##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  |  | For the fiscal year ended December 31,
    2003                                                 
|  |  | or                                                                                              
| 
|o |  | 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



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Advanced Fibre Communications, Inc.

|                       |  |                                                   
|---------------------- |  | --------------------------------------------------
|A Delaware Corporation |  | 68-0277743(I.R.S. Employer
    Identification No.)

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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes þ          No o

The aggregate market value of voting and
non-voting common equity held by non-affiliates of the
Registrant computed as of June 27, 2003 was $1,384,782,767.
(Solely for the purpose of calculating the preceding amount, all
directors and officers of the Registrant are deemed to be
affiliates.)

As of March 8, 2004, there were 87,876,521
shares of the Registrants common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Annual Report to
Stockholders for the year ended December 31, 2003 and the
Definitive Proxy Statement issued in connection with the 2004
Annual Meeting of Stockholders to be held on May 20, 2004,
are incorporated by reference in Parts II and III of this report.



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ADVANCED FIBRE COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K


FOR THE YEAR ENDED DECEMBER 31, 2003


TABLE OF CONTENTS

|              |  |                                                                                                                      |  |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                                                      |  | Page
|              |  |                                                                                                                      |  |     
|PART I.      
|Item 1.       |  | Business                                                                                                             |  |      | 2  | 
|Item 2.       |  | Properties                                                                                                           |  |      | 15 | 
|Item 3.       |  | Legal Proceedings                                                                                                    |  |      | 15 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                              |  |      | 15 | 
|PART II.     
|Item 5.       |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |  |      | 15 | 
|Item 6.       |  | Selected Financial Data                                                                                              |  |      | 17 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |  |      | 17 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |  |      | 17 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                                      |  |      | 17 | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |  |      | 17 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |  |      | 17 | 
|PART III.    
|Item 10.      |  | Directors, Executive
    Officers and Key Employees of the Registrant                                                |  |      | 18 | 
|Item 11.      |  | Executive Compensation                                                                                               |  |      | 22 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |  |      | 22 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                   |  |      | 22 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                                           |  |      | 23 | 
|PART IV.     
|Item 15.      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                                  |  |      | 23 | 
|Exhibit 10.37
|Exhibit 10.38
|Exhibit 10.39
|Exhibit 13.1 
|Exhibit 13.2 
|Exhibit 13.3 
|Exhibit 23.1 
|Exhibit 31   
|Exhibit 32   



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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 these statements by terms such as may,
intend, might, expect,
believe, seek, anticipate,
estimate, predict,
potential, target, goals,
projects, plan, should,
could, would, or 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 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 notes thereto in our 2003 Annual Report to
Stockholders, which information is incorporated by reference and
filed as Exhibits 13.2 and 13.3.




Item 1.Business

Company Background

Advanced Fibre Communications®, Inc.
(AFC®) (Nasdaq: AFCI) was incorporated in California in May
1992, and reincorporated in Delaware in September 1995. An
initial public offering was completed on October 1, 1996.
Our principal executive offices are located at 1465 North
McDowell Boulevard, Petaluma, California 94954. The telephone
number at that address is (707) 794-7700. We can also be
reached at 1-800-690-AFCI or through our Internet Website at
www.afc.com. Information on our Website 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 solutions and services. We are an
access market provider, delivering multiservice broadband
solutions to the global telecommunications industry. Through our
market-proven access solutions, we enable telecommunications
companies such as wireline carriers to deliver voice and
high-speed broadband services to their customers. Our
comprehensive portfolio enables carriers to deliver the
triple play of bundled voice, video and high-speed
Internet/data services over copper and/or fiber-based networks.
AFCs suite of access solutions includes:



|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | AdvancedVoiceSM, which provides both
    legacy and packet-based voice solutions;                                                                                           
| 
| | FiberDirectSM, an innovative
    Fiber-to-the-Premises (FTTP) offering that enables carriers
    to deploy a high- capacity all-fiber network;                              
| 
| | TelcoVideoSM, a solution that delivers
    advanced voice, high-speed Internet, video and other
    entertainment services; and                                             
| 
| | UniversalDSLSM, which delivers digital
    subscriber line (DSL) technology in multiple deployment options
    and configurations to customers regardless of their location.

Our suite of access solutions incorporates
elements of our core product portfolio, which includes
AccessMAXTM, TelliantTM,
TransMAXTM, PremMAXTM, AFCs network
management system, PanoramaTM, professional services
and plant cabinets and technologies.

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In order to articulate our strategy of being the
leading supplier of advanced voice and broadband solutions in
the access marketplace, we have launched a new brand positioning
and communications campaign: AFC  The Acronym for
Access SM.

On February 20, 2004, we completed the
acquisition of North American Access (NAA), a business unit of
Marconi Communications, Inc. (Marconi), a subsidiary of Marconi
Corporation plc. The information in this Business section of our
Annual Report on Form 10-K does not reflect the NAA
acquisition.

Industry Background

Over the past decade, the telecommunications
industry has witnessed rapid changes in the way people
communicate. Many of these changes arise from the tremendous
growth of the Internet and broadband technologies, such as DSL,
as well as wireless communications. The Internet has become a
widespread means of communication, while traditional analog
voice services have experienced little growth. Plain old
telephone services (POTS) have always been the core of any
wireline carriers business. However, wireline carriers are
challenged today to meet the increasing demand for broadband
services while protecting their valuable legacy voice revenues.

The access network  the connection
between subscribers and telephone companies  is
undergoing major advancements. Analog circuits, traditionally
used for most voice services, are being upgraded to digital
packets that can carry new and more advanced voice services.
Carriers are also beginning to migrate their legacy copper-based
access networks to high-capacity all-fiber access networks.

As a result of competition from wireless and
other wireline communications companies, along with increased
consumer demand for faster, cheaper, and more advanced services,
some carriers are starting to converge their separate voice and
data networks onto single next-generation networks.
These networks efficiently and cost-effectively deliver both
voice and broadband services. Voice-over-Packet (VoP), DSL and
FTTP are three examples of emerging packet-based services that
will be converged onto next-generation networks and then
delivered to a subscribers location. This convergence of
voice and broadband services allows carriers to lower operating
costs and generate new revenues.

The regulatory environment is also a factor
driving the need for network convergence. Concerns over
regulatory ambiguity created hesitation among wireline carriers
for deployment of packet-based voice and broadband services.
Meanwhile, cable companies have continued to successfully
rollout a competitive service bundle of voice, video and
high-speed Internet services.

The combination of competition, capital
constraints and regulatory issues has placed significant
pressure on wireline carriers. Today, they are presented with a
tremendous challenge of modernizing their legacy networks to
deliver advanced voice and broadband services. Faced with the
difficult task of quickly offering high-bandwidth and reliable
services to customers beyond the reach of their traditional
service areas, we believe carriers need the most flexible
broadband solutions available  solutions that extend
carriers reach while maximizing revenues and minimizing
costs. We believe AFC is well positioned to supply carriers with
access solutions that will leverage their existing network
assets, reduce operating costs and, most importantly, generate
new revenues.

Opportunities

Many of the future opportunities in the
telecommunications industry are driven by the promise of
broadband service rollout. We have identified two trends
highlighting this broadband rollout:



|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
| | The transition from circuit-based networks to
    packet-based networks, and                           
| 
| | The upgrade of the network infrastructure from
    primarily copper-based to predominately fiber-based.

We refer to these trends as
packetization and fiberization,
respectively.

The impacts of these trends have already been
realized throughout most of the network core. However, the
conversion of the edge of the network (i.e., the connection
between the carriers central office and its

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subscribers) still requires carriers to make
significant investments. Our portfolio of access solutions is
well positioned to support wireline carriers businesses as
they start the process of upgrading their access networks.


Over the course of the next several years, many
regulatory issues must be resolved, and legacy services still
need to be delivered. Our solutions are well positioned because
our platforms have the flexibility to deliver both legacy and
new packet-based fiber services. Once regulatory issues are
resolved, carriers will be able to upgrade their network
platforms and migrate to the new fiber architectures with a
simple service card upgrade. We are also looking to leverage our
solutions globally as we gain experience and volume in North
America.

Solutions Portfolio

We provide access solutions that are
standards-based, carrier-grade and meet the most demanding
specifications while serving a variety of network layouts. Our
comprehensive portfolio provides carriers with solutions that
satisfy the demand for emerging broadband, packet-based services
in a cost-effective and efficient manner. We created our
solutions portfolio to help our customers succeed in the highly
competitive access marketplace, providing access equipment that
addresses emerging broadband services and the technologies, such
as DSL, video, VoP, and FTTP, that are reshaping the access
landscape. Our access solutions include:



|  |                
|- | ---------------
| | AdvancedVoice, 
| 
| | FiberDirect,   
| 
| | TelcoVideo, and
| 
| | UniversalDSL.  

AdvancedVoice

Essential voice services, such as POTS,
narrowband and wideband data, are still key revenue generators
for wireline carriers. Our AdvancedVoice solution includes
traditional POTS, incorporates narrowband and wideband
networking, and enables the seamless migration of legacy
services onto the growing packetized broadband network. This
convergence of VoP networks is viewed as an important
opportunity for carriers to initially decrease operation costs
and, ultimately, increase revenue opportunities. AdvancedVoice
uses a carriers existing infrastructure to protect its
substantial investment, allowing it to continue delivering
reliable voice services and maintain essential revenue streams.
At the foundation of AdvancedVoice is AFCs AccessMAX
platform. AccessMAX is capable of being configured as a digital
loop carrier, digital subscriber line access multiplexer
(DSLAM), or optical line terminal. A new feature to our
AdvancedVoice solution is a new gateway processing engine that
provides media gateway functionality in any of our AccessMAX
systems.

FiberDirect

FiberDirect is a carriers path to deploying
FTTP, enabling the build out of an all-fiber network with
virtually unlimited bandwidth at the subscribers premises.
We believe our FiberDirect solution enables wireline carriers to
quickly and economically transition from legacy copper to
high-speed, high-capacity all-fiber networks. At the foundation
of FiberDirect is our AccessMAX platform. With a single
AccessMAX shelf, FiberDirect provides a comprehensive suite of
narrowband and broadband architectures and services. With the
addition of a passive optical network (PON) plug-in card,
AccessMAX can be upgraded to a FiberDirect system.

In November of 2003, Verizon announced it
selected us as one of four vendors to provide the equipment for
its planned deployment of high-speed, high-capacity FTTP
systems. In January 2004, we signed a multiyear agreement with
Verizon as the primary FTTP project vendor to provide the
central office and premises electronics, also known as the
active elements of FTTP technology. We believe FTTP will be the

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final evolution of the access network, providing
carriers with the most advanced broadband network to serve the
needs of their customers.


TelcoVideo

Carriers are increasingly looking to deliver
voice, video and high-speed Internet/ data in one comprehensive
offering. Our TelcoVideo solution is a cost-effective advanced
broadband solution that leverages existing network
infrastructures, minimizes operation costs and satisfies
subscriber demand for advanced Internet, video and entertainment
services. As the migration to FTTP networks calls for the
simultaneous delivery of video services over copper or fiber,
our TelcoVideo offers flexible video deployment options.

Built on AccessMAX and Telliant platforms,
TelcoVideo seamlessly integrates into existing
telecommunications networks, leveraging copper and fiber
equipment. AccessMAX provides scalable and flexible central
office and remote access solutions over copper or fiber for
voice, video and high-speed Internet/ data delivery. Telliant
provides a unified central office platform for data and video.
It aggregates, processes and delivers video and high-speed
Internet/ data for both central office and remote terminal
subscriber interfaces.

UniversalDSL

Carriers need the most flexible DSL solutions
available to address the difficult task of quickly offering
high-bandwidth and reliable services to customers beyond the
reach of their traditional service areas, while maximizing
revenues and minimizing costs. Our UniversalDSL offers a wide
range of deployment options for wireline carriers, delivering
scalable DSL solutions to subscribers regardless of their
location. Built on industry standards, UniversalDSL utilizes the
AccessMAX and Telliant platforms to fulfill the stringent
carrier-class requirements of central office and remote terminal
applications. AccessMAX can be utilized as a low-density central
office DSLAM or in remote cabinets for integrated DSL and POTS,
as well as cabinet retrofit or DSLAM overlay. For central office
applications, Telliant can be configured as a DSLAM, an
aggregator for DSLAMs, a multiservice switch for inter-working
frame relay, asynchronous transfer mode (ATM) and Ethernet
services, or an integrated broadband remote access server
(BRAS). Both platforms deliver a powerful UniversalDSL solution,
fulfilling a carriers need for high-speed data and
Internet today, and positioning their network for simplified
migration to video and FTTP-based services in the future.

Product Portfolio

For over a decade, we have been a provider of
broadband access solutions for the global telecommunications
industry. Our products can quickly and cost-effectively upgrade
legacy telecommunications networks, delivering narrowband,
wideband and broadband services to all subscribers regardless of
their location. Our product portfolio includes:



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | AccessMAX:An
    integrated multiservice access platform (IMAP), AccessMAX is our
    flagship product. AccessMAX provides flexibility and scalability
    for simultaneous delivery of voice, video and high-speed
    Internet/ data, as well as any combination of narrowband,
    wideband and broadband service, anywhere in the network. Copper,
    fiber and wireless transport options offer flexibility while
    maximizing the carriers existing infrastructure. Flexible
    configurations allow the carrier to fill any route requirement
    and thereby enable service delivery to network customers.
| 
| | Telliant:A
    multiservice platform for the central office that is well suited
    for a higher concentration of DSL subscribers and bandwidth-rich
    applications such as video, BRAS and other functions that
    require Internet protocol (IP) intelligence. Telliant allows for
    the replacement of several traditional network components,
    including routers, switches and DSLAMs.                                                                                                                                                                                                                     
| 
| | TransMAX:An optical
    add-drop multiplexer that uses coarse wavelength division
    multiplexing technology to relieve fiber-optic bottlenecks in
    local access networks.                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | PremMAX:An
    integrated access device that aggregates voice and data traffic
    at the customers premises onto the access network.                                                     
| 
| | AFCs network management system,
    Panorama:Our software application
    that simplifies the provisioning, management and maintenance of
    our equipment in a carriers access network.
| 
| | Professional
    Services:Our team of professionals
    who provide consulting, engineering and installation services.                                                                     
| 
| | Environmentally hardened plant cabinets and
    technologies: A variety of cabinets
    provide cost-effective and flexible solutions for inside and
    outside plant applications.       

Markets and Customers

We sell our products and services to customers in
the U.S. and international marketplaces. In the U.S., these
customers include incumbent local exchange carriers (ILECs),
independent operating companies (IOCs) and regional Bell
operating companies (RBOCs). Outside of the U.S., our customers
include international telecommunications companies, alternative
carriers, system integrators and original equipment
manufacturers.

Sprint North Supply Company (Sprint) and Alltel
Communications Products, Inc. (Alltel) accounted for 35.9% and
13.0% of total revenues in 2003, respectively. Sprint, Verizon
and Alltel accounted for 22.8%, 11.3% and 10.7% of total
revenues in 2002, respectively. Sprint accounted for 17.2% of
total revenues in 2001. No other customer accounted for 10% or
more of total revenues in any of these years.

Backlog

Our backlog primarily consists of purchase orders
for products, software and services to be delivered within the
next year. At December 31, 2003, 2002 and 2001, our backlog
was approximately $11.5 million, $32.2 million and
$25.5 million, respectively. We consider backlog to be an
indicator of future sales, but not the sole predictor because
our customers may cancel or defer orders without penalty.

Sales, Marketing and Customer
Support

Our products are distributed and serviced
worldwide through our direct sales force and indirectly through
distributors and sales representatives.

Our U.S. sales, marketing and customer service
groups conduct activities from our corporate headquarters and
regional offices in California, Kansas, Florida and Texas. Our
U.S. sales personnel are dedicated to specific customer accounts
and sales are made through direct calls to service providers.
Additionally, sales to customers often involve marketing through
consulting engineers retained by IOCs 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 integrators, distributors and agents. Our
international sales group consists of direct salespersons and
technical, engineering and support personnel located in the U.S.
and Mexico.

Our 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, analyze and
deliver technical value propositions, product strategy
applications and technical marketing information.

We maintain a customer support organization that
provides our customers with high quality technical and
administrative product support. We maintain a technical
assistance center and a staff of qualified technical service
engineers (TSEs) to support service needs. AFCs field
support can dispatch fully trained and qualified TSEs from
customer support centers in California, Texas and Mexico. Each
TSE has the technical expertise to provide Quality of Service as
required under the TL 9000 and ISO 9001 certification
standards.

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We provide warranty service, post-sales technical
support, and technical and operational training to our
customers. We also provide technical pre-sales assistance to our
sales representatives and distributors. In addition to our field
TSEs, we rely on various third party organizations to provide
post-sales support to North American customers. We provide
international customer support directly or through our
authorized distributors. Training courses and materials are made
available to customers either through student training or
train-the-trainer programs.

Research and Development

We have research and development offices in
California, Florida and Texas. Our research and development
efforts are focused on developing access network products with
advanced features for global telecommunications markets. Our
product family is designed as modular firmware, and modular
hardware and software platforms that can be configured and
adapted to particular service provider 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 our product family. This
includes enhancements to our AccessMAX platform to support FTTP
interfaces, development of several optical network terminal
products, support for VoP interfaces, support for video over IP
applications, enhancement of DSL service cards, ATM switch and
aggregation enhancements, RBOC-specific enhancements and cost
reductions. For international markets, efforts have been focused
on an international standard version of the domestic feature set.

During the product development process, we invest
substantial resources in products that often require extensive
field testing and evaluation before introduction to the market.
We have invested substantial engineering resources in the
development of custom application specific integrated circuits
(ASICs) that we believe provide feature and cost advantages for
our products. These ASICs and the software that manages them
create a core capability set that would require considerable
effort to replicate.

We expensed research and development costs of
$66.1 million in 2003, $61.7 million in 2002 and
$64.2 million in 2001. As a percentage of total revenues,
research and development costs represented 20% in 2003, 18% in
2002 and 20% in 2001. We consider our research and development
efforts vital to our future success. We plan to continue to
support the development of new products and features, while
seeking to carefully manage associated costs through expense
controls.

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 our product family.

Competition

Our competitors range from small companies, both
U.S. and international, to large multinational corporations. Our
principal established competitors for our core product,
AccessMAX, include Compagnie Financière Alcatel (Alcatel)
and Lucent Technologies Inc. (Lucent). Some of our competitors
enjoy superior name recognition in the market or have more
extensive financial, marketing and technical resources than we
do.

We believe rapid technological change, continuing
regulatory change and industry restructuring will continue to
cause 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 the
technological and regulatory changes will continue to attract
new entrants to the market in which we compete.

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Telecommunications and Technology
Investments

We have made investments in several start-up
ventures specializing in advanced telecommunications
technologies.

We acquired 10.6 million shares of Cisco
Systems, Inc. (Cisco) stock as a result of our investment in
privately-held Cerent Corporation, which merged with Cisco in
1999. See the Liquidity and Capital Resources section of
Managements Discussion and Analysis of Financial Condition
and Results of Operations for additional information regarding
this investment.

Beginning in 1999, we have made investments
totaling $6.6 million in a privately-held company. It is a
minority interest investment accounted for under the cost
method. In 2003 and 2001, we recorded impairments of $1.0
million and $2.3 million, respectively, to the investment.
We believe the dilution of ownership led to the impairment in
both years. Our net investment in this company totaled $3.3
million as of December 31, 2003.

In 2001, we made an investment in the
privately-held development stage company, AccessLan
Communications, Inc. (AccessLan). Our investment included an
equity investment in AccessLans preferred stock and an
option to acquire the company, which we exercised in March 2002.

We made a $2.0 million minority interest
investment during the first quarter of 2004 in a privately-held
company. The investment is accounted for under the cost method.

Compliance with Regulatory and Industry
Standards

Our products must comply with a significant
number of voice and data regulations and standards that vary
between U.S. and international markets. Standards for new
services continue to evolve and we continue to modify our
products or develop new versions to meet these standards.

We have maintained compliance with ISO 9001 since
we were first certified in 1997. ISO 9000 is a series of
standards agreed to by the International Organization for
Standardization (ISO). ISO 9001 is the highest level of
accreditation and includes an assessment of 20 elements covering
various aspects of design, development, distribution and
production of equipment.

TL 9000 is a set of quality system standards
specific to the telecommunications industry, based on best
practice and business excellence models. TL 9000 contains all
ISO 9001 requirements as well as other telecommunications
industry requirements. TL 9000 adds additional focus on customer
needs, strategic planning and accountability. TL 9000 registered
companies are also required to report measurements based on
customer satisfaction and the quality of the hardware and
software developed by the supplier. We have been TL 9000
certified for hardware, software and services since 2000. In
October 2003, we received TL 9000 certification for the San Jose
facility that was acquired as a part of the acquisition of
AccessLan in 2002.

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.

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Employees

As of December 31, 2003, we had 773
employees. None of our employees are covered by collective
bargaining agreements and we have never experienced a work
stoppage, strike or labor dispute. Overall, we believe relations
with our employees are good.

Risk Factors That Might Affect Future
Operating Results and Financial Condition

You should carefully consider the following risk
factors and the other information included in this Annual Report
on Form 10-K before investing in our common stock. Our
business and results of operations could be seriously impaired
by any of the following risks. The trading price of our common
stock could decline due to any of these risks and investors
could lose part or all of their investment.



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

Our quarterly and annual operating results have
fluctuated in the past and are likely to fluctuate in the future
due to a variety of factors, many of which are outside our
control. These factors include, but are not limited to:



|  |                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Telecommunications market conditions and general
    economic conditions;                                                                                                                               
| 
| | The level of capital spending and financial
    strength of our customers;                                                                                                                              
| 
| | Changes in revenues, cost of revenues and gross
    margins resulting from changes in our sales and distribution mix;                                                                                   
| 
| | Changes in revenues, cost of revenues and gross
    margins resulting from variations in the mix of products sold;                                                                                      
| 
| | The effect of winter seasonality on shipments and
    installations which may cause revenues in the quarter ended
    March 31 to be lower than revenues in the preceding quarter
    ended December 31;
| 
| | Our ability to successfully introduce new
    technologies and products ahead of our competitors;                                                                                                       
| 
| | Introductions or announcements of new products by
    our competitors;                                                                                                                                  
| 
| | The timing, size and mix of the orders we receive;                                                                                                                                                      
| 
| | Adequacy of supplies for key components and
    assemblies;                                                                                                                                             
| 
| | Financial strength of our customers and vendors;                                                                                                                                                        
| 
| | Our ability to effectively and efficiently
    produce and ship orders promptly on a price-competitive basis;                                                                                           
| 
| | Our ability to accurately forecast and execute
    our strategy and operating plans;                                                                                                                    
| 
| | Our ability to integrate and operate acquired
    businesses and technologies; and                                                                                                                      
| 
| | Changes in accounting rules, such as expensing
    employee stock option grants.                                                                                                                        

Any of these factors could result in a
significant negative impact on our operating results. Volatility
in the price of our common stock may occur as the result of
operating results not meeting the expectations of the investment
community. In such event, the market price of our common stock
could significantly decline. A significant market price decline
could result in litigation. Litigation could be costly, lengthy
and divert managements attention and resources from our
core business operations.

9



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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 and Alltel accounted for 35.9% and 13.0%
of total revenues in 2003, respectively. Sprint, Verizon and
Alltel accounted for 22.8%, 11.3% and 10.7% of total revenues in
2002, respectively, and Sprint accounted for 17.2% in 2001. No
other single customer accounted for 10% or more of total
revenues in any of these periods. Our five largest customers
accounted for 68.0%, 56.3% and 43.6% of total revenues in 2003,
2002 and 2001, 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
great extent on sales to a small number of large accounts. This
dependence may increase due to our strategy of growing several
large accounts. There can be no assurance that significant
existing customers will continue to purchase products from us at
current levels, if at all. In the event that a significant
existing customer merges with another company, there can be no
assurance that such customer will continue to purchase our
products. The loss of one or more significant existing customers
or a decrease in the level of purchases from these customers
could result in a decrease in revenues and net income, an
increase in excess and obsolete inventory, and increase our
dependency on our remaining significant customers.

Sprint and Alltel are distribution subsidiaries
of Sprint Corporation and Alltel Corporation, respectively.
These subsidiaries distribute our products to their respective
affiliates for deployment in their own networks and resell our
products to third party IOC customers. Historically, we believe
that products representing approximately 25% to 40% of our sales
to Sprint and Alltel have been sold to IOC customers.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Significant portions of our revenues are
    generated through sales of the AccessMAX family of products and
    a decline in demand for these products would result in decreases
    in revenues and net income.

Significant portions of our revenues are derived
from our AccessMAX product family. Any decrease in market demand
for AccessMAX products would result in decreased revenues and
lower net income. Factors that could affect demand for our
products include price competition, regulatory uncertainty,
technological change and new product introductions or
announcements by our competitors.

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

We recently completed the acquisition of NAA. We
have limited experience in acquiring and integrating companies.
We may pursue additional acquisitions of companies, products and
technologies in the future as part of our efforts to enhance our
existing product solutions, introduce new product solutions and
fulfill changing customer requirements.

Acquisitions could adversely affect our operating
results in the short-term. The NAA acquisition, and acquisitions
in general, involve numerous risks including disruption of our
business, exposure to unknown liabilities of the acquired
company, and failure to successfully integrate the operations,
products, technologies or personnel of the acquired company. We
may not realize the anticipated benefits of our acquisition of
NAA or other acquisitions in the future, such as increased
market share and sales or successful development and market
acceptance of new products. The acquired products and
technologies in the NAA acquisition or other future acquisitions
may not result in sufficient revenues to offset the expenses
associated with the acquisition.

In addition, goodwill arising from acquisitions
may result in significant impairment write-downs charged to our
operating results in one or more future periods. As of
December 31, 2003, we had $55.9 million in goodwill
related to the acquisition of AccessLan in 2002. We expect to
record substantial additional goodwill in connection with the
NAA acquisition. The effects of these events could harm our
business, financial condition and results of operations.

10



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##### Table of Contents





| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
characterized by rapid change and converging technology, 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 access market. Industry
consolidation among our competitors may increase their financial
resources, enabling them to reduce their prices. This could
require us to either reduce our product prices or risk losing
market share. Moreover, industry consolidation may result in
stronger competitors that are better able to compete as
sole-source suppliers for their customers.

Some of our competitors are in a better position
to withstand reductions in customers capital spending.
Some of these competitors have broader product portfolios and
market share, and may not be as susceptible to downturns in the
telecommunications industry. These competitors offerings
compete directly with our product solutions and provide
comprehensive ranges of other products.

Our principal established competitors include
Alcatel and Lucent. Some of our competitors enjoy superior name
recognition in the market or have more extensive financial,
marketing and technical resources than we do. We expect to face
increased competition with our established and newly launched
product solutions, from both established and emerging
competitors.

Continued growth in the access market is highly
dependent on a strong level of capital investments in broadband
access solutions and a positive regulatory environment for
larger ILEC customers. Future reductions in capital expenditures
by companies in the telecommunications industry, including some
of our customers, could seriously harm our revenues, net income
and cash flows.



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

Our customers are public carriers and, in the
U.S., include ILECs, IOCs and RBOCs. 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 product solutions and services, and end user
demand for advanced telecommunications services. The financial
problems affecting the telecommunications industry in general
could continue to cause a slowdown in our sales and result in
slower payments or in customer payment defaults. Further, there
can be no assurance that carriers, foreign governments or other
customers will pursue infrastructure upgrades that will
necessitate the implementation of advanced product solutions
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. The economic slowdown impacting the
telecommunications industry has affected customers capital
spending patterns for deploying new services and we cannot
provide assurance as to when, or if, capital spending will
improve.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to develop and introduce new
    product solutions that meet changing customer requirements and
    address technological advances would limit our future
    revenues.

The telecommunications equipment market is
characterized by rapidly changing technology, changes in end
user requirements, and frequent new product introductions and
enhancements. Our success will depend upon our ability to
accurately forecast market trends, enhance our product solutions
through the timely development of new technology, develop and
introduce new feature enhancements, and implement ongoing cost
reductions. We must commit significant resources to develop new
product solutions before knowing whether our investments will
result in solutions the market will accept. Market acceptance of
our product solutions may be significantly reduced or delayed if
we fail or are late to respond to new technological
developments, or if we experience delays in product development.

The introduction of products embodying new
technologies or the emergence of new industry standards can
render our existing products obsolete or unmarketable.
Competitors new products, product enhancements,

11



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##### Table of Contents



services or technologies that replace or shorten
the life cycle of our products could impair the competitiveness
of our product solutions.


Our future operating results will be impacted by
whether new products and solutions, including AdvancedVoice,
FiberDirect, TelcoVideo and UniversalDSL, are widely deployed by
operators, the actual timing and quantity of orders for our
solutions, growth in demand for broadband services, and our
ability to gain market share and experience growth. For example,
in November 2003, Verizon announced it selected us as one of
four vendors to provide the equipment for its planned deployment
of high-speed, high-capacity FTTP systems. We will incur costs
and expenses associated with preparation for the deployment of
our FTTP systems; these deployment costs and expenses will
precede our generation of revenues from the FTTP systems. Our
future revenues and expenses will be affected by the degree to
which Verizon invests in FTTP systems and the timing of any such
investment.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 or limited-source
    suppliers.

Our growth and ability to meet customer demands
are dependent on our ability to obtain timely deliveries of
components from our suppliers. We currently purchase certain key
components from sole or limited-source vendors. Most of our
component purchases are on a purchase order basis without
guaranteed supply arrangements. Some of our sole and
limited-source vendors allocate parts to multiple
telecommunications equipment manufacturers based on market
demand for components and equipment. This may result in
shortages of certain key components sold to us. In the event of
a disruption in supply, we may not be able to identify an
alternative source in a timely manner, at favorable prices or of
acceptable quality. Such a failure could limit our ability to
meet scheduled deliveries to our customers and increase our
expenses. This could reduce our gross profit margin and net
income.

We have purchase agreements with contract
manufacturers (CMs) which allow us to negotiate volume discounts
and help assure us of a steady supply of components. The
agreements require the CMs to purchase component parts to be
used in manufacturing our products and authorize them to make
purchases in accordance with agreed-upon lead times. We provide
CMs with forecasts of our expected needs and we issue purchase
orders covering a certain period of time for specific
quantities. As customers increasingly demand shorter delivery
timeframes, the difficulty of accurately forecasting component
mix and quantity needs creates additional risk. If we
overestimate our requirements, the CMs may assess cancellation
penalties or we may have excess or obsolete inventory. If we
underestimate our requirements, the CMs may have inadequate
inventory, which could interrupt manufacturing of our products.
Both situations could reduce our gross profit margin and net
income.

We cannot be assured that CMs will allocate
sufficient resources to the timely completion of our orders in
accordance with our quality standards. Qualifying a new CM is
costly and time consuming and could result in significant
interruptions in the supply of our products.



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

Some of our customers order specifications
require us to design and build systems and purchase parts 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 if we experience delays or cancellation of orders, we
may be unable to cost-effectively rework system configurations
or return parts to inventory as available-for-sale. Write-downs
and accruals for unrealizable inventory negatively impact our
gross profit margins and net income.

12



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

We seek to protect our technology through a
combination of copyrights, trademarks, trade secret laws,
contractual obligations and patents. These intellectual property
protection measures may not be sufficient to prevent wrongful
misappropriation of our technology. These measures will not
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 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. Litigation could result in substantial costs
and diversion of management resources, while not guaranteeing a
successful result.



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

We have been subject to several intellectual
property disputes in the past, and due to the intensely
competitive nature of our industry, we expect to continue being
subject to infringement claims and other intellectual property
disputes. As a result, 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. Litigation
could be expensive, lengthy and divert managements
attention and resources from core business operations. Adverse
determinations could result in the loss of our proprietary
rights, or prevent us from manufacturing or selling our
products. They may also subject us to significant liabilities
and require that we seek licenses from third parties. In such
case, we cannot be assured that licenses will be available on
commercially reasonable terms, if at all, from any third party
that asserts intellectual property claims against us. Any
inability to obtain third party licenses required to develop new
products or product enhancements could require us to obtain
substitute technology of lower quality or performance standards
or at greater cost, any of which could seriously impair our
competitiveness.



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

Our success depends in large part on our ability
to attract and retain key technical and management personnel.
Despite the economic slowdown, competition for some specific
skill sets remains intense. The process of identifying and
attracting key employees is often a lengthy and costly process.
Our key employees generally do not have employment agreements.
All of our employees receive stock options, and negative trends
in the stock price could adversely affect our ability to retain
key employees. There can be no assurance that we will succeed in
retaining key employees. We expect continued challenges in
recruiting, assimilating, motivating and retaining the key
technical and management personnel necessary to effectively
manage our operations.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our products are complex and may contain
    undetected errors that could result in significant unexpected
    expenses.

Our products are complex, and despite extensive
testing, may contain undetected defects or errors. These issues
may only become apparent after products are shipped, when
product features are introduced or as new versions are released.
The occurrence of any defects, errors or failures could result
in delays or cancellation of orders, product returns, warranty
costs or legal actions by our customers or our customers
end users. Any of these issues could reduce revenues, gross
profit margin and net income.

13



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##### Table of Contents





| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Our ability to sell
products would be impaired if we fail to ensure our systems are
compliant with evolving standards and regulations in a timely
manner. Testing to ensure compliance and interoperability
requires significant investments of time and money.
Additionally, our selling ability would be impaired if we fail
to obtain compliance on new features or fail to maintain
interoperability with equipment from other companies. As a
result, we could experience customer contract penalties, delayed
or lost customer orders, decreased revenues and reduced net
income.

In our work with large customers such as RBOCs,
our agreements frequently contain provisions for performance
compensation payments (PCPs) that are tied to key milestones
related to the availability of product releases containing
certain product features. Completion of such milestones requires
timely and successful R&D efforts, and on converting the
results of those R&D efforts into usable, cost effective
products. R&D efforts are, by their very nature, large and
complicated projects, which rely in part on the work of third
parties over which we have no control, and on which there can be
no assurance of success. For example, our agreement with Verizon
to provide FTTP systems has several provisions requiring PCPs
for failure to meet key milestones or provide product features
by specified dates. We recently received notification from
Verizon that we failed to achieve a February 23, 2004
milestone for delivery of a product release; the PCP for this
milestone is $2 million. We subsequently provided the
required product release on March 8, 2004. Accordingly, we
could experience reduced net income in future quarters due to
penalties imposed under such agreements as a result of certain
failures to comply with strict contractual terms, regardless of
the significance of any noncompliance in relation to the overall
project.

We have maintained compliance with ISO 9001
since we were first certified in 1997, and TL 9000 since we
were first certified for hardware, software and services in
2000. TL 9000 contains all ISO 9001 requirements as
well as other telecommunications industry requirements. In
October 2003, we received TL 9000 certification for the San
Jose facility that was acquired in May 2002. There can be no
assurance that we will maintain these certifications. The
failure to maintain TL 9000 certification may adversely
impair the competitiveness of our products.

Government actions will continue to have a direct
impact on the telecommunications industry and our business. We
believe the final ruling arising from the Federal Communications
Commissions (FCCs) Triennial Review encourages
long-term investment in broadband networks and migration to
FTTP-based services. The 1996 Telecommunications Act imposed
additional regulations that affect telecommunications services,
including changes to pricing, access by competitive vendors and
other broad changes to data and telecommunications networks and
services. These changes have had a major impact on the pricing
and availability of services, and may affect the deployment of
future services. There can be no assurance that any future
legislative and regulatory changes will not have a material
adverse effect on our products competitiveness. Moreover,
uncertainty regarding future legislation and governmental
policies combined with emerging new competition may also affect
the demand for our product solutions.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | We face risks associated with international
    markets and distribution channels.

International sales constituted 14% of our
revenues in 2003, 2002 and 2001. International sales have
fluctuated in absolute dollars and are expected to continue to
fluctuate in future periods.

Access to international markets is often
difficult to achieve due to trade barriers and established
relationships between government-owned or government-controlled
carriers and traditional local equipment vendors. We rely on a
number of third party distributors and sales representatives to
market and sell our products outside of the U.S. There can be no
assurance that third party distributors or sales representatives
will provide the support and effort necessary to effectively
service our international markets. In some cases, our gross
profit margins have been lower for sales through third party and
indirect distribution channels

14



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##### Table of Contents



than for sales through our direct sales efforts.
Increased sales through our third party and indirect
distribution channels could reduce our overall gross profit
margin and net income.


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,
thereby adversely impacting our competitiveness in those
countries. We currently intend that any earnings of our foreign
subsidiaries remain permanently invested in these entities to
facilitate the potential expansion of our business. Our cash
flows could be adversely affected to the extent that these
earnings are actually or deemed repatriated, resulting in the
imposition of additional U.S. federal and state income taxes.

We must comply with various country-specific
standards and regulations to compete in international markets.
Our product solutions may be incompatible with the legacy
infrastructure of some international markets. If our existing
international customers adopt network standards incompatible
with those supported by our product solutions, 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. These factors
could result in delays or loss of customer orders, decreased
revenues and lower net income.

Economic risks that may impact our international
sales include the inability to collect receivables from
customers due to a countrys economic collapse and
resulting currency exchange controls. This would negatively
impact our cash flow and result in receivable write-offs.




Item 2.Properties

We lease five buildings in Petaluma, California.
Two of these buildings house our principal executive offices,
administrative, sales, marketing, product development,
manufacturing and distribution functions. The remaining three
buildings are unoccupied or subleased to non-affiliated
entities. In addition to our Petaluma facilities, we lease
properties in San Jose, California (research and development),
Miramar, Florida (research and development), Richardson, Texas
(sales, technical assistance, and research and development),
Largo, Florida (subleased to a non-affiliated entity), Buffalo
Grove, Illinois (unoccupied), Orange, Connecticut (unoccupied),
and several other locations for sales and technical assistance.
Internationally, we occupy leased offices for sales and sales
support functions in Mexico City, Mexico. We lease office space
in Redding, United Kingdom, which is unoccupied.

We utilized approximately 56% of our total
available space as of March 8, 2004. We believe that the
facilities used in our operations are suitable for their
respective uses and adequate to meet the anticipated level of
operations in 2004. In addition, we believe that appropriate
additional facilities will be available to accommodate growth as
needed.




Item 3.Legal
Proceedings

None.




Item 4.Submission
of Matters to a Vote of Security Holders

None.




PART II.






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Our common stock is traded on the Nasdaq National
Market, or Nasdaq, under the symbol AFCI. Our common stock price
is listed daily in The Wall Street Journal and other
publications by the abbreviation AdvFibComm.

15



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##### Table of Contents



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

|                                     |  |      |       |     |  |   |       | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|2003:                                |  | High |       | Low
|                                     |  |      |       |    
|First Quarter (through March 29)     |  | $    | 19.69 |     |  | $ | 14.94 | 
|Second Quarter (through June 28)     |  |      | 19.38 |     |  |   | 14.10 | 
|Third Quarter (through September 27) |  |      | 25.23 |     |  |   | 15.21 | 
|Fourth Quarter (through December 27) |  |      | 26.70 |     |  |   | 19.59 | 

|                                     |  |      |       |     |  |   |       | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|2002:                                |  | High |       | Low
|                                     |  |      |       |    
|First Quarter (through March 30)     |  | $    | 19.73 |     |  | $ | 15.20 | 
|Second Quarter (through June 29)     |  |      | 20.18 |     |  |   | 15.30 | 
|Third Quarter (through September 28) |  |      | 19.30 |     |  |   | 12.68 | 
|Fourth Quarter (through December 28) |  |      | 18.18 |     |  |   | 12.82 | 

On March 8, 2004, the last reported sale
price of our common stock on Nasdaq was $24.80 per share. As of
March 8, 2004, there were approximately 433 record holders,
most of which are brokerage firms, holding our common stock.

Dividend Policy

We have never declared or paid cash dividends on
our capital stock. Based on recent legislation that reduced the
tax rate on dividends, we may consider the commencement of
dividend payments in the future.

Issuance of Unregistered Securities

None.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information as of
December 31, 2003 regarding compensation plans (including
individual compensation arrangements) under which equity
securities are authorized for issuance:

|                                                           |  |                            |        |                     |  |                             |       |  |  |  |       | 
|---------------------------------------------------------- |  | -------------------------- | ------ | ------------------- |  | --------------------------- | ----- |  |  |  | ----- | 
|                                                           |  |                            |        |                     |  | Number of Securities       
|                                                           |  |                            |        |                     |  | Remaining Available for    
|                                                           |  |                            |        |                     |  | Future Issuance under      
|                                                           |  | Number of Securities to be |        |                     |  | Equity Compensation        
|                                                           |  | Issued upon Exercise of    |        | Weighted-Average    |  | Plans [Excluding Securities
|                                                           |  | Outstanding Options(1)     |        | Exercise Price of   |  | Reflected in Column (a)]   
|                                                           |  | (in thousands)             |        | Outstanding Options |  | (in thousands)             
|Plan Category                                              |  | (a)                        |        | (b)                 |  | (c)                        
|                                                           |  |                            |        |                     |  |                            
|Equity Compensation Plans Approved by Shareholders         |  |                            | 15,533 |                     |  | $                           | 21.29 |  |  |  | 1,752 | 
|Equity Compensation Plans not Approved by
    Shareholders |  |                            | 224    |                     |  |                             | 0.05  |  |  |  | 38    | 
|                                                           |  |                            |        |                     |  |                             |       |  |  |  |       | 
|Balance as of December 31, 2003                            |  |                            | 15,757 |                     |  | $                           | 20.99 |  |  |  | 1,790 | 
|                                                           |  |                            |        |                     |  |                             |       |  |  |  |       | 



---



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The equity compensation plan not approved by
    shareholders consists of options assumed in connection with the
    AccessLan acquisition completed in May 2002.

See Note 11 of the Notes to Consolidated
Financial Statements for information regarding the material
features of the plans above.

16



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##### Table of Contents



Other Information

Trading
Plans.R. Leon Blackburn,
Vice President & Corporate Controller, and Jack L. Ermey,
Vice President, Global Sales, have each established written
plans in accordance with Securities and Exchange Commission
Rule 10b5-1 for gradually liquidating a portion of their
holdings of our common stock. Mr. Blackburn and
Mr. Ermey established the plans to diversify their
investment portfolios while avoiding a conflict of interest or
the appearance of any such conflict that might arise from their
positions with AFC.

Mr. Blackburn has informed us that he
intends to exercise options covering up to 6,800 shares of stock
per quarter and to sell the resulting shares in the public
market, subject to certain contingencies relating to
continuation of employment and prevailing stock price. This plan
is effective from July 30, 2004 through December 31,
2004.

Mr. Ermey has informed us that he intends to
exercise options covering up to 23,217 shares of stock per
quarter and to sell the resulting shares in the public market,
subject to certain contingencies relating to continuation of
employment and prevailing stock price. This plan is effective
from May 1, 2004 through December 31, 2004.

Purchases of Equity Securities by
AFC.We repurchased or reacquired
51,876 shares of our common stock during the year ended
December 31, 2003, at a cost of $0.7 million.




Item 6.     Selected
Financial Data

The information required by this item is set
forth in our 2003 Annual Report to Stockholders, which is
incorporated by reference and filed as Exhibit 13.1.




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

The information required by this item is set
forth in our 2003 Annual Report to Stockholders, which is
incorporated by reference and filed as Exhibit 13.2.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

The information required by this item is set
forth in our 2003 Annual Report to Stockholders, which is
incorporated by reference and filed as Exhibit 13.2.




Item 8.     Financial
Statements and Supplementary Data

The information required by this item is set
forth in our 2003 Annual Report to Stockholders, which is
incorporated by reference and filed as Exhibit 13.3.




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.




Item 9A.     Controls
and Procedures

AFC maintains disclosure controls and
procedures, as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934 (the Exchange Act). These
disclosure controls and procedures are designed to ensure that
information required to be disclosed by AFC in reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms. They are
also designed to ensure that such information is accumulated and
communicated to AFCs management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating AFCs disclosure
controls and procedures, we recognized that no matter how well
conceived and operated, disclosure controls and procedures can
provide only reasonable, not absolute, assurance that their
objectives are met. Additionally, we evaluated the cost-benefit
relationship in the design of our disclosure controls and
procedures. Their design is also based in part upon certain

17



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##### Table of Contents



assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.


Subject to the limitations noted above, our
management, with the participation of our CEO and CFO, has
evaluated the effectiveness of the design and operation of
AFCs disclosure controls and procedures as of the end of
the fourth fiscal quarter covered by this annual report on
Form 10-K. Based on that evaluation, the CEO and CFO have
concluded that AFCs disclosure controls and procedures
were effective to meet the objectives for which they were
designed.

There were no changes in our internal control
over financial reporting identified in connection with the
foregoing evaluation that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.



PART III.




Item 10.     Directors,
Executive Officers and Key Employees of the
Registrant

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

|                           |  |     |    |          |  |                                                                                
|-------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------------
|Name                       |  | Age |    | Position
|                           |  |     |    |         
|Executive Officers         |  |     |    |          |  |                                                                                
|John A. Schofield          |  |     | 55 |          |  | Chairman of the Board, President & Chief
    Executive Officer                 
|Keith E. Pratt             |  |     | 40 |          |  | Chief Financial Officer & Senior Vice
    President, Finance and Administration
|R. Leon Blackburn          |  |     | 58 |          |  | Vice President & Corporate Controller                                          
|Jack L. Ermey              |  |     | 58 |          |  | Vice President, Global Sales                                                   
|Key Employees              |  |     |    |          |  |                                                                                
|Charles C. Geiger          |  |     | 39 |          |  | Vice President, Product Management & Marketing                                 
|Amy M. Paul                |  |     | 35 |          |  | Vice President, General Counsel & Corporate
    Secretary                      
|Victoria L. Perrault       |  |     | 50 |          |  | Vice President, Administrative Services                                        
|Jeffrey S. Rosen           |  |     | 40 |          |  | Vice President, Operations, Information
    Technology & Customer Service      
|E. James Sackman           |  |     | 43 |          |  | Vice President & Chief Technical Officer                                       
|Doak K. Smailer            |  |     | 46 |          |  | Vice President, Professional/ Customer Services
    & Quality                  
|Jorge A. Valdes            |  |     | 42 |          |  | Vice President, Engineering                                                    
|Outside Directors          |  |     |    |          |  |                                                                                
|Ruann F. Ernst(1)(3)(4)    |  |     | 57 |          |  | Director                                                                       
|Clifford H. Higgerson(2)   |  |     | 64 |          |  | Director                                                                       
|Frank Ianna (5)            |  |     | 54 |          |  | Director                                                                       
|William L. Keever(1)(2)(4) |  |     | 58 |          |  | Director                                                                       
|Martin R. Klitten(1)(4)    |  |     | 59 |          |  | Director                                                                       
|Dan Rasdal(1)(3)           |  |     | 70 |          |  | Director                                                                       



---



|    |                                                                     
|--- | --------------------------------------------------------------------
|(1) | Member of the Audit Committee                                       
|   
|(2) | Member of the Compensation Committee                                
|   
|(3) | Member of the Nominating Committee                                  
|   
|(4) | Member of the Governance Committee                                  
|   
|(5) | Mr. Iannas committee memberships will
    be determined in May 2004

18



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##### Table of Contents



John A. Schofield, Chairman of the Board,
President & Chief Executive Officer

John Schofield, who has over 30 years of
general management, sales, marketing, operations and engineering
experience in the global data and telecommunications industry,
was elected to serve as Advanced Fibre Communications
Chairman of the Board in October 2001. Mr. Schofield joined
AFC in March 1999 as President and Chief Executive Officer and
was appointed to the board of directors in May 1999. From 1995
to 1999, Mr. Schofield held several senior management
positions with ADC Telecommunications, Inc., including President
of the Integrated Solutions Group, which provided turnkey system
solutions to telecommunications providers such as regional Bell
operating companies, competitive access providers, interexchange
carriers, and competitive local exchange carriers. Prior to
joining ADC, Mr. Schofield was Senior Vice President of
Sales and Marketing for Telex Communications, Inc., a leading
manufacturer of professional audio, broadcast communication,
tape duplication, multimedia, aviation RF and hearing instrument
products marketed throughout the U.S. and in more than 100
countries. Mr. Schofield received his bachelors
degree in electrical engineering from NSW Institute of
Technology (Sydney, Australia). Mr. Schofield is also a
director of Integrated Device Technology, Inc.

Keith E. Pratt, Chief Financial Officer
& Senior Vice President, Finance and
Administration

Keith Pratt, who has a strong background in
business strategy, marketing and acquisitions, was promoted to
AFCs Senior Vice President in 2001 and Chief Financial
Officer and Assistant secretary in 1999. Mr. Pratt joined
AFC in September 1997 as Director of Corporate Development and
served in this position until his promotion in 1999. Prior to
joining AFC in September 1997, Mr. Pratt was Director,
Strategy and Business Development Group, at Pacific Telesis.
Prior to Pacific Telesis, he served as a Senior Associate at
Booz, Allen & Hamilton. Mr. Pratt received his
bachelors degree in engineering from the University of
Cambridge (England) and earned his M.B.A. from Stanford
University.

R. Leon Blackburn, Vice President
& Corporate Controller

Leon Blackburn joined Advanced Fibre
Communications in September 2000, bringing more than
25 years of telecommunications experience to his current
position at AFC. Prior to joining the Company,
Mr. Blackburn served as Assistant Controller at AirTouch
Communications, a wireless communications company acquired by
United Kingdom-based Vodafone in 1999. Prior to working for
AirTouch, Mr. Blackburn served as Director of Finance for
Pacific Telesis. He received his bachelors degree in
business administration, with an emphasis in finance and
accounting, from San Francisco State University.
Mr. Blackburn also earned an M.B.A. from Saint Marys
College of California.

Jack L. Ermey, Vice President, Global
Sales

Jack Ermey joined Advanced Fibre Communications
in January 2000 as the Companys Regional Vice President,
National Local Exchange Carrier Sales. Mr. Ermey was promoted to
Vice President, National Carriers, in November 2001, and to his
current position of Vice President, Global Sales, in January
2003. Prior to joining AFC, Mr. Ermey worked for a number
of telecommunications equipment companies, including Alcatel,
DSC Communications, and AT&T Network Systems. He has held a
number of sales management positions at these companies, and has
been responsible for sales strategy to some of the nations
largest and most innovative telephone companies, including
Alltel, GTE, Sprint, Verizon, as well as independent operating
companies and local rural exchange carriers. He received his
bachelors degree from the University of Redlands. A
Vietnam War Veteran, Mr. Ermey served in the United States
Air Force from 1965 through 1969.

Charles C. Geiger, Vice President, Product
Management & Marketing

Charles Corey Geiger has been with
Advanced Fibre Communications since November 1998, supporting
the Company in a number of senior executive positions. Prior to
joining AFC, Mr. Geiger served as a Senior Director of
Marketing and Sales in DSC Communications European
Operations. From 1986 until 1996, he held several professional
and managerial positions at Bell Laboratories and at the former
AT&T

19



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##### Table of Contents



Network Systems (now Lucent Technologies).
Mr. Geiger received his bachelors and masters
degrees in electrical engineering from the Georgia Institute of
Technology.


Amy M. Paul, Vice President, General
Counsel & Corporate Secretary

Amy Paul joined Advanced Fibre Communications in
December 1995, and has served as the Companys Vice
President, General Counsel and Corporate Secretary, since
February 1999. Ms. Paul is responsible for overseeing all
of the Companys legal affairs, as well as serving as
compliance officer and secretary to AFCs board of
directors. Previously, Ms. Paul served as AFCs
Director of Contracts and Legal Affairs. Prior to joining the
Company, Ms. Paul served as an associate in the business
and technology group at San Francisco-based Brobeck, Phleger
& Harrison. Ms. Paul received her bachelors
degree from University of California at Los Angeles and a juris
doctorate from the University of San Diego.

Victoria L. Perrault, Vice President,
Administrative Services

Victoria Perrault joined Advanced Fibre
Communications in March 1996. She served as the Director, Human
Resources, from August 1999 until December 1999, when she was
promoted to Vice President, Administrative Services. Prior to
joining AFC, Ms. Perrault was the Director of Human
Resources for the advanced products division at Aegon USA.
Ms. Perrault received her bachelors degree from the
University of California at Berkeley and a juris doctorate from
the University of California, Hastings College of Law. She is
also certified as a senior human resource professional.

Jeffrey S. Rosen, Vice President,
Operations, Information Technology & Customer
Service

Jeff Rosen joined Advanced Fibre Communications
in March 2000, bringing more than 15 years of manufacturing
and supply chain experience to his position at AFC. Prior to
joining the Company, Mr. Rosen served as a Director at
Solectron Corporation in various operations and supply chain
management roles. Previous to working at Solectron,
Mr. Rosen was a Senior Associate at Booz, Allen &
Hamilton. From 1985 to 1991, Mr. Rosen held several
manufacturing positions at Raytheon and Teradyne. Mr. Rosen
received his bachelors degree in mechanical engineering
from Tufts University and his M.B.A. from Yale University.

E. James Sackman, Vice President &
Chief Technical Officer

Jim Sackman joined Advanced Fibre Communications
in April 1997 and serves as Vice President and Chief Technical
Officer. Mr. Sackman is a recognized industry expert in the
access space for narrowband, broadband and fiber-optic systems.
Previously, Mr. Sackman held various engineering positions
at AFC, including spearheading the development of the first
digital loop carrier-based ADSL line card in March of 1999.
Prior to joining AFC, he spent 12 years at Racal-Datacom,
where his positions included Engineering Director for Remote
Access Server products and ATM Systems Architect.
Mr. Sackman also held positions at Siemens
Information Systems, Modular Computer and Fairchild Test
Systems. He received his bachelors degree in computer
engineering from the Rochester Institute of Technology (New
York). Mr. Sackman holds four U.S. patents in the areas of
ATM switching and system timing and he has also been a deputy
approvals liaison engineer for the BABT.

Doak K. Smailer, Vice President,
Professional/ Customer Services & Quality

Doak Smailer joined Advanced Fibre Communications
in November 1998 as Director, Quality. He was promoted to Vice
President of Quality in February 2000 and to his present
position as the companys Vice President,
Professional/Customer Services & Quality in September
2002. Prior to joining AFC, Mr. Smailer was Director,
Corporate Quality, for DSC Communications. Mr. Smailer
received his bachelors degree in science from the United
States Military Academy at West Point and holds an M.B.A. from
Southern Methodist University.

20



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##### Table of Contents



Jorge A. Valdes, Vice President,
Engineering

Jorge Valdes joined Advanced Fibre Communications
in March 1998 as Engineering Director for AFCs Miramar,
Florida office. Mr. Valdes, who was promoted to Vice
President, Engineering, in July 1999, currently has
responsibility for all development engineering centers,
including AFCs offices in Petaluma, California; San Jose,
California; Miramar, Florida; and Richardson, Texas. In his role
as Vice President, he has led the development effort to add
broadband capability to AFCs AccessMAX platform and
develop the AccessMAX FiberDirect solution. From 1985 until he
joined AFC, Mr. Valdes held positions at Racal-Datacom in
engineering management, product development and product
management. He was system architect and project development lead
of the Excalibur DAP product line, which achieved number one
market share in the DDS marketplace. He received his
bachelors degree in electrical engineering and M.B.A. from
the University of Miami. Mr. Valdes holds two U.S. patents
in communications.

Ruann F. Ernsthas
served as a Director since 1998. From June 1998 through January
2002, Dr. Ernst served as Chief Executive Officer of an
e-business delivery network, Digital Island, Inc., a
Cable & Wireless company. Dr. Ernst was
Chairperson of the Board of Digital Island from December 1999
through July 2001 when the company was acquired by Cable &
Wireless, Plc. From 1988 through 1998, Dr. Ernst worked for
Hewlett Packard Company, an electronics equipment and computer
company, in various management positions, most recently as
General Manager, Financial Services Business Unit.
Dr. Ernst is also a director of one private and two
not-for-profit companies.

Clifford H. Higgersonhas served as a Director since 1993.
Mr. Higgerson has served as a general partner of
ComVentures, a venture capital firm, since 1987 and as a general
partner of Vanguard Venture Partners, a venture capital firm
since July 1991. Mr. Higgerson is also a director of Tut
Systems, Inc. and nine private companies.

Frank Iannawas
appointed to the board of directors in February 2004.
Mr. Ianna served as President, Network Services for
AT&T Corporation from 1998 through April 2003, when he
retired. Since September 2003, Mr. Ianna has been providing
consulting services to AT&T Corporation through Adea
Solutions, a consulting firm. From 1990 through 1998,
Mr. Ianna held several senior management positions with
AT&T including Executive Vice President, Network and
Computing Services and Vice President and General Manager,
Network and Computing Services. Mr. Ianna currently serves
on the Board of Trustees for the Stevens Institute of Technology.

William L. Keeverhas served as a Director since 2001
and was named the Lead Director of Advanced Fibre
Communications, Inc. in 2003. Mr. Keever was the Chief
Executive Officer of Vodafone Asia Region, a wireless
telecommunications company from January 2002 to June 2003, when
he retired. Mr. Keever was President of Vodafone Americas
Asia Region from 2000 until January 2002 when he was promoted to
Regional Chief Executive Officer. From 1999 to 2000,
Mr. Keever was Executive Vice President, Network and
Systems Operations for AirTouch Cellular. From 1998 to 1999,
Mr. Keever was President of AirTouch International and from
1997 to 1998 he was Executive Vice President, German Operations
for AirTouch Communications, Inc.

Martin R. Klittenhas served as a Director since 2001.
Mr. Klitten was Executive Vice President for Chevron
Corporation from August 2000 to September 2001, when he retired.
From 1989 through August 2000, Mr. Klitten served as
Chevrons Vice President of Finance and Chief Financial
Officer.

Dan Rasdalhas
served as a Director since 1993. Mr. Rasdal served as a
director of Symmetricom, Inc., a telecommunications company,
from 1985 to 2000. From 1985 to July 1998, Mr. Rasdal was
Chairman of the Board, President and Chief Executive Officer of
Symmetricom.

Our bylaws call for a board of directors composed
of a minimum of six directors and a maximum of nine; the number
of directors, which shall constitute the whole board of
directors, is fixed from time to time by

21



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##### Table of Contents



resolution of the board of directors. The office
terms of the board of directors are divided into three classes:




|  |                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ruann F. Ernst, John A. Schofield and Frank Ianna
    are Class II Directors, and their terms will expire at the
    annual meeting of stockholders to be held in 2004.
| 
| | Martin R. Klitten and Dan Rasdal are
    Class III Directors, and their terms will expire at the
    annual meeting of stockholders to be held in 2005.                
| 
| | Clifford H. Higgerson and William L. Keever are
    Class I Directors, and their terms will expire at the
    annual meeting of stockholders in 2006.                  

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

Directorships are distributed equally among the
three classes so that, as nearly as possible, each class is
equally weighted and represented.

Audit Committee Financial Expert

The information required by this item is set
forth in our 2004 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.

Section 16(a) Beneficial Ownership
Reporting Compliance

Directors, executive officers and individuals
owning more than ten percent of our common stock are required to
file initial reports of ownership and changes in ownership with
the Securities and Exchange Commission (SEC) under Section
16(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act). The SEC regulations also require those persons to
provide copies of all filed Section 16(a) reports to us. We
have reviewed the report copies filed in 2003, and based also on
written representations from those persons we believe that there
was compliance with Section 16(a) filing requirements for
2003 with the exception of one Form 4 filed late.

Code of Ethics

We have adopted a code of ethics that applies to
all of our employees and board of directors, including our
principal executive officer, principal financial officer, and
principal accounting officer and controller. A copy of the code
of ethics is accessible, free of charge, at our Internet website
http://www.afc.com. Information on our website is not part of
this report.




Item 11.Executive
Compensation

The information required by this item is set
forth in our 2004 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this item is set
forth in our 2004 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.




Item 13.Certain
Relationships and Related Transactions

The information required by this item is set
forth in our 2004 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.

22



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##### Table of Contents






Item 14.Principal
Accountant Fees and Services

The information required by this item is set
forth in our 2004 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.




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 or which are
incorporated herein by reference:

1. Financial Statements:

As of December 31, 2003 and 2002:

 Consolidated Balance Sheets

For the Years Ended December 31, 2003, 2002
and 2001:

 Consolidated Statements of Operations

 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)                                                                                                                                                                                           
|        | 3.6   |                      |  | Second Amended and Restated Bylaws of the
    Registrant.(10)                                                                                                                                                                               
|        | 3.7   |                      |  | Third Amended and Restated Bylaws of the
    Registrant.(11)                                                                                                                                                                                
|        | 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)

23



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##### Table of Contents



|        |         |                      |  |                                                                                                                                                                                                                                                                                              
|------- | ------- | -------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                     
|Number  |         | Document Description
|        |         |                     
|        | 10.15   |                      |  | Redwood Business Park Net Lease dated
    June 3, 1996 between the Registrant and G&W/ Redwood
    Associates Joint Venture, for the premises located at Buildings
    1 & 9 of Willow Brook Court.(1)                                                                                       
|        | 10.17   |                      |  | Form of Indemnification Agreement for Executive
    Officers and Directors of the Registrant.(1)                                                                                                                                                                                             
|        | 10.18   |                      |  | The Registrants 1993 Stock Option/ Stock
    Issuance Plan, as amended (1993 Plan).(1)                                                                                                                                                                                                      
|        | 10.19   |                      |  | Form of Stock Option Agreement pertaining to the
    1993 Plan.(1)                                                                                                                                                                                                                           
|        | 10.20   |                      |  | Form of Notice of Grant of Stock Option
    pertaining to the 1993 Plan.(1)                                                                                                                                                                                                                  
|        | 10.21   |                      |  | Form of Stock Purchase Agreement pertaining to
    the 1993 Plan.(1)                                                                                                                                                                                                                         
|        | 10.22   |                      |  | The Registrants 1996 Stock Incentive Plan
    (1996 Plan).(1)                                                                                                                                                                                                                               
|        | 10.23   |                      |  | Form of Stock Option Agreement pertaining to the
    1996 Plan.(1)                                                                                                                                                                                                                           
|        | 10.23.1 |                      |  | Form of Automatic Stock Option Agreement
    pertaining to the 1996 Plan.(1)                                                                                                                                                                                                                 
|        | 10.24   |                      |  | Form of Notice of Grant of Stock Option
    pertaining to the 1996 Plan.(1)                                                                                                                                                                                                                  
|        | 10.24.1 |                      |  | Form of Notice of Grant of Non-Employee Director
    Automatic Stock Option pertaining to the 1996 Plan.(1)                                                                                                                                                                                  
|        | 10.25   |                      |  | Form of Stock Issuance Agreement pertaining to
    the 1996 Plan.(1)                                                                                                                                                                                                                         
|        | 10.26   |                      |  | The Registrants Employee Stock Purchase
    Plan.(1)                                                                                                                                                                                                                                        
|        | 10.31   |                      |  | Cypress Center Net Lease dated October 9,
    1997 between the Registrant and RNM Lakeville L.P., for the
    premises located at 2210 South McDowell Boulevard.(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)                                                                                             
|        | 10.36   |                      |  | Asset and Sale Agreement dated January 5,
    2004, as amended, by and among Marconi Advanced Communications,
    Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi
    Corporation plc, Fibre Communications, Inc. and Advanced Fibre
    Communications North America, Inc.(12)
|        | 10.37   |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and John Schofield.                                                                                                                                                                                      
|        | 10.38   |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and Keith E. Pratt.                                                                                                                                                                                      
|        | 10.39   |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and R. Leon Blackburn and Jack L.
    Ermey.                                                                                                                                                             
|        | 13.1    |                      |  | Five-Year Summary of Selected Consolidated
    Financial Data from the 2003 Annual Report to Stockholders.                                                                                                                                                                                   
|        | 13.2    |                      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations from the 2003
    Annual Report to Stockholders.                                                                                                                                                   
|        | 13.3    |                      |  | Financial Statements and Supplementary Data from
    the 2003 Annual Report to Stockholders.                                                                                                                                                                                                 
|        | 21.1    |                      |  | Subsidiaries of the Registrant.(1)                                                                                                                                                                                                                                                           
|        | 23.1    |                      |  | Report on Schedule and Consent of KPMG LLP.                                                                                                                                                                                                                                                  
|        | 31      |                      |  | Certifications.                                                                                                                                                                                                                                                                              
|        | 32      |                      |  | Statements of Chief Executive Officer and Chief
    Financial Officer Under 18 U.S.C. 1350.                                                                                                                                                                                                  



---



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Portions of this Exhibit have been granted
    Confidential Treatment.



| |     |                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.

24



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| |     |                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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) | Incorporated by reference from the
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2001, filed with the Securities and Exchange
    Commission on March 20, 2002.                  



|     |                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002, filed with the Securities and
    Exchange Commission on March 18, 2003.           
|    
|(11) | Incorporated by reference from the
    Registrants Quarterly Report on Form 10-Q for the
    quarterly period ended June 30, 2003, filed with the
    Securities and Exchange Commission on August 8, 2003.
|    
|(12) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Securities and Exchange Commission on March 4, 2004.                                                      

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

A Current Report on Form 8-K was filed on
October 21, 2003 reporting the issuance of a press release
announcing third quarter 2003 financial results.

25



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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)                       



| |     |                      
| | --- | ---------------------
| | By: | /s/ JOHN A. SCHOFIELD

| |                                          
| | -----------------------------------------
| |                                          
| | John A. Schofield                        
| | President and Chief Executive
    Officer

Date: March 11, 2004

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
John A. Schofield and Keith E. Pratt, and each of them, his/her
true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him/her and in
his/her name, place and stead, in any and all capacities, to
sign any and all amendments to this report on Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.

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                                      |  | Title                 |  | Date          
|                                               |  |                       |  |               
|                                              
|/s/ JOHN A. SCHOFIELDJohn A. Schofield         |  | Chairman of the Board |  | March 11, 2004
|                                              
|/s/ RUANN F. ERNSTRuann F. Ernst               |  | Director              |  | March 11, 2004
|                                              
|/s/ CLIFFORD H. HIGGERSONClifford H. Higgerson |  | Director              |  | March 11, 2004
|                                              
|/s/ WILLIAM L. KEEVERWilliam L. Keever         |  | Director              |  | March 11, 2004
|                                              
|/s/ MARTIN R. KLITTENMartin R. Klitten         |  | Director              |  | March 11, 2004
|                                              
|/s/ DAN RASDALDan Rasdal                       |  | Director              |  | March 11, 2004

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##### Table of Contents



|                                       |  |                                                                                                                                                 |  |                |  | 
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  |                                                                                                                                                 |  |               
|Signature                              |  | Title                                                                                                                                           |  | Date          
|                                       |  |                                                                                                                                                 |  |               
|                                      
|/s/ KEITH E. PRATTKeith E. Pratt       |  | Chief Financial Officer & Senior Vice
    President, Finance and Administration (Duly Authorized Signatory
    and Principal Financial Officer) |  | March 11, 2004
|                                      
|/s/ R. LEON BLACKBURNR. Leon Blackburn |  | Vice President & Corporate Controller
    (Principal Accounting Officer)                                                                        |  | March 11, 2004

27



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##### Table of Contents



ADVANCED FIBRE COMMUNICATIONS, INC.

Schedule II  Valuation
and Qualifying Accounts


(In thousands)


|                                |  |            |       |            |  |            |        |            |  |            |    |  |  |  |         |   |  |  |     | 
|------------------------------- |  | ---------- | ----- | ---------- |  | ---------- | ------ | ---------- |  | ---------- | -- |  |  |  | ------- | - |  |  | --- | 
|                                |  |            |       |            |  |            |        |           
|                                |  |            |       | Additions  |  |            |        |           
|                                |  |            |       |            |  |            |        |           
|                                |  | Balance at |       | Charged to |  | Charged to |        | Deductions |  | Balance at
|                                |  | Beginning  |       | Costs and  |  | Other      |        | from       |  | End of    
|Allowance for Doubtful Accounts |  | of Period  |       | Expenses   |  | Accounts   |        | Allowance  |  | Period    
|                                |  |            |       |            |  |            |        |            |  |           
|Year ending December 31, 2001   |  |            | 1,948 |            |  |            | 10,261 |            |  |            | 58 |  |  |  | (11,315 | ) |  |  | 952 | 
|Year ending December 31, 2002   |  |            | 952   |            |  |            | 850    |            |  |            |   |  |  |  | (983    | ) |  |  | 819 | 
|Year ending December 31, 2003   |  |            | 819   |            |  |            | 407    |            |  |            |   |  |  |  | (507    | ) |  |  | 719 | 

|                                 |  |            |        |            |  |            |        |            |  |            |     |  |  |  |        |   |  |  |        | 
|-------------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | --- |  |  |  | ------ | - |  |  | ------ | 
|                                 |  |            |        |            |  |            |        |           
|                                 |  |            |        | Additions  |  |            |        |           
|                                 |  |            |        |            |  |            |        |           
|                                 |  | Balance at |        | Charged to |  | Charged to |        | Deductions |  | Balance at
|                                 |  | Beginning  |        | Costs and  |  | Other      |        | from       |  | End of    
|Reserve for Purchase Commitments |  | of Period  |        | Expenses   |  | Accounts   |        | Reserve    |  | Period    
|                                 |  |            |        |            |  |            |        |            |  |           
|Year ending December 31, 2001    |  |            | 1,800  |            |  |            | 13,412 |            |  |            |    |  |  |  | (1,186 | ) |  |  | 14,026 | 
|Year ending December 31, 2002    |  |            | 14,026 |            |  |            | (911   | )          |  |            | 683 |  |  |  | (7,461 | ) |  |  | 6,337  | 
|Year ending December 31, 2003    |  |            | 6,337  |            |  |            | (2,450 | )          |  |            |    |  |  |  | (999   | ) |  |  | 2,888  | 

|                              |  |            |        |            |  |            |        |            |  |            |       |   |  |  |         |   |  |  |        | 
|----------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ----- | - |  |  | ------- | - |  |  | ------ | 
|                              |  |            |        |            |  |            |        |           
|                              |  |            |        | Additions  |  |            |        |           
|                              |  |            |        |            |  |            |        |           
|                              |  | Balance at |        | Charged to |  | Charged to |        | Deductions |  | Balance at
|                              |  | Beginning  |        | Costs and  |  | Other      |        | from       |  | End of    
|Reserve for Inventories       |  | of Period  |        | Expenses   |  | Accounts   |        | Reserve    |  | Period    
|                              |  |            |        |            |  |            |        |            |  |           
|Year ending December 31, 2001 |  |            | 14,088 |            |  |            | 25,449 |            |  |            | (166  | ) |  |  | (3,548  | ) |  |  | 35,823 | 
|Year ending December 31, 2002 |  |            | 35,823 |            |  |            | 2,502  |            |  |            | 1,056 |   |  |  | (19,819 | ) |  |  | 19,562 | 
|Year ending December 31, 2003 |  |            | 19,562 |            |  |            | 3,868  |            |  |            | (799  | ) |  |  | (7,326  | ) |  |  | 15,305 | 

|                                                 |  |            |       |            |  |            |        |            |  |            |   |  |  |  |    |   |  |  |       | 
|------------------------------------------------ |  | ---------- | ----- | ---------- |  | ---------- | ------ | ---------- |  | ---------- | - |  |  |  | -- | - |  |  | ----- | 
|                                                 |  |            |       |            |  |            |        |           
|                                                 |  |            |       | Additions  |  |            |        |           
|                                                 |  |            |       |            |  |            |        |           
|                                                 |  | Balance at |       | Charged to |  | Charged to |        | Deductions |  | Balance at
|Reserve for Product Returns, Promotional Rebates |  | Beginning  |       | Costs and  |  | Other      |        | from       |  | End of    
|and Other Rebates and Credits                    |  | of Period  |       | Expenses   |  | Accounts   |        | Reserve    |  | Period    
|                                                 |  |            |       |            |  |            |        |            |  |           
|Year ending December 31, 2001                    |  |            | 1,722 |            |  |            | (1,171 | )          |  |            |  |  |  |  |   |   |  |  | 551   | 
|Year ending December 31, 2002                    |  |            | 551   |            |  |            | 106    |            |  |            |  |  |  |  |   |   |  |  | 657   | 
|Year ending December 31, 2003                    |  |            | 657   |            |  |            | 4,787  |            |  |            |  |  |  |  | (5 | ) |  |  | 5,439 | 

|                              |  |            |        |            |  |            |        |            |  |            |   |  |  |  |        |   |  |  |        | 
|----------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | - |  |  |  | ------ | - |  |  | ------ | 
|                              |  |            |        |            |  |            |        |           
|                              |  |            |        | Additions  |  |            |        |           
|                              |  |            |        |            |  |            |        |           
|                              |  | Balance at |        | Charged to |  | Charged to |        | Deductions |  | Balance at
|                              |  | Beginning  |        | Costs and  |  | Other      |        | from       |  | End of    
|Reserve for Warranty          |  | of Period  |        | Expenses   |  | Accounts   |        | Reserve    |  | Period    
|                              |  |            |        |            |  |            |        |            |  |           
|Year ending December 31, 2001 |  |            | 11,596 |            |  |            | 9,305  |            |  |            |  |  |  |  | (8,262 | ) |  |  | 12,639 | 
|Year ending December 31, 2002 |  |            | 12,639 |            |  |            | 10,467 |            |  |            |  |  |  |  | (8,009 | ) |  |  | 15,097 | 
|Year ending December 31, 2003 |  |            | 15,097 |            |  |            | 4,552  |            |  |            |  |  |  |  | (8,532 | ) |  |  | 11,117 | 

28



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##### Table of Contents



ADVANCED FIBRE COMMUNICATIONS, INC.

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

|        |       |                      |  |                                                                                                                                           
|------- | ----- | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                     
|Number  |       | Document Description
|        |       |                     
|        | 10.37 |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and John A. Schofield.                                
|        | 10.38 |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and Keith E. Pratt.                                   
|        | 10.39 |                      |  | Severance Agreement in connection with Change in
    Control between the Registrant and R. Leon Blackburn and Jack L.
    Ermey.          
|        | 13.1  |                      |  | Five-Year Summary of Selected Consolidated
    Financial Data from the 2003 Annual Report to Stockholders.                                
|        | 13.2  |                      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations from the 2003
    Annual Report to Stockholders.
|        | 13.3  |                      |  | Financial Statements and Supplementary Data from
    the 2003 Annual Report to Stockholders.                                              
|        | 23.1  |                      |  | Report on Schedule and Consent of KPMG LLP.                                                                                               
|        | 31    |                      |  | Certifications.                                                                                                                           
|        | 32    |                      |  | Statements of Chief Executive Officer and Chief
    Financial Officer Under 18 U.S.C. 1350.                                               

29