<PAGE>


                                  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 SEPTEMBER 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 November 9, 2001: 50,625,704
shares.


<PAGE>


                                      INDEX

<TABLE>
<CAPTION>
Part I  Financial Information                                                                      Page
                                                                                                   ----
<S>                                                                                                <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.......................................................................     10

            Risk Factors.......................................................................     17

Item 3.     Quantitative and Qualitative Disclosures About Market Risk ........................     30

Part II  Other Information

Item 1.      Legal Proceedings..................................................................    30

Item 2.      Changes in Securities and Use of Proceeds..........................................    31

Item 3.      Defaults Upon Senior Securities....................................................    31

Item 4.      Submission of Matters to a Vote of Security Holders................................    31

Item 5.      Other Information..................................................................    32

Item 6.      Exhibits and Reports on Form 8-K...................................................    32

             A.  Exhibits.......................................................................    32

             B.  Reports on Form 8-K............................................................    32

Signatures....................................................................................      33
</TABLE>


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


                                       i

<PAGE>


                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

                           ACCELERATED NETWORKS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (THOUSANDS)

<TABLE>
<CAPTION>
                                                                             AS OF
                                                                 -----------------------------
                                                                 SEPTEMBER 30,    DECEMBER 31,
                                                                     2001            2000
                                                                 -------------    ------------
ASSETS                                                           (unaudited)
<S>                                                               <C>             <C>
Current assets:
  Cash and cash equivalents                                        $  38,124       $  62,194
  Short term investments                                                  --           7,913
  Accounts receivable, net of allowance for doubtful accounts
     of $305 at September  30, 2001 and $760 at December 31,
     2000 (Note 4)                                                       136           5,490
  Amounts due from related party                                          --          11,147
  Inventories                                                          4,594           5,266
  Prepaid and other current assets                                     1,643           1,570
                                                                   ---------       ---------
    Total current assets                                              44,497          93,580
Property and equipment, net                                            9,219          10,164
Other assets                                                             155             199
                                                                   ---------       ---------
      Total assets                                                 $  53,871       $ 103,943
                                                                   =========       =========

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                                5,012          13,216
  Accrued payroll                                                      2,405           1,708
  Capital lease obligations, current                                     107              97
  Deferred revenue                                                       786           3,370
                                                                   ---------       ---------
      Total current liabilities                                        8,310          18,391
Capital lease obligations, net of current portion                         87             168
                                                                   ---------       ---------
    Total liabilities                                                  8,397          18,559
Commitments and contingencies (Notes 6, 7 and 8)
Stockholders' equity:
  Common stock, authorized ---- 200,000 shares; issued and                51              50
     outstanding ---- 50,626 and 50,387 shares at September
     30, 2001 and December 31, 2000, respectively
  Additional paid-in capital                                         176,860         180,913
  Deferred stock compensation                                         (1,309)         (4,391)
  Foreign currency translation adjustment                                (93)            (79)
  Accumulated deficit                                               (130,035)        (91,109)
                                                                   ---------       ---------
      Total stockholders' equity                                      45,474          85,384
                                                                   ---------       ---------
      Total liabilities and stockholders' equity                   $  53,871       $ 103,943
                                                                   =========       =========
</TABLE>

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


                                       1
<PAGE>

                           ACCELERATED NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       (THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                    THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                  ----------------------    ----------------------
                                                                                  SEPTEMBER    SEPTEMBER    SEPTEMBER    SEPTEMBER
                                                                                   30, 2001     30, 2000     30, 2001     30, 2000
                                                                                  ---------    ---------    ---------    ---------
<S>                                                                               <C>          <C>          <C>           <C>
Net revenue (includes related party revenue of $167 and $2,058 for the
      three and nine months ended September 30, 2001, respectively; and
      $4,034 and $7,317 for the three and nine months ended September 30,
      2000, respectively) .....................................................    $    404     $ 11,567     $  2,633     $ 26,182
Cost of revenue (1) ...........................................................       3,358        7,895        8,264       18,421
                                                                                   --------     --------     --------     --------
Gross profit (loss) ...........................................................      (2,954)       3,672       (5,631)       7,761

Operating expenses (1):
     Research and product development .........................................       4,549        6,513       18,603       18,106
     Sales and marketing ......................................................         918        5,887        6,096       18,228
     General and administrative ...............................................       1,821        1,750        6,213        4,562
     Other charges ............................................................       2,766           --        4,147           --
                                                                                   --------     --------     --------     --------
           Total operating expenses ...........................................      10,054       14,150       35,059       40,896
                                                                                   --------     --------     --------     --------

Loss from operations ..........................................................     (13,008)     (10,478)     (40,690)     (33,135)

     Other income, net ........................................................         333        1,486        1,764        2,491
                                                                                   --------     --------     --------     --------

Loss before provision for income taxes ........................................     (12,675)      (8,992)     (38,926)     (30,644)

Provision for income taxes ....................................................          --           --           --            1
                                                                                   --------     --------     --------     --------

Net loss ......................................................................     (12,675)      (8,992)     (38,926)     (30,645)

Beneficial conversion feature .................................................          --           --           --       (9,882)
                                                                                   --------     --------     --------     --------

Net loss applicable to common stockholders ....................................    $(12,675)    $ (8,992)    $(38,926)    $(40,527)
                                                                                   ========     ========     ========     ========

Basic and diluted net loss per share applicable to common stockholders ........    $  (0.25)    $  (0.19)    $  (0.79)    $  (1.48)
                                                                                   ========     ========     ========     ========

Weighted average shares  outstanding used to compute basic and diluted net
     loss per share applicable to common stockholders .........................      49,848       48,535       49,227       27,430
                                                                                   ========     ========     ========     ========

(1) Amortization of deferred stock-based compensation included in:
     Cost of revenues .........................................................    $    (40)    $     90     $    (17)    $    399
     Research and product development .........................................        (148)         809         (100)       2,712
     Sales and marketing ......................................................        (500)         786       (1,322)       2,655
     General and administrative ...............................................         156          561          405        1,254
                                                                                   --------     --------     --------     --------
                                                                                   $   (532)    $  2,246     $ (1,034)    $  7,020
                                                                                   ========     ========     ========     ========
</TABLE>

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


                                       2
<PAGE>

                           ACCELERATED NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                             --------------------------
                                                             SEPTEMBER      SEPTEMBER
                                                              30, 2001       30, 2000
                                                             ----------     -----------
<S>                                                          <C>            <C>
OPERATING ACTIVITIES:
   Net loss ............................................      $(38,926)      $ (30,645)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization .....................         3,225           1,859
     Provision for bad debts ...........................          (435)            622
     Issuance of warrant to purchase common stock ......            --           1,385
     Amortization of deferred stock compensation .......        (1,034)          7,020
     Changes in current assets and liabilities:
       Accounts receivable .............................        16,936         (10,091)
       Inventories .....................................           672            (747)
       Prepaids and other assets .......................           (29)           (979)
       Accounts payable and accrued expenses ...........        (8,204)          2,718
       Accrued payroll .................................           697             824
       Deferred revenue ................................        (2,584)          2,421
       Foreign currency translation adjustment .........           (14)             --
                                                              --------       ---------
         Net cash used for operating activities ........       (29,696)        (25,613)

INVESTING ACTIVITIES:
   Net maturities of available-for-sale securities .....         7,913              --
   Net purchases of property and equipment .............        (2,280)         (4,634)
                                                              --------       ---------
         Net cash provided by (used for) investing
           activities ..................................         5,633          (4,634)

FINANCING ACTIVITIES:

   Proceeds from issuance of redeemable
     convertible preferred stock, net ..................            --          38,425
   Proceeds from issuance of common stock, net of
     repurchases .......................................            64          65,895
   Payments under capital lease obligations and
     credit facilities .................................           (71)         (2,553)
                                                              --------       ---------
         Net cash provided by (used for)
          financing activities .........................            (7)        101,767
                                                              --------       ---------
         Net increase (decrease) in cash and cash
          equivalents ..................................       (24,070)         71,520
Cash and cash equivalents at beginning of period .......        62,194          15,207
                                                              --------       ---------
Cash and cash equivalents at end of period .............      $ 38,124       $  86,727
                                                              ========       =========

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

   Conversion of preferred to common stock upon
      completion of initial public offering ............      $     --       $  88,282
                                                              ========       =========
</TABLE>



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


                                       3
<PAGE>

                           ACCELERATED NETWORKS, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL
     INTERIM INFORMATION RELATING TO THE THREE- AND NINE-MONTH PERIODS ENDED
                    SEPTEMBER 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 the Company's current and prospective customers, which has
led to an overall decrease in demand for the Company's products and has caused
significant shortfalls in the Company's 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
in the United States of America 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 September 28, 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 in the United States of America,
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>

                           ACCELERATED NETWORKS, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (ALL INTERIM INFORMATION RELATING TO THE THREE- AND NINE-MONTH PERIODS ENDED
                    SEPTEMBER 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            NINE MONTHS ENDED
                                                              ------------------------      -----------------------
                                                              SEPTEMBER      SEPTEMBER      SEPTEMBER     SEPTEMBER
                                                              30, 2001       30, 2000       30, 2001      30, 2000
                                                              ---------      ---------      ---------     ---------
<S>                                                           <C>            <C>            <C>            <C>
Numerator:

Net loss applicable to common stockholders .............      $(12,675)      $ (8,992)      $(38,926)      $(40,527)
                                                              ========       ========       ========       ========

Denominator (basic and diluted):

Weighted average shares outstanding ....................        50,632         50,398         50,572         29,701
Less: weighted average common shares subject to
   repurchase ..........................................          (784)        (1,863)        (1,345)        (2,271)
                                                              --------       --------       --------       --------
Weighted average shares used to compute basic and
   diluted net loss per share applicable to common
   stockholders ........................................        49,848         48,535         49,227         27,430

Basic and diluted net loss per share applicable to
    common stockholders ................................      $  (0.25)      $  (0.19)      $  (0.79)      $  (1.48)
                                                              ========       ========       ========       ========
</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    NINE MONTHS ENDED
                                                                ---------------------  ---------------------
                                                                SEPTEMBER   SEPTEMBER  SEPTEMBER   SEPTEMBER
                                                                30, 2001    30, 2000   30, 2001    30, 2000
                                                                ---------   ---------  ---------   ---------
<S>                                                             <C>         <C>        <C>         <C>
Weighted-average common stock equivalents:

Preferred stock ...........................................          --         --          --      16,878
Unvested shares of common stock subject to repurchase .....         784      1,863       1,345       2,271
Warrants ..................................................         229        229         229         102
Stock options .............................................      11,167      6,446       9,831       5,111
                                                                 ------      -----      ------      ------
Weighted-average common stock equivalents .................      12,180      8,538      11,405      24,362
                                                                 ======      =====      ======      ======
</TABLE>


                                       5
<PAGE>

                           ACCELERATED NETWORKS, INC.

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

3.      INVENTORIES

        Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                September 30,   December 31,
                                   2001            2000
                                -------------   ------------
<S>                             <C>             <C>
Raw materials ..........          $1,426          $1,651
Work-in-process ........             174             925
Finished goods .........           2,994           2,690
                                  ------          ------
                                  $4,594          $5,266
                                  ======          ======
</TABLE>

4. ACCOUNTS RECEIVABLE

        During the quarter ended September 30, 2001, the Company recorded a
reduction to accounts receivable of approximately $810,000 with a corresponding
reduction in deferred revenue. This was related to shipment of products to a
reseller in the second quarter of fiscal 2000, for which the revenues were
deferred. The Company continues to expect that current conditions in the
telecommunications equipment industry will have a negative impact on its ability
to ultimately collect this receivable and recognize the corresponding revenues.
Accordingly, management deemed it appropriate to record the adjustment.

5. SIGNIFICANT CUSTOMERS AND SEGMENT REPORTING

        For the three and nine months ended September 30, 2001, sales to the
Company's largest customer (a related party) accounted for approximately 41% and
78% 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 September 30, 2001. The Company operates in one
industry segment providing multi-service broadband access products. Through
September 30, 2001, the Company's foreign operations have been insignificant.

6. RELATED-PARTY TRANSACTIONS

        For the three and nine months ended September 30, 2001 and September 30,
2000, the Company recognized revenue of approximately $167,000, $2,058,000,
$4,034,000 and $7,317,000 respectively, from sales to a significant stockholder
(the "Stockholder") of the Company. At September 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 guaranteed 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 deferred 10% of all product revenue related to these
shipments. Through September 30, 2001, the Company has shipped approximately
$12,584,000 under this arrangement, of which approximately $1,258,000 was
deferred.

        In April 2001, the End User voluntarily filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. In October 2001, the Company was
notified that an event of default between the Stockholder and the End User had
occurred, and, accordingly the Stockholder made an informal demand for payment
of $981,000 related to the recourse guarantee. As a result of this informal
demand, during the quarter ended September 30, 2001 the Company recorded an
adjustment to increase liabilities by $981,000 with a corresponding reduction in
deferred revenue.


                                       6
<PAGE>

                           ACCELERATED NETWORKS, INC.

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


7. COMMITMENTS AND CONTINGENCIES

        At September 30, 2001, the Company had approximately $3,000,000 in
non-cancelable purchase commitments to its former principal contract
manufacturers, which are expected to be fulfilled and paid in various increments
through the first quarter of fiscal 2002. At September 30, 2001 there is
approximately $600,000 included in accounts payable and accrued expenses on the
balance sheet related to these commitments.

        At September 30, 2001, the Company had commitments of approximately
$2,600,000 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. At September 30, 2001, there is approximately $1,639,000
included in accounts payable and accrued expenses on the balance sheet related
to these commitments.

8. LEGAL PROCEEDINGS

Securities Litigation

        Following the Company's April 17, 2001 announcement that it would
restate its financial results, seven securities class action lawsuits were filed
in the United States District Court for the Central District of California
against the Company and certain of its current and former officers and
directors. The seven pending punitive securities class action lawsuits were
consolidated by the Honorable Judge Ronald S.W. Lew as In Re Accelerated
Networks Securities Litigation in a court order dated June 15, 2001. Plaintiffs
filed a Consolidated Amended Complaint on October 30, 2001. The Amended
Complaint generally alleges that the defendants made materially false and/or
misleading statements regarding the Company's financial condition and prospects
during the period between June 22, 2000 through April 17, 2001 in violation of
Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 and
that the registration statement and prospectus issued by defendants in
connection with Company's June 23, 2000 IPO contained untrue statements of
material fact and omitted to state material facts in violation of Sections 11,
12(a)(2) and 15 of the Securities Exchange Act of 1933. The Company intends to
vigorously pursue its defense of the lawsuit.

IPO Allocation Cases

        In June 2001, three punitive shareholder class action lawsuits were
filed against Accelerated Networks, Inc. (or "the Company"), certain of its
officers and directors and several investment banks that were underwriters of
the Company's initial public offering. It is possible that additional similar
complaints may be filed against the Company. The present cases were filed in the
United States District Court for the Southern District of New York, purportedly
on behalf of investors who purchased the Company's stock between June 23, 2000
and June 8, 2001. The lawsuits allege violations of Sections 11 and 15 of the
Securities Exchange Act of 1933, Section 10(b) and Rule 10b-5 promulgated
thereunder and Section 20(a) of the Securities Exchange Act of 1934 against one
or both of the Company and the individual defendants. The claims are based on
allegations that the underwriter defendants agreed to allocate stock in the
Company's June 23, 2000 initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading in violation of the securities laws because it did not
disclose these arrangements. These lawsuits are part of the massive "IPO
allocation" litigation involving the conduct of underwriters in allocating
shares of successful IPOs. The


                                       7
<PAGE>

Company believes that more than one hundred and eighty other companies have been
named in more than eight hundred identical lawsuits that have been filed by some
of the same plaintiffs' law firms. The Company and its officers and directors
intend to defend against the pending actions vigorously.

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 defend these actions vigorously.

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 third quarter of fiscal 2001, the Company recorded other
charges totaling approximately $2,766,000 as follows:

<TABLE>
<S>                                                                 <C>
              Employee separation and retention paid............    $  938,000
              Reserve for employee retention pay through
                September 30, 2001..............................     1,639,000
              Other.............................................       189,000
                                                                    ----------
              Total.............................................    $2,766,000
                                                                    ==========
</TABLE>

        These charges were incurred primarily as the result of: i) costs
associated with the further restructuring of operations, which resulted in a
workforce reduction of approximately 20%, ii) reserves established for the
pro-rata portion of the employee retention commitment, iii) reserves established
related to a product defect claim, and iv) disposal of assets related to
continued reduction in personnel. The Company expects that it will incur charges
of a similar nature in the fourth quarter of fiscal 2001.


                                       8
<PAGE>

                           ACCELERATED NETWORKS, INC.

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


10. SUBSEQUENT EVENT

        On November 9, 2001, the Company entered into a definitive merger
agreement with Occam Networks, Inc. ("Occam"), a California corporation,
pursuant to which the parties agreed to a merger transaction involving the
merger of a wholly owned subsidiary of the Company into Occam, with Occam
surviving as a wholly owned subsidiary of the Company. The merger agreement has
been approved by the boards of directors of both the Company and Occam, and by a
special committee of the board of directors of the Company.

        Under the terms of the merger agreement, upon consummation of the
merger, stockholders of Occam will receive shares of common stock of the
Company, and option holders and warrant holders of Occam will receive options
and warrants in the Company, collectively representing approximately 68 percent
of the Company on a fully diluted basis. In conjunction with the merger, the
combined entity will receive an additional $10 million in cash and a $10 million
funding commitment.

        The transaction, which will be accounted for as a purchase, is expected
to close in the first quarter of 2002, subject to the satisfaction of certain
customary closing conditions, including the approval of the stockholders of both
companies. Stockholders of each company holding in excess of the percentage
required to approve the merger have entered into voting agreements irrevocably
agreeing to vote in favor of, and otherwise support, the merger.

        Upon consummation of the merger, Kumar Shah, president and chief
executive officer of Occam, is expected to be named president and chief
executive officer of the Company, and the directors and officers of the Company
are expected to be composed primarily of current directors and officers of
Occam. One member of the Company's current board of directors, or another
designee of the Company, will continue as a member of the board following the
merger.

        The Company has begun implementing measures to restructure its
operations to conform to Occam's intended post-merger operating plans, including
the discontinuation of further development, sales and marketing efforts related
to the Company's MSAP product line and a workforce reduction of approximately
40% on November 12, 2001, pursuant to which the Company will pay out
approximately $2,100,000 in retention and separation costs. The Company expects
to incur additional charges in the fourth quarter of fiscal 2001 related to
additional workforce reductions, consolidation of facilities, write-down of
inventories, and the disposal and write-down of assets.


                                       9
<PAGE>

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 September 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, May 15, and August 14, 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 September
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 September 30, 2001, we had an accumulated deficit
of approximately $130.0 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.

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


                                       10
<PAGE>

Recent Events

        On November 9, 2001, we entered into a definitive merger agreement with
Occam Networks, Inc. ("Occam"), a California corporation, pursuant to which the
parties agreed to a merger transaction involving the merger of a wholly owned
subsidiary our company into Occam, with Occam surviving as a wholly owned
subsidiary of our company. The merger agreement has been approved by the boards
of directors of both our company and Occam, and by a special committee of the
board of directors of our company.

        Under the terms of the merger agreement, upon consummation of the
merger, stockholders of Occam will receive shares of common stock of our
company, and option holders and warrant holders of Occam will receive options
and warrants in our company, collectively representing approximately 68 percent
of our company on a fully diluted basis. In conjunction with the merger, the
combined entity will receive an additional $10 million in cash and a $10 million
funding commitment.

        The transaction, which will be accounted for as a purchase, is expected
to close in the first quarter of 2002, subject to the satisfaction of certain
customary closing conditions, including the approval of the stockholders of both
companies. Stockholders of each company holding in excess of the percentage
required to approve the merger have entered into voting agreements irrevocably
agreeing to vote in favor of, and otherwise support, the merger.

        Upon consummation of the merger, Kumar Shah, president and chief
executive officer of Occam, is expected to be named president and chief
executive officer of our company, and the directors and officers of our company
are expected to be composed primarily of current directors and officers of
Occam. One member of our current board of directors, or another designee of our
company, will continue as a member of the board following the merger.

        We have begun implementing measures to restructure our operations to
conform to Occam's intended post-merger operating plans, including the
discontinuation of further development, sales and marketing efforts related to
the our MSAP product line and a workforce reduction of approximately 40% on
November 12, 2001, pursuant to which we will pay out approximately $2.1 million
in retention and separation costs. We expect to incur additional charges in the
fourth quarter of fiscal 2001 related to additional workforce reductions,
consolidation of facilities, write-down of inventories, and the disposal and
write-down of assets.

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

NET REVENUE

        To date, we have generated substantially all of our revenue from sales
of our MSAP and carrier-class IAD products. Sales of our MSAP carrier-class IAD
products constituted approximately 27% and 73%, respectively, of our revenue for
the nine months ended September 30, 2001 and approximately 48% and 52%,
respectively, of our revenue for the nine months ended September 30, 2000. We
have recently discontinued the development, sales and marketing of our MSAP
product line, which could have a negative impact on our revenues. We believe
that sales of our carrier-class IAD products will account for substantially all
of our revenue for the foreseeable future.

We recognized net revenue of approximately $404,000 for the three months ended
September 30, 2001, which represented a decrease of approximately $11.2 million,
or 96%, from approximately $11.6 million for the three months ended September
30, 2000. We recognized net revenue of approximately $2.6 million for the nine
months ended September 30, 2001, which represented a decrease of approximately
$23.5 million, or 90%, from approximately $26.2 million for the nine months
ended September 30, 2000. These decreases were attributable to decreased sales
of both our MSAP voice gateways and concentrators and our carrier-class IAD's,
primarily as a result of the continued deterioration of market conditions in the
telecommunications equipment industry which has severely impacted our major
customers' spending patterns. For example, during the nine months ended
September 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 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, which
in recent periods has


                                       11
<PAGE>

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 nine months ended September 30, 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 nine months ended September 30, 2001, sales to our
largest customer, Siemens, accounted for approximately 41% and 78% of our
revenue, respectively. For the three months ended September 30, 2001, sales to
our three largest customers accounted for approximately 61% of our revenue, of
which sales to Siemens, CTC Communications Group and Cable Onda accounted for
approximately 41%, 10% and 10% 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 September 30, 2001 was approximately $3.4 million, which
represented a decrease of approximately $4.4 million, or 56%, from approximately
$7.8 million for the three months ended September 30, 2000. Cost of revenue, net
of amortization of deferred compensation, for the nine months ended September
30, 2001 was approximately $8.3 million, which represented a decrease of
approximately $9.7 million, or 54%, from approximately $18.0 million for the
nine months ended September 30, 2000. These decreases were primarily a result of
decreased sales of our products, offset in large part by excess inventory
charges recorded in the three months ended September 30, 1001. Cost of revenue
in the three and nine months ended September 30, 2001 consisted primarily of
charges for excess inventory, amounts paid to third-party contract
manufacturers, cancellation fees related to excess inventory purchase
commitments, personnel and other costs such as royalties on product shipments,
warranty expense, and assembly costs. Cost of revenue as a percentage of net
revenue, net of amortization of deferred compensation, was 841% and 67% for the
three months ended September 30, 2001 and 2000, respectively, and 315% and 69%
for the nine months ended September 30, 2001 and 2000, respectively. This
increase was attributed primarily to i) charges of approximately $2.1 million
related to excess inventory on hand in excess of future requirements, ii)
approximately $238,000 in settlement and cancellation charges for inventory
purchase commitments in excess of future requirements, iii) the increase in
fixed manufacturing overhead costs as a percentage of sales related to lower
production volumes, iv) a higher percentage of IAD product sales, which
typically have lower margins; iv) a decrease in the average selling prices of
our products; and vi) approximately $393,000 in direct cost of revenues during
the nine months ended September 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.

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 discontinued excess or obsolete
inventory. We are likely to incur additional charges in the fourth quarter of
fiscal 2001 related to discontinued, excess and obsolete inventories for the
MSAP product line. We also expect that current economic conditions in the
telecommunications market will continue to have a negative impact on the average
selling prices for our IAD products. Any one of these


                                       12
<PAGE>

factors will also have a negative impact on gross margins.



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 September 30, 2001 were
approximately $4.7 million, which represented a decrease of approximately $1.0
million, or approximately 18%, from approximately $5.7 million for the three
months ended September 30, 2000. This decrease was primarily the result of
decreased use of third-party development, decreased design and prototype
activity and decreased use of our products for internal design and testing
purposes. Research and product development expenses, net of amortization of
deferred compensation, for the nine months ended September 30, 2001 were
approximately $18.7 million, which represented an increase of approximately $3.3
million, or approximately 21%, from approximately $15.4 million for the nine
months ended September 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 nine months ended September
30, 2001, net of amortization of deferred compensation, were approximately
1,163% and 710%, respectively. 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 September 30, 2001 were approximately
$1.4 million, which represented a decrease of approximately $3.7 million, or
approximately 72%, from approximately $5.1 million for the three months ended
September 30, 2000. Sales and marketing expenses, net of amortization of
deferred compensation, for the nine months ended September 30, 2001 were
approximately $7.4 million, which represented a decrease of approximately $8.2
million, or approximately 52%, from approximately $15.6 million for the nine
months ended September 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 dollars in the foreseeable future; however, such costs
will fluctuate as a percentage of revenue.

        A significant portion of our sales expenses is 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 September 30, 2001, sales through our direct sales force and
sales through Siemens accounted for 59% and 41%, respectively, of our product
sales. For the nine months ended September 30, 2001, sales through our direct
sales force and sales through Siemens accounted for 22% and 78%, respectively,
of our product sales. To date, we have not generated a significant amount of
revenue from international sales, although we continue to devote limited
resources to our sales and marketing efforts internationally.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of salaries and related
expenses for executive, finance,


                                       13
<PAGE>

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 September 30, 2001 were approximately
$1.7 million, which represented an increase of approximately $476,000, or
approximately 40%, from approximately $1.2 million for the three months ended
September 30, 2000. General and administrative expenses, net of amortization of
deferred compensation, for the nine months ended September 30, 2001 were
approximately $5.8 million, which represented an increase of approximately $2.5
million, or approximately 76%, from approximately $3.3 million for the nine
months ended September 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 our operations, 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 reductions in
workforce and other cost reduction initiatives.

OTHER CHARGES

        During the three month periods ended June 30 and September 30, 2001, we
incurred other charges of approximately $1.4 million and $2.8 million,
respectively, as follows:

        THREE MONTHS ENDED JUNE 30, 2001:

<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 September 30, 2001, substantially all of these costs
had been paid.

        THREE MONTHS ENDED SEPTEMBER 30, 2001:

<TABLE>
<S>                                                   <C>
Employee separation and retention paid .........      $  938,000
Reserve for employee retention pay through
  September 30, 2001 ...........................       1,639,000
Other ..........................................         189,000
                                                      ----------
Total ..........................................      $2,766,000
                                                      ==========
</TABLE>

        These charges were incurred primarily as the result of: i) costs
associated with the further restructuring of operations, which resulted in a
workforce reduction of approximately 20%, ii) reserves established for the
pro-rata portion of the employee retention commitment, iii) reserves established
related to a product defect claim, and iv) disposal of assets related to
continued reduction in personnel. We expect that we will incur charges of a
similar nature in the fourth quarter of fiscal 2001.

AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION

In fiscal 2000, we recorded total deferred stock-based compensation of
approximately $6.0 million,


                                       14
<PAGE>

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 and $4.1 million resulting from stock option cancellations and
repurchase of unvested common shares from employees for the year ended December
31, 2000 and the nine months ended September 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 $688,000 of stock-based compensation
expense related to amortization previously recorded on unvested stock options
which were cancelled, and recognized approximately $156,000 in stock-based
compensation expense during the three months ended September 30, 2001, as
compared to approximately $2.2 million in amortization incurred for the three
months ended September 30, 2000. We reversed approximately $1.4 million of
stock-based compensation expense related to amortization previously recorded on
unvested stock options which were cancelled, and recognized approximately
$405,000 of stock-based compensation expense during the nine months ended
September 30, 2001, as compared to approximately $7.0 million in amortization
incurred for the nine months ended September 30, 2000. At September 30, 2001 we
had approximately $1.3 million of unamortized deferred stock-based compensation,
which will be subject to future adjustments as the result of amortization and
future cancellations related to reductions in personnel during the fourth
quarter of fiscal 2001.

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 September 30, 2001 was
approximately $333,000, which represented a decrease of approximately $1.2
million or approximately 78% from approximately $1.5 million for the three
months September 30, 2000. Other income, net of other expenses, for the nine
months ended September 30, 2001 was approximately $1.8 million, which
represented a decrease of approximately $727,000, or approximately 29% from
approximately $2.5 million for the nine months ended September 30, 2000. This
decease was primarily attributable to interest earned on lower average cash
balances throughout the relevant period, as well as a reduction in the average
interest rates over the prior year.

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 nine months ended September
30, 2000. There were no such charges incurred for the three or nine months ended
September 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. In September 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 September 30, 2001, we had cash and cash equivalents of approximately
$38.1 million, no outstanding debt under any credit facilities, and
approximately $194,000 of outstanding obligations under our equipment loans.

        We used approximately $29.7 million in cash for operating activities for
the nine months ended September 30, 2001, an increase of approximately $4.1
million, or 16%, from approximately $25.6 million used for operating activities
for the nine months ended September 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 a decrease in accounts receivable
related to customer collections in the second quarter of fiscal 2001.

In addition, during the quarter ended September 30, 2001, we recorded a
reduction to accounts receivable of


                                       15
<PAGE>

approximately $810,000 with a corresponding reduction in deferred revenue. This
was related to shipment of products to a reseller in the second quarter of
fiscal 2000, for which the revenues were deferred. We continue to expect that
current conditions in the telecommunications equipment industry will have a
negative impact on our ability to ultimately collect this receivable and
recognize the corresponding revenues. Accordingly, our management deemed it
appropriate to record the adjustment (See Notes to Consolidated Financial
Statements -- Note 4).

        We also recorded an adjustment to increase liabilities by $981,000 with
a corresponding reduction in deferred revenue related to an informal demand for
payment related to a recourse guarantee arrangement with Siemens (See Notes to
Consolidated Financial Statements -- Note 6).

        We generated approximately $5.6 million from our investing activities
for the nine months ended September 30, 2001, as compared to approximately $4.6
million used for investing activities for the nine months ended September 30,
2000. The difference was due primarily to the net maturities of short-term
investments of approximately $7.9 million for the nine months ended September
30, 2001 and a decrease in purchases of property and equipment from
approximately $4.6 million during the nine months ended September 30, 2000 to
approximately $2.3 million during the nine months ended September 30, 2001.

        Cash used for financing activities for the nine months ended September
30, 2001 was approximately $7,000, as compared to cash generated from financing
activities of approximately $101.8 million for the nine months ended September
30, 2000. This decrease was attributed primarily to net proceeds generated from
our Series D preferred stock financing and initial public offering and
concurrent private placement during the nine months ended September 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 September 30, 2001, we had approximately $3.0 million in
non-cancelable purchase commitments to our former principal contract
manufacturers, which are expected to be fulfilled and paid in various increments
through the first quarter of fiscal 2002. At September 30, 2001 there is
approximately $600,000 included in accounts payable and accrued expenses on the
balance sheet related to these commitments.

        At September 30, 2001 we had commitments of approximately $2.6 million
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, as defined.
At September 30, 2001 there is approximately $1.6 million included in accounts
payable and accrued expenses on the balance sheet related to these commitments.

We anticipate that operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources. We believe that our cash
on hand will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. In the event additional financing
is required, we may not be able to raise it on acceptable terms, or at all.


                                       16
<PAGE>

                                  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 ASSOCIATED WITH OUR PROPOSED MERGER WITH OCCAM


        The proposed merger with Occam is subject to a number of risks that
could have adverse effects on the Company notwithstanding the realization of the
potential benefits of the proposed merger, some of which are summarized below.
For instance, the failure to complete the merger could have a material adverse
effect on the Company's stock price and its ability to continue its business and
operations.  Even if the merger is completed, the combined organization may
incur significant costs in integrating the operations of the Company with those
of Occam.  This integration process may also divert management's attention away
from operations.  Even if the integration process is completed, there are many
reasons the combined organization may not realize the expected benefits of the
merger, including but not limited to its ability to retain and hire key
employees and risks to the combined organization associated with Occam's
business, financial performance and operations.  In addition, after the merger,
our existing stockholders and other equity holders will own approximately 32% of
the combined company, resulting in significant dilution to our existing
investors. The stock price of the Company may also decline as a result of the
announcement, pendency or completion of the proposed merger.  These and other
risks associated with the proposed merger and Occam will be described in greater
detail in the prospectus/proxy statement that the Company intends to file with
the SEC in connection with the proposed merger.

                   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 September 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, May 8, 2001, and August 14,
2001 and in our registration statement on Form S-1 declared effective by the SEC
on September 22, 2000.

WE OPERATE IN A MARKET THAT HAS EXPERIENCED A PROLONGED AND 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 continued 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.

WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO GENERATE SUFFICIENT NET
REVENUE IN THE FUTURE TO ACHIEVE OR SUSTAIN PROFITABILITY.

We have incurred significant losses since inception and expect that our net
losses and negative cash flow will continue for the foreseeable future as we
grow our business. As of September 30, 2001, we had an accumulated deficit of
approximately $130.0 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


                                       17
<PAGE>

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.

        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 reasonable cost and expense levels. We may not
be able to achieve or sustain profitability in the future.

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:

        - our ability to consummate the proposed merger with Occam;

        - telecommunications market conditions and economic conditions;

        - the amount and timing of orders for our products;

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

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

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

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

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

        - our ability to control costs;

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

        - changes in the prices of our components;

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

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

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

        - the timing of recognizing revenue and deferral of revenue;

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

        - our ability to develop, manufacture, ship and support all of our
          product lines,


                                       18
<PAGE>

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

        - potential seasonality of our sales; and

        - 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:

        - demand for broadband access;

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

        - 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;

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

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

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

        - 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 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, and have been consolidated


                                       19
<PAGE>

into a single amended complaint. We are also aware that three 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 defend the actions
vigorously.

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 41% and 78% of our
revenues for the three and nine months ended September 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 September 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 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


                                       20
<PAGE>

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:

        - the skill set of our customers;

        - the size of the network deployment;

        - the complexity of our customers' network environment;

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

        - 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.

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.


                                       21
<PAGE>

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, during the first quarter of fiscal 2001, we 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, during the second and third
quarters of fiscal 2001, we downsized our workforce pursuant to a business
strategy 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

        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. To date, due in large part to the downturn
in the market for telecommunications equipment, we have not been able to
successfully accomplish the foregoing in an efficient and timely manner, and, as
such, our business, financial condition and results of operations have been
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.


                                       22
<PAGE>

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 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.

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. To remain in compliance with listing requirements, our common stock must
maintain a minimum bid price of $1.00 for ten consecutive trading days. We were
initially provided 90 calendar days, or until October 10, 2001, to regain
compliance; however, Nasdaq suspended these proceedings pursuant to a moratorium
on the minimum bid and public float requirements for continued listing on
Nasdaq, effective September 27, 2001 If Nasdaq lifts its moratorium and we are
unable to demonstrate such compliance within the, our securities may be delisted
from The Nasdaq National Market at a future date. 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


                                       23
<PAGE>

business, financial condition and results of operations.

BECAUSE WE DEPEND UPON A SMALL NUMBER OF OUTSIDE CONTRACTORS TO MANUFACTURE OUR
PRODUCTS, OUR OPERATIONS COULD BE DELAYED OR INTERRUPTED IF WE ENCOUNTER
PROBLEMS WITH THEM.

        We rely primarily upon Fine Pitch Industries, Inc. ("Fine Pitch") to
build our products. 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.
Our contract manufacturers 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 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.

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

        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 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:

        - international telecommunications market;

        - difficulties and costs of staffing and managing foreign operations;

        - certification requirements;

        - longer sales cycles;

        - expenses associated with customizing products for foreign countries;


                                       24
<PAGE>

        - dependence on local vendors;

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

        - protectionist laws and business practices that favor local
          competition;

        - reduced protection for intellectual property rights in some countries;

        - difficulties associated with enforcing agreements through foreign
          legal systems;

        - greater difficulty in collecting accounts receivable;

        - fluctuations in currency exchange rates;

        - unexpected changes in regulatory requirements;

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

        - political and economic instability;

        - import or export licensing requirements; and

        - 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:

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

        - product returns;

        - negative publicity regarding us and our products;

        - unexpected expenses to remedy errors;

        - diversion of our development resources;

        - increased service warranty, costs and repair; and

        - 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.


                                       25
<PAGE>

        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 primary contract
manufacturer, Fine Pitch. Consequently, Fine Pitch 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, Fine Pitch 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 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.


                                       26
<PAGE>

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 our 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, 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 OR
OTHER UNFORESEEN CATASTROPHE


                                       27
<PAGE>

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.


                                       28
<PAGE>

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.


                                       29
<PAGE>

        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
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 DEVELOP COMPONENTS THAT WE RELY ON FOR OUR
CURRENT AND PRODUCTS, WE MAY NOT BE ABLE TO OFFER COMPETITIVE PRODUCTS.

        Some of our products may 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 Litigation

        Following the Company's April 17, 2001 announcement that it would
restate its financial results, seven securities class action lawsuits were filed
in the United States District Court for the Central District of California
against the Company and certain of its current and former officers and
directors. The seven pending punitive securities class action lawsuits were
consolidated by the Honorable Judge Ronald S.W. Lew as In Re Accelerated
Networks Securities Litigation in a court order dated June 15, 2001. Plaintiffs
filed a Consolidated Amended Complaint on October 30, 2001. The Amended
Complaint generally alleges that the defendants made materially false and/or
misleading statements regarding the Company's financial condition and prospects
during the period between June 22, 2000 through April 17, 2001 in violation of
Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 and
that the registration statement and prospectus issued by defendants in
connection with Company's June 23, 2000 IPO contained untrue statements of
material fact and omitted to state material facts in violation of Sections 11,
12(a)(2) and 15 of the Securities Exchange Act of 1933. The Company intends to
vigorously pursue its defense of the lawsuit.

IPO Allocation Cases

In June 2001, three punitive shareholder class action lawsuits were filed
against Accelerated Networks, Inc. (or "the Company"), certain of its officers
and directors and several investment banks that were underwriters of the
Company's initial public offering. It is possible that additional similar
complaints may be filed against the Company. The present cases were filed in the
United States District Court for the Southern District of New York, purportedly
on behalf of investors who purchased the Company's stock between June 23, 2000
and June 8, 2001. The lawsuits allege violations of Sections 11 and 15 of the
Securities Exchange Act of 1933, Section 10(b) and Rule 10b-5 promulgated


                                       30
<PAGE>

thereunder and Section 20(a) of the Securities Exchange Act of 1934 against one
or both of the Company and the individual defendants. The claims are based on
allegations that the underwriter defendants agreed to allocate stock in the
Company's June 23, 2000 initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to
make additional purchases in the aftermarket at pre-determined prices.
Plaintiffs allege that the Prospectus for the Company's initial public offering
was false and misleading in violation of the securities laws because it did not
disclose these arrangements. These lawsuits are part of the massive "IPO
allocation" litigation involving the conduct of underwriters in allocating
shares of successful IPOs. The Company believes that more than one hundred and
eighty other companies have been named in more than eight hundred identical
lawsuits that have been filed by some of the same plaintiffs' law firms. The
Company and its officers and directors intend to defend against the pending
actions vigorously.

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 defend these actions vigorously.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. On September 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 September 22, 2000. The Offering commenced
on September 23, 2000 and closed on September 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 September 30, 2001, the Company had used approximately $27.1
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.


                                       31
<PAGE>

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 September 8, 2001, because Nasdaq staff had
requested the hearing be continued for 30 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). The Company initially was provided 90 calendar
days, or until October 10, 2001, to regain compliance; however, Nasdaq suspended
these proceedings pursuant to a moratorium on the minimum bid and public float
requirements for continued listing on Nasdaq, effective September 27, 2001. If
Nasdaq lifts its moratorium and the Company is unable to demonstrate compliance,
its securities may be delisted from The Nasdaq National Market at a future date.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits

               None.


        (b)    REPORTS OF FORM 8-K

               None.


                                       32
<PAGE>

                                   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: November 14, 2001




                                       33