<PAGE>   1
                                                                    EXHIBIT 13.2


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Except for the historical financial information contained herein, the following 
discussion and analysis may contain "forward-looking statements" within the 
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 
21E of the Securities Exchange Act of 1934, as amended. Such statements include 
declarations regarding the intent, belief or current expectations of the 
Company and its management. Prospective investors are cautioned that any such 
forward-looking statements are not guarantees of future performance and involve 
a number of risks and uncertainties; actual results could differ materially 
from those indicated by such forward-looking statements.

Among the important factors that could cause actual results to differ 
materially from those indicated by such forward-looking statements, as set 
forth in Part II. Item 7 - "Certain Factors That Might Affect Future Operating 
Results" of this Annual Report on Form 10-K are:

o  Potential Fluctuations in Future Operating Results and Seasonality
o  Customer Concentration
o  Risks Associated with International Markets
o  Competition
o  Risk of Failure to Manage Expanding Operations
o  Concentrated Product Line, New Products and Rapid Technological Change
o  Dependence on Telecommunications Industry and Small Line Size Market
o  Dependence on Sole Source and Limited Number of Third Party Manufacturers 
   and Support Organizations
o  Risks Associated with Pending Litigation
o  Limited Protection of Proprietary Technology; Risk of Third Party Claims of 
   Infringement
o  Dependence on Key Personnel
o  Year 2000
o  Compliance with Regulations and Industry Standards
o  Other risks identified from time to time in the Company's Reports and 
   Registration Statements filed with the Securities and Exchange Commission

OVERVIEW

AFC designs, develops, manufacturers, markets and supports the Universal 
Modular Carrier 1000(TM) ("UMC 1000" system), a cost-effective multi-service 
digital loop carrier system developed to serve small to mid line size markets. 
The UMC 1000 is designed to enable telecommunications companies and other 
service providers to connect subscribers to the central office switch for voice 
and data communications over copper, fiber and analog radio networks. The 
Company began shipping the UMC 1000 in January 1994.

During 1998, revenues increased 16.7% over 1997; however, operating income 
declined as a percentage of revenues from 20.0% in 1997 to 12.1% in 1998.
Revenues fell short of internal expectations, primarily due to lower
international sales in the Asia Pacific region. International sales in the Asia
Pacific region were affected by the adverse economic conditions experienced in
this region and the delay in certain technological developments designed for the
international markets. Revenue growth during 1998 was also adversely affected by
lower than anticipated sales to the Regional Bell Operating Companies and the
substantial reduction in sales to GTE from 1997. As a result of the slower
growth in revenues, operating income was lower than the prior year as certain of
the Company's expenses were based on anticipated revenues and were relatively
fixed in the short-term. Operating income were also impacted by the Company's
decision to significantly increase its investment in research and development
activities. Operating income decreased from $53.5 million in the year ended 1997
to $37.8 million in 1998.

<PAGE>   2
Although AFC has achieved profitability every year beginning in 1995, there can 
be no assurance that profitability will be sustained or increased in the 
future. Substantially all of AFC's revenues are derived from the UMC 1000 and 
this concentration is expected to continue in the foreseeable future. Any 
decrease in the overall level of sales of, or the prices for, the UMC 1000 
could have a material adverse effect on the Company's business, financial 
condition and results of operations. Adverse factors include introductions or 
announcements by competitors, price competition, a decline in the demand for 
the UMC 1000, product obsolescence, system configurations, loss of customers, 
and penetration of certain markets, among other reasons.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of 
revenues represented by certain items reflected in the Company's consolidated 
statements of operations:

<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                             --------------------------------
                                             1998         1997        1996(1)
                                             -----        -----       -------
<S>                                          <C>          <C>          <C>
Revenues                                     100.0%       100.0%       100.0%
Cost of revenues                              53.9         54.5         56.8
                                             -----        -----        -----
  Gross profit                                46.1         45.5         43.2
                                             -----        -----        -----

Operating expenses:
  Research and development                    13.1          9.6         11.1
  Selling, general and administrative         20.9         15.9         16.3
  DSC litigation costs                          --           --         14.5
                                             -----        -----        -----
    Total operating expenses                  34.0         25.5         41.9
                                             -----        -----        -----

Operating income                              12.1         20.0          1.3
Other income, net                              1.3          1.8          1.8
                                             -----        -----        -----
Income before income taxes                    13.4         21.8          3.1
Income taxes (benefit)                         4.7          8.1         (2.4)
                                             -----        -----        -----
Net income                                     8.7%        13.7%         5.5%
                                             =====        =====        =====
</TABLE>

(1) Includes a charge of $15.8 million to reflect a cash payment of $10.1 
    million and the issuance of 1,451,574 shares of Common Stock to DSC in 
    settlement of outstanding litigation. Without this charge, operating income 
    as a percentage of revenues for the year ended December 31, 1996 would have 
    been 13.4%.

1998 COMPARED WITH 1997

REVENUES. For the year ended December 31, 1998, revenues totaled $312.7 
million, an increase of $44.8 million, or 16.7%, over the $267.9 million 
reported in 1997. The largest increase in revenues was in the domestic market 
which increased $33.8 million or 17.1% over the prior year. International 
revenues increased $11.1 million, or 15.7%, year-over-year and represented 
26.2% of revenues in 1998 and 26.5% of revenues in 1997.

The increase in domestic revenues for 1998 was primarily the result of sales 
growth in the Competitive Local Exchange Carrier ("CLEC") market and continued 
sales penetration of the Independent Local Exchange Carrier market. The growth 
in revenues was partially offset by the substantial reduction in sales to GTE 
from 1997. The growth in international sales was primarily due to higher sales 
to our customer in South Africa, partially offset by lower sales in the Asia 
Pacific region. The Company anticipates the effect of the economic conditions 
in the Asia Pacific region will have a continuing adverse affect on the 
Company's business, financial condition and results of operations. For the year 
ended December 31, 1998, WinStar Communications, Inc. (a CLEC customer) 
accounted for 11.2% of total revenues and Integrators of System Technology 
(Pty) Ltd. of South Africa accounted for 10.4%. For the year


<PAGE>   3
ended December 31, 1997, GTE accounted for 19.2% of total revenues. No other 
customer accounted for 10% or more of total revenues in either period. Although 
the Company's largest customers have varied from period to period, the Company 
anticipates that its results of operations in any given period will continue to 
depend to a significant extent upon sales to a small number of customers. There 
can be no assurance that the Company's principal customers will continue to 
purchase the UMC 1000 at current levels, if at all. The loss of one or more 
major customers could have a material adverse effect on the Company's business, 
financial condition and results of operations.

GROSS PROFIT. For the year ended December 31, 1998, gross profit was $144.1 
million compared with $121.9 million for 1997, and represented gross margins as 
a percentage of revenues of 46.1% in 1998 and 45.5% in 1997. The increase in 
gross profit percentage from 1997 to 1998 was due to cost savings from 
engineering design changes, the customer mix, vendor discounts, and higher 
royalty revenue. In the future, gross profits may fluctuate due to a wide 
variety of factors, including: the mix between domestic and international 
sales, the customer mix, the product mix, the timing and size of orders which 
are received and can be shipped in a quarter, the availability of adequate 
supplies of key components and assemblies, the Company's ability to introduce 
new products and technologies on a timely basis, the timing of new product 
introductions or announcements by the Company or its competitors, price 
competition, unit volume, royalty revenues, and changes in warranty coverage.

RESEARCH AND DEVELOPMENT. For the year ended December 31, 1998, research and
development expenses increased $15.3 million, or 59.5%, to $41.0 million
compared with $25.7 million in 1997. Research and development expenses
represented 13.1% of total revenues in 1998 and 9.6% in 1997.

The increase in research and development expenses from 1997 to 1998 was 
primarily due to the addition of engineering personnel and the related 
increases in salaries, benefits, hiring and relocation, facility costs, and use 
of outside consultants and services. Additional expense increases were a result 
of material costs and depreciation on test equipment used to develop and test 
new products and features. As of December 31, 1998, the number of employees in 
research and development was 288 compared with 176 at the end of 1997, an 
increase of 63.6%. The Company plans to continue to support the development of 
new products, features and product cost reductions. All research and 
development costs to date have been expensed as incurred.

SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1998, 
selling, general and administrative expenses increased $22.6 million, or 52.9%, 
to $65.3 million compared with $42.7 million in 1997. Selling, general and 
administrative expenses represented 20.9% of total revenues in 1998 and 15.9% 
in 1997.

The increase in general and administrative expenses for the year ended December 
31, 1998 as compared with 1997 was primarily due to compensation and benefits,
litigation costs, facility costs, and depreciation on capital equipment
purchases. The increases in sales and marketing expenses for the year ending
December 31, 1998 as compared with 1997 was attributable primarily to additional
sales and marketing personnel and the associated salaries and benefits, the
effect of higher revenue levels on commissions earned by the sales force and
international distributors, and increased spending on travel and outside
services. Selling, general and administrative headcount increased 27.0% to 329
as of December 31, 1998, from 259 as of the end of 1997.

INCOME TAXES. For 1998 and 1997, income taxes were recorded at an effective 
rate that approximated the combined federal and state statutory rates. The 
effective tax rate declined from 37.0% in 1997 to 35.0% in 1998 primarily due 
to tax exempt interest income, utilization of research and development credits, 
and benefits from the Company's Foreign Sales Corporation.
 
<PAGE>   4

1997 COMPARED WITH 1996

REVENUES. Revenues for the year ended December 31, 1997 were $267.9 million 
compared with $130.2 million for 1996, an increase of $137.7 million or 105.8%. 
International revenues were $70.9 million for 1997 compared with $27.1 million 
for 1996, an increase of $43.8 million or 161.6%. The increase in revenues for 
1997 was primarily due to continued growth in the independent telephone market, 
an increase in international revenues arising from expanded marketing and 
targeting efforts, the introduction of the 3GDLC and other new features of the 
UMC 1000, and the expansion of the Company's customer base. For the year ended 
December 31, 1997, GTE accounted for 19.2% of total revenues. No other single 
customer accounted for 10% or more of total revenues in 1997. For the year 
ended December 31, 1996, no single customer accounted for 10% or more of total 
revenues.

GROSS PROFIT. For the year ended December 31, 1997, gross profit was $121.9 
million or 45.5% of revenues compared with $56.2 million or 43.2% of revenues 
for 1996, an increase of $65.7 million or 116.9%. The improvement in gross 
profit, as a percentage of revenues, from 1996 to 1997 resulted from greater 
efficiencies achieved in the purchasing and manufacturing activities associated 
with higher unit volume, engineering design improvements, and the lower cost of 
inventory manufactured in China.

RESEARCH AND DEVELOPMENT. For the year ended December 31, 1997, research and 
development expenses were $25.7 million compared with $14.4 million for 1996, 
an increase of $11.3 million or 78.5%. Research and development expenses were 
9.6% of revenues for 1997 and 11.1% for 1996.

The increase in research and development expenses from 1996 to 1997 was 
primarily due to the addition of personnel hired to develop technology, the use 
of outside services for certain development and testing efforts, and the higher 
costs for material and test equipment used to develop and test new products and 
features. As of December 31, 1997, the number of employees in research and 
development was 176 compared with 124 in 1996, an increase of 41.9%.

SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1997, 
selling, general and administrative expenses were $42.7 million compared with 
$21.2 million for 1996, an increase of $21.5 million or 101.4%. Selling, 
general and administrative expenses were 15.9% of revenues for 1997 and 16.3% 
in 1996.

The increase in sales and marketing expenses from 1996 to 1997 was attributed 
primarily to the effect of higher revenue levels on commissions earned by the 
Company's sales force and by international distributors, additional sales and 
marketing personnel including the growth of the Company's infrastructure for 
international operations, increased advertising and trade show participation, 
and increased travel and entertainment expenses. Additional employees, expenses 
related to the conversion of management and accounting systems, higher facility 
costs, and legal costs associated with the ITRI litigation predominately 
accounted for the increase in general and administrative expenses from 1996 to 
1997. Selling, general and administrative headcount increased 82.4% to 259 as 
of December 31, 1997, from 142 as of the end of the prior year.

DSC LITIGATION. From July 1993 until June 1996 the Company was involved in 
litigation with DSC Communications Corporation ("DSC"). DSC alleged, among 
other things, that the Company's UMC 1000 technology contained or was derived 
from trade secrets and other proprietary technology of DSC. The parties entered 
into a Settlement Agreement and Mutual Releases dated as of June 24, 1996 (the 
"Settlement Agreement") pursuant to which the litigation was terminated. Under 
the terms of the Settlement Agreement, the Company paid DSC $3.0 million in 
June 1996 and $7.1 million in July 1996, and issued 1,451,574 shares of Common 
Stock to DSC. The full settlement amount was recorded during the second quarter 
of 1996 as a charge of $15.8 million. Under the terms of the Settlement 
Agreement, the Company maintains all rights to the UMC 1000 technology free and 
clear of any claim by DSC.

OTHER INCOME, NET. For the year ended December 31, 1997, net other income was 
$4.9 million compared with $2.4 million in 1996 (including a $1.5 million gain 
on dissolution of joint venture), an increase of $2.5 million or 104.2%.

<PAGE>   5
The increase in 1997 was primarily due to investment income from the investment 
of a portion of the proceeds of the Company's IPO in October 1996.

INCOME TAXES (BENEFIT). For the year ended December 31, 1997, the Company 
recorded income taxes at an effective rate that approximated the combined 
federal and state statutory rates. For the year ended December 31, 1996, an 
income tax benefit of $3.2 million was recorded to reflect the benefit of the 
DSC litigation settlement and the decrease in the valuation allowance recorded 
against the Company's deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

The components of the Company's capital resources and liquidity as of December 
31, 1998 and 1997 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           ---------------------
                                                             1998         1997
                                                           --------     --------
<S>                                                      <C>           <C>
Cash and cash equivalents                                  $ 20,669      $ 9,053
Marketable securities                                        90,084       96,143
Working capital, excluding cash and cash equivalents
 and marketable securities                                   98,571       88,444
</TABLE>

As of December 31, 1998, cash, cash equivalents and marketable securities 
amounted to $110.8 million compared with $105.2 million as of December 31, 1997.

In February 1997, AFC completed a secondary offering of 4,000,000 shares of 
Common Stock, 3,600,000 of which were sold by certain stockholders and 400,000 
of which were sold by the Company, generating approximately $7.8 million of net 
proceeds to the Company.

Operating activities in 1998 generated net cash of $33.3 million. This was 
primarily the result of operating earnings, including adjustments for non-cash 
activities such as tax benefit generated from the exercise and sale of stock 
options, depreciation resulting from a higher asset base, and a decrease in 
accounts receivable. Offsetting these sources of cash were increases in other 
assets, and a reduction in accounts payable and accrued liabilities. Days sales 
outstanding were 90 days at the end of 1998 compared with 78 days at the end of 
1997, mainly as a result of longer payment terms provided on international 
sales. Net cash of $28.1 million was used in investing activities in 1998, 
primarily as a result of purchasing fixed asset equipment to support employee 
and facility growth, and research and development and manufacturing activities. 
Included in the fixed asset equipment purchases were approximately $4.1 million 
in assets acquired as a result of buying out certain operating leases.

AFC has a $50.0 million unsecured bank line through two banks with an interest 
rate of prime, or LIBOR, plus 0.75%. The line of credit expires in July 1999. 
Under the bank line, the banks may issue letters of credit up to $10.0 million 
on behalf of the Company. The bank line requires the Company to comply with 
certain debt and financial covenants. As of December 31, 1998, $597,000 in 
letters of credit and no borrowings were outstanding under the bank line, and 
the Company was in compliance with the covenants contained in the agreement. 
The Company also has lease lines totaling $5.1 million that were used for 
equipment and furniture purchases.

The Company also maintains bank facilities with two banks under which the 
Company may open foreign exchange contracts up to $40.0 million. There are no 
borrowing provisions associated with these facilities and there are no 
financial covenants associated with the facilities. At December 31, 1998, a
foreign exchange contract of $1,146,000 was outstanding, with a maturity date of
January 14, 1999.                                     
<PAGE>   6
The Company's facility obligations and commitments are based in part on
anticipated growth projections, and in the near term, are relatively fixed.
Based on existing commitments for additional office space, the company will have
excess office space in the near future. The Company's results of operations
could be adversely affected if it is unable to, in a timely manner, sublease the
excess facility space at rents comparable to the Company's obligations.

Existing cash and short-term investments, available credit facilities, and cash
flows from operating and financing activities are believed to be adequate to
support the Company's financial resource needs, including working capital
requirements, capital expenditures and operating lease obligations for the next
twelve months.

FOREIGN CURRENCY AND INTEREST RATE RISK

The UMC 1000 is sold worldwide, primarily through a direct sales force in the
domestic market, and through a direct sales force, distributors and sales
representatives in international markets. AFC's wholly owned, Hong Kong-based
subsidiary, markets the UMC 1000 throughout the Asia Pacific region. The Asia
Pacific region's economy has deteriorated resulting in the devaluation of
currencies in certain countries of that region. The Company sells the UMC 1000
in this region, primarily in China, under U.S. dollar denominated contracts. The
UMC 1000 is also marketed in Central and Latin American countries, including
Brazil. The Brazilian economy has deteriorated recently resulting in the
significant devaluation of the Brazilian real. The impact of the Brazilian
downturn on other countries in this region has yet to be determined. Sales of
the UMC 1000 in this region are made under U.S. dollar denominated contracts.

The Company is exposed to market risk as a result of foreign exchange rate
fluctuations. The Company has one customer contract that is payable in French
francs. The receivable is hedged using forward currency exchange contracts. The
remainder of international sales are denominated in U.S. dollars. The
introduction in 1999 of the "Euro" currency may cause increased competition
among European companies which in turn may cause the value of the Euro to
materially fluctuate relative to the U.S. dollar. Adoption of the Euro is not
expected to have a material impact on AFC's business, results of operations or
financial condition.

The Company has sales and representative offices in China, Hong Kong, Singapore,
India, Poland and the U.K. Operating expenses for these offices have
historically been short-term in nature and are immaterial to the Company on a
consolidated basis.

Changes in domestic interest rates create risk for AFC and may cause adverse
fluctuations of its marketable securities portfolio and cash flows. The Company
may be affected by changes in the short-term U.S. Prime Rate and the resulting
interest rate on amounts borrowed under its line of credit. AFC's marketable
securities portfolio consists of domestic municipal debt and domestic corporate
debt, of which approximately 62% mature in one year or less. At December 31,
1998, the weighted average yield on the Company's marketable securities was
3.71%, and the weighted average yield on cash equivalents was 4.56%. Changes in
short-term U.S. interest rates affect the market value of those marketable
securities. Because of the short-term nature of its investment portfolio, the
Company believes its exposure to these market fluctuations is not significant.
If, at December 31, 1998, interest rates had increased immediately by two full
percentage points, the Company believes its marketable securities portfolio
would not have declined by a material amount. The marketable securities
portfolio is treated as available-for-sale under Financial Accounting Standards
Board No. 115.

SEASONALITY

AFC's customers normally install a portion of the UMC 1000 in outdoor 
locations. Shipments of the UMC 1000 are subject to the effects of seasonality, 
with fewer installation projects scheduled for the winter months. The majority 
of the Company's sales are to companies in North America, and accordingly, the 
Company believes that over time the effect of seasonality will cause its
revenues in the quarter ended March 31 to be lower than revenues in the
preceding quarter
<PAGE>   7
ended December 31. In particular, AFC currently believes that revenues in the
quarter ended March 31, 1999 will be lower than revenues in the quarter ended
December 31, 1998. See "Quarterly Results of Operations".

YEAR 2000 COMPLIANCE

AFC has formed a Year 2000 Committee to understand and address the year 2000 
("Y2K") issue as it affects the Company's infrastructure, operations, and the 
UMC 1000 product. Representatives from each functional area of the Company are 
responsible for identifying and assessing organizational readiness, preparing 
remediation steps, testing, and applying new standards and contingency plans. 
AFC has identified and assessed a majority of the potential Y2K-affected 
hardware, software, and facility equipment, and vendors. For the most part, 
AFC's systems and software have been found to be Y2K compliant, or have been
upgraded to compliance through manufacturers' upgrades.

The Company is currently in the process of surveying and testing its vendors' 
Y2K readiness and developing its own contingency plans in case of vendors' 
failures. Contingency plans for vendor Y2K failures include pre-qualifying 
alternative vendor suppliers, maintaining multiple vendor sources for critical 
components and assemblies, and maintaining adequate supplies of key components 
on hand. However, there can be no assurance that AFC will be able to obtain
sufficient materials from alternative sources. Current or alternative
manufacturers may not be able to meet the Company's supply requirements and such
supplies may not continue to be made available at favorable prices, or at all. A
survey is currently underway of AFC's leased properties and facilities,
including operational vendors providing power, local and long distance
telecommunications, water, heating and cooling, and various services to
determine the status of embedded technology equipment that could affect AFC's
operations. The Company plans to test and validate its internal operations,
complete the vendor surveys, and finalize and implement contingency plans by
mid-1999. Failure of the Company to adequately address all known and unknown Y2K
compliance issues could have a material adverse affect on AFC's business,
financial condition and results of operations.

The UMC 1000 was originally designed and developed to be Y2K compliant. AFC 
utilizes operating systems and software applications that were designed and 
developed to properly reflect the year 2000 and subsequent years' data. 
Although the Company believes that its product and operating systems are Y2K 
compliant, the Company's manufacturing suppliers may utilize equipment or 
software that is not compliant. The failure on the part of any vendor to 
adequately address its own Y2K compliance issues could lead to delays on the 
part of the vendor in the delivery of subassemblies for use in the Company's 
products, or disruption of services provided by a vendor, any of which could 
have a material adverse effect on the Company's business, financial condition 
and results of operations. The remaining Y2K compliance activities are not 
expected to result in significant incremental operating expenses; the Company 
estimates the cost to complete its Y2K readiness and contingency plans are not
expected to exceed $200,000. Expenditures to date in relation to Y2K readiness
have been immaterial.

CERTAIN ACCOUNTING PRONOUNCEMENTS

The Company has adopted the provisions of Statement of Financial Accounting 
Standards ("SFAS") No. 130, Reporting Comprehensive Income. The SFAS disclosure 
is described more fully in Note 1 of "Notes to Consolidated Financial 
Statements".

During the fourth quarter of 1998, the Company adopted the provisions of SFAS 
No. 131, Disclosures About Segments of an Enterprise and Related Information.
The SFAS disclosure is described more fully in Notes 1 and 11 of "Notes to 
Consolidated Financial Statements".
<PAGE>   8
SFAS No. 133, Accounting for Derivative and Hedging Activities, is effective 
for the Company beginning in the first quarter of 2000. Refer to Note 1 of 
"Notes to Consolidated Financial Statements" for a discussion of the accounting 
treatment of derivative instruments as required by this Statement.