<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------
                                    FORM 10-Q

(MARK ONE)
      [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                 FOR THE THREE MONTH PERIOD ENDED JUNE 30, 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 000-30741

                           ACCELERATED NETWORKS, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                  77-0442752
     (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                   Identification No.)

            301 SCIENCE DRIVE                                93021
          MOORPARK, CALIFORNIA                            (Zip Code)
 (Address of principal executive office)

                                 (805) 553-9680
              (Registrant's telephone number, including area code)

                                       N/A
              (Former name, former address and former fiscal year,
                          if changed since last report)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
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 [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Number of shares of Common Stock outstanding as of August 2, 2001: 50,735,734
shares.

<PAGE>   2



                                      INDEX

<TABLE>
<CAPTION>
Part I    Financial Information                                                                          Page
-------------------------------                                                                          ----
<S>         <C>                                                                                          <C>
Item 1.     Consolidated Balance Sheets................................................................   1
            Consolidated Statements of Operations......................................................   2
            Consolidated Statements of Cash Flows......................................................   3
            Notes to Consolidated Financial Statements.................................................   4
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations......   9
            Risk Factors...............................................................................   15
Item 3.     Quantitative and Qualitative Disclosures About Market Risk ................................   28

Part II   Other Information
---------------------------
Item 1.     Legal Proceedings..........................................................................   28
Item 2.     Changes in Securities and Use of Proceeds..................................................   29


Item 3.     Defaults Upon Senior Securities............................................................   29
Item 4.     Submission of Matters to a Vote of Security Holders........................................   29
Item 5.     Other Information..........................................................................   29
Item 6.     Exhibits and Reports on Form 8-K...........................................................   30
            A.  Exhibits...............................................................................   30
            B.  Reports on Form 8-K....................................................................   30
Signatures.............................................................................................   31
</TABLE>

      In this Report, "Accelerated Networks," the "Company," "we," "us" and
"our" collectively refers to Accelerated Networks, Inc.


                                       i
<PAGE>   3

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                           ACCELERATED NETWORKS, INC.
                           CONSOLIDATED BALANCE SHEETS
                       (THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                AS OF
                                                                                     ----------------------------
                                                                                       JUNE 30,      DECEMBER 31,
                                                                                        2001            2000
                                                                                     -----------     ------------
                               ASSETS                                                (unaudited)
<S>                                                                                  <C>             <C>
Current assets:
    Cash and cash equivalents ..................................................      $  47,872       $  62,194
    Short term investments .....................................................              -           7,913
    Accounts receivable, net of allowance for doubtful accounts of $325 at
      June 30, 2001 and $760 at December 31, 2000 (Note 4) .....................            888           5,490
    Amounts due from related party .............................................              -          11,147
    Inventories ................................................................          6,879           5,266
    Prepaid and other current assets ...........................................          1,379           1,570
                                                                                      ---------       ---------
        Total current assets ...................................................         57,018          93,580
Property and equipment, net ....................................................         10,310          10,164
Other assets ...................................................................            173             199
                                                                                      ---------       ---------
        Total assets ...........................................................      $  67,501       $ 103,943
                                                                                      =========       =========
           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued expenses ......................................          4,915          13,216
    Accrued payroll ............................................................            889           1,708
    Capital lease obligations, current .........................................            104              97
    Deferred revenue ...........................................................          2,774           3,370
                                                                                      ---------       ---------
        Total current liabilities ..............................................          8,682          18,391
Capital lease obligations, net of current portion ..............................            114             168
                                                                                      ---------       ---------
        Total liabilities ......................................................          8,796          18,559

Commitments and contingencies (Notes 5 and 6)
Stockholders' equity:
    Common stock, authorized -- 200,000 shares; issued and outstanding --
      50,736 and 50,387 shares at June 30, 2001 and December 31, 2000,
      respectively .............................................................             51              50
    Additional paid-in capital .................................................        178,365         180,913
    Deferred stock compensation ................................................         (2,281)         (4,391)
    Foreign currency translation adjustment ....................................            (70)            (79)
    Accumulated deficit ........................................................       (117,360)        (91,109)
                                                                                      ---------       ---------
        Total stockholders' equity .............................................         58,705          85,384
                                                                                      ---------       ---------
        Total liabilities and stockholders' equity .............................      $  67,501       $ 103,943
                                                                                      =========       =========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                       1
<PAGE>   4

                           ACCELERATED NETWORKS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       (THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                      THREE MONTHS ENDED     SIX MONTHS ENDED
                                                                                    ----------------------   ------------------
                                                                                     JUNE 30,     JUNE 30,   JUNE 30,  JUNE 30,
                                                                                       2001         2000       2001      2000
                                                                                    ---------     --------   --------  --------
<S>                                                                                 <C>           <C>        <C>       <C>
Net revenue (includes related party revenue of $581
  and $1,891 for the three and six months ended
  June 30, 2001, respectively; and $487 and $3,283 for the
  three and six months ended June 30, 2000, respectively) ........................    $    670    $  7,463   $  2,229   $ 14,615
Cost of revenue (1)...............................................................       2,469       5,171      4,906     10,526
                                                                                      --------    --------   --------   --------
Gross profit (loss)...............................................................     (1,799)       2,292     (2,677)     4,089

Operating expenses (1):
      Research and product development............................................       6,539       6,165     14,054     11,593
      Sales and marketing.........................................................       1,321       7,697      5,178     12,341
      General and administrative..................................................       1,844       1,860      4,392      2,812
      Other charges...............................................................       1,381           -      1,381          -
                                                                                      --------    --------   --------   --------
             Total operating expenses.............................................      11,085      15,722     25,005     26,746
                                                                                      --------    --------   --------   --------
Loss from operations..............................................................     (12,884)    (13,430)   (27,682)   (22,657)

      Other income, net...........................................................         573         620      1,431      1,005
                                                                                      --------    --------   --------   --------
Loss before provision for income taxes............................................     (12,311)    (12,810)   (26,251)   (21,652)

Provision for income taxes........................................................           -           -          -          1
                                                                                      --------    --------   --------   --------
Net loss .........................................................................     (12,311)    (12,810)   (26,251)   (21,653)

Beneficial conversion feature.....................................................           -           -          -     (9,882)
                                                                                      --------    --------   --------   --------
Net loss applicable to common stockholders........................................    $(12,311)   $(12,810)  $(26,251)  $(31,535)
                                                                                      ========    ========   ========   ========
Basic and diluted net loss per share applicable to common stockholders............      $(0.25)   $  (1.14)  $  (0.53)  $  (3.34)
                                                                                      ========    ========   ========   ========
Weighted average shares outstanding used to compute basic and
  diluted net loss per share applicable to common stockholders ...................      49,573      11,213     49,140      9,438
                                                                                      ========    ========   ========   ========
(1) Amortization of deferred stock-based compensation included in:
      Cost of revenues............................................................    $      5    $     41   $     23   $    309
      Research and product development............................................          (5)        625         48      1,903
      Sales and marketing.........................................................        (644)      1,188       (822)     1,869
      General and administrative..................................................         163         535        249        693
                                                                                      --------    --------   --------   --------
                                                                                      $   (481)   $  2,389   $   (502)  $  4,774
                                                                                      ========    ========   ========   ========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.



                                       2
<PAGE>   5

                           ACCELERATED NETWORKS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                     SIX MONTHS ENDED
                                                                                 -------------------------
                                                                                  JUNE 30,       JUNE 30,
                                                                                    2001           2000
                                                                                 ----------      ---------
<S>                                                                              <C>             <C>
Operating activities:
      Net loss .............................................................     $ (26,251)      $ (21,653)
      Adjustments to reconcile net loss to net cash used in
         operating activities:
         Depreciation and amortization .....................................         2,222           1,123
         Provision for bad debts ...........................................          (435)            203
         Issuance of warrant to purchase common stock ......................             -           1,385
         Amortization of deferred stock compensation .......................          (502)          4,774
         Changes in current assets and liabilities:
             Accounts receivable ...........................................        16,184          (2,780)
             Inventories ...................................................        (1,613)           (668)
             Prepaids and other assets .....................................           217            (245)
             Accounts payable and accrued expenses .........................        (8,301)          4,256
             Accrued payroll ...............................................          (819)            168
             Deferred revenue ..............................................          (596)          1,620
             Foreign currency translation adjustment .......................             9               -
                                                                                 ---------       ---------
                 Net cash used for operating activities.....................       (19,885)        (11,817)

INVESTING ACTIVITIES:
      Net maturities of available-for-sale securities ......................         7,913               -
      Net purchases of property and equipment ..............................        (2,367)         (3,608)
                                                                                 ---------       ---------
                 Net cash provided by (used for) investing activities ......         5,546          (3,608)

FINANCING ACTIVITIES:
      Proceeds from issuance of redeemable convertible
        preferred stock, net................................................             -          38,425
      Proceeds from issuance of common stock, net of repurchases ...........            64          66,029
      Payments under capital lease obligations and credit facilities .......           (47)           (383)
                                                                                 ---------       ---------
                 Net cash provided by financing activities .................            17         104,071
                                                                                 ---------       ---------
                 Net increase (decrease) in cash and cash equivalents.......       (14,322)         88,646
Cash and cash equivalents at beginning of period ...........................        62,194          15,207
                                                                                 ---------       ---------
Cash and cash equivalents at end of period .................................     $  47,872       $ 103,853
                                                                                 =========       =========
</TABLE>



              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       3
<PAGE>   6

                           ACCELERATED NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED
                      JUNE 30, 2001 AND 2000 IS UNAUDITED)



1.    BUSINESS AND BASIS OF PRESENTATION

The Company

      Accelerated Networks, Inc. (the "Company") develops, manufactures, and
markets telecommunications products that enable the bundling of voice and data
services over a single broadband access network. The Company's target customers
are providers of voice and/or data services including competitive local exchange
carriers, or CLECs, interexchange carriers, or IXCs, regional bell operating
companies, or RBOCs, incumbent local exchange carriers, or ILECs, and foreign
telephone companies. The market for the Company's products is extremely
competitive and is characterized by rapid technological change, new product
development and product obsolescence, and a competitive business environment for
the attraction and retention of workers. The current market for
telecommunications equipment is characterized by a drastic reduction in the
spending patterns by our current and prospective customers, which has led to an
overall decrease in demand for our products and has caused significant
shortfalls in our revenues.

Basis of Presentation

      The accompanying consolidated financial statements of the Company are
unaudited, other than the consolidated balance sheet at December 31, 2000, and
reflect all material adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to present fairly
the Company's financial position, results of operations and cash flows for the
interim periods. The results of operations for the current interim periods are
not necessarily indicative of results to be expected for the entire fiscal year.

      These consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Form 10-K, as filed with the Securities and Exchange Commission on May
8, 2001 for the year ended December 31, 2000.

      The Company reports its quarterly results based on a thirteen week
accounting calendar. Accordingly, the actual quarter end for the second quarter
of fiscal 2001 was June 29, 2001. However, for financial presentation purposes,
the Company reports its quarterly results as of the last calendar day of the
last full month within the period.


Use of Estimates

      In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.



                                       4

<PAGE>   7



                           ACCELERATED NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED
                      JUNE 30, 2001 AND 2000 IS UNAUDITED)



2.    NET LOSS PER SHARE

      The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                          THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                         --------------------      --------------------
                                                                         JUNE 30,    JUNE 30,      JUNE 30,    JUNE 30,
                                                                           2001        2000          2001        2000
                                                                         --------    --------      --------    --------
<S>                                                                      <C>         <C>           <C>         <C>
Numerator:
---------
Net loss applicable to common stockholders..........................     $(12,311)   $(12,810)     $(26,251)   $(31,535)
                                                                         ========    ========      ========    ========
Denominator (basic and diluted):
-------------------------------
Weighted average shares outstanding.................................       50,479      13,519        50,560      11,914
Less: weighted average common shares subject to
  repurchase........................................................         (906)     (2,306)       (1,420)     (2,476)
                                                                         --------    --------      --------     -------
Weighted average shares used to compute basic and
  diluted net loss per share applicable to common
  stockholders......................................................       49,573      11,213        49,140       9,438

Basic and diluted net loss per share applicable to
  common stockholders...............................................      $ (0.25)    $ (1.14)     $  (0.53)    $ (3.34)
                                                                          =======     =======      ========     =======
</TABLE>

The following table presents common stock equivalents (potential common stock)
that are not included in the diluted net loss per share calculation above
because their effect would be antidilutive for the periods indicated (shares in
thousands):

<TABLE>
<CAPTION>

                                                                          THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                         --------------------      --------------------
                                                                         JUNE 30,    JUNE 30,      JUNE 30,    JUNE 30,
                                                                           2001        2000          2001        2000
                                                                         --------    --------      --------    --------
<S>                                                                      <C>         <C>           <C>         <C>
Weighted-average common stock equivalents:
-----------------------------------------
Preferred stock......................................................         --       32,376            --      32,754
Unvested shares of common stock subject to
  repurchase ........................................................        906        2,306         1,420       2,476
Warrants.............................................................         29           29            29          29
Stock options........................................................      9,964        5,956         9,254       5,193
                                                                         -------     --------      --------    --------
Weighted-average common stock equivalents............................     10,899       40,667        10,703      40,452
                                                                         =======     ========      ========    ========
</TABLE>


                                       5
<PAGE>   8


                           ACCELERATED NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED
                      JUNE 30, 2001 AND 2000 IS UNAUDITED)


3.    INVENTORIES

      Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                       June 30,     December 31,
                                                                         2001          2000
                                                                      ---------     ------------
<S>                                                                   <C>              <C>
               Raw materials...................................       $  3,670         $1,651
               Work-in-process.................................            225            925
               Finished goods..................................          2,984          2,690
                                                                      --------         ------
                                                                      $  6,879         $5,266
                                                                      ========         ======
</TABLE>


4.    ACCOUNTS RECEIVABLE

      Included in net accounts receivable at June 30, 2001 is approximately
$810,000 due from a reseller for shipment of products in the second quarter of
fiscal 2000. The corresponding revenue has been deferred and is included in
deferred revenue on the balance sheet. The Company expects that current
conditions in the telecommunications equipment industry may continue to have a
negative impact on its ability to ultimately collect this receivable and
recognize the corresponding revenues.

5.    SIGNIFICANT CUSTOMERS AND SEGMENT REPORTING

      For the three and six months ended June 30, 2001, sales to the Company's
largest customer (a related party) accounted for approximately 86% and 85% of
total revenue, respectively. With the deterioration of market conditions in the
telecommunications industry, certain customers have acknowledged that not all of
their purchased inventory has been deployed in service provider networks. To
date, the Company has not granted inventory return rights and only limited stock
rotation rights to certain types of customers, the revenue for which has been
fully deferred as of June 30, 2001. The Company operates in one industry segment
providing multi-service broadband access products. Through June 30, 2001, the
Company's foreign operations have been insignificant.


6.    RELATED-PARTY TRANSACTIONS

      For the three and six month periods ended June 30, 2001 and June 30, 2000,
the Company recognized revenue of approximately $581,000, $1,891,000, $487,000
and $3,283,000 respectively, from sales to a significant stockholder (the
"Stockholder") of the Company. At June 30, 2001 there were no amounts due from
the Stockholder.

      In connection with certain sales to the Stockholder commencing in the
quarter ended September 30, 2000, the Company agreed to guarantee a portion of
the financing provided by the Stockholder to one of its customers, an end-user
of the Company's products (the "End User"). Under the terms of the recourse
guarantee, the Company has agreed to guarantee 10% of the aggregate amount of
the Company's products sold by the Stockholder to the End User, up to
$15,000,000, through November 2007. The Company defers 10% of all product
revenue related to these shipments. Through June 30, 2001, the Company has
shipped approximately $12,584,000 under this arrangement, of which approximately
$1,258,000 has been deferred.

      During the quarter ended June 30, 2001, the End User voluntarily filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. The Company has not
been notified as to whether an event of default between the Stockholder and the
End User has occurred, and whether or not the Company may be obligated to pay
its applicable portion of the recourse guarantee in the event of any such
default. As of June 30, 2001, substantially all accounts receivable outstanding
related to sales transactions between the Stockholder and the End User had been
paid to the Company in full.




                                       6
<PAGE>   9

                           ACCELERATED NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED
                      JUNE 30, 2001 AND 2000 IS UNAUDITED)



7.    COMMITMENTS AND CONTINGENCIES

      At June 30, 2001, the Company had approximately $3,300,000 in
non-cancellable purchase commitments to its principal contract manufacturers,
which are expected to be fulfilled and paid in various increments through the
first quarter of fiscal 2002. At June 30, 2001 there is approximately $1.2
million included in accounts payable and accrued expenses on the balance sheet
related to these commitments.

At June 30, 2001, the Company had commitments of approximately $3,200,000 in
connection with its employee retention program. Pursuant to the terms of the
program, all employees in good standing are eligible to receive a retention
payment on or before December 31, 2001, as defined by the program. In the event
of a workforce reduction, in addition to the retention payment, employees will
also be entitled to a separation payment based on length of service, as defined.


8.    LEGAL PROCEEDINGS

Securities Class Action Litigation

      Beginning on or about April 19, 2001, a number of purported class action
lawsuits have been filed against the Company and certain current and former
officers in the United States District Court for the Central District of
California. The lawsuits purport to bring suit on behalf of those who purchased
the Company's publicly traded securities between June 22, 2000 and April 17,
2001. Plaintiffs allege that defendants made false and misleading statements,
purport to assert claims for violations of the federal securities laws, and seek
unspecified compensatory damages and other relief. The Company expects the
actions to be consolidated into a single action. The Company believes the claims
are without merit and intends to defend the actions vigorously.

      In addition, the Company is currently aware that two securities class
action lawsuits have been filed against the Company, the underwriters of its
Initial Public Offering, its individual Board members and certain former
officers, in the United States District Court for the Southern District of New
York. The lawsuits, which were filed on behalf of investors who purchased stock
between June 22, 2000 and June 8, 2001, generally allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Company made
false and misleading statements or omissions with respect to these alleged
activities in violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Sections 11 and 15 of the Securities Act of 1933. The Company
believes the allegations are without merit and intends to defend the actions
vigorously. The Company expects these cases and any subsequently filed cases
regarding this matter will be consolidated into a single action and that
plaintiffs will file a consolidated complaint. The Company understands that, to
date, at least one hundred and ten other companies have been named in nearly
identical lawsuits that have been filed by some of the same law firms.

Product Defect Litigation

      In October 2000, the Company was advised by one of its customers that the
customer believed that certain of the Company's products sold and delivered to
the customer were defective and that it believed that the Company failed to
perform under the agreement between the two parties. The customer demanded that
it be permitted to return the products to the Company in exchange for a return
of the purchase price of approximately $3,000,000. On May 8, 2001, the customer
filed a lawsuit against the Company in the United States District Court of
Colorado related to this claim. The Company has denied the customer's
allegations, and has retained counsel to continue investigation into the
allegations.


                                       7
<PAGE>   10

                           ACCELERATED NETWORKS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (ALL INTERIM INFORMATION RELATING TO THE THREE- AND SIX-MONTH PERIODS ENDED
                      JUNE 30, 2001 AND 2000 IS UNAUDITED)


8.    LEGAL PROCEEDINGS (CONTINUED)

Patent Claim

      In July 2000, the Company received notification from a competitor of
alleged patent infringement related to the distribution of certain of its
products. The Company has engaged outside legal counsel with respect to this
matter and believes that the resolution of this matter will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows. The Company has not recorded any charge related to
this claim.

9.    OTHER CHARGES

      During the second quarter of fiscal 2001, the Company recorded other
charges totaling approximately $1,381,000 as follows:

<TABLE>

<S>                                                          <C>
            Employee separation pay.......................    $  669,000
            Legal and accounting fees.....................       401,000
            Facilities consolidation and closures.........       220,000
            Other.........................................        91,000
                                                              ----------
            Total.........................................    $1,381,000
                                                              ==========
</TABLE>


      These charges were incurred primarily as the result of: i) costs
associated with the restructuring of operations and implementation of a new
operating plan, which resulted in a workforce reduction of approximately 30%,
the closure of three facilities, and the cancellation of certain marketing
activities, and; ii) legal and accounting fees related to the delayed Form 10-K
filing and restatement of fiscal 2000 quarterly financial statements, as well as
legal fees incurred to remain in compliance with The Nasdaq National Market
listing requirements.

10.   SUBSEQUENT EVENT

      The Nasdaq Listing Qualifications Panel has given notice to the Company
that it failed to comply with Marketplace Rule 4450(a)(5) because its common
stock had failed to maintain a minimum bid price of $1.00 over 30 consecutive
trading days. The Company has been provided 90 calendar days, or until October
10, 2001, to regain compliance. If the Company is unable to demonstrate
compliance, its securities may be delisted at that time.




                                       8
<PAGE>   11

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 this Form
10-Q and similar discussions in our registration statement declared effective by
the SEC on June 22, 2000 and our subsequent Reports on Form 10-K and Forms
10-Q/A and 10-Q filed with the SEC on May 8 and May 15, 2001, discuss 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 other 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 telecommunications products that enable the bundling
of voice and data services over a single broadband access network. Our
multiservice broadband access products are designed to allow our customers to
efficiently and cost-effectively deliver and manage multiple voice and data
services over a single broadband access facility using various broadband access
technologies. Our target customers are CLECs, IXCs, RBOCs, ILECs, and foreign
telephone companies.

      We were incorporated in October 1996. From inception through June 1999,
our operating activities consisted primarily of developing a research and
development organization, testing prototype designs, staffing of our marketing,
sales, field service and customer support organizations, building a management
team, and establishing relationships with potential customers. We commenced
shipments of our MSAP voice gateways, MSAP concentrators and carrier-class IADs
in the second calendar quarter of 1999. Since inception, we have incurred
significant losses and as of June 30, 2001, we had an accumulated deficit of
approximately $117.4 million. We have not achieved profitability on a quarterly
or annual basis and do not expect to achieve profitability in the near future,
if at all. We expect to incur significant research and development, sales and
marketing, and general and administrative expenses in the future and, as a
result, we will need to generate significantly higher revenue to achieve and
maintain profitability.

      We believe our future success is dependent upon establishing successful
relationships with a variety of distribution partners. To date, we have entered
into a value-added reseller agreement with Solunet and OEM relationships with
Siemens AG and its affiliate, Siemens ICN. To be successful, we must reach
agreements with additional distribution partners, both domestically and
internationally. Similarly, the complexity of our products requires highly
trained customer service, professional services and support personnel.

      The current market for telecommunications equipment is characterized by a
drastic reduction in the spending patterns by our current and prospective
customers, which has led to an overall decrease in demand for our products and
has caused significant shortfalls in our revenues. In addition, we have been
unable to gain much visibility into the future market for our products, and, as
such, we can provide no assurance that the market, or our revenues, will be
sufficient to support our ongoing operations in the foreseeable future.
Competition in our market is intense, and we expect competition to increase in
the future. To remain competitive in this market, we may continue to add
features to our products based on the anticipated needs of our current and
potential customers. This may result in increased research and development
expenses and may result in the continued reduction in our operating margins.
This competition may also result in significant price reductions and loss of
market share. We expect that product life cycles will remain relatively short
and that the average selling price and gross margin for our products will
decline as each product matures. To offset such declines, we may be required to
introduce new, higher performance products on a timely basis. Further, we must
reduce our manufacturing costs on a per unit basis and sell sufficient volumes
in order to maintain our gross margin. If we fail to reduce our manufacturing
costs on a per unit basis or achieve volume shipment requirements, our gross
margin will continue to decline. Any of the above events could have a material
and



                                       9
<PAGE>   12

adverse effect on our business, results of operations and financial condition.

      In response to generally poor economic conditions within the
telecommunications equipment market, and the resulting impact on our operations,
during the first quarter of fiscal 2001 we retained Regent Pacific Management
Corporation to manage the day-to-day operations of our company, including the
services of Gary J. Sbona as our President and Chief Executive Officer, and
announced a new operating plan designed to meet the following objectives:

      -     optimize the organization and reduce operating expenses;

      -     refocus R&D efforts to maximize current product lines and
            development of certain next generation product lines; and

      -     redirect sales and marketing activities to focus on near-term sales
            and profit opportunities and potential future customers.

      Implementation of major components of this operating plan began in the
second quarter of 2001, and included a headcount reduction of approximately 30%.
The initial savings from these reductions is expected to occur in the third
quarter of 2001. We incurred charges of approximately $980,000 during the second
quarter of fiscal 2001, primarily related to employee separation, facilities
consolidation and closures, and the termination of certain marketing activities.
There can be no assurance that our management will be able to successfully
complete the implementation of the plan or that any of its objectives will be
achieved. In addition, we may make other significant changes to our business,
strategies and operating budget as a result of the plan.

Recent Events

      In July 2001, we engaged the services of Alliant Partners, an investment
banking firm, to assist us to identify, evaluate and implement potential
opportunities designed to maximize shareholder value. We believe that these
opportunities could include one or more of the following:

      -     divesture of one or more product lines;

      -     joint product development in the United States and Europe; and/or

      -     merger, acquisition, or other strategic corporate partnership.

There can be no assurance that our management or Alliant Partners will be
successful in these efforts, and if these efforts are not successful our ongoing
operations will be materially and adversely impacted.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2000.

NET REVENUE

      To date, we have generated substantially all of our revenue from sales of
our MSAP and carrier-class IAD products and we believe that sales of these
products will continue to account for substantially all of our revenue for the
foreseeable future. Sales of our MSAP and carrier-class IAD products constituted
approximately 28% and 72%, respectively, of our revenue for the three months
ended June 30, 2001 and approximately 57% and 43%, respectively, of our revenue
for the six months ended June 30, 2000.

      We recognized net revenue of approximately $670,000 for the three months
ended June 30, 2001, which represented a decrease of approximately $6.8 million,
or 91%, from approximately $7.5 million for the three months ended June 30,
2000. We recognized net revenue of approximately $2.2 million for the six months
ended June 30, 2001, which represented a decrease of approximately $12.4
million, or 85%, from approximately $14.6 million for the six months ended June
30, 2000. These decreases were attributable to decreased sales of both our MSAP
voice gateways and concentrators and our carrier-class IAD's, mostly as a result
of the deterioration of market conditions in the telecommunications equipment
industry which has severely impacted our major customers' spending patterns. For
example, during the six months ended June 30, 2001, we experienced a significant
decrease in expected revenues due to i) the cancellation of a $3.6 million order
and ii) the loss of approximately $578,000 in sales related to



                                       10
<PAGE>   13

shipments made to a customer in March 2001 that filed for Chapter 11 bankruptcy
protection in April 2001, for which we could not recognize revenue. In addition,
we have historically derived a substantial portion of our revenues through our
relationship with Siemens, who in recent periods has derived a substantial
portion of revenues related to our products from a single customer. During the
second quarter of fiscal 2001, this customer filed for Chapter 11 bankruptcy
protection, which also negatively impacted our anticipated revenues for the
three and six months ended June 30, 2001, and which we believe will continue to
impact our revenue growth for at least the remainder of fiscal 2001. Overall, we
expect that the current conditions in the telecommunications equipment industry
will continue to have a negative impact on the financial condition of our
existing and prospective customers, and our ability to generate revenue.

      For the three and six months ended June 30, 2001, sales to our largest
customer, Siemens, accounted for approximately 86% and 85% of our revenue,
respectively. For the three months ended June 30, 2000, sales to our three
largest customers accounted for approximately 84% of our revenue, of which sales
to Lightyear Unidial, CTC Communications Group and Firstworld Communications
accounted for approximately 42%, 27% and 15% of our revenue, respectively. For
the six months ended June 30, 2000, sales to our three largest customers
accounted for approximately 80% of our revenue, of which sales to Lightyear
Unidial, CTC Communications Group and Siemens accounted for approximately 30%,
28% and 22% of our revenue, respectively. While we anticipate that sales to any
specific customer will vary from period to period, we expect that we will
continue to have significant customer concentration for the foreseeable future.
To date, we have derived a significant portion of our revenue from a small
number of orders and our sales have been made on the basis of individual
purchase orders, rather than long-term commitments. In addition, while Siemens
AG currently owns approximately 18.1% of our common stock and has been a
significant distribution channel for us, Siemens may decide to focus its efforts
in the future on Efficient Networks' products, given its acquisition of
Efficient Networks. There can be no assurance that we will be able to compete
successfully with our existing or new competitors, or that competitive pressures
will not materially and adversely affect our business, financial condition and
results of operations.

COST OF REVENUE

      Our cost of revenue consists primarily of amounts paid to third-party
contract manufacturers, personnel and other costs such as royalties on product
shipments, warranty expense and assembly costs. We outsource most of our product
and printed circuit board assembly to contract manufacturers

      Cost of revenue, net of amortization of deferred compensation, for the
three months ended June 30, 2001 was approximately $2.5 million, which
represented a decrease of approximately $2.7 million, or 52%, from approximately
$5.1 million for the three months ended June 30, 2000. Cost of revenue, net of
amortization of deferred compensation, for the six months ended June 30, 2001
was approximately $4.9 million, which represented a decrease of approximately
$5.3 million, or 52%, from approximately $10.2 million for the six months ended
June 30, 2000. These decreases were primarily a result of decreased sales of our
products. Cost of revenue in the three- and six- months ended June 30, 2001
consisted primarily of amounts paid to third-party contract manufacturers,
personnel and other costs such as royalties on product shipments, warranty
expense, inventory reserves and assembly costs. Cost of revenue as a percentage
of net revenue was 368% and 69% for the three months ended June 30, 2001 and
2000, respectively and 219% and 70% for the six months ended June 30, 2001 and
2000, respectively. This increase was attributed primarily to i) the increase in
fixed manufacturing overhead costs as a percentage of sales, ii) a higher
percentage of IAD product sales, which typically have lower margins; and iii)
approximately $393,000 in direct cost of revenues during the six months ended
June 30, 2001 for which no corresponding sales were recorded as the result of
shipments to a major customer that filed for bankruptcy in April 2001.

      In addition, we defer revenue related to a recourse guarantee on certain
sales with Siemens (see Note 6 - Notes to Consolidated Financial Statements). We
expense our cost of revenues related to revenues deferred under the recourse
guarantee as products are shipped; accordingly, we record cost of revenue on
these shipments with only a partial increase in corresponding revenues. We may
experience significant fluctuations in our cost of sales as a percentage of net
revenues based upon the inclusion or exclusion of transactions in our sales mix
that give rise to deferred revenue under the recourse guarantee.

      We anticipate that our cost of revenues will continue to significantly
vary as a percentage of net revenue from period to period, and will greatly
depend on variations in our fixed manufacturing overhead absorption rates, as
well as the mix and average selling prices of products sold. In addition, we
anticipate that competitive and economic pressures, as well as the impact of the
recent downturn in our market, could cause us to reduce our prices, adjust the
carrying values of our inventory, or record losses related to excess or obsolete
inventory. Any one of these factors



                                       11
<PAGE>   14

will also have a negative impact on gross margins.

      Our actual mix of products sold will depend significantly on the amount of
orders from new and existing customers, and the stage of their network
deployment. In general, if demand for our products begins to recover and sales
levels increase, our gross margin will primarily be affected by the following
factors:

            o     demand for our products and services;

            o     absorption rate of fixed manufacturing overhead costs;

            o     the mix of our products and services sold;

            o     new product introductions both by us and by our competitors;

            o     changes in our pricing policies and those of our competitors;

            o     the mix of sales channels through which our products and
                  services are sold;

            o     the volume manufacturing pricing, if any, we are able to
                  attain from our contract manufacturers for outsourced
                  manufacturing.

RESEARCH AND PRODUCT DEVELOPMENT EXPENSES

      Research and development expenses consist primarily of salaries and
related personnel costs, consulting and third-party development costs, costs
associated with licensed technology, prototype costs and other costs related to
the design, development, testing, and enhancements of our products. We also
incur significant expenses in connection with the purchase of equipment used to
test our products as well as the use of our products for internal design and
learning purposes. We expense our research and development costs as they are
incurred, with the exception of capital expenditures, which are capitalized and
depreciated over their estimated useful lives, generally two to five years.

      Research and product development expenses, net of amortization of deferred
compensation, for the three months ended June 30, 2001 were approximately $6.5
million, which represented an increase of approximately $1.0 million, or
approximately 18%, from approximately $5.5 million for the three months ended
June 30, 2000. Research and product development expenses, net of amortization of
deferred compensation, for the six months ended June 30, 2001 were approximately
$14.0 million, which represented an increase of approximately $4.3 million, or
approximately 45%, from approximately $9.7 million for the six months ended June
30, 2000. These increases were primarily a result of increased engineering
personnel costs, increased use of third-party development, increased design and
prototype activity and increased use of our products for internal design and
testing purposes. As a percentage of net revenue, research and product
development expenses for the three and six months ended June 30, 2001, net of
amortization of deferred compensation, were approximately 977% and 628%,
respectively. Research and development expenditures are essential to our future
success and we expect that these expenses will continue to represent a
significant portion of our operating expenses in the future.

SALES AND MARKETING EXPENSES

      Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional
demonstration equipment and other marketing expenses.

      Sales and marketing expenses, net of amortization of deferred
compensation, for the three months ended June 30, 2001 were approximately $2.0
million, which represented a decrease of approximately $4.5 million, or
approximately 70%, from approximately $6.5 million for the three months ended
June 30, 2000. Sales and marketing expenses, net of amortization of deferred
compensation, for the six months ended June 30, 2001 were approximately $6.0
million, which represented a decrease of approximately $4.5 million, or
approximately 43%, from approximately $10.5 million for the six months ended
June 30, 2000. These decreases were due primarily to a decrease in salaries
related to headcount reductions, decreased commission expenses related to
decreased sales, a reversal of bad debt expense related to accounts receivable
reserves recorded in prior periods against accounts which were collected in the
second quarter of fiscal 2001, and, to a lesser extent, decreased activities and
costs related to advertising, trade shows and public relations. We do not
anticipate that our sales and marketing costs will increase substantially in
absolute



                                       12
<PAGE>   15

dollars in the foreseeable future; however, such costs will fluctuate as a
percentage of revenue.

      A significant portion of our sales expenses are incurred to support our
direct sales force; however, to date we have sold a significant amount of our
products in the United States through our OEM relationship with Siemens. For the
three months ended June 30, 2001, sales through our direct sales force and sales
through Siemens accounted for 13% and 86%, respectively, of our product sales.
For the six months ended June 30, 2001, sales through our direct sales force and
sales through Siemens accounted for 14% and 85%, respectively, of our product
sales. To date, we have not generated any revenue from international sales,
although we continue to devote limited resources to our sales and marketing
efforts internationally, including the opening of a sales office in Belgium in
October 2000.

GENERAL AND ADMINISTRATIVE EXPENSES

      General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, information
technology, and administrative personnel, as well as recruiting, professional
fees, insurance and other general corporate expenses.

      General and administrative expenses, net of amortization of deferred
compensation, for the three months ended June 30, 2001 were approximately $1.7
million, which represented an increase of approximately $356,000, or
approximately 27%, from approximately $1.3 million for the three months ended
June 30, 2000. General and administrative expenses, net of amortization of
deferred compensation, for the six months ended June 30, 2001 were approximately
$4.1 million, which represented an increase of approximately $2.0 million, or
approximately 96%, from approximately $2.1 million for the six months ended June
30, 2000. These increases were primarily due to the additional general and
administrative personnel, facilities expansion and related overhead costs to
support our operations, the appointment of Regent Pacific to assist in managing
the Company, and increased insurance, legal and accounting expenses to support
the compliance requirements of being a public company. We anticipate that our
general and administrative expenses will decrease in future periods, related
primarily to our recent reduction in workforce and other cost reduction
initiatives.

OTHER CHARGES

      During the second quarter of fiscal 2001, the Company recorded other
charges totaling approximately $1,381,000 as follows:

<TABLE>

<S>                                                          <C>
          Employee separation pay..........................  $  669,000
          Legal and accounting fees........................     401,000
          Facilities consolidation and closures............     220,000
          Other............................................      91,000
                                                             ----------
          Total............................................  $1,381,000
                                                             ==========
</TABLE>

      These charges were primarily incurred as the result of: i) costs
associated with the restructuring of operations and implementation of a new
operating plan, which resulted in a workforce reduction of approximately 30%,
the closure of three facilities, and the cancellation of certain marketing
activities, and; ii) legal and accounting fees related to the delayed Form 10-K
filing and restatement of fiscal 2000 quarterly financial statements, as well as
legal fees incurred to remain in compliance with The Nasdaq National Market
listing requirements. As of June 30, 2001, substantially all of these costs had
been paid.

AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION

      In fiscal 2000, we recorded total deferred stock-based compensation of
approximately $6.0 million, representing the difference between the deemed value
of our common stock for accounting purposes and the exercise price of the
options at their date of grant, and reversed deferred stock-based compensation
of approximately $5.5 million, $1.5 million and $1.1 million resulting from
stock option cancellations and repurchase of unvested common shares from
employees for the year ended December 31, 2000 and the three months ended March
31, 2001 and June 30, 2001, respectively. We are amortizing the deferred stock
compensation over the vesting periods of the applicable options, or repurchase
periods for the exercised options, generally over four years. We reversed
approximately $1.0 million of stock-based compensation expense related to
amortization previously recorded on unvested stock options which were cancelled,
and recognized approximately $532,000 in stock-based compensation expense during
the three months ended June 30, 2001, as compared to approximately $2.4 million
in amortization incurred for the three



                                       13
<PAGE>   16

months ended June 30, 2000. We reversed approximately $1.2 million of
stock-based compensation expense related to amortization previously recorded on
unvested stock options which were cancelled, and recognized approximately
$689,000 of stock-based compensation expense during the six months ended June
30, 2001, as compared to approximately $4.8 million in amortization incurred for
the six months ended June 30, 2000. At June 30, 2001 we had approximately $2.3
million of unamortized deferred stock-based compensation, which will be
amortized over the vesting period of the underlying options.

OTHER INCOME (EXPENSE)

      Our other income (expense) consists primarily of interest earned on our
cash balances, cash equivalents and short-term investments, partially offset by
interest expense paid on capital leases and credit facilities. Other income, net
of other expenses, for the three months ended June 30, 2001 was approximately
$573,000, which represented a decrease of approximately $47,000 or approximately
8% from approximately $620,000 for the three months June 30, 2000. Other income,
net of other expenses, for the six months ended June 30, 2001 was approximately
$1.4 million, which represented an increase of approximately $426,000, or
approximately 42% from approximately $1.0 million for the six months June 30,
2000. This increase was primarily attributable to interest earned on higher
average cash balances throughout the relevant period.

BENEFICIAL CONVERSION FEATURE

      In connection with the issuance of Series D preferred stock in February
and March 2000, we incurred a non-cash charge to equity of approximately $9.9
million related to the beneficial conversion feature on the Series D preferred
stock. As a result of this non-cash equity charge, our net loss attributed to
common shareholders was adversely impacted for the six months ending June 30,
2000. There were no such charges incurred for the three or six months ended June
30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

      Since inception, we have financed our operations primarily through sales
of equity securities. We raised approximately $88.6 million in private
placements of redeemable convertible preferred securities prior to our initial
public offering. In June 2000, we completed an initial public offering of 4.6
million shares (including 600,000 shares pursuant to the underwriters'
over-allotment option) of Common Stock at a price of $15.00 per share, resulting
in proceeds of approximately $62.3 million net of the underwriters discount and
offering expenses. We also sold 200,000 shares of our Common Stock at $15.00 per
share in a concurrent private placement, resulting in proceeds of approximately
$3.0 million.

      At June 30, 2001, we had cash and cash equivalents of approximately $47.9
million, no outstanding debt under any credit facilities, and approximately
$218,000 of outstanding obligations under our equipment loans.

      We used approximately $19.9 million in cash for operating activities for
the six months ended June 30, 2001, an increase of approximately $8.1 million,
or 68%, from approximately $11.8 million used for operating activities for the
six months ended June 30, 2000. This increase was primarily due to the increase
in net loss for the period, a decrease in accounts payable and accrued
liabilities resulting from increased payments to vendors, and an increase in
inventories, offset in large part by an decrease in accounts receivable related
to customer collections in the second quarter of fiscal 2001.

      Included in our accounts receivable at June 30, 2001 is approximately
$810,000 due from a reseller for shipment of products in the second quarter of
fiscal 2000. The corresponding revenue has been deferred and is included in
deferred revenue on the balance sheet. We expect that current conditions in the
telecommunications equipment industry may continue to have a negative impact on
our ability to ultimately collect this receivable.

      We generated approximately $5.5 million from our investing activities for
the six months ended June 30, 2001, as compared to approximately $3.6 million
used for investing activities for the six months ended June 30, 2000. The
difference was due primarily to the net maturities of short-term investments of
approximately $7.9 million for the six months ended June 30, 2001 and a decrease
in purchases of property and equipment from approximately $3.6 million during
the six months ended June 30, 2000 to approximately $2.4 million during the six
months ended June 30, 2001.

      Cash generated from financing activities for the six months ended June 30,
2001 was approximately $17,000, as compared to cash generated from financing
activities of approximately $104.1 million for the six months ended



                                       14
<PAGE>   17
June 30, 2000. This decrease was attributed primarily to net proceeds generated
from our Series D preferred stock financing and initial public offering during
the six months ended June 30, 2000.

      We currently have no significant commitments for capital expenditures. We
anticipate that we will increase our capital expenditures and capital lease
commitments consistent with our anticipated needs.

      At June 30, 2001, we had approximately $3,300,000 in non-cancellable
purchase commitments to our former and current principal contract manufacturers,
which are expected to be fulfilled and paid in various increments through the
first quarter of fiscal 2002. At June 30, 2001 there is approximately $1.2
million included in accounts payable and accrued expenses on the balance sheet
related to these commitments.

      At June 30, 2001 we had commitments of approximately $3,200,000 in
connection with our employee retention program. Pursuant to the terms of the
program, all employees in good standing are eligible to receive a retention
payment on or before December 31, 2001, as defined by the program. In the event
of a workforce reduction, in addition to the retention payment, employees will
also be entitled to a separation payment based on length of service.

      We anticipate that operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may use cash resources to fund acquisitions or investments in complementary
businesses, technologies or products. Our capital requirements over the next
twelve months will depend on many factors, including our ability to achieve
anticipated revenues and manage operating expenses. To reduce our expenditures
and preserve cash, we recently implemented several cost-cutting measures,
including a workforce reduction, expense management programs and a reduction in
projected capital spending. Given the current economic downturn in our industry,
we can not be certain that we will generate adequate revenues to sustain our
operating and capital expenditures at their current levels. If we are unable to
substantially increase revenues, manage expenditures and collect upon accounts
receivable, or if we incur unexpected expenditures, then we may need to reduce
expenses further or raise additional funds in order to continue our operations.
If additional funding is not available on acceptable terms when needed, this
will have a material adverse effect on our ability to achieve our intended
business objectives.


                                  RISK FACTORS

      Before deciding to invest in Accelerated Networks or to maintain or
increase your investment, you should carefully consider the risks described
below, in addition to the other information contained in this report and in our
other filings with the SEC, including our subsequent Reports on Forms 10-K,
10-Q/A, 10-Q and 8-K. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business
operations. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the
market price of our common stock could decline and you may lose all or part of
your investment.

                   RISKS THAT MAY CAUSE FINANCIAL FLUCTUATIONS

WE HAVE A LIMITED AND WIDELY FLUCTUATING OPERATING HISTORY, WHICH WILL MAKE IT
DIFFICULT OR IMPOSSIBLE FOR YOU TO PREDICT OUR FUTURE RESULTS OF OPERATIONS.

      We have a very limited operating history upon which to base your
investment decision. We were incorporated in October 1996 and did not begin
shipping our products in significant volume until June 1999. Due to our limited
and widely fluctuating operating history, it is difficult or impossible to
predict our future results of operations. Investors in our common stock must
consider our business, industry and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving and intensely competitive
markets such as the market for broadband access equipment. In particular, you
should carefully consider the specific risks which are discussed in more detail
in this section, in our Annual Report on Form 10-K and Quarterly Reports on Form
10-Q and 10-Q/A filed with the SEC on May 15, 2001 and May 8, 2001 and in our
registration statement on Form S-1 declared effective by the SEC on June 22,
2000.

WE OPERATE IN A MARKET THAT HAS RECENTLY EXPERIENCED A SIGNIFICANT ECONOMIC
SLOW-DOWN, WHICH WILL MAKE IT DIFFICULT OR IMPOSSIBLE FOR YOU TO PREDICT OUR
FUTURE RESULTS OF OPERATIONS

      The current market for telecommunications equipment is characterized by a
drastic reduction in the spending patterns by our current and prospective
customers, which has led to an overall decrease in demand for our products and
has caused significant shortfalls in our revenues. In addition, we have been
unable to gain much visibility into the future market for our products, and, as
such, we can provide no assurance that the market, or our revenues, will be
sufficient to support our ongoing operations in the foreseeable future.

                                       15
<PAGE>   18
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO GENERATE SUFFICIENT NET
REVENUE IN THE FUTURE TO ACHIEVE OR SUSTAIN PROFITABILITY OR CONTINUE AS A GOING
CONCERN.

      We have incurred significant losses since inception and expect that our
net losses and negative cash flow will continue for the foreseeable future. As
of June 30, 2001, we had an accumulated deficit of approximately $117.4 million.
Although we generated net revenue of approximately $34.2 million for the year
ended December 31, 2000, our net revenue has significantly decreased in
subsequent periods, and we expect our net revenue to continue to decrease in the
near future. Accordingly, we cannot assure you that we will ever generate
sufficient net revenue to achieve or sustain profitability or continue our
current level of operations.

      We have large fixed expenses and we expect to continue to incur
significant expenses for research and development, sales and marketing, customer
support, developing distribution channels and general and administrative
expenses. In particular, the deterioration of market conditions in the
telecommunications equipment industry, our significant operating expenses, and
the rate at which competition in our industry is intensifying, we may not be
able to adequately control our costs and expenses or achieve or maintain
adequate operating margins. As a result, our ability to achieve and sustain
profitability will depend on our ability to generate and sustain substantially
higher revenue while maintaining or reducing cost and expense levels. To reduce
our expenditures and preserve cash, we recently implemented several cost-cutting
measures, including a workforce reduction, expense management programs and a
reduction in projected capital spending. Given the current economic downturn in
our industry, we can not be certain that we will generate adequate revenues to
sustain our operating and capital expenditures at their current levels. If we
are unable to substantially increase revenues, manage expenditures and collect
upon accounts receivable, or if we incur unexpected expenditures, then we may
need to reduce expenses further or raise additional funds in order to continue
our operations. In light of our declining stock price and the extreme volatility
in the technology capital markets, additional funding may not be available on
favorable terms or at all.  If additional funding is not available on acceptable
terms when needed, we may be unable to continue our operations and achieve our
intended business objectives.

OUR REVENUE AND OPERATING RESULTS HAVE RECENTLY FALLEN BELOW ANALYSTS' AND
INVESTORS' EXPECTATIONS, WHICH HAS LED TO A DECLINE IN OUR STOCK PRICE. IF OUR
REVENUE AND OPERATING RESULTS CONTINUE TO FALL BELOW ANALYSTS' AND INVESTORS'
EXPECTATIONS, OUR STOCK PRICE MAY NOT RECOVER FROM THIS DECLINE, OR IT MAY
DECLINE BELOW ITS CURRENT PRICE.

      Our quarterly operating results have fluctuated in the past and are likely
to fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. If our quarterly or annual operating results
do not meet the expectations of investors and securities analysts, the trading
price of our common stock could significantly decline. Some of the factors that
could affect our quarterly or annual operating results include:

            o     telecommunications market conditions and economic conditions;

            o     the amount and timing of orders for our products;

            o     the cancellation or rescheduling of significant orders for our
                  products;

            o     our ability to receive and fulfill orders evenly, across any
                  given quarter;

            o     our ability to develop, manufacture, introduce, ship and
                  support new products and product enhancements;

            o     our mix of products sold and the mix of distribution channels
                  through which our products are sold;

            o     the amount and timing of our research and development
                  expenses;

            o     our ability to control costs;

            o     our ability to obtain sufficient supplies of sole or limited
                  source components for our products;

            o     changes in the prices of our components;

            o     our ability to attain and maintain production volumes and
                  quality levels for our products;

            o     the length and variability of the sales cycle for our
                  products;

            o     our ability to realize forecasted sales for a particular
                  period;

                                       16
<PAGE>   19

            o     the timing of recognizing revenue and deferral of revenue;

            o     our ability to manage product transitions and adapt to
                  technological advancements;

            o     our ability to develop, manufacture, ship and support all of
                  our product lines, for example, IADs, MSAP as a concentrator
                  and MSAP as a voice gateway;

            o     announcements, new product introductions and reductions in the
                  price of products offered by our competitors;

            o     potential seasonality of our sales; and

            o     costs relating to possible acquisitions and integration of
                  technologies or businesses.

      As a result of any of these factors, it is likely that in the future, our
quarterly or annual operating results are likely to continue to fall below the
expectations of public market analysts and investors. In this event, the price
of our common stock could significantly decline below its current level.

      Sales of our products depend on the widespread adoption of multiservice
broadband access services and if the demand for multiservice broadband access
services does not develop, then our results of operations and financial
condition would be adversely affected.

      Our business will continue to be harmed, and our results of operations and
financial condition will continue to be adversely and materially affected, if
the demand for multiservice broadband access services does not increase, or if
our customers' multiservice broadband access service offerings are not well
received in the marketplace. Certain critical factors will likely continue to
affect the development of the multiservice broadband access services market.
These factors include:

            o     demand for broadband access;

            o     the development of a viable business model for multiservice
                  broadband access services, including the capability to market,
                  sell, install and maintain these services;

            o     the extent that service providers are unable to deploy
                  broadband access using DSL due to delays or other difficulties
                  in gaining access to the copper-pair infrastructure from
                  ILECs;

            o     cost constraints, such as installation, space and power
                  requirements at carrier central offices;

            o     ability to interoperate with equipment from multiple vendors
                  in service provider networks;

            o     evolving industry standards for DSL, T1 and other transmission
                  technologies;

            o     varying and uncertain conditions of the copper-pair
                  infrastructure, including size and length, electrical
                  interference, and crossover interference with voice and data
                  telecommunications services; and

            o     domestic and foreign government regulation.

Even if these factors are adequately addressed, given the economic downturn in
our market, we cannot be certain that we will be able to successfully market,
sell and deploy our products in large enough volumes to support our operations.
The market for multiservice broadband access services has developed more slowly
than anticipated, and may in fact not fully develop at all. This could happen
for a number of reasons. For instance, our customers, particularly CLECs, may
not be able to obtain sufficient capital, personnel and other resources to
operate and grow their business or may fail to execute their business plans. In
the case of DSL, the rate of deployment of broadband access using DSL has in
fact been slower than expected, resulting in decreased capital expenditures on
broadband access equipment by telecommunications service providers. If these
circumstances continue to exist, or if we are not



                                       17
<PAGE>   20

able to address the foregoing factors, our business would be harmed, and our
results of operations and financial condition would be adversely affected.

WE ARE CURRENTLY NAMED AS DEFENDANT IN SEVERAL SECURITIES CLASS ACTION LAWSUITS
AND A PRODUCT DEFECT LAWSUIT. IF WE ARE UNABLE TO SUCCESSFULLY DEFEND OURSELVES
IN ANY ONE OF THESE LAWSUITS, AND IF OUR LIABILITY INSURANCE COVERAGE IS NOT
ADEQUATE TO COVER OUR LOSSES, OUR CASH RESOURCES WOULD BE MATERIALLY ADVERSELY
IMPACTED.

      A number of purported class action lawsuits have been filed against our
company and certain current and former officers in the United States District
Court for the Central District of California. We are also aware that two
securities class action lawsuits have been filed against the Company, the
underwriters of its Initial Public Offering, its individual Board members and
certain former officers, in the United States District Court for the Southern
District of New York. We believe these allegations are without merit and intend
to defend the actions vigorously.

      We are also currently a party to a product defect claim whereby one of our
customers has demanded that it be permitted to return the products to the
Company in exchange for a return of the purchase price of approximately $3.0
million. On May 8, 2001, the customer filed a lawsuit against our company in the
United States District Court of Colorado related to this claim. We have denied
the customer's allegations, and have retained counsel to continue investigation
into the allegations.


WE DERIVE ALMOST ALL OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS AND OUR
REVENUE COULD DECLINE SIGNIFICANTLY IF WE LOSE A CUSTOMER, IF A CUSTOMER CANCELS
OR DELAYS AN ORDER, OR IF WE ARE NOT ABLE TO COLLECT RECEIVABLES FROM CUSTOMERS
OR ARE REQUIRED TO GRANT STOCK ROTATION OR INVENTORY RETURN RIGHTS TO OUR
CUSTOMERS.

      Since we depend on a small number of customers, our revenue could be
materially and adversely impacted if we lose a customer, if a customer cancels
or delays an order, or if we are not able to collect receivables from customers
or are required to grant stock rotation or inventory return rights to our
customers. Sales to Siemens accounted for approximately 86% and 85% of our
revenues for the three and six months ended June 30, 2001, respectively.
Accordingly, if we do not diversify and expand our customer base, our future
success would significantly depend upon the timing and size of future purchase
orders, if any, from our largest customers. In addition, if any of our customers
is acquired, we may lose its business. The loss of any one of our customers, or
the delay of a significant order from any of our customers, even if only
temporary, could, among other things, reduce or delay our recognition of
revenue, harm our reputation in the industry, and reduce our ability to
accurately predict cash-flow. Market conditions in the telecommunications
equipment industry have also deteriorated significantly and many of our
customers and potential customers have experienced financial difficulties,
including bankruptcy. Accordingly, while we have to date collected the majority
of our accounts receivable outstanding as of June 30, 2001, we may not be able
to do so in the future, and may be required to write off a significant amount of
accounts receivable. In addition, some of our customers have not yet deployed
equipment that they have purchased from us, and may request stock rotation or
inventory return rights with respect to equipment they purchase from us. While
to date, we have not granted inventory return rights and have only granted
limited stock rotation rights to certain customers, we may be required to do so
in the future. Since we derive almost all of our revenue from a small number of
customers, any of these events could materially and adversely affect our
business, financial condition and results of operations.

OUR CUSTOMERS MAY SPORADICALLY PLACE LARGE ORDERS WITH SHORT LEAD TIMES, WHICH
MAY CAUSE OUR REVENUE AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER.

      We believe that our current and prospective customers often deploy their
networks in large increments and on a sporadic basis. Accordingly, we may
receive purchase orders for significant dollar amounts on an irregular basis.
These orders may have short lead times. As a result, we may not have sufficient
inventory to fulfill these orders and we may incur significant costs in
attempting to expedite and fulfill these orders. Further, our revenue and
operating results may vary significantly and unexpectedly from quarter to
quarter.

IF WE FAIL TO CAPITALIZE ON OPPORTUNITIES TO WIN CONTRACTS FROM OUR KEY
CUSTOMERS, WE MAY NOT BE ABLE TO SELL PRODUCTS TO THOSE CUSTOMERS FOR AN
EXTENDED PERIOD OF TIME.

      We believe that our current and prospective customers deploy their
networks in large increments and on a sporadic basis. As a result, if we fail to
win a purchase contract from a key customer, we may not have an opportunity to
sell products to that customer until its next purchase cycle, which may not be
for an extended period of time. In addition, if we fail to win contracts from
key customers that are at an early stage in their design cycle, our



                                       18
<PAGE>   21

ability to sell products to these customers in the future may be adversely
affected because they may prefer to continue purchasing products from their
existing vendor. Since we rely on a small number of customers for the majority
of our sales, our failure to capitalize on limited opportunities to win
contracts with these customers would have a material adverse effect on our
business, results of operations and financial condition.

      The long sales and implementation cycles for our products may cause our
revenue and operating results to vary significantly.

      A customer's decision to purchase our products often involves a
significant commitment of its resources and a lengthy evaluation and product
qualification process. As a result, our sales cycles may be lengthy and we may
incur substantial sales and marketing expenses and expend significant management
effort without any guarantee of a sale. The length of our sales cycles will vary
depending on the type of customer to whom we are selling. Because of the recent
economic downturn in our market and resulting slowdown in spending for
telecommunications equipment, it is currently difficult or impossible to predict
the length of a typical sales cycle for any of our current or prospective
customers. Even after making the decision to purchase our products, our
customers often deploy our products slowly and deliberately. Timing of
deployment can vary widely and depends on:

            o     the skill set of our customers;

            o     the size of the network deployment;

            o     the complexity of our customers' network environment;

            o     the degree of hardware and software configuration necessary to
                  deploy our products; and

            o     their ability to finance their purchase of our products as
                  well as their operations.

      As a result, our revenue and operating results may vary significantly from
quarter to quarter.

IF WE FAIL TO MANAGE OUR ORDER BACKLOG, NEW ORDERS AND SHIPMENT SCHEDULES FOR
EACH QUARTER, OUR OPERATING RESULTS FOR THAT PERIOD WILL BE ADVERSELY AFFECTED.

      We recognize revenue when our products are shipped, subject to appropriate
deferrals and allowances. Accordingly, the linearity of our revenue will depend
on our ability to receive and fulfill orders evenly across any given quarter. To
date, our order backlog at the beginning of each quarter has not been
significant and we expect this trend to continue for the foreseeable future.
Accordingly, we must obtain additional orders in a quarter for shipment in that
quarter to achieve our revenue objectives. Our sales agreements may allow
purchasers to delay scheduled delivery dates without penalty. Further, our
customer purchase orders allow purchasers to cancel orders within negotiated
time frames without significant penalty. In addition, due in part to factors
such as the timing of product release dates, purchase orders and product
availability, significant volume shipments of our products could occur at the
end of our fiscal quarters. If we fail to ship products by the end of a quarter
our operating results may be materially and adversely affected for that quarter.
In the past, we have experienced cancellation of orders, resulting in additional
costs and expenses. We defer revenue for PCS, stock rotation rights under
specific arrangements with distributors and amounts related to a recourse
guarantee with Siemens. We may experience significant fluctuations in our
revenue in the future based upon the inclusion or exclusion of one or any of
these components in our sales mix that give rise to deferred revenue. For
example, for the six months ended June 30, 2001, approximately $1.6 million of
our product shipments was subject to the recourse agreement, of which
approximately $160,000 was deferred. In addition, as of June 30, 2001 we had
approximately $973,000 in deferred revenue related to stock rotation rights
granted to distributors and resale contingencies.

IF WE FAIL TO INCREASE OUR REVENUE, OR IF WE EXPERIENCE DELAYS IN GENERATING OR
RECOGNIZING REVENUE, WE WILL CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.

      Our operating expenses are largely based on anticipated personnel
requirements and revenue trends, and a high percentage of our expenses are, and
will continue to be, fixed. In addition, we may be required to spend more in
research and development than originally budgeted in order to respond to
industry trends. We may also incur significant new costs related to possible
acquisitions and the integration of new technologies. As a result, if we fail to
increase our revenue, or if we experience delays in generating or recognizing
revenue results we will continue to incur substantial operating losses.



                                       19
<PAGE>   22

IF WE FAIL TO MANAGE OUR OPERATIONS, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

      We have experienced significant changes in our operations. These changes
have placed a significant strain on our managerial, operational and financial
resources. For example, we recently experienced several changes in our senior
management, including the retention of Regent Pacific Management Corporation, to
act as our CEO, our CFO and our Vice President of Sales and Marketing. In
addition, we recently downsized our workforce by approximately 30% and began the
implementation of a business strategy designed to meet the following objectives:

      o     optimize the organization and reduce operating expenses

      o     refocus R&D efforts to maximize current product lines and
            development of certain next generation product lines; and

      o     redirect sales and marketing activities to focus on near-term sales
            and profit opportunities and potential future customers

      In addition, we will need to coordinate our domestic and international
operations and may be required to establish the necessary infrastructure to
implement our international strategy. If we are not able to accomplish the
foregoing in an efficient and timely manner, our business, financial condition
and results of operations could be materially and adversely affected.

IF WE FAIL TO ENHANCE OUR EXISTING PRODUCTS OR DEVELOP AND INTRODUCE NEW
PRODUCTS THAT MEET CHANGING CUSTOMER REQUIREMENTS AND TECHNOLOGICAL ADVANCES,
OUR ABILITY TO SELL OUR PRODUCTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.

      Our markets are characterized by rapid technological advances, evolving
industry standards, changes in end-user requirements, frequent new product
introductions and changes in voice and data service offerings by service
providers. Our future success will significantly depend on our ability to
anticipate or adapt to such changes and to offer, on a timely and cost-effective
basis, products that meet changing customer demands and industry standards. The
timely development of new or enhanced products is a complex and uncertain
process and we may not have sufficient resources to successfully and accurately
anticipate technological and market trends, or to successfully manage long
development cycles. We may also experience design, manufacturing, marketing and
other difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. The introduction of new or enhanced
products also requires that we manage the transition from older products to
these new or enhanced products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products are
available for delivery to meet anticipated customer demand. We may also be
required to collaborate with third parties to develop our products and may not
be able to do so on a timely and cost-effective basis, if at all. If we are not
able to develop new products or enhancements to existing products on a timely
and cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our business, financial condition and results of operations
would be materially and adversely affected.

OUR ABILITY TO OPERATE AND GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THIRD PARTIES.

      Our success will substantially depend on our ability to develop and
maintain strategic relationships. Our strategic relationships are relatively
new, and we cannot be certain that any revenue will be derived from those
arrangements. The amount and timing of resources that our strategic partners
devote to our business is not within our control and our strategic partners may
not perform their obligations as expected. In the event that any strategic
partner breaches or terminates its relationship with us, we may not be able to
sustain or grow our business. We may also not be able to maintain or develop
strategic relationships or to replace strategic partners. In addition, our
current largest distribution partner, Siemens, acquired Efficient Networks, one
of our competitors. As a result, we do not believe that Siemens will continue to
devote adequate, if any, resources to work with us in the future. Accordingly,
we believe that our business may be further harmed if we are unable to develop
and maintain strategic relationships with additional third parties.

IF WE ARE UNABLE TO RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
SUCCESSFULLY ACHIEVE OUR OBJECTIVES.

               Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, marketing, engineering and
management personnel, many of whom perform important management functions and
would be difficult to replace. During the fourth quarter of 2000 and in the
first quarter of 2001, we experienced significant personnel changes at the
senior management level, including the hiring of a new Chief



                                       20
<PAGE>   23

Executive Officer and Chairman of the Board, Chief Financial Officer and Vice
President of Finance and Administration, Vice President of Worldwide Sales, and
Vice President of Marketing. Although the Board has entered into an agreement
with Regent Pacific Management Corporation to provide personnel to fill these
and other senior management positions, the agreement is due to expire in August
of 2003 and may be canceled at any time after February 2002. If the agreement
with Regent Pacific were canceled or not renewed, the loss of the Regent Pacific
personnel could have a material adverse effect on our operations, especially
during any transition phase to new management after the cancellation or
non-renewal. Similarly, if any adverse change in our relationship with Regent
Pacific occurs, it could hinder management's ability to direct our business and
materially and adversely affect our business, financial condition and results of
operations. In addition, while we have established a retention program for all
employees, we cannot guarantee that we will not lose critical employees. The
loss of the services of any other key management personnel, or key sales
personnel and engineers, could materially adversely affect our business,
financial condition and results of operations.

      In addition, during the second quarter of 2001, we reduced our workforce
by approximately 30%. Our success depends to a large extent on the retention of
and continued contributions from our remaining employees. If we are not able to
attract and retain the necessary personnel, we will not be able to operate and
grow our business. Recruiting qualified personnel in our industry is intensely
competitive and time-consuming. In particular, in the past we have experienced
difficulty in hiring hardware, software, system and test and customer support
engineers. We believe that we will continue to experience difficulty in
recruiting and retaining qualified personnel in the future.

IF WE ARE UNABLE TO ACHIEVE AND MAINTAIN A MINIMUM BID PRICE FOR OUR COMMON
STOCK, AS REQUIRED BY THE NASDAQ NATIONAL MARKET, OUR STOCK MAY BE DELISTED.

We have received notification by the Nasdaq Listing Qualifications Panel that we
have failed to comply with Marketplace Rule 4450(a)(5) because our common stock
has failed to maintain a minimum bid price of $1.00 for 30 consecutive trading
days. We have been provided 90 calendar days, or until October 10, 2001, to
regain compliance. To regain compliance, our common stock must maintain a
minimum bid price of $1.00 for ten consecutive trading days. If we are unable to
demonstrate such compliance within the 90-day period, our securities may be
delisted from The Nasdaq National Market at that time. If a delisting were to
occur, we believe that our common stock would trade on the OTC Bulletin Board or
in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such
alternatives are generally considered to be less efficient markets, and our
stock price, as well as the liquidity of our common stock, may be adversely
impacted as a result. This may also adversely impact the ability of our
stockholders to purchase and sell our shares in an orderly manner, or at all.
Furthermore, a delisting of our shares could damage our general business
reputation and harm our ability to raise additional funds. Each of these events
could have a material adverse effect on our business, financial condition and
operating results.

WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS, AND IF
WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, WE WILL NOT BE ABLE TO
DELIVER OUR PRODUCTS TO OUR CUSTOMERS.

      Several of the key components used in our products, including field
programmable gate arrays, DSL transreceivers, microprocessors, digital signal
processors and custom power supplies, are sourced from single or limited sources
of supply. These suppliers range from small vendors to large established
companies. We do not have guaranteed supply arrangements with most of our key
suppliers, and our contract manufacturers or we may not be able to obtain
necessary supplies in a timely manner. Financial or other difficulties faced by
these suppliers or significant changes in demand for these components could
limit the availability of these components. In addition, any of our sole-source
suppliers could be acquired by, or enter into exclusive arrangements with, our
competitors, stop selling their products or components to us at commercially
reasonable prices, or refuse to sell their products or components to us
altogether. Any interruption or delay in the supply of any of these components,
or the inability to obtain these components from alternate sources at acceptable
prices and within a reasonable amount of time, would adversely affect our
ability to meet scheduled product deliveries to our customers and would
materially adversely affect our business, results of operations and financial
condition. As much as six months could be required before we would begin
receiving adequate supplies from alternative suppliers, if any. In addition,
qualifying additional suppliers is time-consuming and expensive and exposes us
to potential supplier production difficulties or quality variations.

      It is also possible that a source may not be available for us or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis, if at all, which could have a material adverse effect on our
business, financial condition and results of operations.

BECAUSE WE DEPEND UPON A SMALL NUMBER OF OUTSIDE CONTRACTORS TO MANUFACTURE OUR
PRODUCTS, OUR OPERATIONS



                                       21
<PAGE>   24

COULD BE DELAYED OR INTERRUPTED IF WE ENCOUNTER PROBLEMS WITH THEM.

      We historically have relied on Avnet, Inc., A-Plus Manufacturing and Arrow
Electronics to build our products, and have recently transitioned most of our
contract services from Avnet to Fine Pitch Industries, Inc. We do not have
internal manufacturing capabilities. Our reliance on third-party manufacturers,
primarily Fine Pitch, involves a number of risks, including the absence of
adequate capacity, the unavailability of or interruptions in access to certain
process technologies and reduced control over component availability, delivery
schedules, manufacturing yields and costs. If any of our current or previous
suppliers are unable or unwilling to continue manufacturing our products in
required volumes and at high quality levels, we will have to identify, qualify
and select acceptable alternative manufacturers, which could take more than six
months. It is possible that an alternate source may not be available to us when
needed or be in a position to satisfy our production requirements at acceptable
prices and quality. Any significant interruption in manufacturing would result
in us having to reduce our supply of products to our customers, which in turn
could have a material adverse effect on our customer relations, business,
financial condition and results of operations. Avnet, Arrow, A-Plus and Fine
Pitch also build products for other companies, and we cannot be certain that
they will always have sufficient quantities of inventory available to fill
orders placed by our customers, or that they will allocate their internal
resources to fill our orders on a timely basis.

      We have completed our transition to Fine Pitch for our manufacturing
capability. In addition to the inherent risks associated with such a transition,
commencing volume production is expensive and time consuming. If we are required
or choose to change contract manufacturers, our revenue may decline and our
customer relationships may be damaged.

      We may not be able to effectively manage our relationships with our
contract manufacturers and they may not meet our future requirements for timely
delivery. Any interruption in the operations of our contract manufacturers would
adversely affect our ability to meet our scheduled product deliveries to our
customers, which could cause the loss of existing or potential customers and
could materially adversely affect our business, results of operations and
financial condition. In addition, if our contract manufacturers fail to build
products with sufficient quality, our reputation, business, results of
operations and financial condition will be harmed.

IF WE ARE NOT ABLE TO ESTABLISH RELATIONSHIPS WITH A VARIETY OF DISTRIBUTION
PARTNERS, WE MAY NOT BE ABLE TO INCREASE OUR SALES AND GROW OUR BUSINESS.

      We believe that our future success is dependent upon establishing
successful relationships with a variety of distribution partners. To date, we
have entered into a value-added reseller agreement with Solunet and OEM
agreements with Siemens AG and Siemens ICN. While Siemens AG and its affiliates
currently own approximately 18.1% of our outstanding shares, Siemens also sells
products that compete with our products and has acquired Efficient Networks, one
of our competitors. Accordingly, we cannot assure you that it will devote
adequate resources to distributing our products. We also cannot be certain that
we will be able to reach agreement with additional distribution partners on a
timely basis or at all, or that any of our current or future distribution
partners will devote adequate resources to selling our products. If we cannot
establish these relationships, we may not be able to increase our sales and grow
our business.

IF INSTALLATIONS OF OUR MSAP CONCENTRATORS AT CENTRAL OFFICES ARE DELAYED, OUR
REPUTATION MAY BE HARMED AND WE MAY LOSE SALES.

      Our MSAP Concentrators are generally installed at carrier central offices.
In many cases, deployment of our equipment at carrier central offices is
intended to facilitate the provisioning of services that compete with the
carrier's services. Therefore, carriers may have an incentive to withhold or
delay installations of our MSAP concentrators. While we believe that current
regulations and laws require these carriers to cooperate in allowing
installation of our equipment, any delay, whether justified or not, will
adversely affect our customers' ability to deploy our equipment, which in turn
would adversely affect our reputation and result in lost sales. This would
result in a material adverse effect on our business, results of operations and
financial condition.

WE HAVE NO SIGNIFICANT EXPERIENCE OPERATING IN INTERNATIONAL MARKETS AND WE MAY
NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MANAGE OUR INTERNATIONAL OPERATIONS.

      We may decide to expand our international operations and enter new
markets. This expansion will require significant management attention and
financial resources. We have only recently launched our international sales
operations in Canada and Europe. As a result, we have limited experience in
marketing and distributing our products internationally and in developing
versions of our products that comply with local standards. Our current
international



                                       22
<PAGE>   25

sales efforts, particularly those in Europe, will likely be impacted by seasonal
purchasing patterns in foreign countries, which is typical of European customers
during the summer months. In addition, our international operations, including
those in Canada and Europe, will be subject to other inherent risks, including:

      o     international telecommunications market;

      o     difficulties and costs of staffing and managing foreign operations;

      o     certification requirements;

      o     longer sales cycles;

      o     expenses associated with customizing products for foreign countries;

      o     dependence on local vendors;

      o     dependence on our ability to establish and maintain strategic
            relationships with international distribution partners;

      o     protectionist laws and business practices that favor local
            competition;

      o     reduced protection for intellectual property rights in some
            countries;

      o     difficulties associated with enforcing agreements through foreign
            legal systems;

      o     greater difficulty in collecting accounts receivable;

      o     fluctuations in currency exchange rates;

      o     unexpected changes in regulatory requirements;

      o     the impact of recessions in economies outside the United States;

      o     political and economic instability;

      o     import or export licensing requirements; and

      o     potential adverse tax consequences.

IF OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES.

      Our products are highly technical and are designed for deployment in very
large and complex networks. Although we thoroughly test our products, because of
their nature, they can only be fully tested when deployed in live networks that
generate high amounts of voice and/or data traffic. Because of our short
operating history, our products have not yet been broadly deployed.
Consequently, our customers may discover errors or defects in our products after
they have been broadly deployed. In addition, our customers may use our products
in conjunction with products from other vendors. As a result, when problems
occur, it may be difficult to identify the source of the problem. Any defects or
errors in our products discovered in the future, or failures of our customers'
networks, whether caused by our products or another vendor's products, could
result in:

      o     loss of, or delay in, revenue and loss of market share;

      o     product returns;

      o     negative publicity regarding us and our products;

      o     unexpected expenses to remedy errors;




                                       23
<PAGE>   26

      o     diversion of our development resources;

      o     increased service warranty, costs and repair; and

      o     increased insurance costs.

Any of the above items could have a material adverse effect on our business,
results of operations and financial condition.

IF OUR PRODUCTS CONTAIN DEFECTS, WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT
LIABILITY CLAIMS AND DAMAGE TO OUR REPUTATION.

      Because our products are designed to provide critical communications
services, we may be subject to significant liability claims. Our agreements with
customers typically contain provisions intended to limit our exposure to
liability claims. However, these limitations may not preclude all potential
claims resulting from a defect in one or more of our products. Although we
believe that we maintain adequate product liability insurance covering certain
damages arising from implementation and use of our products, our insurance may
not be sufficient to cover us against all possible liability. Liability claims
could also require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could seriously damage our reputation and have a material adverse
effect on our business, financial condition and results of operations.

IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.

      We do not have a long-term supply contract with our contract manufacturer.
Consequently, this manufacturer is not obligated to supply products to us for
any specific period, in any specific quantity or at any certain price, except as
may be provided in a particular purchase order. Lead times for the materials and
components that we order vary significantly and depend on numerous factors,
including the specific supplier, contract terms and demand for a component at a
given time. If we overestimate our component requirements, our contract
manufacturer may purchase excess inventory. For those parts that are unique to
our products, we could be required to pay for these excess parts and recognize
related inventory write-down costs. If we underestimate our requirements, our
contract manufacturer may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenue. We
also may experience shortages of certain components from time to time, which
also could delay the manufacturing of our products and recognition of revenue.

WE MAY INVEST A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEVELOP, MARKET AND SELL
OUR PRODUCTS AND MAY NOT REALIZE ANY RETURN ON THIS INVESTMENT.

      We may invest a significant amount of our resources to develop, market and
sell our products. Accordingly, our success will depend on our ability to
generate sufficient revenue from sales of these products to offset the expenses
associated with developing, marketing and selling them. There are many risks
that we face in doing so. In particular, the rapidly changing technological
environment in which we operate can require the frequent introduction of new
products, resulting in short product lifecycles. Accordingly, if our products do
not quickly achieve market acceptance, they may become obsolete before we have
generated enough revenue from their sales to realize a sufficient return on our
investment.

      As a result, we may incur significant expenses and losses due to lack of
customer demand, unusable purchased components for these products and the
diversion of our engineers from future product development efforts. From time to
time we may also need to write-down inventories to current values or write-off
excess and obsolete inventory. If we incur substantial development, sales,
marketing and inventory expenses that we are not able to recover, and we are not
able to compensate for such expenses, our business, financial condition and
results of operations could be materially and adversely affected.

IF THE DEVELOPMENT AND ADOPTION OF RELEVANT INDUSTRY STANDARDS DO NOT OCCUR ON A
TIMELY BASIS, OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.

      Our ability to achieve market acceptance for our products will also depend
on the timing and adoption of industry standards for new technologies in our
markets. Many technological developments occur prior to the adoption of relevant
industry standards. The absence of an industry standard related to a specific
technology may prevent widespread market acceptance of products using that
technology. The existence of multiple competing



                                       24
<PAGE>   27

standards may also retard or delay the development of a broad market for our
products. We may develop products that use new technologies prior to the
adoption of industry standards related to these technologies. Consequently, our
products may not comply with eventual industry standards, which could hurt our
ability to sell these products and also require us to quickly design and
manufacture new products that meet these standards. Even after industry
standards are adopted, the future success of our products depends upon
widespread market acceptance of their underlying technologies.

OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE.

      Our success and ability to compete substantially depend on our proprietary
technology. Despite our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford us only limited protection.
Any infringement of our proprietary rights could result in significant
litigation costs, and any failure to adequately protect our proprietary rights
could result in our competitors offering similar products, potentially resulting
in loss of a competitive advantage and decreased revenue. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements and licensing arrangements, to establish and protect
our proprietary rights. We presently have no patents, although we have seven
patent applications pending. In addition, the laws of certain foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
United States. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing the unauthorized
use of our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, financial condition and
operating results.

WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS
THAT COULD SERIOUSLY HARM OUR BUSINESS.

      We are currently a party to a purported patent infringement claim. While
we believe that the resolution of this matter will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows, we cannot assure you that we would prevail in any such actions,
given their complex technical issues and inherent uncertainties. Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed.

      Although we are not aware of any additional material intellectual property
claims against us, we may be a party to litigation in the future. Our industry
is characterized by frequent intellectual property litigation based on
allegations of infringement of intellectual property rights. From time to time,
third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies or rights that are important to our business. In
addition, in our agreements, we may agree to indemnify our customers for any
expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any claims asserting that our
products infringe or may infringe on proprietary rights of third parties, with
or without merit, could be time-consuming, resulting in costly litigation and
diverting the efforts of our technical and management personnel. These claims
could also result in product shipment delays or require us to modify our
products or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all.


IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES.

      Companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We have received claims of this kind in the past and we cannot
assure you that we will not receive claims of this kind in the future or that
those claims will not result in material litigation. We could incur substantial
costs in defending ourselves against these claims, regardless of their merits,
which would have a material and adverse effect on our business, financial
condition and results of operations.

POTENTIAL ECONOMIC AND POLITICAL INSTABILITY IN INDIA COULD ADVERSELY AFFECT OUR
PRODUCT DEVELOPMENT EFFORTS.

      We believe that we currently receive favorable tax and tariff treatment
for our product development activities in India. However, if political
instability in India results in a government adverse to foreign corporate
activity, a number of adverse consequences could occur, including higher
tariffs, taxes or export controls, and increased governmental ownership or
regulation, any of which would increase our costs of product development. In
addition,


                                       25
<PAGE>   28

we record expenses for our subsidiary in India in Indian Rupees. Accordingly,
our operating results are also exposed to changes in exchange rates between the
U.S. dollar and Indian Rupee. While to date, our results have not materially
been affected by any changes in currency exchange rates, devaluation of the U.S.
dollar against the Indian Rupee would adversely affect our expenses for our
Indian subsidiary.

OUR BUSINESS COULD BE SHUT DOWN OR SEVERELY IMPACTED IF A NATURAL DISASTER
OCCURS.

      Our business and operations depend on the extent to which our facility and
products are protected against damage from fire, earthquakes, power loss, and
similar events. Despite precautions taken by us, a natural disaster or other
unanticipated problem could, among other things, hinder our research and
development efforts, delay the shipment of our products and affect our ability
to receive and fulfill orders. For example, since we perform all of our final
assembly and tests in one location, any fire or other disaster at our assembly
facility would have a material adverse effect on our business, results of
operations and financial condition. While we believe that our insurance policy
is comparable to those of similar companies in our industry, it does not cover
all natural disasters, in particular, earthquakes or floods.

               RISKS ASSOCIATED WITH THE BROADBAND ACCESS INDUSTRY

INTENSE COMPETITION COULD PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUE
AND PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.

      The market for multiservice broadband access products is highly
competitive. We compete directly with numerous companies, including Alcatel SA,
Cisco Systems, Inc., CopperCom, Inc., Copper Mountain Networks, Inc., Jetstream
Communications, Inc., Lucent Technologies, Inc., Nokia, Nortel Networks, Inc.,
Tollbridge Technologies, Inc. and Zhone Technologies. Many of our current and
potential competitors have longer operating histories, significantly greater
selling and marketing, technical, manufacturing, financial, customer support,
professional services and other resources, including vendor-sponsored financing
programs. As a result, these competitors are able to devote greater resources to
the development, promotion, sale and support of their products. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could develop new technologies that compete with our products or even
render our products obsolete. We may not have sufficient resources to continue
to make the investments or achieve the technological advances necessary to
compete successfully with existing or new competitors. In addition, due to the
rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including other large
telecommunications equipment manufacturers, may enter our markets, thereby
further intensifying competition.

      The markets in which we compete are characterized by increasing
consolidation, as exemplified by the acquisition of Efficient Networks by
Siemens and the acquisitions of Promatory Communications, Inc., by Nortel
Networks and PairGain Technologies, Inc. by ADC Telecommunications, Inc. We
cannot predict how industry consolidation will affect our competitors and we may
not be able to compete successfully in an increasingly consolidated industry.
Additionally, because we may be dependent on strategic relationships with third
parties in our industry, any consolidation involving these parties could reduce
the demand for our products and otherwise harm our business prospects. For
instance, Siemens has been a significant distribution channel for our products
but we do not know if Siemens will continue to provide adequate, if any,
resources to work with us in the future, in light of Siemens' acquisition of
Efficient Networks, one of our competitors. Our competitors that have large
market capitalizations or cash reserves are also better positioned than we are
to acquire other companies, including our competitors, thereby obtaining new
technologies or products that may displace our product lines. Any of these
acquisitions could give our competitors a strategic advantage that would
materially and adversely affect our business, financial condition and results of
operations.

      In addition, many of our competitors have much greater name recognition
and have a more extensive customer base, broader customer relationships,
significant financing programs, and broader product offerings than we do. These
companies can adopt aggressive pricing policies and leverage their customer
bases and broader product offerings to gain market share. We have encountered,
and expect to continue to encounter, potential customers that, due to existing
relationships with our competitors, are committed to the product offerings of
these competitors. As a result, these potential customers may not consider
purchasing our products.

      We expect that competitive pressures will result in price reductions,
reduced margin and loss of market share, which would materially and adversely
affect our business, financial condition and results of operations.



                                       26
<PAGE>   29

IF OUR PRODUCTS ARE NOT INTEROPERABLE WITHIN OUR CUSTOMERS' NETWORKS, ORDERS
WILL BE DELAYED OR CANCELED AND COULD RESULT IN SUBSTANTIAL PRODUCT RETURNS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.

      Many of our customers require that our products be designed to interface
with their existing networks, each of which may have different specifications
and utilize multiple protocol standards. Our customers' networks may contain
multiple generations of products from different vendors that have been added
over time as their networks have grown and evolved. Our products may be required
to interoperate with these products as well as with future products in order to
meet our customers' requirements. In some cases, we may be required to modify
our product designs to achieve a sale, which may result in a longer sales cycle,
increased research and development expense, and reduced operating margins. If
our products do not interoperate with existing equipment in our customers'
networks, installations could be delayed, orders for our products could be
cancelled or our products could be returned. This could have a material adverse
effect on our business, financial condition and results of operations.

IF WE FAIL TO COMPLY WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS, SALES OF
OUR EXISTING AND FUTURE PRODUCTS COULD BE ADVERSELY AFFECTED.

      The markets for our products are characterized by a significant number of
laws, regulations and standards, including those promulgated by the Federal
Communications Commission, or FCC, and standards established by Underwriters
Laboratories, some of which are evolving as new technologies are deployed. While
we believe that our products comply with all current governmental laws,
regulations and standards, we cannot assure you that we will be able to continue
to design our products to comply with all necessary requirements in the future.
In addition, our customers may require our products to comply with various
industry standards, such as those promulgated by Telcordia Technologies, or
proprietary standards promoted by our competitors. Our key competitors may
establish proprietary standards which they do not make available to us. As a
result, we may not be able to achieve interoperability with their products.
Internationally, we may also be required to comply with standards established by
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunication Union.

      Our customers may also require, or we may otherwise deem it necessary or
advisable, that we modify our products to address actual or anticipated changes
in the regulatory environment. Failure of our products to comply, or delays in
compliance, with the various existing, anticipated, and evolving industry
regulations and standards could adversely affect sales of our existing and
future products. Moreover, the enactment of new laws or regulations, changes in
the interpretation of existing laws or regulations or a reversal of the trend
toward deregulation in the telecommunications industry, could have a material
adverse effect on our customers, and thereby materially adversely affect our
business, financial condition and results of operations.

OUR CUSTOMERS ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS THAT NEGATIVELY IMPACT OUR CUSTOMERS COULD HARM OUR
BUSINESS.

      The jurisdiction of the FCC extends to the entire communications industry,
including our customers. Future FCC regulations affecting the broadband access
industry, our customers, or their service offerings, may harm our business. For
example, FCC regulatory policies that affect the availability of data and
Internet services may impede our customers' penetration into certain markets or
affect the prices that they are able to charge. In addition, international
regulatory bodies are beginning to adopt standards and regulations for the
broadband access industry. These domestic and foreign standards and regulations
address various aspects of Internet use, including issues relating to liability
for information retrieved from or transmitted over the Internet, online context
regulation, user privacy, taxation, consumer protection, security of data,
access by law enforcement, as well as intellectual property ownership, obscenity
and libel. Resulting standards and regulations, or judgments in favor of
plaintiffs in lawsuits against service providers, e-commerce and other Internet
companies, could adversely affect the development of e-commerce and other uses
of the Internet. This, in turn, could directly or indirectly materially
adversely impact the broadband telecommunications and data industry in which our
customers operate. To the extent our customers are adversely affected by laws or
regulations regarding their business, products or service offerings, this could
result in a material and adverse effect on our business, financial condition and
results of operations.

IF NECESSARY LICENSES OF THIRD PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR PRODUCT
ENHANCEMENTS, WHICH WOULD SERIOUSLY IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.

      From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that these third-party licenses will be available to us on commercially




                                       27
<PAGE>   30

reasonable terms, if at all. Our inability to obtain necessary third-party
licenses may force us to obtain substitute technology of lower quality or
performance standards or at greater cost, any of which could seriously harm the
competitiveness of our products and which would result in a material and adverse
effect on our business, financial condition and results of operations.

IF THIRD-PARTY SUPPLIERS DO NOT CONTINUE TO DEVELOP NEW COMPONENTS THAT WE RELY
ON FOR FUTURE PRODUCTS, WE MAY NOT BE ABLE TO OFFER COMPETITIVE PRODUCTS.

      Some of our planned future products will rely on components developed by
third parties. If these components fail to be developed by third parties in a
timely basis, or at all, or if they are not otherwise made available to us, we
may not be able to offer new products that are competitive. In this event, our
business, financial condition and results of operations could be materially and
adversely affected.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We do not hold financial instruments for trading or speculative purposes.
Our financial instruments have short maturities and therefore are not subject to
significant interest rate risk. We generally place our marketable security
investments in high credit quality instruments, primarily corporate obligations
with contractual maturities of less than one year. Our financial liabilities
that are subject to interest rate risk are our credit facilities, which have
stated interest rates based on the bank's prime rate. We do not expect any
material loss from our marketable security investments and therefore believe
that our potential interest rate exposure is not material. We do not use any
derivatives or similar instruments to manage our interest rate risk.

      We currently have product development activities in India. We record
expenses for our subsidiary in India in Indian Rupees. Accordingly, our
operating results are also exposed to changes in exchange rates between the U.S.
dollar and Indian Rupee. While to date, our results have not materially been
affected by any changes in currency exchange rates, devaluation of the U.S.
dollar against the Indian Rupee would adversely affect our expenses for our
Indian subsidiary.

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Securities Class Action Litigation

      Beginning on or about April 19, 2001, a number of purported class action
lawsuits have been filed against the Company and certain current and former
officers in the United States District Court for the Central District of
California. The lawsuits purport to bring suit on behalf of those who purchased
the Company's publicly traded securities between June 22, 2000 and April 17,
2001. Plaintiffs allege that defendants made false and misleading statements,
purport to assert claims for violations of the federal securities laws, and seek
unspecified compensatory damages and other relief. The Company expects the
actions to be consolidated into a single action. The Company believes the claims
are without merit and intends to defend the actions vigorously.

      In addition, the Company is currently aware that two securities class
action lawsuits have been filed against the Company, the underwriters of its
Initial Public Offering, its individual Board members and certain former
officers, in the United States District Court for the Southern District of New
York. The lawsuits, which were filed on behalf of investors who purchased stock
between June 22, 2000 and June 8, 2001, generally allege that the underwriter
defendants agreed to allocate stock in the Company's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at pre-determined prices. Plaintiffs allege that the Company made
false and misleading statements or omissions with respect to these alleged
activities in violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and Sections 11 and 15 of the Securities Act of 1933. The Company
intends to defend against the actions vigorously. The Company expects these
cases and any subsequently filed cases regarding this matter will be
consolidated into a single action and that plaintiffs will file a consolidated
complaint. The Company understands that, to date, at least one hundred and ten
other companies have been named in nearly identical lawsuits that have been
filed by some of the same law firms.

Product Defect Litigation

      In October 2000, the Company was advised by one of its customers that the
customer believed that certain of


                                       28
<PAGE>   31

the Company's products sold and delivered to the customer were defective and
that it believed that the Company failed to perform under the agreement between
the two parties. The customer demanded that it be permitted to return the
products to the Company in exchange for a return of the purchase price of
approximately $3.0 million. On May 8, 2001, the customer filed a lawsuit against
the Company in the United States District Court of Colorado related to this
claim. The Company has denied the customer's allegations, and has retained
counsel to continue investigation into the allegations.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(d)   USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On June 28, 2000, the
Company completed an initial public offering (the "Offering") of its Common
Stock, $.001 par value. The shares of Common Stock sold in the Offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-31732) that
was declared effective by the SEC on June 22, 2000. The Offering commenced on
June 23, 2000 and closed on June 28, 2000 after all 4.6 million shares of Common
Stock registered under the Registration Statement (including 600,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) were sold
at a price of $15.00 per share. The aggregate price of the Offering amount
registered was $69.0 million. In connection with the Offering, the Company paid
an aggregate of $4.8 million in underwriting discounts and commissions to the
Underwriters and paid other expenses of approximately $1.9 million. After
deducting the underwriting discounts and commissions and the estimated Offering
expenses described above, the Company received net proceeds from the Offering of
approximately $62.3 million.

As of June 30, 2001, the Company had used approximately $17.4 million of the net
proceeds from the Offering to fund the general operations of the Company. The
Company intends to continue to use the proceeds for general corporate purposes
as described in the prospectus for the Offering, and to fund certain purchase
commitments as described in "Liquidity and Capital Resources" and "Note 7 -
Commitments and Contingencies" included in this Report on Form 10-Q. Except for
salaries, and reimbursements for travel expenses and other out-of-pocket costs
incurred in the ordinary course of business, none of the proceeds from the
offering have been paid by us, directly or indirectly, to any of our directors
or officers or any of their associates, or to any persons owning ten percent or
more of our outstanding stock or to any of our affiliates.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

            None.

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

            None.

ITEM 5.  OTHER INFORMATION

      On April 3, 2001, the Company filed Form NT 10-K, Notification of Late
Filing, seeking relief for delayed filing of its form 10-K pursuant to Rule
12b-25(b). The basis for this request was that the Company had recently retained
a new management team, including its CEO and CFO, as well as several other key
employees in its sales and finance departments. This new management team had
only had a limited period of time to review the Company's financial status and
other related information necessary to complete the filing of its Annual Report
on Form 10-K at that time.

      The Company announced on April 17, 2001 that it was not able to file its
Annual Report for the 2000 fiscal year on Form 10-K as previously contemplated,
because it determined certain revenue recognized in the second quarter of 2000
should have been deferred. Following the announcement, The Nasdaq National
Market announced that trading in the Company's stock was halted, for additional
information requested from the Company, and that trading would remain halted
until the Company has fully satisfied Nasdaq's request for additional
information.

      On April 24, 2001, the Company received a Nasdaq Staff Determination that,
pursuant to Marketplace Rule 4310(c)(14), its common stock was subject to
delisting from The Nasdaq National Market because the Company delayed the filing
of its Form 10-K for the period ended December 31, 2000. The Company filed its
Form 10-K on May 8, 2001. In response to the Staff Determination, the Company
requested a hearing before the Nasdaq Listing Qualifications Panel, which was
scheduled for May 10, 2001. On May 11, 2001, the Company announced that this
hearing had been rescheduled to June 8, 2001, because Nasdaq staff had requested
the hearing be continued for 30



                                       29
<PAGE>   32

days to allow it sufficient time to determine the necessity of a hearing. On May
22, 2001, the Nasdaq staff informed the Company that the delisting hearing had
been cancelled, and trading in the Company's stock resumed.

      On July 12, 2001, the Nasdaq Listing Qualifications Panel gave notice to
the Company that its common stock had failed to maintain a minimum bid price of
$1.00 over the most recent consecutive 30 trading days as required under
Marketplace Rule 4450(a)(5), pursuant to which the Company has been provided 90
calendar days, or until October 10, 2001, to regain compliance. If the Company
is unable to demonstrate compliance, its securities may be delisted from The
Nasdaq National Market at that time.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)   EXHIBITS

      3.1*  Amended and Restated Certificate of Incorporation of the Registrant.

      3.2*  Amended and Restated Bylaws of the Registrant.

      10.1+ Amendment One to the mini-OSS Software License, Development and
            Distribution Agreement dated April 18, 2001, by and between the
            Registrant and Dorado Software, Inc.

      10.2  Standard Manufacturing Agreement dated April 16, 2001, with
            addendum, by and between the Registrant and Fine Pitch Technology,
            Inc.

      ------------------------

      *     Incorporated by reference to Exhibits 3.1 and 3.2, respectively, to
            the Registrant's Form S-1 (Registration No. 333-31732).

      +     Confidential treatment has been requested for certain confidential
            portions of this exhibit pursuant to Rule 24b-2 under the Securities
            and Exchange Act, as amended. In accordance with Rule 24b-2, these
            confidential portions have been omitted from this exhibit and filed
            separately with the Securities and Exchange Commission.

      (b)   REPORTS OF FORM 8-K

            On April 17, 2001, the Company filed a Form 8-K to provide an update
            on its delayed Annual Report of Form 10-K filing, indicating that
            the filing would be further delayed as the result of an ongoing
            examination of certain revenue recognized in the second quarter of
            2000.

            On May 8, 2001, the Company filed a Form 8-K to report revised
            financial results for fiscal 2000, the filing of amended Form
            10-Q/A's for the three month periods ended June 30 and September 30,
            2000, and the filing of its Annual Report on Form 10-K for the year
            ended December 31, 2000.





                                       30
<PAGE>   33

                                   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.

                                       ACCELERATED NETWORKS, INC.
                                       (Registrant)



                                       By: /s/ H. Michael Hogan III
                                           -------------------------------------
                                               H. Michael Hogan III
                                               Vice President, Finance and
                                               Administration and Chief
                                               Financial Officer (Principal
                                               Financial and Accounting Officer)


Dated: August 14, 2001


                                       31
<PAGE>   34

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      Exhibit
        No.     Description
      -------   -----------

<S>   <C>
      3.1*  Amended and Restated Certificate of Incorporation of the Registrant.

      3.2*  Amended and Restated Bylaws of the Registrant.

      10.1+ Amendment One to the mini-OSS Software License, Development and
            Distribution Agreement dated April 18, 2001, by and between the
            Registrant and Dorado Software, Inc.

      10.2  Standard Manufacturing Agreement dated April 16, 2001, with
            addendum, by and between the Registrant and Fine Pitch Technology,
            Inc.
</TABLE>

      ------------------------

      *     Incorporated by reference to Exhibits 3.1 and 3.2, respectively, to
            the Registrant's Form S-1 (Registration No. 333-31732).

      +     Confidential treatment has been requested for certain confidential
            portions of this exhibit pursuant to Rule 24b-2 under the Securities
            and Exchange Act, as amended. In accordance with Rule 24b-2, these
            confidential portions have been omitted from this exhibit and filed
            separately with the Securities and Exchange Commission.