subscriber
bases. The units can be linked together to form a range of larger line systems
up to 2,000 lines. Both units provide narrowband and broadband services in a
single platform, from POTS to xDSL over copper wire, fiber optic cable or
wireless transport media.

     OUTSIDE PLANT CABINETS

     For remote applications requiring an outdoor housing, we offer a wide
variety of cabinets to provide the most cost-effective solution for each
application. From 48 to 2,000 lines, our cabinets incorporate an integrated
platform to save space and power. All outdoor cabinets are environmentally
controlled, easy to install, and fully compatible with the UMC1000 platform and
its feature set.

     INDOOR CABINETS

     Universities, hospitals, banks, ISPs, and business centers require POTS and
high speed data services such as xDSL, fractional or full T-1/E-1, and ISDN. In
order to reduce cost, telecommunications companies can deliver these services
from low-cost, secure indoor cabinets that support rapid installation in
stairwells, closets, or basements, occupying minimal valuable floor space. Our
indoor cabinets meet these needs with 48 to 480 lines, helping
telecommunications companies minimize their capital outlay while extending new
and existing fiber and copper plant.

     EMS1000(TM) ELEMENT MANAGEMENT SYSTEM

     The convergence of voice and data communications, and the
Telecommunications Act of 1996, have focused the telecommunications environment
on advanced services that provide reliable, high-performance communications
networks. Providers now need element management system (EMS) solutions that
integrate seamlessly into the various network management systems and operation
support systems (OSS) of yesterday, today and tomorrow. Our EMS is a valuable
element of the UMC1000 product line, which already provides a local craft user
interface and support for legacy Telcordia or industry standard OSSs via a
simple network management protocol. The EMS provides a centralized graphic user
interface for point-and-click UMC1000 network management. The EMS's flexible
telecommunications management network architecture, centralized management
capabilities, and customized applications integrate with external network
management systems to greatly enhance the service provider's ability to manage
UMC1000 networks.

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     INTEGRATED ADSL

     In 1999, we introduced the ADSL x+y family of ADSL cards that covers a wide
range of integrated ADSL-plus-POTS line cards. This family will include an
International Telecommunications Union-compliant ADSL G.Lite version in 2000.
With a patent pending for our integrated ADSL technology, the ADSL x+y product
portfolio is designed for cost effective, widespread deployment of high-speed
data services with optional derived voice for residential and business markets.
The ATM-enabled ADSL x+y product family of line cards offers a combination of
"x" ADSL circuits and optional "y" life-line POTS circuits with central office
band splitters integrated on single line cards that plug into the UMC1000
multi-service access platform. The new G.Lite, ADSL 6+6, and ATM based ADSL 2+6
card expand our product family from the original full-rate ADSL 2+6.

     EMAX(TM) -- EQUIPMENT MAXIMIZATION SYSTEM

     In September 1999, we announced EMAX, a product designed for revitalizing
existing outside plant housings with higher density and more advanced services
capability for third-party housing equipment. The self-contained EMAX kit fits
into most legacy digital loop carrier (DLC) cabinets, eliminating the need for
additional right-of-way, easements, and permits. Outside plant labor, such as
engineering, construction, equipment installation, and splicing, is minimized by
re-using the existing network infrastructure. EMAX can be installed in as little
as four hours, and at a fraction of the cost of the original first generation
DLC system. EMAX can easily fit into the space of a typical non-AFC DLC channel
bank. EMAX increases the capacity and density of the legacy infrastructure,
often more than doubling the capacity of the cabinet and offering the same range
of narrowband and broadband services available in any UMC1000 system. This added
density enables carriers to meet demand for second and third line POTS services
in areas where standard twisted copper pair phones lines are exhausted.

     CNX1024(TM) -- CURBSIDE NETWORK ACCESS SYSTEM AND
FIBREMAX1440(TM) -- HYBRID FIBRE/POWER NODE

     Also in September 1999, we introduced the Curbside Network Access System
CNX1024 and the FibreMAX1440 Hybrid Fibre/PowerNode, for a full end-to-end
fiber-to-the-curb (FTTC) system with head-end FTTC powering and fiber
distribution node. This system allows carriers to provide On-Demand Multi-
Band(TM), such as advanced broadband services, closer to the edge of the network
and closer to the customer. The CNX1024 system utilizes proven UMC1000
multi-service technology, enabling carriers to cost-effectively add
revenue-generating services.

     ONX1012(TM) -- OPTICAL NETWORK ACCESS SYSTEM AND OCX103(TM) -- OPTICAL
CUSTOMER ACCESS SYSTEM

     In November 1999, we introduced the ONX1012 Optical Network Access System
and the OCX103 Optical Customer Access System. These products are packet-aware
SONET/SDH add-drop optical systems that support TDM, packet, and cell services,
and are targeted to deliver high-value services to business subscribers. The
ONX1012 creates a fully integrated optical access solution that can improve the
economics for carrier networks, saving up to 75% in overall network costs.
ONX1012 can deliver services from TDM private line to ATM, to transparent local
area network service, and broadband Internet services. The OCX103 resides at the
customer premise, connecting the subscriber's voice and data to ONX1012 nodes or
to any other ATM-compliant network element. The OCX103 provides the customer
with familiar data/telephony interfaces, such as T-1/E-1, and Ethernet, and also
adds embedded software that lets carriers quickly set up value-added voice and
data services.

INDUSTRY ALLIANCES

     We seek to enhance our products and technology by forming strategic
alliances with other technology leaders for mutual product leverage and
integration with the UMC1000 system. In 1999, we formed a strategic alliance
with Atmosphere Networks, a leader in packet-aware optical transmission
networks. The agreement includes joint development and interoperability, and
enlists Atmosphere Networks to provide next-generation ATM-based SONET/SDH
solutions to further expand AFC's end-to-end access product portfolio. In

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February 2000, we signed an agreement with Fujitsu Telecommunications Europe
Ltd. that will incorporate our next generation digital loop carrier products
into Fujitsu's multi-service access portfolio with both parties contributing
expertise to develop broadband solutions for Europe.

     We have product and technology alliances with ADTRAN, Inc. and PairGain
Technologies, Inc. to collaborate on high speed digital subscriber line
solutions. We also have a joint marketing agreement with VINA Technologies which
combines VINA's Multiservice T-1 Integrator(R) and the UMC1000 with a GR-303
interface, integrating voice and data traffic into a single T-1 line. We have
entered into alliances with 3Com Corporation, Aware, Inc., Cayman Systems,
Centillium Technology Corporation, Efficient Networks, Inc., and Redback
Networks, Inc., to enable end-to-end broadband/ADSL network solutions for our
customers.

     In 1999, we continued our strategic alliances with Sourcenet Corporation,
which has enlisted Efficient Networks, Inc., Minerva Systems, Newbridge
Networks, nCUBE, and Stellar One Corporation to develop and produce a complete
end-to-end advanced telecommunications services solution called On Demand
Network(TM) (ODN). ODN uses ATM packet switching over DSL to provide high speed
"always on" Internet access, data transport, true video on demand, multichannel
broadcast video, pay per view, and voice service over a single copper pair
connection to the home. ODN is compatible with existing telephones, televisions,
and personal computers, and the service is affordable from a total cost of
ownership perspective.

MARKETS AND CUSTOMERS

     In recent years, traditional voice services in the U.S. and Canada have
grown at approximately 3% per year, with two-thirds of subscribers served
directly from telephone central offices. Remote access devices, such as remote
switching units or DLCs, serve the remaining one-third of the subscriber market.
However, the proportion of subscribers served by remote carrier systems is
growing rapidly, and is expected to reach 50% by mid-2001.

     An estimated 30 million personal computers are connected to the Internet,
mostly with traditional dial-up modem technology over a TDM network. As the
number of computers connected to the Internet approaches 50 million in North
America, we believe that the limitations associated with a TDM infrastructure
will manifest and severely limit the growth and functionality of the network.
Growing market demand for high bandwidth services is forcing telecom providers
to reevaluate their network planning models and create new ones. Network
planners and engineers responsible for this emerging network face a complex
problem: how to effectively implement a network that optimizes diverse services
today such as voice, video, and data through overlay networks and discrete
network elements, while maintaining the design requirements for tomorrow's
network.

     The solution from AFC's perspective is an integrated multi-service access
platform that provides today's foundation for multi-service deployment, with an
evolutionary path to networks of the future.

     Our products are sold in the U.S. and international marketplaces to a
customer base that includes regional Bell operating companies (RBOCs), national
local exchange carriers (NLECs), competitive local exchange carriers (CLECs),
independent operating companies (IOCs), international telephone companies,
alternative carriers, system integrators and original equipment manufacturers
(OEMs). Historically, the largest revenue-producing segments of our customer
base have been the NLECs, IOCs, CLECs, and international telephone companies. In
1999, we sold our products to a wider variety of customer types and we plan to
continue to diversify our customer base among the market segments described
above. During 1999, we derived a lower percentage of our revenues from
international markets. However, we are currently attempting to expand our
presence in international markets and we are focusing our efforts on operators
who are making investments in broadband access infrastructures. Deregulation and
privatization of international incumbent telecommunications companies are
prompting service providers to upgrade and expand existing facilities to improve
their positions in an increasingly competitive marketplace. Simultaneously,
these telecommunications companies are installing technology to enable future
advanced services.

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     During 1999, WinStar Communications, Inc. (WinStar) accounted for 15.7% of
our total revenues and North Supply Company, a subsidiary of Sprint, accounted
for 11.9%. In 1998, WinStar accounted for 11.2% of our total revenues, and
Integrators of System Technology (Pty) Ltd of South Africa accounted for 10.4%.
For 1997, GTE accounted for 19.2% of our total revenues. U.S. revenues,
including royalties, represented 89.3%, 73.8%, and 73.5% of total revenues in
1999, 1998, and 1997, respectively. International revenues, including royalties,
declined to 10.7% in 1999 as compared with 26.2% in 1998 and 26.5% in 1997.

BACKLOG

     At December 31, 1999 and 1998, backlogs were approximately $35.3 million
and $10.8 million, respectively. All of the December 31, 1999 backlog is
expected to be shipped in 2000. We consider backlog to be an indicator, but not
the sole predictor, of future sales.

SALES, MARKETING, AND CUSTOMER SUPPORT

     Our products are marketed worldwide directly to telecommunications
companies and indirectly through original equipment manufacturers, distributors,
and sales representatives.

     Our U.S. sales group conducts sales activities from our corporate
headquarters, regional sales offices in Kansas and Illinois, and throughout the
U.S., including California, Colorado, Texas, Virginia, North Carolina, and
Minnesota, among others. Our U.S. sales personnel are dedicated to specific
customer accounts, segmented by our U.S. customer base. In addition to direct
calls on telecommunications companies, sales to customers often involve
marketing through consulting engineers who are retained by independent
telecommunications companies for engineering, specifications and installation
services. We host an annual technology conference for telecommunication
engineering consultants, consisting of specific product training as well as more
generic technology training in areas such as ADSL, broadband, and multi-service
access. Our U.S. sales group consists of approximately 45 direct salespeople,
technical, engineering, and support personnel located throughout the U.S.

     Our international sales channels include both direct sales to end-user
clients and indirect sales through global regional and country OEMs,
integrators, distributors and agents. Our international sales group consists of
approximately 21 direct salespeople, technical, engineering, and support
personnel located in the U.S., Canada, the United Kingdom, Switzerland, Spain,
France, Australia, Hong Kong, and China.

     The U.S. and international sales organizations receive support from our
product marketing organization for product commercialization, advertising and
marketing communications. Our product marketing organization consists of
approximately 54 employees and is closely aligned with our customer market base
to assess, capture, and deliver technical value propositions, product strategy
applications, and technical marketing collateral.

     We maintain a customer support organization of approximately 85 employees
providing our customers with high-quality technical and administrative product
support. In addition to providing service during our products' standard 24-month
warranty period, our customer support department provides post-sales technical
support, technical and operational training to customers, and technical
pre-sales assistance to AFC's sales representatives and distributors. In
addition to our own field technical service engineers, we also rely on various
third party organizations to provide post-sales support to North American
customers. We provide international customer support directly or through our
authorized distributors. Training courses and materials are made available to
customers either through student training or train-the-trainer programs.

RESEARCH AND DEVELOPMENT

     Our research and development efforts are focused on developing local loop
products with advanced features for global telecommunications markets. The
UMC1000 is designed as a modular software and hardware platform that can be
configured and adapted to particular customer requirements. Development efforts
include extensive attention to ease of installation and use by the customer.
Research and development personnel work closely with sales and marketing
personnel to ensure development efforts are targeted to

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customer needs. Recent development efforts have focused on enhancements to the
UMC1000 product family, such as new fiber-to-the-curb capability, ATM/ADSL
service cards, ATM broadband infrastructure, and larger line size products. For
international markets, efforts have been focused on the V5.1/V5.2 switch
interfaces, element management system, and numerous country-specific
customizations.

     Our industry is characterized by rapidly changing technological and market
conditions which may shorten product life cycles. Our future competitive
position depends not only upon successful production and sales of the UMC1000
product family, but also upon our ability to develop and produce, on a timely
basis, new features and services to meet existing and anticipated industry
demands. We are currently engaged in developing several new features for the
UMC1000 product family. We have also reassessed our internal processes for
developing technology, and we have implemented new procedures for bringing new
products to market. During the product development process, we invest
substantial resources in products that often require extensive field testing and
evaluation before their introduction to the market. We have invested extensive
engineering resources in the development of the Cellennia Cell Bus Gate Array,
and custom ASICs, such as the narrow band gate array and the wide band gate
array.

     Research and development costs charged to expense were $47.5 million in
1999, $41.0 million in 1998, and $25.7 million in 1997. As a percentage of total
revenues, research and development costs represented 16.3% in 1999, 13.1% in
1998, and 9.6% in 1997. We consider our research and development efforts vital
to our future success and we plan to continue to support the development of new
products, features and product cost reductions. We have research and development
offices in Petaluma, California; Buffalo Grove, Illinois; and Miramar, Florida.
As of December 31, 1999, the research and development staff consisted of 249
employees.

MANUFACTURING

     Manufacturing, system integration, and testing operations are performed at
our headquarters in Petaluma, California. Manufacturing operations consist
primarily of final product assembly and testing. Quality is monitored at each
stage of the production and supply process, including the selection of component
vendors, receiving, assembly, final testing, packaging, and shipping.
Functional, environmental, and systems testing and other quality
assurance-related activities are performed on the subassemblies incorporated
into the UMC1000 product family.

     We rely on a limited number of vendors to manufacture subassemblies to
strict specifications for use in our products. In particular, we rely on:

     - Flextronics International Ltd. and Solectron International USA, Inc. to
       manufacture printed circuit board assemblies (PCBA)

     - Siemens Microelectronics, Inc. for PCBA components

     - Paragon Electronic Systems, Inc. and Tyco Printed Circuit Group Inc. to
       manufacture backplanes and channel bank assemblies

     - General Cable Corporation for protector panel subassemblies

     - CMOR Manufacturing and Wilco Wire Technology, Inc. for cable and wire
       harnesses and various turnkey assemblies

     - American Microsystems, Inc. and Texas Instruments for ASICs

     - Hendry Telephone Products for fuse panels and racks

     - Powersafe Standby Batteries Inc. for battery systems

     - LeeMah Electronics Inc. for fully integrated cabinets

     - PairGain Technologies Inc. for custom enclosures and boards

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     - Sonoma Metal Products, Inc., Cowden Metal San Jose, Inc., Mayville Metal
       Products, and EMAR Inc. to manufacture the external housing cabinets

     - Advanced Digital Graphics, Inc. for system documentation

     Certain components used in the UMC1000 product family are only available
from a single source or limited number of vendors. Some of our sole source
vendors are companies which, from time to time, allocate parts to
telecommunications equipment manufacturers due to market demand for components
and equipment. Many of our competitors are much larger and may be able to obtain
priority allocations from these shared vendors, resulting in limited or
unreliable sources of supply for these components. See Part I, Item 1 --
"Certain Factors That Might Affect Future Operating Results" as it pertains to
these matters on page 16 of this Annual Report on Form 10-K.

COMPETITION

     Our competitors range from small companies, both U.S. and international, to
large multinational corporations. Principal competitors include: ADC
Telecommunications, Inc., Cisco Systems, Inc., Compagnie Financiere Alcatel,
Lucent Technologies, Inc., Marconi Communications, Inc., Next Level
Communications, Inc., Northern Telecom Ltd., and Siemens AG.

     Many of these competitors have more extensive financial, marketing, and
technical resources than we do and enjoy superior name recognition in the
market.

     Marconi Communications, Inc. (Marconi) is a competitor in the U.S. market,
but they will also serve as a distributor of our products in certain
international markets starting in 2000. As a result of a settlement and
distribution agreement reached in February 2000, Marconi entered into a minimum
purchase agreement for the UMC1000 product family and will act as a distributor
in specific international markets.

     In addition, pursuant to a settlement agreement and related agreements
entered into with the Industrial Technology Research Institute, certain of its
member companies have been granted certain rights to manufacture and sell the
European Telecommunications Standards Institute (ETSI) version of the narrowband
UMC1000 outside of North America. These companies currently compete with us in
international markets, primarily in China. Upon termination of certain
restrictions set forth in such agreements, in January 2005, such companies will
have a worldwide, non-exclusive, royalty-free, irrevocable license to use a
certain older version of narrowband UMC1000 technology and will be able to
compete with us worldwide at such time.

     We believe rapid technological change, continuing regulatory change and
industry consolidation will continue to cause rapid evolution in the competitive
environment of the telecommunications equipment market, the full scope and
nature of which is difficult to predict. Moreover, we believe that technological
and regulatory change will continue to attract new entrants to the market in
which we compete.

TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS

     We have made investments in two start-up ventures specializing in
telecommunication technologies, Cerent Corporation and Turin Networks. On
November 1, 1999, Cerent was acquired by Cisco Systems, Inc. (Cisco) and our
investment was converted into approximately 5.3 million shares of Cisco common
stock, resulting in a non-operating gain of approximately $379.3 million. We
recorded an unrealized gain of $166.6 million in our Cisco stock at December 31,
1999 for the change in fair value between November 1 and December 31, 1999. In
February 2000, we entered into a hedging transaction, structured as a costless
collar agreement (collar) to minimize the impact of potential adverse market
risk on the Cisco stock we own. The collar covers approximately 5.0 million
shares with a term of approximately three years. The collar limits our exposure
to, and benefits from, price fluctuations in the underlying Cisco stock. It
provides us with a floor value of approximately $650 million for the hedged
shares while allowing us to participate in up to approximately $350 million of
any further appreciation in the shares above the floor value. We recorded the
collar at its estimated fair market value. We account for the collar as a hedge,
and changes in the value of the collar are anticipated to be largely offset by
changes in the value of the underlying stock which is also marked-

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to-market through accumulated other comprehensive income in our balance sheet.
As part of the collar, we will be able to borrow against the value of a portion
of the hedged stock.

COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS

     The UMC1000 product family must comply with a large number of voice and
data regulations and standards, which vary between U.S. and international
markets, and may vary by specific international markets. Standards setting and
compliance verification in the U.S. are determined by the Federal Communications
Commission (FCC), Underwriters Laboratories, Quality Management Institute (QMI),
Telcordia Technologies, Inc. (Telcordia), other independent third party testing
organizations, and by independent telecommunications companies. In international
markets, our products must comply with recommendations issued by Industry
Canada, the International Telecommunications Union, and individual regional
carriers' network operating system requirements and specifications. In addition,
our product must comply with standards issued by ETSI and implemented and
enforced by the telecommunications regulatory authorities of each nation.
Standards for new services continue to evolve, and we will be required to modify
the UMC1000 or develop and support new versions to meet these standards.

     Telcordia testing on the UMC1000 product family is often required to ensure
interoperability with various standards of operations, administration,
maintenance and provisioning systems. Telcordia testing requires significant
investments in time and money to achieve compliance. Some UMC1000 product family
features must pass Telcordia testing prior to field release. See Part I, Item
1 -- "Certain Factors That Might Affect Future Operating Results" as it pertains
to these matters, beginning on page 17 of this Annual Report on Form 10-K.

     We have successfully completed the Telcordia Operations Systems
Modifications for the Integration of Network Elements process on LFACS, TIRKS,
SWITCH, and NMA interoperability. LFACS and TIRKS are OSSs which allow RBOCs'
operations systems to identify the UMC1000's bandwidth and equipment type and
capabilities. SWITCH is an OSS designed to inventory and assign
telecommunications equipment. NMA adds the ability to retrieve UMC1000 alarms
through the RBOCs' operations systems and to generate trouble tickets online.
Switch compliance testing has been completed on GR-303 with Lucent Technologies
on the Lucent 5ESS switch, with Northern Telecom on the DMS-100 switch and with
Siemens on the EWSD switch. The UMC1000 is currently undergoing testing with
Telcordia for integration with OPS/INE allowing provisioning through Telcordia
operating systems.

     In 1997, Underwriters Laboratories officially registered AFC as
ANSI/ISO/ASQC Q9001-1994 (ISO) compliant which signifies a standard of quality
in design, development, production, installation and servicing. In 1998, we
transitioned to QMI as our ISO 9000 registrar. We continue to maintain ISO
certification. The ISO standard consists of all elements defining a quality
system, aimed primarily at achieving customer satisfaction by preventing
nonconformity at all stages, from design through servicing. We are currently
working to achieve compliance and subsequent certification to TL9000, a quality
standard designed specifically for the telecommunications industry.

     In 1996, the U.S. Congress passed regulations that affect
telecommunications services, including changes to pricing, access by competitive
vendors and many other broad changes to the data and telecommunications networks
and services. These changes have had a major impact on the pricing of existing
services and have affected the deployment of future services. These risks are
discussed in Part I, Item 1 -- "Certain Factors That Might Affect Future
Operating Results" beginning on page 10 of this Annual Report on Form 10-K.

ENVIRONMENTAL MATTERS

     Our operations and manufacturing processes are subject to federal, state,
local and foreign environmental protection laws and regulations. These laws and
regulations relate to the use, handling, storage, discharge and disposal of
certain hazardous materials and wastes, the pre-treatment and discharge of
process waste waters and the control of process air pollutants. We believe that
we are in compliance in all material respects with applicable environmental
regulations.

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     If those laws and regulations become more stringent over time, we may not
be able to comply in a timely manner, or comply at all. Compliance with new laws
and regulations could create significant compliance expenses, result in
production suspension and delay, restrict expansion at present locations, and
require the acquisition of costly equipment. Non-compliance with laws and
regulations could result in penalties and suspension of operations.

PROPRIETARY RIGHTS AND LICENSES

     We attempt to protect our technology through a combination of copyrights,
trade secret laws, contractual obligations and patents. No patents are currently
held for the UMC1000 product family, but four patent applications are pending.
There can be no assurance that our intellectual property protection measures
will be sufficient to prevent misappropriation of our technology. See Part I,
Item 1 -- "Certain Factors That Might Affect Future Operating Results" as it
pertains to this matter on page 15 of this Annual Report on Form 10-K. The laws
of many foreign countries do not protect our intellectual property rights to the
same extent as the laws of the U.S. See Part I, Item 3 -- "Legal Proceedings" as
it pertains to this matter on page 19 of this Annual Report on Form 10-K.

     Frequent litigation, based on allegations of patent and other intellectual
property infringement, has resulted from the telecommunications industry's
dependence on proprietary technology. In February 2000, we settled litigation
with Marconi under which we claimed trade secret misappropriation, tortious
interference with contract, and related claims against RELTEC Corporation, which
was acquired by Marconi. This settlement involves Marconi paying a $32.75
million cash payment to us and entering into a distribution agreement for the
UMC1000 product family. In 1998, we settled litigation with the Industrial
Technology Research Institute and its sub-licensee member companies, and others,
involving breach of a prior agreement, trade secret misappropriation, unfair
competition, and related claims. This settlement involved our granting a limited
license to certain of our proprietary technology. Also in 1998, we settled
litigation with Acer Netxus, Inc. enjoining them from developing, manufacturing,
and selling any device utilizing or deriving from our UMC1000 technology. In
1996, we settled litigation with DSC Communications Corporation (DSC) under
which DSC had claimed proprietary rights in the UMC1000 technology. In June
1999, we settled litigation with Alcatel USA, Inc. (formerly DSC) under a
separate proprietary rights claims against our UMC1000 technology.

EMPLOYEES

     As of December 31, 1999, we employed 722 people. None of our employees are
covered by collective bargaining agreements, and we have never experienced a
work stoppage, strike, or labor dispute. We believe relations with our employees
are good.

CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS

     In addition to the other information in this Annual Report on Form 10-K,
the following are important factors that should be considered in evaluating our
business.

     Potential Fluctuations in Future Operating Results and Seasonality. Our
operating results have been, and will continue to be, affected by a wide variety
of factors, some of which are outside of our control, that could, among other
things, lower revenues, increase operating expenses, and lower net income. These
factors include:

     - U.S. and international sales mix

     - Customer mix

     - Product feature component mix

     - Timing and size of orders which are received and can be shipped in a
       quarter

     - Availability of adequate supplies of key components and assemblies

     - Ability to introduce new product features and technologies on a timely
       basis

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<PAGE>   13

     - Timing of new product feature introductions or announcements by us or by
       our competitors

     - Price competition

     - Unit volume

     - Royalty revenue levels

     - Excess or obsolete inventory

     - Adequacy of manufacturing capacity

     - Customers' ability to pay when due

     - Expanded warranty coverage

     We sell the UMC1000 product family primarily to telecommunications
companies installing our equipment as part of their access networks. Additions
to those networks represent complex engineering projects, requiring lengthy
periods from project conceptualization to completion. Our equipment typically
represents only a portion of a given project and, therefore, the timing of
product shipment and revenue recognition is often difficult to forecast. Our
customers normally install a portion of our equipment in outdoor locations.
Shipments of the system can be subject to the effects of seasonality, with fewer
installation projects scheduled for the winter months. The majority of our sales
have been made to telecommunications companies in the U.S., and accordingly, we
believe that over time this seasonality will cause revenues in the quarter ended
March 31 to be lower than revenues in the preceding quarter ended December 31.
In particular, we believe that revenues for the quarter ended March 31, 2000 may
be lower than our revenues in the quarter ended December 31, 1999. In developing
countries, delays and reductions in the planned project deployment can be caused
by additional factors, including currency fluctuations, reductions in capital
availability due to declines in the local economy, priority changes in
governments' budgets, political environment, and delays in receiving government
approval for deployment of the UMC1000 product family in the local loop.

     Expenditures for research and development, sales, general, and
administrative functions are based, in part, on future growth projections and in
the near term are relatively fixed. We may be unable to adjust spending in a
timely manner in response to any unanticipated failure to meet these growth
projections. Accordingly, any significant decline in demand for the UMC1000
product family relative to planned levels could result in, among other things,
higher operating expenses and lower net income in a quarter or subsequent
quarters.

     All of the above factors are difficult to forecast, and these or other
factors could, among other things, reduce revenues, increase operating expenses,
and reduce net income. As a result, we believe that period to period comparisons
are not necessarily meaningful and should not be relied upon as indications of
future performance. There can be no assurance that we will sustain or increase
our profitability in the future.

     We have made an investment in a start-up venture specializing in
telecommunication technologies. This investment is inherently risky, as the
market for the technology or products the company has under development are in
the early stages and may never materialize. We could lose our entire investment
in this company.

     In February 2000, we entered into a hedging transaction structured as a
costless collar agreement to minimize the potential impact of potential adverse
market risk on the Cisco shares we own. We are currently evaluating the
requirements and impact of Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 is effective for us beginning in the first quarter of 2001, and there may be
changes in accounting for hedges under SFAS No. 133 which may affect our income
statement. Refer to Part II, Item 7A -- "Quantitative and Qualitative
Disclosures About Market Risk" as it pertains to this matter on pages 23-25 of
our Annual Report to Stockholders, which information is incorporated by
reference and filed as Exhibit 13.2.

     Fluctuations in our operating results may cause volatility in the price of
our common stock. It is possible that in any given period, revenues or operating
results will be below the expectations of public market analysts

                                       11
<PAGE>   14

and investors. In such event, the market price of our common stock would likely
be materially adversely affected. Due to factors outside our control, there may
be little or no meaningful relationship between the resulting market price of
our common stock and the results of operations. Factors outside of our control,
such as market analysts' published expectations and short traders' activities,
can cause a material fluctuation in our stock price. In addition, the stock
market has demonstrated extreme price and volume fluctuations that have affected
the market price of many technology companies in particular and that have been
unrelated to the operating performance of those companies. The significant
decline in the market price of our common stock in mid-1998 resulted in
stockholder litigation against AFC and various officers and directors. Such
litigation, or future litigation based on fluctuations in our stock price, could
result in substantial litigation costs, and a diversion of management's
attention and resources from our operations. See Part I, Item 3 -- "Legal
Proceedings" as it pertains to this matter on page 19 of this Annual Report on
Form 10-K.

     Customer Concentration. In the year ended December 31, 1999, WinStar
accounted for 15.7% of our total revenues, and Sprint accounted for 11.9%. For
the year ended December 31, 1998, 11.2% of our total revenues were derived from
sales to WinStar and 10.4% to Integrators of System Technology (Pty) Ltd. in
South Africa. No other single customer accounted for 10% or more of total
revenues in either of these periods. Our five largest customers accounted for
46.3% of total revenues in the year ended 1999 and 41.9% in the year ended 1998.
Although our largest customers have varied from period to period, we anticipate
that results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers. This dependence
may increase due to our strategy of securing large accounts. Marconi is our only
customer that has entered into an agreement requiring it to purchase a minimum
amount of product from us. No other customer has a minimum purchase agreement
with us. There can be no assurance that significant customers will continue to
purchase product at current levels, if at all. In the event that a significant
existing customer merges with another company, there can be no assurance that
such customer will continue to purchase the UMC1000 product family. The loss of
one or more significant customers could, among other things, decrease revenues
and net income, and increase our dependency on our remaining significant
customers.

     Delays and Defects in Product Development and Product Feature Releases. We
have experienced delays in completing development and introduction of new
product variations and feature enhancements, and there can be no assurance that
such delays will not continue or recur in the future. We could incur contract
penalties should we fail to meet production and delivery time schedules on
certain orders. There can be no assurance that we will be successful in
developing new product features and releasing products to the market, or that we
will be able to do so before our competitors. The UMC1000 product family
contains a significant amount of complex hardware and software that may contain
undetected or unresolved errors that may become apparent as product features are
introduced, or as new versions are released. Technical difficulties have been
discovered in certain system installations. It is possible that, despite
significant testing, hardware or software errors will be found in the UMC1000
product family after commencement of shipments, resulting in delays or
cancellation of customer orders, payment of contract penalties to customers, or
the loss of market acceptance. Any of these factors could result in, among other
things, decreased revenues, net income, and cash flows.

     Risks Associated with International Markets. A portion of our business is
conducted internationally. Operating in international markets subjects us to
certain risks, including:

     - Political and economic conditions

     - Tariffs or other barriers

     - Longer sales and payment cycles

     - Collection of accounts receivable

     - Staffing and managing international operations

     - Exchange and repatriation controls on foreign earnings

     - Negative tax consequences

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<PAGE>   15

     - Exchange rate fluctuations

     - Changes in regulatory requirements

     International sales constituted 10.7% of our total revenues in the year
ended 1999 and 26.2% in the year ended 1998. International sales have fluctuated
in absolute dollars and as a percentage of revenues and are expected to continue
to fluctuate in future periods. Sales to customers in South Africa, France,
China, Brazil, and Venezuela declined in 1999 compared with 1998. We continue to
experience certain difficulties in international markets, and there can be no
assurance that we can expand our international operations. Failure to meet
revenue projections in the international market could, among other things,
adversely affect consolidated revenues, gross profit, and net income.

     Many international telecommunications companies are owned or strictly
regulated by local authorities. Access to international markets is often
difficult to obtain due to trade barriers and established relationships between
government-owned or controlled telecommunications companies and traditional
indigenous equipment vendors. Many of these companies require extended payment
terms and financing options which increase the risk of nonpayment and may, among
other things, have the effect of increasing our operating expenses, lowering net
income, and decreasing cash flows. We may be required to post bid and
performance bonds for certain customers in international markets. Failure to
meet delivery schedules could also result in the loss of collateral posted for
the bonds or financial penalties, which could, among other things, increase our
operating expenses and lower net income.

     We are working to enter new international markets which demand significant
management attention and financial commitment. Successful expansion of
international operations and sales in certain markets may depend on our ability
to establish and maintain productive strategic relationships. We rely on a
number of third party distributors and sales representatives to market and sell
the UMC1000 product family outside of the U.S. There can be no assurance that
such distributors or sales representatives will provide the support and effort
necessary to service international markets effectively. There can be no
assurance that we will be able to identify suitable parties for joint ventures
or strategic relationships or, even if such parties are identified, that
successful joint ventures or strategic relationships will result. We may be
unable to increase international sales of the UMC1000 product family through
joint ventures or strategic relationships. The failure to do so could
significantly limit our ability to expand international operations and could,
among other things, reduce our revenues, gross profit, and net income.

     Sales activities in foreign countries may subject us to taxation in those
countries. Although we have attempted to minimize our exposure to taxation in
foreign countries, any income or other taxes imposed may increase our overall
effective tax rate and adversely impact our competitiveness in those countries.
In addition, we currently intend that the earnings of our foreign subsidiaries
remain permanently invested in these entities in order to facilitate the
potential expansion of our business. To the extent that these earnings are
actually or deemed repatriated, U.S. and state income taxes would be imposed,
and this could adversely impact our overall effective tax rate, net income, and
cash flows.

     The economies in some Central and Latin American countries have
deteriorated, resulting in the devaluation of currencies in certain of these
countries. These conditions may persist or intensify. These conditions have
contributed to a decline in our international sales. We expect that adverse
economic conditions in foreign countries or foreign currency exchange rates
could result in, among other things, delays or cancellation of customer orders,
decreased revenues, and lower net income.

     Our international sales are primarily U.S. dollar denominated. As a result,
an increase in the value of the dollar relative to foreign currencies could make
our product less competitive in international markets. Refer to Part II, Item
7A -- "Quantitative and Qualitative Disclosures About Market Risk" as set forth
on pages 23-25 of our Annual Report to Stockholders, which information is
incorporated by reference and filed as Exhibit 13.2.

     We must comply with various country-specific regulations and standards to
compete in international markets. Any inability to obtain local regulatory
approval could delay or prevent entrance into international

                                       13
<PAGE>   16

markets, which could result in, among other things, delays or loss of customer
orders, decreased revenues, and lower net income.

     Competition. Many of our competitors have more extensive financial,
marketing and technical resources than AFC and enjoy superior name recognition
in the market. Our primary competitors include: ADC Telecommunications, Inc.,
Cisco Systems, Inc., Compagnie Financiere Alcatel, Lucent Technologies, Inc.,
Marconi Communications, Inc., Next Level Communications, Inc., Northern Telecom
Ltd., and Siemens AG.

     Marconi is a competitor in the U.S. market, but will also serve as a
distributor of our products in the international market starting in 2000. As a
result of a settlement and distribution agreement reached in February 2000,
Marconi entered into a minimum purchase agreement for the UMC1000 product family
line and will act as a distributor in specific international markets.

     As a result of a settlement agreement and related agreements entered into
in 1998 with the Industrial Technology Research Institute, certain of its member
companies have been granted certain rights to manufacture and sell the ETSI
version of the narrowband UMC1000 outside of North America. We currently compete
with such entities in international markets, primarily in China. Upon
termination of certain restrictions set forth in the settlement agreement, those
member companies will gain a worldwide, non-exclusive, royalty-free, irrevocable
license to use a certain version of narrowband UMC1000 technology in January
2005, and will be able to compete with us worldwide.

     We believe rapid technological change, continuing regulatory change and
industry consolidation will continue to cause rapid evolution in the competitive
environment of the telecommunications equipment market, the full scope and
nature of which is difficult to predict. Industry consolidation among our
competitors may provide those companies with price competition leverage and
broader product lines superior to our pricing and present technology. Moreover,
we believe that technological and regulatory change will continue to attract new
entrants to the market in which we compete. There can be no assurance that we
will be able to compete successfully in the future.

     Risk of Failure to Manage Expanding Operations. Historically, we have
experienced a period of growth, which has imposed significant burdens on
management, operations, finance, and other resources. We need to continue to
recruit, train, assimilate, motivate, and retain qualified managers and
employees to manage our operations effectively. Our results of operations could
be adversely affected if revenues do not increase sufficiently to compensate for
any increase in operating expenses and facility obligations resulting from any
expansion. If we fail to effectively manage any growth in our U.S. and
international operations, our business could be disrupted, and we could incur,
among other things, increased operating expenses, lower net income, and
decreases in cash flow.

     There can be no assurance that we will not have excess manufacturing
capacity or that further utilization of our manufacturing and distribution
facility will continue without interruption.

     Our facility obligations and commitments are based in part on anticipated
growth projections, and, in the near-term, are relatively fixed. Based on
existing commitments for additional office space, we may have excess office
space in the future. If we do have excess facilities, we will pursue subleasing
or restructuring our commitments on any excess space. Our operating expenses and
cash flows could be adversely affected if we are unable to, in a timely manner,
restructure our existing commitments or sublease any excess facility space at
rents comparable to our obligations.

     Concentrated Product Line, Uncertainties Associated with New Product
Features and Rapid Technological Change. Substantially all of our revenues are
derived from the UMC1000 product family, and we expect this concentration will
continue in the foreseeable future. Any decrease in the level of sales of, or
the prices for the UMC1000 product family could result in, among other things,
decreased revenues and lower net income. Factors potentially affecting sales
include price competition, introductions or announcements by competitors, a
decline in the demand for the UMC1000 product family, or product obsolescence,
among others.

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<PAGE>   17

     The telecommunications equipment market is characterized by rapidly
changing technology, evolving industry standards, changes in end-user
requirements, and frequent new product introductions and enhancements. The
introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete or unmarketable. For
example, the introduction of new industry digital switch interfaces, such as
GR-303, TR-08, and V5, reduces the amount of equipment required to support each
access line or port. There can be no assurance that technological advances in
the telecommunications industry will not reduce sales of the UMC1000 product
family, diminish market acceptance of the system or render the system obsolete
and possibly result in, among other things, loss of customer orders, decreased
revenues, and lower net income.

     Our success will depend upon our ability to enhance the UMC1000 product
family technology and to develop and introduce, on a timely basis, new products
or new product feature enhancements. Product enhancements must keep pace with
technological developments and emerging industry standards, and address changing
customer requirements in a cost-effective manner. There can be no assurance that
we will be successful in identifying, developing, manufacturing, and marketing
new products or product enhancements that respond to technological change or
evolving industry standards. There can be no assurance that we will overcome
difficulties that could delay or prevent the successful development,
introduction and marketing of these products and enhancements, or that new
products or enhancements will achieve market acceptance. We may be required to
incur substantial costs to modify the UMC1000 product family, develop new
products, and build our infrastructure to accommodate these changes. From time
to time, we or our competitors may announce new products or product
enhancements, services, or technologies that have the potential to replace or
shorten the life cycle of the UMC1000 product family, causing customers to defer
purchasing our equipment.

     Limited Protection of Proprietary Technology; Risk of Third-Party Claims of
Infringement. We attempt to protect our technology through a combination of
copyrights, trade secret laws, contractual obligations, and patents. We do not
presently hold any patents for the UMC1000 product family, and although four
patent applications are pending, they may not result in any issued patents.
These intellectual property protection measures may not be sufficient to prevent
wrongful misappropriation of our technology nor will they prevent competitors
from independently developing technologies that are substantially equivalent or
superior to our technology. The laws of many international countries do not
protect our intellectual property rights to the same extent as the laws of the
U.S. Failure to protect proprietary information could result in, among other
things, loss of our competitive advantage, loss of customer orders, decreased
revenues, and lower net income.

     Like other participants in our industry, we expect that we will be
increasingly subject to infringement claims and other intellectual property
disputes as competition in our market continues to intensify. We have been
subject to several intellectual property disputes in the past.

     From 1998 through January 2000, we pursued trade secret misappropriation
and related claims against RELTEC Corporation, now Marconi Communications, Inc.
The case involved RELTEC's acquisition of AFC's technology through our
Taiwan-based licensee, Vidar-SMS Co., Ltd. The case settled in February 2000,
when Marconi agreed to pay us $32.75 million in cash, and entered into a
distribution agreement for the UMC1000 product family that guarantees AFC
minimum purchases or specified payments over the next three years.

     In 1998, we settled litigation with the Industrial Technology Research
Institute and its sub-licensee member companies, and others, involving breach of
a prior agreement, trade secret misappropriation, unfair competition and related
claims. Under the settlement, we granted a limited license for the use of
certain proprietary technology. In September 1998, we settled litigation with
Acer Netxus, Inc. enjoining them from developing, manufacturing, and selling any
device utilizing or deriving from our UMC1000 technology.

     In 1996, we settled litigation with DSC Communications, Inc. (DSC) under
which DSC had claimed proprietary rights to the UMC1000 technology. In June
1999, we settled litigation with Alcatel USA, Inc. (formerly DSC) under a
separate proprietary rights claim to our UMC1000 technology.

                                       15
<PAGE>   18

     In the future, we may be subject to additional litigation to defend against
claimed infringements of the rights of others or to determine the scope and
validity of the proprietary rights of others. Litigation also may be necessary
to enforce and protect our trade secrets and other intellectual property rights.
Any such litigation could be costly and divert management's attention from
running our operations, either of which could result in, among other things,
increased operating expenses, lower net income, and failure to remain
competitive in a rapidly changing technological environment. Adverse
determinations in such litigation could result in the loss of our proprietary
rights, subject us to significant liabilities, require us to seek licenses from
third parties, or prevent us from manufacturing or selling our products.
Furthermore, there can be no assurance that any necessary licenses will be
available on reasonable terms. Any one of these results could, among other
things, decrease revenues, increase operating expenses, lower net income, and
decrease cash flows.

     Dependence on the Telecommunications Industry. Our customers are
concentrated in the public carrier telecommunications industry and, in the U.S.,
include CLECs, RBOCs, NLECs, and IOCs. Accordingly, our future success depends
upon the capital spending patterns of these customers and the continued demand
by these customers for the UMC1000 product family. Our historical markets have
been the U.S. and international small to mid-line size markets. We are
attempting to expand into larger-line size markets both in the U.S. and
international markets. The UMC1000 product family and any new products we
introduce may not be met with widespread acceptance among the telecommunications
companies and other potential customers. Existing customers and potential
customers may adopt alternative architectures or technologies that are
incompatible with our technology which could result in, among other things,
delays or cancellation of customer orders, decreased revenues, and lower net
income. There can be no assurance that telecommunications companies, foreign
governments or other customers will pursue infrastructure upgrades that will
necessitate the implementation of advanced products such as the UMC1000 product
family. Infrastructure improvements may be delayed or prevented by a variety of
factors including cost, regulatory obstacles, the lack of consumer demand for
advanced telecommunications services and alternative approaches to service
delivery.

     Dependence on Sole Source and Limited Number of Third-Party Manufacturers
and Support Organizations. Certain components used in our products, including
our proprietary ASICs, codec components, certain surface mount technology
components and other components, are only available from a single source or
limited number of vendors. A limited number of vendors manufacture the
subassemblies to our specifications for use in our systems. Some of the sole
source vendors are companies who, from time to time, allocate parts to
telecommunications equipment manufacturers due to market demand for components
and equipment. Many of our competitors are much larger and may be able to obtain
priority allocations from these shared vendors, thereby limiting or making
unreliable the sources of supply for these components. In addition, our current
strategy includes focusing on securing large customer accounts. These customers
may require us to produce and ship large orders within a compressed timeframe.
This may absorb available supplies of components and impair our ability to make
later shipments to others. We have experienced shortages of key components from
time to time in the past, and there can be no assurance that shortages of
components will not occur in the future or will not result in our having to pay
a higher price for components. If sufficient quantities of these or any other
components cannot be obtained, delays or reductions in manufacturing or product
shipments could occur which could result in, among other things, delays or
cancellation of customer orders, lower revenues, gross profit, net income, and
cash flows. In particular, we rely upon:

     - Flextronics International Ltd. and Solectron International USA, Inc. to
       manufacture PCBAs

     - Siemens Microelectronics, Inc. for PCBA components

     - Paragon Electronic Systems, Inc. and Tyco Printed Circuit Group Inc. to
       manufacture backplanes and channel bank assemblies

     - General Cable Corporation for protector panel subassemblies

     - CMOR Manufacturing and Wilco Wire Technology, Inc. for cable and wire
       harnesses and various turnkey assemblies

     - American Microsystems, Inc. and Texas Instruments for ASICs

                                       16
<PAGE>   19

     - Hendry Telephone Products for fuse panels and racks

     - Powersafe Standby Batteries Inc. for battery systems

     - LeeMah Electronics Inc. for fully integrated cabinets

     - PairGain Technologies Inc. for custom enclosures and boards

     - Sonoma Metal Products, Inc., Cowden Metal San Jose, Inc., Mayville Metal
       Products, and EMAR Inc. to manufacture the external housing cabinets

     - Advanced Digital Graphics, Inc. for system documentation

     Our production and shipping schedules could be adversely affected if one or
more of our vendors were to experience financial, operational, production, or
quality assurance difficulties that resulted in a reduction or interruption in
supply to us or otherwise failed to meet our manufacturing requirements. We may
not be able to establish sufficient manufacturing supply from alternative
sources. Current or alternative manufacturers may not be able to meet our future
requirements and such manufacturing services may not continue to be made
available to us at favorable prices, or at all.

     Various third party support organizations provide post-sales support to our
U.S. customers. There can be no assurance that these organizations will be able
to provide the level of customer support demanded by existing or potential
customers.

     Dependence on Key Personnel. Our success depends to a significant extent
upon key technical and management employees. The loss of the services of any of
these key employees could result in, among other things, loss of our competitive
position in a rapidly changing technological environment, which in turn could
lead to decreased revenues, increased operating expenses to locate experienced
replacements, and lower net income. Recently, we have experienced an increase in
our employee turnover rate, including technical and engineering positions.
During the course of 1999, we experienced significant changes in our executive
officers and key employees, including our President and CFO positions.
Competition for highly qualified employees is intense and the process of
locating key technical and management personnel with the required combination of
skills and attributes is often lengthy and expensive. In general, we do not have
employment agreements with, or key person life insurance for, our employees.
There can be no assurance that we will be successful in retaining our existing
key personnel or in attracting and retaining the additional employees we may
require. There can be no assurance as to the ongoing effect of key personnel on
our business, financial condition and results of operations.

     Risks Associated with Pending Litigation. We are a party to certain legal
proceedings as described in Part I, Item 3 -- "Legal Proceedings" beginning on
page 19 of this Annual Report on Form 10-K. We are unable to predict the
ultimate outcome of these proceedings or determine the total expense or possible
loss, if any, that may ultimately be incurred in the resolution of these
proceedings. Regardless of the ultimate outcome, these proceedings could result
in significant diversion of management's time, and significant legal costs which
could result in, among other things, increased operating expenses and lowered
net income, and failure to remain competitive in a rapidly changing
technological environment.

     Compliance with Regulations and Industry Standards. The UMC1000 product
family must comply with a significant number of voice and data regulations and
standards, which vary between U.S. and international markets, and may vary
within specific international markets. Standards for new services continue to
evolve, and we will need to modify our products or develop new versions to meet
these standards. If our systems fail to comply with evolving standards in U.S.
and international markets on a timely basis, our ability to sell our product
would be impaired, and we could experience, among other things, delayed or lost
customer orders, decreased revenues, and lower net income. Standards setting and
compliance verification in the U.S. are determined by the Federal Communications
Commission, Underwriters Laboratories, QMI, Telcordia, other independent third
party testing organizations, and by independent telecommunications companies. In
international markets, our products must comply with recommendations issued by
the Consultative Committee on International Telegraph and Telephony, Industry
Canada, and individual regional carriers' network operating system requirements
and specifications. Our products must also comply with standards issued by the

                                       17
<PAGE>   20

European Telecommunications Standards Institute and implemented and enforced by
the Telecommunications Regulatory Authority of each European nation.

     We need to continue to ensure that the UMC1000 product family is easily
integrated with various network management systems. Telcordia testing on our
products is often required to ensure interoperability with various standards of
operations, administration, maintenance and provisioning systems. Telcordia
testing requires significant investments in time and money to achieve
compliance. Failure to maintain such compliance or to obtain it on new features
released in the future could result in, among other things, delays in or loss of
customer orders, decreased revenues, and lower net income.

     We have maintained compliance with ISO 9001 (ISO) since we were first
certified in 1997. The ISO standard consists of all elements defining a quality
system, aimed primarily at achieving customer satisfaction by preventing
non-conformity at all stages, from design through servicing. There can be no
assurance that we will maintain such certification. The failure to maintain such
certification may preclude selling the UMC1000 product family in certain markets
and could adversely affect our ability to compete with other vendors of
telecommunications equipment.

     Our ability to compete with other telecommunications equipment vendors
could be adversely affected should we fail to maintain interoperability with
other companies or adopt or maintain industry standards in the UMC1000 product
family.

     In 1996, the U.S. Congress passed regulations that affect
telecommunications services, including changes to pricing, access by competitive
vendors and many other broad changes to the data and telecommunications networks
and services. These changes have had a major impact on the pricing of existing
services, and may affect the deployment of future services. These changes have
caused greater consolidation in the telecommunications industry, which in turn
could disrupt existing customer relationships, and could result in, among other
things, delays or loss of customer orders and lower revenues. There can be no
assurance that any future legislative and regulatory changes will not have a
material adverse effect on the demand for the UMC1000 product family.
Uncertainty regarding future policies combined with emerging new competition may
also affect the demand for telecommunications products such as the UMC1000
system.

     Year 2000 Readiness. We did not experience any material disruptions to our
business, results of operations, or the UMC1000 product family as a result of
the transition from 1999 to 2000. We plan to retain our year 2000 (Y2K)
contingency plans in case of any potential Y2K-related events that may arise in
the first half of 2000. We believe we have taken the steps necessary to
understand and resolve Y2K issues; however, failure to adequately address all
known and unknown Y2K readiness issues could result in, among other things,
product shipment delays, unforeseen operating expenses and lower net income. We
tracked external costs incurred to remedy Y2K-affected software, hardware, and
embedded technology. We did not separately track internal costs incurred, such
as payroll costs for employees working on Y2K matters. Expenditures in relation
to Y2K readiness were $73,000.

ITEM 2. PROPERTIES

     We lease four buildings in Petaluma, California where the following
functions reside: administration and principal executive offices, sales,
marketing, product development, manufacturing and distribution. In addition to
our Petaluma headquarters, we lease properties at the following locations:
Buffalo Grove, Illinois (research and development); Itasca, Illinois (sales);
Overland Park, Kansas (sales); Coral Gables, Florida (sales and sales support);
Miramar, Florida (research and development); Shanghai, China (sales support);
Hong Kong (sales); London, England (sales and sales support); and Fribourg,
Switzerland (sales support). These buildings are suitable for our operational
use.

     Our facility obligations and commitments are based in part on anticipated
growth projections, and, in the near-term, are relatively fixed. Based on
existing commitments for additional office space, we will have excess office
space in the near future. We have sublet a portion of the excess office space
and we are actively pursuing subletting additional space that will become
available in the future. Our operating expenses and cash flows

                                       18
<PAGE>   21

could be adversely affected if we are unable to, in a timely manner, restructure
our existing commitments or sublease the excess facility space at rents
comparable to our obligations.

ITEM 3. LEGAL PROCEEDINGS

     Marconi/RELTEC Corporation. In 1997, AFC filed a lawsuit against RELTEC
Corporation, now Marconi Communications, Inc., alleging trade secret
misappropriation, tortious interference with a contract, and related claims. The
case involved RELTEC's acquisition of AFC's technology through our Taiwan-based
licensee, Vidar-SMS Co., Ltd. AFC and Marconi announced a settlement of the case
on February 7, 2000. Related to the settlement, Marconi agreed to pay AFC $32.75
million, and AFC and Marconi entered into a distribution agreement under which
Marconi will distribute the UMC1000 product family in specific countries outside
the U.S. over a three year period, 2000 - 2002. The agreement anticipates that
Marconi will purchase for resale a minimum of $110 million of the UMC1000
product family during the three year period ($30 million in 2000, $40 million in
2001, and $40 million in 2002), and guarantees AFC specified minimum payments if
Marconi's UMC1000 product family purchases do not meet expectations.

     Stockholder Litigation. AFC and various of its current and former officers
and directors are parties to a consolidated lawsuit which purports to be a class
action filed on behalf of certain of our stockholders (excluding the defendants
and parties related to them). The lawsuit alleges that the defendants violated
certain federal securities laws. The plaintiffs filed a consolidated Amended
Complaint on or about January 27, 1999. Defendants' motion to dismiss the
complaint is currently pending before the court. Limited discovery has occurred,
and only limited discovery is expected to occur pending ruling on the motion to
dismiss.

     Based on current information, we believe the suit to be without merit and
intend to defend AFC and its officers and directors vigorously. 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 the opinion of management, resolution of this matter is
not expected to have a material adverse effect on our financial position.
However, 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 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     During the fourth quarter of 1999, no matters were submitted to a vote of
stockholders through the solicitation of proxies or otherwise.

                                       19
<PAGE>   22

                                    PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock is traded on the Nasdaq National Market using the symbol
AFCI. Our common stock price is listed daily in the Wall Street Journal and
other publications under the Nasdaq National Market listing with the
abbreviation AdvFibComm.

     In 1997, we effected a two-for-one stock split and all share, per share and
common stock amounts disclosed have been restated to reflect the effect of this
split.

     The following table lists the high and low closing sales prices of our
common stock as reported by the Nasdaq National Market for each full quarterly
period of the two most recent fiscal years:

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                       FISCAL 1999:                          ------    ------
<S>                                                          <C>       <C>
First Quarter (through March 27)...........................  $13.75    $ 7.38
Second Quarter (through June 26)...........................   15.25      7.09
Third Quarter (through September 25).......................   20.94     13.13
Fourth Quarter (through December 25).......................   44.38     19.00
</TABLE>

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                       FISCAL 1998:                          ------    ------
<S>                                                          <C>       <C>
First Quarter (through March 28)...........................  $40.13    $25.25
Second Quarter (through June 27)...........................   44.50     34.00
Third Quarter (through September 26).......................   41.06      6.00
Fourth Quarter (through December 26).......................   11.88      4.44
</TABLE>

     On March 13, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $80.25 per share. As of December 31, 1999, there were
approximately 427 record holders, or brokerage firms, holding our common stock.

DIVIDEND POLICY

     We have never declared or paid cash dividends on our capital stock. We
currently intend to utilize all of our earnings, if any, for use in our
operations and do not anticipate the payment of cash dividends in the
foreseeable future. In addition, our line of credit agreement requires consent
from the banks prior to payment of dividends.

ISSUANCE OF UNREGISTERED SECURITIES

     None.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The information required by this item is set forth on page 18 of our 1999
Annual Report to Stockholders, which information is incorporated by reference
and filed as Exhibit 13.1.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The information required by this item is set forth on pages 19-23 and 25 of
our 1999 Annual Report to Stockholders, which information is incorporated by
reference and filed as Exhibit 13.2.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this item is set forth on pages 23-25 of our
1999 Annual Report to Stockholders, which information is incorporated by
reference and filed as Exhibit 13.2.

                                       20
<PAGE>   23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is set forth on pages 26-42 of our
1999 Annual Report to Stockholders, which information is incorporated by
reference and filed as Exhibit 13.3.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                       21
<PAGE>   24

                                   PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

     Executive officers are selected annually and serve at the discretion of the
board of directors. No family relationships exist between any of the executive
officers or directors. The following table sets forth certain information with
respect to each person who is an executive officer, key employee or director.

<TABLE>
<CAPTION>
             NAME                AGE                               POSITION
             ----                ---                               --------
<S>                              <C>   <C>
EXECUTIVE OFFICERS
John A. Schofield(3)...........  51    President, Chief Executive Officer and Director
Gregory S. Steele..............  38    Senior Vice President, Chief Operating Officer and acting Vice
                                       President, Operations
Keith E. Pratt.................  37    Vice President, Chief Financial Officer, and Assistant Secretary
Jude S. Radeski................  38    Corporate Controller
Mehmet N. Balos................  44    Vice President, Global Marketing and North American Sales
Jorge A. Valdes................  38    Vice President, Engineering
Robert G. Yates................  57    Vice President, International Sales

KEY EMPLOYEES
Charles C. Geiger..............  35    Vice President, Customer Service
Ron D. Longo...................  38    Vice President, Technical Marketing and Communications
Amy M. Paul....................  31    Vice President, General Counsel and Secretary
Victoria L. Perrault...........  46    Vice President, Administrative Services
Doak K. Smailer................  42    Vice President, Quality

OUTSIDE DIRECTORS
Donald Green(3)................  68    Chairman of the Board
Herbert M. Dwight, Jr.(2)(4)...  69    Director
Ruann F. Ernst(1)(3)(4)........  53    Director
Clifford H. Higgerson(2).......  60    Director
Dan Rasdal(1)(3)...............  66    Director
Alex Sozonoff(1)(2)............  61    Director
</TABLE>

---------------
(1) Member of the Audit Committee

(2) Member of the Compensation Committee

(3) Member of the Nominating Committee

(4) Member of the Governance Committee

     John A. Schofield joined AFC in March 1999 as President and Chief Executive
Officer, and was appointed to the Board of Directors in May 1999. Prior to
joining AFC, Mr. Schofield was employed with ADC Telecommunications, Inc. from
1992 through 1999. He held several positions at ADC, including Senior Vice
President, President of the Integrated Solutions Group, and Managing Director of
Asia Pacific/Latin America. In July 1995, Mr. Schofield joined DSC
Communications Corporation where he held the position of Vice President,
International Sales and Marketing, until his return to ADC in October 1995.

     Gregory S. Steele was named Chief Operating Officer in December 1998 and
was promoted to Senior Vice President in December 1999. From June through
December of 1998, Mr. Steele served as Vice President, Marketing, and from April
1995 through May 1998, he held the position of Vice President, Operations. Mr.
Steele joined AFC in November 1994 and served as the Director of Operations
until his promotion in March 1995. Prior to joining AFC, Mr. Steele held various
positions at DSC Communications

                                       22
<PAGE>   25

Corporation from 1990 to 1994, including Director of Account Marketing and
Senior Manager of Manufacturing.

     Keith E. Pratt was promoted to Vice President, Chief Financial Officer, and
Assistant Secretary in December 1999. Mr. Pratt joined AFC in September 1997 as
Director of Corporate Development and served in this position until his
promotion in 1999. Prior to joining AFC, Mr. Pratt was Director of the Strategy
and Business Development Group with Pacific Telesis from 1995 to 1997. From 1990
through 1994, Mr. Pratt held the position of Senior Associate with Booz, Allen &
Hamilton.

     Jude S. Radeski was promoted to Corporate Controller in December 1999. Mr.
Radeski joined AFC in February 1996 and served as Senior Accounting Manager
until December 1999. Prior to joining AFC, Mr. Radeski held the position of
controller with Truckee-Tahoe Lumber Company from 1992 to 1996.

     Mehmet N. Balos joined AFC in July 1999 as Vice President of Global
Marketing and was appointed to Vice President of North American Sales in
addition to his marketing responsibilities in October 1999. Prior to joining
AFC, Mr. Balos was employed with Ericsson LM Telephone Company from 1997 to 1999
where he was Vice President of Access Marketing, Sales and Services worldwide.
Mr. Balos was General Manager for Pirelli Telecom Systems Group from 1995 to
1997, after heading up Corporate Marketing and Services as Vice President at ADC
Telecommunications, Inc. from 1991 to 1995.

     Jorge A. Valdes has served as Vice President, Engineering since July 1999.
Mr. Valdes joined AFC in March 1998 and served as Director of Engineering in the
Florida development office through July 1999. Prior to joining AFC, Mr. Valdes
served in various management positions with Racal-Datacom from 1990 through
1998, including Engineering Director of Bandwidth Engineering and Access
Engineering as well as Senior Product Marketing Manager.

     Robert G. Yates joined AFC in May 1999 as Vice President, International
Sales. Prior to joining AFC, Mr. Yates was employed with ADC Telecommunications,
Inc., from 1992 through 1999, where he held various positions including Vice
President, Asia Pacific, International Business Development Director and
Managing Director Australia and New Zealand.

     Charles C. Geiger was appointed as the Vice President of Global Customer
Service in July 1999. Mr. Geiger joined AFC in November 1998 as Regional Vice
President of International Operations, where he served until his promotion in
1999. Prior to joining AFC, Mr. Geiger was employed with DSC Communications
Corporation from 1996 through 1998. He held several senior marketing and sales
positions in DSC and was based out of DSC's Denmark and UK facilities. Prior to
1996, Mr. Geiger held several positions in the U.S. and abroad at AT&T Bell
Laboratories and AT&T Network Systems as part of the international engineering,
marketing, and sales functions.

     Ron D. Longo was appointed Vice President of Technical Marketing and
Communications in December 1999. Prior to his promotion, Mr. Longo held the
positions of Director of Global Marketing from February 1999 to December 1999
and Regional Vice President of International Operations from September 1997
through September 1998. Mr. Longo previously held the position of Director of
Worldwide Technical Support and Professional Services at ADTRAN, Inc. from
September 1998 through February 1999. Prior to this, Mr. Longo held various
technical and management positions at ADTRAN, Inc. from May 1994 through
September 1997, and BellSouth Telecommunications from December 1987 through May
1994.

     Amy M. Paul was promoted to Vice President and General Counsel in February
1999. Ms. Paul was named Secretary of the Board in September 1999. Previously,
Ms. Paul served as Director, Contracts and Legal Affairs, from 1995 until 1999.
Prior to joining AFC, Ms. Paul served as an associate in the Business and
Technology Group of Brobeck Phleger & Harrison LLP from 1993 to 1995.

     Victoria L. Perrault was promoted to Vice President of Administrative
Services in December 1999. Ms. Perrault joined AFC in March 1996, as the Human
Resource Manager and was promoted to Director of Human Resources in August 1996.
Prior to joining AFC, Ms. Perrault was the Director of Human Resources for the
Advanced Products Division of Aegon USA from 1993 to 1995.

                                       23
<PAGE>   26

     Doak K. Smailer was promoted to Vice President, Quality in February 2000.
Mr. Smailer joined AFC in November 1998 as Director, Domestic Quality and was
promoted to Director, Quality in May 1999. Prior to joining AFC, Mr. Smailer was
employed with DSC Communications Corporation from 1990 through 1998, where he
held the positions of Manager of Corporate Quality and Director of Corporate
Quality.

     Donald Green is a co-founder of AFC and has served as Chairman of the Board
since 1992. Mr. Green served as Chief Executive Officer from June 1998 to March
1999 and from May 1992 to June 1997. Mr. Green is also a director of TCSI
Corporation, and three private organizations.

     Herbert M. Dwight, Jr. has served as a Director since 1998. Mr. Dwight is
the retired Chairman of the Board of Optical Coating Laboratory, Inc. (OCLI), an
optical coating and specialty ink manufacturer. Mr. Dwight served in this
position from 1991 to February 2000. From 1991 to April 1998, Mr. Dwight also
served as Chief Executive Officer of OCLI and from 1991 to 1997, he served as
President of OCLI. Mr. Dwight has also served as Chairman of the Board of
Vicinity Corporation since October 1999 and as a director of Applied Magnetics,
Inc. and Applied Materials, Inc.

     Ruann F. Ernst has served as a Director since 1998. Ms. Ernst has served as
Chief Executive Officer of Digital Island, Inc., an e-business delivery network,
since June 1998 and has been Chairman of the Board of Digital Island since
December 1999. From June 1998 through December 1999, Ms. Ernst also served as
President of Digital Island. From 1994 to 1998, Ms. Ernst served as General
Manager, Financial Services Business Unit for Hewlett-Packard Company, an
electronics equipment and computer company. Prior to that, Ms. Ernst served in
various management positions at Hewlett-Packard and General Electric. Ms. Ernst
is also a director of Phoenix International Corporation and two private
organizations.

     Clifford H. Higgerson has served as a Director since 1993. Mr. Higgerson
has served as a General Partner of Communications Ventures, a venture capital
firm, since 1987 and a General Partner of Vanguard Venture Partners, a venture
capital firm and a stockholder of AFC, since July 1991. Mr. Higgerson is also a
Director of Digital Island, Inc., Tut Systems, Inc. and twelve private
companies.

     Dan Rasdal has served as a Director since 1993. Mr. Rasdal has served as a
director of Symmetricom, Inc. (Symmetricom), a telecommunications company, since
1985. From 1985 to July 1998, Mr. Rasdal was Chairman of the Board, President,
and Chief Executive Officer of Symmetricom. Mr. Rasdal is also a director of
Celeritek, Inc.

     Alex Sozonoff has been a Director since 1997. Mr. Sozonoff has served as
Vice President of Customer Advocacy for Hewlett-Packard Company, an electronics
equipment and computer company, since 1998. From 1994 to 1998, he was Vice
President of Marketing for Hewlett-Packard.

     Our certificate of incorporation calls for a board of directors composed of
seven directors. The terms of office of the board of directors are divided into
three classes:

     - Clifford H. Higgerson, John Schofield, and Alex Sozonoff are Class I
       Directors, and their terms will expire at the annual meeting of the
       stockholders to be held in 2000.

     - Herbert M. Dwight, Jr. and Ruann F. Ernst are Class II Directors, and
       their terms will expire at the annual meeting of the stockholders to be
       held in 2001.

     - Donald Green and Dan Rasdal are Class III Directors, and their terms will
       expire at the annual meeting of the stockholders to be held in 2002.

     At each annual meeting of stockholders, the newly elected directors' terms
begin on the date of election and qualification and continue for three years
through the third annual meeting following election. Terms may differ in the
case where a director resigns, is removed from office, or until the time when a
successor director is elected and qualified.

     If the need arises to increase the number of directors, additional
directorships will be distributed equally among the three classes so that, as
nearly as possible, each class is equally weighted and represented.

                                       24
<PAGE>   27

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Directors, executive officers, and individuals owning more than ten percent
of our common stock are required to file initial reports of ownership and
changes in ownership with the Securities and Exchange Commission under Section
16(a) of the Securities Exchange Act of 1934, as amended. The Securities and
Exchange Commission regulations also require those persons to provide copies of
all filed Section 16(a) reports to us. We have reviewed the report copies filed
in 1999, and based also on written representations from those persons, we
believe that there was compliance with Section 16(a) filing requirements for
1999, except that Mr. Valdes inadvertently filed certain holdings late on Form
5.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is set forth in our 2000 Proxy
Statement to be filed within 120 days from our fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is set forth in our 2000 Proxy
Statement to be filed within 120 days from our fiscal year end.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is set forth in our 2000 Proxy
Statement to be filed within 120 days from our fiscal year end.

                                       25
<PAGE>   28

                                    PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     The following is a list of the consolidated financial statements and the
financial statement schedules which are included in this Form 10-K or which are
incorporated herein by reference:

     1. FINANCIAL STATEMENTS:

       As of December 31, 1999 and 1998:
            - Consolidated Balance Sheets

       For the Years Ended December 31, 1999, 1998, and 1997:
            - Consolidated Statements of Income
            - Consolidated Statements of Stockholders' Equity and Other
        Comprehensive Income
            - Consolidated Statements of Cash Flows

       Notes to Consolidated Financial Statements

       Independent Auditors' Report

       Quarterly Results of Operations (Unaudited)

     2. FINANCIAL STATEMENT SCHEDULE:

            - Schedule II -- Valuation Accounts

     All other financial statements and financial statement schedules have been
omitted because they are not applicable, or the required information is included
in the consolidated financial statements or notes thereto.

     3(a). EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DOCUMENT DESCRIPTION
-------                       --------------------
<S>       <C>
3.3.1     Fifth Amended and Restated Certificate of Incorporation of
          the Registrant.(3)
3.3.2     Certificate of Designation of Series A Junior Participating
          Preferred Stock.(5)
3.5       Amended and Restated Bylaws of the Registrant.(2)
4.1       Specimen Certificate of Common Stock.(1)
4.3       Certificate of Incorporation of the Registrant (included in
          Exhibit 3.3.1).
4.4       Rights Agreement dated as of May 13, 1998, between the
          Registrant and BankBoston, N.A.(5)
4.5       Amendment to Rights Agreement dated as of October 19, 1998
          between the Registrant and BankBoston, N.A.(7)
10.4.1    Form of Amendment to Warrants and Performance Warrants.(1)
10.5      Warrant Issued in Connection with the Sale of the
          Registrant's Series E Preferred Stock on September 29,
          1995.(1)
10.8      Promissory Note Secured by Pledge Agreement, dated May 31,
          1995 by Donald Green in favor of the Registrant.(1)
10.9      Stock Pledge Agreement, dated June 16, 1995 between the
          Registrant and Donald Green.(1)
10.10     Compensation Agreement, dated March 23, 1999 between the
          Registrant and John A. Schofield.(8)
10.11     Hangzhou Aftek Communication Registrant Ltd. Contract, dated
          June 18, 1994 between Advanced Fibre Technology
          Communication (Hong Kong) Limited and Hangzhou Communication
          Equipment Factory of the MPT., HuaTong Branch.(1)+
</TABLE>

                                       26
<PAGE>   29

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DOCUMENT DESCRIPTION
-------                       --------------------
<S>       <C>
10.15     Redwood Business Park Net Lease, dated June 3, 1996 between
          the Registrant and G & W/ Redwood Associates Joint Venture,
          for the premises located at Buildings 1 & 9 of Willow Brook
          Court.(1)
10.17     Form of Indemnification Agreement for Executive Officers and
          Directors of the Registrant.(1)
10.18     The Registrant's 1993 Stock Option/Stock Issuance Plan, as
          amended (1993 Plan).(1)
10.19     Form of Stock Option Agreement pertaining to the 1993
          Plan.(1)
10.20     Form of Notice of Grant of Stock Option pertaining to the
          1993 Plan.(1)
10.21     Form of Stock Purchase Agreement pertaining to the 1993
          Plan.(1)
10.22     The Registrant's 1996 Stock Incentive Plan (1996 Plan).(1)
10.23     Form of Stock Option Agreement pertaining to the 1996
          Plan.(1)
10.23.1   Form of Automatic Stock Option Agreement pertaining to the
          1996 Plan.(1)
10.24     Form of Notice of Grant of Stock Option pertaining to the
          1996 Plan.(1)
10.24.1   Form of Notice of Grant of Non-Employee Director Automatic
          Stock Option pertaining to the 1996 Plan.(1)
10.25     Form of Stock Issuance Agreement pertaining to the 1996
          Plan.(1)
10.26     The Registrant's Employee Stock Purchase Plan.(1)
10.31     Cypress Center Net Lease, dated October 9, 1997 between the
          Registrant and RNM Lakeville L.P., for the premises located
          at 2210 South McDowell Boulevard.(4)
10.33.1   Redwood Business Park Net Lease, dated September 22, 1999
          between the Registrant and 99 AF Petaluma, L.L.C., for the
          premises located at 1465 McDowell Boulevard North.(9)
10.34.2   First Amendment to Amended and Restated Revolving Credit
          Agreement, dated February 1, 2000 between the Registrant and
          Banque Nationale De Paris and Bank of America, N.A.
10.35     Master Stock Purchase Agreement and Pledge Agreement
          Specialized Term Appreciation Retention Sale (STARS) dated
          February 9, 2000 between the Registrant and Bank of America,
          N.A.++
13.1      Selected Consolidated Financial Data from the 1999 Annual
          Report to Stockholders.
13.2      Management's Discussion and Analysis of Financial Condition
          and Results of Operations from the 1999 Annual Report to
          Stockholders.
13.3      Financial Statements and Supplementary Data from the 1999
          Annual Report to Stockholders.
21.1      Subsidiaries of the Registrant.(1)
23.1      Report on Schedule and Consent of KPMG LLP.
27.0      Financial data schedule.
</TABLE>

---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
    Form S-1 (File No. 333-8921) filed with the Securities and Exchange
    Commission on July 26, 1996, as amended, and declared effective September
    30, 1996.

(2) Incorporated by reference from the Registrant's Quarterly Report on Form
    10-Q for the quarterly period ended June 30, 1997, filed with the Securities
    and Exchange Commission on August 8, 1997.

(3) Incorporated by reference from the Registrant's Quarterly Report on Form
    10-Q for the quarterly period ended September 30, 1997, filed with the
    Securities and Exchange Commission on November 7, 1997.

(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
    for the year ended December 31, 1997, filed with the Securities and Exchange
    Commission on March 23, 1998.

(5) Incorporated by reference from the Registrant's Current Report on Form 8-K
    filed with the Securities and Exchange Commission on May 19, 1998.

                                       27
<PAGE>   30

(6) Incorporated by reference from the Registrant's Quarterly Report on Form
    10-Q for the quarterly period ended June 30, 1998, filed with the Securities
    and Exchange Commission on August 10, 1998.

(7) Incorporated by reference from the Registrant's Current Report on Form 8-K
    filed with the Securities and Exchange Commission on October 29, 1998.

(8) Incorporated by reference from the Registrant's Quarterly Report on Form
    10-Q for the quarterly period ended March 31, 1999, filed with the
    Securities and Exchange Commission on May 7, 1999.

(9) Incorporated by reference from the Registrant's Quarterly Report on Form
    10-Q for the quarterly period ended September 31, 1999, filed with the
    Securities and Exchange Commission on November 8, 1999.

 +  Portions of this Exhibit have been granted Confidential Treatment.

++  Confidential Treatment has been requested for portions of this exhibit.

     3(b).REPORTS OF FORM 8-K:
          We filed one report on Form 8-K dated February 9, 2000 on February 11,
          2000, announcing the press release with respect to a hedging
          transaction involving shares of Cisco Systems, Inc. common stock owned
          by AFC.

                                       28
<PAGE>   31

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          ADVANCED FIBRE COMMUNICATIONS, INC.
                                          (Registrant)

                                          By:     /s/ JOHN A. SCHOFIELD
                                            ------------------------------------
                                                     John A. Schofield
                                               President and Chief Executive
                                                           Officer

                                                                  March 21, 2000

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                 SIGNATURE AND TITLE                            DATE
                 -------------------                            ----
<S>                                                        <C>

/s/ DONALD GREEN                                           March 21, 2000
-----------------------------------------------------
Donald Green
Chairman of the Board

/s/ HERBERT M. DWIGHT, JR.                                 March 21, 2000
-----------------------------------------------------
Herbert M. Dwight, Jr.
Director

/s/ RUANN F. ERNST                                         March 21, 2000
-----------------------------------------------------
Ruann F. Ernst
Director

/s/ CLIFFORD H. HIGGERSON                                  March 21, 2000
-----------------------------------------------------
Clifford H. Higgerson
Director

/s/ DAN RASDAL                                             March 21, 2000
-----------------------------------------------------
Dan Rasdal
Director

/s/ JOHN A. SCHOFIELD                                      March 21, 2000
-----------------------------------------------------
John A. Schofield
Director

/s/ ALEX SOZONOFF                                          March 21, 2000
-----------------------------------------------------
Alex Sozonoff
Director

/s/ KEITH E. PRATT                                         March 21, 2000
-----------------------------------------------------
Keith E. Pratt
Vice President, Chief Financial Officer,
and Assistant Secretary
(Duly Authorized Signatory and
Principal Financial Officer)

/s/ JUDE S. RADESKI                                        March 21, 2000
-----------------------------------------------------
Jude S. Radeski
Corporate Controller
(Duly Authorized Signatory and
Principal Accounting Officer)
</TABLE>

                                       29
<PAGE>   32

                      ADVANCED FIBRE COMMUNICATIONS, INC.

INDEX TO EXHIBITS FILED WITH THIS ANNUAL REPORT ON FORM 10-K:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                        DOCUMENT DESCRIPTION
    -------                       --------------------
    <S>       <C>
    10.34.2   First Amendment to Amended and Restated Revolving Credit
              Agreement, dated February 1, 2000 between the Registrant and
              Banque Nationale De Paris and Bank of America, N.A.
    10.35     Master Stock Purchase Agreement and Pledge Agreement
              Specialized Term Appreciation Retention Sale (STARS) dated
              February 9, 2000 between the Registrant and Bank of America,
              N.A.++
    13.1      Selected Consolidated Financial Data from the 1999 Annual
              Report to Stockholders.
    13.2      Management's Discussion and Analysis of Financial Condition
              and Results of Operations from the 1999 Annual Report to
              Stockholders.
    13.3      Financial Statements and Supplementary Data from the 1999
              Annual Report to Stockholders.
    23.1      Report on Schedule and Consent of KPMG LLP.
    27.0      Financial data schedule.
</TABLE>
<PAGE>   33
                       ADVANCED FIBRE COMMUNICATIONS, INC.
                        SCHEDULE II - VALUATION ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                    ADDITIONS
                                              ---------------------
                                  BALANCE      CHARGED
                                     AT       TO COSTS     CHARGED      DEDUCTIONS    BALANCE
ALLOWANCE FOR                     BEGINNING     AND        TO OTHER       FROM      AT END OF
RECEIVABLES                       OF PERIOD   EXPENSES     ACCOUNTS     ALLOWANCE     PERIOD
-----------------------------     ---------   --------     --------     ----------  ---------
<S>                               <C>         <C>          <C>          <C>         <C>
Year ending December 31, 1997      $    -       2,729             -           -       $2,729
Year ending December 31, 1998       2,729       3,658             -      (1,061)       5,326
Year ending December 31, 1999       5,326      (1,586)            -        (304)       3,436
</TABLE>


<TABLE>
<CAPTION>
                                                       ADDITIONS
                                                ------------------------
                                   BALANCE
                                      AT          CHARGED       CHARGED       DEDUCTIONS       BALANCE
                                   BEGINNING      TO COSTS      TO OTHER        FROM         AT END OF
RESERVE FOR INVENTORY              OF PERIOD    AND EXPENSES    ACCOUNTS       RESERVE         PERIOD
-----------------------------      ---------    ------------    --------      ---------      ---------
<S>                                <C>          <C>             <C>           <C>            <C>
Year ending December 31, 1997        $  614         1,971             -         (1,185)        $1,400
Year ending December 31, 1998         1,400         4,949             -         (1,398)         4,951
Year ending December 31, 1999         4,951         7,221          (113)        (4,051)         8,008
</TABLE>


<TABLE>
<CAPTION>
                                                    ADDITIONS
                                             ------------------------
                                 BALANCE
                                    AT          CHARGED      CHARGED       DEDUCTIONS      BALANCE
                                 BEGINNING     TO COSTS      TO OTHER        FROM         AT END OF
WARRANTY RESERVE                 OF PERIOD   AND EXPENSES    ACCOUNTS       RESERVE         PERIOD
-----------------------------    ---------   ------------    --------      ----------     ---------
<S>                              <C>         <C>             <C>           <C>            <C>
Year ending December 31, 1997      $2,551         9,171             -        (6,793)         $4,929
Year ending December 31, 1998       4,929        11,504             -        (9,870)          6,563
Year ending December 31, 1999       6,563         8,910             -        (6,575)          8,898
</TABLE>