<PAGE>

                                                                    EXHIBIT 13.3

                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                  --------------------------------------------------------
                                                       2002                2001                2000
                                                  ----------------    ---------------     ----------------
<S>                                                 <C>                 <C>                 <C>
Revenues                                            $  344,063          $  327,569          $  416,850
Cost of revenues                                       179,957             215,956             215,303
                                                  ----------------    ---------------     ----------------
       Gross profit                                    164,106             111,613             201,547
                                                  ----------------    ---------------     ----------------
Operating expenses:
     Research and development                           61,658              64,169              58,828
     Sales and marketing                                47,625              49,385              47,463
     General and administrative                         26,370              37,323              29,172
     Securities litigation costs                         4,443                   -                   -
     Amortization of acquired intangibles                3,275                   -                   -
     In-process research and development                12,423                   -                   -
                                                  ----------------    ---------------     ----------------
       Total operating expenses                        155,794             150,877             135,463
                                                  ----------------    ---------------     ----------------

Operating income (loss)                                  8,312             (39,264)             66,084

Other income (expense):
     Unrealized gains on Cisco investment               18,352             285,729                   -
     Interest income                                     7,724               9,829               9,880
     Equity in losses of investee                       (1,079)               (930)                  -
     Other                                              13,506              11,610              41,564
                                                  ----------------    ---------------     ----------------
       Total other income, net                          38,503             306,238              51,444
                                                  ----------------    ---------------     ----------------

Income before income taxes                              46,815             266,974             117,528

Income taxes                                            14,981             101,450              39,960
                                                  ----------------    ---------------     ----------------

Net income                                          $   31,834          $  165,524          $   77,568
                                                  ================    ===============     ================

Basic net income per share                          $     0.38          $     2.03          $     0.97
                                                  ================    ===============     ================

Shares used in basic per share computations             83,380              81,381              80,201
                                                  ================    ===============     ================

Diluted net income per share                        $     0.37          $     1.98          $     0.91
                                                  ================    ===============     ================

Shares used in diluted per share computations           85,292              83,638              84,800
                                                  ================    ===============     ================
</TABLE>


          See accompanying notes to consolidated financial statements.




                                       51
<PAGE>



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

<TABLE>
<CAPTION>

                                                                                               DECEMBER 31,
                                                                                      --------------------------------
                                                                                          2002              2001
                                                                                      -------------     --------------
<S>                                                                                  <C>               <C>
ASSETS

   Current assets:
     Cash and cash equivalents                                                        $     94,754      $     39,528
     Cisco marketable securities and related hedge contracts                               688,840           670,489
     Other marketable securities                                                           213,030           245,725
     Accounts receivable, less allowances of  $819 and $952
          in 2002 and 2001, respectively                                                    41,381            58,528
     Inventories                                                                            30,553            29,711
     Other current assets                                                                   26,667            34,967
                                                                                      -------------     --------------

                Total current assets                                                     1,095,225         1,078,948

   Property and equipment                                                                   51,076            55,406
   Goodwill                                                                                 56,119                 -
   Other acquired intangibles                                                                5,675                 -
   Other assets                                                                             25,555            13,056
                                                                                      -------------     --------------

                Total assets                                                          $  1,233,650      $  1,147,410
                                                                                      =============     ==============


LIABILITIES AND STOCKHOLDERS' EQUITY

   Current liabilities:
     Accounts payable                                                                 $      7,503      $      9,969
     Accrued liabilities                                                                    81,259            73,550
     Deferred tax liabilities                                                              221,673           221,132
                                                                                      -------------     --------------

                Total current liabilities                                                  310,435           304,651

   Long-term liabilities                                                                     4,426             4,154

   Commitments and contingencies


   Stockholders' equity:
     Preferred stock, $0.01 par value; 5,000,000 shares authorized;
             no shares issued and outstanding                                                    -                 -
     Common stock, $0.01 par value; 200,000,000 shares authorized;
             84,386,969 shares issued and 84,376,169 shares outstanding
             in 2002 and 82,113,830 shares issued and outstanding in 2001                      844               821
     Additional paid-in capital                                                            336,542           287,937
     Deferred compensation                                                                    (833)                -
     Note receivable from stockholder                                                            -               (56)
     Accumulated other comprehensive income                                                  1,880             1,242
     Retained earnings                                                                     580,495           548,661
     Treasury stock, 10,800 shares in 2002                                                    (139)                -
                                                                                      -------------     --------------
                Total stockholders' equity                                                 918,789           838,605
                                                                                      -------------     --------------

                Total liabilities and stockholders' equity                            $  1,233,650      $  1,147,410
                                                                                      =============     ==============

</TABLE>

          See accompanying notes to consolidated financial statements.



                                       52
<PAGE>
                       ADVANCED FIBRE COMMUNICATIONS, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                              Notes     Accumulated
                                Common Stock                Addi-             Receiv-   Other                    Total
                               ------------------  Deferred tional     Trea-  able      Compre-                  Stock-   Comp-
                                                   Compen-  Paid-in    sury   Stock-    hensive      Retained    holders' hensive
                               Shares      Amount  sation   Capital    Stock  holders   Income       Earnings    Equity   Income
                               ----------  ------  -------  --------   -----  --------  ----------   --------    ------   --------
<S>                            <C>         <C>     <C>      <C>       <C>     <C>       <C>          <C>         <C>       <C>
Balances as of
  December 31, 1999            79,077,392  $  790  $   (96) $238,074  $    -   $(241)     $100,968   $305,569   $645,064   $350,038
                                                                                                                           ========
Exercise of common
  stock options and
  warrants                      1,388,094      14        -     8,747       -       -             -          -      8,761
Employee stock
  purchase plan
  purchases                       213,129       2        -     2,456       -       -             -          -      2,458
Conversion of preferred
  stock into common
  stock in pooling                 56,240       1        -     1,248       -       -             -          -      1,249
Forfeiture of stock
  options                               -       -       96       (96)      -       -             -          -          -
Repurchase of common stock         (4,044)      -        -        (1)      -       -             -          -         (1)
Payments of notes receivable
  from stockholders                     -       -        -         -       -      102            -          -        102
Cancellation of notes
  receivable from
  stockholder                           -       -        -         -       -       83            -          -         83
Cancellation of common
  stock                              (839)      -        -         -       -        -            -          -          -
Tax benefit from
option exercises                        -       -        -    17,575       -        -            -          -     17,575
Net Income                              -       -        -         -       -        -            -     77,568     77,568   $ 77,568
Other comprehensive income:
  Foreign exchange rate
    translation                         -       -        -         -       -        -          (12)         -        (12)       (12)
  Net unrealized gain on
    available-for-sale
    securities (1)                      -       -        -         -       -        -       66,818          -     66,818     66,818
                               ----------  ------  -------  --------   -----  --------  ----------    --------    ------   --------
Balances as of
December 31, 2000              80,729,972     807        -   268,003       -      (56)     167,774    383,137    819,665   $144,374
                               ----------  ------  -------  --------   -----  --------  ----------    --------    ------   =========
Exercise of common stock
  options                       1,125,894      11        -     9,931       -        -            -          -      9,942
Employee stock purchase plan
  purchases                       265,582       3        -     4,249       -        -            -          -      4,252
Cancellation of common stock       (7,618)      -        -         -       -        -            -          -          -
Tax benefit from
  option exercises                      -       -        -     5,754       -        -            -          -      5,754
Net income                              -       -        -         -       -        -            -    165,524    165,524   $165,524
Other comprehensive income:
  Foreign exchange rate
    translation                         -       -        -         -       -        -            5          -          5          5
  Reclassification of net
    unrealized gain on
    trading securities                  -       -        -         -       -        -     (167,426)         -   (167,426)  (167,426)
  Net unrealized gain on
    available-for-sale
    securities (1)                      -       -        -         -       -        -          889          -        889        889
                               ----------  ------  -------  --------   -----  --------  ----------    --------    ------   ========
Balances as of
December 31, 2001              82,113,830     821        -   287,937       -      (56)       1,242    548,661    838,605   $ (1,008)
                               ----------  ------  -------  --------   -----  --------  ----------    --------    ------   ========
Exercise of common stock
  options                       2,011,992      20        -    13,145       -        -            -          -     13,165
Employee stock purchase
  plan purchases                  263,631       3        -     3,872       -        -            -          -      3,875
Tax benefit from
  option exercises                      -       -        -     9,239       -        -            -          -      9,239
Treasury stock repurchase         (10,800)      -        -         -    (139)       -            -          -       (139)
Acquisition of AccessLan                -       -        -    22,381       -        -            -          -     22,381
Settlement of note
  receivable from
  stockholder                      (2,484)      -        -       (32)      -       56            -          -         24
Deferred compensation                   -       -   (3,549)        -       -        -            -          -     (3,549)
Amortization of deferred
  compensation                          -       -    2,716         -       -        -            -          -      2,716
Net income                              -       -        -         -       -        -            -     31,834     31,834   $ 31,834
Other comprehensive income:
  Foreign exchange rate
    translation                         -       -        -         -       -        -           (2)         -         (2)        (2)
  Net unrealized gain on
    available-for-sale
    securities(1)                       -       -        -         -       -        -          640          -        640        640
                               ----------  ------  -------  --------   -----  --------   ---------   --------   --------   --------
Balances as of
December 31, 2002              84,376,169  $  844  $  (833) $336,542   $(139) $    -      $  1,880   $580,495   $918,789   $ 32,472
                               ==========  ======  =======  ========   =====  ========   =========   ========   ========   ========

</TABLE>

<TABLE>
<CAPTION>

                                                                   2002        2001         2000
                                                                 --------    --------     --------
<S>                                                              <C>         <C>          <C>
(1) Net unrealized gain on  available-for-sale
      marketable securities                                      $    822    $    835     $108,600
    Less: deferred income taxes  (benefit) related to the net
      unrealized gain                                                 182         (54)      41,782
                                                                 --------    --------     --------
Total                                                            $    640    $    889     $ 66,818
                                                                 ========    ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       53
<PAGE>





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

<TABLE>
<CAPTION>

                                                                                             YEARS ENDED DECEMBER 31,
                                                                             -------------------------------------------------------
                                                                                   2002                2001               2000
                                                                             ----------------    ---------------    ----------------
<S>                                                                             <C>                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                   $   31,834          $  165,524         $   77,568
   Adjustments to reconcile net income to net cash provided by
    operating activities:
     Depreciation and amortization                                                  20,266              19,422             15,544
     Unrealized gains on Cisco investment                                          (18,351)           (285,729)                 -
     In-process research and development                                            12,423                   -                  -
     Tax benefit from option exercises                                               9,238               5,754             17,575
     Other non-cash adjustments to operating income                                    988               4,906                 83
     Allowances for uncollectible accounts                                             850              10,261                600
     Equity in losses of investee, net of tax                                          734                 577                  -
     Deferred income taxes                                                             359             (23,488)              (649)
     Tax related to SFAS No. 133 reclassification of Cisco investment                    -             106,776                  -
     Reserve for inventory write-down and accrued purchase commitments                   -              31,519              1,800
     Write-down of impaired investment                                                   -               2,275                  -
     Changes in operating assets and liabilities:
         Accounts receivable                                                        16,760              30,310            (37,688)
         Inventories                                                                  (478)             11,538            (23,585)
         Other current assets                                                          467              (5,366)           (18,777)
         Other assets                                                                1,666               1,368                927
         Accrued and other liabilities                                               2,436              13,730             17,335
         Accounts payable                                                              (36)             (9,951)                52
                                                                              ----------------    ---------------    ---------------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                             79,156              79,426             50,785
                                                                             ----------------    ---------------    ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of marketable securities                                            (566,187)           (627,140)          (405,243)
    Sales of marketable securities                                                 454,474             306,406            152,086
    Maturities of marketable securities                                            145,230             283,668            195,177
    Acquisition, net of cash acquired                                              (42,978)                  -                  -
    Restricted investment                                                          (20,120)                  -                  -
    Purchase of property and equipment                                             (11,218)            (12,921)           (23,743)
    Other long-term investments                                                          -             (12,473)            (4,635)
                                                                              ----------------    ---------------    -------------
              NET CASH USED IN INVESTING ACTIVITIES                                (40,799)            (62,460)           (86,358)
                                                                              ----------------    ---------------    --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from exercise of common stock options and warrants, net                17,008              14,194              6,578
    Purchase of treasury stock                                                        (139)                  -                  -
                                                                              ----------------    ---------------    ---------------
              NET CASH PROVIDED BY FINANCING ACTIVITIES                             16,869              14,194              6,578
                                                                              ----------------    ---------------    ---------------
EFFECT OF ADJUSTMENT TO CONFORM FISCAL YEAR ENDS
    IN POOLING TRANSACTION                                                              -                   -              5,991

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    55,226              31,160            (23,004)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                        39,528               8,368             31,372

                                                                              ----------------    ---------------    ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                          $   94,754          $   39,528         $    8,368
                                                                              ================    ===============    ===============

CASH PAID (REFUND RECEIVED):
    Income taxes                                                                $   (5,533)         $    4,784         $   19,093

NON-CASH INVESTING AND FINANCING ACTIVITY - Common stock options
    issued for acquisition                                                      $   22,381          $        -         $        -

</TABLE>


          See accompanying notes to consolidated financial statements.



                                       54
<PAGE>







                       ADVANCED FIBRE COMMUNICATIONS, INC.
                   Notes to Consolidated Financial Statements


NOTE  1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, cabinets as well as related professional services.

FISCAL YEAR

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

BASIS OF CONSOLIDATION

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

In November 2002, the Financial Accounting Standards Board (FASB) reached a
consensus on Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. In general, this issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, this
issue addresses how to determine whether an arrangement involving multiple
deliverables contains more than one earnings process and, if so, how to divide
the arrangement into separate units of accounting consistent with the identified
earnings processes for revenue recognition purposes. This issue also addresses
how arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. EITF Issue No. 00-21 is applicable to
arrangements entered into after June 15, 2003. We are currently determining what
effect, if any, the provisions of EITF Issue No. 00-21 will have on our
operating results or financial position.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS. We follow SFAS No. 2,
Accounting For Research and Development Costs, and expense all research and
development costs as incurred. We also follow SFAS No. 86, Accounting For the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.



                                       55
<PAGE>


Significant costs incurred for the development of computer software and
enhancements to existing software products that will be sold, leased or
otherwise marketed are capitalized when technological feasibility has been
established. These capitalized costs are subject to an ongoing assessment of
recoverability based on anticipated future revenues and changes in technologies.
Costs that are capitalized include direct labor and related overhead. The
unamortized balance of capitalized software development cost at the end of 2002
and 2001 was zero and $1.9 million, respectively. Amortization of capitalized
software development costs begins when the product is available for general
release. Amortization is based on the straight-line method. Unamortized
capitalized software development costs determined to be in excess of net
realizable value of the product are expensed immediately. Software development
costs amortized during 2002, 2001 and 2000, were $1.9 million, $2.2 million and
$0.8 million, respectively.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. We have an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to pay their amounts
owed to us. We base our allowance on periodic assessment of our customers'
liquidity and financial condition through credit rating agencies, financial
statement review and historical collection trends. Write-offs against the
allowances generally occur after we assess the particular customer's liquidity
and financial condition and conclude that collection in the future is highly
unlikely.

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

EQUITY-BASED COMPENSATION PLANS. We follow Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and we account for
equity-based compensation plans with employees and non-employees on the board of
directors using the intrinsic value method. If compensation cost for our
stock-based compensation plans had been determined in accordance with the fair
value approach set forth in SFAS No. 123, Accounting for Stock-Based
Compensation, our net income and earnings per share would have been reduced to
the pro forma amounts as follows (in thousands, except per share data):

<TABLE>
<CAPTION>


                                                              2002           2001          2000
                                                         -----------     ---------      ---------
<S>                                                      <C>             <C>            <C>
Net income, as reported                                  $    31,834     $ 165,524      $  77,568
Stock based employee compensation expense
  included in reported net income,
  net of related tax effects                                  (1,847)            -              -
Total stock based employee compensation
  expense determined under fair value methods
  for all awards, net of related tax effects                 (59,029)      (59,368)       (46,129)
                                                         -----------     ---------      ---------
Pro forma net income (loss)                                 $(29,042)     $106,156        $31,439
                                                         ===========     =========      =========
Earnings per share:
  Basic - as reported                                    $      0.38      $   2.03      $    0.97
  Basic - pro forma                                            (0.35)         1.30           0.39
  Diluted - as reported                                         0.37          1.98           0.91
  Diluted - pro forma                                          (0.34)         1.27           0.37
</TABLE>



See Note 8 for further discussion of our equity-based compensation plans.

OTHER SIGNIFICANT ACCOUNTING POLICIES

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


                                       56
<PAGE>



MARKETABLE SECURITIES. Our marketable securities are reported at fair value and
are classified as trading or available-for-sale. On January 1, 2001, we
reclassified our investment in Cisco Systems, Inc. (Cisco) stock from
available-for-sale to trading. This reclassification results in periodic changes
in fair value included in other income or expense.

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

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

GOODWILL AND OTHER ACQUIRED INTANGIBLES. In July 2001, the FASB issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used and
establishes new standards for the recognition of certain identifiable intangible
assets, separate from goodwill, for all business combinations initiated after
June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with finite useful lives be amortized over their respective estimated useful
lives to their estimated residual values. We adopted SFAS No. 141 and 142 as
required.

OTHER ASSETS. Other assets principally include marketable securities held as
collateral for a U.S. customer contract bond and an equity investment in a
non-publicly traded development-stage company accounted for under the cost
method. We own less than twenty percent (20%) in the company and do not have
significant influence over its operating or financial policies.

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

ADVERTISING COSTS.  We expense all advertising costs as incurred.

REPURCHASE OF COMMON STOCK. We have a stock repurchase plan that provides for
the repurchase of up to ten percent (10%) of our currently issued and
outstanding shares of common stock. Repurchases may be made from time to time at
various prices in the open market, through block trades or otherwise. The
purpose of the repurchase plan is to help us achieve our long-term goal of
enhancing shareholder value.

ESTIMATES IN FINANCIAL STATEMENTS. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, to disclose contingent assets and liabilities at the date of the
financial statements and to report amounts of revenues and expenses during the
reporting period. Actual results could differ from our estimates. Such estimates
include reserve for warranty, allowance for doubtful accounts, reserve for
inventories and purchase commitments, and allowance for customer returns.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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


                                       57
<PAGE>


NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net income per
share is computed using the weighted average number of shares of common stock
outstanding, plus dilutive common stock equivalents during the period. Dilutive
common stock equivalents consist of stock options to purchase common stock and
contributions to the Employee Stock Purchase Plan using the treasury stock
method.

FOREIGN CURRENCY TRANSLATION

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

CERTAIN RISKS AND CONCENTRATIONS

Our primary exposure to credit risk arises from cash equivalents and trade
accounts receivable. To reduce credit risk, we perform ongoing credit
evaluations of our customers' financial condition. In some cases, we may require
customer prepayment, bank guarantees or letters of credit and, if necessary, we
put customers on credit hold. We maintain adequate allowances for potential
credit losses. Our customers are concentrated in the public carrier
telecommunications industry. Our five largest customers accounted for 39% and
43% of our gross accounts receivable at December 31, 2002 and 2001,
respectively. Although our largest customers have varied from period to period,
we anticipate that receivables in any given period will continue to be
concentrated among a small number of customers. Recent severe financial problems
affecting the telecommunications industry in general may continue to result in
slower payments or defaults on accounts receivable. To reduce the foreign
receivables currency risk, we use foreign exchange hedge contracts in certain
situations where the risk is material.

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

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 application
specific integrated circuits (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.

RECLASSIFICATIONS AND RESTATEMENTS

Certain prior year amounts have been reclassified to conform with the current
year's presentation.

We originally invested $12.5 million in AccessLan Communications, Inc.
(AccessLan) during the third quarter of 2001, which we accounted for using the
cost method of accounting. Effective April 1, 2002, after exercising our option
to purchase the remaining interests in AccessLan, we changed our method of
accounting from the cost method to the equity method. We retroactively applied
the equity method for our ownership interest in AccessLan from the date of our
initial investment as required under APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. This resulted in reductions to net
income of $0.7 million for the four and a half months through May 13, 2002, and
$0.6 million for the year ended December 31, 2001.

                                       58
<PAGE>
All historical financial information was restated to reflect the acquisition of
GVN Technologies, Inc. (GVN) in the second quarter of 2000, which was accounted
for as a pooling of interests. See Note 10 for additional information on our
acquisition of GVN.

SFAS NO. 133 IMPLEMENTATION IN 2001

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 supersedes EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
To Exit an Activity (Including Certain Costs Associated with a Restructuring),
and requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, as opposed to when
management is committed to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. This
Statement is effective for exit or disposal activities initiated after December
31, 2002. The provisions of SFAS No. 146 are required to be applied
prospectively to newly initiated exit activities and may affect the timing of
recognizing future restructuring costs, as well as the amounts recognized. We
are currently determining what effect, if any, the provisions of SFAS No. 146
will have on our operating results or financial position.

In November 2002, the FASB reached a consensus on EITF Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. In general, this
issue addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities.
Specifically, this issue addresses how to determine whether an arrangement
involving multiple deliverables contains more than one earnings process and, if
so, how to divide the arrangement into separate units of accounting consistent
with the identified earnings processes for revenue recognition purposes. This
issue also addresses how arrangement consideration should be measured and
allocated to the separate units of accounting in the arrangement. EITF Issue No.
00-21 is applicable to arrangements entered into after June 15, 2003. We are
currently determining what effect, if any, the provisions of EITF Issue No.
00-21 will have on our operating results or financial position.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to include
disclosure of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of certain other obligations
undertaken in issuing a guarantee. The disclosure provisions of the
Interpretation are effective for our December 31, 2002 results and we have
adopted those requirements and included these disclosures in Note 5. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. We are currently assessing the impact of adopting the initial recognition
and initial measurement requirements of FIN 45 on our consolidated financial
statements.


                                       59
<PAGE>
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for an entity that voluntarily
changes to the fair-value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to
require prominent disclosure about the effects on reported net income and
earnings per share and the entity's accounting policy decisions with respect to
stock-based employee compensation. Certain of the disclosure requirements are
required for all companies, regardless of whether the fair value method or
intrinsic value method is used to account for stock-based employee compensation
arrangements. We continue to account for our employee incentive stock option
plans using the intrinsic value method in accordance with the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees. The amendments to SFAS No. 123 will be effective for fiscal years
ended after December 15, 2002 and for interim periods beginning after December
15, 2002. See Note 8 for our adoption of the disclosure provisions of this
statement.

NOTE  2.   MARKETABLE SECURITIES

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

                                                     DECEMBER 31,
                                             ---------------------------
                                                2002             2001
                                             ------------    -----------
<S>                                          <C>             <C>
Corporate equity securities                  $ 688,840       $  670,489
Municipal debt securities                      213,030          241,725
Corporate debt securities                            -            4,000
                                            -----------      -----------
     Total marketable securities             $ 901,870       $  916,214
                                            ============     ===========
</TABLE>

CORPORATE EQUITY SECURITIES

On November 1, 1999, our investment in Cerent Corporation (Cerent) was converted
into 10.6 million shares of Cisco common stock as a result of Cisco acquiring
Cerent. In February and May 2000, we entered into hedge contracts to minimize
the impact of potential adverse market risk on the Cisco stock we own. The hedge
contracts provide us with a floor value of $690 million for the shares if held
to maturity. We are able to borrow up to the full present value of the floor
value of the hedge contracts. In 2001, we implemented SFAS No. 133 resulting in
the reclassification and recognition of gains in the Cisco shares and the
related hedge contracts from accumulated other comprehensive income to
non-operating income. As a result of SFAS No. 133, we recognized $18.4 million
and $285.7 million in unrealized gains during 2002 and 2001, respectively. As
discussed in Note 12, the primary hedge contract covering 10.1 million shares
matured and was settled in February 2003.

DEBT SECURITIES

At December 31, 2002, our debt securities portfolio contained a $2.2 million
unrealized gain, compared with a $1.4 million unrealized gain at December 31,
2001. The fair value of securities maturing in one year or less and those
maturing between one year and five years was $58.0 million and $155.0 million,
respectively, as of December 31, 2002.

NOTE  3. INVENTORIES

The major components of inventories are comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                            ----------------------------
                                                 2002            2001
                                             ----------      -----------
<S>                                           <C>              <C>
Raw materials                                 $  9,919         $ 12,909
Work-in-progress                                 1,152              993
Finished goods                                  19,482           15,809
                                             ----------      -----------
     Total inventories                        $ 30,553         $ 29,711
                                             ==========      ===========

</TABLE>



                                       60
<PAGE>




NOTE  4.PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                        DECEMBER 31,
                                               ------------------------------
                                                   2002             2001
                                               -------------     ------------
<S>                                              <C>               <C>
Furniture and fixtures                           $ 16,241          $ 15,273
Computer, software, and office equipment           36,563            33,031
Engineering equipment                              57,046            50,221
                                               -------------     ------------
                                                  109,850            98,525
Less: accumulated depreciation                     58,774            43,119
                                               -------------     ------------
Property and equipment, net                      $ 51,076          $ 55,406
                                               =============     ============


</TABLE>

NOTE  5. ACCRUED LIABILITIES

A summary of accrued liabilities follows (in thousands):

<TABLE>
<CAPTION>

                                                        DECEMBER 31,
                                                -----------------------------
                                                   2002             2001
                                                -----------     -------------
<S>                                               <C>             <C>
Income and sales taxes                            $ 33,609        $ 24,052
Accrual for purchase commitments                     6,337          14,026
Warranty                                            15,097          12,639
Salaries and benefits                               12,926          10,201
Other accruals                                       9,476           8,690
Deferred revenues                                    2,314           3,942
Securities litigation settlement                     1,500               -
                                                -----------     -------------
Total accrued liabilities                         $ 81,259        $ 73,550
                                                ===========     =============

</TABLE>

The warranty reserve activity for the three years ended December 31, 2002
follows (in thousands):

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                   -------------------------------------------------
                                                       2002             2001              2000
                                                   -------------    --------------   ---------------
<S>                                                  <C>              <C>              <C>
          Balance at beginning of period             $ 12,639         $ 11,597         $  8,898
          Accrual for warranty costs                   10,468            9,307           10,100
          Settlements made (in cash or in
             kind) during the period                   (8,010)          (8,265)          (7,401)
                                                   -------------    --------------   ---------------
          Balance at end of period                   $ 15,097         $ 12,639         $ 11,597
                                                   =============    ==============   ===============
</TABLE>




                                       61
<PAGE>


NOTE  6. INCOME TAXES

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

<TABLE>
<CAPTION>

                                                                     CHARGE IN
                                                                      LIEU OF
                                                                      INCOME
                                         CURRENT     DEFERRED(1)      TAXES(2)         TOTAL
                                        ---------   ------------     ----------      ---------
<S>                                     <C>          <C>              <C>            <C>
Year ended December 31, 2002:
  Federal                               $    (416)   $    5,254       $  8,271       $  13,109
  State                                     5,617        (4,713)           968           1,872
                                        ---------    ----------       --------       ---------
Income taxes                            $   5,201    $      541       $  9,239       $  14,981
                                        =========    ==========       ========       =========
Year ended December 31, 2001:
  Federal                               $   7,215    $   78,318       $  5,204       $  90,737
  State                                     5,203         4,960            550          10,713
                                        ---------    ----------       --------       ---------
Income taxes                            $  12,418    $   83,278       $  5,754       $ 101,450
                                        =========    ==========       ========       =========
Year ended December 31, 2000:
  Federal                               $  16,080    $    1,334       $ 15,494       $  32,908
  State                                     6,954        (1,983)         2,081           7,052
                                        ---------    ----------       --------       ---------
Income taxes (benefit)                  $  23,034    $     (649)      $ 17,575       $  39,960
                                        =========    ==========       ========       =========
</TABLE>

(1)   Deferred tax expense excludes deferred taxes on the unrealized gains and
      losses on available-for-sale marketable securities that are included in
      equity in accumulated other comprehensive income. For 2001, the deferred
      portion of the tax provision included $106.8 million that was reclassified
      from accumulated other comprehensive income to tax expense upon our
      implementation of SFAS No. 133 in January 2001. Excluding this amount, the
      deferred portion of the tax provision would be a benefit, or decrease, of
      $23.5 million.

(2)   The charge in lieu of income taxes results from the tax benefit of stock
      option exercises.

Income taxes differ from the amounts computed by applying the U.S. federal
statutory tax rate of 35% in each of the years ended December 31, 2002, 2001 and
2000 to income before income taxes as follows (in thousands):

<TABLE>
<CAPTION>

                                                          YEARS ENDED DECEMBER 31,
                                              --------------------------------------------------
                                                  2002               2001             2000
                                              --------------     --------------   --------------
<S>                                             <C>                <C>              <C>
Income taxes at statutory rate                  $ 16,385           $ 93,441         $ 41,135
State taxes, net of federal benefit                1,217              6,963            4,583
Current losses and temporary differences
  for which no benefit was recognized                639              1,390            1,038
Foreign sales corporation benefit                      -                  -             (184)
Utilization of tax credits                        (1,844)            (1,632)          (2,250)
Tax exempt interest                               (2,007)            (2,044)          (2,761)
Other                                                591              3,332           (1,601)
                                              --------------     --------------   --------------
Income taxes                                    $ 14,981           $101,450         $ 39,960
                                              ==============     ==============   ==============
</TABLE>



                                       62
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                  ------------------------------
                                                      2002             2001
                                                  -------------   --------------
<S>                                               <C>              <C>
Deferred tax assets:
  Allowances and accruals                           $   20,363       $   29,213
  Research tax credit carry-forwards                    16,816            4,913
  Amortization of acquired intangibles                   4,745                -
  Net operating loss carry-forwards                      7,014            5,367
  Unrealized loss on marketable securities               1,270              595
                                                  -------------    -------------
Gross deferred tax assets                               50,208           40,088
                                                  -------------    -------------
  Deferred tax liabilities:
  Recognized gain on marketable securities            (263,062)        (254,217)
  Unrealized gain on marketable securities              (1,623)            (765)
  Net book value over net tax basis                     (7,196)          (6,238)
                                                  -------------    -------------
  Gross deferred tax liabilities                      (271,881)        (261,220)
                                                  -------------    -------------
  Net deferred tax liabilities                      $ (221,673)      $ (221,132)
                                                  =============    =============
</TABLE>

As of December 31, 2002, we had research credit carry-forwards for federal and
California income tax return purposes of approximately $9.8 million and $10.8
million, respectively. The federal and California research tax credit
carry-forwards are available to reduce future income taxes. The federal research
credit carry-forwards will expire at various dates through the year 2022 and the
California research credits will carry forward indefinitely until utilized. For
the year 2002, we had federal and California net operating loss carry-forwards
of $12.0 million and $41.7 million, respectively. The California net operating
loss carry-forward is related to AccessLan. These net operating losses may be
utilized to offset future taxable income. The federal net operating loss will
expire at various dates through 2022 and the California net operating loss will
expire at various dates through 2013.

We regularly assess our ability to realize the deferred tax assets recorded. Our
methodology to determine the amount of deferred tax assets that are likely to be
realized is based upon our recent earnings and our estimated future taxable
income. We believe that it is more likely than not that the total net deferred
tax assets recorded will be realized.

We have recorded a deferred tax liability of approximately $263 million at
December 31, 2002 related to the gain on our Cisco stock and two hedge
contracts. The primary hedge contract is for 10.1 million Cisco shares and
matured in February 2003. The second hedge contract is for 0.5 million Cisco
shares and matures in May 2003. The deferred tax liability of $263 million will
be reclassified to a current liability during 2003 when the hedge contracts are
settled.

In 2003, it is estimated that the total tax liability for the gain on the Cisco
stock and hedge contracts will be approximately $265 million upon settlement of
the hedge contracts. This is based on the increase in the value of the hedge
contracts during the year and application of the appropriate statutory tax
rates. We settled the primary hedge contract in February 2003 using borrowed
shares of Cisco stock and we will do the same with the second hedge contract in
May 2003. We believe this allows for a deferral of the tax on the hedge contract
gain. The tax authorities may challenge our position with respect to the
deferral of the tax on this gain. Accordingly, we will pay an estimated $265
million in federal and state taxes on the full amount of the gain in order to
avoid potentially significant interest and penalties should we be unable to
sustain our tax position. We will then seek a refund on the estimated $210
million portion we believe is subject to deferral. See Note 12 for further
discussion of this transaction.


                                       63
<PAGE>



NOTE 7. BANK BORROWINGS

We maintain an uncommitted bank facility for the issuance of commercial and
standby letters of credit. As of December 31, 2002 we had $2.7 million in
letters of credit outstanding under this facility, including $0.5 million issued
as a five-year deposit on one of our leased facilities.

We maintain bank agreements with two banks under which we may enter into foreign
exchange contracts for up to $40 million. There are no borrowing provisions or
financial covenants associated with these facilities. At December 31, 2002,
there were no foreign exchange contracts outstanding.

In February and May 2000, we entered into hedge contracts to minimize the impact
of potential adverse market risk on the Cisco shares we own. We are able to
borrow up to the full present value of the floor value of the hedge contracts.
The February 2000 hedge contract matured and was settled in February 2003. We
currently do not have any borrowings outstanding against the May 2000 hedge
contract. See Note 12 for further discussion of this transaction.

NOTE 8. STOCKHOLDERS' EQUITY

COMMON STOCK OPTIONS

SHAREHOLDER APPROVED PLANS
Our 1996 Stock Incentive Plan (the 1996 Plan) is the successor equity incentive
program to our 1993 Stock Option/Stock Issuance Plan (the Predecessor Plan). The
share reserve automatically increases on the first trading day of each calendar
year by an amount equal to 3% of the number of shares of common stock
outstanding on the last trading day of the immediately preceding calendar year.
As of December 31, 2002, 28,642,267 shares of common stock were authorized for
issuance under the 1996 Plan. There are no remaining shares authorized for
issuance under the Predecessor Plan as of December 31, 2002.

o    Options issued prior to 1997 generally vest 20% on the first anniversary of
     the grant date and ratably over the following 48 months.

o    Options issued after 1997 to new employees generally vest 25% on the first
     anniversary of the grant date and ratably over the following 36 months.

o    Options issued in 1997 through 1999 to employees with at least one year of
     service generally vest ratably over 48 months from the date of grant.

o    Options issued after 1999 through November 2002 to employees with at least
     one year of service generally vest ratably over 36 months from the date of
     grant.

o    Options issued after November 2002 to employees with at least one year of
     service generally vest ratably over 48 months from the date of grant.

o    Options issued prior to 2000 to all non-employee directors of our board
     vest 33% on the first anniversary of the grant and ratably over the
     following 24 months.

o    Options issued after 2000 to newly-appointed non-employee directors of our
     board vest 33% on the first anniversary of the grant date and ratably over
     the following 24 months.

o    Options issued after 2000 to existing non-employee directors of our board
     vest 100% on the first anniversary of the grant date.

o    Options expire ten years from the date of grant and are normally cancelled
     three months after termination of employment.

NON-SHAREHOLDER APPROVED PLANS
Pursuant to the terms of the AccessLan acquisition, all AccessLan stock options
were assumed by us effective May 13, 2002 and will become AFC common stock upon
exercise. Although assumed by us, the AccessLan stock options, excluding their
Employee Incentive Plan (EIP) stock options, remain exercisable upon the same
terms and conditions as under the AccessLan stock option plan pursuant to which
they were granted and the applicable option agreements. AccessLan's EIP stock
options, however, contained an acceleration clause which resulted in 65% of the
granted pool vesting on May 13, 2002. The remaining unvested portion of EIP
stock options vest at the rate of 2% for each month of continuous service.



                                       64

<PAGE>


     o    AccessLan options generally vest 25% on the first anniversary of the
          grant date and ratably over the following 36 months.

     Summary of Shareholder and Non-Shareholder Approved Stock Options Plan
     Activity:

<TABLE>
<CAPTION>

                                    SHAREHOLDER           NON-SHAREHOLDER                               EXERCISABLE AT
                                   APPROVED PLANS         APPROVED PLANS          ALL PLANS               END OF YEAR
                              -----------------------  -------------------  ----------------------   ---------------------
                                             WEIGHTED             WEIGHTED                WEIGHTED               WEIGHTED
                                             AVERAGE              AVERAGE                 AVERAGE                AVERAGE
                                             EXERCISE             EXERCISE                EXERCISE               EXERCISE
                                 SHARES       PRICE    SHARES      PRICE       SHARES       PRICE     SHARES      PRICE
                               ----------    --------  -------    --------   ----------   --------   --------    --------
<S>                           <C>          <C>        <C>         <C>       <C>           <C>        <C>          <C>
Balance at December 31, 1999    9,187,496   $ 14.53          -      $    -    9,187,496    $ 14.53
  Granted                       4,150,386     36.72          -           -    4,150,386      36.72
  Exercised                    (1,332,154)     6.51          -           -   (1,332,154)      6.51
  Cancelled                    (1,376,218)    22.57          -           -   (1,376,218)     22.57
                               ----------   -------   ---------     -------  ----------    -------    ---------    -------
Balance at December 31, 2000   10,629,510     23.16          -           -   10,629,510      23.16    3,219,604    $ 15.11
  Granted                       5,920,899     17.91          -           -    5,920,899      17.91
  Exercised                    (1,125,894)     8.89          -           -   (1,125,894)      8.89
  Cancelled                    (1,162,936)    27.57          -           -   (1,162,936)     27.57
                               ----------   -------   ---------     -------  ----------    -------    ---------    -------
Balance at December 31, 2001   14,261,579     21.75          -           -   14,261,579      21.75    6,100,525      20.58
  Granted                       4,339,567     17.12          -           -    4,339,567      17.12
  Exercised                    (1,447,677)     9.07    (564,315)      0.05   (2,011,992)      6.54
  Cancelled                    (1,801,743)    25.40     (16,349)      0.05   (1,818,092)     25.17
  Options assumed from
    AccessLan acquisition (1)           -         -   1,231,078       0.05    1,231,078       0.05
                               ----------   -------   ---------     -------  ----------    -------    ---------    -------
Balance at December 31, 2002   15,351,726   $ 21.21     650,414     $ 0.05   16,002,140    $ 20.35    8,182,134    $ 21.42
                               ----------   -------   ---------     -------  ----------    -------    ---------    -------
</TABLE>

<TABLE>
<CAPTION>
                                                         WEIGHTED
                                                         AVERAGE
                                                        FAIR VALUE
                                                        OF OPTIONS
                                 AVAILABLE            GRANTED DURING
                                 FOR GRANT               THE YEAR
                                 ----------          ---------------
<S>                             <C>                  <C>
Balance at December 31, 1999
  Granted
  Exercised
  Cancelled
                                 ---------              -------
Balance at December 31, 2000     3,788,384              $ 25.20
  Granted
  Exercised
  Cancelled
                                 ---------              -------
Balance at December 31, 2001     1,452,320                11.61
  Granted
  Exercised
  Cancelled
  Options assumed from
    AccessLan acquisition (1)
                                 ---------              -------
Balance at December 31, 2002     1,377,915              $ 11.08
                                 ---------              -------

</TABLE>


<TABLE>
<CAPTION>
<S>                                                                        <C>
(1) Options assumed from the AccessLan acquisition include:
    AccessLan options outstanding as of the beginning of 2002                1,181,326
    AccessLan options granted during 2002 but prior to the acquisition date     49,752
                                                                             ---------
      Total AccessLan options assumed by AFC                                 1,231,078
                                                                             =========
</TABLE>






     The following table summarizes information about the Shareholder Approved
     and Non-Shareholder Approved Plan stock options outstanding as of December
     31, 2002:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                        ----------------------------------------     ------------------------
                                          WEIGHTED
                                          AVERAGE       WEIGHTED                     WEIGHTED
                                         REMAINING      AVERAGE                      AVERAGE
   RANGE OF OPTION                      CONTRACTUAL     EXERCISE                     EXERCISE
   EXERCISE PRICES       SHARES         LIFE (YEARS)     PRICE         SHARES          PRICE
   ---------------      ---------       ------------    --------      ---------      --------
<S> <C>                <C>              <C>             <C>          <C>          <C>
    $0.01 -  $8.63      2,170,148          6.5           $  5.08      1,874,616      $  5.41
     8.78 -  16.31      1,655,144          7.5             14.58      1,152,401        15.02
    16.46 -  16.63      2,197,047          8.4             16.62      1,126,464        16.62
    16.71 -  17.67      2,854,893          9.8             16.86        145,712        17.24
    17.70 -  19.67      2,605,212          9.0             19.27        639,822        19.38
    19.69 -  24.06      2,046,057          7.9             22.79      1,358,266        22.88
    24.25 -  81.31      2,473,639          7.3             44.04      1,884,853        44.10
    --------------     ----------       ------------     -------      ---------      -------
    $0.01 - $81.31     16,002,140          8.2           $ 20.35      8,182,134      $ 21.42
                       ==========                                     =========
</TABLE>

                                       65
<PAGE>


EMPLOYEE STOCK PURCHASE PLAN

Under the 1996 Employee Stock Purchase Plan (the Purchase Plan) we are
authorized to issue up to three million shares of common stock to eligible
employees of AFC and participating subsidiaries. The Purchase Plan has been
implemented in a series of successive offering periods, each with a maximum
duration of 24 months. Eligible employees can enter on the start date of any
offering period or on any subsequent semi-annual entry date. Effective February
1, 2001, the maximum contribution rate allowed under the Purchase Plan was
increased from 10% to 15%. The purchase price of the stock is the lower of 85%
of: 1) the fair market value of the common stock on the participant's entry date
(strike price), or 2) the fair market value on the semi-annual purchase date.
Purchase dates are January 31 and July 31 of each year, or the closest business
day preceding those dates when the purchase date falls on a non-business day. If
the fair market value on any purchase date during the existing offering period
is less than the strike price established at the beginning of the offering
period, a new offering period will commence. The current offering period
commenced on February 1, 2003 and is scheduled to continue through January 31,
2005.

A total of 263,631 shares of common stock with a weighted average fair value of
$14.65 per share were purchased in 2002. At December 31, 2002, 1,712,921 shares
remained available for issuance. A total of 175,266 shares with a weighted
average fair value of $14.36 were purchased on January 31, 2003 using
contributions withheld during the period from August 1, 2002 to January 31,
2003.

PRO FORMA FAIR VALUE INFORMATION

We apply the intrinsic value method of accounting prescribed by APB Opinion No.
25 for our stock-based compensation plans. As of the end of December 2002, the
total outstanding options held by our Chief Executive Officer and the other
executive officers amounted to 9.3% of the 16.0 million outstanding options held
by all employees.

We use the Black-Scholes option-pricing model to derive the theoretical fair
value of employee stock option grants. An over-the-counter public market for
employee stock options would give a more accurate approximation of the fair
value, however, no such market exists. Instead, we use the Black-Scholes model,
which along with the binomial model, are the two accepted methods under SFAS No.
123 for use in providing the theoretical fair value provisions disclosure. The
binomial model is more difficult to use and produces a similar result to that of
the Black-Scholes model. Many in the accounting profession believe the
Black-Scholes model cannot objectively measure the theoretical fair value of
employee stock options because of the wide-ranging, and therefore often
misleading results, caused by the inherent subjectivity of some of the
assumptions. For example, the volatility assumption is based on a combination of
historical and implied volatilities. The theoretical fair value of options can
be raised or lowered based on changing the implied volatility rate. Similarly,
the theoretical fair value can be altered based on the expected option lives
utilized. Expected option lives are based on a combination of historical
employee behavior, modified by subjective judgments regarding future expected
employee behavior under different market circumstances. Employee forfeitures are
forecasted and subsequently adjusted to actual after the theoretical fair value
of the options has been calculated. In situations where the market value falls
below the option grant price, the Black-Scholes expense valuation is not
adjusted for these options, which no longer have incremental value to the
employee. The options continue to be valued and expensed at a price that may
never be realized over the expected remaining life. For these reasons, we firmly
believe that the pro forma fair value information computed under the
Black-Scholes model is potentially misleading and inaccurate. Accordingly, the
Black-Scholes model pro forma fair value information should be interpreted
solely as an approximation, as opposed to a representation, of what pro forma
net income would have been if we had expensed the fair value of options issued
to employees.

The fair value of option grants in 2002, 2001 and 2000 were estimated on the
date of grant using the Black-Scholes option-pricing model, assuming no dividend
yield and with the following weighted average assumptions:


                                       66
<PAGE>


<TABLE>
<CAPTION>

                              WEIGHTED AVERAGE       WEIGHTED AVERAGE
                                 RISK-FREE            EXPECTED LIFE
            VOLATILITY         INTEREST RATE             (YEARS)
            ----------       -----------------      ----------------
<S>           <C>               <C>                     <C>
2002             95%               3.03%                   4
2001            100%               4.31%                   3
2000            100%               5.89%                   3
</TABLE>

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

<TABLE>
<CAPTION>

                                         WEIGHTED AVERAGE     WEIGHTED AVERAGE
       SEMI-ANNUAL                          RISK-FREE           EXPECTED LIFE
      PURCHASE DATES     VOLATILITY       INTEREST RATE           (MONTHS)
--------------------     ----------     -----------------     ----------------
<S>                       <C>              <C>                      <C>
January 2003                 96%             1.0%                      6
July 2002                    97%             1.7%                      6
January 2002                100%             4.8%                     13
July 2001                   100%             4.8%                     13
January 2001                 97%             4.9%                     17
July 2000                    97%             4.9%                     17
January 2000                 85%             4.9%                      8
</TABLE>


REPURCHASE OF COMMON STOCK. In October 2001, our board of directors authorized a
stock repurchase plan that provides for the repurchase of up to ten percent
(10%) of our currently issued and outstanding shares of common stock.
Repurchases may be made from time to time at various prices in the open market,
through block trades or otherwise. The plan became effective in October 2001 and
may be suspended at any time without prior notice. The purpose of the repurchase
plan is to help us achieve our long-term goal of enhancing shareholder value.
During 2002, 10,800 shares were repurchased at a cost of $0.1 million under this
plan. The effect of the repurchase plan on the calculation of net income per
common share was insignificant.

STOCKHOLDERS' RIGHTS PLAN

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

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

NET INCOME PER SHARE

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


                                       67
<PAGE>


<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                            ------------------------------------------
                                                                2002            2001          2000
                                                            ----------       ----------     ----------

<S>                                                         <C>              <C>            <C>
Net income                                                  $   31,834       $  165,524     $   77,568
                                                            ==========       ==========     ==========

Shares used in basic per share computations - weighted
  average common shares outstanding for the period              83,380           81,381         80,201
Weighted average number of shares of dilutive options
   and warrants                                                  1,912            2,257          4,599
                                                            ----------       ----------     ----------
Shares used in diluted per share computations                   85,292           83,638         84,800
                                                            ==========       ==========     ==========
Basic net income per share                                  $     0.38       $     2.03       $   0.97
                                                            ==========       ==========     ==========
Diluted net income per share                                $     0.37       $     1.98       $   0.91
                                                            ==========       ==========     ==========
</TABLE>

Options to purchase 11,572,757 shares, 5,504,953 shares and 842,653 shares of
common stock outstanding at December 31, 2002, 2001 and 2000, respectively, were
excluded from the computation of diluted net income per share. This is because
the exercise prices for these options were greater than the respective average
market price of the common shares and their inclusion would be antidilutive.

NOTE 9. COMMITMENTS AND CONTINGENCIES

LEASES

Office space and certain equipment are leased under operating leases. Future
minimum payments under operating leases with an initial term of more than one
year as of December 31, 2002 are summarized as follows (in thousands):

<TABLE>
<S>                                 <C>
     2003                           $   9,016
     2004                               8,636
     2005                               8,410
     2006                               7,935
     2007                               7,356
     Thereafter                        24,747
                                    ---------
      Total minimum lease payments  $  66,100
                                    ==========
</TABLE>


We sublease three of our facilities. The total future minimum lease payments
have not been reduced by $14.1 million of future sublease payments to be
received under non-cancelable subleases. In 2001, we vacated an engineering
facility in Largo, Florida and entered into a sublease agreement for the entire
space. Our lease term continues through 2007, while the sublease agreement
extends through 2004. We accrued $1.5 million to short-term and long-term
liabilities for our Largo, Florida facility operating lease in 2001. The amount
represents the present value of the loss we expect to incur for the ongoing
shortfall between our sublease income and operating lease obligation. If the
sublessee does not renew its lease agreement with us, and we are unable to enter
into another sublease agreement through the March 31, 2007 term of the lease
obligation, the amount of the ultimate loss based on the lease could increase by
up to $1 million before tax. Total sublease payments received in 2002, 2001 and
2000 were $2.2 million, $1.5 million and $0.6 million, respectively. Total gross
rent expense for all operating leases were $9.4 million, $8.6 million and $7.9
million, for the years ended December 31, 2002, 2001 and 2000, respectively.

EMPLOYEE BENEFIT PLAN

We have a 401(k) plan (the Plan) under which employees may contribute a portion
of their compensation on a tax-deferred basis to the Plan. We contributed to the
Plan on a matching basis up to a maximum of $5,500 per employee during 2002.
Participants in the Plan are neither required, nor solicited by us, to elect a
stock fund that contains AFC common stock. We act as the Plan administrator.
During 2002, 2001 and 2000, we contributed $2.5 million, $2.6 million and $2.1
million, respectively, to the Plan.

                                       68
<PAGE>

PURCHASE AGREEMENTS WITH CONTRACT MANUFACTURERS

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

o    for any materials it has purchased for use in the manufacture of our
     products bought within standard lead times, or otherwise, if we granted
     approval of the purchase,

o    for work in process, and

o    for all finished products manufactured for us that are in the CM's
     possession.

Under such agreements, our maximum liability as of December 31, 2002 was $18.0
million, of which $6.3 million was accrued on the balance sheet. As of December
31, 2001, our maximum liability under such agreements was $26.0 million, of
which $14.0 million was accrued on the balance sheet.

LITIGATION

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, 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 our fourth
quarter 2002 operating expenses 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.


                                       69
<PAGE>
NOTE 10.  ACQUISITIONS

ACCESSLAN ACQUISITION. On May 13, 2002, we completed our acquisition of
AccessLan, a privately-held development stage company. We acquired the San Jose,
California-based company for its technology designed to consolidate multiple
network elements into a single, cost effective platform for next generation
networks. The acquisition was accounted for as a purchase business combination,
and accordingly, the results of AccessLan's operations after May 13, 2002 have
been included in our consolidated statements of income.

We originally invested $12.5 million in AccessLan during the third quarter of
2001, which we accounted for using the cost method of accounting. Effective
April 1, 2002, after exercising our option to purchase the remaining interests
in AccessLan, we changed our method of accounting from the cost method to the
equity method. We retroactively applied the equity method for our ownership
interest in AccessLan from the date of our initial investment as required under
APB Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock. This resulted in reductions to net income of $0.7 million for the four
and a half months through May 13, 2002, and $0.6 million for the year ended
December 31, 2001.

The  value of the purchase was $82.1 million, which consisted of the following:

o    $10.8 million, our initial investment in AccessLan, net of
     acquisition-related costs,

o    $43.4 million in cash paid to acquire all of the outstanding shares of
     AccessLan that we did not already own,

o    $5.5 million for liabilities assumed, and

o    $22.4 million representing the fair value of 1.2 million stock options
     issued to AccessLan employees.

Pursuant to the terms of the AccessLan acquisition, all AccessLan stock options
were assumed by AFC effective May 13, 2002 and were converted to 1,231,078 AFC
common stock options at the conversion ratio of .0216 to 1. Moreover, the
AccessLan stock options, excluding their EIP stock options, remain exercisable
upon the same terms and conditions as under the AccessLan stock option plan
pursuant to which they were granted and the applicable option agreements.
AccessLan EIP stock options, however, contained an acceleration clause which
resulted in 65% of the granted pool vesting on May 13, 2002, with the remainder
vesting at the rate of 2% for each month of continuous service.

We engaged third party appraisers to conduct a final valuation of the tangible
and intangible assets of AccessLan. The appraisers issued a preliminary report
during the fourth quarter of 2002. The allocation to acquired goodwill is
currently estimated at $56.1 million. Goodwill will not be amortized, but will
be reviewed annually for impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets. A goodwill impairment test was completed during the
fourth quarter of 2002 and resulted in a determination of non-impairment at that
time. The acquired workforce intangible asset was included in goodwill. Of the
$56.1 million in goodwill, approximately $48.2 million will be amortized over a
15-year period for federal tax purposes. None of the goodwill will be deductible
for California tax purposes.

A summary of the AccessLan purchase price allocation is as follows (in
thousands):

<TABLE>
<S>                                                     <C>
    Cash, accounts receivable, inventory and other      $  1,400
    Property and equipment (net)                           2,329
    Goodwill                                              56,119
    Other identifiable intangibles                         6,264
    Deferred compensation                                  3,549
    In-process research and development                   12,423
                                                        --------
       Total                                            $ 82,084
                                                        ========
</TABLE>

At the time of acquisition, we recognized a $12.4 million write-off of
non-recurring charges for acquired technology that had not reached technological
feasibility, had no alternative future use and for which successful development
was uncertain. Subsequent to the acquisition, there have been no significant
developments related to the current status of any of the in-process research and
development projects that would result in material changes to the assumptions.

An independent appraiser performed a valuation of the acquired intangible assets
from AccessLan using an income approach model. The income approach model
explicitly recognizes that the current value of an asset is premised upon the
expected receipt of future economic benefits such as future earnings and cash
flows. Indications of value are developed by discounting these future benefits
to their present value, using a discount rate that reflects both the current
return requirements of the market and the risks inherent in the specific
investment. This approach is appropriate where an identifiable stream of income
can be attributed to the particular asset being valued, as is the case with
certain intangible assets. We provided the independent appraiser with an
earnings forecast of our future earnings and cash flows. The forecasted cash
flows were then tax effected at a rate of 35%. This computed amount was then
discounted to its present value using a 21.75% discount rate.

Telliant 2.X is the technology acquired from AccessLan that was under
development at the time of acquisition. Telliant 2.X technology is planned to


                                       70
<PAGE>
be released in two phases, Phase 1 and Phase 2. Phase 1 of Telliant 2.X is
comprised of a set of hardware and software features that provides integrated
asynchronous transfer mode (ATM), switching, Internet protocol (IP) routing and
subscriber management services for enhanced scalability of broadband networks.
At the time of acquisition, Phase 1 was estimated to be 80% complete. We
estimate that Phase 1 was 95% complete as of December 31, 2002 and was
completed in February 2003. Phase 2 introduces a set of hardware and software
features that allow service providers to offer new broadcast video services
over DSL to their residential customers. At the time of acquisition, Phase 2
was estimated to be 33% complete. We estimate that Phase 2 was 67% complete as
of December 31, 2002 and is scheduled for completion by May 2003. Our
completion percentage estimates were based upon comparing actual costs incurred
to the total project cost estimate as of the measurement date.

There can be no assurances that we will be able to complete the development of
these products on a timely basis. Failure to complete these products could have
an adverse impact on our financial condition or results of operations.

Of the $6.3 million in other identifiable intangibles, $3.8 million was assigned
to completed technology and $2.5 million was assigned to non-compete agreements.
Completed technology will be amortized based on the future sales of related
products. Non-compete agreements will be amortized over three years. The $3.5
million deferred compensation will be amortized over three and a half years.

In 2002, $3.3 million was charged to operating expenses for the amortization of
the acquired intangibles.

Pro forma results of operations have not been presented because the results of
AccessLan's operations were not significant relative to the results of AFC's
operations.

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

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

NOTE 11.  SEGMENT INFORMATION

We operate in the access market and derive substantially all of our revenues
from sales of the AFC product family. The chief operating decision makers
evaluate performance, make operating decisions and allocate resources based on
consolidated financial data. Accordingly, we consider AFC to be a single
operating segment. As such, we are required to disclose certain information
about geographic concentrations and major customers.

The following geographic information is presented for the years ended December
31, 2002, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                             ------------------------------------------
                                                 2002            2001           2000
                                             -----------     -----------    -----------
<S>                                         <C>             <C>            <C>
Revenues:
 Domestic                                    $   295,017     $   282,004    $   368,904
 International                                    49,046          45,565         47,946
                                             -----------     -----------    -----------
  Total revenues                             $   344,063     $   327,569    $   416,850
                                             ===========     ===========    ===========
Long-lived assets:
 Domestic                                    $    51,033     $    55,311    $    66,078
 International                                        43              95            621
                                              ----------    ------------    -----------
  Total long-lived assets                    $    51,076     $    55,406    $    66,699
                                             ===========     ===========    ===========
Total assets                                 $ 1,233,650     $ 1,147,410    $ 1,135,175
                                             ===========     ===========    ===========
Major customers, percentage of revenues:
 Customer A                                           23%             17%            14%
 Customer B                                           11%              -              -
 Customer C                                           11%              -              -
 Customer D                                            -               -             16%
</TABLE>


                                       71
<PAGE>



NOTE 12.  SUBSEQUENT EVENT

On February 9, 2003, the primary hedge contract on our Cisco marketable
securities matured. This hedge contract covered 10.1 million of the 10.6 million
Cisco shares we own. The remaining 0.5 million shares are covered by a second
hedge contract maturing in May 2003. We borrowed 10.1 million shares of Cisco
stock in February 2003 to settle the first hedge contract and received $656.2
million in cash. We retained the Cisco shares we already owned, which are now
pledged as security under the new Cisco stock loan. The $656.2 million was
invested in available-for-sale municipal and corporate debt and equity
securities according to our existing investment policy. The 10.1 million Cisco
shares we own will be reflected as a restricted short-term asset at their fair
market value in our March 31, 2003 consolidated balance sheet. The fair market
value of our new Cisco share loan obligation will be reflected as a short-term
liability. We expect to incur costs of approximately $1 million annually, net of
taxes, to pursue this plan. We will also reclassify approximately $252 million
in deferred taxes related to the recognized gain on the shares and hedge
contract to current taxes payable in our March 31, 2003 consolidated balance
sheet. We plan to borrow an additional 0.5 million shares to settle the second
hedge contract in May 2003. We expect to receive total cash proceeds of
approximately $690 million for settlement of the hedge contracts in February and
May 2003.

In 2003, we estimate the total amount of taxes on the gain related to the Cisco
shares and the hedge contracts will be $265 million. The total amount of taxes
due in 2003 is comprised of an estimated $55 million due on the stock gain and
an estimated $210 million due on the hedge contracts gain. By using borrowed
shares, we believe that payment of the estimated $210 million in taxes on the
gain attributable to the hedge contracts could be deferred until we settle our
new Cisco stock loans. While we believe that current tax law permits the
deferral of payment of taxes on the gain from settlement of the hedge contracts,
tax authorities may challenge this position. Accordingly, we will pay an
estimated $265 million in federal and state taxes on the full amount of the gain
in order to avoid potentially significant interest and penalties should we be
unable to sustain our tax position. We will then seek a refund of the $210
million portion we believe is subject to deferral.



                                       72
<PAGE>




                          INDEPENDENT AUDITORS' REPORT



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


We have audited the accompanying consolidated balance sheets of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Fibre
Communications, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Notes 1 and 2 to the consolidated financial statements, in 2001
the Company changed its method of accounting for derivative financial
instruments upon implementation of Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. In 2001, the Company also adopted SFAS No. 141,
Business Combinations, and certain provisions of SFAS No. 142, Goodwill and
Other Intangible Assets, as required, for the goodwill and intangible assets
resulting from business combinations consummated after June 30, 2001. In 2002,
the Company fully adopted the provisions of SFAS No. 142, as required, for
goodwill and intangible assets resulting from business combinations consummated
after June 30, 2001.


                                          KPMG LLP


San Francisco, California
February 14, 2003



                                       73
<PAGE>
                      ADVANCED FIBRE COMMUNICATIONS, INC.
                        QUARTERLY RESULTS OF OPERATIONS
Selected quarterly financial data is summarized below (unaudited) (in thousands)

<TABLE>
<CAPTION>
                                                             QUARTERS ENDED
                                              ------------------------------------------------
                                                DEC. 31,  SEPT. 30,     JUNE 30,     MAR. 31,
                                                  2002      2002        2002(1)        2002
                                              ----------  ----------   ---------    ----------
<S>                                           <C>         <C>          <C>           <C>
Revenues                                      $ 85,746    $   91,767   $  86,286     $  80,264
Cost of revenues                                43,356        46,603      47,336        42,662
                                              --------    ----------   ---------     ---------
Gross profit                                    42,390        45,164      38,950        37,602
                                              --------    ----------   ---------     ---------
Operating expenses:
  Research and development                      15,534        17,058      15,824        13,242
  Sales and marketing                           10,997        12,264      12,952        11,412
  General and administrative                     6,303         6,701       6,878         6,488
  Securities litigation settlement costs         1,500             -       2,943             -
  Amortization of acquired intangibles             912         1,280       1,083             -
  In-process research and development               27             -      12,396             -
                                              --------    ----------   ---------     ---------
    Total operating expenses                    35,273        37,303      52,076        31,142
                                              --------    ----------   ---------     ---------
Operating income (loss)                          7,117         7,861     (13,126)        6,460
Other income, net                               18,708         6,255       9,750         3,790
                                              --------    ----------   ---------     ---------
Income (loss) before taxes                      25,825        14,116      (3,376)       10,250
Income taxes (benefit)                           8,264         4,517      (1,080)        3,280
                                              --------    ----------   ---------     ---------
Net income (loss)                             $ 17,561    $    9,599   $  (2,296)    $   6,970
                                              ========    ==========   =========     =========
Basic net income (loss) per share             $   0.21    $     0.11   $   (0.03)    $    0.08
Shares used in basic per share computations     84,211        83,836      83,121        82,354
Diluted net income (loss) per share           $   0.21     $    0.11    $  (0.03)    $    0.08
Shares used in diluted per share computations   85,577        85,754      83,121        83,932
</TABLE>

<TABLE>
<CAPTION>
                                                              QUARTERS ENDED
                                             --------------------------------------------------
                                                DEC. 31,   SEPT. 30,    JUNE 30,       MAR. 31,
                                                2001(2)      2001         2001          2001(3)
                                             ----------   ----------   ---------      ---------
<S>                                           <C>         <C>          <C>           <C>
Revenues                                      $  82,102   $   84,647   $  78,609     $  82,211
Cost of revenues                                 76,281       47,050      43,977        48,648
                                              ---------   ----------   ---------     ---------
Gross profit                                      5,821       37,597      34,632        33,563
                                              ---------   ----------   ---------     ---------
Operating expenses:
  Research and development                       18,306       15,100      14,797        15,966
  Sales and marketing                            11,857       12,459      12,238        12,831
  General and administrative                      7,801        6,655       6,499        16,368
  Securities litigation settlement costs              -            -           -             -
  Amortization of acquired intangibles                -            -           -             -
  In-process research and development                 -            -           -             -
                                              ---------   ----------   ---------     ---------
    Total operating expenses                     37,964       34,214      33,534        45,165
                                              ---------   ----------   ---------     ---------
Operating income (loss)                         (32,143)       3,383       1,098       (11,602)
Other income, net                                21,276       20,648      10,856       253,458
                                              ---------   ----------   ---------     ---------
Income (loss) before taxes                      (10,867)      24,031      11,954       241,856
Income taxes (benefit)                           (3,000)       8,455       4,090        91,905
                                              ---------   ----------   ---------     ---------
Net income (loss)                             $  (7,867)  $   15,576   $   7,864     $ 149,951
                                              =========   ==========   =========     =========
Basic net income (loss) per share             $   (0.10)  $     0.19    $   0.10     $    1.85
Shares used in basic per share computations      82,034       81,699      81,176        80,963
Diluted net income (loss) per share           $   (0.10)  $     0.18    $   0.09     $    1.80
Shares used in diluted per share computations    82,034       84,371      83,277        83,101
</TABLE>

(1)  In the second quarter ending June 30, 2002, we incurred in-process research
     and development costs of $12.4 million and amortization expenses of $1.1
     million related to our acquisition of AccessLan Communications, Inc.
     Additionally, we paid $2.9 million in litigation settlement costs.

(2)  In the fourth quarter ending December 31, 2001, gross profit was lower than
     preceding quarters as a result of a write-off of $18.0 million for excess
     and obsolete inventories, and an accrual of $12.0 million for purchase
     commitments.

(3)  In the first quarter ending March 31, 2001, general and administrative
     expenses included $9.3 million provision for doubtful accounts related to
     receivables from a value-added reseller , or VAR, deemed to be
     uncollectible. This expense, along with non-recognition of $11.9 million in
     revenues for shipments made to Winstar Communications, Inc. and the VAR,
     for which product costs were recognized, and an increase of $2.2 million in
     reserve for excess and obsolete inventories, contributed to the operating
     loss of $11.6 million for the quarter. In addition, other income and income
     taxes for the quarter included the effects of our implementation of SFAS
     No. 133 on January 1, 2001. The deferred gains on our Cisco investment and
     related hedge contracts of $274.2 million, and the associated deferred
     taxes of $106.8 million were reclassified from accumulated other
     comprehensive income to non-operating income and tax expenses,
     respectively.

          See accompanying notes to consolidated financial statements.

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<PAGE>



SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                      ADVANCED FIBRE COMMUNICATIONS, INC.




Date: March 18, 2003                  By:      /s/Keith E. Pratt
                                          --------------------------------------
                                      Name:  Keith E. Pratt
                                      Title: Chief Financial Officer &
                                             Senior Vice President,
                                             Finance and Administration
                                      (Duly Authorized Signatory and
                                       Principal Financial Officer)


                                       75