<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K

(Mark One)

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

                    For fiscal year ended December 31, 2000

                                      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 24597

                          CARRIER ACCESS CORPORATION
            (Exact name of registrant as specified in its charter)

            DELAWARE                                     84-1208770
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)

                     5395 Pearl Parkway, Boulder, CO 80301
              (Address of principal executive offices) (Zip Code)

                                (303) 442-5455
             (Registrant's telephone number, including area code)

          ___________________________________________________________

           Securities registered pursuant to 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $0.001 per share
                               (Title of Class)



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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

   As of March 1, 2001, there were 24,678,774 shares of the Registrant's common
stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the Registrant (based upon the closing sale price of such shares
on the Nasdaq National Market on March 1, 2001) was approximately $60,327,314.
Shares of the Registrant's common stock held by each executive officer and
director and by each entity that owns 10% or more of the Registrant's
outstanding common stock have been excluded in that such persons or entities may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Certain sections of the Registrant's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
<PAGE>

                          CARRIER ACCESS CORPORATION

                      INDEX TO ANNUAL REPORT ON FORM 10-K
                  For the Fiscal Year Ended December 31, 2000

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                                                                                                    Page No.
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PART I
<S>                                                                                                 <C>
Item 1.  Business.................................................................................      3

Item 2.  Properties...............................................................................     17

Item 3.  Legal Proceedings........................................................................     17

Item 4.  Submission of Matters to a Vote of Security Holders......................................     17


PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters....................     18

Item 6.  Selected Financial Data..................................................................     18

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations....     20

Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................     25

Item 8.  Consolidated Financial Statements and Supplementary Data.................................     25

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.....     39


PART III

Item 10. Directors and Executive Officers of the Registrant.......................................     40

Item 11. Executive Compensation...................................................................     40

Item 12. Security Ownership of Certain Beneficial Owners and Management...........................     40

Item 13. Certain Relationships and Related Transactions...........................................     40


PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...........      41
</TABLE>
<PAGE>

                          FORWARD LOOKING STATEMENTS

   The information contained in this report contains certain forward-looking
statements. When used in this report, the words "anticipates," "believes,"
"expects," "intends," "will," "forecasts," "plans," "future," "strategy," or
similar expressions may identify forward-looking statements. These statements
are based on current expectations and projections about our industry and
assumptions made by the management and are not guarantees of future performance.
Our actual results, performance or achievements may differ materially from those
anticipated or implied by forward-looking statements. Factors that could cause
or contribute to material differences include the disclosure in the "Risk
Factors" section in this report, as well as our other periodic reports on Form
10-Q filed with the Securities and Exchange Commission. We undertake no
obligation to update any forward-looking statements in this Report on Form 10-K.

   Unless otherwise indicated, references in this report to specific years and
quarters are to our fiscal year and fiscal quarters.

   Our principal executive offices are located at 5395 Pearl Parkway, Boulder,
Colorado 80301; our telephone number is (800) 442-5455 and our web site is
http://www.carrieraccess.com. The information on our web site is not
incorporated in this report.
<PAGE>

                                    PART I

ITEM 1. BUSINESS

General

     We were incorporated in Colorado in September 1992 and reincorporated in
Delaware in June 1998. We are a leading provider of broadband digital equipment
solutions to communications service providers. These service providers include
competitive local exchange carriers, incumbent local exchange carriers,
independent operating companies, interexchange carriers, Internet service
providers, and wireless mobility carriers. Our products are used by our
customers to provide services including local and long distance voice, high-
speed data and Internet services to businesses, government and enterprise end
users. Our Access Bank(R), Wide Bank(R), Access Navigator(TM), Adit(TM) and
Broadmore products are connected to T1, digital subscriber line, digital radio,
T3 and optical access networks to provide enhanced communications for
businesses.

   Our digital equipment provides a "last mile" solution for the distribution
and management of high bandwidth services from service providers. Reaching large
numbers of businesses and consumers using voice and high speed Internet access
requires connectivity from service provider networks to end user locations.
Installation of our central office communications and customer-located voice and
data communications equipment enables this connectivity. Our products allow
service providers to cost-effectively connect end users to their network
products, decrease ongoing transmission equipment and maintenance expenses,
while enabling new service delivery, such as integrated voice and high speed
Internet access. Our products enable high bandwidth digital deployments targeted
at end users requiring between four and 2800 telephone and data line equivalents
of bandwidth. We believe that over 500 service providers and 1,873 other end
users have purchased our products directly or through our distributors.

Products

   Our products currently include the Access Bank, Wide Bank, Access Navigator,
Adit and Broadmore products. The Access Bank I offers digital connectivity for
local and long distance voice service, and converts a single T1 digital network
access line into 24 telephone circuits for voice, facsimile and modem
connections. The Access Bank II expands on the voice functions of the Access
Bank I by adding high-speed data ports for computer connectivity and dual T1
line interfaces for increasing data speeds and connecting end user phone
systems. The Access Exchange is a customer-located access switch that enables
long distance service providers to offer local services from their embedded base
switching equipment. The Wide Bank 28 is a highly-integrated M1-3 standard
multiplexer designed to connect T1 equipment to high-bandwidth T3 and STS1
digital circuits, providing up to 28 T1 connections for high speed
communications services. The Access Navigator/DCS Service Manager provides a
complete solution for managing 768 DSOs or 32 T-1 access connections in a highly
integrated package. The Access Navigator/GR- 303 offers a highly integrated
solution for combining multi-line local voice and data services on customer T1
access lines. In addition to the concentration and management of CLASS(R) voice
services the Access Navigator/GR-303 grooms and optimally concentrates
fractional T1 data connections from customer locations. The Adit products are
multi-service digital access devices that provide carriers with a single
scalable network connection and platform. Currently, the Adit products support
FXS, FXO, ISDN BRI, T1, 10/100 Base-T with IP routing, and Dual Port V.35. The
Adit 600 integrates traditional data and business-class voice services with
today's broadband interfaces. The Adit 105 is designed to help service providers
penetrate the emerging home and small business markets quickly, inexpensively
and en masse by providing DSL service delivery with minimum installation and
configuration. The Broadmore product fills the service creation gap between low-
cost DWDM (Dense Wave Division Multiplexing) optical transport and user
services.

   Our customer service terminals integrate high-speed data and business-class
voice services in a compact, modular and cost-effective platform. In addition to
business, voice and data service interfaces, reducing our customer service
terminals, designed to support, asynchronous transfer mode, Internet Protocol
routing, Frame Relay, and Integrated Services Digital Network Basic Rate
services. Our newest customer service terminal, the Adit 105, is designed to
help service providers penetrate the emerging home and small business markets
quickly, inexpensively, and en masse by providing DSL service delivery of 8 POTS
and Ethernet data reducing installation and configuration times.

   We differentiate our products on their ability to enable multiple service
offerings, facilitate the rapid deployment of new services, reduce cost of
ownership, provide programmable software-based functionality, scale cost
effectively at service provider and end user locations, and satisfy the safety
and regulatory requirements of service providers and end users. The retail list
prices of our products range from $995 to $50,000, depending upon product
configuration.

   The Access Bank Products

     The Access Bank products are a line of Customer Service Terminals ("CST"s)
designed to deliver carrier-class voice and data services in a one rack-unit.
The Access Bank products provide a solution for major services, including voice
only, voice and data over T1, voice and data over high-bit-rate digital
subscriber line, and data over symmetrical digital subscriber line. The Access
Bank products deliver quality services for regional bell operating companies,
independent local exchange carriers, interexchange carriers, and Internet
service providers.

   Access Bank I-Released: June 1995
<PAGE>

   Our Access Bank I provides an economical, compact, and reliable solution for
converting T1 digital access services from communications service providers
including independent local exchange carriers and competitive local exchange
carriers to 12 or 24 individual analog telephone circuits at end user locations.
The unit consists of a controller, called the line interface unit, and one or
two telephone line interface cards. The Access Bank I incorporates an integrated
T1 Channel Service Unit, which allows customers to plug in a T1 line without
having to connect other external devices to perform service termination. Six
different types of 12-channel telephone line interface circuit cards provide
many popular voice service options while also delivering enhanced local services
such as Caller ID and distinctive ringing. The Access Bank I supports data
services such as fax and high-speed modem traffic by automatically adjusting to
line conditions in order to provide a clean, high-quality transmission path. The
Access Bank I is principally used by service providers for economical local
service delivery, long distance service delivery using T1 access, digital
service interconnection to PBXs and key systems, Internet modem pool connections
to T1, branch office connectivity to T1, and rapid deployment of temporary
telephone services.

   Access Bank I TR-08-Released: November 1996

   The Access Bank I TR-08 provides a Bellcore Standard TR-08 digital loop
carrier software protocol in addition to the basic features of the Access Bank
I. TR-08 signaling delivers T1 connections directly to the line side T1 ports of
local switches and is widely deployed in local exchange carrier, competitive
local exchange carrier, and independent local exchange carrier networks to save
money. Service providers use the Access Bank I TR-08 for economical local
service delivery and expansion of line capacity for local switches. The Access
Bank I TR-08 provides low-cost, compact, wiring closet deployment of carrier-
class enhanced voice features such as Caller ID and distinctive ringing to
service providers using Lucent, Nortel, Siemens and other local exchange
switches.

   Access Bank II-Released: November 1996

   Our Access Bank II delivers twice the T1 capacity of the Access Bank I in the
same size package, enabling service providers to integrate high-speed Internet
service with multi-line voice service in a single unit. The Access Bank II
includes two T1 interfaces with fully integrated channel service unit and data
service unit functionality. It uses the same 12-channel telephone line interface
circuit cards as the Access Bank I. Each of the two T1 interfaces can
accommodate current and future bandwidth requirements for a combination of
facsimile, modem, high-speed Internet, voice, and PBX telephone services. The
T1s can be configured to provide redundant protection for end users' mission
critical voice and Internet applications. The integral V.35 data interface and
T1 interfaces offer connectivity for Internet access routers, enterprise
routers, frame relay devices, video and other high-speed data applications.
Service providers rely on the flexibility of the Access Bank II to deliver
multi-line voice plus high-speed Internet connections to enterprise branch
offices, small business customers, and medium-sized business locations. By
combining digital data with voice over one or two T1 lines, bandwidth can be
utilized more efficiently, saving on communication access costs. The Access Bank
II also includes sophisticated management capabilities such as an optional
Ethernet simple network management protocol ("SNMP") local area network
management connection for configuration and monitoring.

   Access Exchange-Released: April 1998

   The Access Exchange performs the functions of the Access Bank II and
integrates software and digital signal processing capability to provide
automatic call routing and number translation on a call-by-call basis. This
product allows long distance service providers to combine local voice services
with long distance and high-speed Internet access on their existing switch
infrastructure while routing calls to the local exchange carrier for local
calling, directory, 911, and other lifeline services.

   Wide Bank Products

   The Wide Bank DS3 and STS-1 access products were engineered to replace old-
generation equipment and dramatically reduce the size and power requirements of
older communications equipment. In addition, the Wide Bank products utilize new
levels of software integration over older equipment to provide a feature-rich
and cost-effective platform supporting full high- and low-speed redundancy,
hitless T3 and STS-1 network protection, built-in Network Interface Units and
Bit Error Rate Test capabilities. The Wide Bank products also conform to the
most popular management schemes used by our service provider customers,
including SNMP via Ethernet, local or remote Command Line Interface and
Transaction Language 1 ("TL1"). Certification to Network Equipment Building
Systems ("NEBS") enables installation in a wide-array of service provider
environments including central offices and co-location facilities while the
modular design permits a platform cost and configuration to be matched exactly
to the service provider needs.

   Wide Bank 28/DS3 Multiplexer- Released: November 1997

   Our Wide Bank 28/DS3 Multiplexer connects a high bandwidth digital T3 (672
telephone line equivalents) network access line to 28 T1 or 21 E1 service
connections. The Wide Bank 28 allows communications service providers (wireline
and wireless), Internet Service Providers, Enterprise, and Government customers
to consolidate multiple T1s or E1s into T3 services to reduce monthly access
costs. The Wide Bank 28 also provides redundant T3 service distribution from
digital radio connections, T1 service expansion from fiber multiplexers and
connects T3 incumbent local exchange carrier services to Internet service
providers' remote access servers. The Wide Bank 28 is used by wireless service
providers to provide T3 to T1 conversion, T1 circuit grooming, network
<PAGE>

protection, and remote management using the C-Bit T3 overhead of their high-
bandwidth digital wireline and digital radio connections. These connections
typically provide the backbone links between mobile radio (cellular or PCS)
transmission sites. The Wide Bank 28 incorporates T1 Network Interface Unit
functionality to eliminate additional equipment and installation labor costs for
service providers. A Maintenance Service Option (MSO) is available for providing
testing and maintenance capabilities without disruption of services by field
technicians.

   Wide Bank 28 is NEBS Level 3 certified and offers the features and
performance in compliance with NEBS Level 3 criteria as outlined by Telcordia
Technologies for Central Office equipment. The NEBS certification allows service
providers to install the Wide Bank 28 in central office locations where the
product is designed to operate under electrical and physical environmental
stresses such as electromagnetic interference, high and low temperature range
and earthquake and vibration conditions. The Wide Bank 28 offers multiple
management controls and TL-1 Management Control. In addition a Java-based
Graphical User Interface for ease of operations and management on the service
providers' network, as well as a SNMP systems enterprise MIB providing ease of
integration with existing Network Management Systems.

   Wide Bank 28/STS-1 Multiplexer- Released: June 1999

   The Wide Bank 28/STS-1 Multiplexer cost-effectively delivers T1 service
connections from SONET STS-1 electrical interfaces. This addition to our widely
accepted and deployed Wide Bank 28 products offers new capabilities for high-
bandwidth network access technology.

   The Wide Bank 28/STS-1 Multiplexer reduces the overall cost of deploying T1
services at service provider Local Digital Switch (LDS), collocation, Point-of-
Presence (POP), Service Access Point (SAP) and on-network building locations.
Our Wide Bank 28/STS-1 Multiplexer is designed to eliminate the additional
expense of transmultiplexing T3 signals over SONET for fiber transport and
reduce the amount of stranded bandwidth within the SONET shelf, while greatly
decreasing the cost per T1 connection provided to service provider customers.
High-capacity SONET add/drop multiplexers and digital radios can be more
economically deployed to provide high-capacity T1 services.

   The Wide Bank 28/STS-1 Multiplexer optimizes valuable space in central
offices, co-location, or digital loop carrier cabinets. Services can be added in
scalable quad T1 increments, suiting applications from small outside cabinets to
large switching centers.

   The Wide Bank 28/STS-1 Multiplexer offers SNMP, Telnet, and TL-1 management
options as well as alarm reporting and performance monitoring to the Virtual
Tributary 1.5 (VT1.5) tributary-based DSX-1 services, enabling service providers
to gain the cost and management advantages of STS-1 interconnections in a very
compact, scalable network product.

   Access Navigator Products

   The Access Navigator products include: the Access Navigator/DCS Service
Manager, providing a cost effective 1/0 cross-connect solution; the Access
Navigator/GR-303 + Data Host, providing an easy to manage GR-303 host solution;
and the most recent addition to the product, the Navigator Valet Graphical User
Interface configuration tool.

   With both NEBS and customer premises certifications, we designed the Access
Navigator products to be located in service provider racks or on end user
customer walls. The Access Navigator products combine the power of a 32 T1
digital cross connect system with remotely managed demarcation and small space
requirements. Integrated testing and optional common equipment redundancy ensure
carrier-class service availability. The Access Navigator products were designed
to significantly reduce space, power and installation labor as compared to old
generation digital cross connect and channel service equipment.

   Access navigator products provide management access via Ethernet SNMP, Telnet
CLI, RS-232 CLI, Navigator Valet Graphical User Interface, and GR-303 EOC (for
the GR-303 + Data Host version). Flow-through provisioning and testing control
over ESF T1 connections, from the Access Navigator to our Access Bank II and
Adit 600 units, are designed to allow service providers to add new services
remotely, reduce service provider truck rolls and improve voice and Internet
service availability at customer premise locations.

   Access Navigator/DCS Service Manager-Released: January 1999

     The Access Navigator/DCS Service Manager provides a complete solution for
managing four to 32 T1 access connections in a highly integrated package. With
the functions of a 1/0 digital cross connect system, plus demarcation testing,
service providers are able to decrease maintenance costs and labor, while
increasing service availability.

     By using smaller cross connects our wireless service provider customers are
able to reduce initial capital costs and increase service revenue from existing
hub sites.

   Access Navigator/GR-303 + Data Host - Released: January 1999

   The Access Navigator/GR-303 offers a highly integrated solution for combining
multi-line local voice and data services on customer T1 access lines. In
addition to the concentration and management of CLASS voice services, the Access
Navigator/GR-303
<PAGE>

grooms fractional T1 data connections, including Internet traffic, from customer
locations. Fractional voice and data services from multiple customers and
applications are concentrated by the Access Navigator to save recurring
transmission costs, and capital costs on switch or router ports.

   Navigator Valet: - Released: January 2000

   The Navigator Valet provides a Graphical User Interface that eases the
configuration of system parameters and cross connection mappings. The Navigator
Valet can be used in a standalone configuration or in conjunction with a
customer's upper level Network Management System.

   Adit Products

     The Adit products are a line of CSTs and are providing up to 4 eight voice
channels and are designed to bring next-generation technologies to today's
telecommunications networks. The Adit products are designed as a modular,
scalable solution to help service providers deliver the technologies and
services their customers are demanding. Currently, the Adit products support in-
demand features such as a wide range of analog telephony; ISDN BRI; Centrex
Services and high speed internet and video. Future additions to the modular
service cards will let customers deploy new services quickly, easily, and
inexpensively.

   Adit 600 - Released: December 1999

   Adit 600 builds on Access Bank concepts, doubling voice circuit density, and
is designed to add digital subscriber line transport, ISDN BRI, integrated
routing, and expandable V.35 port capacity. Data and voice traffic can be
groomed directly across 18 T1/E1s (up to 512 DS0s) with the integrated 1/0
digital cross connect at a fraction of the cost and size of previous solutions.

   A unique feature of the Adit 600 is its ability to support TDM, designed with
a migration path for asynchronous transfer mode, or inverse multiplexing over
asynchronous transfer mode network connections. Bandwidth can grow seamlessly as
end user customer service needs increase. The product architecture is designed
for scalability for communications service providers, allowing them to deliver
additional services to end users and grow their access solution set as their
business grows, without costly replacement of customer located equipment.

   Adit 105 - Introduced: December 2000

   The Adit 105 is designed to enable deployment of integrated voice and data
DSL services. The Adit 105 supports delivery of up to 8 telephone line
equivalents of voice services plus Ethernet data over xDSL transport interfaces
using ATM. The first release of the Adit 105 works with the Lucent Stinger SDSL
and Jetstream ATM voice gateway platforms. Support for the DSLAM and ATM voice
gateway platforms is planned. The Adit 105 is designed for safety, convenience,
and easy installation.

   Broadmore Product

   Broadmore - Released: October 2000

   The new Carrier Access Broadmore product supplies OC-3c, DS-3, and T1/E1
services via broadband ATM service provisioning and management. An OC3-12c
network connection feeds circuit emulated private line, traditional TDM, and
carrier interconnections into a converged ATM core transport network. Our 1700
product fills the service creation gap between low-cost DWDM optical transport
and user services. The product is available for shipment with OC-12c, OC-3c, and
SDH network interfaces, and T3 or T1/E1 service interfaces. Structured T3 and
OC-3 SONET interfaces are planned, to convert standard SONET TDM access to
broadband ATM optical cores.

Customers

   To date, a significant portion of our sales are made through third-party
distributors to communications service providers, such as competitive local
exchange carriers, Internet service providers, independent operating carriers,
independent local exchange carriers, utilities and wireless service providers
who provide enhanced voice and high-speed data and Internet services to end user
businesses. In addition, we sell our products through direct sales to this same
customer base principally through volume purchase agreements.

   Our customer base is distributed over 1,873 end users, however sales are
concentrated among a small number of distributors and service provider customers
that have historically accounted for a majority of our net revenue. For the year
ended December 31, 2000, Walker & Associates and ADC Telecommunications
accounted for 17% and 16%, respectively, of net revenue. In 1999, Walker &
Associates and ADC Telecommunications accounted for 27% and 14%, respectively,
of net revenue. In addition to being dependent on a small number of distributors
for a majority of our net revenue, we believe our products are distributed to a
limited number of service provider customers who are primarily competitive
local-service providers and wireless. We believe that in 1999, approximately 75
service provider customers were the end users representing approximately 85% of
our net revenue and that in 2000, approximately 35 service provider customers
were the end users representing approximately 74% of our net revenue.

   Sales, Marketing and Customer Support
<PAGE>

   Sales. We currently employ a leveraged sales model consisting of a direct
sales and sales engineering force, which works with strategic accounts and with
our third-party distributors to identify potential customers and provide pre-and
post-sales support to our service provider customers and other end users. Sales
to third-party distributors accounted for the majority of our revenues for the
years ended December 31, 1999 and December 31, 2000.

   Third-Party Distributors. Our distributors are responsible for fulfilling
product orders and warehousing product as well as identifying potential
customers. We establish relationships with distributors through written
agreements that provide prices, discounts and other material terms and
conditions under which the distributor is eligible to purchase our products for
resale. Such agreements generally do not grant exclusivity to the distributors,
do not prevent the distributors from carrying competing product lines, and do
not require the distributors to sell any particular dollar amount of our
products, although the contracts may be terminated at our discretion if
specified sales targets and end user satisfaction goals are not attained. We
occassionally provide our distributors with limited stock rotation and price
protection rights. Other than limited stock rotation rights, we do not provide
our distributors with general product return rights. We have limited knowledge
of the financial condition of certain of our distributors; however, we are aware
that some of our distributors have limited financial and other resources, which
could impair their ability to pay us. Although the financial instability of
these certain distributors has not limited any distributor's ability to pay us
for our products to date, we cannot assure you that any bad debt we incur will
not exceed our bad debt reserves or that the financial instability of one or
more of our distributors will not harm our business, or results of operations.
We have limited knowledge of the inventory levels of our products carried by our
original equipment manufacturers and distributors, and our original equipment
manufacturers and distributors have in the past reduced, and may in the future
reduce, planned purchases of our products due to overstocking. Moreover,
distributors who have overstocked our products have in the past reduced, and may
in the future reduce, their inventories of our products by selling such products
at significantly reduced prices. Any such reduction in planned purchases or
sales at reduced prices by distributors or original equipment manufacturers in
the future could reduce the demand for our products, create conflicts with other
distributors or otherwise harm our business. In addition, three times a year,
some of our distributors are allowed to return a maximum of fifteen percent of
the unsold products held in stock by such distributor, which were purchased
within the four-month period prior to such return date, for an equal dollar
amount of new equipment.

   While to date these returns have not had a material impact on our results of
operations, these returns through stock rotation could harm our future
operations. We believe we have made adequate allowances to provide for these
returns. We are generally required to give our distributors a 60-day notice of
price increases or decreases. In addition, we grant certain of our distributors
"most favored customer" terms, pursuant to which we have agreed to not knowingly
grant another distributor the right to resell our products on terms more
favorable than those granted to the existing distributor, without offering
equally favorable terms to the existing distributor. These price protection and
"most favored customer" clauses could cause a material decrease in the average
selling prices and gross margins of our products, which would harm our business
and results of operations.

   Direct Sales. A significant portion of the sales of our products is made
through direct sales. As a result, our continued success depends on building and
maintaining good relations with our direct customers. We have limited knowledge
of the financial condition of certain of our direct customers; however, we are
aware that some of our direct customers have limited financial and other
resources that could impair their ability to pay us. We cannot assure you that
any bad debts that we incur will not exceed our reserves or that the financial
instability of one or more of our direct customers will not harm our business,
financial condition or results of operations. Any reduction in planned purchases
by direct customers in the future could harm our business. In addition, we grant
certain of our direct customers "most favored customer" terms, pursuant to which
we have agreed to not knowingly provide another direct customer with similar
terms and conditions a better price than those provided to the existing direct
customer, without offering the more favorable prices to the existing direct
customer. It is possible that these price protection and "most favored customer"
clauses could cause a material decrease in the average selling prices and gross
margins of our products, which would harm our business and results of
operations. Our direct customers do not have any obligation to purchase
additional products, and accordingly they may terminate their purchasing
arrangements with us, or significantly reduce or delay the amount of our
products that they order. Any such termination, change, reduction or delay in
orders would harm our business.

   Sales Engineering. Our sales group including Sales and Sales Engineering is
responsible for product configuration, evaluation, installation and telephone
presales support activities. Our sales engineering strategy focuses on assisting
service providers and end users in rapidly integrating our products into their
networks. The sales engineering support group identifies service provider and
end user leads and, based on initial presentations, provides evaluation units
for trial in communication service provider and end user networks. After
successful trial and approval, the service provider or end user is provided with
product installation and maintenance training. The sale of our products averages
between four and twelve months in the case of certain service providers
(including competitive local exchange carriers and service providers), but can
take significantly longer in the case of independent local exchange carriers and
certain distributors and other end users. Initially, our sales engineering
support group is involved in educating service providers and end users on the
functionality and benefits that may be derived from using our products.
Subsequently, members of both our sales engineering and research and development
organizations are involved in providing the service provider or end user with
the required training and technical support to integrate our products into a new
application or service.

   Marketing. Our marketing organization develops strategies for products and,
along with the sales force, develops key account strategies and defines product
and service functions and features. Marketing is responsible for sales support,
request for information, request for quotes and request for proposals, in-depth
product presentations, interfacing with operations, setting price levels,
developing new services/business opportunities and writing proposals in response
to customer requests for information or quotations.
<PAGE>

We engage in a number of marketing activities that include exhibiting products
and customer applications at industry trade shows, advertising in selected
publications aimed at targeted markets, public relations activities with trade
and business press, publication of technical articles and the distribution of
sales literature, technical specifications and documentation, in order to create
awareness, market demand and sales opportunities for our products.

     Customer Service and Support. Based on customer support calls, we believe
that ongoing customer support is critical to maintaining and enhancing
relationships with service providers, end users and distributors. The service
provider and end user support group has five functions: new product development,
that provides for product ideas and enhancements based on customer requirements
through the pre- and post-sales support effort; inbound technical support, that
focuses on pre- and post-sales calls made to us from our customers; outbound
application support and response to request for proposals and request for
quotations; training, including installation and application development
training for customers, sales engineers and employees; and reporting and
analysis based on the automated trouble ticket and returned material systems.

Competition

     There is intense competition in the telecommunications equipment market
with a large number of suppliers providing a variety of products to diverse
market segments. We believe that the principal competitive factors in our
markets include: performance and reliability; flexibility, scalability and ease-
of-use; breadth of features and benefits; end-to-end management systems, and
lower initial and lifetime costs. We believe our product solutions compete
favorably with respect to each of these factors.

     Our existing and potential competitors include many large domestic and
international companies, including certain companies that have substantially
greater financial, manufacturing, technological, sales and marketing,
distribution and other resources. Our principal competitors for our Access Bank
and Adit 600 products include Adtran, Inc. ("Adtran"), Advanced Fibre
Communications, Inc. ("AFC"), Cisco Systems, Inc. ("Cisco"), General DataCom
Industries, Inc. ("General DataCom"), Lucent Technologies, Inc. ("Lucent"), NEC
USA, Inc. ("NEC"), Newbridge Networks Corporation ("Newbridge"), Northern
Telecom Limited ("Nortel"), PairGain Technologies, Inc. ("Pairgain"), Paradyne
Corporation ("Paradyne"), and other small private companies.  Our principal
competitors for the Adit 105 include Polycom, Efficient Networks, VINA
Technologies, Jetstream, Accelerated Networks, Cisco, and CopperCom.  Our
principal competitors for our Wide Bank products include Adtran, Alcatel Alsthom
Compagnie Generale d'Electricite ("Alcatel"), NEC, Nortel, and other small
private companies. Our principal competitors for our Access Navigator products
include AFC, Alcatel,  Cisco, Lucent, Newbridge, Nortel, Telect, Inc.
("Telect"), Tellabs, Inc. ("Tellabs") and other small private companies. We
expect that many of our competitors who currently offer products competitive
with only one of our product lines will eventually offer products competitive
with all of our product lines. In addition, many start-up companies have
recently begun to manufacture products similar to those offered by us. Due to
the rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware and software
companies, may enter those markets, thereby further intensifying competition.
Additionally, one of our distributors is currently competing with us, and
additional distributors may begin to develop or market products in competition
with us.

     Many of our current and potential competitors are substantially larger than
us and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, these competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can.
These competitors may enter our existing or future markets with solutions that
may be less costly, provide higher performance or additional features or be
introduced earlier than our solutions. Many communications companies have large
internal development organizations that develop software solutions and provide
services similar to our products and services. These communications companies
also make a regular practice of acquiring smaller technology companies to gain
entrance into our markets, further accelerating their product development
efforts. Some of our competitors currently offer more lucrative financing
alternatives to their customers than we provide at this time.  We expect our
competitors to continue to improve the performance of their current products and
to introduce new products or technologies that provide added functionality and
other features. Successful new product introductions or enhancements by our
competitors could cause a significant decline in sales or loss of market
acceptance of our products and services, which could result in continued intense
price competition or could make our products and services or technologies
obsolete or noncompetitive. To be competitive, we will be required to continue
investing significant resources in research and development and sales and
marketing. We may not have sufficient resources to make such investments or to
make the technological advances necessary to be competitive. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of our prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which would have a material adverse effect on our business. We cannot assure
you that we will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on our business.

Manufacturing

     Our manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control, and packaging and
shipping. We currently use several independent manufacturers to provide certain
printed circuit boards, chassis and subassemblies. We have developed a
manufacturing process that enables us to configure our products to be adapted to

                                       8
<PAGE>

different customer hardware and software applications at the final assembly
stage. This flexibility is designed to reduce both our manufacturing cycle time
and our need to maintain a large inventory of finished goods. We believe that
the efficiency of our manufacturing process to date is largely due to our
product architecture and our commitment to manufacturing process design.

     We spend significant engineering resources producing customized software
and hardware to assure consistently high product quality. We test every product
both during and after the assembly process using internally developed automated
product assurance testing procedures. These procedures consist of automated
board and automated system testing as well as environmental testing. Although we
generally use standard parts and components for our products, many key
components are purchased from sole or single source vendors for which
alternative sources are not currently available. We cannot assure you that we
will not experience supply problems in the future from any of our manufacturers
or vendors. Any such difficulties could harm our business.

Research and Product Development

     We focus our development efforts on providing enhanced functionality to our
existing products, including total network solutions and performance and the
development of additional software-based features and functionality. Extensive
product development input is obtained from customers and our monitoring of end
user needs and changes in the marketplace. Our current product development focus
has been on developing digital broadband access solutions and completing new
products such as the recently introduced Adit and Broadmore products. We believe
that our success will depend, in part, on our ability to develop and introduce
in a timely fashion new products and enhancements to our existing products. We
have in the past made, and intend to continue making, significant investments in
product and technological development. Our engineering, research and development
expenditures totaled approximately $5.6 million, $13.6 million and $28.7 million
in 1998, 1999 and 2000, respectively. We perform our research and product
development activities at our principal offices in Boulder, Colorado and Tulsa,
Oklahoma. We added an additional research and product development center in
Roanoke, Virginia when we acquired Millennia Systems, Inc. in August of 2000.
Also, in February of 2001 we added a research and development center in
Camarillo, CA. Our inability to develop new products or enhancements to existing
products on a timely basis, or the failure of these new products or enhancements
to achieve market acceptance, could have a material adverse effect on our
business.

Patents, Licenses and Proprietary Information

     We rely upon a combination of patent, copyright and trademark and trade
secret laws as well as confidentiality procedures and contractual restrictions
to establish and protect our proprietary rights. We have also entered into
confidentiality agreements with our employees and consultants and we enter into
non-disclosure agreements with our suppliers and distributors so as to limit
access to and disclosure of our proprietary information. However, such measures
may not be adequate to deter and prevent misappropriation of our technologies or
independent third-party development of similar technologies. The laws of certain
foreign countries in which our products are or may be developed, manufactured or
sold may not protect our products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of our technology and products more likely.

     As of March 31, 2001, we had been issued eight U.S. patents and we had nine
U.S. patent applications pending. The issued patents cover various aspects of
voice and data circuits, switching technologies and redundancy. The U.S. patents
begin to expire in the year 2015. We also have eight U.S. trademark applications
pending, five international trademark applications pending, and four trademarks
registered. A large number of patents and frequent litigation based on
allegations of patent infringement exist within the telecommunications industry.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies that are important to us. If
claims asserting that our products infringed proprietary rights of third parties
were determined adversely to us, it could have a material adverse effect on our
business, financial condition or results of operations.

Employees

     At March 1, 2001, we employed 460 full-time employees in 26 states.
Additionally, we employ a number of engineering and other employees on a part-
time basis. No employees are covered by any collective bargaining agreements. We
believe that our relationships with our employees are good. The loss of any of
our key management or technical personnel could harm our business.

     Many of our employees are highly skilled, and our continued success depends
in part upon our ability to attract and retain such employees.  In an effort to
attract and retain such employees, we continue to offer employee benefit
programs that we believe are at least equivalent to those offered by our
competitors.  Despite these programs, we, along with most of our competitors,
have experienced difficulties at times in hiring and retaining certain skilled
personnel.  In critical areas, we have utilized consultants and contract
personnel to fill these needs until full time employees could be recruited.  We
have never experienced a work stoppage, none of our domestic employees are
represented by a labor organization, and we believe our employee relations to be
good.

                                 RISK FACTORS

     Investors should carefully consider the risks described below before making
an investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently known to us or that we currently
believe are immaterial may also impair our business operations. Our business
could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks and investors may lose all or part of
their investment. In assessing these risks,

                                       9
<PAGE>

investors should also refer to the other information contained or incorporated
by reference in this Form 10-K Report, including our consolidated financial
statements and related notes.


We Have a Limited Operating History.

     We have a limited operating history. We did not begin commercial deployment
of our broadband digital access equipment until 1995. Prior to 1997, we recorded
only nominal product revenue. Although we have been profitable on an annual
basis in recent years, we had a loss from operations of $2.1 million in the
fourth quarter of 2000. Accordingly, an investor in our common stock must
evaluate the risks, uncertainties and difficulties frequently encountered by
early stage companies in rapidly evolving markets such as the communications
equipment industry. Some of these risks include:

 .  significant fluctuations in quarterly operating results;

 .  the intensely competitive market for communications equipment;

 .  the expenses and challenges encountered in expanding our sales, marketing and
   research and development infrastructure;

 .  the risks related to our timely introduction of new packet based products and
   product enhancements; and

 .  the risks associated with general economic conditions, particularly as they
   may effect the communications equipment industry.

     Due to our limited operating history and experience with respect to these
issues, we may not successfully implement any of our strategies or successfully
address these risks and uncertainties.

Our Quarterly Results Fluctuate Significantly, and We May Not be Able to
Maintain Our Growth Rates.

     Although our revenues grew significantly from fiscal 1998 to 2000, these
growth rates may not be sustainable, as is evidenced by our Wide Bank revenue,
and you should not use these past results to predict future revenue or operating
results.  Additionally, our revenues in the third and fourth quarters of 2000
fell short of initial management estimates, and we experienced a decrease in
revenues and an operating loss in the fourth quarter of 2000.  We cannot
guarantee that the Company will not have revenue shortfalls again in the future.
Our quarterly and annual operating results have fluctuated in the past and may
vary significantly in the future.  Our future operating results will depend on
many factors, many of which are outside of our control, including the following:

 .  the size of the orders for our products, and the timing of such orders;

 .  the commercial success of our products, and our ability to ship enough
   products to meet customer demand;

 .  changes in the financial stability of our distributors, customers or
   suppliers;

 .  changes in our pricing policies or the pricing policies of our competitors;

 .  fluctuations in ordering due to increased direct sales to customers;

 .  potential bad debt due to increased direct sales;

 .  inability to obtain third party financing for our service provider customers;

 .  seasonal fluctuations in the placement of orders;

 .  changes in our distribution channels;

 .  potential delays or deferrals in our product implementation at customer
   sites;

 .  technical problems in customizing or integrating our products with end users'
   systems, and potential product failures or errors;

 .  certain government regulations; and

 .  general economic conditions as well as those specific to the communications
   equipment industry.

     A significant portion of our net revenue has been derived from a limited
number of large orders, and we believe that this trend will continue in the
future, especially if the percentage of direct sales to end users increases.
The timing of these orders and our ability to fulfill them can cause material
fluctuations in our operating results, and we anticipate that such fluctuations
will occur.  Also, our distribution and purchase agreements generally allow our
distributors and direct customers to postpone or cancel orders without penalty
until a relatively short period of time prior to shipment.  In the third and
fourth quarters of 2000, we experienced cancellations and delays of orders, and
we expect to continue to experience order cancellations and delays from time to
time in the future.  Any shortfall in orders would harm our operating income for
a quarter or series of quarters, especially since operating expenses in a
quarter are relatively fixed, and these fluctuations could affect the market
price of our common stock.

     Because most all of our sales have historically been through indirect
distribution channels, our ability to judge the timing and size of individual
orders is more limited than for manufacturers who have been selling directly to
the end users of their products for longer periods of time.  Moreover, the
current downturn in general economic conditions has lead to significant
reductions in customer

                                       10
<PAGE>

spending for telecommunications equipment, which has resulted in delays or
cancellations of orders for our products. Our operating expenses are based on
our expectations of future revenues and are relatively fixed in the short term.
Due to these and other factors, if our quarterly or annual revenues fall below
the expectations of securities analysts and investors, the trading price our
common stock could significantly decline, as we experienced in the third and
fourth quarters of 2000.

We Depend on Emerging Service Providers for Substantially All of Our Business.

     Our customers have consisted primarily of competitive local exchange
carriers and, to a lesser extent, long distance service providers, Internet
service providers, independent operating carriers and wireless service
providers. The market for the services provided by the majority of these service
providers has only begun to emerge since the passage of the Telecommunications
Act of 1996 (the "1996 Act"), and many new and existing service providers are
continuing to build their networks and infrastructure and rolling out their
services in new geographical areas. These new service providers require
substantial capital for the development, construction and expansion of their
networks and the introduction of their services. The ability of these emerging
service providers to fund such expenditures often depends on their ability to
obtain sufficient financing. Recently, this financing has not been available to
many of these emerging service providers on favorable terms, if at all,
particularly due to recent negative market conditions in the United States. If
our current or potential emerging service provider customers cannot successfully
raise the needed funds, or if they experience any other trends adversely
affecting their operating results or profitability, these service providers'
capital spending programs may be adversely impacted. If our current or potential
service provider customers are forced to defer or curtail their capital spending
programs, our sales and operating results will likely be harmed.

     In addition, many of the industries in which the service providers operate
have recently experienced consolidation.  In particular, many telecommunication
service providers have recently acquired, been acquired or merged with Internet
service providers or other service providers.  The loss of one or more of our
service provider customers, through industry consolidation or otherwise, could
have a material adverse effect on our sales and operating results.

Our Customers are Subject to Heavy Government Regulation in the
Telecommunications Industry, and Regulatory Uncertainty May Have a Material
Adverse Effect on Our Business.

     Competitive local exchange carriers are allowed to compete with independent
local exchange carriers in the provisioning of local exchange services primarily
as a result of the adoption of regulations under the 1996 Act that impose new
duties on independent local exchange carriers to open their local telephone
markets to competition.  Although the 1996 Act was designed to expand
competition in the telecommunications industry, the realization of the
objectives of the 1996 Act is subject to many uncertainties.  Such uncertainties
include judicial and administrative proceedings designed to define rights and
obligations pursuant to the 1996 Act, actions or inaction by independent local
exchange carriers or other service providers that affect the pace at which
changes contemplated by the 1996 Act occur, resolution of questions concerning
which parties will finance such changes, and other regulatory, economic and
political factors.  Any changes to the 1996 Act or the regulations adopted
thereunder, the adoption of new regulations by federal or state regulatory
authorities under the 1996 Act or any legal challenges to the 1996 Act could
have a material adverse impact upon the market for our products.

     We are aware of certain litigation challenging the validity of the 1996 Act
and local telephone competition rules adopted by the Federal Communications
Commission ("FCC") for the purpose of implementing the 1996 Act.  Furthermore,
Congress has indicated that it may hold hearings to gauge the competitive impact
of the 1996 Act and we cannot assure you that Congress will not propose changes
to the Act.  This litigation and potential regulatory change may delay further
implementation of the 1996 Act, which could hurt demand for our products.
Moreover, our distributors or service provider customers may require that we
modify our products to address actual or anticipated changes in the regulatory
environment.  Further, we may decide to modify our products to meet these
anticipated changes.  Our inability to modify our products in a timely manner or
address such regulatory changes could harm our business.

Our Markets are Highly Competitive and Have Many More Established Competitors.

     The market for our products is intensely competitive, with a large number
of equipment suppliers providing a variety of products to diverse market
segments within the telecommunications industry. Our existing and potential
competitors include many large domestic and international companies, including
certain companies that have substantially greater financial, manufacturing,
technological, sales and marketing, distribution and other resources. Our
principal competitors for our Access Bank and Adit product include Accelerated
Networks, Adtran, AFC, Cisco, Copper Com, Efficient Networks, General Datacom,
Jetstream, Lucent, NEC, Newbridge, Nortel, Pairgain, Paradyne, Polycom, VINA
Technologies and other small private ompanies. Our principal competitors for our
Wide Bank product include Adtran, Alcatel, NEC, Nortel and other small private
companies. Our principal competitors for our Access Navigator product include
AFC, Alcatel, Cisco, Lucent, Newbridge, Nortel, Telect, Tellabs and other small
private companies. We expect that many of our competitors who currently offer
products competitive with only one of our products will eventually offer
products competitive with all of our products. In addition, many start-up
companies have recently begun to manufacture products similar to ours. Due to
the rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware and software
companies, may enter these markets through acquisition, thereby further
intensifying competition. Additionally, one of our distributors is currently
competing with us, and additional distributors may begin to develop or market
products that compete with our products.

     Many of our current and potential competitors are substantially larger than
we are and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, such competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote

                                      11
<PAGE>

greater resources than we can devote to the development, promotion and sale of
their products. Such competitors may enter our existing or future markets with
solutions that may be less costly, provide higher performance or additional
features or be introduced earlier than our solutions. Many telecommunications
companies have large internal development organizations that develop software
solutions and provide services similar to our products and services. We expect
our competitors to continue to improve the performance of their current products
and to introduce new products or technologies that provide added functionality
and other features. Successful new product introductions or enhancements by our
competitors could cause a significant decline in sales or loss of market
acceptance of our products. Competitive products may also cause continued
intense price competition or render our products or technologies obsolete or
noncompetitive.

     To be competitive, we will have to continue to invest significant resources
in research and development and sales and marketing.  We may not have sufficient
resources to make such investments or  be able to make the technological
advances necessary to be competitive.  In addition, our current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of our prospective customers.  Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.  Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
would harm our business.

We Are Substantially Dependent on Our Distribution Channels.

     To date, a large portion of the sales of our products has been made through
distributors.  Our distributors are responsible for warehousing products and
fulfilling product orders as well as servicing potential competitive service
provider customers and, in some cases, customizing and integrating our products
at end users' sites.  As a result, our success depends on maintaining good
relations with our distributors.  Sales of our products historically have been
made to a limited number of distributors and other direct customers, as follows:

 .  In 1998, Walker and Associates, Phillips Communications and Telsource
   Corporation accounted for 43%, 15% and 13% of net revenue, respectively.

 .  In 1999, Walker and Associates and ADC Telecommunications, Inc. accounted for
   27% and 14% of net revenue, respectively.

 .  For the year ended December 31, 2000 Walker and Associates and ADC
   Telecommunications, Inc. accounted for 18% and 16% of net revenue
   respectively.

     We expect that a significant portion of sales of our products will continue
to be made to a small number of distributors.  Accordingly, if we lose any of
our key distributors, or experience reduced sales to such distributors, our
business would be harmed.

     We have limited knowledge of the financial condition of certain of our
distributors, however, we are aware that some of our distributors have limited
financial and other resources which could impair their ability to pay us.  We
cannot assure you that any bad debts that we incur will not exceed our reserves
or that the financial instability of one or more of our distributors will not
harm our business, financial condition or results of operations.

     We generally provide our distributors with limited stock rotation and price
protection rights.  Other than limited stock rotation rights, we do not provide
our distributors with general product return rights.  We have limited knowledge
of the inventory levels of our products carried by our original equipment
manufacturers and distributors, and our original equipment manufacturers and
distributors have in the past reduced planned purchases of our products due to
overstocking.  Such reductions in purchases due to overstocking occurred in the
fourth quarter of 2000 and may occur again in the future.  Moreover,
distributors who have overstocked our products have in the past reduced their
inventories of our products by selling such products at significantly reduced
prices, and this may occur again in the future.  Any reduction in planned
purchases or sales at reduced prices by distributors or original equipment
manufacturers in the future, could reduce the demand for our products, create
conflicts with other distributors or otherwise harm our business.  In addition,
three times a year certain distributors are allowed to return a maximum of
fifteen percent of our unsold products for an equal dollar amount of new
equipment.  The products must have been held in stock by such distributor and
have been purchased within the four-month period prior to the return date.  We
cannot assure you that we will not experience significant returns in the future
or that we will make adequate allowances to offset these returns.  We believe we
have made adequate allowances for these returns to date.

     We are generally required to give our distributors a 60-day notice of price
increases.  Orders entered by distributors within the 60-day period are filled
at the lower product price.  In the event of a price decrease, we are sometimes
required to credit distributors the difference in price for any stock they have
in their inventory.  In addition, we grant certain of our distributors "most
favored customer" terms, pursuant to which we have agreed to, not knowingly,
grant another distributor the right to resell our products on terms more
favorable than those granted to the existing distributor, without offering the
more favorable terms to the existing distributor.  It is possible that these
price protection and "most favored customer" clauses could cause a material
decrease in the average selling prices and gross margins of our products, which
could in turn have a material adverse effect on distributor inventories, our
business, financial condition or results of operations.

     In addition to being dependent on a small number of distributors for a
majority of our net revenue, we believe our products are distributed to a
limited number of service provider customers who are primarily competitive local
exchange carriers. None of these service provider customers has any obligation
to purchase additional products.  Accordingly, we cannot assure you that present
or future customers will not terminate their purchasing arrangements with either
us or our distributors, or that they will not significantly reduce or delay the
amount of our products that they order.  Any such termination, change, reduction
or delay in orders could harm our business.

                                       12
<PAGE>

General Economic Conditions Could Continue to Harm our Business

     We have become increasingly subject to adverse changes in general economic
conditions, which can result in reductions in capital expenditures by the end
user customers of our distributors and our direct sales customers, longer sales
cycles, deferral or delay of purchase commitments for our products, and
increased price competition. These factors materially impacted our business in
the second half of 2000, and most severely in the fourth quarter, and if the
current economic slowdown continues or worsens, these factors would continue to
adversely affect our business and results of operations. In addition, in the
second half of 2000 some service providers, which comprise our principal
customers, experienced capital budget constraints, which caused financial
troubles for these companies. This combined with service delays slowed the
expected growth in this market which, in turn, resulted in our lower than
expected revenues in the third and fourth quarters of 2000. If service providers
continue to experience problems, our business may continue to be adversely
impacted.

We are Substantially Dependant on Our Direct Sales and Direct Customers.

     Currently, a significant portion of the sales of our products is being made
through direct sales.  As a result, our continued success depends on building
and maintaining good relations with our direct customers.

     We have limited knowledge of the financial condition of certain of our
direct customers. We are aware, however, that some of our direct customers have
limited financial and other resources that could impair their ability to pay us.
We cannot assure you that any bad debts that we incur will not exceed our
reserves or that the financial instability of one or more of our direct
customers will not harm our business, financial condition or results of
operations.

     Any reduction in planned purchases by direct customers could harm our
business.  In addition, we grant certain of our direct customers "most favored
customer" terms, pursuant to which we have agreed to not knowingly provide
another direct customer with similar terms and conditions a better price than
those provided to the existing direct customer, without offering the more
favorable prices to the existing direct customer.  It is possible that these
price protection and "most favored customer" clauses could cause a material
decrease in the average selling prices and gross margins of our products, which
could, in turn, harm our business.

     Our direct customers do not have any obligation to purchase additional
products, and accordingly, they may terminate their purchasing arrangements with
us, or significantly reduce or delay the amount of our products that they order
without penalty.  Any such termination, change, reduction or delay in orders
would harm our business.

Our Growth is Dependent Upon Successfully Maintaining and Expanding Our
Distribution Channels and Direct Sales.

     Our future net revenue growth will depend in large part on the following
factors:

 .  our success in maintaining our current distributor and direct relationships;

 .  diversifying our distribution channels by selling to new distributors and to
   new direct customers; and

 .  improvement in general economic conditions and available funding for service
   providers.

Maintaining and Expanding Our Current Service Provider Customer Base

     Most of our existing distributors currently also distribute the products of
our competitors.  Some of our existing distributors may in the future distribute
or use other competitive products.  We cannot assure you that we will be able to
attract and retain a sufficient number of our existing or future distributors
and direct customers or that they will recommend, or continue to use, our
products or that our distributors will devote sufficient resources to market and
provide the necessary customer support for such products.  In the event that any
of our current distributors or direct customers reduce their purchases of our
products, or that we fail to obtain future distributors or direct customers, our
business could be harmed.

     In addition, it is possible that our distributors will give a higher
priority to the marketing and customer support of competitive products or
alternative solutions than to our products. Further, we cannot assure you that
our distributors will continue to offer our products. Our distributor
relationships are established through formal agreements that generally (1) do
not grant exclusivity, (2) do not prevent the distributor from carrying
competing products and (3) do not require the distributor to purchase any
minimum dollar amount of our products. Additionally, our distribution agreements
do not attempt to allocate certain territories for our products among our
distributors. To the extent that different distributors target the same end
users of our products, distributors may come into conflict with one another,
which could damage our relationship with, and sales to, such distributors.

Our Operating Results Are Substantially Dependent on Sole and Single Source
Suppliers.

     Although we generally use standard parts and components for our products,
many key parts and components are purchased from sole source vendors for which
alternative sources are not currently available.  We currently purchase
approximately fifteen key components from vendors for which there is currently
no substitute, and we purchase over one hundred and twenty key components from
single vendors.  In addition, we rely on several independent manufacturers to
provide certain printed circuit boards, chassis and subassemblies for our
products.  Our inability to obtain sufficient quantities of these components has
in the past resulted in, and may in the future result in, delays or reductions
in product shipments, which could harm our business, financial condition or
results of operations.  In the event of a reduction or interruption of supply,
we may need as much as six months before we would begin receiving adequate
supplies from alternative suppliers, if any.  We cannot assure you that any such
source would become available to us or that any such source would be in a
position to satisfy our production requirements on a timely basis, if at all.
In such event, our business would be materially harmed.

                                       13
<PAGE>

     In addition, manufacturing certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components, especially for newly designed components, exposes us to potential
production difficulties and quality variations that they experience, which has
negatively impacted cost and timely delivery of our products. Any significant
interruption in the supply, or degradation in the quality, of any such component
could have a material adverse effect on our business, financial condition or
results of operations.

Our Ability to Meet Customer Demand Depends on the Availability of Our
Components.

     Our distributors and direct customers frequently require rapid delivery
after placing an order. Because we do not maintain significant component
inventories, delays in shipment by one of our suppliers have lead to lost sales
and sales opportunities. Lead times for materials and components vary
significantly and depend on many factors, some of which are beyond our control,
such as specific supplier performance, contract terms and general market demand
for components. If distributor orders vary significantly from forecasts, we may
not have enough inventories of certain materials and components to fill orders.
Any shortages in the future, including those occasioned by increased sales,
could result in delays in fulfillment of customer orders. Such delays could harm
our business.

Our Dependence on Independent Manufacturers Could Result in Product Delivery
Delays.

     We currently use several independent manufacturers to provide certain
components, printed circuit boards, chassis and subassemblies.  Our reliance on
independent manufacturers involves a number of risks, including the potential
for inadequate capacity, the unavailability of, or interruptions in access to
certain process technologies, and reduced control over delivery schedules,
manufacturing yields and costs.  Some of our manufacturers and suppliers are
undercapitalized, and such manufacturers or suppliers may be unable in the
future to continue to provide manufacturing services or components to us.  If
these manufacturers are unable to manufacture our components in required
volumes, we will have to identify and qualify acceptable additional or
alternative manufacturers, which could take in excess of nine months.  We cannot
assure you that any such source would become available to us or that any such
source would be in a position to satisfy our production requirements on a timely
basis, if available.  Any significant interruption in our supply of these
components would result in delays or in the allocation of products to customers,
which in turn could have a material adverse effect on our business, financial
condition or results of operations.  Moreover, since all of our final assembly
and test operations are performed in one location, any fire or other disaster at
our assembly facility would harm our business.

Our Executive Officers and Certain Key Personnel Are Critical to Our Business,
and These Officers and Key Personnel May Not Remain With Us in the Future.

     Our success depends to a significant degree upon the continued
contributions of our Chief Executive Officer, Corporate Development Officer and
key management, sales, engineering, finance, customer support and product
development personnel, many of whom would be difficult to replace. In
particular, the loss of Roger Koenig, President and Chief Executive Officer, who
co-founded us, could harm us. We believe that our future success will depend in
large part upon our ability to attract and retain highly skilled managerial,
sales, customer support and product development personnel. Competition for
qualified personnel in our industry and geographic location is intense, and we
cannot assure you that we will be successful in attracting and retaining such
personnel. We do not have employment contracts with any of our key personnel.
The loss of the services of any such persons, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineering personnel and qualified sales personnel, could harm our
business.

Our Growth is Dependent on Our Introduction of New Products and Enhancements to
Existing Products, and Any Delay in Customers' Transition to Our New Products
Could Adversely Affect Our Business.

     Our success depends on our ability to enhance our existing products and to
timely and cost-effectively develop new products including features that meet
changing end user requirements and emerging industry standards.  However, we
cannot assure you that we will be successful in identifying, developing,
manufacturing, and marketing product enhancements or new products that will
respond to technological change or evolving industry standards.  We intend to
continue to invest significantly in product and technology development.  We have
in the recent past experienced delays in the development and commencement of
commercial shipment of new products and enhancements, resulting in distributor
and end user frustration and delay or loss of net revenue.  It is possible that
we will experience similar or other difficulties in the future that could delay
or prevent the successful development, production or shipment of such new
products or enhancements, or that our new products and enhancements will not
adequately meet the requirements of the marketplace and achieve market
acceptance.  Announcements of currently planned or other new product offerings
by our competitors or us have in the past caused, and may in the future cause,
distributors or end users to defer or cancel the purchase of our existing
products.  Our inability to develop, on a timely basis, new products or
enhancements to existing products, or the failure of such new products or
enhancements to achieve market acceptance, could harm our business.

     The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends.  Our introduction of new or
enhanced products will also require us to manage the transition from older
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand.  We have historically
reworked certain of our products in order to add new features which were
included in subsequent release of such product.  We can give no assurance that
these historical practices will not occur in the future and cause us to record
lower revenue or negatively affect our gross margins.

                                       14
<PAGE>

     We believe that average selling prices and gross margins for our products
will decline as such products mature and as competition intensifies.  To offset
declining selling prices, we believe that we must successfully reduce the costs
of production of our existing products and introduce and sell new products and
product enhancements on a timely basis at a lower cost or sell products and
product enhancements that incorporate features that enable them to be sold at
higher average selling prices.  We may not be able to achieve the desired cost
savings.  To the extent that we are unable to reduce costs sufficiently to
offset any declining average selling prices or we are unable to introduce
enhanced products with higher selling prices, our gross margins will decline,
and such decline would harm our business.

We Face Risks Associated with Acquisitions.

     In 2000 we acquired Millennia Systems, Inc. and certain product lines of
Litton Network Access Systems ("LNAS"), and we may acquire or make similar such
investments in complementary companies, products or technologies in the future.
We face uncertainty in successfully integrating the acquired business of
Millennia Systems, Inc. and the acquired assets of LNAS.  In addition, if we buy
a company, we could have difficulty in integrating that company's personnel and
operations.  Furthermore, the key personnel of the acquired company may decide
not to work for us.  If we make other types of acquisitions, we could have
difficulty in assimilating the acquired technology or products into our
operations.  These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses.  We may have to incur debt,
write-off software development costs or other assets, incur severance
liabilities, amortize expenses related to goodwill and other intangible assets
or issue equity securities to pay for any future acquisitions.  The issuance of
equity securities could dilute our existing stockholders' ownership.

     We cannot assure you that we will be successful in overcoming these or any
other significant risks encountered in any acquisition we may make.  The failure
to achieve the anticipated benefits of these or any future acquisitions, or to
successfully integrate the acquired operations, could harm our business and
results of operations.

Our Products May Suffer From Defects or Errors That May Subject Us to Product
Returns and Product Liability Claims.

     Our products have contained in the past, and may contain in the future,
undetected or unresolved errors when first introduced or when new versions are
released.  Despite our extensive testing, errors, defects or failures are
possible in our current or future products or enhancements.  If such defects
occur after commencement of commercial shipments, the following may happen:

 .  delay in or loss of market acceptance and sales;

 .  product returns;

 .  diversion of development resources resulting in new product development
   delay;

 .  injury to our reputation; or

 .  increased service and warranty costs.

     Any of these results could have a material adverse effect on our business.
Significant delays in meeting deadlines for announced product introductions or
enhancements or performance problems with such products could result in an
undermining of customer confidence in our products, which would harm our
customer relationships as well.

     Although we have not experienced any product liability claims to date, the
sale and support of our products entails the risk of such claims, and it is
possible that we will be subject to such claims in the future.  A successful
product liability claim brought against us could harm our business.  Our
agreements with our distributors and direct customers typically contain
provisions designed to limit our exposure to potential product liability claims.
However, it is possible that the limitation of liability provisions contained in
our agreements may not be effective or adequate under the laws of certain
jurisdictions.

A Longer Than Expected Sales Cycle May Affect Our Revenues and Operating
Results.

     The sale of our broadband digital access products averages approximately
four to twelve months in the case of service providers, but can take
significantly longer in the case of incumbent local exchange carriers and other
end users. This process is often subject to delays over which we have little or
no control, including (1) a distributor's or a service provider's budgetary
constraints, (2) distributor or service provider internal acceptance reviews,
(3) the success and continued internal support of a service provider's own
development efforts, and (4) the possibility of cancellation or delay of
projects by distributors or service providers. In addition, as service providers
have matured and grown larger, their purchase process may become more
institutionalized, and it will become increasingly difficult, and requires more
of our time and effort, to gain the initial acceptance and final adoption of our
products by these end users. Although we attempt to develop our products with
the goal of facilitating the time to market of our service provider's products,
the timing of the commercialization of a new distributor or service provider
applications or services based on our products is primarily dependent on the
success and timing of a service provider's own internal deployment program.
Delays in purchases of our products can also be caused by late deliveries by
other vendors, changes in implementation priorities and slower than anticipated
growth in demand for our products. A delay in, or a cancellation of, the sale of
our products could harm our business and cause our results of operations to vary
significantly from quarter to quarter.

We Must Keep Pace with Rapid Technological Change to Remain Competitive.

     The communications marketplace is characterized by (1) rapidly changing
technology, (2) evolving industry standards, (3) changes in end user
requirements and (4) frequent new product introductions and enhancements that
may render our existing

                                       15
<PAGE>

products obsolete. We expect that new packet based technologies will emerge as
competition in the communications industry increases and the need for higher
volume and more cost efficient transmission equipment expands. Industry
standards for multi-service digital access equipment and technology are still
evolving. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products obsolete or
unmarketable. For example, if the business market were to broadly adopt
telecommunications equipment based on cable modems or cable telephony, sales of
our existing or future products could be significantly diminished. As standards
and technologies evolve, we will be required to modify our products or develop
and support new versions of our products. The failure of our products to comply,
or delays in achieving compliance, with the various existing and evolving
industry standards could harm sales of our current products or delay
introduction of our future products.

Failure to Meet Future Capital Needs May Adversely Affect Our Business.

     We require substantial working capital to fund our business. As of December
31, 2000, we had approximately $52.0 million dollars in cash and short-term
investments. We believe that such cash and cash equivalents, together with cash
generated by operations, if any, will be sufficient to meet our capital
requirements for at least the next twelve months. However, our capital
requirements depend on several factors, including the rate of market acceptance
of our products, the ability to expand our client base, the growth of sales and
marketing and other factors. If capital requirements vary materially from those
currently planned, we may require additional financing sooner than anticipated.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could harm our business.

Continued Expansion of the Market for Communications Services is Necessary for
Our Future Growth.

     Our success will also depend on continued growth in the market for
communications services.  The global communications marketplace is evolving, and
it is difficult to predict our potential size or future growth rate.  We cannot
assure you that this market will continue to grow.  Moreover, increased
regulation may present barriers to the sales of existing or future products.  If
this market fails to grow or grows more slowly or in a different direction than
we currently anticipate, our business would be harmed.  In the second half of
2000 adverse changes and economic conditions adversely impacted the market for
the communications services.  If the current economic slowdown continues or
worsens the market for communications services will continue to be effected
which would subsequently have an adverse affect on our business.

Our Failure to Adequately Protect Our Proprietary Rights May Adversely Affect
Us.

     We rely primarily on a combination of patent, copyright, trademark and
trade secret laws, as well as confidentiality procedures and contractual
restrictions, to establish and protect our proprietary rights. As of March 31,
2001, we have a total of eight U.S. patents and we have nine additional patents
that are pending issuance. We also have four U.S. registered trademarks, eight
U.S. trademark applications pending and five international trademark
applications pending. We have entered into confidentiality agreements with our
employees and consultants and entered into non-disclosure agreements with our
suppliers, customers and distributors in order to limit access to and disclosure
of our proprietary information. However, such measures may not be adequate to
deter and prevent misappropriation of our technologies or independent third-
party development of similar technologies.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.  Further, we may be subject
to additional risks as we enter into transactions in foreign countries where
intellectual property laws do not protect our proprietary rights as fully as do
the laws of the U.S.  We cannot assure you that our competitors will not
independently develop similar or superior technologies or duplicate any
technology that we have.  Any such events could harm our business.

     The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in our markets increases and the
functionality of our products is enhanced and overlaps with the products of
other companies, we may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. From time to
time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to us. We have
no assurance that any future claims, if determined adversely to us, would not
harm our business. In our distribution agreements, we agree to indemnify
distributors and service provider customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. In certain limited instances, the amount of such indemnities may
be greater than the net revenue we may have received from the distributor.

     In the event litigation is required to determine the validity of any third-
party claims, such litigation, whether or not determined in our favor, could
result in significant expense to us, divert the efforts of our technical and
management personnel or cause product shipment delays.  In the event of an
adverse ruling in any litigation, we might be required to discontinue the use
and sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses from third parties.  In the event of a
claim or litigation against or by us or our failure to develop or license a
substitute technology on commercially reasonable terms, our business could be
harmed.

Our Stock Price Has Been Highly Volatile.

                                       16
<PAGE>

     The market price of our common stock has been and is likely to continue to
be subject to fluctuations in response to variations in operating results,
announcements of technological innovations or new products by us or our
competitors, changes in financial estimates or recommendations by securities
analysts, regulatory developments and other events or factors. In addition, the
stock market in general and the market prices of equity securities of many high
technology companies in particular, have experienced extreme price fluctuations,
which often have been unrelated to the operating performance of such companies.
These broad market fluctuations may harm the market price of our common stock.
Our stock price and the stock market in general have been particularly volatile
in recent quarters.

We are Controlled by a Small Number of Stockholders.

     Our members of the Board of Directors and executive officers, together with
members of their families and entities that may be deemed affiliates of or
related to such persons or entities, beneficially own approximately 57.4% of our
outstanding shares of common stock. In particular, Mr. Koenig and Ms. Pierce,
our Chief Executive Officer and Corporate Development Officer, respectively, are
married and together beneficially own approximately 55.8% of our outstanding
shares of common stock. Accordingly, these stockholders are able to elect all
members of our Board of Directors and determine the outcome of all corporate
actions requiring stockholder approval, such as mergers and acquisitions. This
level of ownership by such persons and entities may delay, defer or prevent a
change in control and may harm the voting and other rights of other holders of
our common stock.


ITEM 2.  PROPERTIES

     Our principal administrative, sales and marketing, research and development
and support facilities consist of approximately 80,000 square feet of office
space in Boulder, Colorado. We occupy these premises under a lease expiring
December 31, 2009. As of December 31, 2000, the annual base rent for this
facility was approximately $776,553. We also have a research and development
facility consisting of approximately 15,000 square feet of office space in
Tulsa, Oklahoma, a research and development facility consisting of approximately
17,000 square feet of office space in Roanoke, Virginia and a research and
development facility consisting of approximately 14,500 square feet of office
space in Camarillo, CA.

     Our principal manufacturing and shipping facilities consists of
approximately 97,000 square feet of space in Boulder, Colorado. We occupy these
premises under a lease expiring November 13, 2005. As of December 31, 2000, the
annual base rent for this facility was approximately $365,613.

     In addition to our principal office space in Boulder, Colorado, we lease
approximately 14,000 square feet of additional office space in Boulder, which is
currently subleased. We also lease an office in Greensboro, NC for our field
sales and support organization. We believe that our current facilities and
planned expansions are adequate to meet our needs through the next twelve
months. See "Business-Risk Factors Our Quarterly Results Fluctuate Significantly
and We May Not be Able to Maintain Our Existing Growth Rates and Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources."

ITEM 3.  LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The names, ages and positions of all our executive officers as of March 1,
2001 are listed below, followed by a brief account of their business experience.
Executive officers are normally appointed annually by the Board of Directors at
a meeting of the directors immediately following the Annual Meeting of the
Stockholders. There are no family relationships among these officers, other than
between Mr. Koenig and Ms. Pierce, who are married, nor any arrangements or
understandings between any officer and any other person pursuant to which an
officer was selected.

<TABLE>
<CAPTION>
        Name                               Age          Position
        -----------------------------------------------------------------------------------------------------------------------
        <S>                                <C>       <C>
        Roger L. Koenig................     46       President and Chief Executive Officer
        Nancy Pierce...................     43       Corporate Development Officer, Treasurer and Secretary
        Tim Anderson...................     41       Chief Financial Officer, Vice President of Finance and Administration
        Mark D. Herbst.................     40       Chief Operations Officer
</TABLE>

     Roger L. Koenig. Mr. Koenig has served as President, Chief Executive
Officer and Chairman of the Board of Directors of the Company since the
Company's inception in September 1992. Prior to co-founding the Company, Mr.
Koenig served as the President and Chief Executive Officer of Koenig
Communications, an equipment systems integration and consulting firm. Prior to
founding Koenig Communications, Mr. Koenig held a number of positions with
IBM/ROLM Europe, a telecommunications equipment

                                       17
<PAGE>

manufacturer, including Engineering Section Manager for Europe. Mr. Koenig
received a B.S. in Electrical Engineering from Michigan State University and an
M.S. in Engineering Management from Stanford University.

     Nancy Pierce. Ms. Pierce has served as Corporate Development Officer since
April 2000. Ms. Pierce has served as the Treasurer, Secretary and a Director of
the Company since its inception in September 1992. Ms. Pierce held previous
positions within the Company of Corporate Controller, Chief Financial Officer,
and Vice President-Finance and Administration. Prior to co-founding the Company,
Ms. Pierce served as the Controller of Koenig Communications, a systems
integration and consulting firm. Prior to joining Koenig Communications, Ms.
Pierce was a systems analyst at IBM Corporation and an internal auditor at ROLM
Corporation. Ms. Pierce received a B.S. from Colorado State University and a
M.B.A. from California State University, Chico.

     Tim Anderson. Mr. Anderson has served as Chief Financial Officer and Vice
President of Administration since April 2000. Mr. Anderson has served as the
Vice President of Finance since July 2000. Mr. Anderson previously held the
position within the Company of Corporate Controller, since February 1996. Prior
to joining the Company, Mr. Anderson served as the Controller of RIK Medical LLC
from September 1994 to February 1996. Mr. Anderson received a B.S. and M.B.A.
from the University of Colorado and is a Certified Management Accountant.

     Mark D. Herbst. Mr. Herbst has served as Chief Operations Officer since
January 2001. Mr. Herbst previously held the position within the Company of Vice
President of Operations, since June 2000. Prior to joining the Company, Mr.
Herbst served as the Senior Vice President for the Dii Group, a leading provider
of contract electronics manufacturing solutions, from July 1987 to May 2000. Mr.
Herbst received a B.S. in accountancy from Northern Arizona University.

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a) Market Price of and Dividends on the Registrant's Common Equity.

     We made our initial public offering on July 30, 1998 at a price of $12.00
per share. Our common stock is listed on the Nasdaq National Market under the
symbol "CACS." The table below sets forth the high and the low closing sales
prices per share as reported on the Nasdaq National Market for the periods
indicated.

     YEAR ENDED DECEMBER 31, 2000                  HIGH          LOW
     ----------------------------                  ----          ---

         First quarter ended March 31, 2000        $69.938     $ 44.00
         Second quarter ended June 30, 2000        $52.875     $33.563
         Third quarter ended September 30, 1999    $66.938     $19.813
         Fourth quarter ended December 31, 2000    $20.875     $ 6.750

     On March 1, 2001, the last reported sale price of the Registrant's common
stock was $5.656 per share. As of March 1, 2001, there were approximately 119
record holders of our common stock. Because many of our shares of common stock
are held by brokers and other institutions on behalf of stockholders, we are
unable to accurately estimate the total number of stockholders represented by
these record holders. We have never declared cash dividends on our common stock.
We currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.

     (b) Recent Sales of Securities

     We issued an aggregate of 163,004 shares of common stock pursuant to the
acquisition of Millennia Systems, Inc. These shares were issued without
registration under the 1933 Securities Act in reliance upon the exemptions under
Section 4(2) and Regulation D. The shares were exchanged for the capital stock
of Millennia Systems, Inc.

     In reliance on Rule 701 promulgated under the Securities Act of 1933,
during the year ended December 31, 2000, we issued an aggregate of 1,618,890
shares of common stock pursuant to the exercise of stock option grants under our
1998 Stock Option Plan.

ITEM 6.   SELECTED FINANCIAL DATA

     The selected financial data for the years ended December 31, 1996, 1997,
1998, 1999 and 2000 have been derived from our audited consolidated financial
statements. The information set forth below should be read in connection with
our audited consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of the Financial Condition and Results of
Operations" included elsewhere in this Annual Report.

                                       18
<PAGE>

Consolidated Financial Highlights

<TABLE>
<CAPTION>
                                                              As of or for the Year Ended
                                                                     December 31,
                                                 --------------------------------------------------------
                                                         (In thousands, except per share data)
                                                   1996       1997       1998         1999         2000
                                                 --------   --------   --------    ---------    ---------
     <S>                                         <C>        <C>        <C>         <C>          <C>
     Revenue, net.............................   $  5,809   $ 18,719   $ 48,133    $ 108,815    $ 148,050
     Gross profit.............................   $  2,525   $  9,250   $ 25,066    $  63,316    $  81,281
     Operating income (loss)..................   $   (100)  $  2,346   $  9,437    $  33,106    $  23,269
     Net income (loss)........................   $    (76)  $  1,735   $  6,949    $  23,565    $  18,550
     Net income (loss) available
       to common stockholders.................   $   (361)  $    614   $  5,363    $  23,565    $  18,550
     Income (loss) per share:
       Basic..................................   $  (0.03)  $   0.04   $   0.29    $    0.98    $    0.76
       Diluted................................   $  (0.03)  $   0.04   $   0.28    $    0.93    $    0.74
     Working capital..........................   $  2,941   $ 16,615   $ 60,571    $  90,153    $  99,851
     Total assets.............................   $  4,822   $ 21,680   $ 72,313    $ 108,345    $ 149,515
     Redeemable preferred stock...............   $  3,722   $ 17,358   $      -    $       -    $       -
     Stockholders' equity.....................   $   (158)  $    560   $ 63,358    $  97,234    $ 132,797
</TABLE>

     (1)  No cash dividends were paid for any of the years presented. We paid
          distributions to shareholders while a Subchapter S Corporation
          totaling $48,000 in 1996.

                                       19
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

NOTICE CONCERNING FORWARD-LOOKING STATEMENTS

     This Management's Discussion and Analysis contains forward-looking
statements that have been made pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
based on current expectations, estimates and projections about our industry,
management's beliefs, and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of these words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Factors that might cause our future results to differ materially
from those discussed in the forward-looking statement include, but are not
limited to, those discussed under Item 1 - "Business-Risk Factors" and elsewhere
in this Form 10-K Report. We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

Overview

     We are a leading provider of broadband access equipment solutions to
communications service providers, including competitive local exchange carriers,
incumbent local exchange carriers, independent operating companies, Internet
service providers, interexchange carriers and wireless mobility service
providers. Carrier Access products are used for the provisioning of enhanced
voice and high-speed data and Internet services by service providers to
businesses, government and enterprise end users. Carrier Access' Access Bank,
Wide Bank, Access Navigator, Adit and Broadmore products are connected to T1,
high-bit-rate digital subscriber line, digital radio, T3 and optical access and
transport networks.

     Our digital equipment provides a "last mile" solution for the distribution
and management of high bandwidth services from service providers throughout the
United States. Reaching large numbers of consumers using voice and high-speed
Internet access requires connectivity from service providers to end users.
Installation of our central office communications and customer-located voice and
data communications equipment enables this connectivity. Our products allow
service providers to cost-effectively connect end users to their network
products, decrease ongoing transmission equipment and maintenance expenses,
while enabling new service delivery, such as integrated voice, video, data and
high-speed Internet access. Our products enable high bandwidth digital
deployments targeted at end users requiring between four and 2,800 telephone and
data line equivalents of bandwidth. We believe that over 500 service providers
and 1,875 other end users have purchased our products directly or through our
distributors.

     We were incorporated in September of 1992 as a successor company to Koenig
Communications, an equipment systems integration and consulting company which
had been in operation since 1986. In the summer of 1995, we ceased our systems
integration and consulting business and commenced our main product sales with
the introduction of the Access Bank products. In the fourth quarter of 1997, we
began commercial deployment of our Wide Bank products and in January of 1999, we
began commercial deployment of our Access Navigator products. In December of
1999 we began deployment of the first of our Adit products.  In October of 2000
we acquired the Broadmore products.  Accordingly, we have only a limited
operating history on which to base an evaluation of our business and prospects.
Our prospects must be considered in light of the risks, uncertainties and
difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets.

     Our net revenue is derived from the sales of broadband digital access
equipment and accessories. We recognize revenue upon shipment of product from
our distribution facility to our distributors' warehouses and direct customers.
See Note 1 of Notes to Consolidated Financial Statements. In 1997, our Access
Bank products and the Wide Bank products accounted for approximately 68% and
27%, respectively, of our net revenue. In 2000, our Access Bank products, Adit
products, Wide Bank products, Access Navigator products, and Broadmore products
accounted for approximately 12.6%, 14.9%, 57.1%, 9.4% and 1.0%, respectively, of
our net revenue.

     Most of the sales of our products have historically been through
distributors. Our distributors are responsible for warehousing product and
fulfilling product orders as well as identifying potential service provider
customers and, in some cases, customizing and integrating our products at end
users' sites. As a result, our success depends on maintaining good relations
with our distributors. Sales of our products historically have been made to a
limited number of distributors. In 1998, Walker, Phillips and Telsource
accounted for 43%, 15% and 13% of net revenue, respectively. In 1999, Walker and
ADC accounted for 27% and 14% of net revenue, respectively. In 2000, Walker and
ADC accounted for 17% and 16% of net revenue, respectively. We expect that sales
of our products will continue to be made to a small number of key distributors.
Accordingly, the loss of, or reduction in sales to, any of our key distributors
could have a material adverse effect on our business. See Note 9 of Notes to
Consolidated Financial Statements. In addition, significant portions of the
sales of our products are currently being made through direct sales. As a
result, our continued success also depends on building and maintaining good
relations with our direct customers.

     We have limited knowledge of the financial condition of certain of our
customers. However, we are aware that some of our customers have limited
financial and other resources, which could impair their ability to pay us. While
we believe we have adequately

                                       20
<PAGE>

provided for uncollectable accounts, we cannot assure you that any bad debts
that we incur will not exceed our reserves or that the financial instability of
one or more of our customers will not harm our business, financial condition or
results of operations.

     Any reduction in planned purchases by our customers in the future could
harm our business. In addition, we grant certain of our customers "most favored
customer" terms, pursuant to which we have agreed to not knowingly provide
another customer with similar terms and conditions or a better price than those
provided to the existing customer, without offering the more favorable prices to
the existing customer. It is possible that these price protection and "most
favored customer" clauses could cause a material decrease in the average selling
prices and gross margins of our products, which could in turn have a material
adverse effect on our business, financial condition or results of operations.

     Our customers do not have any obligation to purchase additional products,
and accordingly, they may terminate their purchasing arrangements with us, or,
as occurred in the fourth quarter of 2000, significantly reduce or delay the
amount of our products that they order. Any such termination, change, reduction
or delay in orders could have a material adverse effect on our business.

     In addition to being dependent on a small number of distributors and direct
customers for a majority of our net revenue, we believe that the end users of
our products consist of a limited number of service provider customers who are
primarily competitive local exchange carriers. We believe that in 1999, thirty-
five (35) service provider customers, indirectly, accounted for 83% of our net
revenue and that in 2000, approximately thirty-five (35) service provider
customers, indirectly, accounted for 74% of our net revenue. In particular, we
believe that one of these service provider customers accounted for more than 10%
of our net revenue in 2000. See Note 8 of Notes to Consolidated Financial
Statements. None of these customers has any obligation to purchase additional
products or services. Accordingly, there can be no assurance that present or
future customers will not terminate their purchasing arrangements with us or our
distributors or significantly reduce or delay the amount of our products that
they order. Any such termination, change, reduction or delay in orders could
have a material adverse effect on our business. We generally provide our
distributors with limited stock rotation and price protection rights, and we
have granted certain of our distributors "most favored customer" terms. There
can be no assurance that these stock rotation rights, price protection rights or
most favored customer provisions will not have a material adverse effect on our
business, operating results or financial condition.

     We believe that average selling prices and gross margins for our products
will decline as such products mature, as volume price discounts in distributor
contracts take effect and as competition intensifies, among other factors. In
2000, we reduced the price of our Wide Bank and Access Bank products, and we
expect to make further price reductions in 2001 with respect to certain Access
Bank and Wide Bank products. In addition, discounts to distributors and direct
customers vary among product lines and are based on volume shipments, both of
which affect gross margins. We believe our gross margins are likely to fluctuate
based on product and channel mix. Gross margins will also likely be reduced from
time to time by new product introductions.

     In August of 2000, we acquired all of the issued and outstanding common
stock of Millennia Systems, Inc. for cash of approximately $2.1 million, 163,004
shares of common stock valued at approximately $7.3 million and the exchange of
vested employee stock options valued at approximately $0.4 million, for total
consideration of approximately $9.8 million. Based on the purchase price
allocation, approximately $9.8 million of the purchase price was allocated to
goodwill and other intangible assets which is being amortized on a straight-line
basis over periods ranging from three to five years.

     In October of 2000, we acquired the ATM product lines of LNAS, a division
of Litton Systems, Inc. located in Roanoke, Virginia. The new Carrier Access
Broadmore product supplies OC-3c, DS-3, and T1/E1 services via broadband ATM
service provisioning and management. We acquired the product lines for cash of
approximately $8.6 million. Based on the purchase price allocation,
approximately $8.0 million was allocated to goodwill and other intangible assets
that are being amortized on a straight-line basis over periods ranging from
three to five years.

Results of Operations

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                  ----------------------------------------
     (In thousands, except percentages and per share amounts)                       1998            1999            2000
                                                                                  --------        --------        --------
     <S>                                                                          <C>             <C>             <C>
     Net revenue.......................................................           $ 48,133        $108,815        $148,050
     Gross margin as a percentage of revenue...........................                 52%             58%             55%
     Net income available to common stockholders.......................              5,363          23,565          18,550
     Income per share (diluted)........................................           $   0.28        $   0.93        $   0.74
   -----------------------------------------------------------------------------------------------------------------------
</TABLE>

     For 2000, our net revenue increased to $148.1 million compared to $108.8
million and $48.1 million for the years ended December 31, 1999 and 1998
respectively. These increases in net revenue were due to a significant increase
in the sales of all products, including the Adit and Access Navigator products,
enhancements to existing products and increased acceptance of the Wide Bank
products. For 2000, our net income decreased to $18.6 million from $23.6 million
and $5.4 million for the years ended December 31, 1999 and 1998 respectively.
Net income was lower in 2000 due to lower than anticipated net revenue in the
second half of 2000, particularly in the fourth quarter which resulted in
increased operating expenses as a percentage of net revenue and a decrease in
gross margin. Our gross margin was 55%, 58% and 52% for the years ended December
31, 2000, 1999 and 1998 respectively. Operating expenses increased as employees
were added to develop, market, and sell new and existing products. Operating
expenses also increased due to amortization of goodwill and other intangibles
related to the acquisitions of Millennia Systems, Inc. and LNAS.

                                       21
<PAGE>

Net Revenue and Cost of Sales

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                             ----------------------------------------------
     (In thousands)                                                            1998               1999               2000
                                                                             --------           --------           --------
     <S>                                                                     <C>                <C>                <C>
     Net revenue.......................................................      $ 48,133           $108,815           $148,050
     Cost of sales.....................................................        23,067             45,499             66,679
</TABLE>

     Net revenue for 2000 was $148.1 million. This represented an increase of
$39.2 million or 36% from the $108.8 million of net revenue in 1999. The
increase was due to the introduction of the Adit products along with increases
in the sale of existing products to distributors and other direct customers. Net
revenue increased to $108.8 million in 1999 from $48.1 million in 1998,
representing an increase of $60.7 million or 126%. These increases were
attributable to the increased sales of existing products and enhancements in the
Access Bank and Wide Bank products. We anticipate that sales for the Wide Bank
and Access Navigator and Adit products will increase at a greater rate than the
Access Bank products. The Broadmore product was acquired in October of 2000 and
we believe trial and evaluations of this product will convert into customer
sales in 2001. The timing and quantities of orders for our products may vary
from quarter to quarter in the future. This is due to factors such as demand for
the products and ordering patterns of distributors and other direct customers.
We believe that this trend will continue in the future, especially if the
percentage of direct sales to end users increases. The timing of customer orders
and our ability to fulfill them can cause material fluctuations in our operating
results; we anticipate that such fluctuations will occur.

     During 2000, the majority of sales of our products was made through
distributors. Our success depends in part on the continued sales and customer
support efforts of our network of distributors and increasing our sales to our
direct customers. In 2000, Walker and ADC accounted for 17% and 16%
respectively, of net revenue. We expect that the sale of our products will
continue to be made to a small number of distributors and other direct
customers. Accordingly, the loss of, or a reduction in sales to, any of our key
distributors or key direct customers could have a material adverse effect on our
business, financial condition or results of operations. In addition to being
dependent on a small number of distributors for a majority of our net revenue,
we believe that our products are distributed to a limited number of service
provider customers who are primarily competitive local exchange carriers. In
2000, we believe, based on information provided to us by our distributors, that
one of these end user customers' purchases were in excess of 10% of our revenue.

     Costs of sales increased to $66.7 million for 2000 compared to $45.5
million for 1999 and $23.1 million in 1998. In each year, the increase was
primarily attributable to increased product shipments, partially offset by cost
reductions in existing product platforms.

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                             ----------------------------------------------
     (In thousands)                                                            1998               1999               2000
                                                                             --------           --------           --------
     <S>                                                                     <C>                <C>                <C>
     Gross profit......................................................      $ 25,066           $ 63,316           $ 81,281
     Gross margin......................................................            52%                58%                55%
</TABLE>

     Our gross profit for 2000 was $81.3 million. This represents an increase of
$18.0 million or 28% from the 1999 gross profit of $63.3 million. Gross margin
decreased to 55% in 2000 from 58% in 1999. The decrease in gross margin was
driven primarily by lower than anticipated revenue in the second half of 2000,
particularly the fourth quarter, decreases in selling prices, and the
introduction of the Adit products which experienced higher production costs
typical of new product introductions. These decreases were partially offset by
cost reductions.  Gross profit was approximately $63.3 million in 1999, an
increase from $25.1 million in 1998. This 153% increase was caused by the
increased shipments of our products partially offset by cost reductions. Gross
margins for 1999 and 1998 were 58% and 52%, respectively. We believe that gross
margins will decline if pricing declines occur in our products at a greater rate
than anticipated cost reductions. New product introductions could also harm
gross margins until production volumes increase. We believe that average selling
prices and gross margins for our products will decline as such products mature,
as volume price discounts in distributor contracts and direct sales
relationships take effect and as competition intensifies, among other factors.
In addition, discounts to distributors vary among product lines and are based on
volume shipments, both of which affect gross margins. Our gross margins vary
between products. As a result, we believe that our gross margins are likely to
fluctuate in the future based on product mix and channel mix. Gross margins will
likely be reduced from time to time by new product introductions by us and our
competitors.

Research and Development Expenses

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                             ----------------------------------------------
     (In thousands)                                                            1998               1999               2000
                                                                             --------           --------           --------
     <S>                                                                     <C>                <C>                <C>
     Research and development expenses.................................      $  5,588           $ 13,601           $ 28,697
     As a percentage of net revenue....................................          11.6%              12.5%              19.4%
</TABLE>

     Research and development expenses increased to $28.7 million for 2000 from
$13.6 million for 1999. This increase of $15.1 million or 111% was primarily due
to an increase in the number of personnel engaged in the development of new
products, specifically the Adit 600 and Adit 105 programs, the acquisition of
two research and development facilities in Roanoke, Virginia and

                                       22
<PAGE>

personnel added for enhancing our existing products. Research and development
expenses increased from $5.6 million in 1998 to $13.6 million for 1999. This
increase of $8.0 million or 143% was primarily attributable to an increase in
the number of personnel engaged in the development of new products, primarily
the Access Navigator as well as enhancements developed for the existing
products. Expenditures for prototyping and regulatory compliance also
contributed to the increase, although to a much lesser extent. We expect the
amount of research and development will increase in 2001, to fund the
development of new products and enhancements for existing product platforms and
the addition of new research and development facilities.

Selling, General and Administrative Expenses

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                    ---------------------------------------------
     (In thousands)                                                                   1998               1999              2000
                                                                                    --------           --------          --------
     <S>                                                                            <C>                <C>               <C>
     Sales and marketing expenses......................................             $  6,083           $ 11,154          $ 20,035
     General and administrative expenses...............................                3,270              4,637             8,783
                                                                                    --------           --------          --------
     Total selling, general and administrative expenses................             $  9,353           $ 15,791           $ 28,818
     As a percentage of net revenue....................................                 19.4%              14.5%              19.5%
</TABLE>

     Selling, general and administrative expenses increased to $28.8 million in
2000. For 1999 we had selling, general and administrative expenses totaling
$15.8 million. This represented an increase of $13.0 million or 82%. Marketing
expense increases reflect increased hiring and marketing activity with respect
to the introduction of the Access Navigator, Adit 600 and Adit 105 products,
customer support, advertising and trade shows. The increase in sales and
marketing expenses was the result of our expanded sales and marketing activities
and an increase in the size of the sales force and a corresponding increase in
sales salaries, bonuses and commissions.  General and administrative expenses
increased, in part, due to the amortization of goodwill and other intangibles
related to the acquisitions of Millennia Systems, Inc. and the ATM product lines
from LNAS.  Selling, general and administrative expenses increased to 19.5% of
revenue in 2000 from 14.5% of revenue in 1999 in part due to less than
anticipated revenue in 2000.

     We have hired and intend to continue to hire additional sales and marketing
personnel and will continue to aggressively pursue sales and marketing
campaigns. We expect these expenses to increase in absolute dollars in the
future. We also expect general and administrative expenses to increase in
absolute dollars as we incur additional costs related to the administration of
multiple facilities.

Stock-Based Compensation

     As discussed in Note 1 to the Consolidated Financial Statements, we account
for our stock-based compensation plans in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. During 1997 and the six months ended June 30, 1998, we granted
options to employees with exercise prices less than the fair value per share
based upon our previous preferred stock offerings and the estimated price per
share in the initial public offering. Accordingly, we have recorded deferred
compensation expense totaling approximately $3.1 million.  As a result of the
acquisition of Millennia Systems, Inc., the Company issued options with exercise
prices below the fair market value on the date of the grant.  We recorded a
deferred compensation expense totaling approximately $877,000 for these stock
options.  Compensation expense will be recognized pro rata over the 48-month
vesting period of the options. Compensation expense totaled approximately
$688,000, $818,000 and $497,000 for 1998, 1999 and 2000, respectively. It is our
intention to generally grant future stock options with exercise prices equal to
the fair value of the underlying Common Stock on the date of grant.

Interest and Other Income

     Interest and other income increased to $3.5 million in 2000 from $2.3
million in 1999. This increase of $1.2 million was due to interest income earned
on higher cash and cash equivalent balances. Interest and other income increased
to $2.3 million in 1999 from $1.2 million in 1998. The increase was primarily
due to interest earned on the proceeds of the 1998 initial public offering and
cash reserves generated by operations.

Income Taxes

     For 2000, our effective combined federal and state income tax rate was
30.8%, compared to 33.5% for 1999. In both 2000 and 1999 we realized a tax
benefit from research and development tax credits and non-taxable interest
income. We had a combined income tax rate in 1998 of 34.8 %. We expect our
effective tax rate to remain in the 32% to 34% range in the future if tax laws
and rates do not materially change. See Note 6 of Notes to Consolidated
Financial Statements.

                                       23
<PAGE>

Liquidity and Capital Resources

     We have funded our operations to-date primarily through cash generated from
operations, sales of common and preferred stock and periodic borrowings under
our credit facility.

<TABLE>
<CAPTION>
                                                                                                         As of December 31,
                                                                                                    --------------------------
     (In thousands)                                                                                   1999              2000
                                                                                                    --------          --------
     <S>                                                                                            <C>               <C>
     Working capital.....................................................................           $ 90,153          $ 99,851
     Cash, cash equivalents and securities...............................................             65,321            52,460
     Total assets........................................................................            108,345           149,515
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 Year End December 31,
                                                                                   ---------------------------------------------
     (In thousands)                                                                  1998                 1999            2000
                                                                                   --------             --------        --------
     <S>                                                                           <C>                  <C>             <C>
     Net cash provided (used) by:
       Operating activities............................................            $  9,553             $ 14,176        $  2,901
       Investing activities............................................             (22,063)             (22,387)          1,368
       Financing activities............................................              37,607                2,470           3,083
</TABLE>

     Cash Flows

     Net cash provided by operating activities for 2000 totaled approximately
$2.9 million, while operating activities in 1999 generated approximately $14.2
million of net cash. Cash provided by operating activities in 2000 was mainly
due to net income and increases in accounts payable and accrued compensation and
was offset by increases in inventory, accounts receivable and a decrease in
income taxes payable. We anticipate that increased sales to direct customers
could increase days sales outstanding and therefore accounts receivable balances
could increase in the future. Cash provided by operating activities in 1999 was
mainly due to net income and increases in accrued liabilities, and was partially
offset by increases in accounts receivable. Cash used by operating activities in
1998 was primarily due to increases in inventory and accounts receivable,
partially offset by net income and increases in accounts payable.

     Our inventory levels increased to approximately $31.4 million at December
31, 2000 from approximately $9.4 million at December 31, 1999. The increase in
finished goods was due to less than anticipated sales in the fourth quarter of
2000 and raw materials increased due to purchase commitments made for long lead-
time materials in anticipation of higher sales volumes. We believe our inventory
reserves are appropriate.

     Cash provided by investing activities was approximately $1.4 million for
the year ended December 31, 2000 and cash used was approximately $22.4 million
for 1999. Cash provided by investing activities in 2000 was primarily the result
of maturities of U.S. Government Agency and corporate bonds with maturities
greater than three months and was reduced by the acquisition of Millennia
Systems, Inc. and the ATM product lines from LNAS. Our capital expenditures for
2000 were $9.5 million for additions to facilities and equipment to support our
research, development and manufacturing activities, compared to $5.3 million for
1999. We anticipate that we will need to expand our facilities in our current
and other locations to accommodate hiring additional personnel throughout the
year 2001 to support ongoing operations. Cash used by investing activities was
approximately $22.1 million for 1998, related primarily to purchases of U.S.
Government Agency and corporate bonds with maturities greater than three months
and capital expenditures for additions to facilities and equipment to support
our research, development and manufacturing activities. We intend to continue to
significantly increase our capital expenditures in 2001 and thereafter for
additions to facilities and equipment to support our research, development and
manufacturing activities.

     Cash provided by financing activities was approximately $3.1 million for
2000 and $2.5 million for 1999. Cash provided by financing activities in 2000
was primarily due to the exercise of stock options. Cash provided by financing
activities in 1999 was primarily due to exercise of stock options and net
proceeds from the issuance of common stock in our initial public offering in
1998.

     Liquidity

     At December 31, 2000, our principal sources of liquidity included cash and
cash equivalents and marketable securities available for sale of approximately
$52.5 million and an unsecured bank credit facility of $5.0 million, which bears
interest at either the prime rate or at the LIBOR rate plus 200 basis points.
This working capital line of credit is limited to a borrowing base determined by
the balance of our eligible receivables and inventory. At December 31, 2000,
there was no outstanding balance under the working capital line. See Note 5 of
Notes to Consolidated Financial Statements.

     At December 31, 1999, our working capital was approximately $90.2 million
and had increased to $99.9 million at December 31, 2000. We have no significant
capital spending or purchase commitments other than inventory purchase
commitments and facilities leases. See Note 11 of Notes to Consolidated
Financial Statements.

                                       24
<PAGE>

     We believe that our existing cash, investment balances, and our line of
credit are adequate to fund our projected working capital and capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent we experience
growth in the future, our investing activities may require additional cash;
however, there can be no assurance that additional funds or capital will be
available in adequate amounts and on terms reasonably acceptable to us. We may
consider using our capital to make strategic investments or to acquire or
license technology or products. We may also enter into strategic alliances with
third parties that could provide access to additional capital. Any such
activities could require us to obtain additional financing.

     Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities, "which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounts which certain conditions are met.  SFAS No. 133,
which has been amended by SFAS 137, is effective for our fiscal year ending
December 31, 2001.  The adoption of SFAS No. 133 had no significant impact on
our financial position, results of operations, or cash flows.

     In December 1999, the SEC released Staff Accounting Bulletin No. 101 ("SAB
101") "Revenue Recognition in Financial Statements", which provides guidance on
the recognition, presentation and disclosure of revenue in financial statement
filed with the SEC.  Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years beginning
between December 16, 1999 and March 15, 2000.  The adoption of SAB 101 had no
significant impact on our financial position, results of operations, or cash
flows.

     In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation", an Interpretation of APB
Opinion No. 25 ("FIN 44").  This opinion provides guidance on the accounting for
certain stock option transactions and subsequent amendments to stock option
transactions.  FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
To the extent that FIN 44 covers events occurring during the period from
December 14, 1998 and January 12, 2000, but before July 1, 2000, the effect of
applying this Interpretation are to be recognized on a prospective basis.  The
adoption of FIN 44 had no significant impact on our financial position, results
of operations, or cash flows.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates.  Historically, and as of
December 31, 2000, we have had little or no exposure to market risk in the area
of changes in foreign currency exchange rates as measured against the United
States dollar.  Historically, and as of December 31, 2000, we have not used
derivative instruments or engaged in hedging activities.


ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Index to Consolidated Financial Statements and Consolidated Financial
                              Statement Schedule

                                                                            Page
                                                                            ----

CONSOLIDATED FINANCIAL STATEMENTS:

Independent Auditors' Report..................................................26
Consolidated Balance Sheets
   December 31, 1999 and 2000.................................................27
Consolidated Statements of Operations
   Years ended December 31, 1998, 1999 and 2000...............................28
Consolidated Statements of Stockholders' Equity
   Years ended December 31, 1998, 1999 and 2000...............................29
Consolidated Statements of Cash Flows
   Years ended December 31, 1998, 1999 and 2000...............................30
Notes to Consolidated Financial Statements....................................31

FINANCIAL STATEMENT SCHEDULE:

Independent Auditors' Report..................................................42

SCHEDULE II - - VALUATION AND QUALIFYING ACCOUNTS.............................43

                                       25
<PAGE>

                         Independent Auditors' Report

The Board of Directors
Carrier Access Corporation:

     We have audited the accompanying consolidated balance sheets of Carrier
Access Corporation and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of Carrier Access
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carrier
Access Corporation and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

KPMG LLP

Boulder, Colorado
January 18, 2001




                                       26
<PAGE>

                          CARRIER ACCESS CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                           ----------------------------
                                                                                              1999               2000
                                                                                           ---------          ---------
<S>                                                                                        <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                               $  25,460          $  32,812
   Marketable securities available for sale                                                   39,861             19,648
   Accounts receivable, net of allowance for doubtful
       accounts of $464 and $653 in
       1999 and 2000, respectively                                                            22,454             23,059
   Income tax receivable                                                                           -              4,383
   Inventory, net (note 3)                                                                     9,444             31,355
   Deferred income taxes (note 6)                                                              2,182              3,417
   Prepaid expenses and other                                                                  1,863              1,895
                                                                                           ---------          ---------
   Total current assets                                                                      101,264            116,569
                                                                                           ---------          ---------
Property and equipment, net of accumulated depreciation and amortization
   (note 4)                                                                                    6,890             13,942
Goodwill and other intangibles, net of amortization (note 2)                                       -             16,879
Deferred income taxes (note 6)                                                                    60              1,894
Other assets                                                                                     131                231
                                                                                           ---------          ---------
   Total assets                                                                            $ 108,345          $ 149,515
                                                                                           ---------          ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                        $   4,140          $  10,262
   Accrued compensation payable                                                                2,339              4,340
   Accrued warranty costs payable                                                                981                907
   Line-of-credit (note 5)                                                                     1,000                  -
   Cooperative advertising                                                                       271                 29
   Deferred rent concessions (note 11)                                                           412                579
   Income taxes payable                                                                        1,399                  -
   Other liabilities                                                                             569                601
                                                                                           ---------          ---------
   Total current liabilities                                                                  11,111             16,718
                                                                                           ---------          ---------

Stockholders' equity (note 8):
Common stock $0.001 par value, 60,000 authorized and 24,179
   and 24,673 shares issued and outstanding at
   December 31, 1999 and 2000, respectively                                                       29                 30
Additional paid-in capital                                                                    69,447             86,135
Deferred compensation                                                                         (1,559)            (1,425)
Retained earnings                                                                             29,317             47,867
Accumulated other comprehensive income                                                            --                190
                                                                                           ---------          ---------
   Total stockholders' equity                                                                 97,234            132,797
                                                                                           ---------          ---------
Commitments (note 11)
Total liabilities and stockholders' equity                                                 $ 108,345          $ 149,515
                                                                                           =========          =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       27
<PAGE>

                          CARRIER ACCESS CORPORATION
                           STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                           ---------------------------------------------
                                                                             1998              1999               2000
                                                                           -------           --------           --------
<S>                                                                        <C>               <C>                <C>
Net revenue                                                                $48,133           $108,815           $148,050
Cost of sales                                                               23,067             45,499             66,769
                                                                           -------           --------           --------
 Gross profit                                                               25,066             63,316             81,281
                                                                           -------           --------           --------
Operating expenses:
 Sales and marketing                                                         6,083             11,154             20,035
 Research and development                                                    5,588             13,601             28,697
 General and administrative                                                  3,270              4,637              8,783
 Amortization of deferred stock option compensation (note 8)                   688                818                497
                                                                           -------           --------           --------
 Total operating expenses                                                   15,629             30,210             58,012
                                                                           -------           --------           --------
      Income from operations                                                 9,437             33,106             23,269
Interest income                                                              1,213              2,354              3,589
Other income (expense), net                                                     11                (24)               (63)
                                                                           -------           --------           --------
      Income before income taxes                                            10,661             35,436             26,795
Income tax expense (note 6)                                                  3,712             11,871              8,245
                                                                           -------           --------           --------
 Net income                                                                  6,949             23,565             18,550
Preferred stock dividend requirement (note 7)                               (1,586)                --                 --
                                                                           -------           --------           --------
 Net income available to common stockholders                               $ 5,363           $ 23,565           $ 18,550
                                                                           =======           ========           ========
Income per share:
 Basic                                                                     $  0.29           $   0.98           $    0.76
 Diluted                                                                   $  0.28           $   0.93           $    0.74
Weighted average common shares outstanding:
 Basic                                                                      18,253             23,939              24,428
 Diluted                                                                    19,387             25,223              24,975
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       28
<PAGE>

                          CARRIER ACCESS CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                (In thousands)

<TABLE>
<CAPTION>
                                                                       Common Stock      Additional      Deferred
                                                                       ------------        Paid-in     Stock Option    Retained
                                                                    Shares       Amount    Capital     Compensation    Earnings
                                                                   -------     ---------  --------    --------------  ----------
<S>                                                                 <C>         <C>      <C>           <C>            <C>
  BALANCES AT JANUARY 1, 1998................................        14,300     $  19    $  1,296       $ (1,144)     $    389
Exercise of stock options....................................           299         -          64              -             -
Deferred stock compensation related to stock options
  issued at less than fair value (note 8)....................             -         -       1,921         (1,921)            -
Amortization of deferred stock compensation (note 8).........             -         -           -            688             -
Preferred stock dividend requirement (note 7)................             -         -           -              -        (1,586)
Issuance of common stock in initial public offering,
  net of offering costs (note 7).............................         3,450         3      37,599              -             -
Conversion of preferred stock to common stock (note 7).......         5,593         6      18,939              -             -
Purchase and retirement of common stock......................           (12)        -         (59)             -             -
Tax benefit from exercise of stock options (note 6)..........             -         -         195              -             -
Net income...................................................             -         -           -              -         6,949
                                                                     ------     -----    --------       --------      --------
  BALANCES AT DECEMBER 31, 1998..............................        23,630        28      59,955         (2,377)        5,752
Exercise of stock options....................................           549         1       1,469              -             -
Amortization of deferred stock compensation (note 8).........             -         -           -            818             -
Tax benefit from exercise of stock options (note 6)..........             -         -       8,023              -             -
Net income...................................................             -         -           -              -        23,565
                                                                     ------     -----    --------       --------      --------
  BALANCES AT DECEMBER 31, 1999..............................        24,179        29      69,447         (1,559)       29,317
Exercise of stock options....................................           331         1       4,084              -             -
Amortization of deferred stock compensation (note 8).........             -         -           -            497             -
Forfeitures of deferred stock compensation related to
  stock options issued at less than fair value...............             -         -        (514)           514             -
Issuance of common stock and stock options
  in connection with acquisition.............................           163         -       8,561           (877)            -
Unrealized gain on investments...............................             -         -           -              -             -
Tax benefit from exercise of stock options (note 6)..........             -         -       4,557              -             -
Net income...................................................             -         -           -              -        18,550
                                                                     ------     -----    --------       --------      --------
  BALANCES AT DECEMBER 31, 2000..............................        24,673     $  30    $ 86,135       $ (1,425)     $ 47,867
                                                                     ======     =====    ========       ========      ========

<CAPTION>
                                                                        Accumulated
                                                                           Other             Total
                                                                      Comprehensive       Stockholders'
                                                                          Income             Equity
                                                                          ------             ------
<S>                                                                   <C>                 <C>
  BALANCES AT JANUARY 1, 1998.................................           $    -              $    560
Exercise of stock options.....................................                -                    64
Deferred stock compensation related to stock options
  issued at less than fair value (note 8).....................                -                     -
Amortization of deferred stock compensation (note 8)..........                -                   688
Preferred stock dividend requirement (note 7).................                -                (1,586)
Issuance of common stock in initial public offering,
  net of offering costs (note 7)..............................                -                37,602
Conversion of preferred stock to common stock (note 7)........                -                18,945
Purchase and retirement of common stock.......................                -                   (59)
Tax benefit from exercise of stock options (note 6)...........                -                   195
Net income....................................................                -                 6,949
                                                                         ------              --------
  BALANCES AT DECEMBER 31, 1998...............................                -                63,358
Exercise of stock options.....................................                -                 1,470
Amortization of deferred stock compensation (note 8)..........                -                   818
Tax benefit from exercise of stock options (note 6)...........                -                 8,023
Net income....................................................                -                23,565
                                                                         ------              --------
  BALANCES AT DECEMBER 31, 1999...............................                -                97,234
Exercise of stock options.....................................                -                 4,085
Amortization of deferred stock compensation (note 8)..........                -                   497
Forfeitures of deferred stock compensation related to
  stock options issued at less than fair value................                -                     -
Issuance of common stock and stock options
  in connection with acquisition..............................                -                 7,684
Unrealized gain on investments................................              190                   190
Tax benefit from exercise of stock options (note 6)...........                -                 4,557
Net income....................................................                -                18,550
                                                                         ------              --------
  BALANCES AT DECEMBER 31, 2000...............................           $  190              $132,797
                                                                         ======              ========
</TABLE>

         See accompanying notes to consolidated financial statements.

<PAGE>

                          CARRIER ACCESS CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                                    Year end December 31,
                                                                                               -----------------------------------
                                                                                                  1998        1999          2000
                                                                                               ---------    ---------    ---------
<S>                                                                                            <C>          <C>          <C>
Cash flows from operating activities:
   Net income..........................................................................        $    6,949   $   23,565   $  18,550
   Adjustments to reconcile net income to net cash
      provided (used) by operating activities:
   Depreciation and amortization expense...............................................               470        1,012       3,903
   Compensation expense related to stock options issued at less than fair value........               688          818         497
   Deferred income tax benefit.........................................................            (1,079)        (926)     (3,068)
   Tax benefit relating to exercise of stock options...................................               195        8,023       4,557
      Changes in operating assets and liabilities:
      Accounts receivable..............................................................            (3,847)     (13,961)       (371)
      Income tax receivable............................................................                --           --      (4,383)
      Inventory........................................................................             1,731       (4,391)    (21,155)
      Prepaid expenses and other.......................................................              (747)      (1,120)       (115)
      Accounts payable.................................................................               945          510       4,264
      Accrued warranty costs payable...................................................               308          387        (224)
      Accrued compensation payable.....................................................             1,457          501       1,890
      Cooperative advertising..........................................................               308         (196)       (242)
      Deferred rent concessions........................................................                57          138         168
      Income taxes payable.............................................................             2,000         (601)     (1,400)
      Other liabilities................................................................               118          417          28
                                                                                               ----------   ----------   ---------
      Net cash provided by operating activities........................................             9,553       14,176       2,899
                                                                                               ----------   ----------   ---------
Cash flows from investing activities:
   Purchase of equipment...............................................................            (1,802)      (5,303)     (9,498)
   Sales (purchases) of securities available for sale, net.............................           (20,261)     (17,084)     20,404
   Payments for net assets acquired in acquisitions, net of cash acquired..............                --           --      (9,538)
                                                                                               ----------   ----------   ---------
   Net cash provided (used) by investing activities....................................           (22,063)     (22,387)      1,368
                                                                                               ----------   ----------   ---------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net.........................................            37,602           --          --
   Proceeds from exercise of stock options.............................................                64        1,470       4,085
   Purchase and retirement of common stock.............................................               (59)          --          --
   Proceeds from short-term borrowings.................................................                --        1,000          --
   Payments on short-term borrowings...................................................                --           --      (1,000)
                                                                                               ----------   ----------   ---------
   Net cash provided by financing activities...........................................            37,607        2,470       3,085
                                                                                               ----------   ----------   ---------
   Net increase (decrease) in cash and cash equivalents................................            25,097       (5,741)      7,352
Cash and cash equivalents at beginning of year.........................................             6,104       31,201      25,460
                                                                                               ----------   ----------   ---------
Cash and cash equivalents at end of year...............................................        $   31,201   $   25,460   $  32,812
                                                                                               ----------   ----------   ---------
Supplemental disclosure of cash flow and financing activities information:
   Cash paid for income taxes..........................................................        $    2,616   $    5,330    $ 12,599
                                                                                               ----------   ----------   ---------
   Conversion of preferred stock to common stock.......................................        $   18,945   $       --    $     --
                                                                                               ==========   ==========   =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       30
<PAGE>

                          CARRIER ACCESS CORPORATION
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1998, 1999 and 2000

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a. Business and Basis of Presentation. Carrier Access Corporation ("CAC"
or the "Company") is a leading provider of broadband digital access equipment to
communications service providers, including competitive local exchange carriers,
Internet service providers, IOCs, IXEs and wireless service providers, which is
used for the provisioning of enhanced voice and high-speed Internet services by
service providers to end users such as small and medium-sized businesses and
government and educational institutions. The Company sells its products through
distributors and directly to end user customers. The Company operates in one
business segment and substantially all of its sales and operations are domestic.

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

     The preparation of consolidated financial statements in conformity with
auditing standards generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
disclosures of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

     b. Cash and Cash Equivalents and Marketable Securities Available-for-Sale.
Cash and cash equivalents include investments in highly liquid debt securities
with maturities or interest reset dates of three months or less at the time of
purchase.

     Marketable securities available-for-sale represent U.S. Government Agency
and corporate bonds with maturities of greater than three months and are
recorded at fair value. At December 31, 1999 and 2000, amortized cost
approximates market value. Securities available-for-sale consisted of the
following as of December 31 (in thousands, except percentages):

<TABLE>
<CAPTION>
                                                  Amortized Cost and Market Value              2000 Interest Rates
                                             ---------------------------------------------     --------------------
                                                      1999                   2000
                                             --------------------   ----------------------
          <S>                                <C>                    <C>                        <C>
          Medium Term Notes                               $ 8,500                  $    --                         --
          Corporate Notes                                   4,622                    4,682              4.10% to 4.13%
          Municipal Bonds                                  18,339                    8,816              4.05% to 4.73%
          Other                                             8,400                    6,150              4.64% to 4.70%
                                             --------------------   ----------------------
          Total                                           $39,861                  $19,648
                                             ====================   ======================
</TABLE>

     Short-term investments are classified as available-for-sale as defined by
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and accordingly are recorded at fair
value.  Increases or decreases in the fair value of investments classified as
available-for-sale are recorded in comprehensive income (loss), net of the
related tax effect.

     c. Inventory. Inventory is recorded at the lower of cost or market using
standard costs that approximate average costs. Costs include certain warehousing
costs and other allocable overhead.

     d. Property and Equipment. Property, equipment and leasehold improvements
are recorded at cost and are depreciated and amortized using the straight-line
method over useful lives ranging from three to thirty years or the lease term.
Depreciation and amortization expense for the years ended December 31, 1998,
1999 and 2000 totaled $470,000, $1,012,000, and $ 3,009,000, respectively.

     e. Goodwill and Other Intangibles. Goodwill and other intangibles are
amortized on a straight-line basis over the estimated future periods to be
benefited which range from three to five years.  Goodwill and other intangibles,
net were $16.9 million at December 31, 2000.  There was no goodwill or other
intangibles at December 31, 1999.

     f. Revenue Recognition. Revenue from sales of products is recognized upon
shipment. Reserves for estimated sales returns through stock rotation are
recorded when sales are made to customers with the right of return and are based
on management's estimate of expected returns and historical experience.

     The Company provides limited price protection to its distributors, whereby
increases in prices are subject to a 60-day notice period before becoming
effective. In addition, the distributor is entitled to receive a credit for
subsequent price decreases to the extent of unsold distributor inventory at the
time of the price decrease. The Company also provides its distributors with
limited stock rotation rights, whereby products may be returned for an equal
dollar amount of new or different equipment. Customers are limited to three
exchanges per year and an amount equal to 15% of purchases in the preceding
four-month period. Neither of these rights affect the total sales price or
payment obligations of the customer. In addition, the customers' obligation to
the Company is not contingent upon

                                       31
<PAGE>

the ultimate resale of the products. The Company provides for the estimated
impact of price protection and stock rotation rights in its allowance for
estimated returns based on historical experience and management's forecasts of
price protection credits and returns.

     g. Advertising Costs. In addition to its own advertising activities, the
Company accrues a specified percentage of the previous quarter's sales over
certain contractual minimums to reimburse distributors for a portion of their
advertising costs. Any unused allowance expires if not used within the following
six months. Cooperative advertising expense for the years ended December 31,
1998, 1999 and 2000 totaled $342,442, $269,224, and $83,422, respectively, and
is included in sales and marketing expense.

     h. Research and Development Costs. Research and development costs are
charged to operations as incurred.

     i. Long-Lived Assets. Long-lived assets are comprised of intangible assets
and property, plant and equipment.  Long-lived assets, including certain
identifiable intangibles and goodwill related to those assets to be held and
used, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.  An
estimate of undiscounted future cash flows produced by the asset, or the
appropriate grouping of assets, is compared to the carrying value to determine
whether an impairment exists, pursuant to the provisions of Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of.  If an asset is
determined to be impaired, the loss is measured based on quoted market prices in
active markets, if available.  If quoted market prices are not available, the
estimate of fair value is based on various valuation techniques, including a
discounted value of estimated future cash flows and fundamental analysis.  The
Company reports an asset to be disposed of at the lower of its carrying value or
its estimated net realizable value.

     j. Income Taxes. The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
required to the extent any deferred tax assets may not be realizable.

     k. Income Per Share. Income per share ("EPS") is presented in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 requires the presentation of basic and diluted EPS. Under
SFAS 128, basic EPS excludes dilution for potential common shares and is
computed by dividing income or loss available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted and resulted in the
issuance of common stock. Diluted income per share includes the impact of common
stock options and excludes the impact of redeemable preferred stock, as the
effect of the assumed conversion of the preferred stock and the elimination of
the related dividend requirement would be antidilutive.

     l. Stock-Based Compensation. The Company accounts for its stock-based
employee compensation plan using the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations. The Company has provided pro
forma disclosures of net income and income per share, as if the fair value based
method of accounting for the plan, as prescribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied.

     Stock options issued to consultants and others for services are recorded at
fair value as prescribed by SFAS 123. Charges to operations associated with
these option grants were not significant during the years ended December 31,
1998, 1999 and 2000.

     m. Warranty Costs. The Company provides limited warranty protection to
customers for a period of up to five years from the date of sale for parts and
labor. The Company has accrued for its warranty obligations based on historical
experience and management's estimate of future warranty costs to be incurred.

     n. Comprehensive Income. Comprehensive income consists of net unrealized
holding gains or losses on available-for-sale securities.

2.   Acquisitions

     In August of 2000, the Company acquired all of the issued and outstanding
common stock of Millennia Systems, Inc. ("Millennia") for cash of approximately
$2.1 million, 163,004 shares of common stock valued at approximately $7.3
million and the exchange of vested employee stock options valued at
approximately $0.4 million, for total consideration of approximately $9.8
million.  Based on the purchase price allocation, approximately $9.8 million of
the purchase price was allocated to goodwill and other intangible assets,
including workforce, which are being amortized on a straight-line basis over
periods ranging from three to five years.  In addition, unvested Millennia stock
options were replaced with equivalent unvested stock options of the Company.
The excess of the fair value of the Company's common stock over the exercise
prices of the stock options, which totaled approximately $877,000, was recorded
as deferred stock option compensation and will be expensed over the vesting
period of the stock options.  Millennia, located in Roanoke, Virginia, develops
broadband communications equipment.

                                       32
<PAGE>

   In October of 2000, the Company acquired the ATM product lines of Litton
Network Access Systems, a division of Litton Systems, Inc. ("LNAS") for cash of
approximately $8.6 million.  Based on the purchase price allocation,
approximately $8.0 million of the purchase price was allocated to goodwill and
other intangible assets, including workforce, customer base and core technology,
which are being amortized on a straight-line basis over periods ranging from
three to five years.  LNAS is also located in Roanoke, Virginia.

   Both of the acquisitions were accounted for using the purchase method of
accounting and accordingly, the accompanying consolidated financial statements
include the results of operations of the acquired businesses since the dates of
acquisition.  The aggregate purchase prices of the acquisitions were allocated
based on fair values to current assets, equipment, goodwill and other
intangibles and current liabilities in the amounts of $1.0 million, $0.5
million, $17.8 million and $0.9 million, respectively.

   The following unaudited pro forma information has been prepared assuming that
the acquisitions occurred on January 1, 1999 (in thousands, except per share
amounts).

                                              Years Ended December 31,
                                              -------------------------
                                               1999                 2000
                                               ----                 ----
          Net revenue                      $111,128             $149,750
          Net earnings                     $ 19,233             $ 15,355
          Diluted earnings per share       $   0.76             $   0.61


   The pro forma information is based on historical results and does not
necessarily reflect the actual operating results that would have occurred nor is
it necessarily indicative of future results of operations of the combined
enterprises.

3. Inventory

   The components of inventory as of December 31, are summarized as follows (in
thousands):

                                                      1999      2000
                                                     ------    -------
               Raw materials......................   $5,109    $15,600
               Work-in-process....................       25         36
               Finished goods.....................    4,927     16,288
               Reserve for obsolescence...........     (617)      (569)
                                                     ------    -------

                                                     $9,444    $31,355
                                                     ======    =======

4. Property and Equipment

   Property and equipment as of December 31, consisted of the following (in
thousands):

                                                       1999      2000
                                                      -------   -------
               Machinery and software...............  $ 6,831   $16,382
               Real property........................      270       270
               Furniture, fixtures and other........      478       671
               Leasehold improvements...............    1,165     1,471
                                                      -------   -------
                                                        8,744    18,794
               Less accumulated depreciation........   (1,854)   (4,852)
                                                      -------   -------
                                                      $ 6,890   $13,942
                                                      =======   =======

5. Debt

   In 2000, the Company entered into a credit agreement with a bank that
provides for a $5.0 million revolving line of credit. The revolving line of
credit has two interest options, either prime rate or the LIBOR rate plus 200
basis points, matures in 2001, and is secured by certain assets of the Company.
There was no borrowing under the revolving line of credit at December 31, 2000.

   The above credit agreement contains certain restrictive covenants, including
the maintenance of various financial ratios and does not permit the payment of
any dividends without the prior written consent of the lender.

                                       33
<PAGE>

6. Income Taxes

   Income tax expense (benefit) consists of the following for the years ended
December 31, (in thousands):

                                                1998       1999       2000
                                              -------    -------    -------
          Current.........................    $ 4,791    $12,797    $11,313
          Deferred........................     (1,079)      (926)    (3,068)
                                              -------    -------    -------
            Income tax expense............    $ 3,712    $11,871    $ 8,245
                                              =======    =======    =======

     A reconciliation of expected income tax expense calculated by applying the
statutory Federal tax rate to actual income tax expense for the years ended
December 31, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 1998          1999          2000
                                                                                ------       -------       -------
        <S>                                                                     <C>          <C>           <C>
        Expected income tax expense......................................       $3,631       $12,403       $ 9,378
        State income taxes, net of federal tax benefit...................          386         1,160         1,022
        Research and experimentation credit..............................         (286)       (1,232)       (1,686)
        Other, net.......................................................          (19)         (460)         (469)
                                                                                ------       -------       -------
         Actual income tax expense.......................................       $3,712       $11,871       $ 8,245
                                                                                ======       =======       =======
</TABLE>


   The tax effects of significant temporary differences that result in deferred
tax assets and liabilities at December 31, are as follows (in thousands):

<TABLE>
                                                                                                 1999          2000
                                                                                                ------        ------
     <S>                                                                                        <C>           <C>
     Deferred tax assets:
        Allowance for doubtful accounts and returns.....................................        $  519        $  828
        Inventory reserves..............................................................           237           893
        Accrued warranty and cooperative advertising....................................           386           302
        Other accrued expenses..........................................................           ---           154
        Compensation accruals...........................................................           907         1,600
        Research and experimentation credit.............................................           432         2,118
        Other, net......................................................................           166           285
                                                                                                ------        ------
            Total deferred tax asset....................................................        $2,647        $6,180
                                                                                                ------        ------
     Deferred tax liabilities:
        Property and equipment..........................................................          (349)         (748)
        Other, net......................................................................           (56)         (121)
                                                                                                ------        ------
            Total deferred tax liabilities..............................................          (405)         (869)
                                                                                                ------        ------
        Net deferred tax asset..........................................................        $2,242        $5,311
                                                                                                ======        ======
</TABLE>

     The Company has analyzed the sources and expected reversal periods of its
deferred tax assets.  At December 31, 2000, the Company has a research and
experimentation credit carryforward of approximately $2.1 million which will
expire in the year 2020 if not utilized.  The Company believes that the tax
benefits attributable to deductible temporary differences will be realized by
recognition of future taxable amounts.

     For the years ended December 31, 1998, 1999 and 2000, the Company
recognized $195,000, $8,023,000 and $4,557,210 as a direct increase to paid-in
capital for the income tax benefit resulting from the exercise of non-qualified
stock options by employees.

7.   Redeemable Preferred Stock and Initial Public Offering

     During 1995, the Company authorized a new class of preferred stock,
consisting of 5,000,000 convertible Series A preferred shares with a par value
of $0.10 per share. The preferred shares were convertible, at the option of the
holder, into shares of common stock that was subject to the three-for-two
forward split. The preferred shares were redeemable at the option of a majority
of the preferred stockholders, any time after four years from the date of
issuance, provided that the Company had not achieved certain financial results
or completed a public offering of common stock, both as defined.

     On June 21, 1996, the Company completed a private placement of 1,210,861
shares of Series A preferred stock at a price of $2.86 per share, for net
proceeds of $3,049,406. The private placement included 135,678 preferred shares
issued to note holders. In the event of the Company's liquidation, or redemption
of the preferred shares, the Series A preferred stockholders were entitled to
$2.86 per share plus unpaid dividends equal to 15% of the liquidation value per
annum.

     During 1997, the Company amended its articles of incorporation to authorize
a new class of preferred stock, consisting of 2,725,998 convertible Series B
preferred shares with a par value of $0.10 per share. On September 16, 1997, the
Company completed

                                       34
<PAGE>

a private placement of 2,517,894 shares of Series B preferred stock at a price
of $4.99 per share, for net proceeds of $12,514,291. In the event of the
Company's liquidation, or redemption of the preferred shares, the Series B
stockholders were entitled to $4.99 per share plus unpaid dividends equal to 15%
of the liquidation value per annum.

     In August of 1998, the Company completed its initial public offering of
3,450,000 shares of common stock at $12.00 per share, for net proceeds of
approximately $37.6 million. Aggregate offering costs were approximately $3.8
million.  In connection with the initial public offering, 1,210,861 shares of
Series A preferred stock and 2,517,894 shares of Series B preferred stock with a
liquidation value of $2.86 and $4.99 per share, respectively, were converted
into common stock, resulting in the issuance of 5,593,133 shares of common stock
to the preferred stockholders.

8.   Stock Options

     Pursuant to the Company's 1998 stock option plan (the "Plan"), a committee
appointed by the Company's Board of Directors may grant incentive and
nonqualified options to employees, consultants and directors. The Plan currently
authorizes the grant of options up to 4,875,000 shares of authorized common
stock. Incentive stock options have a ten-year term and non-qualified stock
options have a five-year term. A majority of the stock options vest 25% on the
first anniversary date of the grant and 6.25% each quarter thereafter, with the
remaining stock options vesting 100% five years from the grant date. As of
December 31, 2000, an aggregate of 6,879,794 options had been granted under the
Plan of which 1,234,120 were incentive stock options and 5,645,674 were non-
qualified stock options.

     The following summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
                                                                                Shares               Weighted Average
                                                                             Under Option             Exercise Price
                                                                             ------------             --------------
        <S>                                                                  <C>                     <C>
        Options outstanding at January 1, 1998......................           1,343,952                  $ 0.42
          Granted...................................................           1,413,150                    8.82
          Exercised.................................................            (298,856)                   0.22
          Canceled..................................................            (658,906)                   3.33
                                                                             -----------

        Options outstanding at December 31, 1998....................           1,799,340                    5.99
          Granted...................................................           1,084,050                   40.19
          Exercised.................................................            (548,847)                   2.68
          Canceled..................................................            (414,427)                  20.86
                                                                             -----------

        Options outstanding at December 31, 1999....................           1,920,116                   22.91
          Granted...................................................           1,918,400                   30.18
          Exercised.................................................            (331,041)                  12.34
          Canceled..................................................            (764,394)                  29.50
                                                                             -----------

        Options outstanding at December 31, 2000....................           2,743,081                   27.45
                                                                             ===========

        Options available for grant at December 31, 2000                       2,067,417
                                                                             ===========

        Options exercisable at December 31, 1999                                 872,773
                                                                             ===========
        Options exercisable at December 31, 2000                                 656,503
                                                                             ===========
</TABLE>


                                       35
<PAGE>

  The following summarizes information about outstanding options at December 31,
2000:

<TABLE>
<CAPTION>
                              Options Outstanding                     Options Exercisable
          -----------------------------------------------   -------------------------------------
                                        Weighted-average
             Range of     Number of        remaining           Number           Weighted-average
             exercise      options      contractual life     of options             exercise
              prices     outstanding        (in years)       exercisable             price

          ---------------------------------------------------------------------------------------
<S>                      <C>            <C>                  <C>                <C>
           0.00 - 12.00      393,622            2.1             356,237              $ 5.77
          12.00 - 24.00      785,553            3.6              23,718               19.75
          24.00 - 36.00      645,092            3.6              94,877               31.83
          36.00 - 48.00      599,389            3.4             135,298               38.77
          48.00 - 60.00      319,425            3.7              46,373               53.11
                           ---------                            -------
                           2,743,081            3.3             656,503               20.19
                           =========                            =======
</TABLE>

As discussed in Note 1, the Company applies APB 25 and related interpretations
in accounting for stock options issued to employees and directors. As a result,
for options issued with exercise prices below the estimated fair market value on
the date of grant, the Company recorded deferred compensation expense totaling
approximately $1,227,000 for options granted during the year ended December 31,
1997, and $1,921,000 for options granted during the year ended December 31,
1998. Such deferred compensation expense will be amortized to operations pro
rata over the forty-eight month option vesting period. Such amortization expense
totaled approximately $688,000, $818,000 and $497,000 for the years ended
December 31, 1998, 1999 and 2000, respectively. In 2000 the Company reversed
$514,000 against additional paid-in capital for forfeitures of deferred stock
compensation related to stock options issued at less than fair value.

   The weighted average fair values of options granted during 1998, 1999 and
2000 were  $6.28, $30.61, and $30.18 per share, respectively, using the Black-
Scholes option-pricing model with the following assumptions: no expected
dividends, 89.5% volatility in 1998, 99.4% volatility in 1999, and 111%
volatility in 2000, expected life of the options of five years in 1998, 1999 and
2000 and a risk-free interest rate of 6.0% for 1998 and 1999, and 5.0% for the
year 2000. Had compensation cost for the Company's stock-based compensation plan
been determined based upon the fair value of options on the grant dates,
consistent with the provisions of SFAS 123, the Company's 1998, 1999 and 2000
pro forma net income would have been as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                     ----------------------------
                                                                     1998       1999         2000
                                                                     ----       ----         ----
          <S>                                                       <C>        <C>        <C>
          Net income available to common stockholders:
            As reported.....................................        $5,363     $23,565    $18,550
            Pro forma.......................................         5,039      14,779      7,504
          Income per common share:
            As reported:
               Basic........................................        $ 0.29     $  0.98    $  0.76
               Diluted......................................          0.28        0.93       0.74
            Pro forma:
               Basic........................................        $ 0.28     $  0.62    $  0.31
               Diluted......................................          0.26        0.59       0.30
</TABLE>

9.   Significant Customers, Suppliers and Concentration of Credit Risk

   Our customers are primarily distributors and original equipment
manufacturers, who resell the Company's products to end users. The Company
recognized revenue from the following significant customers and end users for
the years ended December 31 (in thousands):

          Company                                   1998      1999      2000
          --------------------------------------  --------  --------  --------
             A..................................  $20,749   $29,877   $25,801
             B..................................    2,337    15,195    23,366
             C..................................       --     9,234    19,349
             D..................................    7,369     9,858     2,545
             E..................................    6,360     3,660       227

   Although the Company generally uses standard parts and components for its
products, many key components are purchased from sole or single source vendors
for which alternative sources may not currently be available. The identification
and utilization of new suppliers for such items could adversely effect the
Company's future operating results.

                                      36
<PAGE>

   The Company is exposed to potential concentrations of credit risk from its
accounts receivable with its various customers and receivables are concentrated
in customers in the telecommunications industry. To reduce this risk, the
Company has a policy of assessing the creditworthiness of its customers and
monitors the aging of its accounts receivable for potential uncollectable
accounts.

10.  Employee Benefit Plan

   In May 1996, the Company adopted a defined contribution employee benefit plan
(the "401(k) Plan") under Section 401(k) of the Internal Revenue Code which is
available to all employees who meet the 401(k) Plan's eligibility requirements.
Employees may contribute up to the maximum limits allowed by the Internal
Revenue Code. The Company may make discretionary employer matching contributions
to the 401(k) Plan. The Company made no contributions to the 401(k) Plan in
1998, 1999 or 2000.


11.  Commitments

   The Company leases office space under various noncancelable-operating leases
that expire through 2009. Future obligations under these leases are as follows
(in thousands):


                    Year ending December 31:
                         2001.........................        $ 1,991
                         2002.........................          2,111
                         2003.........................          2,200
                         2004.........................          2,311
                         2005.........................          2,115
                         Thereafter...................          1,927
                                                              -------
                                                              $12,655
                                                              =======

The Company records rent expense under noncancelable operating leases using the
straight-line method after consideration of increases in rental payments over
the lease term, and records the difference between actual payments and rent
expense as deferred rent concessions.

   Rent expense for the years ended December 31, 1998, 1999 and 2000 totaled
$555,483, $977,889 and $1,533,801, respectively.

                                      37
<PAGE>

12.   Quarterly Financial Information (unaudited)

   The following information summarizes selected quarterly financial information
for the two years ended December 31, 2000 (in thousands, except per share data).


<TABLE>
<CAPTION>
                                                                                    Quarter ended December 31, 2000
                                                                   -----------------------------------------------------------------
                                                                       First            Second        Third       Fourth        Year
                                                                   -----------------------------------------------------------------
<S>                                                                <C>             <C>          <C>          <C>          <C>
Net revenue                                                               $38,726      $44,126      $40,184     $25,014     $148,050
Cost of sales                                                              16,745       19,102       19,042      11,880       66,769
                                                                     ------------    ---------    ---------    --------     --------
 Gross profit                                                              21,981       25,024       21,142      13,134       81,281

Operating expenses:
 Selling, general and administrative                                        5,590        7,005        8,427       7,797       28,818
 Research and development                                                   5,931        7,153        7,437       8,176       28,697
 Amortization of deferred stock option compensation                           124          103          114         155          497
                                                                      ------------    ---------    ---------    --------     -------
   Income (loss) from operations                                           10,336       10,763        5,164      (2,994)      23,269
Other income, net                                                             721          801          842       1,162        3,526
                                                                     ------------    ---------    ---------    --------     --------
   Income (loss) before income taxes                                       11,057       11,564        6,006      (1,832)      26,795
Income tax expense (benefit)                                                3,538        3,701        1,922        (916)       8,245
                                                                     ------------    ---------    ---------    --------     --------
 Net income (loss)                                                        $ 7,519      $ 7,863      $ 4,084     $  (916)    $ 18,550
                                                                     ============    =========     ========    ========     ========
Income (loss) per share:
 Basic                                                                    $  0.31      $  0.32      $  0.17     $ (0.04)    $   0.76
 Diluted                                                                  $  0.30      $  0.32      $  0.16     $ (0.04)    $   0.74

                                                                                     Quarter ended December 31, 1999
                                                                      --------------------------------------------------------------
                                                                           First      Second        Third       Fourth        Year
                                                                      ------------  ---------    ----------   ---------   ----------
Net revenue                                                               $21,684      $25,288      $28,730     $33,113     $108,815
Cost of sales                                                               8,884       11,088       11,808      13,719       45,499
                                                                      -----------   ----------   ----------   ---------   ----------
 Gross profit                                                              12,800       14,200       16,922      19,394       63,316

Operating expenses:
  Selling, general and administrative                                       3,209        3,714        3,944       4,924       15,791
  Research and development                                                  2,323        2,893        4,061       4,324       13,601
  Amortization of deferred stock option compensation                          205          205          204         204          818
                                                                       ----------    ---------    ----------   ---------   ---------
   Income from operations                                                   7,063        7,388        8,713       9,942       33,106
Other income, net                                                             556          543          606         625        2,330
                                                                       ----------    ---------    ----------   ---------   ---------
   Income before income taxes                                               7,619        7,931        9,319      10,567       35,436
Income tax expense                                                          2,707        2,814        3,075       3,275       11,871
                                                                       ----------    ---------    ----------   ---------   ---------
 Net income                                                               $ 4,912      $ 5,117      $ 6,244     $ 7,292     $ 23,565
                                                                       ==========    =========    =========    ========    =========
Income per share:
 Basic                                                                    $  0.21      $  0.21      $  0.26     $  0.30     $   0.98
 Diluted                                                                  $  0.19      $  0.20      $  0.25     $  0.29     $   0.93
</TABLE>

                                       38
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                       39
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item concerning our directors and
executive officers is incorporated by reference to the information set forth in
the sections entitled "Proposal One--Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2001
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of our fiscal year ended December 31, 2000 (the "2001 Proxy
Statement"), except that certain information required by this item concerning
our executive officers is incorporated by reference to the information set forth
in the section entitled "Executive Officers of the Company" at the end of Part I
of this Annual Report on Form 10-K.

     There are no family relationships between any of our executive officers,
other than that between Mr. Koenig and Ms. Pierce.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal One--Election of Directors--Director Compensation" and "Executive
Officer Compensation" in our 2001 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in our 2001 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Transactions with Management" in our 2001 Proxy
Statement.

                                       40
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  The following documents are filed as part of this Form 10-K:

          1.   Consolidated Financial Statements. The following consolidated
               financial statements of the Company and the Independent Auditors'
               Report are filed as part of this Form 10-K:

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----
<S>                                                                                                      <C>
Independent Auditors' Report..........................................................................     26

Consolidated Balance Sheets as of December 31, 1999 and 2000..........................................     27

Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000............     28

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000..     29

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000............     30

Notes to Consolidated Financial Statements............................................................     31
</TABLE>

          2.   Consolidated Financial Statement Schedule. The following
               consolidated financial statement schedule of the Company for the
               years ended December 31, 1998, 1999 and 2000 filed as part of
               this Form 10-K should be read in conjunction with the
               Consolidated Financial Statements, and related notes thereto, of
               the Company.

               Schedule II - Valuation and Qualifying Accounts for the years
               ended December 31, 1998, 1999 and 2000.

               Schedules other than those listed above have been omitted since
               they are either not required, not applicable, or the information
               is otherwise included.

          3.   Exhibits. The exhibits listed on the accompanying index to
               exhibits immediately following the consolidated financial
               statement schedule are filed as part of, or incorporated by
               reference into, this Form 10-K.

     (b)  Reports on Form 8-K. No Reports on Form 8-K were filed during the
          fourth quarter ended December 31, 2000.

                                       41
<PAGE>

                         Independent Auditors' Report

The Board of Directors
Carrier Access Corporation:

     Under date of January 18, 2001, we reported on the consolidated balance
sheets of Carrier Access Corporation and subsidiaries as of December 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000, which are included in the Company's Annual Report on Form
10-K for 2000. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement Schedule II-Valuation and Qualifying Accounts. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits.

     In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

KPMG LLP

Boulder, Colorado
January 18, 2001

                                       42
<PAGE>

                                  SCHEDULE II
                          CARRIER ACCESS CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                                (In thousands)


<TABLE>
<CAPTION>
                                                               Balance at      Additions                  Balance at
                                                                Beginning     Charged to     Bad Debt        End
Allowance for doubtful accounts:                                of Period     Operations    Write-offs    of Period
                                                              -----------     ----------    ----------    -----------
<S>                                                            <C>            <C>           <C>           <C>
  Year Ended:
December 31, 1998..................................           $       398            245            --    $       643
                                                              ===========     ==========    ==========    ===========
December 31, 1999..................................           $       643            (47)         (132)   $       464
                                                              ===========     ==========    ==========    ===========
December 31, 2000..................................           $       464            211           (22)   $       653
                                                              ===========     ==========    ==========    ===========

Inventory Obsolescence Reserve:

  Year Ended:
December 31, 1998..................................           $        --            805          (229)   $       576
                                                              ===========     ==========    ==========    ===========
December 31, 1999..................................           $       576            794          (753)   $       617
                                                              ===========     ==========    ==========    ===========
December 31, 2000..................................           $       617          1,076        (1,124)   $       569
                                                              ===========     ==========    ==========    ===========
</TABLE>

     See accompanying independent auditors' report.

                                       43
<PAGE>

                                 EXHIBIT INDEX

Exhibit
Number                   Description of Document
-----                    -----------------------

 2.1      Agreement and Plan of Reorganization by and among Carrier Access
          Corporation, Millennia Acquisition Corporation and Millennia Systems,
          Inc. dated as of August 4, 2000 (incorporated herein by reference to
          Exhibit 2.1 to the Registrant's filing on Form 8-K dated August 18,
          2000).

 3.1      Registrant's Amended and Restated Certificate of Incorporation as
          filed with the Secretary of State of Delaware on August 5, 1998
          (incorporated herein by reference to Exhibit 3.1 to the Registrant's
          Registration Statement on Form S-1, Reg. No. 333-53947 ("Registrant's
          1998 S-1")).

 3.2      Registrant's Bylaws (incorporated herein by reference to Exhibit 3.2
          to the Registrant's 1998 S-1).

 4.1      Form of Registrant's Specimen Common Stock Certificate (incorporated
          herein by reference to Exhibit 4.1 to the Registrant's 1998 S-1).

 4.2      Amended and Restated Investor Rights Agreement, among the Registrant
          and the investors and founders named therein, dated September 16, 1997
          (incorporated herein by reference to Exhibit 4.2 to the Registrant's
          1998 S-1).

10.1      Form of Diamond Level Distributor Agreement (incorporated herein by
          reference to Exhibit 10.1 to the Registrant's 1998 S-1).

10.2      Form of Platinum Level OEM Agreement (incorporated herein by reference
          to Exhibit 10.2 to the Registrant's 1998 S-1).

10.3      Line of Credit Agreement with Bank One for $5,000,000 dated July 2,
          1998 (incorporated herein by reference to Exhibit 10.3 to the
          Registrant's 1998 S-1).

10.4      Lease Agreement between Carrier Access Corporation and Cottonwood Land
          and Farms Ltd. for facilities at 5395 Pearl Parkway, Boulder,
          Colorado, dated June 1, 1995 (incorporated herein by reference to
          Exhibit 10.4 to the Registrant's 1998 S-1).

10.5      Amendment to Lease Agreement between Carrier Access Corporation and
          Cottonwood Land and Farms Ltd. Dated September 20, 1995 (incorporated
          herein by reference to Exhibit 10.5 to the Registrant's 1998 S-1).

10.6      Registrant's 1995 Stock Option Plan (incorporated herein by reference
          to Exhibit 10.6 to the Registrant's 1998 S-1).

10.7      Registrant's 1998 Stock Option Plan (incorporated herein by reference
          to Exhibit 10.7 to the Registrant's 1998 S-1).

10.8      Amendment to Lease Agreement between Carrier Access Corporation and
          Cottonwood Land and Farms Ltd. Dated October 25, 1998 (incorporated
          herein by reference to Exhibit 10.8 to the Registrant's 1998 S-1).

10.9      Form of Directors' and Officers' Indemnification Agreement (which is
          incorporated herein by reference to Exhibit 10.9 to the Registrant's
          1998 S-1).

10.10     Lease Agreement between Carrier Access Corporation and TC Boulder
          Warehouse, LP, a Delaware limited partnership for facilities at 6837
          Winchester Circle, Boulder, Colorado, dated November 13, 1998
          (incorporated herein by reference to Exhibit 10.10 to the Registrant's
          1998 S-1).

10.11     Line of Credit Agreement with Bank One for $5,000,000 dated July 2,
          1999 (incorporated herein by reference to Exhibit 10.11 to the
          Registrant's Form 10-K dated March 30, 2000).

10.12*    First Amendment to Line of Credit Agreement and Promissory Note
          Modification Agreement with Bank One for $5,000,000 dated July 2,
          2000.

23.1*     Consent of KPMG LLP, Independent Certified Public Accountants.

24.1*     Power of Attorney (Reference is made to the following Signature Page).


* Filed herewith.

                                       44
<PAGE>

SIGNATURE

     Pursuant to the requirements of section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boulder, State of
Colorado, on this 30th day of March 2001.

                          CARRIER ACCESS CORPORATION
                                 (Registrant)


                  By:       /s/ Timothy R. Anderson
                            -----------------------

                     Timothy R. Anderson
                     Chief Financial Officer, Vice President of Finance and
                     Administration


                               POWER OF ATTORNEY

     Know all men by these presents, that each person whose signature appears
below constitutes and appoints Nancy Pierce, his or her attorney-in-fact, with
power of substitution in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the attorney-in-fact or his
or her substitute or substitutes may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the persons whose signatures appear below, which persons have
signed such report on March 30, 2001 in the capacities indicated:

<TABLE>
<CAPTION>
                                 Signature                                                           Title
                                 ---------                                                           -----
          <S>                                                                   <C>
          /s/ Roger L. Koenig
          ------------------------------------------
          (Roger L. Koenig)                                                     President, Chief Executive Officer
                                                                                (Principal Executive Officer) and Chairman
                                                                                of the Board of Directors
          /s/ Timothy R. Anderson
          ------------------------------------------
          (Timothy R. Anderson)                                                 Chief Financial Officer
                                                                                Vice President of Finance and Chairman
                                                                                and Administration

          /s/ Nancy Pierce
          ------------------------------------------
          (Nancy Pierce)                                                        Chief Development Officer and
                                                                                Director

          /s/ Douglas Carlisle
          ------------------------------------------
          (Douglas Carlisle)                                                    Director

          /s/ Joseph Graziano
          ------------------------------------------
          (Joseph Graziano)                                                     Director

          /s/ David R. Laube
          ------------------------------------------
          (David R. Laube)                                                      Director

          /s/ John W. Barnett, Jr.
          ------------------------------------------
          (John W. Barnett, Jr.)                                                Director
</TABLE>


                                       45