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



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FORM 10-K/A
(AMENDMENT NO. 1)



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

For the fiscal year ended December 31, 2001


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
Corporation |  | I.R.S. Employer
Identification No.
68-0277743

1465 North McDowell Boulevard
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/A or any amendment to
this Form 10-K/A. [   ]

As of March 11, 2002, there were 82,405,362 shares of Advanced Fibre
Communications, Inc. common stock outstanding, and the aggregate market price
of shares held by non-affiliates was approximately $1,552,011,000. (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 Definitive Proxy Statement issued in connection with
the 2002 Annual Meeting of Stockholders held on May 29, 2002, are incorporated
by reference in Part III of this report.





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TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.     
|             | Item 1. Business                                                                             
|             | Item 2. Properties                                                                           
|PART II.    
|             | Item 6. Selected Consolidated Financial Data                                                 
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 8. Financial Statements and Supplementary Data                                          
|PART III.   
|             | Item 14. Controls and Procedures                                                             
|PART IV.    
|             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES  
|10-K/A      
|Exhibit 23.1



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ADVANCED FIBRE COMMUNICATIONS, INC.

Explanatory Note

This Amendment No. 1 to Form 10-K/A
(Form 10-K/A) amends Items 1, 2, 6, 7 and 8 of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
including the consolidated financial statements therein, which was originally
filed on March 20, 2002 (the Original Filing). On October 17,
2002, we reported that we had made an adjustment to previously reported
financial results for 2001 and the first two quarters of 2002 to
correct the previously reported results due to an error in our
accounting for an operating lease, and related fixed assets and
leasehold improvements upon vacating a leased engineering facility.
The adjustment to our 2001 results reflects a $1.7 million
after-tax charge ($2.7 million on a pre-tax basis) in the fourth
quarter of 2001 for the ongoing shortfall between our sublease income
and operating lease obligation, as well as the write-off of related
fixed assets and leasehold improvements. Additionally, our adjusted
financial results include our previously announced retroactive application of the
equity method of accounting for our investment in AccessLan Communications,
Inc. (AccessLan), a company we acquired in May of 2002.

Giving effect to these adjustments, net income for 2001 decreased
to $165.5 million, or $1.98 earnings per share, from previously reported net
income of $167.8 million, or $2.01 earnings per share. Net loss for the fourth
quarter of 2001 was adjusted to $7.9 million, or $0.10 loss per share, from a
previously reported net loss of $5.8 million, or $0.07 loss per share.

The circumstances pertaining to this adjustment are described in greater detail
under Overview in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations herein, and Note 2 of Notes to
Consolidated Financial Statements.

Restatement of Financial Statements

The consolidated financial statements and financial statement schedule included
in this Form 10-K/A have been restated to give effect to the adjustment
discussed under Overview in Item 7 and the previously announced retroactive
application of the equity method of accounting for our investment in AccessLan.
Except for financial statement information and related disclosures that are
specifically related to the restatement, all information contained in this report is stated as of the date of the Original Filing. This amendment does
not otherwise update information in the Original Filing to
reflect facts or events occurring subsequent to the date of the
Original Filing.





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ADVANCED FIBRE COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K/A
(AMENDMENT NO. 1)
FOR THE YEAR ENDED DECEMBER 31, 2001

Table of Contents

|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | Page
|         |  |                                                                                       |  |     
|         |  | PART I.                                                                               |  |     
|Item 1.  |  | Business                                                                              |  | 4   
|Item 2.  |  | Properties                                                                            |  | 18  
|         |  | PART II.                                                                              |  |     
|Item 6.  |  | Selected Consolidated Financial Data                                                  |  | 19  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 33  
|         |  | PART III.                                                                             |  |     
|Item 14. |  | Controls and Procedures                                                               |  | 54  
|         |  | PART IV.                                                                              |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 55  

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PART I.

Except for the historical financial information contained herein, the following
discussion and analysis contains forward-looking statements. In some cases,
you can identify forward-looking statements by terms such as may, intend,
might, will, should, could, would, expect, believe, estimate,
predict, potential, or the negative of these terms and similar expressions
intended to identify forward-looking statements. These statements reflect our
current views with respect to future events and are based on assumptions and
subject to risks and uncertainties. We discuss many of these risks and
uncertainties in greater detail in Part I, Item 1 of this Annual Report on Form
10-K/A under the heading Risk Factors That Might Affect Future Operating
Results and Financial Condition. These risks and uncertainties may cause our
actual results, performance, or achievements to be materially different from
any future results, performance, or achievements expressed or implied by the
forward-looking statements. These factors are not intended to be an
all-encompassing list of risks and uncertainties that may affect the
operations, performance, development and results of our business. You should
not place undue reliance on these forward-looking statements. Also, these
forward-looking statements represent our estimates and assumptions as of the
date of this report. We are under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual
results or to changes in our expectations.

The following discussion should be read in conjunction with our Managements
Discussion and Analysis of Financial Condition and Results of Operations,
financial statements and related notes beginning on page 21 of this Annual
Report on Form 10-K/A.




Item 1.Business

Company Background

Advanced Fibre Communications®, Inc., or AFC®, (Nasdaq: AFCI) was incorporated
in California in May 1992 and reincorporated in Delaware in September 1995. We
completed an initial public offering on October 1, 1996. Our principal
executive offices are located at 1465 North McDowell Boulevard, Petaluma,
California, 94954 and the telephone number at that address is (707) 794-7700.
We can also be reached through our Internet Web site at http://www.afc.com.
Information on our Web site is not part of this report. Throughout this
document, references to we and our indicate the same meaning as AFC and
AFCs, respectively. We develop, manufacture, and support a family of
telecommunications access products and services that enable telecommunications
companies and other service providers to connect their central office switches
to end users for voice and high speed data communications. Our products
include integrated multiservice access platforms, integrated access devices,
optical network access concentrators, network services, network element
management systems, and indoor and environmentally hardened outdoor cabinets
and related service and transmission technologies for the portion of the
telecommunications network between the service providers central office and
end user businesses and homes, often referred to as the local loop, or last
mile.

Our OmniMAX product family is a multiservice broadband solution for providing
voice and data services for the telecommunications industry. We released the
AccessMAX System 8 in 2001, offering a migration strategy for delivering
packet-switched voice and broadband services. The AccessMAX System 8 allows
service providers to increase service offerings from legacy time division
multiplex, or TDM, services to high speed next-generation broadband services.
AccessMAX System 8 also allows more efficient transmission applications such as
Voice over Packet, Voice over Digital Subscriber Line, or DSL, and Video over
Asymmetric Digital Subscriber Line, or ADSL, while preserving quality of
service. The term broadband refers to all transmission speeds of T1 and
higher. T1 is a digital transmission line or service capable of carrying 24
non-compressed voice calls, or 1.5 megabits per second of data transmissions.
Packet-based refers to a way voice or data is transmitted over a line.
Traditional circuit-based transmission utilizes bandwidth constantly, whether
or not voice or data is being transmitted; packet-based transmission occupies
bandwidth only when a packet of voice or data is sent, freeing up bandwidth for
other users.

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Industry Background

The Telecommunications Act of 1996 opened the telecommunications markets to new
entrants and created an environment in which service providers accelerated the
offering of expanded voice, data, and video services. Growth in the Internet,
electronic commerce, and telecommuting has increased pressure on service
providers to supply a broader range of voice and data services over faster
networks. Networks are required to transmit increasingly larger volumes of
data and video to communicate information, conduct business, and deliver
entertainment. 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 that are capable of providing the
improved reliability and increased speed of transmission generally required for
better data and video service over the network. Growth in broadband network
applications has resulted in increased infrastructure investment by network
operators in order to expand their network capacity and provide new
applications and services to meet their customers needs.

Expanding Product Portfolio

Our product portfolio is the OmniMAX product family, which consists of products
that provide remote broadband access solutions in the telecommunications
network. Following are the products and solutions we currently offer:

The OmniMAX Product Family

Our OmniMAX portfolio consists of integrated multiservice access platforms, or
IMAPs, integrated access devices, or IADs, optical network access
concentrators, network services, network element management systems,
environmentally hardened outside plant cabinets, indoor cabinets, and related
service and transmission technologies. The OmniMAX product family provides
narrowband, wideband, and broadband services to customers. Our OmniMAX
products can be deployed quickly and cost-effectively to build domestic and
international broadband packet-based networks, and to upgrade legacy access
networks for delivering broadband services to subscribers, regardless of their
geographic location. Our OmniMAX product family consists of AccessMAX,
PremMAX, TransMAX, ATLAS, and Panorama.

AccessMAX

AccessMAX is our product family of IMAPs and environmentally hardened cabinets
and technology for last mile voice, data, and broadband DSL solutions. The
AccessMAX group of products includes the UMC1000®, DMAX, AccessMAX System 8,
and our equipment upgrade products EMAX, and EMAXplus. In 1996, in
anticipation of the predicted growth in demand for high speed Internet access
and other broadband services, we engineered a next-generation digital loop
carrier, or NGDLC, with a unique three-bus backplane architecture that provides
our products the built-in capability to accommodate future advancements in
telecommunications technology.

AccessMAX products have a hybrid voice and data architecture enabling them to
operate within various types of networks. The systems are scalable to over
2,000 lines and can transition from a narrowband to a broadband access system.
Because of this flexibility, AccessMAX products offer cost-effective integrated
multiservice access solutions with a wide variety of features and advanced
services that can be added or altered as a customers network changes and
grows.

We have invested substantial engineering resources in the development of custom
application specific integrated circuits, or ASICs, such as our Narrowband Gate
Array, Wideband Gate Array, and Cell Bus Gate Array. A gate array is a custom
design integrated circuit, or chip, that allows systems designers to provide
advanced processing functions targeted to the application, typically at a lower
cost or with higher functionality than off-the-shelf solutions. Our Cellennia
is a custom ASIC consisting of over 1.5 million gates, with the ability to
multiply the bandwidth capacity of our product tenfold. Cellennia is the key
technology that activates our high speed cell bus, providing a fully
distributed broadband architecture. This distributed broadband architecture
allows us to continue to offer our pay as you grow philosophy in the
deployment of broadband services.

We have increased the number of DSL circuits on each ADSL card along with a
transition to asynchronous transfer mode, or ATM, a technology that involves
high speed switching capabilities. These cards, like their

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first generation predecessors, contain plain old telephone service, or POTS,
circuitry and splitters to allow service providers the ability to offer POTS
and DSL on the same copper pair transport medium.

Different versions of the AccessMAX platform shelves, or channel bank
assemblies, are uniquely suited to solve various service delivery needs. The
AccessMAX family incorporates both domestic (American National Standards
Institute, or ANSI) and international (European Telecommunications Standards
Institute, or ETSI) capabilities in a single platform to address the global
market for telecommunications equipment.

The UMC1000 is our original narrowband to broadband service delivery platform,
and is capable of simultaneously providing traditional narrowband and wideband
services such as POTS, integrated services digital network, or ISDN, and T1,
along with a variety of DSL services over copper wire, fiber optic cable, or
wireless transport media. The UMC1000 product family consists of 48-line and
120-line units, which can be installed in a variety of network configurations.
These units can be linked together to form larger line systems of over 2,000
lines. In addition, our DMAX1120 provides the capability and power to
accommodate 100% DSL deployment from the UMC1000. This new platform leverages
all of the existing capabilities of the UMC1000 while giving service providers
more choices as they build out and optimize their networks for the high speed
services of the future.

We released the AccessMAX System 8 in 2001, offering a migration strategy for
delivering packet-switched voice and broadband services. The AccessMAX System
8 allows service providers to expand access network capacity and service
offerings from legacy TDM services to high speed next-generation broadband
services to emerging applications such as Voice over Packet, Voice over DSL,
and Video over ADSL, while preserving quality of service. The system allows
in-service upgrades activating the second ATM cell bus designed into our
original backplane architecture in 1996.

EMAX and EMAXplus are our equipment maximization systems that provide rapid and
efficient retrofit of in-place third party cabinets. These systems increase
the capacity and density of the legacy infrastructure and fit into the space of
a typical non-AFC digital loop carrier channel bank, eliminating the need for
additional right of way and permits. The added density enables carriers to
meet demand for second and third line POTS or ADSL services in areas where
standard twisted copper pair phone lines are exhausted. Outside plant labor is
minimized by reusing the existing network infrastructure.

Outside Plant Cabinets

For remote applications requiring outdoor housings, we market a variety of
cabinets to provide the most cost-effective solution for each application.
From 48 to over 2,000 lines, our cabinets incorporate and integrate components
to save space and power. All outside cabinets are environmentally hardened to
allow operation over an extended range of temperatures.

Indoor Cabinets

Internet service providers, business centers, universities, hospitals, banks,
small office and home office customers require traditional telephone service as
well as high speed data services such as DSL and ISDN. Service providers can
deliver these services from low-cost, secure indoor cabinets that can be
installed in stairwells, closets, or basements, occupying minimal floor space.
Our indoor cabinets meet these needs with 48 to 480 lines, helping service
providers minimize their capital outlay while extending new and existing fiber
and copper plant.

ATLAS

ATLAS is our professional service organization made up of teams of
professionals, regionally located, who provide consulting and complete
end-to-end installation and operations, maintenance, and provisioning services
for voice, data, and video networks. ATLAS services include developing and
implementing network solutions for service providers, which maximize the use of
existing equipment, identify expansion capabilities, and include engineering
services, site surveys, implementation recommendations and strategies, project
management, and equipment installation for existing and next-generation access
networks. In addition, ATLAS offers customized service support agreements, as
well as technical training courses, which provide our

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customers with an understanding of technological advancements and hands-on
experience to operate and maintain all AFC equipment and software.

Panorama EMS

Our Panorama element management system, or EMS, is a software application
product providing a centralized graphic user interface for point and click
management of the OmniMAX network. The auto-detection functionality and
graphical mapping display allows network administrators to quickly locate and
check the status of all AFC equipment within their access network. Panoramas
flexible telecommunications management network architecture, centralized
management capabilities, and customized applications integrate with external
network management systems to enhance the service providers ability to manage
OmniMAX networks.

TransMAX

TransMAX is our family of optical network access platforms and includes a
multiservice access concentrator allowing voice and data integration over
packet-aware optical networks, enhancing data handling efficiencies over
traditional non-packet-aware optical networks, saving bandwidth and money. A
packet-aware network is one that recognizes that data is being transmitted in
packets and ceases transmission once the data has been sent, resulting in more
efficient use of bandwidth. A non-packet-aware network can transmit data in
packets, but continues to occupy bandwidth by transmitting even after there is
no more data to send.

PremMAX

Our PremMAX product line of IADs work with our AccessMAX product line to
simplify and lower the cost of delivering total business services to small and
medium-sized business customers. The PremMAX IAD aggregates voice and data
traffic at the customer premise onto the access loop. The PremMAX product is
managed through the Panorama EMS.

Substantial Installed Base

In the U.S., major incumbents such as Sprint Corporation, Verizon
Communications Inc., and SBC Communications, Inc., as well as other incumbent
local exchange carriers, or ILECs, national local exchange carriers, or NLECs,
competitive local exchange carriers, or CLECs, and independent operating
companies, or IOCs, deploy the OmniMAX product family. We have also made
inroads into the international marketplace as a result of access network
modernization in the Caribbean and Latin America, Western Europe, Africa, and
the Asia Pacific region. The AccessMAX has received type approval for
deployment by major operators in over 23 countries.

The OmniMAX product family is distributed and serviced worldwide through our
direct sales force and distributors. Our multiple-channel distribution
approach allows customers to select the channel that best addresses their
specific needs and provides us with broad coverage of global markets.

Ryan, Hankin, Kent, Inc., or RHK, a telecommunications market research firm,
estimates there are between 75  80 million POTS lines and 4  4.5 million ADSL
lines currently deployed industry wide. Of that amount, on a cumulative basis
through December 31, 2001, we have shipped or deployed approximately 5.4
million POTS lines and approximately 105,000 ADSL lines.

Markets and Customers

We continue to grow market share in our core NGDLC business, providing products
to many carriers including larger ILECs, NLECs, and over 800 IOCs in North
America. The key factors that create market demand for NGDLC business are new
housing and the replacement of obsolete and high-maintenance outside plant.
For carriers, fiber is a cost-effective alternative to building additional
copper (twisted pair) infrastructure to reach their customers who live or work
beyond three miles from the carriers central office. NGDLC remote terminals
serve as connectors between the fiber feeder and copper distribution loops
providing those customers with both voice and DSL service connections.

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RHK predicts that the DSL market will grow to almost 16 million lines by 2005.
Telechoice, publisher of xDSL and DSL industry analysis, estimates that DSL
will reach more than 11.5 million subscribers by the end of 2003, most of which
will be ADSL. Further, the majority of central office deployment of ADSL has
been completed, according to RHK, which could mean the additional deployment of
ADSL lines will be in remote terminals such as those offered through our
AccessMAX System 8.

We have identified several areas we are targeting for future growth opportunities:



| |  | Central office line termination for soft switching   
|- |  | -----------------------------------------------------
| 
| |  | Packet aggregation in the central office             
| 
| |  | Subscriber management functionality                  
| 
| |  | Enhanced fiber capabilities                          
| 
| |  | Enhanced network management and professional services

Service providers are looking to suppliers to support them in the move to a
converged packet access network to provide expanded broadband services. Two
technical trends mark the broadband rollout: the transition from circuits to
packets, and the upgrade of the network infrastructure from copper to fiber.
Much of the service providers network cores have been upgraded to packets and
fiber, but the access network still requires significant investment to be fully
converted. Access networks connect end users to the services available at the
network core, and provide end user revenue streams to service providers.
Conversion of the access network is stimulated by end user demand for broadband
services. Our AccessMAX system 8 allows service providers to utilize existing
fiber buildout to deploy broadband services and access connections to satisfy
end user demand.

There is growth potential through next-generation switching in the access
market. Our AccessMAX System 8 addresses the issue of integrated line
termination capabilities. Next-generation multiservice packet switches, or
soft switches, do not have integrated line termination capabilities, and
require packet terminations from the voice side at the central office.
AccessMAX System 8 already serves this function at remote terminals with
integrated switch interface protocols and full broadband capabilities. As
service providers deploy the new soft switches, we plan to continue to develop
enhancements to AccessMAX System 8 to continue to support central office line
termination systems.

As service providers migrate their network to a converged all packet
architecture, efficient packet aggregation in front of high cost switching
ports will be a critical step in cost effectively passing traffic between end
users and core network elements. The AccessMAX System 8 aggregates voice and
data packets at remote terminals, increasing the efficiency of copper and fiber
links to the central office. This capability reduces the costs of operating a
large packet network. We plan to continue to develop products that will
provide central office-based edge switching and aggregation capabilities
coupled with service management to assist the migration of service providers to
Internet protocol, or IP, networks.

Subscriber management functionality and packet aggregation equipment are
necessary to gaining revenue from end user packet terminations. We plan to
expand our product family to combine this functionality in a single platform to
streamline operations.

Deploying new broadband services into the access network increases the
transport needs of the access network. We have integrated fiber transport
capabilities into the AccessMAX family of products and we are evaluating
technologies that lower the cost of deploying fiber in the access network.

We plan to continue to expand our ATLAS network management and professional
services solutions around the AccessMAX product family to help our customers
design, install, operate, and manage their complex networks.
Our OmniMAX products are sold in the U.S. and international marketplaces to a
customer base that includes NLECs, CLECs, IOCs, ILECs, international
telecommunications companies, alternative carriers, system integrators and
original equipment manufacturers, or OEMs. Historically, the largest
revenue-producing markets of our customer base have been the NLECs, IOCs,
CLECs, and international telecommunications companies.

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In 2001, we sold our products to a wide variety of customer types, as discussed
previously, and we plan to continue to diversify our customer base. During
2001, we derived slightly lower revenues from international markets compared
with 2000. We are continuing to expand our presence in international markets
and we are focusing our efforts on operators who are making investments in
broadband access infrastructures. The migration to broadband 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.

For the year 2001, sales to North Supply Company, a subsidiary of Sprint
(Sprint), accounted for 10% or more of total revenues. In 2000, Winstar
Communications, Inc., (Winstar) and Sprint each accounted for 10% or more of
total revenues. Winstar and Sprint each accounted for 10% or more of total
revenues in 1999. No other customer accounted for 10% or more of total
revenues in any of these periods.

Financial information relating to geographic areas for 1999-2001 is included in
Note 12 of Notes to Consolidated Financial Statements of this Annual Report
on Form 10-K/A.

Backlog

Our backlog primarily consists of purchase orders for services, and products
and software to ship within the next year. At December 31, 2001, 2000, and
1999, backlogs were approximately $25.5 million, $40.8 million, and $35.4
million, respectively. Included in the 2000 backlog was $11.9 million of
shipments made to Winstar and a value-added reseller, or VAR, that was not
recognized in 2001 due to non-collectibility. We consider backlog to be an
indicator, but not the sole predictor, of future sales because our customers
may cancel or defer orders without penalty. Cancelation or reduction of
pending purchase orders could seriously harm our future revenues.

Sales, Marketing, and Customer Support

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

Our U.S. sales, marketing, and customer service groups conduct activities from
our corporate headquarters in California, and regional offices in Kansas,
Illinois, Connecticut, Florida, Texas, and Virginia. Our U.S. sales personnel
are dedicated to specific customer accounts across our U.S. customer base. In
addition to direct calls to service providers, sales to customers often involve
marketing through consulting engineers who are retained by independent
telecommunications companies for engineering, specifications, and installation
services.

Our international sales channels include both direct sales to end users and
indirect sales through global, regional and country OEMs, integrators,
distributors and agents. Our international sales group consists of direct
salespeople and technical, engineering, and support personnel located in the
U.S., Canada, Mexico, Switzerland, France, and Australia.

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 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 that provides our customers with
high quality technical and administrative product support. We provide warranty
service, as well as post-sales technical support, technical and operational
training to customers, and technical pre-sales assistance to our sales
representatives and distributors. In addition to our 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.

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Research and Development

Our research and development efforts are focused on developing local loop
products with advanced features for global telecommunications markets. The
OmniMAX product family is designed as a modular firmware 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 customer
needs. Recent development efforts have focused on enhancements to the OmniMAX
product family, such as fiber-to-the-curb capability, DSL service cards, ATM
broadband infrastructure, soft switch interfaces and larger line size products.
For international markets, efforts have been focused on an international
standard for switch interfaces known as V5, ATM broadband infrastructure, 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 partly on our ability to generate and introduce new technology
and features to existing and new products for the OmniMAX product family. We
are engaged in developing new features for the OmniMAX product family. 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 substantial engineering resources
in the development of custom ASICs which we believe provide feature and price
advantages for our products. These ASICs and the software that manages them
create a core capability set that would require considerable effort to
replicate.

Research and development costs charged to expense were $64.2 million in 2001,
$58.8 million in 2000, and $48.3 million in 1999. As a percentage of total
revenues, research and development costs represented 20% in 2001, 14% in 2000,
and 16% in 1999. The increase in 2001 research and development costs as a
percentage of total revenues was largely the result of the decline in total
revenues from 2000 to 2001. 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 California, Illinois, Florida, and Texas.

Manufacturing

Manufacturing, system integration, and testing operations are performed at our
manufacturing facility in Petaluma, California. Manufacturing operations
consist primarily of final product assembly and testing. We rely on a number
of vendors to manufacture subassemblies to strict specifications for use in our
products. 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 OmniMAX product family.

Certain components used in our products 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. These vendors
supply a number of our competitors as well as us.

Competition

Our competitors range from small companies, both U.S. and international, to
large multinational corporations. Principal competitors include: Compagnie
Financière Alcatel, Lucent Technologies Inc., and Marconi Communications Inc.
Some of these competitors have more extensive financial, marketing, and
technical resources than we do and enjoy superior name recognition in the
market.

Pursuant to a settlement agreement and related agreements entered into with the
Industrial Technology Research Institute, an entity of the Republic of China,
certain of its member companies have been granted specific rights to
manufacture and sell the ETSI version of the narrowband UMC1000 outside of
North America. These companies currently compete with us in international
markets, primarily in China. In January 2005, upon termination of certain
restrictions set forth in the agreements, these 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.

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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

Over the past several years, we have made investments in several start-up
ventures specializing in telecommunications technologies. In 1999, our
investment in Cerent Corporation (Cerent) was converted into approximately 10.6
million shares of Cisco Systems, Inc. (Cisco) common stock, adjusted for a
2-for-1 stock split, as a result of Cisco acquiring Cerent. Upon the
conversion, we recognized a non-operating gain of approximately $379.3 million.
In February and May 2000, we entered into hedging transactions structured as
costless collar agreements, or collars, to minimize the impact of potential
adverse market risk on the Cisco stock we own. The collars provide us with a
floor value of approximately $690.0 million for the shares if held to maturity.
We are able to borrow up to the full present value of the floor value of the
collars. In 2001, we implemented Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities,
resulting in the reclassification and recognition of gains in the Cisco shares
and the related collars from accumulated other comprehensive income to
non-operating income. As a result of the reclassification, we recognized
$285.7 million in unrealized gains during 2001. See Note 3 of Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K/A.

During the fourth quarter of 2001, we recorded a $2.3 million impairment in our
investment in a development stage company. Our net investment in this company
totaled $4.3 million as of March 11, 2002. We believe macroeconomic conditions
and an industry capital spending slowdown adversely affected the valuation of
the company and led to the impairment.

In the latter half of 2001, we entered into an OEM agreement with a privately
held development stage company, (company) and made an investment in the
company. Under the terms of the OEM agreement, we are authorized to use,
promote, market and distribute the companys products in development of end to
end solutions utilizing the products. Our investment includes an equity
investment in the companys preferred stock and an option to acquire the
company. We carry the investment at cost as we hold less than 20% ownership in
the company and do not have the ability to exercise significant influence over
the companys operations. Under the terms of the purchase option agreement, we
may, at our sole discretion, elect at any time through April 2, 2002 to acquire
for cash or stock, all of the outstanding shares of the company. Our
determination as to whether to exercise the option will be based upon our
assessment of the companys product development efforts and business prospects,
as well as market conditions and other factors relevant to the companys
business. If we do not exercise the option to acquire the company, and the
company has achieved specified engineering and product development milestones,
certain shareholders of the company hold a put option giving them the right to
require us to purchase from them a specified series of the companys
outstanding preferred stock for approximately $6.0 million. The put option
becomes exercisable for 90 days after the expiration of our purchase option.

Compliance with Regulatory and Industry Standards

Our products must comply with a significant number of voice and data
regulations and standards which vary between U.S. and international markets,
and vary by 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. Standards setting and compliance
verification in the U.S. are determined by the Federal Communications
Commission, or FCC, Underwriters Laboratories, Quality Management Institute,
Telcordia Technologies, Inc., other independent third party testing
organizations, and by independent telecommunications companies. In
international markets, our products must comply with standards and
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 comply
with standards issued by ETSI and implemented and enforced by the
telecommunications regulatory authorities of each nation.

In addition to maintaining our ISO 9001 certification since 1997, we have also
been certified compliant with TL9000 since 2000. TL 9000 is a set of quality
system standards based on best practice and business excellence

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models, specifically created by and for the telecommunications industry. TL
9000 includes all of the elements of the ISO 9001 Quality System Standard, plus
a number of other requirements specific to the telecommunications industry. It
adds additional focus on customer needs, strategic planning, and
accountability. In addition to the TL 9000 Quality System Requirements, there
are sets of measurements that TL 9000 registered companies must report. These
measurements are based on customer satisfaction, and the quality of the
hardware and software developed by the supplier. Included in our certification
are products and services in the three classifications of TL 9000: hardware,
software, and services.

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.

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 OmniMAX product family, but six 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 Risk Factors That Might Affect Future Operating Results and Financial
Condition as it pertains to this matter in this Annual Report on Form 10-K/A.
The laws of many foreign countries do not protect our intellectual property
rights to the same extent as the laws of the U.S.

Employees

As of December 31, 2001, we had 843 employees. 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.

Risk Factors That Might Affect Future Operating Results and Financial Condition

In addition to the other information in this Annual Report on Form 10-K/A, the
following are risk factors that should be considered in evaluating AFC and an
investment in our common stock. The trading price of our common stock could
decline due to any of these risks, and investors in our common stock could lose
all or part of their investment.

A number of factors could cause our operating results to fluctuate
significantly and cause volatility in our stock price.

Our operations have been, and will continue to be, affected by a wide variety
of factors, many of which are outside our control. These factors include, but
are not limited to, the level of capital spending and financial strength of our
customers, changes in our U.S. and international sales and distribution mix,
our product feature component mix and our ability to introduce new technologies
and features ahead of our competitors, introductions or announcements of new
products by our competitors, the timing and size of the orders we receive,
adequacy of supplies for key components and assemblies, our ability to
efficiently produce and ship orders promptly on a price-competitive basis, and
our ability to integrate and operate acquired businesses and technologies.

We sell our OmniMAX product family primarily to telecommunications companies
installing our equipment as part of their access networks. Additions to those
networks represent complex and lengthy engineering projects, with our equipment
typically representing only a portion of a given project. As a result, the
timing of product shipment is often difficult to forecast. A portion of our
equipment is usually installed in outdoor locations, so shipments of the system
can be subject to the effects of seasonality, with fewer installation projects
scheduled for the winter months. Many of our customers spend greater amounts
of their calendar-year capital budgets during our fourth quarter and utilize
the inventory build-up in the following first quarter. These factors may cause

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revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter ended December 31. Sales in developing countries can be
affected by delays and reductions in planned project deployment, currency
fluctuations, reductions in capital availability, priority changes in
government budgets, delays in receiving government approvals, and the political
environment.

Expenditures for research and development, sales and marketing, and general and
administrative functions are based in part on future growth projections and are
relatively fixed for the near-term. We may be unable to adjust spending in a
timely manner in response to any unanticipated failure to meet these growth
projections. 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, which could result
in, among other things, higher operating expenses and lower net income.

Fluctuations in our operating results, such as revenues or operating results
not meeting the expectations of the investment community, may cause volatility
in the price of our common stock. In such event, the market price of our
common stock could decline significantly. A significant decline in the market
price of our common stock could result in litigation, which could also result
in increased costs and diversion of managements attention and resources from
our operations.

We operate in a rapidly changing competitive and economic environment. If we
are unable to adapt quickly to these changes, our business and results of
operations could be seriously harmed.

The telecommunications equipment market is undergoing rapid competitive and
economic changes, the full scope and nature of which are difficult to predict.
We believe that technological and regulatory change will continue to attract
new entrants to the market in which we compete. Industry consolidation among
our competitors may increase their financial resources, enabling them to reduce
their prices. This would require that we reduce the prices of our products or
risk losing market share. A competitors customer may acquire one of our
customers and shift all capital spending to our competitor, possibly resulting
in material reductions to our revenues and net income.

Many of our competitors are in a better position to withstand reductions in
customers capital spending. These competitors often have broader product
portfolios and market share and may not be as susceptible to downturns in the
telecommunications industry. These competitors offer products directly
competing with our product portfolio and also provide comprehensive ranges of
other access systems. A customer may elect to consolidate its supplier base
for the advantages of one-stop shopping solutions for all its product needs.
Reductions in our customers capital spending could materially reduce our
revenues and net income.

Our principal competitors include: Compagnie Financière Alcatel, Lucent
Technologies Inc., and Marconi Communications Inc. Some of our competitors
have more extensive financial, marketing, and technical resources than we do
and enjoy superior name recognition in the market.

Various member companies of the Industrial Technology Research Institute, with
whom we currently compete in international markets, primarily in China, have
been granted specific rights to manufacture and sell the ETSI version of our
narrowband UMC1000 product outside of North America. Upon termination of
certain restrictions in January 2005, these member companies will gain a
worldwide, non-exclusive, royalty-free, irrevocable license to use an older
version of narrowband UMC1000 technology and will be able to compete with us
worldwide.

Continued growth in the broadband access market is highly dependent on a
vibrant economy, a strong level of capital expenditures for broadband access
solutions products, a positive regulatory environment for larger ILEC
customers, and the continued funding of emerging local service carriers by
large communications equipment providers. The compounding effect of the
current economic contraction, current regulatory action or inaction, and high
debt levels may result in further reductions in capital expenditures by
companies in the telecommunications industry, including some of our customers,
and this could seriously harm our revenues and net income.

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We rely on a limited number of customers for a substantial portion of our
revenues. If we lose one or more of our significant customers or experience a
decrease in the level of sales to any of these customers, our revenues and net
income could decline.

Sprint accounted for 10% or more of total revenues in 2001, and Winstar and
Sprint each accounted for 10% or more of total revenues in both 2000 and 1999.
No other single customer accounted for 10% or more of total revenues in any of
these periods. Our five largest customers accounted for 44%, 49%, and 47% of
total revenues in 2001, 2000, and 1999, respectively. 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 focusing on securing several large accounts rather than many
small accounts. There can be no assurance that significant existing customers
will continue to purchase products from us at current levels, if at all. For
example, sales to Winstar decreased in 2001 as a result of their deteriorated
financial condition and filing for protection under bankruptcy laws. In the
event that a significant existing customer merges with another company, there
can be no assurance that such customer will continue to purchase our products.
The loss of one or more significant existing customers or a decrease in the
level of purchases from these customers could, among other things, result in a
decrease in revenues and net income, excess and obsolete inventory, and
increase our dependency on our remaining significant customers.

Our revenues depend on the capital spending programs and financial capabilities
of our service provider customers and ultimately on the demand for new
telecommunications services from end users.

Our customers are concentrated in the public carrier telecommunications
industry and, in the U.S., include ILECs, NLECs, IOCs, and CLECs. Our
historical markets have been the U.S. and international small to mid-line size
markets, and we are attempting to expand into larger-line size markets both in
the U.S. and internationally. Our ability to generate future revenues depends
upon the capital spending patterns and financial capabilities of our customers,
continued demand by our customers for our products and services, and end user
demand for advanced telecommunications services. Recent severe financial
problems affecting the telecommunications industry in general could continue to
cause a slowdown in our sales, and result in slower payments or defaults on
account. CLECs in particular have experienced difficulties in raising capital
to build out their networks, which, along with the scale and complexity of
providing DSL service, has contributed to a substantial slowdown in their
capital spending. For example, the financial distress of Winstar and a VAR
resulted in our non-recognition of approximately $11.9 million of revenues in
the first quarter of 2001, and an increase in our allowance for doubtful
accounts of approximately $9.3 million with respect to the VAR. Also, 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 ours. 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.

We may be unable to sell customer-specific inventory which could result in
lower gross profit margins and net income.

Some of our customers have order specifications requiring us to design,
purchase parts, and build systems that are unique to a customer. In many
cases, we forecast and purchase components in advance and allocate resources to
design and manufacture the systems. If our customers requirements change, or
we experience delays or cancelation of orders, we may be unable to
cost-effectively rework the system configurations and return the parts to
inventory as available for sale. In the fourth quarter of 2001, we recorded an
$18.0 million write-down to cost of revenues for excess and obsolete inventory,
much of which was customer-specific inventory. We also recognized a $12.0
million accrual to cost of revenues in the fourth quarter of 2001 for long-term
purchase agreements with contract manufacturers, much of which was incurred for
specific customers. In the first quarter of 2001, we increased our inventory
reserves by approximately $2.2 million for inventories designed in accordance
with the specifications of Winstar and Tellabs. Write-downs and accruals for
unrealizable inventory negatively impacts our gross profit margins and net
income.

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We must attract, retain, and motivate key technical and management personnel in
a competitive market in order to sustain or grow our business.

Our success depends to a significant extent upon key technical and management
employees. 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. This
competition is particularly intense in Northern California, where there is a
concentration of established and emerging technology companies. In general, we
do not have employment agreements with our employees, or carry key person life
insurance. 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. We must continue to recruit, train, assimilate,
motivate, and retain qualified managers and employees to manage our operations
effectively. Otherwise, we may be unable to execute our business plan
effectively and our results of operations could be significantly adversely
affected.

Recent and future acquisitions may compromise our operations and financial
results.

As part of our efforts to enhance our existing products, introduce new
products, and fulfill changing customer requirements, we may pursue
acquisitions of complementary companies, products, and technologies.
Acquisitions could adversely affect our operating results in the short term as
a result of dilutive issuances of equity securities and the incurrence of
additional debt costs. The purchase price for an acquired company may exceed
its book value, creating goodwill, possibly resulting in significant impairment
write-downs charged to our operating results in one or more periods. We have
limited experience in acquiring and integrating outside companies. In the
process of making an acquisition, we may suffer disruption to our business,
become exposed to unknown liabilities of acquired companies, or fail to
successfully integrate another company, its products and technologies, or its
personnel. The effects of these events could harm our business, financial
condition, and results of operations.

We are subject to numerous and changing regulations and industry standards. If
our products do not meet these regulations or are not compatible with these
standards, our ability to sell our products could be seriously harmed.

Our products 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. Standards setting and compliance verification
in the U.S. are determined by the FCC, Underwriters Laboratories, Quality
Management Institute, Telcordia Technologies, Inc., 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 ETSI and implemented and enforced by the telecommunications
regulatory authorities of each nation.

We need to continue to ensure that our products are easily integrated with
various telecommunications systems. Telcordia testing on our products is often
required to ensure interoperability with various standards of operations,
administration, maintenance, and provisioning systems. Telcordia testing also
requires significant investments in time and money to achieve compliance. If
our systems fail to comply with evolving standards in U.S. and international
markets on a timely basis, or if we fail to obtain compliance on new features,
our ability to sell our products would be impaired, and we could experience,
among other things, delayed or lost customer orders, decreased revenues, and
lower net income.

We have maintained compliance with ISO 9001 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. We have maintained compliance
with TL9000 since we were first certified for hardware, software and services
in 2000. TL9000 certification is a quality standard designed specifically for
the telecommunications industry. There can be no assurance that we will
maintain these certifications. The failure to maintain any such certification
or to maintain interoperability with other companies may negatively affect our
ability to compete with other telecommunications equipment vendors and may
preclude selling certain of our products in certain markets.

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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, decreased revenues, and lower net
income. Regulatory issues stemming from the 1996 Telecommunications Act
include conflicting state and federal regulations for DSL deployment, and it is
unclear when resolution will take place. There can be no assurance that any
future legislative and regulatory changes will not have a material adverse
effect on the demand for our products. Uncertainty regarding future
legislation and governmental policies combined with emerging new competition
may also affect the demand for our products.

We face risks associated with international markets and distribution channels.

International sales constituted 14% of our total revenues in 2001, 11% in 2000
and 11% in 1999. International sales have fluctuated in absolute dollars and
as a percentage of revenues and are expected to continue to fluctuate in future
periods.

We have had limited success in entering new international markets. Many
international telecommunications companies are owned or strictly regulated by
local authorities. Access to international markets is often difficult to
achieve due to trade barriers and established relationships between
government-owned or controlled telecommunications companies and traditional
local equipment vendors. Successful expansion of international operations and
sales in some of these markets may depend on our ability to establish and
maintain productive strategic relationships with established telecommunications
companies, local equipment vendors, or entities successful at penetrating
international markets. In the fourth quarter of 2001, we closed our sales and
representative offices in Hong Kong, Shanghai, and London. We rely on a number
of third party distributors and sales representatives to market and sell our
products outside of the U.S., and there can be no assurance that such
distributors or sales representatives will provide the support and effort
necessary to service international markets effectively. In addition, in the
past our gross profit margins, in some cases, have been lower for products sold
through some of our third party and indirect distribution channels than for
products sold through our direct sales efforts. Increased sales through our
third party and indirect distribution channels may reduce our overall gross
profit margins 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. federal and state income taxes would be
imposed, and this could adversely impact our cash flows.

We must comply with various country-specific standards and regulations to
compete in certain markets. Some international network standards vary from
those of the U.S., and our product family may be incompatible with the legacy
infrastructure. This could hamper our ability to sell our product family into
certain countries. If our existing international customers adopt
non-U.S.-compliant network standards, we could experience a loss of revenues
and lowered net income. Any inability to obtain or maintain local regulatory
approval could delay or prevent entrance into certain markets, which could
result in, among other things, delays or loss of customer orders, decreased
revenues, and lower net income.

We may be unable to secure necessary components and support because we depend
upon a limited number of third party manufacturers and support organizations,
and in some cases we rely upon sole source suppliers.

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. We purchase most components on a purchase order basis,
and we do not have guaranteed supply arrangements with many of our key
suppliers. Some of the sole source and limited source vendors are

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companies who, from time to time, allocate parts to telecommunications
equipment manufacturers due to market demand for components and equipment.
During the worldwide telecommunications market expansion in the late 1990s,
many component suppliers placed critical components on worldwide allocation.
During 2000 we experienced shortages of certain optical components, laser
diodes, which are used in our products. Many of our competitors are much
larger and may be able to obtain priority allocations from these shared
vendors, thereby limiting or making unreliable our sources of supply for these
components. If we are unable to obtain sufficient supply from alternative
sources, reduced supplies and higher prices of components could significantly
limit our ability to meet scheduled product deliveries to our customers and
increase our expenses, which would seriously harm our business and results of
operations.

Our failure to develop and introduce new products that meet changing customer
requirements and address technological advances would limit our future
revenues.

New product development often requires long-term forecasting of market trends,
and development and implementation of new technologies. If we fail or are late
to respond to new technological developments, or if we experience delays in
product development, market acceptance of our products may be significantly
reduced or delayed. 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.

Our success will depend upon our ability to enhance the OmniMAX product family
through the development of new technology and to develop and introduce, on a
timely basis, new products or new product feature enhancements. 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 OmniMAX product family causing customers to defer purchases
of our equipment. If we fail to respond on a cost-effective and timely basis
to technological advances in the telecommunications industry, we may experience
diminished market acceptance and reduced sales of our products, and our
business would be seriously harmed.

Our products are complex and may contain undetected errors which could result
in significant unexpected expense.

Our products contain a significant amount of complex hardware, firmware, and
software that may contain undetected errors that may become apparent as product
features are introduced, or as new versions are released. It is possible that,
despite significant testing, hardware, firmware, or software errors will be
found in our products after commencement of shipments resulting in delays or
cancelation of customer orders, payment of contract penalties to customers,
warranty costs or the loss of market acceptance and revenues.

Our product line is concentrated in a single family of products and a decline
in demand for these products would result in decreased revenues and net income.

Substantially all of our revenues are derived from the OmniMAX product family,
and we expect this concentration will continue in the foreseeable future. Any
decrease in prices or sales levels could result in decreased revenues and lower
net income. Factors potentially affecting sales prices and demand for our
products include price competition, new product introductions or announcements
by competitors, or product obsolescence, among others.

Failure or inability to protect our intellectual property will adversely affect
our ability to compete, which could result in decreased revenues.

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 OmniMAX product family, and although six 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 foreign countries do not protect
our intellectual property rights to the same

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extent as the laws of the U.S. Failure or inability to protect proprietary
information could result in loss of our competitive advantage, loss of customer
orders and decreased revenues. Furthermore, policing the unauthorized use of
our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights. This litigation could result in
substantial costs and diversion of resources and may not ultimately be
successful.

We may be subject to intellectual property infringement claims that are costly
to defend and could limit our ability to use some technologies in the future.

Like other participants in our industry, we expect that we will continue to be
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. In the future, we may be
subject to additional litigation and may be required to defend against claimed
infringements of the rights of others or to determine the scope and validity of
the proprietary rights of others. Any such litigation could be costly and
divert managements attention from our operations. 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 seriously harm our business and results
of operations.




Item 2.Properties

We lease five buildings in Petaluma, California. Two of these buildings are
subleased; the other three, a total of approximately 374,000 square feet, house
the principal executive offices, as well as administrative, sales, marketing,
product development, manufacturing, and distribution functions. In addition to
our Petaluma facilities, we lease domestic properties in Miramar, Florida
(research and development), Richardson, Texas (sales, and research and
development), Buffalo Grove, Illinois (research and development, and technical
assistance), Largo, Florida, and several other locations for sales and
technical assistance. As of December 1, 2001, we have subleased the Largo
facility. Internationally, we occupy leased offices for sales and sales
support functions in: Paris, France; Fribourg, Switzerland; Mexico City,
Mexico; and Sydney, Australia.

We utilized approximately 68% of our total available space as of March 11,
2002. We believe that the facilities used in our operations are suitable for
their respective uses and adequate to meet our level of operations anticipated
in 2002. In addition, we believe that appropriate additional facilities will
be available to accommodate growth as needed.

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PART II.




Item 6.Selected Consolidated Financial Data

FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

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|------------------------------------------------- | -------------------------- | ------------------------ | --------- | ------------------------------------- | ------------------ | ------- | --------- | ----------- | ------- | ------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------ | 
|                                                  |                            |                          |           | Years Ended December 31,             
|                                                  |                            |                          |           |                                      
|                                                  |                            |                          |           | 2001(1)                               |                    | 2000(2) |           | 1999(3) (4) |         | 1998(4) |         | 1997   
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |        
|                                                  |                            |                          |           | (restated)                            |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|                                                  |                            |                          |           | (in thousands, except per share data)
|Consolidated Statements of Income
Data:           |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Revenues                                          |                            | $                        | 327,569   |                                       |                    | $       | 416,850   |             |         | $       | 296,611 |         |         | $ | 316,409 |         |         | $ | 267,858 |        
|Cost of revenues                                  |                            |                          | 215,956   |                                       |                    |         | 215,303   |             |         |         | 157,911 |         |         |   | 171,843 |         |         |   | 145,933 |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|                                                  | Gross profit               |                          |           | 111,613                               |                    |         |           | 201,547     |         |         |         | 138,700 |         |   |         | 144,566 |         |   |         | 121,925 |       
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Operating expenses:                               |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|                                                  | Research and development   |                          |           | 64,169                                |                    |         |           | 58,828      |         |         |         | 48,343  |         |   |         | 41,687  |         |   |         | 25,726  |       
|                                                  | Sales and marketing        |                          |           | 49,385                                |                    |         |           | 47,463      |         |         |         | 34,425  |         |   |         | 35,992  |         |   |         | 21,854  |       
|                                                  | General and administrative |                          |           | 37,323                                |                    |         |           | 29,172      |         |         |         | 33,947  |         |   |         | 30,437  |         |   |         | 20,799  |       
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|                                                  |                            | Total operating expenses |           |                                       | 150,877            |         |           |             | 135,463 |         |         |         | 116,715 |   |         |         | 108,116 |   |         |         | 68,379 | 
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Operating income (loss)                           |                            |                          | (39,264   | )                                     |                    |         | 66,084    |             |         |         | 21,985  |         |         |   | 36,450  |         |         |   | 53,546  |        
|Other income, net                                 |                            |                          | 306,238   |                                       |                    |         | 51,444    |             |         |         | 385,444 |         |         |   | 4,051   |         |         |   | 4,866   |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Income before income taxes                        |                            |                          | 266,974   |                                       |                    |         | 117,528   |             |         |         | 407,429 |         |         |   | 40,501  |         |         |   | 58,412  |        
|Income taxes                                      |                            |                          | 101,450   |                                       |                    |         | 39,960    |             |         |         | 158,359 |         |         |   | 14,648  |         |         |   | 21,612  |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Net income                                        |                            | $                        | 165,524   |                                       |                    | $       | 77,568    |             |         | $       | 249,070 |         |         | $ | 25,853  |         |         | $ | 36,800  |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Basic net income per share (5)                    |                            | $                        | 2.03      |                                       |                    | $       | 0.97      |             |         | $       | 3.20    |         |         | $ | 0.34    |         |         | $ | 0.52    |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Shares used in basic per share
computations       |                            |                          | 81,381    |                                       |                    |         | 80,201    |             |         |         | 77,723  |         |         |   | 75,273  |         |         |   | 70,131  |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Diluted net income per share (5)                  |                            | $                        | 1.98      |                                       |                    | $       | 0.91      |             |         | $       | 3.05    |         |         | $ | 0.32    |         |         | $ | 0.48    |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Shares used in diluted per share
computations     |                            |                          | 83,638    |                                       |                    |         | 84,800    |             |         |         | 81,657  |         |         |   | 79,825  |         |         |   | 77,469  |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|                                                  |                            |                          |           |                                       | As of December 31,
|                                                  |                            |                          |           |                                       |                   
|                                                  |                            |                          | 2001      |                                       |                    |         | 2000      |             |         |         | 1999    |         |         |   | 1998    |         |         |   | 1997    |        
|                                                  |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Consolidated Balance Sheets Data:                 |                            |                          |           |                                       |                    |         |           |             |         |         |         |         |         |   |         |         |         |   |         |        
|Cash, cash equivalents, and
marketable securities |                            | $                        | 955,742   |                                       |                    | $       | 875,153   |             |         | $       | 732,122 |         |         | $ | 110,866 |         |         | $ | 105,196 |        
|Working capital                                   |                            |                          | 774,297   |                                       |                    |         | 744,723   |             |         |         | 583,357 |         |         |   | 208,604 |         |         |   | 193,640 |        
|Total assets(6) (7)                               |                            |                          | 1,147,410 |                                       |                    |         | 1,135,175 |             |         |         | 900,787 |         |         |   | 309,114 |         |         |   | 273,983 |        
|Stockholders equity                              |                            |                          | 838,605   |                                       |                    |         | 819,665   |             |         |         | 645,064 |         |         |   | 267,839 |         |         |   | 223,720 |        
|Book value per share                              |                            |                          | 10.21     |                                       |                    |         | 10.15     |             |         |         | 8.16    |         |         |   | 3.52    |         |         |   | 3.08    |        
|Number of employees                               |                            |                          | 843       |                                       |                    |         | 959       |             |         |         | 722     |         |         |   | 815     |         |         |   | 660     |        

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|(1) |  | 2001 includes an unrealized gain of $285.7 million resulting from our
application of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities,and related
net gains on our Cisco Systems, Inc. (Cisco) common stock holdings during
the year. See Note 3 of Notes to Consolidated Financial Statements for
further information. Pro forma net income for 2001, which excludes the
unrealized Cisco gains, and certain other income statement credits and
charges, was $16.1 million. See Managements Discussion and Analysis
under the heading, Pro Forma Results for additional information.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 2000 includes $42.9 million from Marconi Communications Inc. as
settlement of outstanding litigation and a subsequent distribution
payment. Without this non-operating income, and excluding $1.1 million in
acquisition related costs, net income would have been $50.0 million.                                                                                                                                                                                                                                                                                                                                                                          
|   
|   
|   
|   
|(3) |  | 1999 includes a $379.3 million gain recognized upon conversion of an
investment into Cisco common stock. Without this gain, and related tax
effects, our net income for the year ended December 31, 1999 would have
been $19.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|   
|   
|   
|(4) |  | Amounts have been restated to reflect the acquisition of GVN
Technologies, Inc. in May 2000 accounted for as a pooling of interests;
number of employees has not been restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|   
|   
|   
|(5) |  | See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing
basic and diluted net income per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|   
|   
|   
|(6) |  | Total assets for 2001, 2000, and 1999 include the market value of our
Cisco holdings and related collars of $670.5 million, $659.0 million, and
$551.4 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|   
|   
|   
|(7) |  | Certain prior year amounts included in total assets have been
reclassified to conform with current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

AFCs long-term debt is not significant. No cash dividends per share were paid
for any of the five years presented.

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

Forward-Looking Statements

This report contains forward-looking statements. In some cases, you can
identify forward-looking statements by terms such as may, intend, might,
will, should, could, would, expect, believe, estimate, predict,
potential, or the negative of these terms and similar expressions intended to
identify forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions and subject to
risks and uncertainties. We discuss many of these risks and uncertainties in
greater detail in Part I, Item 1 of this Annual Report on Form 10-K/A under the
heading Risk Factors That Might Affect Future Operating Results and Financial
Condition as filed with the Securities and Exchange Commission. These risks
and uncertainties may cause our actual results, performance, or achievements to
be materially different from any future results, performance, or achievements
expressed or implied by the forward-looking statements. These factors are not
intended to be an all-encompassing list of risks and uncertainties that may
affect the operations, performance, development and results of our business.
You should not place undue reliance on these forward-looking statements. Also,
these forward-looking statements represent our estimates and assumptions as of
the date of this report. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.

The following discussion should be read in conjunction with our financial
statements and related notes included elsewhere in this report.

A certification with respect to this Annual Report on Form 10-K/A by our Chief
Executive Officer and Chief Financial Officer, as required by Section 906 of
the Sarbanes-Oxley Act of 2002, has been submitted to the SEC as additional
correspondence accompanying this report.

Overview

On October 17, 2002, we announced that we had made an
adjustment to previously reported results for the year ended December 31, 2001.
The adjustment is the result of a $1.7 million after-tax charge
($2.7 million on a pre-tax basis) that should
have been taken in the fourth quarter of 2001. During the fourth quarter of
2001, we vacated an engineering facility in Largo, Florida, and entered into a
sublease agreement for the entire space. Upon a recent review of our
facilities, we realized that, in accordance with generally accepted accounting
principles, we should have
recognized an impairment charge in the fourth quarter of 2001 for the ongoing
shortfall between our sublease income and our operating lease obligation. The
net book value of the related leasehold improvements, furniture, fixtures, and
telephone equipment also should have been written off. Additionally,
our adjusted financial results include our previously announced retroactive application of the
equity method of accounting for our investment in AccessLan
Communications, Inc. (AccessLan). Our equity in AccessLans losses was
$0.6 million after tax ($0.9 million on a pre-tax basis.) Accordingly, the discussion below
has been modified to reflect the adjustments to our 2001 financial
statements.

We design, manufacture, and provide a family of products and services that
offer broadband, wideband, and narrowband solutions for the portion of the
telecommunications network between the service providers central office and
end user businesses and homes. Our OmniMAX product family is a multiservice
broadband solution for providing voice and data services for the
telecommunications industry. We released the AccessMAX System 8 in 2001,
offering a migration strategy for delivering packet-switched voice and
broadband services. The AccessMAX System 8 allows service providers to expand
network access capacity and service offerings from legacy time division
multiplex services to high speed next-generation broadband services to emerging
applications such as Voice over Packet, Voice over Digital Subscriber Line, or
DSL, and Video over Asymmetric Digital Subscriber Line, while preserving
quality of service. We market our product family through our direct sales
force, distributors, and value-added resellers. We sell our products primarily
to service providers who install our equipment as part of their access
networks. Our customers generally include national local exchange carriers, or
NLECs, independent operating companies, or IOCs, large incumbent local exchange
carriers, or ILECs, competitive local exchange carriers, or CLECs, and
international carriers.

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Our customers normally install a portion of the OmniMAX system in outdoor
locations, and shipments are subject to the effects of seasonality with fewer
installation projects scheduled for the winter months. Historically, we have
also experienced a weaker demand for our products during the beginning of the
year as compared with the shipment levels in the preceding fourth quarter.
This fluctuation is a result of customers maximizing their calendar-year
capital budgets in the fourth quarter and utilizing the inventory build-up
during the following first quarter. As a result of these factors, we believe
that over time, revenues for the quarter ended March 31 will be lower than
revenues in the preceding quarter ended December 31.

Our results of operations have been adversely affected by the recent downturn
in the telecommunications industry and worldwide economies. We experienced
lower than forecasted shipments during 2001. We believe current economic
conditions may continue to cause customers to reduce and defer capital
spending. We also believe the current regulatory environment is causing delays
in some of our customers investments in broadband services. Some of our
larger customers are delaying deployment of DSL until clarification occurs on
regulatory issues stemming from the Telecommunications Act of 1996. In the
current environment, there exists conflicting state and federal regulations for
DSL deployment, and it is unclear when resolution will take place.

Beginning in late 2000 and continuing through mid-2001, we focused on building
our organization and procuring inventory to support forecasted business growth.
As the general slowdown in our customers capital spending and the effect that
had on our results of operations became apparent, we implemented a reduction in
force in October 2001. Related to this reduction, we recorded $2.7 million for
an engineering facility lease impairment and fixed asset write-off, and $1.6
million in severance costs in 2001. We also reduced staff in certain foreign
sales offices in December 2001 and incurred $0.6 million for closure and
severance costs. As part of our original forecasted growth in early 2001, we
entered into long-term purchase agreements with vendors. In the fourth quarter
of 2001, after receiving additional customer input, we updated our business
plan for 2002 and determined an inventory adjustment was needed. We wrote-down
inventory by $18.1 million and recognized a $12.0 million accrual for inventory
purchase agreements.

We completed an inventory of certain fixed assets in the fourth quarter of 2001
and recorded a $1.4 million loss on the disposal of idle and obsolete
equipment. We determined that our investment in a privately-held company was
impaired and recorded a $2.3 million write-down in the fourth quarter of 2001
to reflect the companys lowered market valuation.

In the fourth quarter of 2001, we recorded a $13.6 million distribution payment
due from Marconi Communications Inc. (Marconi), as non-operating income. As a
result of our implementation of Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
in the first quarter of 2001, we recognized $285.7 million in non-operating
income in 2001 for the net unrealized gain on our shares of Cisco Systems,
Inc. (Cisco) and the related collar agreements.

During the first quarter of 2001, we did not recognize revenues of
approximately $11.9 million on shipments made to Winstar Communications, Inc.
(Winstar) and a value-added reseller, or VAR, due to the likelihood of
non-collectibility. Winstar and the VAR filed for protection under bankruptcy
laws in the second and fourth quarters of 2001, respectively. We also
increased our allowance for doubtful accounts by approximately $9.3 million for
the VAR receivable. In addition, we increased inventory reserves by
approximately $2.2 million for inventories designed in accordance with the
specifications of Winstar and Tellabs, Inc. (Tellabs), because we did not
anticipate further business with either of these customers.

We attempted to balance our operating expenses with our decreased revenues and
results of operations. We have focused on cost controls while we continued to
invest in research and development activities that would keep us in a strong
position to take advantage of sales opportunities when economic conditions
improve and demand recovers.

Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America, or GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of revenues, expenses, assets, and liabilities, and related disclosure
of contingent assets and liabilities. As the complexity and subjectivity of
estimates and judgments increase, the inherent level of precision in the
financial statements can decrease. Applying GAAP requires our judgment in

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determining the relative appropriateness of acceptable accounting principles
and methods of application in diverse and complex economic activities. We
evaluate our estimates and judgments on an on-going basis, including those
related to our product warranty, product returns, assessment of recoverability
of capitalized software development costs, excess and obsolete inventory, and
allowance for doubtful accounts. We base our estimates on historical
experience and other assumptions we believe are reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities, which may not be
readily apparent from other sources.

We believe the application of our accounting policies accurately reflects our
financial condition and results of operations in the consolidated financial
statements, and provides comparability between periods. We believe our
accounting policies are reasonable and appropriate for our business. The
following critical accounting policies affect the more significant estimates
and judgments used in the preparation of our consolidated financial statements.

Critical Accounting Policies and Estimates

Some business transactions are subject to uncertainty and are recorded using
estimates and our best judgment at any given time, within the parameters of
GAAP. An explanation of the sensitivity of financial statements to the
methods, assumptions and estimates underlying their preparation and the
interplay of specific uncertainties with accounting measurements follows.

Revenue Recognition, Allowances and Product Warranty.In compliance with the
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements,and SFAS No. 48, Revenue
Recognition When Right of Return Exists,we recognize revenue when the earnings
process is complete. The earnings process is considered complete when
persuasive evidence of an arrangement between a customer and AFC exists, when
delivery and acceptance has occurred or services have been rendered, when
pricing is fixed or determinable, when any right of return lapses or is
reasonably estimable, and when collectibility is reasonably assured. We follow
these same revenue recognition standards for sales made to our authorized
distributors and sales representatives. AICPA Statements of Position 97-2,
Software Revenue Recognition,and 98-9, Modification of SOP 97-2, Software
Recognition, With Respect to Certain Transactions,generally require revenues
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. Revenues
allocated to maintenance are recognized ratably over the maintenance term.
Revenues from service activities are generally recognized ratably over the
service period. Allowances for returns are established based on experience. A
provision for estimated warranty costs is established at the time of sale and
adjusted periodically based on experience. We consider differing market
conditions when recognizing revenues, such as the recent decline in capital
spending in our industry, and the relative financial condition of our
customers. These conditions do not impact the method by which we recognize
revenues or the methodology for computing the provision for warranty; however,
such conditions could impact the allowance for returns.

Research and Development and Software Development Costs.We follow SFAS No. 2,
Accounting For Research and Development Costs,and charge all research and
development costs to expense as incurred. We follow SFAS No. 86, Accounting
For the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.
Costs incurred for the development of computer software and enhancements to
existing software products that will be sold, leased, or otherwise marketed are
capitalized when technological feasibility has been established. These
capitalized costs are subject to an ongoing assessment of recoverability based
on anticipated future revenues and changes in technologies. Costs that are
capitalized include direct labor and related overhead. Amortization of
capitalized software development costs begins when the product is available for
general release. Amortization is based on the straight-line method.
Unamortized capitalized software development costs determined to be in excess
of net realizable value of the product are expensed immediately. Under
different circumstances, we believe there would be no change in the way we
expense research and development costs and, accordingly, there would be no
change to our results of operations, financial position, or changes in cash
flows. If we changed the estimates used in the assessment of recoverability
for computer software-related capitalized costs, such as the anticipated future
revenues or changes in technologies, these could result in a lower net
realizable value. This in turn would increase our reported operating expenses,
and lower our net income, but would have no effect on our cash flows.

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Allowance for Doubtful Accounts.We have an allowance for doubtful accounts
for estimated losses resulting from the inability of customers to make payments
to our accounts receivable. We base our allowance on periodic assessment of
our customers liquidity and financial condition through credit rating
agencies, financial statement review, and historical collection trends.
Additional allowances may be required if the liquidity or financial condition
of our customers were to deteriorate, resulting in an impairment in their
ability to make payments. We consider differing market conditions when
recording our allowance, such as the recent downturn in the telecommunications
industry and worldwide economies, and the relative financial condition of our
customers. These conditions do not impact the methodology we use to compute
our allowance.

Inventories and Reserve for Excess and Obsolete Inventories.Inventories
include material, labor and overhead and are valued at the lower of cost
(first-in, first-out basis) or market. A reserve for excess and obsolete
product and an accrual for purchase commitments have been established; the
balances are assessed continuously, and adjusted on a quarterly basis. Under
different market conditions, such as an environment of decreasing vendor and
material costs, we could change our methodology to last-in, first-out basis,
resulting in short-term effects such as lower costs of revenues, higher gross
profit margin, and higher net income. However, this alternative methodology
could lead to higher reserves for excess and obsolete product as the potential
for higher-priced inventory on hand increases, and could result in additional
short-term effects such as higher cost of revenues, lower gross profit margin,
and lower net income.

We provide additional clarification and analysis about non-financial
information in Part I, Item 1 of this Annual Report on Form 10-K/A under the
heading Risk Factors That Might Affect Future Operating Results and Financial
Condition.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items reflected in our consolidated statements
of income:

|                           |                            |                          |     |                          |    |      |     |      |    |  |     |    |    | 
|-------------------------- | -------------------------- | ------------------------ | --- | ------------------------ | -- | ---- | --- | ---- | -- |  | --- | -- | -- | 
|                           |                            |                          |     | Years Ended December 31,
|                           |                            |                          |     |                         
|                           |                            |                          |     | 2001                     |    | 2000 |     | 1999
|                           |                            |                          |     |                          |    |      |     |     
|                           |                            |                          |     | (restated)               |    |      |     |      |    |  |     |   
|Revenues                   |                            |                          | 100 | %                        |    |      | 100 | %    |    |  | 100 | % 
|Cost of revenues           |                            |                          | 66  |                          |    |      | 52  |      |    |  | 53  |   
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|                           | Gross profit               |                          |     | 34                       |    |      |     | 48   |    |  |     | 47 |   
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|Operating expenses:        |                            |                          |     |                          |    |      |     |      |    |  |     |   
|                           | Research and development   |                          |     | 20                       |    |      |     | 14   |    |  |     | 16 |   
|                           | Sales and marketing        |                          |     | 15                       |    |      |     | 11   |    |  |     | 12 |   
|                           | General and administrative |                          |     | 11                       |    |      |     | 7    |    |  |     | 11 |   
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|                           |                            | Total operating expenses |     |                          | 46 |      |     |      | 32 |  |     |    | 39 | 
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|Operating income (loss)    |                            |                          | (12 | )                        |    |      | 16  |      |    |  | 7   |   
|Other income, net          |                            |                          | 93  |                          |    |      | 12  |      |    |  | 130 |   
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|Income before income taxes |                            |                          | 82  |                          |    |      | 28  |      |    |  | 137 |   
|Income taxes               |                            |                          | 31  |                          |    |      | 10  |      |    |  | 53  |   
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   
|Net income                 |                            |                          | 51  | %                        |    |      | 19  | %    |    |  | 84  | % 
|                           |                            |                          |     |                          |    |      |     |      |    |  |     |   

2001 Compared with 2000

Revenues.In 2001, revenues, including service revenues and royalties,
decreased by 21% from 2000 to $327.6 million. U.S. sales declined 24% to
$282.0 million in 2001 and represented 86% of total revenues compared with 89%
in 2000. The decline in U.S. revenues in both amount and as a percentage of
total revenues, reflected the significant decline in sales to Tellabs, Winstar,
and other CLECs in 2001. International revenues declined 5% to $45.6 million
in 2001 and represented 14% of total revenues compared with 11% in 2000. The
decline in international revenues was mainly a result of reduced sales into
South Africa, partially offset by overall increased sales into Latin America
and Canada. The higher ratio of international to total revenues in 2001, was
largely a function of the decline in sales to U.S. customers from 2000 to 2001.

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For the year 2001, sales to North Supply Company, a subsidiary of Sprint
(Sprint) accounted for 10% or more of total revenues. In 2000, Winstar and
Sprint each accounted for 10% or more of total revenues. No other customer
accounted for 10% or more of total revenues in either period. Although our
largest customers have varied over time, we anticipate that results of
operations in any given period will continue to depend to a great extent on
sales to a small number of large accounts. Our five largest customers
accounted for 44% of total revenues in 2001 and 49% in 2000. A number of these
accounts have signed multiyear agreements with us which provide a potential
revenue stream for 2002 and beyond. However, these contracts permit customers
to cancel or reduce the size of their commitments upon notice. Accordingly,
there can be no assurance that ongoing sales to these customers will continue,
or continue at increasing volumes.

Gross Profit.In 2001, gross profit decreased by 45% to $111.6 million. Gross
profit represented 34% of total revenues in 2001 compared with 48% in 2000.

In the fourth quarter of 2001, we recorded $18.0 million in charges to cost of
revenues for excess and obsolete inventory and recognized a $12.0 million
accrual against cost of revenues for inventory purchase agreements. We
experienced a delay in DSL rollouts and changes in some of our larger
customers DSL build-out plans. This, along with a shift from our first
generation DSL products to our second generation DSL products, accounted for a
large portion of the excess and obsolete inventory write-down. We had
inventory built to CLEC specifications that, upon the rapid decline of our CLEC
customers capital spending, we could not cost-effectively re-work for other
customers. Some of the other products in our product family have been
superseded by newer generation technology, resulting in obsolete inventory. We
refocused our international efforts towards newer generation broadband
products, resulting in a write-down of obsolete inventory. Component
inventories were built up in accordance with our original business plan,
resulting in write-downs for amounts in excess of our revised business plan
requirements.

To a lesser extent, gross profit in 2001 declined from 2000 due to negotiated
discounts and product mix for some of our larger volume customers. Materials
purchases were lower in 2001 compared with 2000, while overhead costs remained
relatively unchanged, resulting in costs being spread over a lower volume of
products. The resulting higher burden rate decreased our gross profits in
2001. Gross profit in 2001 was also impacted by the recognition of cost of
sales for shipments to Winstar and a VAR for which approximately $11.9 million
in revenues were not recorded. We also recorded a $2.2 million reserve for
specific inventories deemed to be unsellable as a result of Winstars financial
distress and our expectation that we would not have further sales to Tellabs
for the remainder of 2001.

Our gross profits are affected by a number of factors including, but not
limited to, excess custom inventory, obsolete inventory, long-term purchase
agreements with vendors, customer mix, product mix, volume discounts, cost
reduction programs, and volume of third party distributor sales. Customers
have the ability to cancel purchases, resulting in excess customized inventory
that we may be unable to re-work and sell cost-effectively.

Research and Development.In 2001, research and development expenses increased
by 9% to $64.2 million, and represented 20% of total revenues compared with 14%
in 2000.

The increase in expenses from 2000 to 2001 was primarily the result of
compensation and benefits, fixed asset disposals, a facility lease impairment,
depreciation and amortization, software costs, and rent and facility costs.
Compensation and benefits were higher primarily because the average number of
personnel during 2001, particularly during the first half of the year, was
greater than during 2000. Compensation also included severance costs related
to our October 2001 reduction in force. As of December 31, 2001 our research
and development headcount decreased 9% from 2000 due to consolidation of our
Florida offices, the reduction in force, and concerted efforts to make the
engineering organization more efficient using existing employee resources and
skills. During the fourth quarter of 2001, after completing an inventory of
our engineering-related fixed assets, we disposed of obsolete equipment and
recorded a loss on the disposals. In the fourth quarter of 2001, we vacated
our Largo, Florida facility and entered into a sublease agreement. We recorded
an impairment charge for the ongoing shortfall between our remaining lease
obligation and the sublease income, and wrote down the related fixed assets and
leasehold improvements, totaling $2.7 million. Depreciation and amortization increased as a result of
additional capital purchases to support development and testing of new products
and features.

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These increases reflect our efforts to invest in key product development areas
in order to retain our market share and be positioned to take advantage of
future market opportunities. During 2000, we achieved technological
feasibility of our Panorama EMS software and we capitalized costs associated
with it. We completed and released the software during 2001, and accordingly
began recording post-release costs to research and development expenses. Rent
and related facility costs increased for some of our satellite engineering
offices. Partially offsetting these increases were savings in outside
services, performance-based compensation, direct materials, temporary help, and
travel and entertainment. Various engineering projects involving outside
services were completed by the end of 2000, and our utilization of outside
services decreased in 2001, accordingly. Performance-based compensation was
lower as a result of not meeting certain financial targets, primarily because
of the general slowdown in our customers capital spending and the effect that
had on our results of operations in 2001. In 2000, more direct materials were
utilized for development and completion of our AccessMAX System 8, and 7.1A and
8.0 cards by the end of 2000. Direct material usage was lower in 2001 as new
projects were in different development stages than in 2000 and required lower
expenditure levels. In an effort to reduce our operating expenses in 2001, we
eliminated virtually all of the temporary help positions that had been filled
during 2000. Travel and entertainment expenses were lower due to cost
containment efforts in 2001, reflecting our efforts to align our organization
with current results of operations.

We believe rapidly evolving technology and competition in our industry
necessitates the continued commitment of our resources to research and
development to remain competitive. We plan to continue to support the
development of new products and features, while seeking to carefully manage the
rate of increase in associated costs through expense controls.

Sales and Marketing.In 2001, sales and marketing expenses increased by 4% to
$49.4 million, and represented 15% of total revenues compared with 11% in 2000.

The increase in sales and marketing expenses from 2000 to 2001 was primarily
the result of higher compensation and benefits, fixed asset disposals,
distributor commissions, and depreciation. As part of our efforts to build
support teams for our larger customers, we experienced a higher average number
of sales and marketing employees during the first half of 2001 as compared with
2000. As the general slowdown in our customers capital spending and the
effect that had on our results of operations became apparent, we implemented a
reduction in force, resulting in an 11% decrease in sales and marketing
headcount from December 31, 2000 to December 31, 2001. A higher average number
of sales and marketing employees during the first half of 2001 over the levels
in 2000 resulted in higher compensation and benefit costs. Included in
compensation were severance costs arising from our October 2001 reduction in
force.

During 2001, we reviewed some of our sales and marketing-related trade show,
demo equipment, and demo inventory and disposed of idle and obsolete material.
We experienced sales growth in certain international countries in which we
utilize distributors, causing an increase in distributor commissions. We also
incurred higher levels of depreciation as a result of purchasing additional
software and technical equipment used by our sales, marketing, and customer
service departments in supporting sales and marketing efforts and product
releases. Cost containment efforts in 2001 reflected our efforts to align our
organization with current results of operations. These efforts, along with the
effects of the September 11 tragedies, caused a significant reduction in our
travel and related expenses. As part of our efforts to balance our
organization with our results of operations, we reduced our rate of employee
hiring, which lowered hiring and relocation costs. The effect of our
customers reduced capital spending in 2001 negatively impacted our results of
operations and accordingly, we did not pay performance-based compensation due
to our failure to meet certain financial targets. As a result of current
economic pressures and our revised business plan, we reduced our participation
in trade shows and decreased our advertising.

We believe we have aligned sales and marketing expenses with current results of
operations. We plan to monitor and align future sales and marketing expenses
with future operating results.

General and Administrative.In 2001, general and administrative expenses
increased 28% to $37.3 million and represented 11% of total revenues as
compared to 7% in 2000.

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The increase from 2000 to 2001 was mainly caused by an increase in provision
for doubtful accounts in the first quarter of 2001 for a VAR. During the last
quarter of 2001, we inventoried some of our general and administrative-related
fixed assets and disposed of obsolete equipment, recording a loss on the
disposals. Depreciation increased in 2001 from 2000 because leasehold
improvements associated with buildings we moved into in mid-year 2000 were
occupied for the entire year in 2001. Primarily as a result of a general
slowdown in our customers capital spending patterns and the effect that had on
our results of operations in 2001, we did not meet our internal financial
targets and did not pay associated performance-based compensation. We made
significant donations to education and housing programs in 2000, and although
we have continued to make donations to various causes in 2001, we adjusted our
expenditure levels to reflect our overall reduction in operating expenses. We
also reduced the number of general and administrative employees by 13% from
December 31, 2000 to December 31, 2001.

We believe we have aligned general and administrative expenses with current
results of operations. We plan to monitor and align future general and
administrative expenses with future operating results.

Other Income.In 2001, other income increased 497% to $307.2 million. Our
application of SFAS No. 133 in 2001 resulted in the recognition of $285.7
million in unrealized gains on our Cisco investment and the related collars.
In 2000, prior to adoption of SFAS No. 133, the unrealized gains and losses on
the Cisco investment and related collars were netted and reflected in the
carrying value of the investment, deferred tax liabilities, and accumulated
other comprehensive income on our balance sheet. In 2000, we recorded $32.8
million from Marconi as settlement of outstanding litigation, and $10.1 million
as a subsequent distribution payment. In 2001, we recognized $13.6 million as
a distribution payment due from Marconi which was subsequently received in
January 2002. The settlement of outstanding litigation calls for Marconi to
meet specified distribution revenue goals in 2002; failure to do so makes them
liable to us for a distribution payment for 2002. If this occurs, we will
recognize the distribution payment in 2002 as non-operating income. In the
fourth quarter of 2001, we recorded a $2.3 million impairment in our equity
investment in a privately-held company as a result of the lowered valuation of
the company. Macroeconomic conditions and an industry-wide capital spending
slowdown have affected the availability of venture capital funding for, and
valuations of, development stage companies.

Income Taxes.In 2001 and 2000, we recorded income taxes at an effective tax
rate of 38% and 34%, respectively. The higher rate in 2001 was due to the
effect of recognizing an investment gain related to our implementation of SFAS
No. 133.

2000 Compared with 1999

Revenues.In 2000, revenues, including service revenues and royalties,
increased by 41% over 1999 to $416.8 million. U.S. revenues comprised 86% of
this increase with sales growth distributed across a broad range of customers
and markets.

U.S. revenues grew 39% to $368.9 million in 2000, and represented 89% of total
revenues compared with 89% in 1999. The increase in revenues from the U.S. was
primarily the result of our increase in market share in a growing industry.

International revenues increased 52% to $47.9 million in 2000, and represented
11% of total revenues compared with 11% in 1999. The increase in international
revenues was primarily due to growth in sales to South African, Caribbean, and
Canadian customers.

For the year 2000, sales to Winstar and Sprint each accounted for 10% or more
of total revenues. In 1999, Winstar and Sprint each accounted for 10% or more
of total revenues. No other customer accounted for 10% or more of total
revenues in either of these periods.

Gross Profit.In 2000, gross profit increased by 45% to $201.5 million. As a
percentage of total revenues, gross profit margin represented 48% in 2000,
compared with 47% in 1999. The increase in gross profit margin was primarily
due to favorable customer mix, product mix, and cost reductions. Successful
cost reduction initiatives in our manufacturing operations contributed to lower
costs as a percentage of total revenues compared with 1999. In

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addition, the comparatively higher margin on sales of our Panorama EMS software
product contributed to the increase in gross profit margin in 2000 compared
with 1999.

Research and Development.In 2000, research and development expenses increased
by 22% to $58.8 million, and represented 14% of total revenues compared with
16% in 1999.

The increase in spending was primarily due to increases in hiring, compensation
and benefits expenses, and continued investment in new product development. As
a result of the acquisition of GVN in May 2000, the number of employees in
research and development increased by 27 employees.

The decrease in the ratio of expenses to total revenues compared with 1999 was
primarily due to capitalizing Panorama EMS software development costs out of
expenses into other assets in the fourth quarter of 2000. The amount
represents development costs for the full year. These costs are being
amortized over the life of the current software release which is estimated to
be one year. In addition, we implemented a new product development methodology
that significantly improved our ability to make priority decisions regarding
new projects. The process involves cross-functional teams working together to
evaluate viability of projects before development begins. As a result, we have
experienced improved project management, more efficient use of resources, and
product cost reductions.

Sales and Marketing. In 2000, sales and marketing expenses increased by 38% to
$47.5 million, and represented 11% of total revenues compared with 12% in 1999.

The increase in sales and marketing expenses was mainly due to hiring,
compensation and benefits expenses, primarily attributable to a growth in
employee headcount, and to increased travel and entertainment expenses. These
increases were partially offset by a decrease in distributor commissions as a
smaller portion of our sales in 2000 were made through distributors.

General and Administrative.In 2000, general and administrative expenses
decreased 14% to $29.2 million and represented 7% of total revenues compared
with 11% in 1999.

This decrease in absolute dollars and as a percentage of total revenues was
primarily attributable to a decrease in litigation expenses. In 1999,
litigation expenses were primarily associated with the Marconi lawsuit which
was settled in February 2000. This decrease was partially offset by increases
in compensation and benefits due to an increase in headcount, and to corporate
donations to educational institutions and other non-profit community
organizations.

Other Income.In 2000, other income decreased $334.0 million or 87%. In 1999,
other income included a $379.3 million gain for the step-up in basis of our
investment in Cerent Corporation (Cerent) upon conversion to Cisco common
stock. In 2000, other income included $32.8 million from Marconi as settlement
of outstanding litigation, and $10.1 million as a subsequent distribution
payment.

Income Taxes.In 2000 and 1999, we recorded income taxes at an effective rate
of approximately 34% and 39%, respectively. The effective tax rate decreased
primarily due to the gain arising from the conversion of our investment in
Cerent into Cisco common stock in 1999.

Pro Forma Results

The following table provides a reconciliation of GAAP net income to pro forma
net income. This information is provided to help clarify our ongoing, or core,
business performance and highlight infrequent transactions (in thousands,
except per share data):

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|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         |  |          |          |  
|-------------------- | --------------------- | -------------------------------------------------- | ---------------------- |  | ------------ | -------- | ------ |  | ------- | ------- | ------- |  | -------- | -------- | -
|                     |                       |                                                    |                        |  | Years Ended 
|                     |                       |                                                    |                        |  | December 31,
|                     |                       |                                                    |                        |  |             
|                     |                       |                                                    |                        |  | 2001         |          | 2000   |  | 1999   
|                     |                       |                                                    |                        |  |              |          |        |  |        
|                     |                       |                                                    |                        |  | (restated)   |          |        |  |         |         |         |  |         
|GAAP net income      |                       | $                                                  | 165,524                |  |              | $        | 77,568 |  |         | $       | 249,070 | 
|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         | 
|                     | Pro forma exclusions: |                                                    |                        |  |              |          |        |  |         |         |         |  |         
|                     |                       | Operating:                                         |                        |  |              |          |        |  |         |         |         |  |          |         
|                     |                       | Cost of sales for revenues not recognized          |                        |  | 4,300        |          |        |  |        |         |         |  |         |         
|                     |                       | Excess and obsolete inventory                      |                        |  | 18,850       |          |        |  |        |         |         |  |         |         
|                     |                       | Purchase commitments                               |                        |  | 13,412       |          |        |  |        |         |         |  |         |         
|                     |                       | Provision for doubtful accounts                    |                        |  | 9,251        |          |        |  |        |         |         |  |         |         
|                     |                       | Severance and closure costs for reduction in force |                        |  | 4,935        |          |        |  |        |         |         |  |         |         
|                     |                       | Loss on fixed asset disposals                      |                        |  | 1,412        |          |        |  |        |         |         |  |         |         
|                     |                       | Acquisition-related costs                          |                        |  |             |          |        |  | 1,062   |         |         |  |         |         
|                     | Non-operating:        |                                                    |                        |  |              |          |        |  |         |         |         |  |         
|                     |                       | Litigation settlement and distribution payments    |                        |  | (13,600      | )        |        |  | (42,886 | )       |         |  |         |         
|                     |                       | Conversion of investment into Cisco stock          |                        |  |             |          |        |  |        |         |         |  | (379,290 | )       
|                     |                       | Unrealized gain on Cisco investment                |                        |  | (285,729     | )        |        |  |        |         |         |  |         |         
|                     |                       | Investment impairment                              |                        |  | 2,275        |          |        |  |        |         |         |  |         |         
|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         | 
|                     |                       |                                                    | Total exclusions       |  |              | (244,894 | )      |  |         | (41,824 | )       |  |          | (379,290 | )
|                     |                       | Income tax effect                                  |                        |  | 95,468       |          |        |  | 14,221  |         |         |  | 149,785  |         
|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         | 
|                     |                       |                                                    | Exclusions, net of tax |  |              | (149,426 | )      |  |         | (27,603 | )       |  |          | (229,505 | )
|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         | 
|Pro forma net income |                       | $                                                  | 16,098                 |  |              | $        | 49,965 |  |         | $       | 19,565  | 
|                     |                       |                                                    |                        |  |              |          |        |  |         |         |         | 

Pro forma net income, a non-GAAP measure, is provided to help clarify our
ongoing business performance. For pro forma purposes, the following amounts
have been excluded:

2001



| |  | A $4.3 million charge to cost of revenues is excluded from 2001 as these costs related to sales we did not recognize in the
first quarter of 2001.                                                                                                                                                                                                                                                                                                                
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | An $18.9 million charge for excess and obsolete inventory, consisting of $18.8 million to cost of revenues, and $0.1
million to sales and marketing expenses, is excluded from 2001 to take into account the abrupt decline in customers
spending, customer bankruptcy, changes in DSL rollout, and the resulting impact these had on custom inventory and obsolete
inventory levels.                                                                            
| 
| |  | A $13.4 million accrual for purchase agreements is excluded from 2001 cost of revenues to reflect the abrupt decline in
customers capital spending and the impact this had on our forecasted needs and long-term agreements with vendors.                                                                                                                                                                                                                        
| 
| |  | A $9.3 million charge to provision for doubtful accounts is excluded from 2001 operating expenses to take into account the
abrupt decline in a customers financial condition.                                                                                                                                                                                                                                                                                    
| 
| |  | A $4.9 million charge for facility lease impairment, fixed assets write-down, severance costs, and foreign sales office
closures is excluded from 2001 operating expenses. Macroeconomic conditions and an industry capital spending slowdown
forced us to take a 9% reduction in force in October, consolidate offices, and reduce sales and sales support to certain
international locations to re-align our focus on our core customers, markets, and products.
| 
| |  | A $1.4 million charge for loss on disposal of information technology fixed assets is excluded from 2001 operating expenses
as a result of an extensive fixed asset inventory.                                                                                                                                                                                                                                                                                     
| 
| |  | $13.6 million distribution payment from Marconi is excluded from 2001 non-operating income to omit the effect of non-core
business income.                                                                                                                                                                                                                                                                                                                        

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| |  | $285.7 million in unrealized gains on our Cisco investment are excluded from 2001 non-operating income to omit the effect
of non-core business income.                           
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A $2.3 million charge for impairment on investment is excluded from 2001 non-operating income as a result of the investee
companys equity round financing and related valuation.
| 
| |  | The $95.5 million tax effect related to the amounts listed above is excluded from 2001 income taxes.                                                                             

2000



| |  | A $1.1 million charge related to acquisition of GVN is excluded from 2000 operating expenses to reflect the infrequent
nature of this event. 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A $32.8 million Marconi litigation settlement gain is excluded from 2000 non-operating income to reflect the infrequent
nature of this event.
| 
| |  | A $10.1 million distribution payment from Marconi is excluded from 2000 non-operating income to omit the effect of non-core
business income. 
| 
| |  | The $14.2 million tax effect related to the amounts listed above is excluded from 2000 income taxes.                                         

1999



| |  | $379.3 million unrealized gain related to the conversion of our investment in Cerent into Cisco common stock is excluded to
reflect the infrequent nature of this event.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The $149.8 million tax effect related to the unrealized gain is excluded from 1999 income taxes.                                                                        

Liquidity and Capital Resources

Capital resources and liquidity, our ability to generate adequate amounts of
cash to meet our needs as of December 31, 2001 and 2000 consisted of the
following (in thousands):

|                                                                                                                                                    |  |              |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                                                                                                                                    |  | December 31,
|                                                                                                                                                    |  |             
|                                                                                                                                                    |  | 2001         |         | 2000
|                                                                                                                                                    |  |              |         |     
|Cash and cash equivalents                                                                                                                           |  | $            | 39,528  |      |  | $ | 8,368   | 
|Cisco marketable securities and related collars                                                                                                     |  |              | 670,489 |      |  |   | 658,961 | 
|Other marketable securities                                                                                                                         |  |              | 245,725 |      |  |   | 207,824 | 
|Working capital, excluding cash and cash equivalents,
marketable securities and related collars, and associated
deferred tax assets and liabilities |  |              | 72,941  |      |  |   | 124,249 | 

As of December 31, 2001, cash, cash equivalents, and marketable securities
totaled $955.7 million compared with $875.2 million as of December 31, 2000.
At December 31, 2001, we recorded a value of $670.5 million in Cisco common
stock and the related collars on our balance sheet. The value of our Cisco
investment at December 31, 2001 consisted of $195.8 million in share value, and
$474.7 million in collar value, as compared with a share value of $403.9
million and a collar value of $255.1 million as of December 31, 2000.

We currently own approximately 10.6 million shares of Cisco common stock. We
protected the value of approximately 10.0 million of these shares in February
2000 using a costless collar with a three-year term. In May 2000, we also
entered a similar three-year collar arrangement for the remaining shares of
Cisco common stock. We pledged all of our Cisco stock to secure our
obligations under the collar agreements. We have the ability to borrow up to
the full present value of the $690.0 million floor value of the collars; we
currently do not have any borrowings outstanding against the collars.

At maturity of these collars in February 2003 and May 2003, we may have a
significant taxable gain depending on the market value of Cisco common stock at
that time. The floor value of the collars at maturity is $690.0 million. We
have recognized the accumulated gains on the share value and the collar value
of our investment in non-operating income, and have recorded the related
deferred tax liability. We will adjust the deferred tax liability for the
potential additional taxable gain through maturity of the collars, and
accordingly, there will be no income statement impact at maturity. The cash
flow impact will depend on a number of factors including the market value of
the Cisco shares at the time of maturity. We believe we have sufficient cash
resources to meet any tax obligation, which could be as much as $265.0 million.
We are currently evaluating various tax-efficient business opportunities for
this investment.

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Operating activities in 2001 generated net cash of $79.4 million. This was
primarily the result of net income, and adjustments for non-cash activities
including: the unrealized gains resulting from SFAS No. 133 implementation and
related tax expenses, increases in our accounts receivable collections,
increase in inventory charges, and higher depreciation and amortization
amounts. Days sales outstanding, or DSO, were 64 days at the end of 2001,
compared with 77 days at the end of 2000. The decrease in DSO was primarily
due to the write-off of the VAR receivable, increased shipping linearity, and
improved domestic collections. Net cash of $62.5 million was used in investing
activities in 2001, primarily for marketable securities purchases.

During the last half of 2001, we made a $6.5 million investment in a
development stage company (company) and paid $6.0 million for an option to
acquire the company. Under the terms of the purchase option agreement, we may,
at our sole discretion, elect at any time through April 2, 2002 to acquire for
cash or stock, all of the outstanding shares of the company. Our determination
as to whether to exercise the option will be based upon our assessment of the
companys product development efforts and business prospects, as well as market
conditions and other factors relevant to the companys business. If we do not
exercise the option to acquire the company, and the company has achieved
specified engineering and product development milestones, certain shareholders
of the company hold a put option giving them the right to require us to
purchase from them a specified series of the companys outstanding preferred
stock for approximately $6.0 million. The put option becomes exercisable for
90 days after the expiration of our purchase option. If the put option is
exercised, it may qualify as a triggering event for an impairment review of our
investment in the company, and may result in a write-down and charge to our
current results of operations.

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

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

We entered into collar agreements on our Cisco shares. If we hold the stock
until maturity of the agreements, we will receive a minimum of $690.0 million.
At maturity, the other party to the agreements bears the risk of gains and
losses on the Cisco shares. During the term of the agreement, collar
inefficiencies and the remaining time until maturity can result in net gains or
losses from marking the shares and the collars to market in any one quarter.

We seek to minimize our foreign currency risk by using forward contracts to
hedge material accounts receivable and accounts payable. These contracts are
marked to market and the gains and losses are reflected in our results of
operations.

The following table sets forth, for the periods indicated, the commitments to
make future minimum payments under contractual obligations (in thousands):

|           |       |   |           |        | 
|---------- | ----- | - | --------- | ------ | 
|           |       |   | Facility 
|           |       |   | Operating
|           |       |   | Leases   
|           |       |   |          
|2002       |       | $ | 8,523     |       
|2003       |       |   | 8,247     |       
|2004       |       |   | 8,328     |       
|2005       |       |   | 8,215     |       
|2006       |       |   | 7,769     |       
|Thereafter |       |   | 30,054    |       
|           |       |   |           |       
|           | Total |   | $         | 71,136 | 
|           |       |   |           |       

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We sublease three of our facilities; total future minimum lease payments have
not been reduced by approximately $8.4 million of future minimum sublease
payments to be received under non-cancelable subleases. We accrued
$1.5 million to short term and long term liabilities for our Largo, Florida
facility operating lease. The amount represents the present value of the loss
we expect to incur for the ongoing shortfall between our sublease income and
operating lease obligation. If the sublessee does not renew its lease
agreement with us, and we are unable to enter into another agreement through
the term of the lease obligation (March 31, 2007), the amount of
the ultimate loss based on the lease could
increase by up to $1.0 million before tax.

We believe our existing cash and marketable securities, available credit
facilities and cash flows from operating and financing activities are adequate
to support our financial resource needs, including working capital and capital
expenditure requirements, and operating lease obligations, for the next twelve
months.

SFAS No. 133 Implementation in 2001

On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement requires that we
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Additional
discussion on the effect of SFAS No. 133 on our financial position and results
of operations is included in Notes 1 and 3 of Notes to Consolidated Financial
Statements.

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Item 8.Financial Statements and Supplementary Data

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

|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |         |         | 
|--------------------------------------------- | ------------------------------------ | ------------------------ | ------- | ------------------------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------- | ------- | 
|                                              |                                      |                          |         | Years Ended December 31,
|                                              |                                      |                          |         |                         
|                                              |                                      |                          |         | 2001                     |         | 2000 |         | 1999  
|                                              |                                      |                          |         |                          |         |      |         |       
|                                              |                                      |                          |         | (restated)               |         |      |         |        |         |   |         |        
|Revenues                                      |                                      | $                        | 327,569 |                          |         | $    | 416,850 |        |         | $ | 296,611 |        
|Cost of revenues                              |                                      |                          | 215,956 |                          |         |      | 215,303 |        |         |   | 157,911 |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|                                              |                                      | Gross profit             |         |                          | 111,613 |      |         |        | 201,547 |   |         |         | 138,700 | 
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Operating expenses:                           |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|                                              | Research and development             |                          |         | 64,169                   |         |      |         | 58,828 |         |   |         | 48,343  |        
|                                              | Sales and marketing                  |                          |         | 49,385                   |         |      |         | 47,463 |         |   |         | 34,425  |        
|                                              | General and administrative           |                          |         | 37,323                   |         |      |         | 29,172 |         |   |         | 33,947  |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|                                              |                                      | Total operating expenses |         |                          | 150,877 |      |         |        | 135,463 |   |         |         | 116,715 | 
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Operating income (loss)                       |                                      |                          | (39,264 | )                        |         |      | 66,084  |        |         |   | 21,985  |        
|                                             
|Other
income (expense):                       |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|                                              | Unrealized gains on Cisco investment |                          |         | 285,729                  |         |      |         |       |         |   |         | 379,290 |        
|                                              | Interest income                      |                          |         | 9,829                    |         |      |         | 9,880  |         |   |         | 6,007   |        
|                                              | Equity in losses of investee         |                          |         | (930                     | )       |      |         |       |         |   |         |        |        
|                                              | Other                                |                          |         | 11,610                   |         |      |         | 41,564 |         |   |         | 147     |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|                                              |                                      | Total other income, net  |         |                          | 306,238 |      |         |        | 51,444  |   |         |         | 385,444 | 
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Income before income taxes                    |                                      |                          | 266,974 |                          |         |      | 117,528 |        |         |   | 407,429 |        
|Income taxes                                  |                                      |                          | 101,450 |                          |         |      | 39,960  |        |         |   | 158,359 |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Net income                                    |                                      | $                        | 165,524 |                          |         | $    | 77,568  |        |         | $ | 249,070 |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Basic net income per share                    |                                      | $                        | 2.03    |                          |         | $    | 0.97    |        |         | $ | 3.20    |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Shares used in basic per share computations   |                                      |                          | 81,381  |                          |         |      | 80,201  |        |         |   | 77,723  |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Diluted net income per share                  |                                      | $                        | 1.98    |                          |         | $    | 0.91    |        |         | $ | 3.05    |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        
|Shares used in diluted per share
computations |                                      |                          | 83,638  |                          |         |      | 84,800  |        |         |   | 81,657  |        
|                                              |                                      |                          |         |                          |         |      |         |        |         |   |         |        

See accompanying notes to consolidated financial statements.

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

|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |         |         |           | 
|------------------------------------ | ----------------------------- | -------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | --------- | ------ | ------- | ------- | --------- | 
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         | December 31,
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |             
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         | 2001         |           | 2000  
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         | (restated)   |           |        |         |        
|ASSETS                               |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     | Current assets:               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |        
|                                     |                               | Cash and cash equivalents                                                              |                                                                                                                                                      | $                                          | 39,528  |              |           | $      | 8,368   |        
|                                     |                               | Cisco marketable securities and related collars                                        |                                                                                                                                                      |                                            | 670,489 |              |           |        | 658,961 |        
|                                     |                               | Other marketable securities                                                            |                                                                                                                                                      |                                            | 245,725 |              |           |        | 207,824 |        
|                                     |                               | Accounts receivable, less allowances of $952 and $1,948
in 2001 and 2000, respectively |                                                                                                                                                      |                                            | 58,528  |              |           |        | 99,099  |        
|                                     |                               | Inventories                                                                            |                                                                                                                                                      |                                            | 29,711  |              |           |        | 59,356  |        
|                                     |                               | Other current assets                                                                   |                                                                                                                                                      |                                            | 34,967  |              |           |        | 24,059  |        
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     |                               |                                                                                        |                                                                                                                                                      | Total current assets                       |         |              | 1,078,948 |        |         |         | 1,057,667 | 
|                                     | Property and equipment, net   |                                                                                        |                                                                                                                                                      | 55,406                                     |         |              |           | 66,699 |        
|                                     | Other assets                  |                                                                                        |                                                                                                                                                      | 13,056                                     |         |              |           | 10,809 |        
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |         |        
|                                     |                               |                                                                                        |                                                                                                                                                      | Total assets                               |         | $            | 1,147,410 |        |         | $       | 1,135,175 | 
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     | Current liabilities:          |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |        
|                                     |                               |                                                                                        | Accounts payable                                                                                                                                     |                                            | $       | 9,969        |           |        | $       | 19,920  |          
|                                     |                               |                                                                                        | Accrued liabilities                                                                                                                                  |                                            |         | 73,550       |           |        |         | 48,349  |          
|                                     |                               |                                                                                        | Deferred tax liabilities                                                                                                                             |                                            |         | 221,132      |           |        |         | 244,675 |          
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |         |        
|                                     |                               |                                                                                        |                                                                                                                                                      | Total current liabilities                  |         |              | 304,651   |        |         |         | 312,944   | 
|                                     | Long-term liabilities         |                                                                                        |                                                                                                                                                      | 4,154                                      |         |              |           | 2,566  |        
|                                     | Commitments and contingencies |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |        
|                                     | Stockholders equity:         |                                                                                        |                                                                                                                                                      |                                            |         |              |           |        |        
|                                     |                               |                                                                                        | Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding                                                      |                                            |         |             |           |        |         |        |          
|                                     |                               |                                                                                        | Common stock, $0.01 par value; 200,000,000 shares authorized;
82,113,830 and 80,729,972 shares issued and
outstanding in 2001 and 2000, respectively |                                            |         | 821          |           |        |         | 807     |          
|                                     |                               |                                                                                        | Additional paid-in capital                                                                                                                           |                                            |         | 287,937      |           |        |         | 268,003 |          
|                                     |                               |                                                                                        | Notes receivable from stockholders                                                                                                                   |                                            |         | (56          | )         |        |         | (56     | )        
|                                     |                               |                                                                                        | Accumulated other comprehensive income                                                                                                               |                                            |         | 1,242        |           |        |         | 167,774 |          
|                                     |                               |                                                                                        | Retained earnings                                                                                                                                    |                                            |         | 548,661      |           |        |         | 383,137 |          
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     |                               |                                                                                        |                                                                                                                                                      | Total stockholders equity                 |         |              | 838,605   |        |         |         | 819,665   | 
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       
|                                     |                               |                                                                                        |                                                                                                                                                      | Total liabilities and stockholders equity |         | $            | 1,147,410 |        |         | $       | 1,135,175 | 
|                                     |                               |                                                                                        |                                                                                                                                                      |                                            |         |              |           |       

See accompanying notes to consolidated financial statements

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

|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |          |  
|-------------------------------------------------------------------- | --------------------------------------------------------- |  | ------------ | - | -------- | - | ------------ | - | ---------- | - | ---------- | - | -------- | - | -------- | - | ---------- | - | ------ | - | ----------- | - | ------- | -------- | - | - | ------- | - |  | - | ------- | -------- | - | - | ------- | -------- | -
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   | Notes  |   | Accumulated |   |         |          |   |   | Total   |   |  |   |        
|                                                                     |                                                           |  | Common Stock |   | Deferred |   | Additional   |   | Receivable |   | Other Com- |   |          |   |          |   | Stock-     |   | Com-  
|                                                                     |                                                           |  |              |   | Stock    |   | Paid-In      |   | Stock-     |   | prehensive |   | Retained |   | holders' |   | prehensive
|                                                                     |                                                           |  | Shares       |   | Amount   |   | Compensation |   | Capital    |   | holders    |   | Income   |   | Earnings |   | Equity     |   | Income
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |       
|Balances as of
December 31, 1998                                     |                                                           |  | 76,191,353   |   |          | $ | 762          |   |            | $ | (84        | ) |          | $ | 211,392  |   |            | $ | (730   | ) |             | $ |        |          |   | $ | 56,499  |   |  | $ | 267,839 |          |   | $ | 25,853  |         
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Exercise of common stock
options and warrants                        |                                                           |  | 2,346,136    |   |          |   | 23           |   |            |   |           |   |          |   | 8,613    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 8,636   |          |   |   |         |         
|Issuance of common stock                                             |                                                           |  | 16,276       |   |          |   |             |   |            |   |           |   |          |   | 3        |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 3       |          |   |   |         |         
|Employee stock purchase plan
purchases                               |                                                           |  | 219,318      |   |          |   | 2            |   |            |   |           |   |          |   | 2,245    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 2,247   |          |   |   |         |         
|Inclusion of GVN earnings for the
period July 1 to December 31,
1998 |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   | 881      |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 881     |          |   |   |         |         
|Conversion of preferred stock
into common stock in pooling           |                                                           |  | 239,959      |   |          |   | 2            |   |            |   |           |   |          |   | 1,998    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 2,000   |          |   |   |         |         
|Conversion of debt and accrued
interest into common stock            |                                                           |  | 106,637      |   |          |   | 1            |   |            |   |           |   |          |   | 1,817    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 1,818   |          |   |   |         |         
|Cancelation of notes receivable
from stockholder                     |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   | 489    |   |             |   |        |          |   |   |        |   |  |   | 489     |          |   |   |         |         
|Granting of stock options below
intrinsic value                      |                                                           |  |             |   |          |   |             |   |            |   | (395       | ) |          |   | 395      |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   |        |          |   |   |         |         
|Vesting of stock options below
intrinsic value                       |                                                           |  |             |   |          |   |             |   |            |   | 308        |   |          |   | 513      |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 821     |          |   |   |         |         
|Forfeiture of stock options                                          |                                                           |  |             |   |          |   |             |   |            |   | 75         |   |          |   | (75      | ) |            |   |       |   |             |   |        |          |   |   |        |   |  |   |        |          |   |   |         |         
|Repurchase of common stock                                           |                                                           |  | (42,287      | ) |          |   |             |   |            |   |           |   |          |   | (11      | ) |            |   |       |   |             |   |        |          |   |   |        |   |  |   | (11     | )        |   |   |         |         
|Tax benefit from
option exercises                                    |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   | 10,303   |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 10,303  |          |   |   |         |         
|Net Income                                                           |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   |       |   |             |   |        |          |   |   | 249,070 |   |  |   | 249,070 |          |   | $ | 249,070 |         
|Other comprehensive income:                                          |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|                                                                     | Net unrealized gain on
available-for-sale
securities(1)   |  |              |  |          |   |              |  |            |   |            |  |          |   |          |  |            |   |        |  |             |   |         | 100,968  |   |   |         |  |  |   |         | 100,968  |   |   |         | 100,968  |  
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Balances as of
December 31, 1999                                     |                                                           |  | 79,077,392   |   |          |   | 790          |   |            |   | (96        | ) |          |   | 238,074  |   |            |   | (241   | ) |             |   | 100,968 |          |   |   | 305,569 |   |  |   | 645,064 |          |   | $ | 350,038 |         
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Exercise of common stock
options and warrants                        |                                                           |  | 1,388,094    |   |          |   | 14           |   |            |   |           |   |          |   | 8,747    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 8,761   |          |   |   |         |         
|Employee stock purchase plan
purchases                               |                                                           |  | 213,129      |   |          |   | 2            |   |            |   |           |   |          |   | 2,456    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 2,458   |          |   |   |         |         
|Conversion of preferred stock
into common stock in pooling           |                                                           |  | 56,240       |   |          |   | 1            |   |            |   |           |   |          |   | 1,248    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 1,249   |          |   |   |         |         
|Forfeiture of stock options                                          |                                                           |  |             |   |          |   |             |   |            |   | 96         |   |          |   | (96      | ) |            |   |       |   |             |   |        |          |   |   |        |   |  |   |        |          |   |   |         |         
|Repurchase of common stock                                           |                                                           |  | (4,044       | ) |          |   |             |   |            |   |           |   |          |   | (1       | ) |            |   |       |   |             |   |         |          |   |   |        |   |  |   | (1      | )        |   |   |         |         
|Payments of notes receivable
from stockholders                       |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   | 102    |   |             |   |        |          |   |   |        |   |  |   | 102     |          |   |   |         |         
|Cancelation of notes receivable
from stockholder                     |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   | 83     |   |             |   |        |          |   |   |        |   |  |   | 83      |          |   |   |         |         
|Cancelation of common stock                                          |                                                           |  | (839         | ) |          |   |             |   |            |   |           |   |          |   |         |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   |        |          |   |   |         |         
|Tax benefit from
option exercises                                    |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   | 17,575   |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 17,575  |          |   |   |         |         
|Net Income                                                           |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   |       |   |             |   |        |          |   |   | 77,568  |   |  |   | 77,568  |          |   | $ | 77,568  |         
|Other comprehensive income:                                          |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|                                                                     | Foreign exchange rate translation                         |  |              |  |          |   |              |  |            |   |            |  |          |   |          |  |            |   |        |  |             |   |         | (12      | ) |   |         |  |  |   |         | (12      | ) |   |         | (12      | )
|                                                                     | Net unrealized gain on
available- for-sale
securities(1)  |  |              |  |          |   |              |  |            |   |            |  |          |   |          |  |            |   |        |  |             |   |         | 66,818   |   |   |         |  |  |   |         | 66,818   |   |   |         | 66,818   |  
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Balances as of
December 31, 2000                                     |                                                           |  | 80,729,972   |   |          |   | 807          |   |            |   |           |   |          |   | 268,003  |   |            |   | (56    | ) |             |   | 167,774 |          |   |   | 383,137 |   |  |   | 819,665 |          |   | $ | 144,374 |         
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Exercise of common stock
options                                     |                                                           |  | 1,125,894    |   |          |   | 11           |   |            |   |           |   |          |   | 9,931    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 9,942   |          |   |   |         |         
|Employee stock purchase plan
purchases                               |                                                           |  | 265,582      |   |          |   | 3            |   |            |   |           |   |          |   | 4,249    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 4,252   |          |   |   |         |         
|Cancelation of common stock                                          |                                                           |  | (7,618       | ) |          |   |             |   |            |   |           |   |          |   |         |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   |        |          |   |   |         |         
|Tax benefit from
option exercises                                    |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   | 5,754    |   |            |   |       |   |             |   |        |          |   |   |        |   |  |   | 5,754   |          |   |   |         |         
|Net income (restated)                                                |                                                           |  |             |   |          |   |             |   |            |   |           |   |          |   |         |   |            |   |       |   |             |   |        |          |   |   | 165,524 |   |  |   | 165,524 |          |   | $ | 165,524 |         
|Other comprehensive income:                                          |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|                                                                     | Foreign exchange rate
translation                         |  |              |  |          |   |              |  |            |   |            |  |          |   |          |  |            |   |        |  |             |   |         | (4       | ) |   |         |  |  |   |         | (4       | ) |   |         | (4       | )
|                                                                     | Reclassification of unrealized
gain on trading securities |  |              |  |          |   |              |  |            |   |            |  |          |   |          |  |            |   |        |  |             |   |         | (166,528 | ) |   |         |  |  |   |         | (166,528 | ) |   |         | (166,528 | )
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         
|Balances as of
December 31, 2001 (restated)                          |                                                           |  | 82,113,830   |   |          | $ | 821          |   |            | $ |           |   |          | $ | 287,937  |   |            | $ | (56    | ) |             | $ | 1,242   |          |   | $ | 548,661 |   |  | $ | 838,605 |          |   | $ | (1,008  | )       
|                                                                     |                                                           |  |              |   |          |   |              |   |            |   |            |   |          |   |          |   |            |   |        |   |             |   |         |          |   |   |         |   |  |   |         |          |   |   |         |         

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

See accompanying notes to consolidated financial statements.

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

|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |          |          |         |  
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | -------- | ------------------------ | ------- | ------ | -------- | ------ | ------- | ------- | -------- | -------- | ------- | -
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          | Years Ended December 31,
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                         
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          | 2001                     |         | 2000   |          | 1999  
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |       
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          | (restated)               |         |        |          |        |         |         |          |         
|Cash flows from operating activities:                                   |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|                                                                        | Net income                                                                        |                                                                  | $                                                                 | 165,524                                   |          |                          | $       | 77,568 |          |        | $       | 249,070 |         
|                                                                        | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |         
|                                                                        |                                                                                   |                                                                  | Unrealized gains on Cisco investment                              |                                           |          | (285,729                 | )       |        |          |       |         |         |          | (379,290 | )      
|                                                                        |                                                                                   |                                                                  | Tax related to SFAS No. 133 reclass of Cisco investment           |                                           |          | 106,776                  |         |        |          |       |         |         |          |         |        
|                                                                        |                                                                                   |                                                                  | Reserve for inventory write-down and accrued purchase
commitments |                                           |          | 31,519                   |         |        |          | 1,800  |         |         |          |         |        
|                                                                        |                                                                                   |                                                                  | Deferred income taxes                                             |                                           |          | (23,488                  | )       |        |          | (649   | )       |         |          | 144,853  |        
|                                                                        |                                                                                   |                                                                  | Depreciation and amortization                                     |                                           |          | 19,422                   |         |        |          | 15,544 |         |         |          | 13,187   |        
|                                                                        |                                                                                   |                                                                  | Allowances for uncollectible accounts and returns                 |                                           |          | 10,261                   |         |        |          | 600    |         |         |          | (1,586   | )      
|                                                                        |                                                                                   |                                                                  | Tax benefit from option exercises                                 |                                           |          | 5,754                    |         |        |          | 17,575 |         |         |          | 10,303   |        
|                                                                        |                                                                                   |                                                                  | Other non-cash adjustments to operating income                    |                                           |          | 4,906                    |         |        |          | 83     |         |         |          | 489      |        
|                                                                        |                                                                                   |                                                                  | Write-down of impaired investment                                 |                                           |          | 2,275                    |         |        |          |       |         |         |          |         |        
|                                                                        |                                                                                   |                                                                  | Stock based compensation                                          |                                           |          |                         |         |        |          |       |         |         |          | 821      |        
|                                                                        |                                                                                   |                                                                  | Equity in losses of investee, net of tax                          |                                           |          | 577                      |         |        |          |       |         |         |          |         |        
|                                                                        |                                                                                   |                                                                  | Changes in operating assets and liabilities:                      |                                           |          |                          |         |        |          |        |         |         |          |          |        
|                                                                        |                                                                                   |                                                                  |                                                                   | Accounts receivable                       |          |                          | 30,310  |        |          |        | (37,688 | )       |          |          | 14,306  |  
|                                                                        |                                                                                   |                                                                  |                                                                   | Inventories                               |          |                          | 11,538  |        |          |        | (23,585 | )       |          |          | 12,914  |  
|                                                                        |                                                                                   |                                                                  |                                                                   | Other current assets                      |          |                          | (5,366  | )      |          |        | (18,777 | )       |          |          | (1,451  | )
|                                                                        |                                                                                   |                                                                  |                                                                   | Long-term assets                          |          |                          | 1,368   |        |          |        | 927     |         |          |          | (5,180  | )
|                                                                        |                                                                                   |                                                                  |                                                                   | Accrued and other liabilities             |          |                          | 13,730  |        |          |        | 17,335  |         |          |          | 1,459   |  
|                                                                        |                                                                                   |                                                                  |                                                                   | Accounts payable                          |          |                          | (9,951  | )      |          |        | 52      |         |          |          | 7,186   |  
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |         
|                                                                        |                                                                                   |                                                                  |                                                                   | Net cash provided by operating activities |          |                          | 79,426  |        |          |        | 50,785  |         |          |          | 67,081  |  
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|Cash flows from investing activities:                                   |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|                                                                        |                                                                                   | Purchases of marketable securities                               |                                                                   |                                           | (627,140 | )                        |         |        | (405,243 | )      |         |         | (491,534 | )       
|                                                                        |                                                                                   | Sales of marketable securities                                   |                                                                   |                                           | 306,406  |                          |         |        | 152,086  |        |         |         | 124,268  |         
|                                                                        |                                                                                   | Maturities of marketable securities                              |                                                                   |                                           | 283,668  |                          |         |        | 195,177  |        |         |         | 308,002  |         
|                                                                        |                                                                                   | Purchase of property and equipment                               |                                                                   |                                           | (12,921  | )                        |         |        | (23,743  | )      |         |         | (15,865  | )       
|                                                                        |                                                                                   | Other long term investments                                      |                                                                   |                                           | (12,473  | )                        |         |        | (4,635   | )      |         |         | 3,063    |         
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |         
|                                                                        |                                                                                   |                                                                  |                                                                   | Net cash used in investing activities     |          |                          | (62,460 | )      |          |        | (86,358 | )       |          |          | (72,066 | )
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|Cash flows from financing activities:                                   |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|                                                                        |                                                                                   | Proceeds from exercise of common stock options and warrants, net |                                                                   |                                           | 14,194   |                          |         |        | 6,578    |        |         |         | 15,575   |         
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|                                                                        |                                                                                   |                                                                  |                                                                   | Net cash provided by financing activities |          |                          | 14,194  |        |          |        | 6,578   |         |          |          | 15,575  |  
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|Effect of adjustment to conform fiscal year ends
in pooling transaction |                                                                                   |                                                                  |                                                                  |                                           |          |                          | 5,991   |        |          |        |        |        
|Increase (decrease) in cash and cash equivalents                        |                                                                                   |                                                                  | 31,160                                                            |                                           |          |                          | (23,004 | )      |          |        | 10,590  |        
|Cash and cash equivalents, beginning of year                            |                                                                                   |                                                                  | 8,368                                                             |                                           |          |                          | 31,372  |        |          |        | 20,782  |        
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |         
|Cash and cash equivalents, end of year                                  |                                                                                   | $                                                                | 39,528                                                            |                                           |          | $                        | 8,368   |        |          | $      | 31,372  |        
|                                                                        |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |         |         
|Cash paid:                                                              |                                                                                   |                                                                  |                                                                   |                                           |          |                          |         |        |          |        |         |        
|                                                                        |                                                                                   | Income taxes                                                     |                                                                   | $                                         | 4,784    |                          |         | $      | 19,093   |        |         | $       | 2,399    |         

See accompanying notes to consolidated financial statements.

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Advanced Fibre Communications, Inc.
Notes to Consolidated Financial Statements

Note 1. Description of Business and Summary of Significant Accounting Policies

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

Fiscal Year

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

Basis of Consolidation

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

Critical Accounting Policies and Estimates

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

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

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

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

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

Other Significant Accounting Policies

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

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

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

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

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

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

Equity-Based Compensation Plans.We follow Accounting Principles Board (APB)
opinion No. 25, Accounting for Stock Issued to Employees, and we account for
equity-based compensation plans with employees and non-employees of the board
of directors using the intrinsic value method.

Derivative Instruments and Hedging Activities

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

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Net Income Per Share

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

Foreign Currency Translation

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

Certain Risks and Concentrations

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

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

Reclassifications and Restatements

Certain prior year amounts have been reclassified to conform with the current
years presentation. In addition, as discussed in Note 2 of this Annual Report
on Form 10-K/A, the results for the year ended December 31, 2001 have been
restated.

All historical financial information was restated to reflect the acquisition of
GVN Technologies, Inc. (GVN) in the second quarter of fiscal 2000, which was
accounted for as a pooling of interests. See Note 11 for additional
information on our acquisition of GVN.

SFAS No. 133 Implementation in 2001

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

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

Recent Accounting Pronouncements

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

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

Note 2. Adjustment to Prior Period Results

Correction.We restated our financials statements for the year ended December
31, 2001 due to an error in our accounting for an operating lease and related
fixed assets upon vacating an engineering facility. The adjustment to
operating results for the year ended December 31, 2001 was a $1.7 million
after-tax charge ($2.7 million on a pre-tax basis) that should have been taken in the fourth quarter of 2001.
During the fourth quarter of 2001, we vacated an engineering facility in Largo,
Florida, and entered into a sublease agreement for the entire space. Upon a
subsequent review of our facilities, we realized that, in accordance with
generally accepted accounting principles, we should have recognized a $1.5 million pre-tax
impairment charge in the fourth quarter of 2001 for the ongoing shortfall
between our sublease income and our operating lease obligation. In addition,
we should have written off the $1.2 million pre-tax net book value of the
related leasehold improvements, furniture, fixtures, and telephone equipment.

The adjustment had no impact on revenues or cash flows for the restated period.

Retroactive equity method of accounting for our investment in AccessLan
Communications, Inc. (AccessLan).In the latter half of 2001, we invested
$12.5 million in AccessLan, which we accounted for using the cost method of
accounting. Effective April 1, 2002, upon exercise of our option to purchase
the remaining interests in AccessLan, we changed our method of accounting from
the cost method to the equity method. We retroactively applied the equity
method for our ownership interest in AccessLan from the date of our initial
investment as required under Accounting Principles Board Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock.This resulted in
reductions to net income and retained earnings of $0.6 million for the year
ended December 31, 2001.

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The consolidated financial statements have been restated to reflect the
following adjustments for the year ended December 31, 2001:



| |  | A $2.7 million increase to research and development expenses for the lease
impairment and the related write-off of leasehold improvements and fixed
assets 
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A $0.9 million increase in non-operating expenses to record our equity in
AccessLans losses for the period during which we held an investment in
AccessLan
| 
| |  | Tax benefit of $1.4 million associated with the above items                                                                                                

At December 31, 2001, retained earnings decreased by approximately $2.3 million
as a result of these adjustments. Other balance sheet lines that were impacted
were:



| |  | Other current assets for the reduction in our investment in AccessLan                                             
|- |  | ------------------------------------------------------------------------------------------------------------------
| 
| |  | Property and equipment for the write-off of the Largo facility leasehold
improvements and fixed assets            
| 
| |  | Accrued liabilities for the effect on current taxes payable and the current
portion of the lease impairment charge
| 
| |  | Long term liabilities for the long term portion of the lease impairment
charge                                    
| 
| |  | Deferred tax liabilities for the tax impact of the Largo facility impairment
charge and write-off                 

The consolidated financial statements as of, and for the year ended, December
31, 2001, have been restated to include the effects of the adjustments, as
follows:

Consolidated Statement of Income:

|                             |                    |   |                                       |         |          |   |               |         | 
|---------------------------- | ------------------ | - | ------------------------------------- | ------- | -------- | - | ------------- | ------- | 
|                             |                    |   | Year ended                           
|                             |                    |   | December 31, 2001                    
|                             |                    |   |                                      
|                             |                    |   |                                       |         |          |   | as previously
|                             |                    |   | restated                              |         | reported
|                             |                    |   |                                       |         |         
|                             |                    |   | (in thousands, except per share data)
|Research and development     |                    |   | 64,169                                |         |          |   | 61,435        |        
|                             | Operating expenses |   |                                       | 150,877 |          |   |               | 148,143 | 
|Equity in losses of investee |                    |   | (930                                  | )       |          |   |              |        
|                             | Other income, net  |   |                                       | 306,238 |          |   |               | 307,168 | 
|Income before income taxes   |                    |   | 266,974                               |         |          |   | 270,638       |        
|Income taxes                 |                    |   | 101,450                               |         |          |   | 102,842       |        
|Net income                   |                    | $ | 165,524                               |         |          | $ | 167,796       |        
|Basic earnings per share     |                    | $ | 2.03                                  |         |          | $ | 2.06          |        
|Diluted earnings per share   |                    | $ | 1.98                                  |         |          | $ | 2.01          |        

Consolidated Balance Sheet:

|                            |                                            |   |                   |           |          |   |               |           | 
|--------------------------- | ------------------------------------------ | - | ----------------- | --------- | -------- | - | ------------- | --------- | 
|                            |                                            |   | December 31, 2001
|                            |                                            |   |                  
|                            |                                            |   |                   |           |          |   | as previously
|                            |                                            |   | restated          |           | reported
|                            |                                            |   |                   |           |         
|                            |                                            |   | (in thousands)   
|Other current assets        |                                            | $ | 34,967            |           |          | $ | 35,897        |          
|                            | Total current assets                       |   |                   | 1,078,948 |          |   |               | 1,079,878 | 
|Property and equipment, net |                                            |   | 55,406            |           |          |   | 56,608        |          
|                            | Total assets                               |   |                   | 1,147,410 |          |   |               | 1,149,542 | 
|Accrued liabilities         |                                            |   | 73,550            |           |          |   | 73,624        |          
|Deferred tax liabilities    |                                            |   | 221,132           |           |          |   | 222,176       |          
|                            | Total current liabilities                  |   |                   | 304,651   |          |   |               | 305,769   | 
|Long term liabilities       |                                            |   | 4,154             |           |          |   | 2,896         |          
|Retained earnings           |                                            |   | 548,661           |           |          |   | 550,933       |          
|                            | Total stockholders equity                 |   |                   | 838,605   |          |   |               | 840,877   | 
|                            | Total liabilities and stockholders equity |   |                   | 1,147,410 |          |   |               | 1,149,542 | 

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Note 3. Marketable Securities

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

|                            |                             |   |              |         |      |   |         |         | 
|--------------------------- | --------------------------- | - | ------------ | ------- | ---- | - | ------- | ------- | 
|                            |                             |   | December 31,
|                            |                             |   |             
|                            |                             |   | 2001         |         | 2000
|                            |                             |   |              |         |     
|Corporate equity securities |                             | $ | 670,489      |         |      | $ | 658,961 |        
|Municipal debt securities   |                             |   | 241,725      |         |      |   | 202,334 |        
|Corporate debt securities   |                             |   | 4,000        |         |      |   | 5,490   |        
|                            |                             |   |              |         |      |   |         |        
|                            | Total marketable securities |   | $            | 916,214 |      |   | $       | 866,785 | 
|                            |                             |   |              |         |      |   |         |        

Corporate Equity Securities

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

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

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

Debt Securities

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

Note 4. Inventories

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

|                 |                   |   |              |        |      |   |        |        | 
|---------------- | ----------------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                 |                   |   | December 31,
|                 |                   |   |             
|                 |                   |   | 2001         |        | 2000
|                 |                   |   |              |        |     
|Raw materials    |                   | $ | 12,909       |        |      | $ | 23,741 |       
|Work-in-progress |                   |   | 993          |        |      |   | 1,746  |       
|Finished goods   |                   |   | 15,809       |        |      |   | 33,869 |       
|                 |                   |   |              |        |      |   |        |       
|                 | Total inventories |   | $            | 29,711 |      |   | $      | 59,356 | 
|                 |                   |   |              |        |      |   |        |       

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Note 5. Property and Equipment

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

|                                         |                             |   |              |        |      |   |         |        | 
|---------------------------------------- | --------------------------- | - | ------------ | ------ | ---- | - | ------- | ------ | 
|                                         |                             |   | December 31,
|                                         |                             |   |             
|                                         |                             |   | 2001         |        | 2000
|                                         |                             |   |              |        |     
|                                         |                             |   | (restated)   |        |      |   |        
|Furniture and fixtures                   |                             | $ | 15,273       |        |      | $ | 13,560  |       
|Computer, software, and office equipment |                             |   | 33,031       |        |      |   | 36,071  |       
|Engineering equipment                    |                             |   | 50,221       |        |      |   | 53,777  |       
|                                         |                             |   |              |        |      |   |         |       
|                                         |                             |   | 98,525       |        |      |   | 103,408 |       
|Less: accumulated depreciation           |                             |   | 43,119       |        |      |   | 36,709  |       
|                                         |                             |   |              |        |      |   |         |       
|                                         | Property and equipment, net |   | $            | 55,406 |      |   | $       | 66,699 | 
|                                         |                             |   |              |        |      |   |         |       

At December 31, 2001 engineering equipment included $2.0 million of inventory
that was transferred to fixed assets used to build test equipment for our
operations. The restatement of the December 31, 2001 financial statements
included a write-off of the net book value of property and equipment housed in
our Largo, Florida engineering facility which we subleased for a three-year
term in December 2001. The amount of the write-off was $1.2 million.

Note 6. Accrued Liabilities

A summary of accrued liabilities follows (in thousands):

|                                 |                           |   |              |        |      |   |        |        | 
|-------------------------------- | ------------------------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                 |                           |   | December 31,
|                                 |                           |   |             
|                                 |                           |   | 2001         |        | 2000
|                                 |                           |   |              |        |     
|                                 |                           |   | (restated)   |        |      |   |       
|Income and sales taxes           |                           | $ | 24,052       |        |      | $ | 11,866 |       
|Accrual for purchase commitments |                           |   | 14,026       |        |      |   | 1,800  |       
|Warranty                         |                           |   | 12,639       |        |      |   | 11,597 |       
|Salaries and benefits            |                           |   | 10,201       |        |      |   | 11,055 |       
|Other accruals                   |                           |   | 8,690        |        |      |   | 12,014 |       
|Deferred revenues                |                           |   | 3,942        |        |      |   | 17     |       
|                                 |                           |   |              |        |      |   |        |       
|                                 | Total accrued liabilities |   | $            | 73,550 |      |   | $      | 48,349 | 
|                                 |                           |   |              |        |      |   |        |       

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Note 7. Income Taxes

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

|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|---------------------------------------- | ------- | - | ------- | ------ | ----------- | - | -------- | ------- | ----- | - | --------- | ------ |  | - | ------- | ------- | 
|                                         |         |   |         |        |             |   |          |         |       |   | Charge in |        |  |   |        
|                                         |         |   |         |        |             |   |          |         |       |   | Lieu of   |        |  |   |        
|                                         |         |   |         |        |             |   |          |         |       |   | Income    |        |  |   |        
|                                         |         |   | Current |        | Deferred(1) |   | Taxes(2) |         | Total
|                                         |         |   |         |        |             |   |          |         |      
|Year ended December 31, 2001
(restated): |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |        
|                                         | Federal |   | $       | 7,215  |             |   | $        | 78,318  |       |   | $         | 5,204  |  |   | $       | 90,737  | 
|                                         | State   |   |         | 5,203  |             |   |          | 4,960   |       |   |           | 550    |  |   |         | 10,713  | 
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|Income taxes                             |         | $ | 12,418  |        |             | $ | 83,278   |         |       | $ | 5,754     |        |  | $ | 101,450 |        
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|Year ended December 31, 2000:            |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |        
|                                         | Federal |   | $       | 16,080 |             |   | $        | 1,334   |       |   | $         | 15,494 |  |   | $       | 32,908  | 
|                                         | State   |   |         | 6,954  |             |   |          | (1,983  | )     |   |           | 2,081  |  |   |         | 7,052   | 
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|Income taxes (benefit)                   |         | $ | 23,034  |        |             | $ | (649     | )       |       | $ | 17,575    |        |  | $ | 39,960  |        
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|Year ended December 31, 1999:            |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |        
|                                         | Federal |   | $       | 2,986  |             |   | $        | 121,787 |       |   | $         | 9,175  |  |   | $       | 133,948 | 
|                                         | State   |   |         | 217    |             |   |          | 23,066  |       |   |           | 1,128  |  |   |         | 24,411  | 
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 
|Income taxes                             |         | $ | 3,203   |        |             | $ | 144,853  |         |       | $ | 10,303    |        |  | $ | 158,359 |        
|                                         |         |   |         |        |             |   |          |         |       |   |           |        |  |   |         |         | 



---

|(1) |  | Deferred tax expenses exclude deferred taxes on the unrealized gains and
losses on available-for-sale marketable securities that is included in
equity in accumulated other comprehensive income. For 2001, the deferred
portion of the tax provision includes $106.8 million that was reclassed
from accumulated other comprehensive income to tax expenses upon our
implementation of SFAS No. 133 in January 2001. Excluding this amount,
the deferred portion of the tax provision would be a benefit, or decrease,
of $23.5 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The charge in lieu of income taxes results from the tax benefit of stock
option exercises.                                                                                                                                                                                                                                                                                                                                                                                                                                               

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

|                                                                             |              |   |                          |         |      |   |        |        |  |   |         |         | 
|---------------------------------------------------------------------------- | ------------ | - | ------------------------ | ------- | ---- | - | ------ | ------ |  | - | ------- | ------- | 
|                                                                             |              |   | Years Ended December 31,
|                                                                             |              |   |                         
|                                                                             |              |   | 2001                     |         | 2000 |   | 1999  
|                                                                             |              |   |                          |         |      |   |       
|                                                                             |              |   | (restated)               |         |      |   |        |        |  |   |        
|Income taxes at statutory rate                                               |              | $ | 93,441                   |         |      | $ | 41,135 |        |  | $ | 142,600 |        
|State taxes, net of federal benefit                                          |              |   | 6,963                    |         |      |   | 4,583  |        |  |   | 16,050  |        
|Current losses and temporary differences
for which no benefit was recognized |              |   | 1,390                    |         |      |   | 1,038  |        |  |   | 774     |        
|Foreign sales corporation benefit                                            |              |   |                         |         |      |   | (184   | )      |  |   | (114    | )      
|Utilization of tax credits                                                   |              |   | (1,632                   | )       |      |   | (2,250 | )      |  |   | (1,450  | )      
|Tax exempt interest                                                          |              |   | (2,044                   | )       |      |   | (2,761 | )      |  |   | (1,400  | )      
|Change in valuation allowance                                                |              |   |                         |         |      |   |       |        |  |   | (1,668  | )      
|Other                                                                        |              |   | 3,332                    |         |      |   | (1,601 | )      |  |   | 3,567   |        
|                                                                             |              |   |                          |         |      |   |        |        |  |   |         |        
|                                                                             | Income taxes |   | $                        | 101,450 |      |   | $      | 39,960 |  |   | $       | 158,359 | 
|                                                                             |              |   |                          |         |      |   |        |        |  |   |         |        

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'

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

|                          |                                          |  |              |          |      |  |   |          |  
|------------------------- | ---------------------------------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                          |                                          |  | December 31,
|                          |                                          |  |             
|                          |                                          |  | 2001         |          | 2000
|                          |                                          |  |              |          |     
|                          |                                          |  | (restated)   |          |      |  |  
|Deferred tax assets:      |                                          |  |              |          |      |  |   |         
|                          | Allowances and accruals                  |  | $            | 29,213   |      |  | $ | 15,675   |  
|                          | Research tax credit carry-forwards       |  |              | 4,913    |      |  |   | 1,513    |  
|                          | Net operating loss carry-forwards        |  |              | 5,367    |      |  |   |         |  
|                          | Unrealized loss on marketable securities |  |              | 595      |      |  |   | 239      |  
|                          |                                          |  |              |          |      |  |   |          |  
|                          | Gross deferred tax assets                |  |              | 40,088   |      |  |   | 17,427   |  
|                          |                                          |  |              |          |      |  |   |         
|Deferred tax liabilities: |                                          |  |              |          |      |  |   |         
|                          | Recognized gain on marketable securities |  |              | (254,217 | )    |  |   | (147,687 | )
|                          | Unrealized gain on marketable securities |  |              | (765     | )    |  |   | (107,230 | )
|                          | Net book value over net tax basis        |  |              | (6,238   | )    |  |   | (7,185   | )
|                          |                                          |  |              |          |      |  |   |          |  
|                          | Gross deferred tax liabilities           |  |              | (261,220 | )    |  |   | (262,102 | )
|                          |                                          |  |              |          |      |  |   |          |  
|                          | Net deferred tax liabilities             |  | $            | (221,132 | )    |  | $ | (244,675 | )
|                          |                                          |  |              |          |      |  |   |         

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

Note 8. Bank Borrowings

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

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

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

Note 9. Stockholders Equity

Common Stock Options

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

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| |  | Options issued prior to 1997 generally vest 20% on the first
anniversary of the grant date and ratably over the following 48 months                           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Options issued after 1997 to new employees generally vest 25% on the
first anniversary of the grant date and ratably over the following 36
months             
| 
| |  | Options issued in 1997 through 1999 to employees with at least one
year of service generally vest ratably over 48 months from the date of
grant               
| 
| |  | Options issued after 1999 to employees with at least one year of
service generally vest ratably over 36 months from the date of grant                         
| 
| |  | Options issued to non-employee directors of AFCs board generally vest
33% on the first anniversary of the grant date and ratably over the
following 24 months
| 
| |  | Options expire ten years from the date of grant and are normally
canceled three months after termination of employment                                        

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

|                                                               |  |                          |            |       |  |          |       |       |  |        |            |          |  |   |       |  |  |          |            |   |  |   |       | 
|-------------------------------------------------------------- |  | ------------------------ | ---------- | ----- |  | -------- | ----- | ----- |  | ------ | ---------- | -------- |  | - | ----- |  |  | -------- | ---------- | - |  | - | ----- | 
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 2001                     |            | 2000  |  | 1999    
|                                                               |  |                          |            |       |  |         
|                                                               |  |                          |            |       |  | Weighted |       |       |  |        |            | Weighted |  |   |       |  |  | Weighted
|                                                               |  |                          |            |       |  | Average  |       |       |  |        |            | Average  |  |   |       |  |  | Average 
|                                                               |  |                          |            |       |  | Exercise |       |       |  |        |            | Exercise |  |   |       |  |  | Exercise
|Options                                                        |  | Shares                   |            | Price |  | Shares   |       | Price |  | Shares |            | Price   
|                                                               |  |                          |            |       |  |          |       |       |  |        |            |         
|Outstanding at
beginning of year                               |  |                          | 10,629,510 |       |  | $        | 23.16 |       |  |        | 9,187,496  |          |  | $ | 14.53 |  |  |          | 8,171,547  |   |  | $ | 6.62  | 
|Granted                                                        |  |                          | 5,920,899  |       |  |          | 17.91 |       |  |        | 4,150,386  |          |  |   | 36.72 |  |  |          | 5,148,606  |   |  |   | 21.11 | 
|Exercised                                                      |  |                          | (1,125,894 | )     |  |          | 8.89  |       |  |        | (1,332,154 | )        |  |   | 6.51  |  |  |          | (1,727,436 | ) |  |   | 4.96  | 
|Canceled                                                       |  |                          | (1,162,936 | )     |  |          | 27.57 |       |  |        | (1,376,218 | )        |  |   | 22.57 |  |  |          | (2,405,221 | ) |  |   | 8.48  | 
|                                                               |  |                          |            |       |  |          |       |       |  |        |            |          |  |   |       |  |  |          |            |   |  |   |       | 
|Outstanding at end of year                                     |  |                          | 14,261,579 |       |  | $        | 21.75 |       |  |        | 10,629,510 |          |  | $ | 23.16 |  |  |          | 9,187,496  |   |  | $ | 14.53 | 
|                                                               |  |                          |            |       |  |          |       |       |  |        |            |          |  |   |       |  |  |          |            |   |  |   |       | 
|Exercisable at end of year                                     |  |                          | 6,100,525  |       |  | $        | 20.58 |       |  |        | 3,219,604  |          |  | $ | 15.11 |  |  |          | 2,145,102  |   |  | $ | 6.64  | 
|Available for grant                                            |  |                          | 1,452,320  |       |  |          |       |       |  |        | 3,788,384  |          |  |   |       |  |  |          | 6,558,508  |   |  |   |       | 
|Weighted average fair
value of options
granted during the year |  |                          |            |       |  | $        | 11.61 |       |  |        |            |          |  | $ | 25.20 |  |  |          |            |   |  | $ | 13.27 | 

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

|                |                |        |                     |              |                     |             |           |          |          |       |   |       |  |          |          |           |  |  |   |       | 
|--------------- | -------------- | ------ | ------------------- | ------------ | ------------------- | ----------- | --------- | -------- | -------- | ----- | - | ----- |  | -------- | -------- | --------- |  |  | - | ----- | 
|                |                |        | Options Outstanding |              | Options Exercisable
|                |                |        |                     |              |                    
|                |                |        |                     |              |                     |             | Weighted  |          |          |       |   |       |  |          |          |           |  |  |  
|                |                |        |                     |              |                     |             | Average   |          | Weighted |       |   |       |  |          | Weighted
|                |                |        |                     |              |                     |             | Remaining |          | Average  |       |   |       |  |          | Average 
|Range of Option |                |        |                     |              |                     | Contractual |           | Exercise |          |       |   |       |  | Exercise
|Exercise Prices |                | Shares |                     | Life (Years) |                     | Price       |           | Shares   |          | Price
|                |                |        |                     |              |                     |             |           |          |          |      
|                | $0.01 - $7.88  |        |                     | 2,086,435    |                     |             |           | 5.9      |          |       | $ | 6.71  |  |          |          | 1,646,006 |  |  | $ | 6.48  | 
|                | 8.03 - 9.56    |        |                     | 693,566      |                     |             |           | 7.0      |          |       |   | 8.63  |  |          |          | 486,909   |  |  |   | 8.66  | 
|                | 9.69 - 16.31   |        |                     | 1,550,651    |                     |             |           | 8.1      |          |       |   | 15.11 |  |          |          | 1,046,940 |  |  |   | 15.75 | 
|                | 16.50 - 16.63  |        |                     | 2,404,855    |                     |             |           | 9.3      |          |       |   | 16.63 |  |          |          | 528,951   |  |  |   | 16.62 | 
|                | 16.81 - 19.67  |        |                     | 2,084,396    |                     |             |           | 9.8      |          |       |   | 19.32 |  |          |          | 88,525    |  |  |   | 18.09 | 
|                | 19.69 - 22.15  |        |                     | 925,532      |                     |             |           | 8.9      |          |       |   | 20.74 |  |          |          | 305,635   |  |  |   | 21.15 | 
|                | 22.44 - 28.63  |        |                     | 1,838,726    |                     |             |           | 8.8      |          |       |   | 24.52 |  |          |          | 645,251   |  |  |   | 24.81 | 
|                | 29.13 - 39.75  |        |                     | 619,722      |                     |             |           | 8.3      |          |       |   | 35.40 |  |          |          | 294,665   |  |  |   | 35.36 | 
|                | 40.31 - 44.38  |        |                     | 933,212      |                     |             |           | 8.1      |          |       |   | 43.90 |  |          |          | 581,199   |  |  |   | 44.01 | 
|                | 45.13 - 81.31  |        |                     | 1,124,484    |                     |             |           | 8.4      |          |       |   | 52.73 |  |          |          | 476,444   |  |  |   | 53.15 | 
|                |                |        |                     |              |                     |             |           |          |          |       |   |       |  |          |          |           |  |  |   |       | 
|                | $0.01 - $81.31 |        |                     | 14,261,579   |                     |             |           | 8.4      |          |       | $ | 21.75 |  |          |          | 6,100,525 |  |  | $ | 20.58 | 
|                |                |        |                     |              |                     |             |           |          |          |       |   |       |  |          |          |           |  |  |   |      

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Employee Stock Purchase Plan

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

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

Pro Forma Fair Value Information

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

|                              |             |  |            |         |      |  |      |        |  |  |   |         | 
|----------------------------- | ----------- |  | ---------- | ------- | ---- |  | ---- | ------ |  |  | - | ------- | 
|                              |             |  | 2001       |         | 2000 |  | 1999
|                              |             |  |            |         |      |  |     
|                              |             |  | (restated) |         |      |  |      |        |  |  |  
|Net income:                   |             |  |            |         |      |  |      |        |  |  |   |        
|                              | As reported |  | $          | 165,524 |      |  | $    | 77,568 |  |  | $ | 249,070 | 
|                              | Pro forma   |  |            | 106,156 |      |  |      | 31,349 |  |  |   | 223,576 | 
|Basic net income per share:   |             |  |            |         |      |  |      |        |  |  |   |        
|                              | As reported |  | $          | 2.03    |      |  | $    | 0.97   |  |  | $ | 3.20    | 
|                              | Pro forma   |  |            | 1.30    |      |  |      | 0.39   |  |  |   | 2.88    | 
|Diluted net income per share: |             |  |            |         |      |  |      |        |  |  |   |        
|                              | As reported |  | $          | 1.98    |      |  | $    | 0.91   |  |  | $ | 3.05    | 
|                              | Pro forma   |  |            | 1.27    |      |  |      | 0.37   |  |  |   | 2.74    | 

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

|     |  |            |     |               |  |           |      |               |  |  |   | 
|---- |  | ---------- | --- | ------------- |  | --------- | ---- | ------------- |  |  | - | 
|     |  |            |     |               |  | Risk-free |      | Expected Life
|     |  | Volatility |     | Interest Rate |  | (Years)  
|     |  |            |     |               |  |          
|2001 |  |            | 100 | %             |  |           | 4.31 | %             |  |  | 3 | 
|2000 |  |            | 100 |               |  |           | 5.89 |               |  |  | 3 | 
|1999 |  |            | 90  |               |  |           | 5.81 |               |  |  | 4 | 

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

|               |  |            |     |               |  |           |     |               |  |  |    | 
|-------------- |  | ---------- | --- | ------------- |  | --------- | --- | ------------- |  |  | -- | 
|Semi-Annual    |  |            |     |               |  | Risk-free |     | Expected Life
|Purchase Dates |  | Volatility |     | Interest Rate |  | (Months) 
|               |  |            |     |               |  |          
|January 2002   |  |            | 100 | %             |  |           | 4.8 | %             |  |  | 13 | 
|July 2001      |  |            | 100 |               |  |           | 4.8 |               |  |  | 13 | 
|January 2001   |  |            | 97  |               |  |           | 4.9 |               |  |  | 17 | 
|July 2000      |  |            | 97  |               |  |           | 4.9 |               |  |  | 17 | 
|January 2000   |  |            | 85  |               |  |           | 4.9 |               |  |  | 8  | 
|July 1999      |  |            | 85  |               |  |           | 4.9 |               |  |  | 8  | 
|January 1999   |  |            | 75  |               |  |           | 5.8 |               |  |  | 14 | 

Stockholders Rights Plan

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

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

Net Income Per Share

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

|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ |  |  | - | ------- | 
|                                                                                                        |  | Years Ended December 31,
|                                                                                                        |  |                         
|                                                                                                        |  | 2001                     |         | 2000 |  | 1999
|                                                                                                        |  |                          |         |      |  |     
|                                                                                                        |  | (restated)               |         |      |  |      |        |  |  |  
|Net income                                                                                              |  | $                        | 165,524 |      |  | $    | 77,568 |  |  | $ | 249,070 | 
|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 
|Shares used in basic per share calculations
- weighted average common shares outstanding
for the period |  |                          | 81,381  |      |  |      | 80,201 |  |  |   | 77,723  | 
|Weighted average number of shares of
dilutive options and warrants                                      |  |                          | 2,257   |      |  |      | 4,599  |  |  |   | 3,934   | 
|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 
|Shares used in diluted per share calculations                                                           |  |                          | 83,638  |      |  |      | 84,800 |  |  |   | 81,657  | 
|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 
|Basic net income per share                                                                              |  | $                        | 2.03    |      |  | $    | 0.97   |  |  | $ | 3.20    | 
|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 
|Diluted net income per share                                                                            |  | $                        | 1.98    |      |  | $    | 0.91   |  |  | $ | 3.05    | 
|                                                                                                        |  |                          |         |      |  |      |        |  |  |   |         | 

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

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Note 10. Commitments and Contingencies

Leases

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

|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|2002                         |  | $ | 8,523  | 
|2003                         |  |   | 8,247  | 
|2004                         |  |   | 8,328  | 
|2005                         |  |   | 8,215  | 
|2006                         |  |   | 7,769  | 
|Thereafter                   |  |   | 30,054 | 
|                             |  |   |        | 
|Total minimum lease payments |  | $ | 71,136 | 
|                             |  |   |        | 

We sublease three of our facilities. Total future minimum lease payments have
not been reduced by approximately $8.4 million of future sublease payments to
be received under non-cancelable subleases. We accrued $1.5 million to
short term and long term liabilities for our Largo, Florida facility operating
lease. The amount represents the present value of the loss we expect to incur
for the ongoing shortfall between our sublease income and operating lease
obligation. If the sublessee does not renew its lease agreement with us, and
we are unable to enter into another sublease agreement through the term of the
lease obligation (March 31, 2007), the amount of the ultimate
loss based on the lease could
increase by up to $1.0 million before tax. Total sublease payments received in 2001
and 2000 were $1.5 million and $0.6 million, respectively. We did not have
sublease income in 1999. Total rent expenses for all operating leases were
$8.6 million, $7.9 million, and $6.6 million for the years ended December 31,
2001, 2000, and 1999, respectively.

Employee Benefit Plan

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

Purchase Agreements with Contract Manufacturers

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



| |  | for any materials it has purchased for use in the manufacture of our products bought within standard lead times, or
otherwise, if we granted approval of the purchase
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | for work in process, and                                                                                                                                             
| 
| |  | for all finished products manufactured for us that are in the CMs possession.                                                                                       

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

Litigation

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

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

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

Statements regarding the potential impact of pending litigation are
forward-looking. They reflect our current view with respect to future events,
and involve risks and uncertainties which may cause actual results to be
materially different from any future result that may be suggested, expressed or
implied.

Note 11. Acquisition of GVN Technologies, Inc.

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

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

|                              |       |              |         |                   |  |   |         |         | 
|----------------------------- | ----- | ------------ | ------- | ----------------- |  | - | ------- | ------- | 
|Year ended December 31, 1999: |       | Net revenues |         | Net income (loss)
|                              |       |              |         |                   | 
|AFC                           |       | $            | 296,571 |                   |  | $ | 250,297 |        
|GVN                           |       |              | 40      |                   |  |   | (1,227  | )      
|                              |       |              |         |                   |  |   |         |        
|                              | Total |              | $       | 296,611           |  |   | $       | 249,070 | 
|                              |       |              |         |                   |  |   |         |        

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

Note 12. Segment Information

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

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

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

|                                         |               |                         |           |                          |         |      |           |         |         |   |         |         |         | 
|---------------------------------------- | ------------- | ----------------------- | --------- | ------------------------ | ------- | ---- | --------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |               |                         |           | Years ended December 31,
|                                         |               |                         |           |                         
|                                         |               |                         |           | 2001                     |         | 2000 |           | 1999   
|                                         |               |                         |           |                          |         |      |           |        
|                                         |               |                         |           | (restated)               |         |      |           |         |         |   |         |        
|Revenues:                                |               |                         |           |                          |         |      |           |         |         |   |         |        
|                                         | Domestic      |                         | $         | 282,004                  |         |      | $         | 368,904 |         |   | $       | 265,135 |        
|                                         | International |                         |           | 45,565                   |         |      |           | 47,946  |         |   |         | 31,476  |        
|                                         |               |                         |           |                          |         |      |           |         |         |   |         |         |        
|                                         |               | Total revenues          |           | $                        | 327,569 |      |           | $       | 416,850 |   |         | $       | 296,611 | 
|Long-lived assets:                       |               |                         |           |                          |         |      |           |         |         |   |         |        
|                                         | Domestic      |                         | $         | 68,325                   |         |      | $         | 76,786  |         |   | $       | 63,145  |        
|                                         | International |                         |           | 137                      |         |      |           | 722     |         |   |         | 1,058   |        
|                                         |               |                         |           |                          |         |      |           |         |         |   |         |         |        
|                                         |               | Total long-lived assets |           | $                        | 68,462  |      |           | $       | 77,508  |   |         | $       | 64,203  | 
|Total assets                             |               | $                       | 1,147,410 |                          |         | $    | 1,135,175 |         |         | $ | 900,787 |        
|Major customers, percentage of
revenues: |               |                         |           |                          |         |      |           |         |         |   |         |        
|                                         | Customer A    |                         |           | 17                       | %       |      |           | 14      | %       |   |         | 12      | %      
|                                         | Customer B    |                         |           |                         |         |      |           | 16      | %       |   |         | 16      | %      

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders
Advanced Fibre Communications, Inc.:

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

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

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

As discussed in Notes 1 and 3 to the consolidated financial statements, in 2001 the Company
changed its method of accounting for derivative financial instruments upon
implementation of Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities,as amended by
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities.

As discussed in Note 2 to the consolidated
financial statements, the accompanying consolidated balance sheet as
of December 31, 2001, and the related consolidated statement of
income, shareholders equity and comprehensive income, and cash flows
for the year then ended have been restated.

| |  |         
| |  | --------
| |  | KPMG LLP

San Francisco, California
January 29, 2002, except for Note 2,
which is as of November 8, 2002

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Advanced Fibre Communications, Inc.
Quarterly Results of Operations
Selected quarterly financial data is summarized below (unaudited) (in thousands)

|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |        |        | 
|--------------------------------------------- | -------------------------- | ------------------------ | ------- | -------------- | ------ | --------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | --------- | ------- | -------- | ------ | -------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                              |                            |                          |         | Quarters ended
|                                              |                            |                          |         |               
|                                              |                            |                          |         | Dec. 31,       |        | Sept. 30, |        | June 30, |        | Mar. 31, |        | Dec. 31, |        | Sept. 30, |         | June 30, |        | Mar. 31,
|                                              |                            |                          |         | 2001(1)        |        | 2001      |        | 2001     |        | 2001(2)  |        | 2000(3)  |        | 2000      |         | 2000     |        | 2000(4) 
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |         
|                                              |                            |                          |         | (restated)     |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |  
|Revenues                                      |                            | $                        | 82,102  |                |        | $         | 84,647 |          |        | $        | 78,609 |          |        | $         | 82,211  |          |        | $        | 116,099 |        |        | $ | 114,100 |        |        | $ | 101,232 |        |        | $ | 85,419 |       
|Cost of revenues                              |                            |                          | 76,281  |                |        |           | 47,050 |          |        |          | 43,977 |          |        |           | 48,648  |          |        |          | 55,039  |        |        |   | 60,355  |        |        |   | 54,005  |        |        |   | 45,904 |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Gross profit                                  |                            |                          | 5,821   |                |        |           | 37,597 |          |        |          | 34,632 |          |        |           | 33,563  |          |        |          | 61,060  |        |        |   | 53,745  |        |        |   | 47,227  |        |        |   | 39,515 |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Operating expenses:                           |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|                                              | Research and development   |                          |         | 18,306         |        |           |        | 15,100   |        |          |        | 14,797   |        |           |         | 15,966   |        |          |         | 13,523 |        |   |         | 16,189 |        |   |         | 14,444 |        |   |        | 14,672 |       
|                                              | Sales and marketing        |                          |         | 11,857         |        |           |        | 12,459   |        |          |        | 12,238   |        |           |         | 12,831   |        |          |         | 12,791 |        |   |         | 12,795 |        |   |         | 12,298 |        |   |        | 9,579  |       
|                                              | General and administrative |                          |         | 7,801          |        |           |        | 6,655    |        |          |        | 6,499    |        |           |         | 16,368   |        |          |         | 6,269  |        |   |         | 7,268  |        |   |         | 8,408  |        |   |        | 7,227  |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|                                              |                            | Total operating expenses |         |                | 37,964 |           |        |          | 34,214 |          |        |          | 33,534 |           |         |          | 45,165 |          |         |        | 32,583 |   |         |        | 36,252 |   |         |        | 35,150 |   |        |        | 31,478 | 
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Operating income (loss)                       |                            |                          | (32,143 | )              |        |           | 3,383  |          |        |          | 1,098  |          |        |           | (11,602 | )        |        |          | 28,477  |        |        |   | 17,493  |        |        |   | 12,077  |        |        |   | 8,037  |       
|Other income, net                             |                            |                          | 21,276  |                |        |           | 20,648 |          |        |          | 10,856 |          |        |           | 253,458 |          |        |          | 12,291  |        |        |   | 2,169   |        |        |   | 2,034   |        |        |   | 34,950 |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Income (loss) before taxes                    |                            |                          | (10,867 | )              |        |           | 24,031 |          |        |          | 11,954 |          |        |           | 241,856 |          |        |          | 40,768  |        |        |   | 19,662  |        |        |   | 14,111  |        |        |   | 42,987 |       
|Income taxes (benefit)                        |                            |                          | (3,000  | )              |        |           | 8,455  |          |        |          | 4,090  |          |        |           | 91,905  |          |        |          | 13,861  |        |        |   | 6,685   |        |        |   | 4,798   |        |        |   | 14,616 |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Net income (loss)                             |                            | $                        | (7,867  | )              |        | $         | 15,576 |          |        | $        | 7,864  |          |        | $         | 149,951 |          |        | $        | 26,907  |        |        | $ | 12,977  |        |        | $ | 9,313   |        |        | $ | 28,371 |       
|                                              |                            |                          |         |                |        |           |        |          |        |          |        |          |        |           |         |          |        |          |         |        |        |   |         |        |        |   |         |        |        |   |        |       
|Basic net income (loss) per share             |                            | $                        | (0.10   | )              |        | $         | 0.19   |          |        | $        | 0.10   |          |        | $         | 1.85    |          |        | $        | 0.33    |        |        | $ | 0.16    |        |        | $ | 0.12    |        |        | $ | 0.36   |       
|Shares used in basic per share computations   |                            |                          | 82,034  |                |        |           | 81,699 |          |        |          | 81,176 |          |        |           | 80,963  |          |        |          | 80,688  |        |        |   | 80,431  |        |        |   | 80,043  |        |        |   | 79,624 |       
|Diluted net income (loss) per share           |                            | $                        | (0.10   | )              |        | $         | 0.18   |          |        | $        | 0.09   |          |        | $         | 1.80    |          |        | $        | 0.32    |        |        | $ | 0.15    |        |        | $ | 0.11    |        |        | $ | 0.33   |       
|Shares used in diluted per share computations |                            |                          | 82,034  |                |        |           | 84,371 |          |        |          | 83,277 |          |        |           | 83,101  |          |        |          | 83,999  |        |        |   | 84,658  |        |        |   | 85,043  |        |        |   | 84,968 |       



---

|(1) |  | In the fourth quarter ending December 31, 2001, gross profit was lower than preceding quarters as a result of a write-off of $18.0 million for excess and obsolete inventories, and
an accrual of $12.0 million for purchase commitments. These
charges contributed to the $32.1 million operating loss for the quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | In the first quarter ending March 31, 2001, general and administrative expenses included $9.3 million provision for doubtful accounts related to receivables from a value-added
reseller , or VAR, deemed to be uncollectible. This expense, along with non-recognition of $11.9 million in revenues for shipments made to Winstar and the VAR, for which
product costs were recognized, and an increase of $2.2 million in reserve for excess and obsolete inventories, contributed to the operating loss of $11.6 million for the quarter.
In addition, other income and income taxes for the quarter included the effects of our implementation of SFAS No. 133 on January 1, 2001. The deferred gains on our Cisco
investment and related collars of $274.2 million, and the associated deferred taxes of $106.8 million were reclassified from accumulated other comprehensive income to non-operating
income and tax expenses, respectively.
|   
|   
|   
|   
|(3) |  | In the fourth quarter ending December 31, 2000, gross profit was higher than preceding quarters as a result of recognition of revenues on the first release of our software
product, Panorama element management system, which generated higher margins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|   
|   
|   
|(4) |  | In the first quarter ending March 31, 2000, other income included $32.8 million from Marconi Communications Inc., as a settlement of outstanding litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

See accompanying notes to consolidated financial statements.

53



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PART III.




Item 14.Controls and Procedures

Within 90 days prior to the date of this report, an
evaluation was carried out under the supervision and with the
participation of AFCs management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of AFCs disclosure controls and procedures
as defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934, as amended (the Exchange Act). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that AFCs disclosure controls and procedures are
effective to ensure that information required to be disclosed by AFC
in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Subsequent to the date of that evaluation, there were no significant
changes to AFCs internal controls or in other factors that could
significantly affect these controls, including any corrective
actions with regard to significant deficiencies or material
weaknesses.

54



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##### Table of Contents






PART IV.




Item 15.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 Annual Report on Form
10-K/A:



| | 1. |  | Financial Statements:            
| | -- |  | ---------------------------------
|
| |    |  | As of December 31, 2001 and 2000:



| |  |  | Consolidated Balance Sheets
| | - |  | ---------------------------



| |  |  | For the Years Ended December 31, 2001, 2000, and 1999:
| |  |  | ------------------------------------------------------



| |  |  | Consolidated Statements of Income                                       
| | - |  | ------------------------------------------------------------------------
|
| |  |  | Consolidated Statements of Stockholders Equity and 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 and Qualifying 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:                                                                                                                                                                                                       

|        |  |                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                               
|Number  |  | Document Description                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                               
|3.3.1   |  | Fifth Amended and Restated Certificate of Incorporation of the Registrant. (2)                                                                                                                                                
|3.3.2   |  | Certificate of Designation of Series A Junior Participating Preferred Stock. (4)                                                                                                                                              
|3.5     |  | Amended and Restated Bylaws of the Registrant. (9)                                                                                                                                                                            
|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. (4)                                                                                                                                     
|4.5     |  | Amendment to Rights Agreement dated as of October 19, 1998 between the Registrant and BankBoston,
N.A. (5)                                                                                                                    
|10.10   |  | Compensation Agreement, dated March 23, 1999 between the Registrant and John A. Schofield. (6)                                                                                                                                
|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) 
|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)                                                                                                                                                                   

55



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##### Table of Contents



|        |  |                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                      
|Number  |  | Document Description                                                                                                                                                                 
|        |  |                                                                                                                                                                                      
|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. (3)                        
|10.33   |  | 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. (7)          
|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. (8)
|21.1    |  | Subsidiaries of the Registrant. (1)                                                                                                                                                  
|23.1    |  | Report on Schedule and Consent of KPMG LLP.                                                                                                                                          
|24.1    |  | Power of Attorney. (9)                                                                                                                                                               



---

|(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 September 30, 1997, filed with the
Securities and Exchange Commission on November 7, 1997.                          
|   
|   
|   
|   
|(3) |  | 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.                                            
|   
|   
|   
|   
|(4) |  | Incorporated by reference from the Registrants Current Report on Form
8-K filed with the Securities and Exchange Commission on May 19, 1998.                                                                                    
|   
|   
|   
|   
|(5) |  | Incorporated by reference from the Registrants Current Report on Form
8-K filed with the Securities and Exchange Commission on October 29, 1998.                                                                                
|   
|   
|   
|   
|(6) |  | 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.                                   
|   
|   
|   
|   
|(7) |  | 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.                          
|   
|   
|   
|   
|(8) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 1999, filed with the Securities and
Exchange Commission on March 21, 2000.                                            
|   
|   
|   
|   
|(9) |  | Previously filed on March 21,
2002 as an exhibit to this Form 10-K.                                                                                                                                                              
|   
|   
|   
|   
|   |  | Portions of this Exhibit have been granted Confidential Treatment.                                                                                                                                                               



| |  |  | 3(b). Reports on Form 8-K:
| |  |  | --------------------------

|
|
|

56



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##### Table of Contents






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)       
|                       
|Date: November 12, 2002 | By:                                                     | /s/ John A. Schofield
|                        |                                                        
|                        | John A. Schofield
President and Chief Executive Officer

Pursuant to the requirements of the Securities 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.

|                                        |  |                  
|--------------------------------------- |  | -----------------
|Signature and Title                     |  | Date             
|                                        |  |                  
|                                       
|/s/ John A. Schofield                   |  | November 12, 2002
|                                        |  |                  
|John A. Schofield
Chairman of the Board |  |                  
|                                       
|/s/ Ruann F. Ernst                      |  | November 12, 2002
|                                        |  |                  
|Ruann F. Ernst
Director                 |  |                  
|                                       
|/s/ Clifford H. Higgerson               |  | November 12, 2002
|                                        |  |                  
|Clifford H. Higgerson
Director          |  |                  

57



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|                                                                                                                                                   |  |                  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature and Title                                                                                                                                |  | Date             
|                                                                                                                                                   |  |                  
|                                                                                                                                                  
|/s/ William L. Keever                                                                                                                              |  | November 12, 2002
|                                                                                                                                                   |  |                  
|William L. Keever
Director                                                                                                                         |  |                  
|                                                                                                                                                  
|/s/ Martin R. Klitten                                                                                                                              |  | November 12, 2002
|                                                                                                                                                   |  |                  
|Martin R. Klitten
Director                                                                                                                         |  |                  
|                                                                                                                                                  
|/s/ Dan Rasdal                                                                                                                                     |  | November 12, 2002
|                                                                                                                                                   |  |                  
|Dan Rasdal
Director                                                                                                                                |  |                  
|                                                                                                                                                  
|/s/ Alex Sozonoff                                                                                                                                  |  | November 12, 2002
|                                                                                                                                                   |  |                  
|Alex Sozonoff
Director                                                                                                                             |  |                  
|                                                                                                                                                  
|/s/ Keith E. Pratt                                                                                                                                 |  | November 12, 2002
|                                                                                                                                                   |  |                  
|Keith E. Pratt
Senior Vice President, Chief Financial Officer,
and Assistant Secretary
(Duly Authorized Signatory and
Principal Financial Officer) |  |                  
|                                                                                                                                                  
|/s/ R. Leon Blackburn                                                                                                                              |  | November 12, 2002
|                                                                                                                                                   |  |                  
|R. Leon Blackburn
Vice President, Corporate Controller
(Duly Authorized Signatory and
Principal Accounting Officer)                                |  |                  

58



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ADVANCED FIBRE COMMUNICATIONS, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

|                              |  |            |       |            |  |           |        |            |  |            |    |  |  |  |         |   |  |   |       | 
|----------------------------- |  | ---------- | ----- | ---------- |  | --------- | ------ | ---------- |  | ---------- | -- |  |  |  | ------- | - |  | - | ----- | 
|                              |  |            |       |            |  | ADDITIONS |        |            |  |            |    |  |  | 
|                              |  |            |       |            |  |           |        |            |  |            |    |  |  | 
|                              |  | Balance at |       | Charged to |  | Charged   |        | Deductions |  | Balance at
|Allowance for                 |  | beginning  |       | costs and  |  | to other  |        | from       |  | end of    
|doubtful accounts             |  | of period  |       | expenses   |  | accounts  |        | allowance  |  | period    
|                              |  |            |       |            |  |           |        |            |  |           
|Year ending
December 31, 1999 |  | $          | 1,136 |            |  |           | 1,050  |            |  |            |   |  |  |  | (304    | ) |  | $ | 1,882 | 
|Year ending
December 31, 2000 |  |            | 1,882 |            |  |           | 600    |            |  |            |   |  |  |  | (534    | ) |  |   | 1,948 | 
|Year ending
December 31, 2001 |  |            | 1,948 |            |  |           | 10,261 |            |  |            | 58 |  |  |  | (11,315 | ) |  |   | 952   | 

|                              |  |           |        |            |  |           |        |            |  |            |      |   |  |  |        |   |  |   |        | 
|----------------------------- |  | --------- | ------ | ---------- |  | --------- | ------ | ---------- |  | ---------- | ---- | - |  |  | ------ | - |  | - | ------ | 
|                              |  |           |        |            |  | ADDITIONS |        |            |  |            |      |   |  | 
|                              |  |           |        |            |  |           |        |            |  |            |      |   |  | 
|Reserve for                   |  | Balance   |        |            |  |           |        |            |  |            |      |   |  |  |        |   |  |  
|inventories and               |  | at        |        | Charged to |  | Charged   |        | Deductions |  | Balance at
|purchase                      |  | beginning |        | costs and  |  | to other  |        | from       |  | end of    
|commitments                   |  | of period |        | expenses   |  | accounts  |        | reserve    |  | period    
|                              |  |           |        |            |  |           |        |            |  |           
|Year ending
December 31, 1999 |  | $         | 4,951  |            |  |           | 7,221  |            |  |            | (113 | ) |  |  | (4,051 | ) |  | $ | 8,008  | 
|Year ending
December 31, 2000 |  |           | 8,008  |            |  |           | 10,150 |            |  |            | 635  |   |  |  | (2,905 | ) |  |   | 15,888 | 
|Year ending
December 31, 2001 |  |           | 15,888 |            |  |           | 38,906 |            |  |            | (329 | ) |  |  | (4,616 | ) |  |   | 49,849 | 

|                              |  |           |       |            |  |           |        |            |  |            |   |  |  |  |   |  |  |   |       | 
|----------------------------- |  | --------- | ----- | ---------- |  | --------- | ------ | ---------- |  | ---------- | - |  |  |  | - |  |  | - | ----- | 
|                              |  |           |       |            |  | ADDITIONS |        |            |  |            |   |  |  | 
|                              |  |           |       |            |  |           |        |            |  |            |   |  |  | 
|                              |  | Balance   |       |            |  |           |        |            |  |            |   |  |  |  |   |  |  |  
|                              |  | at        |       | Charged to |  | Charged   |        | Deductions |  | Balance at
|Allowance for                 |  | beginning |       | costs and  |  | to other  |        | from       |  | end of    
|customer returns              |  | of period |       | expenses   |  | accounts  |        | reserve    |  | period    
|                              |  |           |       |            |  |           |        |            |  |           
|Year ending
December 31, 1999 |  | $         | 1,953 |            |  |           | (1,176 | )          |  |            |  |  |  |  |  |  |  | $ | 777   | 
|Year ending
December 31, 2000 |  |           | 777   |            |  |           | 945    |            |  |            |  |  |  |  |  |  |  |   | 1,722 | 
|Year ending
December 31, 2001 |  |           | 1,722 |            |  |           | (1,171 | )          |  |            |  |  |  |  |  |  |  |   | 551   | 

|                              |  |           |        |            |  |           |        |            |  |            |        |   |  |  |        |   |  |   |        | 
|----------------------------- |  | --------- | ------ | ---------- |  | --------- | ------ | ---------- |  | ---------- | ------ | - |  |  | ------ | - |  | - | ------ | 
|                              |  |           |        |            |  | ADDITIONS |        |            |  |            |        |   |  | 
|                              |  |           |        |            |  |           |        |            |  |            |        |   |  | 
|                              |  | Balance   |        |            |  |           |        |            |  |            |        |   |  |  |        |   |  |  
|                              |  | at        |        | Charged to |  | Charged   |        | Deductions |  | Balance at
|                              |  | beginning |        | costs and  |  | to other  |        | from       |  | end of    
|Warranty reserve              |  | of period |        | expenses   |  | accounts  |        | reserve    |  | period    
|                              |  |           |        |            |  |           |        |            |  |           
|Year ending
December 31, 1999 |  | $         | 6,563  |            |  |           | 8,910  |            |  |            |       |   |  |  | (6,575 | ) |  | $ | 8,898  | 
|Year ending
December 31, 2000 |  |           | 8,898  |            |  |           | 10,100 |            |  |            | (1,111 | ) |  |  | (6,290 | ) |  |   | 11,597 | 
|Year ending
December 31, 2001 |  |           | 11,597 |            |  |           | 9,307  |            |  |            |       |   |  |  | (8,265 | ) |  |   | 12,639 | 

59



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SIGNATURE

Pursuant to the requirements 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.                                                                                                                            
|                       
|Date: November 12, 2002 | By:                                                                                                                                                             | /s/Keith E. Pratt
|                        |                                                                                                                                                                
|                        | Name: Keith E. Pratt
Title: Senior Vice President,
Chief Financial Officer,
and Assistant Secretary
(Duly Authorized Signatory and
Principal Financial Officer)

60



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##### Table of Contents



CERTIFICATIONS

I, John A. Schofield, Chairman of the Board, President and Chief Executive Officer
of Advanced Fibre Communications, Inc., or AFC, certify that:

1.
I have reviewed this annual report on Form 10-K/A of AFC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of AFC
as of, and for, the periods presented in this annual report;

4. AFCs other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for AFC and we have:



| |  |  | (a) designed such disclosure controls and procedures to ensure that
material information relating to AFC, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) evaluated the effectiveness of AFCs disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| |  |  | (c) presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                              

5. AFCs other certifying officer and I have disclosed, based on our most
recent evaluation, to AFCs auditors and the audit committee of AFCs board of
directors (or persons performing the equivalent function):



| |  |  | (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect AFCs ability to
record, process, summarize and report financial data and have
identified for AFCs auditors any material weaknesses in internal
controls; and
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in AFCs internal
controls; and                                                                                                                             

6. AFCs other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |        |  |                                                        
|----------------------- |  | ------ |  | -------------------------------------------------------
|                        |  |        |  |                                                        
|Date: November 12, 2002 |  | By:    |  | /s/John A. Schofield                                   
|                        |  |        |  |                                                        
|                        |  | Name:  |  | John A. Schofield                                      
|                        |  | Title: |  | Chairman of the
Board,                                 
|                        |  |        |  | President and Chief Executive Officer                  
|                        |  |        |  | (Duly Authorized Signatory and
Chief Executive Officer)

61



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##### Table of Contents



I, Keith E. Pratt, Senior Vice President, Chief Financial Officer, and
Assistant Secretary of Advanced Fibre Communications, Inc., or AFC, certify
that:

1.
I have reviewed this annual report on Form 10-K/A of AFC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of AFC
as of, and for, the periods presented in this annual report;

4. AFCs other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for AFC and we have:



| |  |  | (a) designed such disclosure controls and procedures to ensure that
material information relating to AFC, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) evaluated the effectiveness of AFCs disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| |  |  | (c) presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                              

5. AFCs other certifying officer and I have disclosed, based on our most
recent evaluation, to AFCs auditors and the audit committee of AFCs board of
directors (or persons performing the equivalent function):



| |  |  | (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect AFCs ability to
record, process, summarize and report financial data and have
identified for AFCs auditors any material weaknesses in internal
controls; and
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in AFCs internal
controls; and                                                                                                                             

6. AFCs other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                        |  |        |  |                                                                        
|----------------------- |  | ------ |  | -----------------------------------------------------------------------
|                        |  |        |  |                                                                        
|Date: November 12, 2002 |  | By:    |  | /s/ Keith E. Pratt                                                     
|                        |  |        |  |                                                                        
|                        |  | Name:  |  | Keith E. Pratt                                                         
|                        |  | Title: |  | Senior Vice
President,
Chief Financial Officer,
and Assistant Secretary
|                        |  |        |  | (Duly Authorized Signatory and
Principal Financial Officer)            

62



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##### Table of Contents



ADVANCED FIBRE COMMUNICATIONS, INC.

Index to exhibits filed with this Annual Report on Form 10-K/A:

|        |  |                                            
|------- |  | -------------------------------------------
|Exhibit |  |                                            
|Number  |  | Document Description                       
|        |  |                                            
|23.1    |  | Report on Schedule and Consent of KPMG LLP.

63