<PAGE>

                                                                   EXHIBIT 13.2

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

FORWARD-LOOKING STATEMENTS

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

The following discussion should be read in conjunction with the financial
statements and notes included elsewhere in this report. Copies of this and our
other Annual Reports on Form 10-K and 10-K/A, Quarterly Reports on Form 10-Q and
10-Q/A, and Current Reports on Form 8-K are accessible, free of charge, at our
Internet website http://www.afc.com. Information on our website is not part of
this report. Copies of these reports are also available without charge by
contacting the Investor Relations Department, c/o Advanced Fibre Communications,
Inc., P.O. Box 751239, Petaluma, California 94975-1239.

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

OVERVIEW

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 telecommunication service providers and
their end users for voice and high-speed Internet, data and video
communications. Our primary product platform, AccessMAX(TM), is a
next-generation digital loop carrier (NGDLC) that supports the "triple play" of
plain old telephone services (POTS), high-speed Internet and video services over
a single network infrastructure. We introduced three new product offerings
during 2002: Telliant(TM), TransMAX(TM) 1500 and AccessMAX System 9.

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

TransMAX 1500 uses the latest coarse wavelength division multiplexing (CWDM)
technology to relieve fiber-optic bottlenecks in local access networks. It
solves today's network problems by providing an economical way of scaling
existing synchronous optical network/synchronous digital hierarchy (SONET/SDH)
infrastructure to support additional services.



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

We market our entire product family through our direct sales force and
indirectly through distributors and sales representatives. We sell our products
primarily to service providers who install our equipment as part of their access
networks. Our customers generally include independent operating companies
(IOCs), large incumbent local exchange carriers (ILECs) and international
carriers.

Our customers normally install a portion of our systems in outdoor locations,
and shipments are subject to the effects of seasonality with fewer installation
projects scheduled for the winter months. Historically, we have also experienced
weaker demand for our products during the beginning of the year as compared with
the shipment levels in the preceding fourth quarter. As a result, we believe
that over time, revenues for the quarter ended March 31 will be lower than
revenues in the preceding quarter ended December 31.

Our results of operations have been adversely affected by the downturn in the
telecommunications industry and worldwide economies over the last two years.
Although the current economic environment is challenging, we believe we have
positioned our business for the long term. On an on-going basis, we attempt to
balance our operating expenses with lower overall revenue levels associated with
the economic downturn. We focus on cost controls while we continue to invest in
research and development activities that will keep us in a strong position to
take advantage of sales opportunities when economic conditions improve and
demand recovers.

We believe current economic conditions may continue to cause our customers and
potential customers to defer and reduce capital spending. During the several
years prior to 2002, a substantial number of service providers invested heavily
in network infrastructures and accelerated growth in the telecommunications
equipment market. Beginning in 2001, many service providers encountered sharp
declines in the amount of available capital funding and many of these service
providers' businesses subsequently failed. These failures have resulted in a
substantial decline in the demand for telecommunications equipment, including
our products. Bankruptcies of some service providers resulted in sales of their
assets, some of which may have included our products, to third party bidders at
prices below original cost. In addition, competition among bidders for these
assets has resulted in delays in the restructuring of the failed service
providers. This may delay the telecommunications industry recovery in the near
term and continue to affect growth in our customers' capital spending. We
believe the current regulatory environment is also causing delays in some of our
customers' investments in broadband services. We believe some of our larger
customers are delaying deployment of DSL service until regulatory issues
stemming from the 1996 Telecommunications Act are clarified. Although in
February 2003 the Federal Communications Commission (FCC) adopted new rules
concerning incumbent local exchange carriers' obligations for elements of their
network, we believe that there is still uncertainty as to the impact of these
rules.

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

Our position with respect to deferral of the tax on the gain related to the
hedge contracts may be challenged by the tax authorities. Accordingly, in 2003
we will pay an estimated $265 million in federal and state taxes on the full
amount of the gain on both the Cisco stock and the hedge contracts in order to
avoid potentially significant interest and penalties should we be unable to
sustain our tax position. On our December 31, 2002 consolidated balance sheet,


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we accounted for the tax liability on the gain from the Cisco stock and hedge
contracts based on the value of these financial instruments at that time and the
applicable statutory tax rates. We intend to seek a refund of approximately $210
million, which will represent the amount of taxes paid on the portion of the
gain that we believe is subject to deferral. There is no assurance as to the
timing or amount of any refund, and we will incur modest costs in pursuing this
course of action. Final resolution of this matter may take several years. Should
we receive the requested refund, the additional cash would be invested for the
benefit of stockholders. Because we will have borrowed the same number of Cisco
shares as we own, upon completion of the transactions, we will not have any
exposure to changes in the per share price for Cisco stock.

During 2002, we completed our acquisition of AccessLan, a developer of a
carrier-class, multiservice CO switching platform designed for the evolving
broadband access networks. The $82.1 million purchase price was allocated to the
assets acquired and the liabilities assumed based on fair values as determined
by third party appraisers during the fourth quarter of 2002. The purchase price
consisted of $43.4 million in cash, assumption of $5.5 million in liabilities,
$22.4 million representing the fair value of 1.2 million stock options issued to
AccessLan employees and $10.8 million based on our initial investment, net of
acquisition costs. In the fourth quarter of 2002, we increased the preliminary
allocation for goodwill from $55.5 million at the end of the third quarter of
2002 to $56.1 million at December 31, 2002, offset by adjustments to the
valuation of fixed assets and intangible assets acquired from AccessLan. The
acquisition was accounted for as a purchase business combination, and
accordingly, the results of AccessLan's operations have been included in our
consolidated statements of income from the date of the acquisition. 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.
Through the acquisition of AccessLan, we added the Telliant product to the AFC
product family.

During 2002, we recorded $4.4 million in charges to operating expenses in
connection with the settlement of a consolidated class action and two individual
non-class securities litigation cases arising in 1998. The class action
securities case was settled on November 18, 2002, wherein 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. The non-class securities litigation involving two
individuals was settled on December 31, 2002. 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 do not expect the amount to be funded by
insurance. Under the terms of both settlements, 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.

During the fourth quarter of 2002, we recorded a $13.6 million distribution
payment due from Marconi Communications, Inc. (Marconi) as non-operating income.

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America, or GAAP. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of revenues,
expenses, assets and liabilities, and related disclosure of contingent assets
and liabilities. As the complexity and subjectivity of estimates and judgments
increase, the inherent level of precision in the financial statements can
decrease. Applying GAAP requires our judgment in determining the relative
appropriateness of acceptable accounting principles and methods of application
in diverse and complex economic activities. We evaluate our estimates and
judgments on an on-going basis, including those related to our product warranty,
product returns, excess and obsolete inventory, and allowance for doubtful
accounts. We base our estimates on historical experience and other assumptions
we believe are reasonable under the circumstances. The results of these
estimates form the basis for making judgments about the carrying values of
assets and liabilities, which may not be readily apparent from other sources.

We believe the application of our accounting policies accurately reflects our
financial condition and results of operations in the consolidated financial
statements and provides comparability between periods. We believe our accounting
policies are reasonable and appropriate for our business. The following critical
accounting policies require us to make significant estimates and judgments in
connection with the preparation of our consolidated financial statements.


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION, ALLOWANCES AND PRODUCT WARRANTY. In compliance with the
Securities and Exchange Commission 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. We consider differing market conditions when
recognizing revenues, such as the recent decline in capital spending in our
industry and the relative financial condition of our customers. These conditions
do not impact the method by which we recognize revenues or the methodology for
computing the provision for warranty and allowance for returns.

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. 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. Under
different circumstances, we believe there would be no change in the methodology
we use to expense research and development costs and, accordingly, there would
be no change to our results of operations, financial position or changes in cash
flows. If we changed the estimates used in the assessment of recoverability for
computer software-related capitalized costs,



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such as the anticipated future revenues or changes in technologies, these
changes could result in a lower net realizable value. This in turn would
increase our reported operating expenses and lower our net income, but it would
not have any effect on our cash flows.

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. Additional allowances may be
required if the liquidity or financial condition of our customers were to
deteriorate, resulting in an impairment in their ability to make payments. We
consider differing market conditions when recording our allowance, such as the
recent downturn in the telecommunications industry and worldwide economies and
the relative financial condition of our customers. These conditions do not
impact the methodology we use to compute our allowance. 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. Under
different market conditions, such as an environment of decreasing vendor and
material costs, we could change our methodology to last-in, first-out basis.
This would result in short-term effects such as lower costs of revenues, higher
gross profit margin and higher net income. However, this alternative methodology
could lead to higher reserves for excess and obsolete product as the potential
for higher-priced inventory on hand increases. It could also result in
additional short-term effects such as higher cost of revenues, lower gross
profit margin and lower net income.

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, pro forma net income (loss) would have been ($29.0) million,
$106.2 million and $31.4 million in 2002, 2001 and 2000, respectively. This
compares with net income, as reported, of $31.8 million, $165.5 million and
$77.6 million in 2002, 2001 and 2000, respectively. Pro forma earnings (loss)
per share, on a diluted basis, would have been ($0.34), $1.27 and $0.37 in 2002,
2001 and 2000, respectively. This compares with earnings per share, as reported
on a diluted basis, of $0.37, $1.98 and $0.91, respectively. See Note 1 of the
"Notes to Consolidated Financial Statements" for further discussion of our
equity-based compensation plans.

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



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RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                                                   YEARS ENDED DECEMBER 31,
                                                     ------------------------------------------------------
                                                          2002                2001               2000
                                                     ---------------     ---------------     --------------
<S>                                                      <C>                 <C>                 <C>
Revenues                                                   100%                100%                100%
Cost of revenues                                            52                  66                  52
                                                     ---------------     ---------------     --------------
   Gross profit                                             48                  34                  48
                                                     ---------------     ---------------     --------------

Operating expenses:
   Research and development                                 18                  20                  14
   Sales and marketing                                      14                  15                  11
   General and administrative                                8                  11                   7
   Securities litigation costs                               1                   -                   -
   Amortization of acquired intangibles                      1                   -                   -
   In-process research and development                       4                   -                   -
                                                     ---------------     ---------------     --------------
       Total operating expenses                             46                  46                  32
                                                     ---------------     ---------------     --------------

Operating income (loss)                                      2                 (12)                 16
Other income, net                                           11                  93                  12
                                                     ---------------     ---------------     --------------
Income before income taxes                                  13                  82                  28
Income taxes                                                 4                  31                  10
                                                     ---------------     ---------------     --------------

Net income                                                   9%                 51%                 19%
                                                     ===============     ===============     ==============
</TABLE>


2002 COMPARED WITH 2001

REVENUES. Comparing 2002 to 2001, total revenues, including service revenues and
royalties, increased by 5% to $344.1 million. U.S. revenues increased 5% to
$295.0 million, and represented 86% of total revenues in both 2002 and 2001. The
increase in U.S. revenues was primarily due to increases in sales to Alltel
Supply Corporation (Alltel), North Supply Company, a subsidiary of Sprint
(Sprint), and Verizon Communications, Inc. (Verizon), partially offset by a
reduction in sales to IOCs and competitive local exchange carriers (CLECs).
International revenues increased 8% to $49.0 million, and represented 14% of
total revenues in years 2002 and 2001. The increase in international revenues
mainly resulted from an increase in sales in Canada, the Caribbean and Latin
America, partially offset by decreased sales in Europe. From a product
perspective, the increase in worldwide revenues was primarily due to an increase
in AccessMAX sales to our larger customers.

For 2002, Alltel, Sprint and Verizon each accounted for 10% or more of total
revenues. In 2001, only Sprint accounted for 10% or more of total revenues. No
other customer accounted for 10% or more of total revenues in either period.
Although our largest customers have varied over time, we anticipate that our
results of operations in future periods will depend largely upon sales to a
small number of large accounts. Our five largest customers accounted for 56% and
44% of total revenues in 2002 and 2001, respectively. A number of these
customers have signed multiyear agreements with us that provide potential
revenue streams for 2003 and beyond. Our customers, however, are permitted to
cancel or reduce the size of their commitments upon notice. There can be no
assurance that ongoing sales to these customers will continue, or continue at
increasing volumes.

GROSS PROFIT. Comparing 2002 to 2001, gross profit increased 47% to $164.1
million. As a percentage of total revenues, gross profit increased from 34% in
2001 to 48% in 2002. Gross profit in 2002 did not include a similar level of
charges as 2001, which included $13.4 million for inventory purchase commitments
and $18.9 million for excess and obsolete inventory. Also contributing to the
increase was our continued focus on product cost reductions, which included
among other things, identifying and procuring material from certain financially
distressed companies at significantly reduced amounts. Another reason for the
gross profit increase included, to a lesser degree, higher margin product mix,
which was partially offset by a lower margin customer mix.


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Our gross profits are affected by a number of factors including, but not limited
to, customer mix, volume discounts, product mix, excess customized inventory,
obsolete inventory, long-term purchase agreements with contract manufacturers,
cost reduction programs, and the volume of third party distributor sales.
Because various customer groups order different product mixes and have different
volume pricing discounts, gross profit will vary as a result of changes in the
mix of customer orders. Individual products have different profit margins and
the mix of products sold has an impact on the margins generated by those sales.
The size of discounts given to a customer may vary depending on the size of
annual sales to the customer. Our ability to successfully implement cost
reduction programs affects fixed and variable costs that impact profit margins.
In a rapidly changing industry, introduction of new products embodying new
technologies may result in existing inventory becoming obsolete. This requires
such obsolete inventory to be expensed. Customers have the ability to cancel
purchase orders, which may result in excess customized inventory that we may be
unable to rework and sell cost effectively. Also, gross profit margins have been
lower in some cases for products sold through our third party and indirect
distribution channels.

RESEARCH AND DEVELOPMENT. Comparing 2002 to 2001, research and development
expense decreased by 4% to $61.7 million. This expense represented 18% of total
revenues in 2002 compared with 20% in 2001.

Our research and development expense decreased primarily from lower fixed asset
write-offs, hiring and relocation costs, development costs, use of outside
services, and depreciation costs. These decreases were partially offset by
increased compensation, lease impairment and software development costs. In
2001, we performed a methodical identification and disposal of obsolete research
and development-related fixed assets and we wrote-off asset and leasehold
improvements associated with exiting our Largo, Florida facility. This enabled
us to minimize the amount of fixed asset disposals in 2002. The resulting effect
of reducing our fixed asset base also caused a decline in our 2002 depreciation
expense.

During 2002, we continued our cost containment efforts. We reduced hirings and
curtailed relocation costs primarily through limiting our hirings to within our
local area. In addition, our release of AccessMAX System 9 required less circuit
board development than System 8, thus contributing significantly to our ability
to reduce our direct material, engineering and testing costs in 2002. Our
outside services costs were lower in 2002 due to a one-time reimbursement of
Telcordia testing fees by a single customer. Partially offsetting these
decreases in research and development expenses was an increase in compensation
expense, caused by the addition of AccessLan's research and development
personnel during the year. Further offsets to the decreases in research and
development expenses were $0.9 million in facility lease impairment charges
related to the consolidation of our Miramar, Florida and Buffalo Grove, Illinois
research and development offices and an increase in software development costs
that were expensed in 2002.

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

SALES AND MARKETING. Comparing 2002 to 2001, sales and marketing expense
decreased 4% to $47.6 million. This expense represented 14% of total revenues in
2002 compared with 15% in 2001.

We experienced a decrease in sales and marketing expense in 2002, primarily from
lower levels of demonstration and trade show material write-offs, depreciation
and continued cost containment efforts driving reductions in travel and
entertainment, employee recruitment and outside services usage. These decreases
were partially offset by increases in performance-based compensation and higher
trade show costs. Our methodical identification and disposal of obsolete trade
show materials, demonstration equipment and demonstration inventory in 2001
enabled us to minimize the need for a similar write-off in 2002, thus decreasing
our 2002 sales and marketing direct material write-offs. These write-offs, along
with an increasing number of assets becoming fully depreciated, caused a decline
in our 2002 depreciation expense. We continued our cost containment efforts in
2002 by reducing our travel and entertainment, employee recruitment and outside
services costs. These decreases were partially offset by payment of
performance-based compensation awards in all four quarters of 2002. In contrast,
we made no performance-based compensation awards in 2001. Additional offsets
included higher total commissions due to higher revenue levels than the previous
year and higher commission rates for certain products. These decreases were also
offset by an increase in trade show costs caused by the introduction of three
new products (Telliant, TransMAX 1500 and AccessMAX System 9) and the expansion
of our trade show presence.


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<PAGE>

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

GENERAL AND ADMINISTRATIVE. Comparing 2002 to 2001, general and administrative
expense decreased by 29% to $26.4 million. This expense represented 8% of total
revenues in 2002 compared to 11% in 2001.

The decrease in general and administrative expense from 2001 to 2002 was
primarily the result of a decline in our provision for doubtful accounts,
depreciation and loss on fixed asset disposals. It was partially offset by an
increase in performance-based compensation awards. Unlike 2001, when we recorded
a significant provision for doubtful accounts related to one financially
troubled customer, doubtful accounts during 2002 were more in line with
historical trends. Our methodical identification and disposal of obsolete
general and administrative-related fixed assets in 2001 enabled us to minimize
the need for a similar write-off in 2002, thus decreasing our 2002 loss on fixed
asset disposals and depreciation expense. These decreases were partially offset
by making performance-based compensation awards in each quarter of 2002. In
contrast, we did not meet our internal financial targets in 2001 and therefore
we did not have any performance-based compensation awards in 2001.

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

SECURITIES LITIGATION COSTS. During 2002, we recorded charges of $4.4 million to
operating expenses in connection with the settlement of a consolidated class
action and two individual non-class securities litigation cases arising in 1998.
The charges represent the portion of the settlement that we currently do not
expect to be funded by insurance.

AMORTIZATION OF ACQUIRED INTANGIBLES. In connection with the acquisition of
AccessLan, we expensed $2.7 million in deferred compensation and $0.6 million in
non-compete agreements in 2002. These intangibles, which have finite lives, will
be expensed over approximately three years. The $56.1 million allocated to
goodwill, which includes acquired workforce intangible assets, 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 in the third quarter of 2002 and resulted in a determination of
non-impairment at that time.

IN-PROCESS RESEARCH AND DEVELOPMENT. Related to our acquisition of AccessLan in
2002, we recognized a one-time $12.4 million write-off for 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 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
ATM, switching, 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.

                                       41
<PAGE>

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.

OTHER INCOME, NET. Comparing 2002 to 2001, other income decreased by 87% to
$38.5 million. This decline is primarily attributable to our implementation of
SFAS No. 133 in 2001, resulting in the reclassification of our Cisco securities
from available-for-sale to trading securities. This resulted in the recognition
of $285.7 million in unrealized gains on our Cisco investment and related hedge
contracts in 2001. In contrast, we recognized $18.4 million in Cisco related
gains in 2002. Other expense in 2001 included a $2.3 million impairment of an
investment in a privately-held company. During 2002, our annual impairment test
of this investment did not reveal any further impairment. Included in other
income in both years were $13.6 million distribution payments due from Marconi
in 2002 and 2001. Payments were received from Marconi in January 2003 and
January 2002. These amounts originated from settlement of outstanding litigation
with Marconi. The settlement called for Marconi to meet specified distribution
revenue goals in 2002 and 2001, which they failed to meet in both years. Marconi
was therefore obligated to make distribution payments of $13.6 million for 2002
and 2001.

INCOME TAXES. In 2002 and 2001, we recorded income taxes at an effective tax
rate of 32% and 38%, respectively. The higher rate in 2001 was due to the effect
of recognizing an investment gain related to our implementation of SFAS No. 133.

2001 COMPARED WITH 2000

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

For the year 2001, sales to Sprint accounted for 10% or more of total revenues.
In 2000, Sprint and Winstar each accounted for 10% or more of total revenues. No
other customer accounted for 10% or more of total revenues in either period. Our
five largest customers accounted for 44% of total revenues in 2001 and 49% in
2000. A number of these customers signed multiyear agreements with us that
provided potential revenue streams for 2002 and beyond. However, these contracts
permit customers to cancel or reduce the size of their commitments upon notice.

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

During 2001, we recorded $18.9 million in charges to cost of revenues for excess
and obsolete inventory and recognized a $13.4 million accrual against cost of
revenues for inventory purchase commitments. We experienced a delay in DSL
rollouts and changes in some of our larger customers' DSL build-out plans. This,
along with a shift from our first generation DSL products to our second
generation DSL products, accounted for a large portion of the excess and
obsolete inventory write-down. We had inventory built to CLEC specifications
that, upon the rapid decline of our CLEC customers' capital spending, we could
not cost-effectively re-work for other customers. Some of the other products in
our product family have been superseded by newer generation technology,
resulting in obsolete inventory. We refocused our international



                                       42
<PAGE>


efforts towards newer generation broadband products, resulting in a write-down
of obsolete inventory. Component inventories were built up in accordance with
our original business plan, resulting in write-downs for amounts in excess of
our revised business plan requirements.

To a lesser extent, gross profit in 2001 declined from 2000 due to negotiated
discounts and product mix for some of our larger volume customers. Material
purchases were lower in 2001 compared with 2000, while overhead costs remained
relatively unchanged, resulting in costs being spread over a lower volume of
products. The resulting higher burden rate decreased our gross profits in 2001.
Gross profit in 2001 was also impacted by the recognition of $4.3 million in
cost of sales for shipments to Winstar and a value-added reseller (VAR) for
which $11.9 million in revenues were not recorded. We also recorded a $2.2
million reserve for specific inventories deemed to be unsellable as a result of
Winstar's financial distress and our expectation that we would not have further
sales to Tellabs for the remainder of 2001. During the fourth quarter of 2001,
we completed an inventory of our fixed assets, disposed of obsolete equipment
and recorded a $0.3 million loss on the disposals. In addition, we also incurred
$0.3 million in severance costs related to our October 2001 reduction in force.

RESEARCH AND DEVELOPMENT. In 2001, research and development expense increased by
9% to $64.2 million, and represented 20% of total revenues compared with 14% in
2000.

The increase in expenses from 2000 to 2001 was primarily the result of
compensation and benefits, fixed asset disposals, a facility lease impairment,
depreciation, software costs, and rent and facility costs. Compensation and
benefits were higher primarily because the average number of personnel during
2001, particularly during the first half of the year, was greater than during
2000. Compensation also included $3.5 million in severance costs related to our
October 2001 reduction in force. As of December 31, 2001, our research and
development headcount decreased 9% from 2000 due to consolidation of our Florida
offices, the reduction in force, and concerted efforts to make the engineering
organization more efficient using existing employee resources and skills. During
the fourth quarter of 2001, after completing an inventory of our
engineering-related fixed assets, we disposed of obsolete equipment and recorded
a loss on the disposals. In the fourth quarter of 2001, we vacated our Largo,
Florida facility and entered into a sublease agreement. We recorded an
impairment charge for the ongoing shortfall between our remaining lease
obligation and the sublease income, and wrote down the related fixed assets and
leasehold improvements, totaling $2.7 million. Depreciation expense increased as
a result of additional capital purchases to support development and testing of
new products and features. These increases reflect our efforts to invest in key
product development areas in order to retain our market share and be positioned
to take advantage of future market opportunities. During 2000, we achieved
technological feasibility of our Panorama(TM) Network Element Management System
software and we capitalized costs associated with it. We completed and released
the software during 2001, and accordingly began recording post-release costs to
research and development expense. Rent and related facility costs increased for
some of our satellite engineering offices. Partially offsetting these increases
were savings in outside services, performance-based compensation, direct
materials, temporary help, and travel and entertainment. Various engineering
projects involving outside services were completed by the end of 2000, and our
utilization of outside services decreased in 2001, accordingly.
Performance-based compensation was lower as a result of not meeting certain
financial targets, primarily because of the general slowdown in our customers'
capital spending and the effect that it had on our results of operations in
2001. In 2000, more direct materials were utilized for development and
completion of our AccessMAX System 8, and 7.1A and 8.0 cards by the end of 2000.
Direct material usage was lower in 2001 as new projects were in different
development stages than in 2000 and required lower expenditure levels. In an
effort to reduce our operating expenses in 2001, we eliminated virtually all of
the temporary help positions that had been filled during 2000. Travel and
entertainment expenses were lower due to cost containment efforts in 2001,
reflecting our efforts to align our organization with our results of operations.

SALES AND MARKETING. In 2001, sales and marketing expense increased by 4% to
$49.4 million, and represented 15% of total revenues compared with 11% in 2000.

The increase in sales and marketing expense from 2000 to 2001 was primarily the
result of higher compensation and benefits, fixed asset disposals, distributor
commissions and depreciation. As part of our efforts to build support teams for
our larger customers, we employed a higher average number of sales and marketing
employees during the first half of 2001 as compared with 2000. As the general
slowdown in our customers' capital spending and the effect that it had on our
results of operations became apparent, we implemented a reduction in force,
resulting in an 11% decrease in sales and marketing headcount from



                                       43
<PAGE>


December 31, 2000 to December 31, 2001. A higher average number of sales and
marketing employees during the first half of 2001 over the levels in 2000
resulted in higher compensation and benefit costs. Included in compensation were
severance costs of $0.9 million arising from our October 2001 reduction in
force.

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

GENERAL AND ADMINISTRATIVE. In 2001, general and administrative expense
increased 28% to $37.3 million and represented 11% of total revenues as compared
to 7% in 2000.

The increase from 2000 to 2001 was mainly caused by a $9.3 million increase in
our provision for doubtful accounts during the first quarter of 2001 for a
single VAR. During the last quarter of 2001, we inventoried some of our general
and administrative-related fixed assets and disposed of obsolete equipment,
recording a $1.1 million loss on the disposals. Depreciation increased in 2001
from 2000 because leasehold improvements associated with buildings we moved into
in mid-year 2000 were occupied for the entire year in 2001. Primarily as a
result of a general slowdown in our customers' capital spending patterns and the
effect that it had on our results of operations in 2001, we did not meet our
internal financial targets and did not pay associated performance-based
compensation. We made significant donations to education and housing programs in
2000, and although we continued to make donations to various causes in 2001, we
adjusted our expenditure levels to reflect our overall reduction in operating
expenses. We also reduced the number of general and administrative employees by
13% from December 31, 2000 to December 31, 2001 and incurred severance costs of
$0.3 million.

OTHER INCOME, NET. In 2001, other income was $306.2 million. Our application of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in
2001 resulted in the recognition of $285.7 million in unrealized gains on our
Cisco investment and the related hedge contracts. In 2000, prior to adoption of
SFAS No. 133, the unrealized gains and losses on the Cisco investment and
related hedge contracts were netted and reflected in the carrying value of the
investment, deferred tax liabilities, and accumulated other comprehensive income
on our balance sheet. In 2000, we recorded $32.8 million from Marconi as
settlement of outstanding litigation, and $10.1 million as a subsequent
distribution payment. In 2001, we recognized $13.6 million as a distribution
payment due from Marconi, which was subsequently received in January 2002. In
the fourth quarter of 2001, we recorded a $2.3 million impairment in our equity
investment in a privately-held company as a result of the lowered valuation of
the company. Macroeconomic conditions and an industry-wide capital spending
slowdown affected the availability of venture capital funding for, and
valuations of, development stage companies.

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

PRO FORMA FAIR VALUE INFORMATION

We apply the intrinsic value method of accounting prescribed by APB Opinion No.
25, Accounting for Stock Issued to Employees, 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.


                                       44
<PAGE>


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, Accounting for Stock-Based Compensation, 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. See Note 1 of the "Notes to
Consolidated Financial Statements" for further discussion of our equity-based
compensation plans.

SUMMARY OF CERTAIN SIGNIFICANT ITEMS

The following table summarizes several items which had a significant impact on
our results of operations during 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                2002            2001           2000
                                                              -------          --------       -------
<S>                                                           <C>              <C>            <C>
Operating:
  Cost of sales for revenues not recognized                         -             4,300             -
  In-process research & development                            12,423                 -             -
  Securities litigation settlement                              4,443                 -             -
  Amortization of acquired intangibles                          3,275                 -             -
  Severance and closure costs for reduction in force              931             4,935             -
  Excess and obsolete inventory                                     -            18,850             -
  Purchase commitments                                              -            13,412             -
  Provision for doubtful accounts                                   -             9,251             -
  Loss on fixed asset disposals                                     -             1,412             -
  Acquisition-related costs                                         -                 -         1,062

Non-operating:
  Litigation settlement and distribution payments             (13,600)          (13,600)      (42,886)
  Unrealized gain on Cisco investment                         (18,352)         (285,729)            -
  Investment impairment                                             -             2,275             -
                                                              -------          --------       -------
    Total                                                     (10,880)         (244,894)      (41,824)
                                                              =======          ========       =======
</TABLE>


2002

o    $12.4 million for in-process research and development costs related to the
     AccessLan acquisition.

o    $4.4 million in securities litigation settlement costs.

o    $3.3 million for amortization of acquired intangibles related to the
     AccessLan acquisition.


                                       45
<PAGE>



o    $0.9 million charge for facility lease impairment charges related to the
     consolidation of our research and development offices.

o    $13.6 million distribution payment from Marconi caused by their inability
     to meet specified distribution goals.

o    $18.4 million in unrealized gain on our Cisco investment.

2001

o    $4.3 million charge to cost of revenues related to sales we did not
     recognize in the first quarter of 2001.

o    $4.9 million charge for facility lease impairment, fixed assets write-down,
     severance costs and foreign sales office closures. These charges related to
     our reduction in force and realignment of our focus on core customers,
     markets and products.

o    $18.9 million charge for excess and obsolete inventory, consisting of $18.8
     million to cost of revenues and $0.1 million to sales and marketing
     expenses. These charges related to the abrupt decline in customers'
     spending, customer bankruptcy, changes in DSL rollout and the resulting
     impact these had on custom inventory and obsolete inventory levels.

o    $13.4 million accrual for purchase commitments related to the abrupt
     decline in customers' capital spending and the impact this had on our
     forecasted needs and long-term agreements with vendors.

o    $9.3 million charge to provision for doubtful accounts related to the
     abrupt decline in a customer's financial condition.

o    $1.4 million charge for loss on disposal of information technology fixed
     assets resulting from a methodical fixed asset inventory.

o    $13.6 million distribution payment from Marconi caused by their inability
     to meet specified distribution goals.

o    $285.7 million in unrealized gains on our Cisco investment.

o    $2.3 million charge for impairment on an investment as a result of the
     investee company's equity round financing and related valuation.

2000

o    $1.1 million charge related to the acquisition of GVN Technologies, Inc.

o    $32.8 million Marconi litigation settlement gain.

o    $10.1 million distribution payment from Marconi caused by their inability
     to meet specified distribution goals.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources, our ability to generate adequate amounts of
cash to meet our needs as of December 31, 2002 and 2001, consisted of the
following (in thousands):

<TABLE>
<CAPTION>

                                                                                     DECEMBER 31,
                                                                             ------------------------------
                                                                                 2002             2001
                                                                             -------------    -------------
<S>                                                                           <C>              <C>
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
Working capital, excluding cash and cash equivalents,
    marketable securities and related hedge contracts, and associated
    deferred tax assets and liabilities                                          51,582           72,941

</TABLE>

Cash and cash equivalents were $94.8 million at December 31, 2002 compared with
$39.5 million at December 31, 2001. The $55.3 million increase was primarily due
to decreases in spending due to our cost containment efforts, movement from
longer-term marketable securities to shorter-term cash equivalents, increase in
accounts receivable collections, and cash from operations. This was partially
offset by cash equivalents transferred to long-term assets as collateral for a
U.S. customer contract during the second quarter of 2002.


                                       46
<PAGE>


Cisco marketable securities and related hedge contracts were $688.8 million at
December 31, 2002, compared with $670.5 million at December 31, 2001. The $18.3
million increase was the result of gains on the hedge contracts exceeding the
loss in share value during the year.

At December 31, 2002, we owned 10.6 million shares of Cisco common stock. We
acquired these shares as a result of our investment in privately-held Cerent,
which was merged with Cisco on November 1, 1999. In February and May 2000, we
entered into two three-year hedge contracts for 10.1 million and 0.5 million
shares of Cisco stock, respectively. We pledged all of our Cisco stock to secure
our obligations under these contracts. The purpose of these contracts was to
minimize the potential adverse market risk on the value of the Cisco shares.
These contracts, which are economically equivalent to costless collar
arrangements, provided us with the right to receive approximately $65 per share
upon delivery of up to 10.1 million Cisco shares in February 2003 and 0.5
million Cisco shares in May 2003. These hedge contracts provided us with a floor
value of approximately $690 million for the Cisco shares if held to maturity and
also enable us to borrow up to the full present value of the floor value of the
hedge contracts. The accumulated unrealized gains on the share value and hedge
contract value through December 31, 2002 have been recognized in non-operating
income, and the related deferred tax liability is reflected in the December 31,
2002 consolidated balance sheet.

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 Cisco 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.

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 gain associated with the hedge contracts.
By using borrowed shares to settle the hedge contracts, 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 approximately $210 million, which will
represent the amount of taxes paid on the portion of the gain that we believe is
subject to deferral.

Other marketable securities were $213.0 million at December 31, 2002, compared
with $245.7 million at December 31, 2001. The $32.7 million decrease arose
primarily as the result of liquidating securities to pay $43.4 million to
AccessLan shareholders and transferring $20.1 million in marketable securities
to long-term assets as collateral for a U.S. customer contract bond. This was
partially offset by increases resulting from investing operating cash flows in
marketable securities.

At December 31, 2002, $20.1 million in restricted cash equivalents and
marketable securities was held as collateral to back a three-year bond posted
for a U.S. customer contract. The bond guarantees our performance under the
contract and is classified as other assets. We will continue to earn interest on
the restricted cash equivalents and marketable securities during the bond
period.

Operating activities in 2002 generated net cash of $79.2 million. This was
primarily the result of net income, collection of the 2001 Marconi distribution
payment receivable and collection of accounts receivables. Investing activities
during 2002 used net cash of $40.8 million, primarily as a result of cash paid
to acquire AccessLan and the collaterization of a bond for a U.S. customer
contract. This was partially offset by a net increase in sales and maturities of
marketable securities.



                                       47
<PAGE>


Working capital increased during the year from $774.3 million at December 31,
2001 to $784.8 million at December 31, 2002. The increase was primarily a result
of decreases in our overall spending, and an increase in the value of our Cisco
hedge contracts. This was partially offset by cash paid in the AccessLan
acquisition and the related recording of goodwill and other intangible assets,
along with the transfer of $20.1 million in cash and cash equivalents to
restricted cash as collateral for a U.S. customer contract bond. Days sales
outstanding decreased to 43 days at the end of 2002, compared with 64 days at
the end of 2001, as a result of improved shipping linearity and an increase in
accounts receivable collections during the year.

We maintain an uncommitted bank facility for the issuance of commercial and
standby letters of credit. At 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 seek to minimize our foreign currency risk by using forward contracts to
hedge material accounts receivable and accounts payable. These contracts are
marked to market and the gains and losses are reflected in our results of
operations.

We maintain bank agreements with two banks under which we may enter into foreign
exchange contracts up to $40.0 million. There are no borrowing provisions or
financial covenants associated with these facilities. At December 31, 2002,
there were no foreign exchange contracts outstanding.

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. During 2002, 10,800 shares were repurchased at a cost of
$0.1 million under this plan. The purpose of the repurchase plan is to help us
achieve our long-term goal of enhancing shareholder value. The effect of the
repurchase plan on the calculation of net income per common share was
insignificant.

In connection with the stock repurchase plan we announced in October 2001, we
established a written trading plan in accordance with SEC Rule 10b5-1 under
which we will repurchase shares of AFC common stock, subject to conditions set
forth in the trading plan. The trading plan runs from December 1, 2002 through
December 2, 2003.

In addition to measuring our cash flow generation and usage based upon our
operating, investing and financing activities included in the Consolidated
Statement of Cash Flows, we also measure our free cash flow. We define free cash
flow, a measure commonly employed by credit providers, as cash flow from
operating activities, less capital expenditures. During 2002 and 2001, we
generated free cash flow of $67.9 million and $66.5 million, respectively.

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

<TABLE>
<CAPTION>
                 <S>                                                       <C>
                                                                             Facility
                                                                             Operating
                                                                              Leases
                                                                            ------------
                  2003                                                      $   9,016
                  2004                                                          8,636
                  2005                                                          8,410
                  2006                                                          7,935
                  2007                                                          7,356
                  Thereafter                                                   24,747
                                                                            ------------
                    Total                                                   $  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 minimum 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.


                                       48
<PAGE>

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 this operating lease representing the present value of the loss we expect to
incur for the ongoing shortfall between our sublease income and operating lease
obligation. If the sublessee does not renew its lease agreement with us, and we
are unable to enter into another agreement through the March 31, 2007 term of
the lease, the amount of the ultimate loss based on the lease could increase by
up to $1 million before tax.

We also have long-term purchase agreements with certain contract manufacturers
which allow us to negotiate volume discounts and provide us with a more steady
supply of components. 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.

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

OFF-BALANCE SHEET ARRANGEMENTS

The SEC recently enacted rules regarding required disclosures of off-balance
sheet arrangements. We do not have any material off-balance sheet arrangements
that have, or are reasonably likely to have, a future effect on our financial
condition or changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.

SFAS NO. 133 IMPLEMENTATION IN 2001

On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. The statement
requires that we recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
Additional discussion on the effect of SFAS No. 133 on our financial position
and results of operations is included in Notes 1 and 2 of the "Notes to
Consolidated Financial Statements."

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk lies primarily in changes in interest rates and fluctuations in
the value of our marketable securities and related hedge arrangements.

We have foreign currency sales to one international customer. We hedge foreign
currency risk on certain accounts receivable and accounts payable with forward
contracts that generally expire within 60 days. These forward contracts are not
designated as hedges and changes in the fair value of these forward contracts
are recognized immediately in earnings.

We face interest rate risk exposure on our marketable securities. Our objective
is to preserve principle. We manage interest rate risk primarily by investing in
the highest rated U.S. government, municipal and corporate debt and equity
securities having various maturities of less than four years.

At December 31, 2002, our $213.0 million marketable debt securities portfolio
consisted of domestic municipal debt securities of various issuers, types and
maturities. Approximately 27% of the debt securities mature in one year or less.
At December 31, 2002, the weighted average yield on our debt securities was 1.8%
and the weighted average yield on cash equivalents was 1.1%.

If interest rates increase, the fair market value, or FMV, of our debt
securities portfolio will decrease. To quantify interest rate risk on our debt
securities portfolio, we used a modeling technique that measures the change in
FMV arising from hypothetical shifts in the yield curve of plus 50 basis points
over an immediate time horizon. The resultant effect would be a loss of $1.4
million on our portfolio valued at $213.0 million at December 31, 2002 as
compared with a loss of $1.0 million on our portfolio valued at $245.7 million
at December 31, 2001.


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<PAGE>


At December 31, 2002 we had market price risk exposure on our Cisco marketable
securities holdings consisting of 10.6 million shares, the full value of which
was protected using hedge contracts purchased in February and May 2000. The
primary hedge contract covered 10.1 million shares and matured on February 9,
2003. We borrowed 10.1 million shares of Cisco stock in February 2003 to settle
the primary hedge contract and received the floor value of the hedge contract
equal to $656.2 million in cash. The $656.2 million was invested in
available-for-sale U.S. government, municipal and corporate debt and equity
securities according to our existing investment policy. We manage the interest
rate and credit risk exposure on these securities by investing in the highest
rated U.S. government, municipal and corporate debt and equity securities having
various maturities of less than four years. Associated with borrowing the
shares, we pledged 10.1 million of the 10.6 million Cisco shares we own as
collateral. Changes in the fair market value of the 10.1 million shares we own
are offset by the changes in fair market value of the 10.1 million shares that
we have borrowed.

We continue to have market price volatility risk exposure on the remaining 0.5
million shares of Cisco covered by the hedge contract maturing in May 2003.
Changes in the fair market value of the hedge contract largely offset changes in
the value of the underlying stock, which is also marked to market. The risk
exposure arises as a result of the lack of completely efficient hedge contract
coverage prior to the May 2003 maturity.

The following table shows the changes in the fair values of the 10.6 million
Cisco shares, and the put and call feature of the hedge contract agreements
arising from a hypothetical 20% increase or decrease in the stock's price of
$13.01 and $18.54 per share, the closing prices on the last business day of our
fiscal years ended December 31, 2002 and 2001, respectively (in thousands):

<TABLE>
<CAPTION>

                             Valuation -20%             No change            Valuation +20%
                            --------------------    --------------------    --------------------
<S>                         <C>                     <C>                     <C>
December 31, 2002:
     Cisco shares                      $109,902                $137,378                $164,853
     Cisco hedges                       578,980                 551,462                 524,060
                           --------------------    --------------------    --------------------
         Net value
                                       $688,882                $688,840                $688,913
                           ====================    ====================    ====================

December 31, 2001:
     Cisco shares                      $156,617                $195,772                $234,925
     Cisco hedges                       513,176                 474,717                 436,287
                           --------------------    --------------------    --------------------
         Net value                     $669,793                $670,489                $671,212
                           ====================    ====================    ====================
</TABLE>


At December 31, 2002, we held a $4.3 million minority equity investment in a
non-publicly traded company. We maintain this investment on a cost basis and do
not have the ability to exercise significant influence over the company's
operations. Our investment is inherently risky because the products of this
company, and the markets for such products, are in the development stage. In
addition, this company is subject to risks resulting from uncertain standards
for new products and competition. The remaining activities necessary to
determine if the products meet functional and technical requirements, and market
acceptance, include testing and customer lab trials. If these products fail
testing procedures or fail to generate customer interest, the value of this
company would likely decline and could result in impairment of our investment.
Additionally, macroeconomic conditions and an industry capital spending slowdown
are affecting the availability of venture capital funding and the valuations of
development stage companies. We could lose our entire investment in this company
and be required to record a charge to operations for any loss. Our ability to
earn a return on this investment is largely dependent on the occurrence of an
initial public offering, merger or sale of the company.


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