FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended: March 31, 2001

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from ________ to ________

Commission file number: 000-31529

ADVANCED SWITCHING COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(State or other jurisdiction of
incorporation or organization) |  | 54-1865834
(IRS Employer
Identification Number)

8330 BOONE BOULEVARD
VIENNA, VA 22182
(703) 448-5540

(Address, including zip code, and telephone number, including area code, of
registrants principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes [ X ] - No [ ]

As of April 30, 2001, there were 42,316,619 shares outstanding of the
Registrants Common Stock, par value $.0025.





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ADVANCED SWITCHING COMMUNICATIONS, INC.

TABLE OF CONTENTS

|                                                                                               |                                                         |  |    |   |  | 
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  | -- | - |  | 
|PART I - FINANCIAL INFORMATION                                                                
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|Item 1 - Financial Statements                                                                 
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|                                                                                               | Condensed Consolidated Balance Sheets                   |  |    | 2 | 
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|                                                                                               | Condensed Consolidated Statements of Operations         |  |    | 3 | 
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|                                                                                               | Condensed Consolidated Statements of Cash Flows         |  |    | 4 | 
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|                                                                                               | Condensed Consolidated Statements of Comprehensive Loss |  |    | 5 | 
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|                                                                                               | Notes to Condensed Consolidated Financial Statements    |  |    | 6 | 
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|Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                         |  | 8  |  
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|Item 3 - Quantitative and Qualitative Disclosures About Market Risk                            |                                                         |  | 14 |  
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|PART II  OTHER INFORMATION                                                                   
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|Item 1 - Legal Proceedings                                                                     |                                                         |  | 14 |  
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|Item 2 - Changes in Securities And Uses of Proceeds                                            |                                                         |  | 14 |  
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|Item 3 - Defaults upon Senior Securities                                                       |                                                         |  | 14 |  
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|Item 4 - Submission of Matters to a Vote of Security Holders                                   |                                                         |  | 14 |  
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|Item 5 - Other Information                                                                     |                                                         |  | 15 |  
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|Item 6 - Exhibits and Reports on Form 8-K                                                      |                                                         |  | 15 |  
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|                                                                                              
|Signatures                                                                                     |                                                         |  | 16 |  





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Advanced Switching Communications, Inc.
Condensed Consolidated Balance Sheets

|                                         |                            |   |                |         |              |   |         |         |  
|---------------------------------------- | -------------------------- | - | -------------- | ------- | ------------ | - | ------- | ------- | -
|                                         |                            |   | (in thousands)
|                                         |                            |   | March 31,      |         | December 31,
|                                         |                            |   | 2001           |         | 2000        
|                                         |                            |   |                |         |             
|                                         |                            |   | (unaudited)   
|Current Assets:                         
|                                        
|                                        
|                                        
|                                        
|                                         | Cash and Cash Equivalents  |   | $              | 71,477  |              |   | $       | 100,609 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Marketable Securities      |   |                | 21,359  |              |   |         | 11,916  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Accounts Receivable        |   |                | 15,299  |              |   |         | 8,225   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Inventory                  |   |                | 9,826   |              |   |         | 6,937   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Other Current Assets       |   |                | 2,869   |              |   |         | 2,276   |  
|                                         |                            |   |                |         |              |   |         |        
|Total Current Assets                     |                            |   | 120,830        |         |              |   | 129,963 |        
|                                         |                            |   |                |         |              |   |         |        
|Property, Plant & Equipment, net         |                            |   | 6,321          |         |              |   | 5,305   |        
|                                        
|                                        
|                                        
|                                        
|Marketable Securities                    |                            |   | 8,977          |         |              |   |        |        
|                                        
|                                        
|                                        
|                                        
|Other Assets                             |                            |   | 1,851          |         |              |   | 2,080   |        
|                                         |                            |   |                |         |              |   |         |        
|Total Assets                             |                            | $ | 137,979        |         |              | $ | 137,348 |        
|                                         |                            |   |                |         |              |   |         |        
|Current Liabilities:                    
|                                        
|                                        
|                                        
|                                        
|                                         | Accounts Payable           |   | $              | 6,750   |              |   | $       | 5,383   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Accrued Liabilities        |   |                | 3,797   |              |   |         | 3,181   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Current Portion of Debt    |   |                | 62      |              |   |         | 96      |  
|                                         |                            |   |                |         |              |   |         |        
|Total Current Liabilities                |                            |   | 10,609         |         |              |   | 8,660   |        
|                                         |                            |   |                |         |              |   |         |        
|Deferred Rent                            |                            |   | 89             |         |              |   | 85      |        
|                                        
|                                        
|                                        
|                                        
|Long-term Debt                           |                            |   | 5              |         |              |   | 5       |        
|                                        
|                                        
|                                        
|                                        
|Stockholders Equity:                   
|                                        
|                                        
|                                        
|                                        
|                                         | Common Stock               |   |                | 107     |              |   |         | 107     |  
|                                        
|                                        
|                                        
|                                        
|                                         | Treasury Stock             |   |                | (200    | )            |   |         | (200    | )
|                                        
|                                        
|                                        
|                                        
|                                         | Additional Paid-In Capital |   |                | 167,518 |              |   |         | 168,121 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Retained Deficit           |   |                | (32,832 | )            |   |         | (30,977 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Unrealized gains           |   |                | 44      |              |   |         | 8       |  
|                                        
|                                        
|                                        
|                                        
|                                         | Deferred Compensation      |   |                | (7,361  | )            |   |         | (8,461  | )
|                                         |                            |   |                |         |              |   |         |        
|Total Stockholders Equity               |                            |   | 127,276        |         |              |   | 128,598 |        
|                                         |                            |   |                |         |              |   |         |        
|Total Liabilities & Stockholders Equity |                            | $ | 137,979        |         |              | $ | 137,348 |        
|                                         |                            |   |                |         |              |   |         |        

See notes to condensed consolidated financial statements.

2



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Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Operations

|                                                                            |                            |   |                         |     |      |   |        |    | 
|--------------------------------------------------------------------------- | -------------------------- | - | ----------------------- | --- | ---- | - | ------ | -- | 
|                                                                            |                            |   | (in thousands, except  
|                                                                            |                            |   | per share amounts)     
|                                                                            |                            |   | Quarter Ended March 31,
|                                                                            |                            |   | 2001                    |     | 2000
|                                                                            |                            |   |                         |     |     
|                                                                            |                            |   | (unaudited)            
|Net Revenue                                                                 |                            | $ | 13,508                  |     |      | $ | 4,994  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cost of Goods Sold                                                          |                            |   | 7,089                   |     |      |   | 3,777  |   
|                                                                            |                            |   |                         |     |      |   |        |   
|Gross Margin                                                                |                            |   | 6,419                   |     |      |   | 1,217  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Research & Development (1)                                                  |                            |   | 4,295                   |     |      |   | 2,651  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Sales & Marketing (1)                                                       |                            |   | 3,944                   |     |      |   | 1,453  |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|General & Administrative (1)                                                |                            |   | 992                     |     |      |   | 476    |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Amortization of Stock Compensation (1)                                      |                            |   | 570                     |     |      |   | 129    |   
|                                                                            |                            |   |                         |     |      |   |        |   
|Operating Expenses                                                          |                            |   | 9,801                   |     |      |   | 4,709  |   
|                                                                            |                            |   |                         |     |      |   |        |   
|Operating Loss                                                              |                            |   | (3,382                  | )   |      |   | (3,492 | ) 
|                                                                            |                            |   |                         |     |      |   |        |   
|Other Income, net                                                           |                            |   | 1,526                   |     |      |   | 604    |   
|                                                                            |                            |   |                         |     |      |   |        |   
|Earnings Before Taxes                                                       |                            |   | (1,856                  | )   |      |   | (2,888 | ) 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Taxes                                                                       |                            |   | 0                       |     |      |   | 0      |   
|                                                                            |                            |   |                         |     |      |   |        |   
|Net Loss                                                                    |                            | $ | (1,856                  | )   |      | $ | (2,888 | ) 
|                                                                            |                            |   |                         |     |      |   |        |   
|Net Loss Per Share:                                                        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Basic and Diluted Net Loss Per Share                                        |                            | $ | (0.04                   | )   |      | $ | (0.25  | ) 
|                                                                            |                            |   |                         |     |      |   |        |   
|Weighted Average Shares                                                     |                            |   | 42,268                  |     |      |   | 11,560 |   
|                                                                            |                            |   |                         |     |      |   |        |   
|                                                                            |                            |   |                         |     |      |   |        |   
|(1)    Amortization of Stock Compensation
         Research and Development |                            | $ | 282                     |     |      | $ | 54     |   
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Sales and Marketing        |   |                         | 226 |      |   |        | 64 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | General and Administrative |   |                         | 62  |      |   |        | 11 | 
|                                                                            |                            |   |                         |     |      |   |        |   
|                                                                            |                            | $ | 570                     |     |      | $ | 129    |   
|                                                                            |                            |   |                         |     |      |   |        |   

See notes to condensed consolidated financial statements.

3



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Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Cash Flows

|                     |                                                     |                                             |   |                |         |      |   |         |         |  
|-------------------- | --------------------------------------------------- | ------------------------------------------- | - | -------------- | ------- | ---- | - | ------- | ------- | -
|                     |                                                     |                                             |   | (in thousands)
|                     |                                                     |                                             |   | March 31,     
|                     |                                                     |                                             |   |               
|                     |                                                     |                                             |   | 2001           |         | 2000
|                     |                                                     |                                             |   |                |         |     
|Operating Activities
|                    
|                    
|                    
|                    
|                     | Net loss                                            |                                             | $ | (1,856         | )       |      | $ | (2,888  | )      
|                    
|                    
|                    
|                    
|                     | Adjustments:                                       
|                    
|                    
|                    
|                    
|                     | Loss on disposal of equipment                       |                                             |   |               |         |      |   | 13      |        
|                    
|                    
|                    
|                    
|                     | Realized loss on marketable securities              |                                             |   | 8              |         |      |   |        |        
|                    
|                    
|                    
|                    
|                     | Depreciation and amortization                       |                                             |   | 667            |         |      |   | 270     |        
|                    
|                    
|                    
|                    
|                     | Amortization of stock compensation                  |                                             |   | 570            |         |      |   | 129     |        
|                    
|                    
|                    
|                    
|                     | Deferred rent                                       |                                             |   | 4              |         |      |   | 11      |        
|                    
|                    
|                    
|                    
|                     | Changes in operating assets and liabilities:       
|                    
|                    
|                    
|                    
|                     |                                                     | Increase in accounts receivable             |   |                | (7,074  | )    |   |         | (2,035  | )
|                    
|                    
|                    
|                    
|                     |                                                     | Decrease (increase) in inventory            |   |                | (2,889  | )    |   |         | 257     |  
|                    
|                    
|                    
|                    
|                     |                                                     | Decrease (increase) in other current assets |   |                | (593    | )    |   |         | 647     |  
|                    
|                    
|                    
|                    
|                     |                                                     | Decrease in other assets                    |   |                | 229     |      |   |         | 4       |  
|                    
|                    
|                    
|                    
|                     |                                                     | Increase in accounts payable                |   |                | 1,367   |      |   |         | 2,150   |  
|                    
|                    
|                    
|                    
|                     |                                                     | Increase (decrease) in accrued liabilities  |   |                | 616     |      |   |         | (222    | )
|                     |                                                     |                                             |   |                |         |      |   |        
|                     |                                                     | Net cash used in operations                 |   |                | (8,951  | )    |   |         | (1,664  | )
|                     |                                                     |                                             |   |                |         |      |   |        
|Investing Activities
|                    
|                    
|                    
|                    
|                     | Purchase of property, plant & equipment             |                                             |   | (1,683         | )       |      |   | (826    | )      
|                    
|                    
|                    
|                    
|                     | Purchase of securities                              |                                             |   | (29,815        | )       |      |   | (19,209 | )      
|                    
|                    
|                    
|                    
|                     | Sale of securities                                  |                                             |   | 11,423         |         |      |   | 699     |        
|                     |                                                     |                                             |   |                |         |      |   |        
|                     |                                                     | Net cash used in investing                  |   |                | (20,075 | )    |   |         | (19,336 | )
|                     |                                                     |                                             |   |                |         |      |   |        
|Financing Activities
|                    
|                    
|                    
|                    
|                     | Exercise of options                                 |                                             |   | 116            |         |      |   | 111     |        
|                    
|                    
|                    
|                    
|                     | Payment of debt                                     |                                             |   | (34            | )       |      |   | (41     | )      
|                    
|                    
|                    
|                    
|                     | Payments in connection with initial public offering |                                             |   | (188           | )       |      |   |        |        
|                     |                                                     |                                             |   |                |         |      |   |        
|                     |                                                     | Net cash (used in) provided by financing    |   |                | (106    | )    |   |         | 70      |  
|                     |                                                     |                                             |   |                |         |      |   |        
|                     | Net decrease in cash and cash equivalents           |                                             |   | (29,132        | )       |      |   | (20,930 | )      
|                    
|                    
|                    
|                    
|                     | Cash and cash equivalents, beginning of period      |                                             |   | 100,609        |         |      |   | 33,012  |        
|                     |                                                     |                                             |   |                |         |      |   |        
|                     | Cash and cash equivalents, end of period            |                                             | $ | 71,477         |         |      | $ | 12,082  |        
|                     |                                                     |                                             |   |                |         |      |   |        

See notes to condensed consolidated financial statements.

4



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Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Comprehensive Loss

|                                                |  |                         |        |      |  |   |        |  
|----------------------------------------------- |  | ----------------------- | ------ | ---- |  | - | ------ | -
|                                                |  | (in thousands)         
|                                                |  | Quarter Ended March 31,
|                                                |  | 2001                    |        | 2000
|                                                |  |                         |        |     
|Net loss                                        |  | $                       | (1,856 | )    |  | $ | (2,888 | )
|                                               
|                                               
|                                               
|                                               
|Unrealized gain (loss) on marketable securities |  |                         | 44     |      |  |   | (3     | )
|                                                |  |                         |        |      |  |   |        |  
|Comprehensive loss                              |  | $                       | (1,812 | )    |  | $ | (2,891 | )
|                                                |  |                         |        |      |  |   |        |  

See notes to condensed consolidated financial statements.

5



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Advanced Switching Communications, Inc.Notes to Condensed Consolidated Financial Statements



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally
included in the annual financial statements, prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to those rules and regulations, although the Company believes that
the disclosures made are adequate to make the information presented not
misleading.           
|  
|   |  | In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments and
reclassifications (all or which are of a normal, recurring nature) that are
necessary for fair presentation for the periods presented. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Companys Form
10-K for the year ended December 31, 2000 filed with the Securities and
Exchange Commission on March 30, 2001.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Inventories consisted of the following at March 31, 2001 and December 31,
2000 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                |  |           |       |              |  |   |       | 
|--------------- |  | --------- | ----- | ------------ |  | - | ----- | 
|                |  | March 31, |       | December 31,
|                |  | 2001      |       | 2000        
|                |  |           |       |             
|Raw materials   |  | $         | 506   |              |  | $ | 796   | 
|               
|               
|               
|               
|Work in process |  |           | 423   |              |  |   | 20    | 
|               
|               
|               
|               
|Finished goods  |  |           | 8,897 |              |  |   | 6,121 | 
|                |  |           |       |              |  |   |       | 
|                |  | $         | 9,826 |              |  | $ | 6,937 | 
|                |  |           |       |              |  |   |       | 



|3. |  | Net Loss Per Share                                                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basic and diluted net loss per share applicable to common shareholders has
been computed using the weighted-average shares of common stock outstanding
during the period. There were no common stock equivalents included in the
calculation, as their effect would have been anti-dilutive for the periods
presented.

6



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Advanced Switching Communications, Inc.Notes to Condensed Consolidated Financial Statements(Continued)



| |  | The following table presents the potential common stock equivalents that are
not included in the diluted net loss per share calculation on the Statements
of Operations (shares in thousands).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |                      |                             |       |                    |   |      |        |       |        | 
|---------- | -------------------- | --------------------------- | ----- | ------------------ | - | ---- | ------ | ----- | ------ | 
|           |                      |                             |       | Three Months Ended
|           |                      |                             |       | March 31,         
|           |                      |                             |       |                   
|           |                      |                             |       | 2001               |   | 2000
|           |                      |                             |       |                    |   |     
|Securities
|           | Options outstanding  |                             |       | 5,778              |   |      |        | 3,554 |       
|          
|          
|          
|          
|           | Warrants outstanding |                             |       | 359                |   |      |        | 125   |       
|          
|          
|          
|          
|           |                      | Preferred stock outstanding |       |                    |  |      |        |       | 20,861 | 
|           |                      |                             |       |                    |   |      |        |      
|Total      |                      |                             | 6,137 |                    |   |      | 24,540 |      
|           |                      |                             |       |                    |   |      |        |      

7



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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

This report on Form 10-Q contains forward-looking statements based on our
current expectations, estimates and projections about our industry,
managements beliefs and certain assumptions made by us. Words such as
anticipates, expects, intends, plans, believes, may, will or
similar expressions are intended to identify forward-looking statements. In
addition any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Such statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in
any forward-looking statements as a result of various factors. The section
entitled Risk Factors set forth in our Form 10-K filed with the SEC on March
30, 2001 discusses some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the information in this report and in our
other filings with the SEC before deciding to invest in our company or to
maintain or increase your investment. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason. The information
contained in this Form 10-Q is not a complete description of our business or
the risks associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in this report
and in our other reports filed with the SEC that discuss our business in
greater detail.

Overview

We design and market a line of broadband access platforms to
telecommunications service providers. Our compact and software-configurable
products enable our customers to transmit voice, data and multimedia
communications traffic more rapidly and cost-effectively while preserving their
investments in existing communications systems.

From our inception in September 1997 through the fourth quarter of 1998,
we were a development stage company and had no revenue and our operating
activities related primarily to research and development, developing and
testing prototype products, building our technical support infrastructure,
staffing our marketing, sales and customer service organizations, and
establishing relationships with suppliers, manufacturers and potential
customers. We commenced shipments of our products in the first quarter of
1999. Since our inception, we have incurred significant losses, and as of
March 31, 2001, we had an accumulated deficit of $32.8 million.

We derive our revenue from sales of our line of broadband access
platforms. We generally recognize revenue from product sales upon shipment
provided that a purchase order has been received or a contract has been
executed, there are no significant uncertainties regarding customer acceptance,
the fee is fixed and determinable and collectibility is deemed probable. If
our arrangement with the customer includes

8



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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

obtaining customer acceptance, revenue is recognized when customer
acceptance has been obtained.

We market and sell our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and original
equipment manufacturers. We depend on a relatively small number of customers
for a large percentage of our revenue in any particular quarter. For the
quarter ended March 31, 2001, two customers each accounted for revenue in
excess 10% of total revenue. For the quarter ended March 31, 2000, we had four
different customers whose revenues were in excess of 10% of the total revenue
for that quarter. In the fourth quarter of 2000, we began to see a shift in
the mix of our customers toward more established carriers, which continued into
the first quarter of 2001. Revenue from established as well as emerging
carriers accounted for a significant portion of the total for the current
quarter. We intend to focus our global sales efforts on more established
carriers, publicizing strategic wins and developing marketing materials and
campaigns targeted at this market segment. While the level of sales to any
specific customer or type of customer is anticipated to vary from period to
period, we expect that we will continue to have significant customer
concentration within certain markets in the foreseeable future. In addition to
the customer concentration we have experienced, we have a lengthy sales cycle
for our products, which may extend for six months or more, and there is often a
significant delay between the time we incur expenses and the time we realize
the related revenue. Moreover, we have historically derived a significant
portion of our revenue from sales that occur near the end of a fiscal quarter.
As a result, delays in anticipated sales are more likely to result in deferral
of the associated revenue beyond the end of a particular quarter, which could
have a significant impact on our operating results for that quarter.

Despite increased revenues, we have not achieved profitability on a
quarterly or an annual basis, and anticipate that we will continue to incur net
losses. We expect to continue to incur significant sales and marketing,
research and development and general and administrative expenses and, as a
result, we will need to generate significant revenues to achieve and maintain
profitability.

Our cost of revenue includes all costs associated with the production of
our products, including cost of materials, manufacturing and assembly costs
paid to contract manufacturers, manufacturing start-up expenses and
manufacturing personnel, including related overheads. Because we outsource our
manufacturing and assembly requirements, a significant portion of our
manufacturing expenses consists of payments to third-party contract
manufacturers. Manufacturing engineering and documentation controls are
performed at our facility in Vienna, Virginia.

Research and development expenses consist primarily of salaries and
related personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. To date, we have
expensed our research and development costs as incurred. Several components of
our research and development

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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

effort require significant expenditures, the timing of which can cause
quarterly variability in our expenses. We incur significant expenses in
connection with the purchase of testing equipment for our products. We believe
that research and development is critical to our strategic product development
objectives and intend to enhance our technology to meet the changing
requirements of our customers. As a result, in the future, we expect our
research and development expenses to increase in absolute dollars and as a
percentage of revenue.

Sales and marketing expenses consist primarily of salaries and related
personnel costs, commissions, promotional, travel and other marketing expenses
and recruiting expenses. We intend to increase our direct sales efforts,
continue to explore effective ways to expand our operations internationally,
hire additional sales and marketing personnel, initiate additional marketing
programs and establish sales offices in new locations. As a result, in the
future, we expect our sales and marketing expenses to increase in absolute
dollars and as a percentage of revenue.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities, human resources and
information technology personnel, recruiting expenses and professional fees.
We expect our general and administrative expenses to increase in absolute
dollars as we add personnel and incur additional costs related to the growth of
our business and our operation as a public company.

Amortization of stock compensation represents the amortization of costs
incurred in connection with option grants to employees whose exercise prices
are below the deemed fair value of our common stock at the date of grant.
These costs are amortized over the vesting period.

Results of Operations

Quarters Ended March 31, 2001 and 2000

Revenue.Our revenue increased by approximately $8.5 million, from $5.0 million
for the quarter ended March 31, 2000 to $13.5 million for the quarter ended
March 31, 2001. This increase was due principally to an increase in sales of
our A-1240, A-3010 and A-4000 products to new customers.

Cost of Revenue.Cost of revenue increased by approximately $3.3 million, from
$3.8 million for the quarter ended March 31, 2000 to $7.1 million for the
quarter ended March 31, 2001. Our gross margin increased from 24.4% to 47.5%,
primarily due to a shift in our customer base and the products sold to those
customers from the first quarter of 2000 to that of 2001. In the first quarter
of 2000, our customers were concentrated in a market segment, specifically
multi-tenant service providers, that demanded a price point significantly lower
than other market segments served by the Company. For the first

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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

quarter of 2001, our customers consisted primarily of established and emerging
carriers that required a product enhanced with software options providing
increased functionality. In addition, in the first quarter of 2000, we had
just transitioned to our turnkey manufacturing arrangements and, as a result,
incurred increased materials and assembly costs when compared to the first
quarter of 2001.

Also in the first quarter of 2001, we experienced continued increases in
production volumes and further improvement in the design of the A-1240 that
allowed more efficient production of the product and contributed to the
improved margins in comparison to the margins we experienced in 2000. We also
expect our manufacturing arrangements to contribute to slightly higher margins
in the near future as our contract manufacturer continues to become more
familiar with our products, and we continue to benefit from additional
purchasing power as a result of increases in production volume. In addition,
as our products gain further acceptance in target markets, we expect our
margins to benefit from reduced costs due to volume and product design changes.

Although our margins have continued to improve, we believe that our gross
margins may continue to be adversely affected by the following factors:



| |  |  | price declines as a result of competitive pressures, increased
sales discounts, new product introductions by our competitors, or other
factors without corresponding cost reductions; and                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the mix of sales channels through which our products and services
are sold, as we generally realize higher gross margin on direct sales,
and our expansion into international markets means we will rely more on
lower-margin sales to resellers and original equipment manufacturers;

However, in order to minimize the impact of those factors listed above, we
will attempt to continue to improve margins by increasing sales of software
options, which generally have a higher gross margin than hardware components,
and by increasing volume and improving management of our contract manufacturing
arrangements.

Research and Development Expenses.Our research and development expenses
increased by approximately $1.6 million, or 62%, from $2.7 million for the
quarter ended March 31, 2000 to $4.3 million for the quarter ended March 31,
2001, representing 56% and 44% of total operating expenses for the quarters
ended March 31, 2000 and 2001, respectively. The increase was due principally
to an increase in the number of research and development personnel and the
costs associated with the development of new products such as the A-4500 and
new features and functionality of the A-4000.

Sales and Marketing Expenses.Our sales and marketing expenses increased by
approximately $2.5 million, or 171%, from $1.5 million for the quarter ended
March 31, 2000 to $3.9 million for the quarter ended March 31, 2001,
representing 31% and 40% of

11



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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

total operating expenses for the quarters ended March 31, 2000 and 2001,
respectively. The increase was due principally to the hiring of additional
sales and marketing personnel, sales-based commissions and marketing program
costs including web development costs, trade shows, advertising and product
launch activities.

General and Administrative Expenses.Our general and administrative expenses
increased by $516,000, or 108%, from $476,000 for the quarter ended March 31,
2000 to $992,000 for the quarter ended March 31, 2001, representing 10% of
total operating expenses for each of the quarters ended March 31, 2000 and
2001. This increase was due to the hiring of additional general and
administrative personnel and increased expenses necessary to support our
growing operations as a public Company.

Other Income, Net.Other income, net of expenses increased by $922,000, or
153%, from $604,000 for the quarter ended March 31, 2000 to $1.5 million for
the quarter ended March 31, 2001. Other income, net consists of interest
earned on our cash balances and marketable securities and interest expense
associated with our bank debt. The increase in other income, net was primarily
due to higher interest income as a result of increases in invested balances.
Our cash and marketable securities at March 31, 2000 was $30.6 million compared
to cash and marketable securities of $101.8 million at March 31, 2001. The
increase in cash and marketable securities is due to the net proceeds of $98.7
million raised in our initial public offering offset by the funds used to
support our operations.

Liquidity and Capital Resources

Since our inception, we have financed our operations through private sales
of securities and through our initial public offering of common stock completed
in October 2000. In addition, to a lesser extent, we have financed our
operations with bank borrowings and equipment lease financing. We have raised
an aggregate of $151.7 million, net of offering expenses, through the sale of
our capital stock, of which $98.7 million came from our initial public
offering.

Net cash used in operating activities for the quarter ended March 31, 2001
was $9.0 million. Net cash used in operating activities for the quarter ended
March 31, 2000 was $1.7 million. Net cash used in operating activities for each
period consisted primarily of the net loss for the period as well as increases
in working capital, primarily accounts receivable and inventory.

Net cash used in investing activities for the quarter ended March 31, 2001
was $20.1 million. Net cash used in investing activities for the quarter ended
March 31, 2000 was $19.3 million. Net cash used in investing activities for
both periods consisted primarily of purchases of marketable securities as well
as purchases of property and equipment.

Net cash used in financing activities for the quarter ended March 31, 2001
was $106,000 due to payments of our outstanding debt and of fees associated
with our initial

12



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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

public offering. Net cash provided by financing activities for the quarter
ended March 31, 2000 was $70,000 as a result of proceeds from the exercise of
options offset by payments of our outstanding debt.

We have no material commitments other than obligations under our credit
facilities and both operating and capital leases.

As of March 31, 2001, our principal source of liquidity consisted of
$101.8 million in cash, cash equivalents and marketable securities. Our
management intends to invest our cash in excess of current operating
requirements in interest-bearing, investment-grade securities with maturities of
no more than eighteen months. The development and marketing of new and enhanced
products and the expansion of our sales channels and associated support
personnel will require a significant commitment of resources. Our future
capital requirements will depend upon a number of factors, including the rate
of growth of our sales, the timing and level of research and development
activities and sales and marketing campaigns. As of March 31, 2001, we did not
have any material commitments for capital expenditures. However, we expect to
incur capital expenditures as we expand our operations in the near future.
Although we do not have any current plans or commitments to do so, from time to
time, we may also consider the acquisition of, or evaluate investments in,
products and businesses complementary to our business. Any acquisition or
investment may require additional capital.

Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that our current cash, cash equivalents and
marketable securities will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. We
may require additional capital to fund our business if we seek to acquire
complementary companies, products or technologies, or for other uses not
presently planned. In addition, if the market for broadband access equipment
develops at a slower pace than anticipated or if we fail to establish
significant market share and achieve a meaningful level of revenue, we may
continue to incur significant operating losses and utilize significant amounts
of capital. As a result, we could be required to raise substantial additional
capital. If cash from other available sources is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to holders of common stock, and the terms of this debt could impose
restrictions on our operations and cause us to incur significant interest
expense. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders. Additional capital may not
be available to us at all, or if available, may be available only on
unfavorable terms. Any inability to raise additional capital when we require
it would materially adversely affect our business, results of operations and
financial condition.

13



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition, our cash equivalents and marketable
securities consist of highly liquid investments. Of the total marketable
securities of $30.3 million, $21.4 million was for securities with remaining
maturities at March 31, 2001 of less than 365 days, the balance of the
securities or $9.0 million had remaining maturities at March 31, 2001 of 365
days or greater. We have the ability to hold these investments until maturity,
and therefore do not expect the value of these investments to be affected to
any significant degree by a sudden change in interest rates.

Exchange Rate Sensitivity

Currently, all of our sales and predominantly all of our expenses are
denominated in United States Dollars. Therefore, we have not engaged in any
foreign exchange hedging activities to date. We do expect to conduct
transactions in foreign currencies in the future, so we may engage in foreign
exchange hedging activities at that time.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition. We may in the future
be party to litigation arising in the course of our business, including claims
that we allegedly infringe on third-party trademarks and other intellectual
property rights. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

14



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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| |  |  | (a)                                                                      |  | Exhibits                                                                                                        
| |  |  | ------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  |                                                                          |  | *10.1 Procurement Agreement Between Qwest Communications
Corporation and Advanced Switching Communications, Inc.
|
| |  |  | (b)                                                                      |  | Reports On Form 8-K                                                                                             
|
| |  |  | No such reports were filed during the three months ended March 31, 2001.



---

|* |  | Confidential treatment requested for portions of this exhibit.
|- |  | --------------------------------------------------------------

15



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SIGNATURES

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 SWITCHING COMMUNICATIONS, INC      
|
|
|
|
| | By: /s/ Harry J. DAndrea                   
| |                                             
| | Harry J. DAndrea                           
|
|
|
|
| | Vice-President, Chief Financial Officer     
|
|
|
|
| | (Principal Financial and Accounting Officer)

Dated:  May 15, 2001

16