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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,
    2002                                             
|  
|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.

(Exact name of registrant as specified in its
charter)


|                                                                                                   |  |                                         
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                           |  | 68-0277743                              
|(State or other jurisdiction of
    incorporation or organization)                                 |  | (I.R.S. Employer
    Identification No.)
|                                                                                                  
|1465 North McDowell Boulevard
    Petaluma, California(Address of principal executive
    offices) |  | 94954(Zip Code)                         

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. þ

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 28, 2002 was $1,372,844,777.
(Solely for the purpose of calculating the preceding amount, all
directors and officers of the Registrant are deemed to be
affiliates.)

As of March 10, 2003, there were 84,986,098
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, 2002 and the
Definitive Proxy Statement issued in connection with the 2003
Annual Meeting of Stockholders to be held on May 22, 2003,
are incorporated by reference in Parts II and III of
this report.



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TABLE OF CONTENTS



|                                                 |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.                                         
|                                                 | Item 1. Business                                                                             
|PART II.                                        
|                                                 | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                 | Item 6. Selected Consolidated Financial Data                                                 
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                 | Item 8. Financial Statements and Supplementary Data                                          
|                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III.                                       
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                 | Item 13. Certain Relationships and Related Transactions                                      
|                                                 | Item 14. Controls and Procedures                                                             
|PART IV.                                        
|                                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                      
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
|Form 10-K                                       
|Exhibit 3.6                                     
|Exhibit 13.1                                    
|Exhibit 13.2                                    
|Exhibit 13.3                                    
|Exhibit 23.1                                    
|Exhibit 24.1                                    
|Exhibit 99.1                                    
|Exhibit 99.2                                    



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ADVANCED FIBRE COMMUNICATIONS, INC.

ANNUAL REPORT ON FORM 10-K


FOR THE YEAR ENDED DECEMBER 31,
2002


TABLE OF CONTENTS

|          |  |                                                                                           |  |      |    | 
|--------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|          |  |                                                                                           |  | Page
|          |  |                                                                                           |  |     
|PART I.  
|Item 1.   |  | Business                                                                                  |  |      | 2  | 
|Item 2.   |  | Properties                                                                                |  |      | 16 | 
|Item 3.   |  | Legal Proceedings                                                                         |  |      | 16 | 
|Item 4.   |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 17 | 
|PART II. 
|Item 5.   |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 17 | 
|Item 6.   |  | Selected Consolidated Financial Data                                                      |  |      | 19 | 
|Item 7.   |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 19 | 
|Item 7A.  |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |      | 19 | 
|Item 8.   |  | Financial Statements and Supplementary Data                                               |  |      | 19 | 
|Item 9.   |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 20 | 
|PART III.
|Item 10.  |  | Directors, Executive Officers and Key Employees
    of the Registrant                     |  |      | 20 | 
|Item 11.  |  | Executive Compensation                                                                    |  |      | 24 | 
|Item 12.  |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 24 | 
|Item 13.  |  | Certain Relationships and Related Transactions                                            |  |      | 24 | 
|Item 14.  |  | Controls and Procedures                                                                   |  |      | 24 | 
|PART IV. 
|Item 15.  |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |      | 25 | 

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PART I.

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

The following discussion should be read in
conjunction with our Managements Discussion and
Analysis of Financial Condition and Results of Operations,
financial statements and related notes in our 2002 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., or
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 and 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
http://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 products and services. Our products and services enable
the connection between the central office (CO) switches of
telecommunications service providers and their end users for
voice and high-speed Internet, data and video communications.
Our products include Integrated Multiservice Access Platforms
(IMAPs), Multiservice Central Office Switching Platforms,
Optical Add-Drop Multiplexers (OADMs), Integrated Access Devices
(IADs), network element management systems and cabinets, as well
as related professional services.

Industry Background

Since the early 1970s, telephone companies have
deployed digital loop carriers (DLCs) as one of the primary
vehicles to extend plain old telephone service (POTS) through
the access network  the portion of the Public
Switched Telephone Network that connects homes and businesses to
the telephone companys COs. Before DLCs, twisted
copper-wire pairs directly connected each subscriber to their
carriers CO. Interference from other wiring as well as
environmental conditions, however, caused these voice and other
narrowband services to degrade in quality typically around two
miles from the originating CO. DLCs extend the reach of
connections to remotely-located subscribers and improve overall
service quality. Over the past three decades, DLCs have evolved
to next-generation digital loop carriers (NGDLCs) capable of
simultaneously providing POTS and advanced broadband services,
such as digital subscriber lines (DSL).

The telecommunications industrys widely
publicized capital expenditure reductions have been less severe
in the access network than in the core of the network, which
underwent a massive build-out in the late 1990s. Because the
pace and complexity of upgrading access networks are more
challenging than the core, they were

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not overbuilt in the spending boom that occurred
a few years ago. Consequently, we believe that there is more
investment required for broadband connectivity in the access
network.


Network modernization accounts for the majority
of principal NGDLC spending. Every year a percentage of the
total installed base is routinely replaced or upgraded on a
pre-determined schedule. In 2002, more than 1.5 million new
homes were built in the U.S., further contributing to NGDLC
sales. The vast majority of these new homes are now being served
by NGDLCs, the most economical and scalable vehicles to deliver
POTS, narrowband and broadband services to growing suburban and
rural subscriber areas. The final factor prompting spending by
carriers (i.e., telecommunication companies selling access to
end users) is the lack of broadband capability in the majority
of the current DLC installed base.

We believe there are three factors influencing
the pace of change in the access network: services, regulation
and technology. The ongoing demand for broadband connections
shows that customer interest in broadband services remains
strong. It seems likely that any significant changes in
broadband regulation could trigger growth in the access market
by encouraging carriers to invest in upgrading neighborhood
networks with new equipment that delivers broadband services.
Congress enactment of the 1996 Telecommunications Act (the
Act) created an environment in which carriers accelerated their
offerings of voice, data and video services. In February 2003,
the Federal Communications Commission (FCC) adopted new rules
concerning incumbent local exchange carriers obligations
for elements of their networks. We believe that despite these
new rules, there still exists uncertainty as to their impact on
the access network market.

We have been developing newer technologies that
make broadband rollout economical for a higher percentage of the
population. In 2000, for example, we released our first
broadband line card with two full-rate DSL circuits. A year
later, we released a four-circuit card. And in 2002, we
announced our six-circuit card. Innovative evolution such as
this helps drive down deployment costs and fends off competing
vendors. Over time, we believe these three factors and their
combined forces may stimulate an increase in investment in the
access network.

Opportunities

We believe it is essential to position ourselves
to grow when the industry rebounds. To achieve this, we are
expanding into new adjacent markets with anticipated higher
growth opportunities. Our current strategic plan has three
critical areas of focus:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | Packet aggregation, routing, switching and
    management in the CO
|
| |  | Enhanced fiber access and transport                                
|
| |  | Enhanced network management and professional
    services          

Much of the future opportunities in the
telecommunications industry are fueled 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 a copper plant to a
predominately fiber plant. 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. But the conversion
of the edge of the network (the connection between the service
providers CO and its subscribers) still requires carriers
to make significant investments. It is the cost effective
packetization and fiberization at the edge of the network that
will enable carriers and subscribers to benefit from the
deployment of broadband services.

Addressing these trends while adhering to our
strategic plan, we brought to market three products during 2002
that address our customers needs of:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Lowering capital and operating expenses                                              
|
| |  | Offering the triple play of bundled voice,
    high-speed Internet and video services

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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhancing competitiveness over cable companies
    and other multiservice operators                                                                                
|
| |  | Providing turnkey solutions, EF&I
    (engineering, furnish and install) services, and project and
    network management by our ATLAS Professional Services group

Our new products include Telliant,
TransMAX 1500 and AccessMAX System 9, and are
discussed below.

Product Portfolio

Our product family was conceived as an access
network product line with low start up costs and flexibility in
providing existing and future broadband services. Our portfolio
of products currently consists of:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | AccessMAX Integrated Multiservice Access Platform                   
|
| |  | Telliant Multiservice Central Office Switching
    Platform         
|
| |  | TransMAX Optical Add-Drop Multiplexers                              
|
| |  | PanoramaTM Network Element Management
    Systems                   
|
| |  | PremMAX Integrated Access Devices                                  
|
| |  | ATLAS Professional Services                                         
|
| |  | Environmentally hardened outside plant cabinets
    and technologies

AccessMAX

DLCs are a universally recognized network element
in the U.S., having been deployed in the access network for more
than 30 years. We have been selling our AccessMAX solutions
into this long-established market for nearly ten years. Carriers
buy our solutions for a number of uses, including the addition
of POTS lines while augmenting their networks to deliver
advanced broadband services.

Our primary product platform, AccessMAX, is an
NGDLC that sits in remote outside plant cabinets in the access
network. AccessMAXs innovative architecture simultaneously
supports the triple play of POTS, high-speed
Internet and video services over a single network
infrastructure. Today, more and more service providers,
particularly our independent operating company (IOC) customers,
are offering triple play services which helps drive down costs
for the service providers and their subscribers.

AccessMAX provides flexibility and scalability
for simultaneous delivery of voice, data and any combination of
narrowband, wideband and broadband service anywhere in the
network. Copper, fiber and wireless transport options offer
flexibility while maximizing the service providers
existing infrastructure. Flexible configurations allow the
service provider to fill any route requirement to enable service
delivery to network customers. AccessMAX enhances traditional
voice-centric networks through the addition of high-speed data
services. This creates new revenue streams from multiple
services such as voice, data and video over an integrated
network.

The AccessMAX group of products includes:



| |   |                             
| | - | ----------------------------
| |  | AccessMAX Systems 7, 8 and 9
|
| |  | UMC1000®                    
|
| |  | DMAX                       
|
| |  | EMAXplus                   

AccessMAX System 9 builds upon the native
asynchronous transfer mode (ATM) architecture introduced in
System 8 last year, delivering more bandwidth for more
revenue-generating services. AccessMAX System 9 brings our
triple play solution to market, positioning us as a complete,
end-to-end, access solutions provider. AccessMAX incorporates
both domestic (American National Standards Institute,

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or ANSI) and international (European
Telecommunications Standards Institute, or ETSI) capabilities,
combined in a single platform to be usable by carriers
throughout much of the world.


The UMC1000 is our original narrowband to
broadband service delivery platform. It is capable of
simultaneously providing traditional narrowband and wideband
services such as POTS, integrated services digital network
(ISDN) and T1, along with a variety of DSL services over copper
wire, fiber optic cable or wireless transport media. The UMC1000
product family consists of 48-line and 120-line units. These
units can be installed in a variety of network configurations
and can be linked together to form larger line systems of over
2,000 lines.

Our DMAX1120 platform leverages all of the
existing capabilities of the UMC1000 while giving service
providers more choices as they build out and optimize their
networks for the high-speed services of the future.

EMAXplus provides rapid and efficient retrofits
of third party cabinets. This system increases the capacity and
density of the legacy infrastructure and fits into the space of
a typical non-AFC DLC channel bank, eliminating the need for
additional rights of way and permits. The added density enables
a service provider to meet demand for additional POTS or
asymmetric digital subscriber line (ADSL) services in areas
where standard twisted copper pair phone lines are exhausted.

Telliant

In May 2002, we announced Telliant for the
broadband marketplace. Telliant is our new carrier-class,
multiservice CO switching platform that delivers unprecedented
capacity and density for the evolving broadband access network.
Telliant is suited for a higher concentration of DSL subscribers
and bandwidth-rich applications such as Internet protocol (IP)
video, broadband remote access server (BRAS) and other functions
that require IP intelligence. We obtained this product through
our acquisition of AccessLan Communications, Inc. (AccessLan) in
May 2002.

In addition to video distribution via OC-12 (622
megabits per second, or Mbps) or Gigabit Ethernet (1 Gbps),
Telliant supports direct video service drops via DSL. This
allows Telliant to replace several traditional network
components, including routers, switches and digital subscriber
line access multiplexers (DSLAMs), with a single multifunction
system. This multifunctionality, combined with ATM switching
capacity, uniquely positions Telliant to address todays CO
practices and evolve to support the advanced requirements of the
near future, while reducing costs and simplifying network
complexity.

TransMAX

In June 2002, we announced TransMAX 1500, our new
OADM for the optical marketplace. TransMAX 1500 uses the latest
coarse wavelength division multiplexing (CWDM) technology to
relieve fiber-optic bottlenecks in local access networks. It
solves todays network problems by providing an economical
way of scaling existing synchronous optical network/ synchronous
digital hierarchy (SONET/SDH) infrastructure for accommodating
new revenue-generating services without requiring a disruptive
upgrade. TransMAX 1500 currently requires the smallest footprint
in the industry and can be deployed in the outside plant
environment, thus enabling service offerings to far-reaching
customers at a minimal initial investment.

Panorama

Our Panorama Network Element Management System is
a software application product. It provides a centralized
graphic user interface for point-and-click management of the
entire AccessMAX, Telliant and TransMAX network. Point-and-click
provisioning enables streamlined and accurate provisioning,
configuring, monitoring and end-to-end management of the service
providers network. Panoramas auto-detection
functionality and graphical mapping display enable network
administrators to quickly locate and check the status of all our
equipment within their networks. Panoramas flexible
telecommunications management network architecture, centralized
management capabilities and customized applications integrate
with external network management.

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PremMAX

Our PremMAX IADs, which are designed for the
competitive local exchange carrier (CLEC) market, work with our
AccessMAX products to simplify and lower the cost of delivering
total business services to small and medium-sized business
customers. PremMAX aggregates voice and data traffic at the
customers premises onto the access network. It is able to
accommodate a mix of narrowband and wideband services over a
single transport, maximizing existing infrastructure.
Scalability allows service providers to incrementally grow and
accommodate service requirements for many customers.

ATLAS

ATLAS is our professional service organization.
It is comprised of regionally located teams of professionals who
provide consulting and complete end-to-end installation and
operations, maintenance and provisioning services for voice,
data and video networks. ATLAS services include auditing,
planning and integrating network solutions for service providers
while maximizing the use of existing equipment. ATLAS can be
used to identify expansion capabilities, provide engineering
services, site surveys, implementation recommendations and
strategies, project management, and equipment installation or
installation supervision for existing and next-generation access
networks. ATLAS offers customized service support agreements, as
well as technical training courses. This gives service providers
an understanding of technological advancements and hands-on
experience to operate and maintain all our equipment and
software.

Cabinets

We market a variety of cabinets to provide the
most cost-effective solution for inside and outside plant
application. From 48 to over 2,000 lines, our cabinets
incorporate and integrate components to save space and power.
The new Sierra line of cabinets feature increased
dissipation of heat generated by broadband access equipment,
expanded battery back-up capacity, flexible configurations and
compliance with new industry standards.

Markets and Customers

We sell our products and services to customers in
the U.S. and international marketplaces, including regional
Bell operating companies (RBOCs), incumbent local exchange
carriers (ILECs), IOCs, CLECs, international telecommunications
companies, alternative carriers, system integrators and original
equipment manufacturers (OEMs). Historically, the ILECs, IOCs,
and international telecommunications companies have been our
largest revenue-producing markets.

In 2002, we sold our products to a wide variety
of customers. We plan to continue to expand our sales to our
largest customers. During 2002, we derived slightly higher
revenues from international markets compared with 2001.
Internationally, we are focusing our efforts on service
providers making investments in broadband access
infrastructures. The migration to broadband and privatization of
international incumbent telecommunications companies are
prompting service providers to upgrade and expand existing
facilities to improve their positions in an increasingly
competitive marketplace.

In 2002, sales to Alltel Supply Corporation
(Alltel), North Supply Company, a subsidiary of Sprint (Sprint),
and Verizon Communications Inc. (Verizon) each accounted for 10%
or more of total revenues. In 2001, Sprint accounted for 10% or
more of total revenues. In 2000, Sprint and Winstar
Communications, Inc. (Winstar) each accounted for 10% or more of
total revenues. No other customer accounted for 10% or more of
total revenues in any of these periods.

Backlog

Our backlog primarily consists of purchase orders
for products, software, and services to be delivered within the
next year. At December 31, 2002, 2001 and 2000, backlogs
were approximately $32.2 million, $25.5 million and
$40.8 million, respectively. Included in the 2000 backlog
was $11.9 million in shipments made to Winstar and a
value-added reseller that was not recognized in 2001 due to
non-collectibility. We

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consider backlog to be an indicator of future
sales, but not the sole predictor because our customers may
cancel or defer orders without penalty. Cancellation or
reduction of pending purchase orders could seriously harm our
future revenues.


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,
Illinois, Connecticut, Florida, Texas and Virginia. Our
U.S. sales personnel are dedicated to specific carriers
customer accounts within our U.S. customer base. In
addition to direct calls to service providers, 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 salespeople and
technical, engineering and support personnel located in the
U.S., Canada, Mexico, Switzerland, the U.K. and Japan.

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, capture
and deliver technical value propositions, product strategy
applications and technical marketing collateral.

We maintain a customer support organization that
provides our customers with high quality technical and
administrative product support. We provide warranty service,
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 technical service engineers, 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, Illinois, 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, such as support for video over IP applications,
enhancement of DSL service cards, fiber to the home (FTTH)
interfaces, soft switch interfaces, 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.

Our industry is characterized by rapidly changing
technological and market conditions that may shorten product
life cycles. Our future competitive position depends partly on
our ability to generate and introduce new technology and
features to existing and new products. During the product
development process, we invest substantial resources in products
that often require extensive field testing and evaluation before
their introduction to the market. We have invested substantial
engineering resources in the development of custom application
specific integrated circuits (ASICs) that we believe provide
feature and price advantages for our products. These ASICs and
the software that manages them create a core capability set that
would require considerable effort to replicate.

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We expensed research and development costs of
$61.7 million in 2002, $64.2 million in 2001 and
$58.8 million in 2000. As a percentage of total revenues,
research and development costs represented 18% in 2002, 20% in
2001 and 14% in 2000. We consider our research and development
efforts vital to our future success, and we plan to continue to
support the development of new products, features, and product
cost reductions.

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.

Certain components used in our products may only
be available from single or limited source vendors. Some of our
sole-source vendors are companies that, from time to time,
allocate parts to telecommunications equipment manufacturers due
to market demand for components and equipment. These vendors
supply a number of our competitors as well as us.

Competition

Our competitors range from small companies, both
U.S. and international, to large, multinational
corporations. Principal competitors for our core product,
AccessMAX, include: Compagnie Financière Alcatel (Alcatel),
Lucent Technologies Inc. (Lucent), and Marconi Communications
Inc. (Marconi). Some of these competitors may have more
extensive financial, marketing and technical resources than we
do and enjoy superior name recognition in the market. However,
we believe that we have a strong financial position and we have
enhanced our name recognition and market share in the access
network market during the past few years.

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.

Telecommunications and Technology
Investments

We have made investments in several start-up
ventures specializing in advanced telecommunications
technologies. In the third quarter of 2001, we made an
investment in the privately-held development stage company,
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.

In 2001, we recorded a $2.3 million
impairment in our investment in another development stage
company. We believe macroeconomic conditions and an industry
capital spending slowdown adversely affected the valuation of
the company and led to the impairment. Our net investment in
this company totaled $4.3 million as of December 31,
2002.

In 1999, our investment in privately-held Cerent
Corporation (Cerent) was merged with Cisco Systems, Inc. (Cisco)
and was converted into approximately 10.6 million shares of
Cisco common stock (adjusted for a 2-for-1 stock split). In
February and May 2000, we entered into two three-year hedge
contracts with Bank of America Securities, Inc. (Bank of
America) for 10.1 million and 0.5 million shares of
Cisco stock, respectively. The purpose of these contracts was to
minimize the potential adverse market risk on the value of the
Cisco shares. See Managements Discussion and Analysis for
additional information regarding this investment.

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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, and vary by
specific foreign markets. Standards for new services continue to
evolve and we need to continue modifying our products or develop
new versions to meet these standards.

With the exception of the facility in San Jose,
California that we obtained through the acquisition of AccessLan
in May 2002, we have maintained our ISO 9001 certification
since 1997 and our TL 9000 certification since 2000.
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 telecommunication
equipment. We anticipate our San Jose facility will become
ISO 9001 and TL 9000 certified during 2003.

TL 9000 is a set of quality system standards
specific to the telecommunications industry, based on best
practice and business excellence models. It adds additional
focus on customer needs, strategic planning and accountability.
TL 9000 registered companies are also required to report
these measurements based on customer satisfaction and the
quality of the hardware and software developed by the supplier.

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. One patent is currently held for our
product family and eight patent applications are pending. There
can be no assurance that our intellectual property protection
measures will be sufficient to prevent misappropriation of 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.

Employees

As of December 31, 2002, we had 857
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 our U.S. and international
sales and distribution mix, our product feature component mix,
our ability to introduce new technologies and features ahead of
our competitors, introductions or announcements of new products
by our competitors, the timing and size of the

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orders we receive, adequacy of supplies for key
components and assemblies, financial strength of our vendors,
our ability to efficiently produce and ship orders promptly on a
price-competitive basis, and our ability to integrate and
operate acquired businesses and technologies.


We sell our products primarily to
telecommunications companies installing our equipment as part of
their access networks. Additions to those networks may represent
complex and lengthy engineering projects, with our equipment
typically representing only a portion of a given project. As a
result, the timing of product shipment is often difficult to
forecast. A portion of our equipment is usually installed in
outdoor locations, so shipments of the system can be subject to
the effects of seasonality, with fewer installation projects
normally scheduled during the winter months. These factors may
cause revenues in the quarter ended March 31 to be lower
than revenues in the preceding quarter ended December 31.
Sales in developing countries can be affected by delays and
reductions in planned project deployment, currency fluctuations,
reductions in capital availability, priority changes in
government budgets, delays in receiving government approvals,
and the political environment.

Expenditures for research and development, sales
and marketing, and general and administrative functions are
based in part on future business projections and are relatively
fixed for the short-term. We may be unable to adjust spending in
a timely manner in response to any unanticipated failure to meet
our business projections. There can be no assurance that we will
not have excess manufacturing capacity or that further
utilization of our manufacturing and distribution facility will
continue without interruption. This could result in, among other
things, higher operating expenses and lower net income.

Volatility in the price of our common stock may
occur as the result of fluctuations in our operating results,
such as revenues or 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 can be costly, lengthy and divert managements
attention and resources from our normal business operations. For
a description of this type of litigation, see Part I,
Item 3 Legal Proceedings of this Annual Report
on Form 10-K.



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

The telecommunications equipment market is
undergoing competitive and economic changes, the full scope and
nature of which are difficult to predict. We believe that
technological and regulatory change will continue to attract new
entrants to the 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,
a competitors customer may acquire one of our customers
and shift all capital spending to our competitor, resulting in
possible material reductions to our revenues and net income.

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

Our principal established competitors include:
Alcatel, Lucent and Marconi. 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 products, from both established and emerging
competitors.

Continued growth in the access market is highly
dependent on a vibrant economy, a strong level of capital
expenditures for broadband access solutions products and a
positive regulatory environment for larger ILEC customers. The
compounding effect of the current economic contraction, current
regulatory uncertainty and high debt levels may result in
further reductions in capital expenditures by companies in the
telecommunica-

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tions industry, including some of our customers.
This could seriously harm our revenues, net income or cash flows.




| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Alltel, Sprint and Verizon each accounted for 10%
or more of total revenues in 2002, Sprint accounted for 10% or
more of total revenues in 2001, and Sprint and Winstar accounted
for 10% or more of total revenues in 2000. No other single
customer accounted for 10% or more of total revenues in any of
these periods. Our five largest customers accounted for 56%, 44%
and 49% of total revenues in 2002, 2001 and 2000, respectively.
Although our largest customers have varied from period to
period, we anticipate that results of operations in any given
period will continue to depend to a significant extent upon
sales to a small number of customers. This dependence may
increase due to our strategy of 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. For example, sales to Winstar, a customer that accounted
for 10% or more of total revenues in 1998, 1999 and 2000,
decreased in 2001 as a result of their deteriorated financial
condition and filing for protection under bankruptcy laws. In
the event that a significant existing customer merges with
another company, there can be no assurance that such customer
will continue to purchase our products. The loss of one or more
significant existing customers or a decrease in the level of
purchases from these customers could 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.



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

Our customers are concentrated in the public
carrier telecommunications industry and, in the U.S., include
large RBOCs, ILECs, CLECs and IOCs. Our historical markets have
been the U.S. and international small to mid-line size
markets. We are attempting to expand into larger-line size
markets both in the U.S. and internationally. Our ability
to generate future revenues depends upon the capital spending
patterns and financial capabilities of our customers, continued
demand by our customers for our products and services, and end
user demand for advanced telecommunications services. Recent
severe financial problems affecting the telecommunications
industry in general could continue to cause a slowdown in our
sales and result in slower payments or defaults on account by
our customers. For example, in the first quarter of 2001, the
financial distress and resulting bankruptcies of Winstar and a
value-added reseller resulted in the non-recognition of
$11.9 million of revenues and a $9.3 million increase
in our allowance for doubtful accounts. In addition, the scale
and complexity of providing DSL service has contributed to a
substantial slowdown in service provider network build-out and
resulted in decreased capital spending in the industry. There
can be no assurance that telecommunications companies, foreign
governments or other customers will pursue infrastructure
upgrades that will necessitate the implementation of advanced
products such as ours. Infrastructure improvements may be
delayed or prevented by a variety of factors including cost,
regulatory obstacles, the lack of consumer demand for advanced
telecommunications services and alternative approaches to
service delivery.

We are targeting Telliant to the broadband
marketplace and TransMAX 1500 to the optical marketplace. Our
ability to generate revenues from the Telliant and TransMAX 1500
products depend in part on the capital spending patterns of our
customers, financial capabilities of our customers, customer
acceptance of our new products, our ability to develop new
features, and end user demand for new services provided by the
Telliant and TransMAX 1500 products. The economic slowdown
affecting the telecommunications industry has affected
customers capital spending patterns for deploying new
services and we cannot provide assurance as to when, or if, the
trend will improve.

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

Some of our customers have order specifications
requiring us to design, purchase parts and build systems that
are unique to a customer. In many cases, we forecast and
purchase components in advance and allocate resources to design
and manufacture the systems. If our customers requirements
change or 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. For
instance, in the fourth quarter of 2001, we recorded an
$18.0 million write-down to cost of revenues for excess and
obsolete inventory, some of which was customer-specific
inventory. In the same period, we also recognized a
$12.0 million accrual to cost of revenues for long-term
purchase commitments with contract manufacturers, much of which
was incurred for specific customers. In the first quarter of
2001, we increased our inventory-related reserves and accruals
by $2.2 million for inventories designed in accordance with
the specifications of Winstar and Tellabs, Inc. Write-downs and
accruals for unrealizable inventory negatively impact our gross
profit margins and net income.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | 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
nor do we carry key-person life insurance on them. There can be
no assurance that we will succeed in retaining our existing and
future key employees. We expect continued challenges in
recruiting, assimilating, motivating and retaining the key
technical and management personnel necessary to effectively
manage our operations.

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

We may pursue acquisitions of complementary
companies, products and technologies, as part of our efforts to
enhance our existing products, introduce new products and
fulfill changing customer requirements. Acquisitions could
adversely affect our operating results in the short-term as a
result of dilutive issuances of equity securities and the
incurrence of additional debt. Goodwill arising from
acquisitions may result in significant impairment write-downs
charged to our operating results in one or more future periods.
We currently have $56.1 million in goodwill related to the
acquisition of AccessLan in the second quarter of 2002. We have
limited experience in acquiring and integrating companies.
Acquisitions involve numerous risks, including disruption to our
business, exposure to unknown liabilities of acquired companies,
and failure to successfully integrate the operations, products,
technologies or personnel of the acquired company. We may fail
to realize the anticipated benefits of an acquisition, such as
increased market share and sales or successful development and
market acceptance of new products. We may expose ourselves to
increased competition due to an expanded product offering
resulting from an acquisition. The effects of these events could
harm our business, financial condition and results of
operations. All of these risks and uncertainties are relevant to
our acquisition of AccessLan.



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

Our products must comply with a significant
number of voice and data regulations and standards, which vary
between U.S. and international markets, and may also vary
within specific foreign markets. We also need to continue to
ensure that our products are easily integrated with various
telecommunications systems. Standards for new services continue
to evolve, requiring us to continuously modify our products or
develop new versions to meet new standards. Testing to ensure
compliance and interoperability requires significant investments
of time and money. If our systems fail to timely comply with
evolving standards in U.S. and international markets, if we
fail to obtain compliance on new features or if we fail to
maintain interoperability with equipment from other companies,
our ability to sell our products would be impaired. We could
thereby

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experience, among other things, customer contract
penalties, delayed or lost customer orders, decreased revenues
and reduced net income.


With the exception of the facility in San Jose,
California that we obtained through the acquisition of AccessLan
in May 2002, we have maintained compliance with
ISO 9001 since we were first certified in 1997 and TL9000
since we were first certified for hardware, software and
services in 2000. There can be no assurance that we will
maintain these certifications. The failure to maintain either of
these certifications may adversely impair the competitiveness of
our products.

Congress passed the 1996 Telecommunications Act
imposing 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 of services, and may affect the deployment of future
services. These changes have also caused greater consolidation
in the telecommunications industry, which could result in, among
other things, disruption of our existing customer relationships,
delays or loss of customer orders, decreased revenues and lower
net income. Regulatory issues stemming from the Act involve
challenges to the FCCs authority to implement regulations
and methods for DSL service rate setting. It is uncertain when
these issues will be resolved. 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 products.



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

International sales constituted 14% of our total
revenues in 2002, 14% in 2001 and 11% in 2000. International
sales have fluctuated in absolute dollars and as a percentage of
revenues and are expected to continue to fluctuate in future
periods.

We have had limited success in entering new
international markets. Many international telecommunications
companies are owned or strictly regulated by local authorities.
Access to international markets is often difficult to achieve
due to trade barriers and established relationships between
government-owned or controlled telecommunications companies and
traditional local equipment vendors. Successful expansion of
international operations and sales in some of these markets may
depend on our ability to establish and maintain productive
strategic relationships with established telecommunications
companies, local equipment vendors or entities successful at
penetrating international markets. We closed several sales and
representative offices in Asia and Europe during the past year.
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 assurances that our third party
distributors or sales representatives will provide the support
and effort necessary to effectively service our international
markets. Historically, our gross profit margins have, in some
cases, been lower for products sold through some of our third
party and indirect distribution channels than for products sold
through our direct sales efforts. Increased sales through our
third party and indirect distribution channels could reduce our
overall gross profit margin and net income.

Sales activities in foreign countries may subject
us to taxation in those countries. Although we have attempted to
minimize our exposure to taxation in foreign countries, any
income or other taxes imposed may increase our overall effective
tax rate, thereby adversely impacting our competitiveness in
those countries. Moreover, 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 family may be incompatible with the legacy
infrastructure of some international markets. This could impair
our ability to sell our product family into certain countries.
If our existing international customers adopt network standards
incompatible with those supported by our products, we could
experience a loss of revenues and lowered net income. Any
inability to obtain or maintain local regulatory

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approval could delay or prevent entrance into
certain markets. This could result in, among other things,
delays or loss of customer orders, decreased revenues and lower
net income.


In addition to the business, tax and regulatory
risks of international markets, there are also economic and
political risks that may impact our international sales. An
example of these risks could be our inability to collect
receivables from customers due to currency exchange controls
imposed as a result of a countrys economic collapse, as is
currently the case in Venezuela. Another example could be a loss
of customers due to terrorism or war. These problems would
decrease our revenues and lower our net income.



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

Our growth and ability to meet customer demands
are also dependent on our ability to obtain timely deliveries of
components from our suppliers. We currently purchase certain key
components used in our products from sole or limited source
vendors. These components include our proprietary ASICs, codec
components and certain surface mount technology components. 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 because many of our competitors are much
larger and may be able to obtain priority allocations from these
shared vendors, thereby limiting or making unreliable our
sources of supply for these components. Although we believe that
there are alternative sources for these components, 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 product deliveries to our customers and increase
our expenses. This could materially adversely affect our
business, gross profit margin and net income.

We have long-term purchase agreements with
certain 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 purchase such parts in accordance with agreed
upon lead times. While the agreements do not obligate us to
purchase any specified minimum volume, we provide CMs with
forecasts of our expected needs and we issue purchase orders
covering a certain period of time for specific quantities. 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 materially adversely affect our business,
gross profit margin and net income.

In addition to the above situations, CMs produce
products for other companies. We cannot be assured that they
will always allocate sufficient internal resources to timely
complete 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. This risk is further intensified as customers
increasingly demand shorter delivery timeframes. During 2002, we
transitioned some of our contract manufacturing to a new CM.



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

New product development often requires long-term
forecasting of market trends, and development and implementation
of new technologies. If we fail or are late to respond to new
technological developments, or if we experience delays in
product development, market acceptance of our products may be
significantly reduced or delayed. The telecommunications
equipment market is characterized by rapidly changing
technology, evolving industry standards, changes in end user
requirements, and frequent new product introductions and
enhancements. The introduction of products embodying new
technologies or the emergence of new industry standards can
render our existing products obsolete or unmarketable.

Our success will depend upon our ability to
enhance our product family through the timely development of new
technology, and the development and introduction of new products
or new product feature

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enhancements. We, or our competitors, may
announce new products or product enhancements, services or
technologies that have the potential to replace or shorten the
life cycle of our product family, causing customers to defer
purchases of our equipment. The competitiveness of our product
could be impaired if we fail to respond to technological
advances in the telecommunications industry on a cost-effective
and timely basis.




| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | 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, errors or failures that
may only become apparent after products are shipped, 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 problems could materially adversely
affect our business, revenues, gross profit margin and net
income.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues are generated primarily through
    sales of the AccessMax family of products and a decline in
    demand for these products would result in decreased revenues and
    net income.

Substantially all of our revenue is derived from
our AccessMAX product family. Any decrease in market demand for
AccessMAX products could result in decreased revenues and lower
net income. Factors that could affect demand for our products
include price competition, technological change and new product
introductions or announcements by our competitors.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, trade secret laws, contractual
obligations and patents. We currently hold one patent for our
product family, and eight patent applications are pending.
However, these applications may not result in issued patents.
These intellectual property protection measures may not be
sufficient to prevent wrongful misappropriation of our
technology nor will they prevent competitors from independently
developing technologies that are substantially equivalent or
superior to our technology. The laws of many foreign countries
do not protect our intellectual property rights to the same
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 resources, while not
guaranteeing a successful result.



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

We expect to continue being subject to
infringement claims and other intellectual property disputes. We
have been subject to several intellectual property disputes in
the past. In the future, we may be subject to additional
litigation and may be required to defend against claimed
infringements of the rights of others or to determine the scope
and validity of the proprietary rights of others. Litigation
could be expensive, lengthy and disrupt managements
attention and detract resources from normal business operations.
Adverse determinations could result in the loss of our
proprietary rights, or prevent us from manufacturing or selling
our products. It 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.

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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Tax authorities may challenge our request for
    a refund of taxes on the gain from the hedge contract on our
    Cisco stock.

We acquired approximately 10.6 million
shares of Cisco stock as a result of our investment in
privately-held Cerent, which was merged with Cisco in 1999. In
February 2000, we entered into a hedge contract, economically
equivalent to a costless collar arrangement, to reduce our risk
with respect to this position. In February 2003, our hedge
contract with respect to the 10.1 million Cisco shares we
own matured, and we received cash proceeds of
$656.2 million. A second hedge contract covering
approximately 0.5 million Cisco shares matures in May 2003.
We expect to receive total cash proceeds of approximately
$690 million for settlement of these hedge contracts in
February and May 2003. We delivered newly borrowed Cisco shares
in settlement of the hedge contract that matured in February
2003. We plan to do the same with respect to the hedge contract
that matures in May 2003. By using borrowed shares rather than
the existing Cisco shares we own, we believe that under current
tax law we are presently obligated to pay taxes only on the
excess of the fair market value of Cisco stock on the date of
the settlement over our tax basis in the stock. We believe that
the payment of taxes on the gain attributable to the hedge
contract will be deferred until we settle the new Cisco stock
loans. We intend to maintain these loans for an extended period,
although there is no assurance that we will be able to do so.

Our position with respect to deferral of the tax
on the gain related to the hedge contracts may be challenged by
the tax authorities. Accordingly, in 2003 we will pay an
estimated $265 million in federal and state taxes on the
full amount of the gain on both the Cisco stock and the hedge
contracts in order to avoid potentially significant interest and
penalties should we be unable to sustain our tax position. On
our December 31, 2002 consolidated balance sheet, we
accounted for the tax liability on the gain from the Cisco stock
and hedge contracts based on the value of these financial
instruments at that time and the applicable statutory tax rates.
We intend to seek a refund of approximately $210 million
which will represent the amount of taxes paid on the portion of
the gain that we believe is subject to deferral. There is no
assurance as to the timing or amount of any refund, and we will
incur modest costs in pursuing this course of action. Final
resolution of this matter may take several years. Should we
receive the requested refund, the additional cash would be
invested for the benefit of stockholders. Because we will have
borrowed the same number of Cisco shares as we own, upon
completion of the transactions, we will not have any exposure to
changes in the per share price for Cisco stock.

Item 2.     Properties

We lease five buildings in Petaluma, California.
Three of these buildings house our principal executive offices,
administrative, sales, marketing, product development,
manufacturing and distribution functions. The remaining two
buildings are 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), Buffalo Grove,
Illinois (research and development), Orange, Connecticut
(technical assistance), Largo, Florida, and several other
locations for sales and technical assistance. The Largo facility
is subleased to a non-affiliated entity. Internationally, we
occupy leased offices for sales and sales support functions in:
Fribourg, Switzerland; Mexico City, Mexico; and Redding, U.K.

We utilized approximately 58% of our total
available space as of March 10, 2003. 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 2003. In addition, we believe that appropriate
additional facilities will be available to accommodate growth as
needed.

Item 3.     Legal
Proceedings

Securities Litigation.Between July 2, 1998 and
August 17, 1998, various class action lawsuits were filed
in the U.S. District Court for the Northern District of
California against AFC and certain of our current and former
officers and directors (defendants). On November 2, 1998,
the court consolidated these lawsuits and a Consolidated Amended
Class Action Complaint was served on January 27, 1999.
In addition, on November 2,

16



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##### Table of Contents



1998, this consolidated class action was
coordinated with two individual actions filed by the State Board
of Administration of Florida and by an individual, John Earnest.
These three complaints alleged various federal and state
securities law violations for the period March 25, 1997
through and including June 30, 1998, and sought an
unspecified amount of damages.


In June 2002, we reached an agreement to settle
the consolidated securities class actions. On September 30,
2002, the court entered an order preliminarily approving the
settlement and approving the form and manner of notice to class
members. On November 18, 2002, after a hearing on the
matter, the court entered a final judgment and order of
dismissal with prejudice of these consolidated securities class
actions.

The total amount of the settlement was
$20.0 million. In connection with the settlement, we
recorded a $2.9 million charge to operating expenses to
cover the portion of the settlement that we did not expect to be
funded by insurance. The balance of the settlement amount was
funded by insurance proceeds.

Under the terms of the settlement, there was no
finding of wrongdoing on the part of any of the defendants or
any other finding that the claims alleged have merit. The
defendants have denied, and continue to deny, the truth of the
allegations in the litigation and all liability, fault or
wrongdoing of any kind.

The settlement did not include the plaintiffs in
the two individual non-class actions who filed requests to be
excluded from the class. On December 31, 2002, we settled
these two individual non-class actions. The total amount of the
settlement was $1.5 million. We recorded a
$1.5 million charge to fourth quarter 2002 operating
expense because we currently do not expect the amount to be
funded by insurance.

Under the terms of this later settlement, there
was no finding of wrongdoing on the part of any of the
defendants or any other finding that the claims alleged have
merit. The defendants have denied, and continue to deny, the
truth of the allegations in the litigation and all liability,
fault or wrongdoing of any kind.

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

None.




PART II.






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

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.

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:

|                                     |  |      |       |     |  |   |       | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|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 | 

|                                     |  |      |       |     |  |   |       | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|2001:                                |  | High |       | Low
|                                     |  |      |       |    
|First Quarter (through March 31)     |  | $    | 24.94 |     |  | $ | 14.31 | 
|Second Quarter (through June 30)     |  |      | 24.04 |     |  |   | 11.94 | 
|Third Quarter (through September 29) |  |      | 27.90 |     |  |   | 14.58 | 
|Fourth Quarter (through December 29) |  |      | 22.47 |     |  |   | 14.26 | 

17



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On March 10, 2003, the last reported sale
price of our common stock on Nasdaq was $15.01 per share. As of
March 10, 2003, there were approximately 411 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. We are currently monitoring proposed tax
legislation, including the elimination of double taxation on
dividends. If double taxation on dividends is eliminated, we may
consider the commencement of dividend payments.

Issuance of Unregistered Securities

None.

Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information as of
December 31, 2002 regarding compensation plans (including
individual compensation arrangements) under which equity
securities are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION

|                                                               |  |                            |        |                     |  |                             |       |  |  |  |       | 
|-------------------------------------------------------------- |  | -------------------------- | ------ | ------------------- |  | --------------------------- | ----- |  |  |  | ----- | 
|                                                               |  |                            |        |                     |  | 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 Security
    Holders     |  |                            | 15,352 |                     |  | $                           | 21.21 |  |  |  | 1,378 | 
|                                                               |  |                            |        |                     |  |                             |       |  |  |  |       | 
|Equity Compensation Plans not Approved by
    Security Holders |  |                            | 650    |                     |  |                             | 0.05  |  |  |  |      | 
|                                                               |  |                            |        |                     |  |                             |       |  |  |  |       | 
|Balance as of December 31, 2002                                |  |                            | 16,002 |                     |  | $                           | 20.35 |  |  |  | 1,378 | 
|                                                               |  |                            |        |                     |  |                             |       |  |  |  |       | 



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Equity compensation plans not approved by
    security holders consists of options assumed in connection with
    the AccessLan acquisition completed on May 13, 2002.

See Note 8 of the Notes to
Consolidated Financial Statements for information
regarding the material features of the above plans. Each of the
above plans provide that the number of shares with respect to
which options may be granted and the number of shares of common
stock subject to an outstanding option shall be proportionately
adjusted in the event of a subdivision or consolidation of
shares or the payment of a stock dividend. Such an event will
result in the purchase price per share of outstanding options
being proportionately adjusted as well.

Other Information

Trading Plans.Our Chairman, President and Chief
Executive Officer, John Schofield, and our Chief Financial
Officer, Keith Pratt, have each established a written plan in
accordance with Securities and Exchange Commission
Rule 10b5-1 for gradually liquidating a portion of their
holdings of our common stock. Mr. Schofield and
Mr. Pratt established the plans to diversify their
investment portfolios while avoiding conflict of interest or the
appearance of any such conflict that might arise from their
positions with AFC.

Mr. Schofield has informed us that he
intends to sell in the public market 1,500 shares of stock per
month either through option exercises or stock already owned,
subject to certain contingencies relating to continuation of
employment and prevailing stock price. His current plan runs
from January 1, 2003 through December 31, 2003.

18



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##### Table of Contents



Mr. Pratt has informed us that he intends to
exercise options covering up to 15,000 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. His current plan runs
from January 1, 2003 through December 31, 2003.




Item 6.     Selected
Consolidated Financial Data

The information required by this item is set
forth in our 2002 Annual Report to Stockholders, which
information is incorporated by reference and filed as
Exhibit 13.1.




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

The information required by this item is set
forth in our 2002 Annual Report to Stockholders, which
information is incorporated by reference and filed as
Exhibit 13.2.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

The information required by this item is set
forth in our 2002 Annual Report to Stockholders, which
information 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 2002 Annual Report to Stockholders, which
information is incorporated by reference and filed as
Exhibit 13.3.

19



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##### Table of Contents






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

None.




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          |  |     | 54 |          |  | Chairman of the Board, President & Chief
    Executive Officer                 
|Keith E. Pratt             |  |     | 40 |          |  | Chief Financial Officer & Senior Vice
    President, Finance and Administration
|R. Leon Blackburn          |  |     | 57 |          |  | Vice President & Corporate Controller                                          
|Jack L. Ermey              |  |     | 57 |          |  | Vice President, Global Sales                                                   
|                          
|Key Employees              |  |     |    |          |  |                                                                                
|Charles C. Geiger          |  |     | 38 |          |  | Vice President, Marketing, Product Management
    & Customer Service           
|Amy M. Paul                |  |     | 34 |          |  | Vice President, General Counsel and Corporate
    Secretary                    
|Victoria L. Perrault       |  |     | 49 |          |  | Vice President, Administrative Services                                        
|Jeffrey S. Rosen           |  |     | 39 |          |  | Vice President, Operations                                                     
|E. James Sackman           |  |     | 42 |          |  | Vice President & Chief Technology Officer                                      
|Doak K. Smailer            |  |     | 45 |          |  | Vice President, Quality, Customer Service &
    Information Technology         
|Jorge A. Valdes            |  |     | 41 |          |  | Vice President, Engineering                                                    
|                          
|Outside Directors          |  |     |    |          |  |                                                                                
|Ruann F. Ernst(1)(3)(4)    |  |     | 56 |          |  | Director                                                                       
|Clifford H. Higgerson(2)   |  |     | 63 |          |  | Director                                                                       
|William L. Keever(1)(2)(4) |  |     | 57 |          |  | Director                                                                       
|Martin R. Klitten(1)(4)    |  |     | 58 |          |  | Director                                                                       
|Dan Rasdal(1)(3)           |  |     | 69 |          |  | Director                                                                       
|Alex Sozonoff(2)(3)        |  |     | 64 |          |  | 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  

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.

20



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##### Table of Contents



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, who received his bachelors degree in
electrical engineering from NSW Institute of Technology (Sydney,
Australia), is also a director of Integrated Device Technology,
Inc.

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

Keith Pratt joined AFC in September 1997 as
Director of Corporate Development and served in this position
until his promotion in 1999. Mr. Pratt was promoted to Vice
President, Chief Financial Officer and Assistant Secretary in
1999. In January 2001, he was promoted to Senior Vice President.
Prior to joining AFC, Mr. Pratt was Director of the
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 his M.B.A. from Stanford University
(California).

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 holds 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 (California). Mr. Ermey served in
the United States Air Force from 1965 through 1969 and is a
Vietnam War Veteran.

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

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

21



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##### Table of Contents



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 degree, cum laude, from the University of San Diego
(California).

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

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. He is a
graduate of Tufts University (Massachusetts), with a
bachelors degree in mechanical engineering. Mr. Rosen
received his M.B.A. from Yale University (Connecticut).

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), and holds four U.S. patents in the areas of ATM
switching and system timing. Mr. Sackman has also been a
deputy approvals liaison engineer for the BABT.

Doak K. Smailer,
Vice President, Quality, Customer Service & Information
Technology

Doak Smailer joined Advanced Fibre Communications
in November 1998 as Director, Domestic Quality. Promoted to his
present position in September 2002, Mr. Smailer serves as
the Companys Vice President, Quality, Customer Service and
Information Technology. 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 (New York)
and holds an M.B.A. from Southern Methodist University (Dallas,
Texas).

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,

22



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##### Table of Contents



California; San Jose, California; Miramar,
Florida; Buffalo Grove, Illinois; and Richardson, Texas. In his
role as Vice President, he has led the development effort to add
broadband capability to AFCs AccessMAX product line.
Mr. Valdes also serves as the executive sponsor for
AFCs Telliant product line and the Companys IPTV
(internet protocol television) solutions. He is key in
AFCs strategic initiative to support service
providers efforts to develop the triple
play  voice, video and data.


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. Mr. Valdes holds two U.S. patents in
communications. He received his bachelors degree in
electrical engineering and M.B.A. from the University of Miami
(Florida).

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 Sphinx International Inc.,
and one private and one not-for-profit company.

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 six private companies.

William L. Keeverwas elected to our board in June 2001. Mr. Keever is the
Chief Executive Officer of Vodafone Asia Region, a wireless
telecommunications company. 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. Mr. Keever is also a
director of Japan Telecom, Japan Telecom Limited and J-Phone.

Martin R. Klittenwas elected to our board in October 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. Mr. Rasdal is also a director of Celeritek,
Inc.

Alex Sozonoffhas
served as a Director since October 1997. Mr. Sozonoff
currently provides consulting services as a senior advisor to
Hewlett-Packard Company, an electronics equipment and computer
company. Mr. Sozonoff served as Vice President of Customer
Advocacy for Hewlett-Packard from 1998 to February 2002, when he
retired. From 1994 to 1998, he was Vice President of Marketing
for Hewlett-Packard.

Our bylaws call for a board of directors composed
of a minimum of seven 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 resolution of the board
of directors. The office terms of the board of directors are
divided into three classes:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Clifford H. Higgerson, William L. Keever, and
    Alex Sozonoff are Class I Directors, and their terms will
    expire at the annual meeting of stockholders in 2003.
|
| |  | Ruann F. Ernst and John A. Schofield 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.              

23



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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.

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 2002,
and based also on written representations from those persons we
believe that there was compliance with Section 16(a) filing
requirements for 2002.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is set
forth in our 2003 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is set
forth in our 2003 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 2003 Definitive Proxy Statement to be filed within
120 days from our fiscal year end.




Item 14.     Controls
and Procedures

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

24



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##### Table of Contents






PART IV.






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

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

1. Financial
Statements:

As of December 31, 2002 and 2001:



| |   |                            
| | - | ---------------------------
| |  | Consolidated Balance Sheets

For the Years Ended December 31, 2002,
2001 and 2000:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Consolidated Statements of Income                                           
|
| |  | Consolidated Statements of Stockholders
    Equity and Comprehensive Income
|
| |  | Consolidated Statements of Cash Flows                                       

Notes to Consolidated Financial Statements

Independent Auditors Report

Quarterly Results of Operations (Unaudited)

2. Financial
Statement Schedule:



| |   |                                                    
| | - | ---------------------------------------------------
| |  | Schedule II  Valuation and
    Qualifying Accounts

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

25



---



##### Table of Contents



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.                                                                                                                                                                                   
|        | 4.1    |                      |  | Specimen Certificate of Common Stock.(1)                                                                                                                                                                                                    
|        | 4.3    |                      |  | Certificate of Incorporation of the Registrant
    (included in Exhibit 3.3.1).                                                                                                                                                             
|        | 4.4    |                      |  | Rights Agreement dated as of May 13, 1998
    between the Registrant and BankBoston, N.A.(4)                                                                                                                                                
|        | 4.5    |                      |  | Amendment to Rights Agreement dated as of
    October 19, 1998 between the Registrant and BankBoston,
    N.A.(5)                                                                                                                           
|        | 10.10  |                      |  | Compensation Agreement dated March 23, 1999
    between the Registrant and John A. Schofield.(6)                                                                                                                                            
|        | 10.11  |                      |  | Hangzhou Aftek Communication Registrant Ltd.
    Contract, dated June 18, 1994 between Advanced Fibre
    Technology Communication (Hong Kong) Limited and Hangzhou
    Communication Equipment Factory of the MPT., HuaTong
    Branch.(1)
|        | 10.15  |                      |  | Redwood Business Park Net Lease dated
    June 3, 1996 between the Registrant and G & W/Redwood
    Associates Joint Venture, for the premises located at
    Buildings 1 & 9 of Willow Brook Court.(1)                                     
|        | 10.17  |                      |  | Form of Indemnification Agreement for Executive
    Officers and Directors of the Registrant.(1)                                                                                                                                            
|        | 10.18  |                      |  | The Registrants 1993 Stock Option/ Stock
    Issuance Plan, as amended (1993 Plan).(1)                                                                                                                                                     
|        | 10.19  |                      |  | Form of Stock Option Agreement pertaining to the
    1993 Plan.(1)                                                                                                                                                                          
|        | 10.20  |                      |  | Form of Notice of Grant of Stock Option
    pertaining to the 1993 Plan.(1)                                                                                                                                                                 
|        | 10.21  |                      |  | Form of Stock Purchase Agreement pertaining to
    the 1993 Plan.(1)                                                                                                                                                                        
|        | 10.22  |                      |  | The Registrants 1996 Stock Incentive Plan
    (1996 Plan).(1)                                                                                                                                                                              
|        | 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)                                            
|        | 13.1   |                      |  | Five-Year Summary of Selected Consolidated
    Financial Data from the 2002 Annual Report to Stockholders.                                                                                                                                  
|        | 13.2   |                      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations from the 2002
    Annual Report to Stockholders.                                                                                                  
|        | 13.3   |                      |  | Financial Statements and Supplementary Data from
    the 2002 Annual Report to Stockholders.                                                                                                                                                
|        | 21.1   |                      |  | Subsidiaries of the Registrant.(1)                                                                                                                                                                                                          
|        | 23.1   |                      |  | Report on Schedule and Consent of KPMG LLP.                                                                                                                                                                                                 
|        | 24.1   |                      |  | Power of Attorney.                                                                                                                                                                                                                          

26



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##### Table of Contents



|        |      |                      |  |               
|------- | ---- | -------------------- |  | --------------
|Exhibit |      |                     
|Number  |      | Document Description
|        |      |                     
|        | 99.1 |                      |  | Certification.
|        | 99.2 |                      |  | Certification.



---



|    |                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the
    Registrants Registration Statement on Form S-1 (File
    No. 333-8921) filed with the Securities and Exchange
    Commission on July 26, 1996, as amended, and declared
    effective September 30, 1996.
|   
|(2) | Incorporated by reference from the
    Registrants Quarterly Report on Form 10-Q for the
    quarterly period ended September 30, 1997, filed with the
    Securities and Exchange Commission on November 7, 1997.                              
|   
|(3) | Incorporated by reference from the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1997, filed with the Securities and
    Exchange Commission on March 23, 1998.                                                
|   
|(4) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Securities and Exchange Commission on May 19, 1998.                                                                                            
|   
|(5) | Incorporated by reference from the
    Registrants Current Report on Form 8-K filed with the
    Securities and Exchange Commission on October 29, 1998.                                                                                        
|   
|(6) | Incorporated by reference from the
    Registrants Quarterly Report on Form 10-Q for the
    quarterly period ended March 31, 1999, filed with the
    Securities and Exchange Commission on May 7, 1999.                                       
|   
|(7) | Incorporated by reference from the
    Registrants Quarterly Report on Form 10-Q for the
    quarterly period ended September 31, 1999, filed with the
    Securities and Exchange Commission on November 8, 1999.                              
|   
|(8) | Incorporated by reference from the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1999, filed with the Securities and
    Exchange Commission on March 21, 2000.                                                
|   
|(9) | 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.                                                



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

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

Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 17, 2002. The
Company announced that it would be making an adjustment to its
previously reported financial results for 2001 and the first two
quarters of 2002.

27



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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 18, 2003

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 18, 2003
|                                              
|/s/ RUANN F. ERNSTRuann F. Ernst               |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ CLIFFORD H. HIGGERSONClifford H. Higgerson |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ WILLIAM L. KEEVERWilliam L. Keever         |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ MARTIN R. KLITTENMartin R. Klitten         |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ DAN RASDALDan Rasdal                       |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ ALEX SOZONOFFAlex Sozonoff                 |  | Director                                                                                                                                        |  | March 18, 2003
|                                              
|/s/ KEITH E. PRATTKeith E. Pratt               |  | Chief Financial Officer & Senior Vice
    President, Finance and Administration (Duly Authorized Signatory
    and Principal Financial Officer) |  | March 18, 2003
|                                              
|/s/ R. LEON BLACKBURNR. Leon Blackburn         |  | Vice President & Corporate Controller (Duly
    Authorized Signatory and Principal Accounting Officer)                                          |  | March 18, 2003

28



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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
|Allowance for                 |  | beginning  |       | costs and  |  | other      |        | from       |  | end of    
|doubtful accounts             |  | of period  |       | expenses   |  | accounts   |        | allowance  |  | period    
|                              |  |            |       |            |  |            |        |            |  |           
|Year ending December 31, 2000 |  |            | 1,882 |            |  |            | 600    |            |  |            |   |  |  |  | (534    | ) |  |  | 1,948 | 
|Year ending December 31, 2001 |  |            | 1,948 |            |  |            | 10,261 |            |  |            | 58 |  |  |  | (11,315 | ) |  |  | 952   | 
|Year ending December 31, 2002 |  |            | 952   |            |  |            | 850    |            |  |            |   |  |  |  | (983    | ) |  |  | 819   | 

|                              |  |            |        |            |  |            |        |            |  |            |      |   |  |  |         |   |  |  |        | 
|----------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ---- | - |  |  | ------- | - |  |  | ------ | 
|                              |  |            |        |            |  |            |        |           
|                              |  |            |        | ADDITIONS  |  |            |        |           
|                              |  |            |        |            |  |            |        |           
|                              |  | Balance at |        | Charged to |  | Charged to |        | Deductions |  | Balance at
|Reserve for inventories and   |  | beginning  |        | costs and  |  | other      |        | from       |  | end of    
|purchase commitments          |  | of period  |        | expenses   |  | accounts   |        | reserve    |  | period    
|                              |  |            |        |            |  |            |        |            |  |           
|Year ending December 31, 2000 |  |            | 8,008  |            |  |            | 10,150 |            |  |            | 635  |   |  |  | (2,905  | ) |  |  | 15,888 | 
|Year ending December 31, 2001 |  |            | 15,888 |            |  |            | 38,906 |            |  |            | (329 | ) |  |  | (4,616  | ) |  |  | 49,849 | 
|Year ending December 31, 2002 |  |            | 49,849 |            |  |            | 1,546  |            |  |            | (390 | ) |  |  | (25,106 | ) |  |  | 25,899 | 

|                              |  |            |       |            |  |            |        |            |  |            |   |  |  |  |   |  |  |  |       | 
|----------------------------- |  | ---------- | ----- | ---------- |  | ---------- | ------ | ---------- |  | ---------- | - |  |  |  | - |  |  |  | ----- | 
|                              |  |            |       |            |  |            |        |           
|                              |  |            |       | ADDITIONS  |  |            |        |           
|                              |  |            |       |            |  |            |        |           
|                              |  | Balance at |       | Charged to |  | Charged to |        | Deductions |  | Balance at
|Allowance for                 |  | beginning  |       | costs and  |  | other      |        | from       |  | end of    
|customer returns              |  | of period  |       | expenses   |  | accounts   |        | reserve    |  | period    
|                              |  |            |       |            |  |            |        |            |  |           
|Year ending December 31, 2000 |  |            | 777   |            |  |            | 945    |            |  |            |  |  |  |  |  |  |  |  | 1,722 | 
|Year ending December 31, 2001 |  |            | 1,722 |            |  |            | (1,171 | )          |  |            |  |  |  |  |  |  |  |  | 551   | 
|Year ending December 31, 2002 |  |            | 551   |            |  |            | 106    |            |  |            |  |  |  |  |  |  |  |  | 657   | 

|                              |  |            |        |            |  |            |        |            |  |            |        |   |  |  |        |   |  |  |        | 
|----------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | - |  |  | ------ | - |  |  | ------ | 
|                              |  |            |        |            |  |            |        |           
|                              |  |            |        | ADDITIONS  |  |            |        |           
|                              |  |            |        |            |  |            |        |           
|                              |  | Balance at |        | Charged to |  | Charged to |        | Deductions |  | Balance at
|                              |  | beginning  |        | costs and  |  | other      |        | from       |  | end of    
|Warranty reserve              |  | of period  |        | expenses   |  | accounts   |        | reserve    |  | period    
|                              |  |            |        |            |  |            |        |            |  |           
|Year ending December 31, 2000 |  |            | 8,898  |            |  |            | 10,100 |            |  |            | (1,111 | ) |  |  | (6,290 | ) |  |  | 11,597 | 
|Year ending December 31, 2001 |  |            | 11,597 |            |  |            | 9,307  |            |  |            |       |   |  |  | (8,265 | ) |  |  | 12,639 | 
|Year ending December 31, 2002 |  |            | 12,639 |            |  |            | 10,468 |            |  |            |       |   |  |  | (8,010 | ) |  |  | 15,097 | 

29



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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                                                                                                                      
|        |  |                                                                                                                                           
|3.6     |  | Second Amended and Restated Bylaws of the
    Registrant.                                                                                 
|13.1    |  | Five-Year Summary of Selected Consolidated
    Financial Data from the 2002 Annual Report to Stockholders.                                
|13.2    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations from the 2002
    Annual Report to Stockholders.
|13.3    |  | Financial Statements and Supplementary Data from
    the 2002 Annual Report to Stockholders.                                              
|23.1    |  | Report on Schedule and Consent of KPMG LLP.                                                                                               
|24.1    |  | Power of Attorney.                                                                                                                        
|99.1    |  | Certification.                                                                                                                            
|99.2    |  | Certification.                                                                                                                            

30