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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 000-31529

ADVANCED SWITCHING COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | 54-1865834
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

8330 BOONE BOULEVARD
VIENNA, VIRGINIA 22182
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 448-5540

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
($.0025 PAR VALUE)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 of 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 statement to
this Form 10-K. [ ]

Based on the closing price of the common stock on February 28, 2002 on the
Nasdaq Stock Market, the aggregate market value of registrants common stock
held by non-affiliates of the registrant was approximately $19,374,405.

As of February 28, 2002, there were 42,808,568 shares of registrants common
stock outstanding.





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TABLE OF CONTENTS

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|Part I   |  |                                                                                       |  |    
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|Item 1   |  | Business                                                                              |  | 3  
|         |  | Risk Factors                                                                          |  | 5  
|Item 2   |  | Properties                                                                            |  | 8  
|Item 3   |  | Legal Proceedings                                                                     |  | 8  
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                   |  | 9  
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|Part II  |  |                                                                                       |  |    
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|Item 5   |  | Market for the Registrants Common Stock and Related Matters                          |  | 9  
|Item 6   |  | Selected Consolidated Financial and Operating Data                                    |  | 10 
|Item 7   |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  | 11 
|Item 7A  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 19 
|Item 8   |  | Financial Statements and Supplementary Data                                           |  | 20 
|Item 9   |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  | 20 
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|Part III |  |                                                                                       |  |    
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|Item 10  |  | Directors and Executive Officers of the Registrant                                    |  | 20 
|Item 11  |  | Executive Compensation                                                                |  | 22 
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 28 
|Item 13  |  | Certain Relationships and Related Transactions                                        |  | 30 
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|Part IV  |  |                                                                                       |  |    
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|Item 14  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 30 
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|         |  | Index to Financial Statements                                                         |  | F-1

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PART I

Item 1.  Business

In addition to historical information this annual report on Form 10-K contains
forward-looking statements. These forward-looking statements involve risks,
uncertainties and assumptions.

BUSINESS

Company Background

We developed, manufactured and marketed network technology and equipment
that enabled communications companies to quickly and economically deliver the
power of the Internet and advanced broadband services to their customers around
the world. Our product line was focused exclusively on providing solutions at
the access network level, enabling our customers to extend the significant
benefits of packet technology from optical core networks to local access
applications.

We were incorporated in Delaware in September 1997. From our inception
through the fourth quarter of 1998, we were a development stage company, had no
revenue and our operating activities related primarily to research and
development, developing and testing prototype products, building our technical
support, infrastructure, staffing our relationships with suppliers,
manufacturers and potential customers. We commenced shipments of our products
in the first quarter of 1999. Since our inception through December 30, 2001,
we had sold approximately $57.2 million of our product cumulatively and
incurred significant losses and, as of December 31, 2001, we had an accumulated
deficit of $87.4 million.

We marketed and sold our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and original
equipment manufacturers. We depended on a relatively small number of customers
for a large percentage of our revenue in any particular quarter. For the year
ended December 31, 2001, we had two customers who accounted for more than 10%
of the total revenue. For the year ended December 31, 2000, we had one of the
same customers from 2001 as well as one other customer who accounted for
more than 10% of the total revenue. In the fourth quarter of 2000, we saw a
shift in the mix of our customers toward more established carriers, a trend
that continued into the first quarter of 2001. However, that trend did not
continue for the last three quarters of 2001 as we were unsuccessful in
generating any revenue from established carriers in any of those quarters. For
example, we were unable to reach agreement with a major customer on a large
purchase order and also we were affected by the continuing general weakness in
the global telecommunications equipment market.

Demand for our products was also negatively affected by a decline in our
emerging carriers capital spending due to abrupt changes in their competitive
market and their limited access to capital and deteriorating financial
performance. These unanticipated reductions in our emerging carriers capital
spending plans, combined with our difficulties in penetrating the more
established carriers, had a material adverse effect on our business.

On July 2, 2001, we announced the implementation of certain cost-cutting
efforts pursuant to our restructuring plan, including a 20 percent reduction in
our workforce. On October 16, 2001, we announced the implementation of further
cost-cutting efforts pursuant to our restructuring plan, including a 36 percent
reduction in our workforce.

Despite our actions to scale down our operations and implement cost
reduction measures, we have continued to incur significant net losses. For the
year ended December 31, 2001, our net loss was approximately $56.4 million. We
have never achieved profitability and our management believed that we would
incur operating losses for the foreseeable future.

On February 4, 2002, our board of directors determined that liquidation
was the best available alternative to maximize stockholder value and approved
the orderly wind down of our operations. Pursuant to our board of directors
decision to liquidate and wind down our operations, we laid off all of our
eighty-seven employees with most terminations effective on April 6, 2002 and
April 20, 2002. However, five employees have termination dates

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that range from May to August of 2002 as these individuals are needed to
wind down the business affairs. The Board also authorized management to
immediately commence efforts to sell our assets subject to stockholder
approval, including inventory and our intellectual property, terminate
commercial agreements and relationships, exit our commercial obligations, and
generally wind down our business and operations.

Review of Alternatives

Our board of directors determined that the prospects for our business were
likely to continue to deteriorate due to continuing weakness in the global
telecommunications equipment market and the financial markets. In October
2001, we retained Morgan Stanley & Co. Incorporated to act as our exclusive
financial advisor to explore strategic alternatives and solicit proposals from
parties with an interest in pursuing a business combination with us. From
October 2001 through December 20, 2001, Morgan Stanley and our management
contacted more than 60 domestic and international strategic and financial
prospects on our behalf. Throughout the process, members of our management
team, members of our special committee and representatives of Morgan Stanley
assisted each party, who so desired, with their due diligence review of our
business and operations and provided access to non-public information about our
business and operations to each of the interested parties. We participated in
numerous telephonic and in-person business and financial overview presentations
and made ourselves available for a number of question and answer sessions for
these interested parties. By late January, our management believed that it was
highly unlikely that any party was prepared to acquire our business on terms
and conditions that were in the best interests of our stockholders and
therefore, the decision was made to wind down our business and operations.

Conclusion of the Board of Directors

On February 4, 2002, our board of directors, with Mr. Mostafa abstaining,
adopted the plan of liquidation. In arriving at this conclusion, our board of
directors considered a number of factors, including alternatives to the
liquidation and the future prospects of our business. Prior to the meeting of
our board of directors on February 4, 2002, our board of directors analyzed the
results of managements investigation of various acquisition and strategic
partnering opportunities. Our board of directors had been informed continuously
of our business affairs and financial condition, and had convened at numerous
separate meetings to consider these issues. Our board of directors had been
apprised by Morgan Stanley of the market values of comparable companies and the
lack of prospects for our business. Accordingly, our board of directors
determined that it would not be advisable to continue to operate on an
independent basis indefinitely if the potential for growth was so limited.
Further, after significant effort, we had not been successful in identifying a
buyer or strategic alliance partner acceptable to us. Based on this
information, our board of directors determined that distribution to the
stockholders of cash proceeds from the sale of our assets would return the
greatest value to our stockholders as compared to other alternatives and that
liquidation would prevent further erosion of stockholders equity through
continuing net losses and market declines. There can be no assurance that the
liquidation value per share of common stock in the hands of the stockholders
will equal or exceed the price or prices at which the common stock has recently
traded or may trade in the future, or that the liquidation value will exceed
zero. However, our board of directors believes that it is in the best interests
of our business and our stockholders to distribute to the stockholders our net
assets, if any, pursuant to the plan of liquidation. If the plan of liquidation
is not authorized and approved by the stockholders, our board of directors will
continue to manage the company as a publicly owned entity and will explore
what, if any, alternatives are then available for the future of our business.

Special Meeting of Stockholders

On April 9, 2002, we will hold a special meeting of stockholders to
consider and vote on a proposal to approve a plan of complete liquidation and
dissolution of the company. A proxy statement describing the plan will be
mailed to our stockholders prior to the meeting. Stockholders are strongly
advised to read the proxy statement when it becomes available, because it will
contain important information. We will file the proxy statement with the
Securities and Exchange Commission. Investors may obtain a free copy of the
proxy statement (when available) and other documents filed by us at the
Commissions web site at http://www.sec.gov. The proxy statement and related
materials may also be obtained for free by directing such requests to Advanced
Switching Communications, Inc., 8330 Boone Boulevard, Vienna, 22182, Attention:
Investor Relations.

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Employees

As of December 31, 2001, we had a total of 91 employees, all of whom were
based in the United States. Forty-five of
our employees were engaged in research and development, 16 in operations, 17 in
marketing and sales and 13 in finance and administrative functions. Subsequent
to our board of directors decision on February 4, 2002 to liquidate and wind
down our operations, we terminated all of our remaining eighty-seven employees
with most terminations being effective on April 6, 2002 and April 20, 2002.
Five employees termination dates will occur in the months of May through August
of 2002 as these individuals are needed to assist in the wind down of our
business affairs.

RISK FACTORS

This Annual Report on Form 10-K contains certain forward looking
statements, including statements concerning our future financial results from
the sale of assets and settlement of liabilities, dissolution proceedings, and
distribution of proceeds to stockholders. Some of our assets may be difficult
for us to convert into cash, and we can make no assurance that we will receive
any material amounts in respect of such assets. No assurance can be given that
the amount to be received in liquidation will equal or exceed the price or
prices at which our common stock traded prior to our dissolution. In addition,
you should keep in mind that the risks described below are not the only risks
that we face. The risks described below are the risks that we currently believe
are material to us. However, additional risks not presently known to us, or
risks that we currently believe are immaterial, may also impair our ability to
distribute proceeds to our stockholders. You should also refer to the other
information set forth in this Annual Report on Form 10-K, including the
discussions set forth in Managements Discussion and Analysis of Financial
Condition and Results of Operations and Business, as well as our financial
statements and the related notes.

Risks Related To Our Liquidation and Dissolution

Stockholders could be liable to the extent of liquidating distributions
received if contingent reserves are insufficient to satisfy the companys
liabilities.

If we fail to create an adequate contingency reserve for payment of our
expenses and liabilities, or if we transfer our assets to a liquidating trust
and the contingency reserve and the assets held by the liquidating trust are
less than the amount ultimately found payable in respect of expenses and
liabilities, each stockholder could be held liable for the payment to creditors
of such stockholders pro rata portion of the excess, limited to the amounts
previously received by the stockholder in distributions from us or the
liquidating trust.

If a court holds at any time that we have failed to make adequate
provision for our expenses and liabilities or if the amount ultimately required
to be paid in respect of such liabilities exceeds the amount available from the
contingency reserve and the assets of the liquidating trust, our creditors
could seek an injunction against the making of distributions under the plan of
liquidation on the grounds that the amounts to be distributed are needed to
provide for the payment of our expenses and liabilities. Any such action could
delay or substantially diminish the cash distributions to be made to
stockholders and/or holders of beneficial interests of the liquidating trust
under the plan of liquidation.

Securities class action claims have been filed against us and certain of
our current and former officer and directors. These claims could delay the
making of any distributions to our stockholders or deplete the proceeds that
might otherwise be available to be distributed to our stockholders.

On February 21, 2002, a complaint was filed in the United States District
Court for the Eastern District of Virginia against us and certain of our
current and former officers and directors. The plaintiffs in this action claim
to own a total of 100 shares and purport to act on behalf of a class of other
stockholders. The complaint alleges violations of the federal securities laws
in connection with our initial public offering and subsequent public
statements. Thereafter, substantially similar complaints were filed in the
same court. We believe the claims asserted in the complaints are without merit
and intend to contest these claims vigorously. However, the outcome of the
suits cannot be predicted. The existence of these claims could delay the
making of any distributions to our stockholders or reduce the amount available
for distribution in connection with the proposed plan of liquidation.

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Anticipated timing of liquidation may not be achieved.

Immediately after the special meeting, if the plan of liquidation is
approved by stockholders, we intend to proceed with the orderly sale of our
assets and file a certificate of dissolution with the Secretary of State of the
State of Delaware. Although we anticipate that we will substantially complete
the sale of our assets within a 12 month period, our board of directors may
determine that it is in the best interests of our stockholders that some assets
be placed into a liquidating trust, which could delay the receipt by
stockholders of the final proceeds of the liquidation.

The liquidation may not result in greater returns to stockholders than our
continuing as a going concern.

We cannot assure you that the plan of liquidation will result in greater
returns to stockholders than our continuing as a going concern or through a
business combination or other transaction with a third party. If the plan of
liquidation is not authorized and approved by the stockholders, our board of
directors will continue to manage the company as a publicly owned entity and
will explore what, if any, alternatives are then available for the future of
our business.

Stockholders may not be able to recognize a loss for federal income tax
purposes until they receive a final distribution from us, which may be as long
as three years.

As a result of our liquidation, for federal income tax purposes
stockholders will recognize gain or loss equal to the difference between (i)
the sum of the amount of cash distributed to them and the aggregate fair market
value (at the time of distribution) of any property distributed to them, and
(ii) their tax basis for their shares of our capital stock. A stockholders tax
basis in his or her shares will depend upon various factors, including the
stockholders cost and the amount and nature of any distributions received with
respect thereto. Any loss will generally be recognized only when the final
distribution from us has been received, which may be as long as three years
after the date that the plan of liquidation is adopted.

Our stock transfer books will close on the final record date, after which
it will not be possible for stockholders to publicly trade in our stock.

We intend to close our stock transfer books and discontinue recording
transfers of common stock at the close of business on the final record date,
the date fixed by our board of directors for filing the certificate of
dissolution. Thereafter, certificates representing the common stock shall not
be assignable or transferable on our books except by will, intestate succession
or operation of law. The proportionate interests of all of our stockholders
shall be fixed on the basis of their respective stock holdings at the close of
business on the final record date, and, after the final record date, any
distributions made by us shall be made solely to the stockholders of record at
the close of business on the final record date, except as may be necessary to
reflect subsequent transfers recorded on our books as a result of any
assignments by will, intestate succession or operation of law.

We expect that our stock will be delisted from the Nasdaq National Market.

Our common stock is currently listed on Nasdaq National Market. Thus, we
are subject to financial and market-related tests and other qualitative
standards established by Nasdaq to maintain our listing. On September 10, 2001,
Nasdaq notified us that we had failed to maintain the $1.00 minimum bid price
requirement for continued listing. We had been given until December 10, 2001 to
come into compliance with this requirement. However, the Nasdaq had
temporarily waived the enforcement of this requirement until January 2002,
which gave us additional time to come into compliance. Since December 31, 2001,
we have met the minimum bid requirement, but we cannot predict whether we will
be able to maintain compliance with the minimum bid requirement or Nasdaqs
other requirements for continued listing. Even if we are able to comply with
the $1.00 minimum bid requirement for continued listing, if the plan of
liquidation is approved by the stockholders, it is likely that we will not be
able to maintain compliance with Nasdaqs other listing requirements or that
Nasdaq will take action to delist our securities from their National Market
System. If our common stock were delisted from Nasdaq for either of these
reasons, trading, if any, would thereafter be conducted on the over-the-counter
market in the so-called pink sheets or on the Electronic Bulletin Board of
the National Association of Securities Dealers, Inc. Consequently, stockholders
may

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find it more difficult to dispose of, or to obtain accurate quotations as to
the price of our common stock thereby reducing the liquidity of our stock,
making it difficult for a stockholder to buy or sell our stock at competitive
market prices, or at all, and we may lose support from institutional investors,
brokerage firms and market makers that currently buy and sell our stock and
provide information to investors about us. Delisting could also cause the price
of our stock to decrease further. In addition, it is likely that we will close
our stock transfer books and restrict transfers of our common stock after
filing the certificate of dissolution with the State of Delaware.

Our directors and officers may have interests in our liquidation and
dissolution that are different from the interests of other stockholders.

Members of our board of directors may be deemed to have a potential
conflict of interest in recommending authorization and approval of the plan of
liquidation.

These interests include:

| |  | our executive officers will receive an aggregate of approximately $1.6 million in severance payments in connection with the termination of their employment; and                 
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our directors and executive officers hold in-the-money options to purchase an aggregate of 140,000 shares
of common stock at a weighted average exercise price of 1.00 per share.

No further stockholder approval will be required.

The approval of the plan of liquidation requires the affirmative vote of
the holders of a majority of all shares of our common stock outstanding and
entitled to vote. If our stockholders approve the plan of liquidation, we will
be authorized to dispose of our assets without further approval of our
stockholders.

We will continue to incur the expense of complying with public company
reporting requirements.

We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended, even though
compliance with such reporting requirements is economically burdensome. In
order to curtail such expenses, after filing our certificate of dissolution we
will seek relief from the Securities and Exchange Commission from the reporting
requirements under the Exchange Act. Until such relief such relief is granted,
we will continue to file current reports on Form 8-K to disclose material
events relating to our liquidation and dissolution along with any other reports
that the Securities and Exchange Commission may require.

Risks Related To The Securities Market

Our Stock Price Has Been And May Continue To Be Volatile

An active public market for our common stock may not be sustained. The
market for technology stocks has been extremely volatile. The stock market in
general, and the Nasdaq National Market and technology companies in particular,
have experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of such companies.
These broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price
of a companys securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of managements attention and resources.

Future Sales Of Our Common Stock In The Public Market Could Cause Our
Stock Price To Fall

Sales of a large number of shares of our common stock in the public
market, or the perception that such sales could occur, could cause the market
price of our common stock to decline. As of December 31, 2001, we had
approximately 42.4 million shares of common stock outstanding. We have filed
with the Securities and Exchange Commission a registration statement on Form
S-8 covering 10.2 million shares reserved under our stock option plans. Sales
of a large number of shares could have an adverse effect on the market price
for our common stock.

Insiders Own A Substantial Number of Advanced Switching Communications
Shares And Could Limit Your Ability To Influence The Outcome Of Key
Transactions, Including Changes Of Control

As of February 28, 2001, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially own
approximately 59.0% of
our outstanding common stock. These stockholders, if acting together, would be
able to influence significantly matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions and adoption of the plan of liquidation.

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Provisions Of Our Charter Documents And Delaware Law May Have
Anti-Takeover Effects That Could Prevent A Change Of Control

Provisions of our amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.

Item 2.  Properties

Our executive offices and principal operations are located in Vienna,
Virginia. We lease approximately 21,000 square feet of office and laboratory
space pursuant to a lease that expires on November 30, 2005. In addition, we
lease approximately 21,000 square feet in the same building under a lease that
expires on August 31, 2002. We also lease approximately 5,000 square feet in
Pompano Beach, Florida under a lease that expires on April 2, 2004. We also
lease sales offices in Dallas and New Jersey.

Item 3.  Legal Proceedings

In October 2001, we announced that we had received notice from Qwest
Communications Corporation purporting to terminate our procurement agreement
with it. From the third quarter of 2000 through the first quarter of 2001,
Qwest made equipment purchases from us totaling over
$15.7 million ($13.8 million under the procurement agreement) and was our
largest customer during this period representing approximately 28% of our total
sales. In its purported notice of termination, Qwest asserted that we were in
material breach of our procurement agreement. In a letter dated October 23,
2001, we responded to Qwests earlier letter, rejecting any breach on our part
and reiterating our rights under the procurement agreement. On November 19,
2001, we received another letter from Qwest purporting to detail the actions
and inactions that constituted breach on our part and requesting us to accept a
return of, and reimburse Qwest for, all products purchased from us less a ten
percent discount in exchange for a release of claims. In a letter dated
December 5, 2001, we refuted the claims contained in Qwests November 19
letter, reiterated our rights to additional purchase orders from Qwest in
excess of $10 million, and suggested that we attempt to negotiate a mutually
acceptable resolution of our dispute. On January 25, 2002, Qwest responded to
our December 5 letter and among other things, asserted that it had revoked
acceptance of equipment previously purchased and requested a refund of the
amounts paid. In addition, however, Qwest also suggested that we attempt to
negotiate a mutually acceptable resolution of our dispute. As a
result, the
parties had discussions but were unable to reach an agreement to resolve their
competing claims. Since then, the parties have exchanged letters reiterating
their respective positions. We intend to vigorously defend any claims that may
be asserted by Qwest.

On February 21, 2002, a complaint was filed in the United States District
Court for the Eastern District of Virginia against us and certain of our
current and former officer and directors. The plaintiffs in this action claim
to own a total of 100 shares and purport to act on behalf of a class of other
shareholders. The complaint alleges violations of the federal securities laws
in connection with our initial public offering and subsequent public
statements. Thereafter, substantially similar complaints were filed in the
same court. We believe the claims asserted in the complaints are without merit
and intend to contest these claims vigorously. However, the outcome of the
suits cannot be predicted. The existence of these claims could delay the
making of any distributions to our stockholders or reduce the amount available
for distribution in connection with the proposed plan of liquidation.

We recently received a letter from Dishnet, a customer that purchased
approximately $1 million worth of equipment from us. In that letter, Dishnet
claimed that the equipment performed unsatisfactorily and sought compensation
in the amount of $30 million in connection with damages and losses suffered as
a result of the failure of the equipment to perform. We believe that we have
fulfilled our obligations to Dishnet, that Dishnets damages claims are without
merit and that Dishnet is not entitled to a refund. Nevertheless, we made a
proposal to resolve our differences with Dishnet by providing them with certain
equipment to replace equipment sent to us for repair and damaged while in
transit. At this juncture, we cannot predict whether Dishnet will pursue this
matter further and, if so, how it will be resolved.

Electronic Instrumentation & Technology, Inc., a former manufacturer of
ours, filed a complaint in the Circuit Court of Loudoun County,
Virginia. In the complaint, EIT claimed that we did not purchase certain
products from EIT and that we were in breach of our purchase agreement. EIT
sought compensation in the amount of

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$83,000, plus additional interest and attorneys fees. We dispute the
amount of EITs claim, and we intend to contest EITs claim vigorously.
However, the outcome of the suit cannot be predicted. The existence of EITs
claims could delay the making of final distributions to our stockholders or
reduce the amount available for distribution in connection with the proposed
plan of liquidation.

We recently received a letter from Benchmark Electronics, Inc., a former
manufacturer of ours. In its letter, Benchmark asserted that we were liable
for non-cancelable, non-returnable or customized items that were procured on
our behalf based upon forecasts provided to Benchmark and for costs associated
with the termination of our relationship. Benchmark is seeking additional
compensation in the amount of $0.9 million, but we dispute the amount of
Benchmarks claim. At this time, we cannot predict whether Benchmark will
pursue this matter and, if so, how it will be resolved.

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

The registrant did not submit any matters to a vote of its security
holders during the quarter ended December 31, 2001.

Part II

Item 5.  Market for the Registrants Common Stock and Related Stockholder Matters

Price Range of Common Stock.

Our common stock is traded on the Nasdaq Stock Market under the symbol
ASCX. Public trading of our common stock began on October 5, 2000. The high
and low for the period October 5, 2000 to December 31, 2000 was $21.75 and
$3.75, respectively. Prior to that, there was no public market for the common
stock. The following table sets forth, for the periods indicated, the high and
low sale price per share of our common stock on the Nasdaq Stock Market for the
year ended December 31, 2001.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Year Ended December 31, 2001 |  | HIGH |       | LOW
|                             |  |      |       |    
|First Quarter                |  | $    | 8.438 |     |  | $ | 2.406 | 
|Second Quarter               |  |      | 5.08  |     |  |   | 2.13  | 
|Third Quarter                |  |      | 2.41  |     |  |   | 0.46  | 
|Fourth Quarter               |  |      | 1.12  |     |  |   | 0.35  | 

As of March 15,
2002, there were approximately 92 shareholders of record
of our common stock. On March 15, 2002, the last sale price reported on the
Nasdaq Stock Market for our common stock was $1.01 per share.

Dividend Policy.

We have never declared or paid any dividends on our common stock. We do
not plan to do so in the foreseeable future.

If the plan of liquidation is approved by our stockholders, we will
distribute to our stockholders our net assets, if any, pursuant to the plan of
liquidation.

9



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##### 



Item 6.  Selected Consolidated Financial and Operating Data

|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |        |       |        | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------- | ------------------------ | --- | ---------------------------------------- | --- | ------ | ----- | ---- | ----- | ----------------------- | ----- | ---- | ------ | ------- | ------ | --- | ------ | ------- | ------ | ----- | ------ | 
|                                                                                               |                                                                                  |                            |                          |     | Period from                              |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |        |      
|                                                                                               |                                                                                  |                            |                          |     | Inception                                |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |        |      
|                                                                                               |                                                                                  |                            |                          |     | (September 10,                           |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |        |      
|                                                                                               |                                                                                  |                            |                          |     | 1997)                                    |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |        |      
|                                                                                               |                                                                                  |                            |                          |     | through                                  |     |        |       |      |       | Year Ended December 31, |       |      |        |        
|                                                                                               |                                                                                  |                            |                          |     | December 31,                             |     |        |       |      |       |                         |       |      |        |        
|                                                                                               |                                                                                  |                            |                          |     | 1997                                     |     | 1998   |       | 1999 |       | 2000                    |       | 2001
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |     
|                                                                                               |                                                                                  |                            |                          |     | (in thousands, except per share amounts)
|Statement of Operations Data:                                                                  |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Revenue                                                                                        |                                                                                  | $                          |                         |     |                                          | $   |       |       |      | $     | 4,278                   |       |      | $      | 37,381  |        |     | $      | 15,512  |       
|Cost of revenue                                                                                |                                                                                  |                            |                         |     |                                          |     |       |       |      |       | 2,839                   |       |      |        | 24.890  |        |     |        | 29,803  |       
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Gross profit (loss)                                                                            |                                                                                  |                            |                         |     |                                          |     |       |       |      |       | 1,439                   |       |      |        | 12,491  |        |     |        | (14,291 | )     
|Operating expenses:                                                                            |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|                                                                                               | Research and development, excluding
stock compensation amortization
amounts(1)   |                            |                          | 111 |                                          |     |        | 3,717 |      |       |                         | 6,718 |      |        |         | 12,510 |     |        |         | 18,286 |      
|                                                                                               | Sales and marketing, excluding stock
compensation amortization
amounts(1)        |                            |                          | 73  |                                          |     |        | 799   |      |       |                         | 3,209 |      |        |         | 12,821 |     |        |         | 10,922 |      
|                                                                                               | General and administrative, excluding
stock compensation amortization
amounts(1) |                            |                          | 125 |                                          |     |        | 611   |      |       |                         | 1,251 |      |        |         | 3,006  |     |        |         | 7,590  |      
|                                                                                               | Impairment of long-lived assets                                                  |                            |                          |    |                                          |     |        |      |      |       |                         |      |      |        |         |       |     |        |         | 6,384  |      
|                                                                                               | Restructuring charges                                                            |                            |                          |    |                                          |     |        |      |      |       |                         |      |      |        |         |       |     |        |         | 1,496  |      
|                                                                                               | Amortization of stock
compensation(1)                                            |                            |                          |    |                                          |     |        |      |      |       |                         | 42    |      |        |         | 1,760  |     |        |         | 2,028  |      
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|                                                                                               |                                                                                  |                            | Total operating expenses |     |                                          | 309 |        |       |      | 5,127 |                         |       |      | 11,220 |         |        |     | 30,097 |         |        |       | 46,706 | 
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Loss from operations                                                                           |                                                                                  |                            | (309                     | )   |                                          |     | (5,127 | )     |      |       | (9,781                  | )     |      |        | (17,606 | )      |     |        | (60,997 | )     
|Other income, net                                                                              |                                                                                  |                            | (16                      | )   |                                          |     | (16    | )     |      |       | (452                    | )     |      |        | (3,173  | )      |     |        | (4,610  | )     
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Net loss                                                                                       |                                                                                  |                            | (293                     | )   |                                          |     | (5,111 | )     |      |       | (9,329                  | )     |      |        | (14,433 | )      |     |        | (56,387 | )     
|Accretion of transaction costs and
accrued dividends on redeemable
convertible preferred stock |                                                                                  |                            |                         |     |                                          |     | (367   | )     |      |       | (2,589                  | )     |      |        | (4,182  | )      |     |        |        |       
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Net loss applicable to common
shareholders                                                     |                                                                                  | $                          | (293                     | )   |                                          | $   | (5,478 | )     |      | $     | (11,918                 | )     |      | $      | (18,615 | )      |     | $      | (56,387 | )     
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Basic and diluted net loss per share                                                           |                                                                                  | $                          | (0.05                    | )   |                                          | $   | (0.48  | )     |      | $     | (1.01                   | )     |      | $      | (1.01   | )      |     | $      | (1.33   | )     
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|Shares used in computing net loss per
share                                                    |                                                                                  |                            | 5,742                    |     |                                          |     | 11,389 |       |      |       | 11,789                  |       |      |        | 18,515  |        |     |        | 42,357  |       
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|                                                                                               |                                                                                 
|(1) Amortization of stock compensation
amounts:                                                |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|                                                                                               |                                                                                  | Research and development   |                          | $   |                                         |     |        | $     |     |       |                         | $     | 5    |        |         | $      | 786 |        |         | $      | 1,060 |       
|                                                                                               |                                                                                  | Sales and marketing        |                          |     |                                         |     |        |       |     |       |                         |       | 35   |        |         |        | 779 |        |         |        | 785   |       
|                                                                                               |                                                                                  | General and administrative |                          |     |                                         |     |        |       |     |       |                         |       | 2    |        |         |        | 195 |        |         |        | 183   |       
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       
|                                                                                               |                                                                                  | $                          |                         |     |                                          | $   |       |       |      | $     | 42                      |       |      | $      | 1,760   |        |     | $      | 2,028   |       
|                                                                                               |                                                                                  |                            |                          |     |                                          |     |        |       |      |       |                         |       |      |        |         |        |     |        |         |       

|                                       |  |                |      |      |  |      |        |      |  |      |         |   |  |   |         |  |  |   |        |  |  |  | 
|-------------------------------------- |  | -------------- | ---- | ---- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- |  |  | - | ------ |  |  |  | 
|                                       |  | December 31,  
|                                       |  |               
|                                       |  | 1997           |      | 1998 |  | 1999 |        | 2000 |  | 2001
|                                       |  |                |      |      |  |      |        |      |  |     
|                                       |  | (in thousands)
|Balance Sheet Data:                    |  |                |      |      |  |      |        |      |  |      |         |   |  |   |         |  |  |   |        | 
|Cash and cash equivalents              |  | $              | 98   |      |  | $    | 1,449  |      |  | $    | 33,012  |   |  | $ | 100,609 |  |  | $ | 36,848 | 
|Marketable securities                  |  |                |     |      |  |      | 3,481  |      |  |      |        |   |  |   | 11,916  |  |  |   | 40,945 | 
|Working capital                        |  |                | 23   |      |  |      | 3,916  |      |  |      | 35,069  |   |  |   | 121,303 |  |  |   | 70,498 | 
|Total assets                           |  |                | 368  |      |  |      | 6,451  |      |  |      | 41,695  |   |  |   | 137,348 |  |  |   | 82,942 | 
|Long-term debt, less current portion   |  |                | 263  |      |  |      | 286    |      |  |      | 98      |   |  |   | 5       |  |  |   | 3      | 
|Redeemable convertible preferred stock |  |                |     |      |  |      | 10,593 |      |  |      | 55,517  |   |  |   |        |  |  |   |       | 
|Total stockholders equity (deficit)   |  |                | (122 | )    |  |      | (5,478 | )    |  |      | (17,475 | ) |  |   | 128,598 |  |  |   | 74,275 | 

10



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

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

Overview

We developed, manufactured and marketed innovative network technology and
equipment that enabled communications companies to quickly and economically
deliver the power of the Internet and advanced broadband services to their
customers around the world. ASC created solutions that were evolutionary,
enabling communications companies to take advantage of their investment in
existing network equipment and facilities while gradually moving to
next-generation technology.

From our inception in September 1997 through the fourth quarter of 1998,
we were a development stage company, had no revenue and our operating
activities related primarily to research and development, developing and
testing prototype products, building our technical support infrastructure,
staffing our marketing, sales and customer service organizations, and
establishing relationships with suppliers, manufacturers and potential
customers. We commenced shipments of our products in the first quarter of
1999. Since our inception, we have incurred significant losses and, as of
December 31, 2001, we had an accumulated deficit of $87.4 million.

Also in October 2001, in response to our revenue shortfall and ongoing
concerns about the outlook for the global telecommunications equipment market,
we retained Morgan Stanley as our financial advisor to assist in identifying
and evaluating various strategic alternatives for our future with the goal of
maximizing shareholder value. Alternatives included a potential merger, sale of
all or part of our company, liquidation, restructuring, acquisition or
strategic alliance. After evaluating the alternatives available to us, we
announced on February 5, 2002 that our board of directors had approved a
resolution to liquidate our company and distribute the remaining net assets to
our stockholders.

In October 2001, we received from Qwest Communications a notice of
termination for cause relating to our procurement agreement with Qwest. We do
not believe there is any basis for Qwest to terminate the procurement
agreement, whether for cause or otherwise, and have so advised Qwest.

On February 21, 2002, a complaint was filed in the United States
District Court for the Eastern District of Virginia against us and certain of
our current and former officers and directors. The plaintiffs in this action
claim to own a total of 100 shares and purport to act on behalf of a class of
other shareholders. The complaint alleges violations of the federal securities
laws in connection with our initial public offering and subsequent public
statements. Thereafter, substantially similar complaints were filed in the same
court. We believe the claims asserted in the complaints are without merit and
intend to contest these claims vigorously. However, the outcome of the suits
cannot be predicted. The existence of these claims could delay the making of any
distributions to our stockholders or reduce the amount available for
distribution in connection with the proposed plan of liquidation.

We derived our revenue from sales of our line of broadband access
platforms. We generally recognized revenue from product sales upon shipment
provided that a purchase order had been received or a contract had been
executed, there were no significant uncertainties regarding customer
acceptance, the fee was fixed and determinable and collectibility was deemed
probable. If our arrangement with the customer included obtaining customer
acceptance, revenue was recognized when customer acceptance had been obtained.

We marketed and sold our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and original
equipment manufacturers. We depended on a relatively small number of

11



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customers for a large percentage of our revenue in any particular quarter.
For the year ended December 31, 2001, two customers each accounted for revenue
in excess of 10% of total revenue. For the year ended December 31, 2000, we
had one of the same customers from 2001 as well as one additional customer who
accounted for more than 10% of the total revenue. In the fourth quarter of
2000, we saw a shift in the mix of our customers toward more established
carriers, a trend that continued into the first quarter of 2001. However, that
trend did not continue for the last three quarters of 2001 as we were
unsuccessful in generating any revenue from established carriers in those
quarters. For example, we failed to reach agreement with a major customer on a
large purchase order and also we were affected by the continuing general
weakness in the global telecommunications equipment market. Nonetheless, we
continued to focus our sales efforts on more established carriers, publicizing
strategic wins and developing marketing materials and campaigns targeted at
this market segment. While the level of sales to any specific customer or type
of customer was anticipated to vary from period to period, we expected that we
would continue to have significant customer concentration in the foreseeable
future. In addition to the customer concentration we experienced, we had a
lengthy sales cycle for our products, which extended for six months or more,
and there was often a significant delay between the time we incurred expenses
and the time we realized the related revenue.

Due to the lack of significant revenue in the last three quarters of 2001,
we had not achieved profitability on a quarterly or an annual basis, and based
on current projections we anticipated incurring significant losses for the
foreseeable future. This was one of many factors which led to the Companys
proposed plan of liquidation.

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

Research and development expenses consisted primarily of salaries and
related personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. Several components of
our research and development effort required significant expenditures, the
timing of which caused quarterly variability in our expenses. We incurred
significant expenses in connection with the purchase of testing equipment for
our products. We believed that research and development was critical to our
strategic product development objectives and intended to enhance our technology
to meet the changing requirements of our customers.

Sales and marketing expenses consisted primarily of salaries and related
personnel costs, commissions, promotional, travel and other marketing and
recruiting expenses.

General and administrative expenses consisted primarily of salaries and
related expenses for executive, finance, legal, facilities, human resources and
information technology personnel, and professional fees.

From July 1, 2001 to December 31, 2001, we had reduced our workforce by
approximately 50%. Subsequent to December 31, 2001, in connection with the
proposed plan of liquidation, we gave notice to our remaining 87 employees
terminating most of them effective April 6, 2002 and April 20, 2002. The rest
of the employees terminations occur within the next six months as they have
been retained for a longer period to wind down the operations of the Company.

The consolidated financial statements and notes to consolidated financial
statements contain information that is pertinent to our managements discussion
and analysis. The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and may result in materially different
results under different assumptions and conditions. We believe that our
critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements.

12



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We recognize revenue from product sales once the title of the product has
passed to the customer, which is generally upon shipment. When the arrangement
with the customer includes obtaining customer acceptance, revenue is recognized
when customer acceptance has been received. Revenue is recognized in amounts
expected to be realized upon final settlement.

ASC provides post-contract support under a warranty agreement for its
products. Upon shipment to its customers, ASC provides for the estimated cost
to repair or replace products to be returned under warranty. ASCs warranty
period is typically 12 months from the date of shipment to the end user. This
support is considered insignificant to the sale of the products and therefore
we recognize any revenue associated with post-contract support in conjunction
with the sale of the product. The customer may purchase an enhanced level of
post-contract support for a period of up to three years. Revenue associated
with this enhanced support is recognized ratably over the period the support is
provided.

Research and development costs are charged to operations as incurred.

We consider all highly-liquid investments purchased with an original
maturity of three months or less to be cash equivalents, and investments with
original maturity dates greater than three months but less than 12 months to be
short-term investments. To date, all marketable securities have been classified
as available-for-sale and have been carried at fair value with unrealized gains
and losses reported as a separate component of comprehensive income. The fair
value of marketable securities was determined based on quoted market prices at
the reporting date for those instruments. The cost of securities sold is based
on specific identification. Premiums and discounts are amortized over the
period from acquisition to maturity and are included in investment income,
along with interest and dividends.

At December 31, 2001, we held U.S. mortgage-backed and corporate debt
securities with an amortized cost of $40,942,000 and a fair value of
$40,945,000, resulting in an unrealized holding gain of $3,000. At December 31,
2000, we held U.S. mortgage-backed and corporate debt securities with an
amortized cost of $11,908,000 and a fair value of $11,916,000, resulting in an
unrealized holding gain of $8,000.

We record a provision for uncollectible amounts once it has determined
that the collection of a receivable is not probable. Total accounts receivable
at December 31, 2001 were net of an allowance for doubtful accounts of
$2,529,000 of which $1,674,000 was recorded as an expense in 2001. Total
accounts receivable at December 31, 2000 were net of an allowance for doubtful
accounts of $855,000.

Inventories are stated at the lower of cost (average cost basis) or market
(net realizable value).

Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line method, based upon
the following asset lives:

|                                          |  |                                              
|----------------------------------------- |  | ---------------------------------------------
|Computer and telecommunications equipment |  | 3 years                                      
|Computer software                         |  | 3 years                                      
|Furniture and office equipment            |  | 5-7 years                                    
|Leasehold improvements                    |  | Shorter of lease term or useful life of asset

Income taxes are accounted for using the liability method. Under this
method, deferred tax assets and liabilities are recorded based on temporary
differences between the financial statement amounts and the tax bases of assets
and liabilities measured using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company periodically
evaluates the realizability of its net deferred tax assets and records a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.

The Company evaluates the potential impairment of long-lived assets based
upon projections of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. During the year ended December 31, 2001, the Company determined
that certain of its property and equipment were impaired and recorded a charge
of $6.4 million. This charge will be excluded in Results of Operations when
calculating the percentage of operating expense categories to total operating
expenses.

13



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

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Revenue.For the year ended December 31, 2001, revenue decreased by
approximately $21.9 million to $15.5 million from $37.4 million for the year
ended December 31, 2000. This decrease was due to a $30.4 million decrease in
revenue when comparing the last three quarters of 2001 to the same period a
year ago resulting primarily from our inability to finalize orders with
established carriers. These orders did not materialize as a result of both our
delays in providing additional features and functionality on our existing
products as well as the continued weakening in the economy, which caused
carriers to significantly reduce their spending. The $30.4 million decrease is
partially offset by an $8.5 million increase in sales of our A-1240, A-3010 and
A-4000 products to new customers, which occurred in the first quarter of this
year as compared to the same period a year ago.

Cost of Revenue.For the year ended December 31, 2001, cost of revenue
increased by approximately $4.9 million to $29.8 million from $24.9 million for
the year ended December 31, 2000. Included in the cost of revenue for the year
ended 2001 is a charge for excess and obsolete inventory of $18.3 million to
reduce the inventory to market value, which was estimated to be lower than
cost. Included in the $18.3 million writedown was an estimated amount for
$2.3 million of purchase commitments at December 31, 2001 for inventory
components to be received in 2002. These commitments were executed in order
to close out remaining obligations in an agreement with our contract
manufacturer. Also included in the cost of revenue for the year is a charge in
the amount of $1.9 million to reduce the carrying amount of capitalized
software costs related to an element management system designed for our
products. Without these charges, our gross margin for the year ended December
31, 2001 would have been 37.9% as compared with a margin of 33.4% for the same
period a year ago. This gross margin increase is primarily due to a shift in
our customer base and the products sold to those customers. During the year
ended December 31, 2000, our customers were concentrated in a market segment,
specifically multi-tenant service providers, that demanded a price point
significantly lower than other market segments served by us. For the same
period in 2001, our customers consisted primarily of carriers that required a
product enhanced with software options providing increased functionality.

Research and Development Expenses.For the year ended December 31, 2001,
research and development expenses increased by approximately $5.8 million, or
46%, to $18.3 million from $12.5 million for the year ended December 31, 2000,
representing 45% and 42% of total operating expenses for the years ended
December 31, 2001 and 2000, respectively. The increase was due principally to
an increase in the number of research and development personnel and the costs
associated with the development of new products such as the A-4500 and new
features and functionality of the A-4000. As a result of the workforce
reduction that occurred in October 2001, our research and development efforts
on new and existing products were negatively impacted.

Sales and Marketing Expenses.For the year ended December 31, 2001, our sales
and marketing expenses decreased by approximately $1.9 million, or 15%, to
$10.9 million from $12.8 million for the year ended December 31, 2000,
representing 27% and 43% of total operating expenses for the years ended
December 31, 2001 and 2000, respectively. Included in sales and marketing
expenses for the year ended December 31, 2000 were charges of $3.0 million
related to warrants issued to two customers. When excluding the costs of the
warrants from the total sales and marketing costs for the year ended December
31, 2000, sales and marketing costs actually increased by $1.1 million, or 11%.
This increase was due principally to the hiring of additional sales and
marketing personnel, sales-based commissions and marketing program costs
including web development costs, trade shows, advertising and product launch
activities as we had experienced significant sales growth until the first
quarter of 2001. Due to the significant decline in sales from the first
quarter to the end of 2001, we have reduced our sales and marketing workforce
by approximately 66% in the period from July 1, 2001 to December
31, 2001.

General and Administrative Expenses.For the year ended December 31, 2001,
general and administrative expenses increased by $4.6 million, or 152%, to $7.6
million from $3.0 million for the year ended December 31, 2000,

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representing 19% and 10% of total operating expenses for the years ended
December 31, 2001 and 2000, respectively. This increase was due, in part, to
the hiring of additional general and administrative personnel, primarily in the
areas of legal and information technology, and increased expenses necessary to
support our operations as a public company. The increase is also due to $1.7
million of bad debt expense included in general and administrative costs for
the year ended December 31, 2001. This charge is for several customers whose
ability to pay for equipment previously sold is uncertain. In addition, in the
fourth quarter of 2001, a charge of $2.2 million was recorded for excess leased
space. This charge represents the expected total amount to be paid by us for
our future lease obligations. As part of our previously discussed workforce
reductions, total headcount in the general and administrative function was
reduced by approximately 30% in the period from July 1, 2001 to
December 31, 2001.

Other Income, Net.Other income, net of expenses increased by $1.4 million, or
45%, from $3.2 million for the year ended December 31, 2000 to $4.6 million for
the year ended December 31, 2001. Other income, net consists of interest
earned on our cash balances and marketable securities offset by interest
expense associated with our bank debt. The increase in other income, net, for
the year ended December 31, 2001 resulted from an increase in the average
invested balance of cash and marketable securities for 2001 as compared to
2000. Our average cash and marketable securities for the year ended December
31, 2001 was $89.8 million compared to average cash and marketable securities of
$48.0 million for the year ended December 31, 2000. The increase in the
average cash and marketable securities is due to the net proceeds of $98.7
million raised in our initial public offering offset by the funds used to
support our operations.

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

Revenue. Our revenue increased by approximately $33.1 million, from $4.3
million for the year ended December 31, 1999 to $37.4 million for the year
ended December 31,2000. This increase was due principally to an increase in
sales of our A-1000, A-2000, A-1240, A-3010 and A-4000 products to new
customers.

Cost of Revenue. Cost of revenue increased by approximately $22.1 million,
from $2.8 million for the year ended December 31, 1999 to $24.9 million for the
year ended December 31, 2000. Our gross margin remained relatively level
decreasing slightly from 33.6% for 1999 to 33.4% for 2000. The margin growth
resulting from the decrease in overhead costs as a percentage of revenue was
offset by an increase in the level of discounts granted to customers to
penetrate a new market segment and an increase in materials and assembly costs
resulting from changes in our manufacturing arrangements.

Research and Development Expenses. Our research and development expenses
increased by approximately $5.8 million, or 86%, from $6.7 million for the year
ended December 31, 1999 to $12.5 million for the year ended December 31, 2000,
representing 60% and 42% of total operating expenses for the years ended
December 31, 1999 and 2000, respectively. The increase was due principally to
an increase in the number of research and development personnel and related
costs associated with the development of new products such as the A-3010,
A-4000, A-5040 and the A-7010 and new features and functionality of the A-1000,
A-1240 and the A-2000.

Sales and Marketing Expenses. Our sales and marketing expenses increased by
approximately $9.6 million, or 300%, from $3.2 million for the year ended
December 31, 1999 to $12.8 million for the year ended December 31, 2000,
representing 29% and 43% of total operating expenses for the years ended
December 31, 1999 and 2000, respectively. The increase was due principally to
warrant issuance costs of $3.1 million along with higher costs from the
following: hiring of additional sales and marketing personnel; sales-based
commissions; and marketing program costs including web development costs, trade
shows, advertising and product launch activities.

The warrant issuance costs represent expenses incurred in connection with
the issuance of warrants to existing or potential customers. In March 2000, in
connection with the signing of a purchase agreement, we issued to Intermedia
Communications, Inc. a warrant to purchase 125,000 shares of our common stock
at an exercise price of $15.00 per share. Under the original warrant agreement,
the warrant vested and became exercisable as product payments were made. In
June 2000, we amended and restated the warrant agreement to provide for
immediate vesting of the warrant and to permit Intermedia to exercise the
warrant after seven years, or earlier depending on the timing and amount of
products purchased. We accounted for the warrant as a cost of establishing a
relationship with a potential customer and recorded a one-time charge of $1.1
million in June 2000. We determined the cost associated with the warrant under
the Black-Scholes option pricing model using the following assumptions:
volatility of 70%; risk-free interest rate of 6.3%; dividend rate of 0%;
and term of seven years.

15



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##### 



In June 2000, in connection with the signing of a purchase agreement, we
issued to Broadband Office a warrant to purchase 222,000 shares of our common
stock at an exercise price of $8.00 per share. The warrant vested immediately
and is exercisable at any time over the next 36 months. We accounted for this
warrant as a cost of developing a long-term business relationship with this
customer. Therefore, in June 2000, we recognized a one-time charge of $1.9
million. The amount of the charge was determined using the Black-Scholes option
pricing model and the following assumptions: volatility of 70%; risk-free
interest rate of 6.0%; dividend rate of 0%; and term of three years.

In August 2000, in connection with the signing of a vendor agreement, we
issued a warrant to purchase 12,500 shares at an exercise price of $13.00 per
share. The warrant vested immediately and is exercisable at any time over the
next 36 months. We recognized the cost as a sales and marketing expense in the
amount of $82,000. The cost was determined using the Black-Scholes option
pricing model and the following assumptions: volatility of 70%; risk-free
interest rate of 6.0%; no expected dividend yield and a term of three years.

General and Administrative Expenses. Our general and administrative expenses
increased by $1.8 million, or 140%, from $1.3 million for the year ended
December 31, 1999 to $3.0 million for the year ended December 31, 2000,
representing 11% and 10% of total operating expenses for the years ended
December 31, 1999 and 2000, respectively. Of the $1.8 million increase, $0.8
million was due to establishing a reserve for customer invoices where there was
a concern of collection. The remaining increase was due to the hiring of
additional general and administrative personnel and increased expenses
necessary to support our growing operations.

Other Income, Net. Other income, net of expenses increased by $2.7 million, or
602%, from $452,000 for the year ended December 31, 1999 to $3.2 million for
the year ended December 31, 2000. Other income, net consists of interest earned
on our cash balances and marketable securities and interest expense associated
with our bank debt. The increase in other income, net was primarily due to
higher interest income as a result of increases in invested balances during
2000, due principally to capital raised in September 1999 and our initial
public offering in October 2000.

16



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##### 



QUARTERLY RESULTS OF OPERATIONS

The following table sets forth, for each of our last eight quarters,
selected data from our statement of operations and such data as a percentage of
revenue. The information for each of these quarters is unaudited and has been
prepared on the same basis as the audited financial statements appearing
elsewhere in this Form 10-K. In the opinion of management, all necessary
adjustments consisting only of normal recurring adjustments have been included
to present fairly the unaudited quarterly results when read in conjunction with
our audited financial statements and the related notes appearing elsewhere in
this Form 10-K. The operating results for any quarter are not necessarily
indicative of the results of any future period.

|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |        |       |        | 
|----------------------------- | --------------------- | -------------------------------------------------------------------------------- | ------------------------ | ----- | ---------------------- | ----- | -------- | ----- | --------- | ----- | -------- | ----- | -------- | ----- | -------- | ----- | --------- | ----- | -------- | ----- | ----- | ----- | ------- | ------ | ----- | ------ | ------- | ------- | ----- | ----- | ------- | ------ | ----- | ------ | 
|                              |                       |                                                                                  |                          |       | QUARTER ENDED         
|                              |                       |                                                                                  |                          |       |                       
|                              |                       |                                                                                  |                          |       | MAR. 31,               |       | JUNE 30, |       | SEPT. 30, |       | DEC. 31, |       | MAR. 31, |       | JUNE 30, |       | SEPT. 30, |       | DEC. 31,
|                              |                       |                                                                                  |                          |       | 2000                   |       | 2000     |       | 2000      |       | 2000     |       | 2001     |       | 2001     |       | 2001      |       | 2001    
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |         
|                              |                       |                                                                                  |                          |       | (DOLLARS IN THOUSANDS)
|STATEMENT OF OPERATIONS DATA: |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|Revenue                       |                       | $                                                                                | 4,994                    |       |                        | $     | 7,939    |       |           | $     | 11,016   |       |          | $     | 13,433   |       |           | $     | 13,508   |       |       | $     | 1,107   |        |       | $      | 500     |         |       | $     | 397     |       
|Cost of revenue               |                       |                                                                                  | 3,777                    |       |                        |       | 5,779    |       |           |       | 7,271    |       |          |       | 8,063    |       |           |       | 7,089    |       |       |       | 8,153   |        |       |        | 11,265  |         |       |       | 3,296   |       
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|                              | Gross profit          |                                                                                  |                          | 1,217 |                        |       |          | 2,160 |           |       |          | 3,745 |          |       |          | 5,370 |           |       |          | 6,419 |       |       |         | (7,046 | )     |        |         | (10,765 | )     |       |         | (2,899 | )    
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|Operating expenses:           |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|                              |                       | Research and development,
excluding stock compensation
amortization amounts(1)   |                          |       | 2,651                  |       |          |       | 2,877     |       |          |       | 3,292    |       |          |       | 3,690     |       |          |       | 4,295 |       |         |        | 4,762 |        |         |         | 4,983 |       |         |        | 4,246 |       
|                              |                       | Sales and marketing, excluding
stock compensation
amortization amounts(1)        |                          |       | 1,453                  |       |          |       | 5,090     |       |          |       | 2,878    |       |          |       | 3,401     |       |          |       | 3,944 |       |         |        | 3,218 |        |         |         | 2,166 |       |         |        | 1,594 |       
|                              |                       | General and administrative,
excluding stock compensation
amortization amounts(1) |                          |       | 476                    |       |          |       | 485       |       |          |       | 580      |       |          |       | 1,465     |       |          |       | 992   |       |         |        | 1,593 |        |         |         | 1,027 |       |         |        | 3,978 |       
|                              |                       | Impairment of long-lived assets                                                  |                          |       |                       |       |          |       |          |       |          |       |         |       |          |       |          |       |          |       |      |       |         |        |      |        |         |         |      |       |         |        | 6,384 |       
|                              |                       | Restructuring charges                                                            |                          |       |                       |       |          |       |          |       |          |       |         |       |          |       |          |       |          |       |      |       |         |        |      |        |         |         | 696   |       |         |        | 800   |       
|                              |                       | Amortization of stock
compensation(1)                                            |                          |       | 129                    |       |          |       | 362       |       |          |       | 634      |       |          |       | 635       |       |          |       | 570   |       |         |        | 528   |        |         |         | 507   |       |         |        | 423   |       
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|                              |                       |                                                                                  | Total operating
expenses |       |                        | 4,709 |          |       |           | 8,814 |          |       |          | 7,384 |          |       |           | 9,191 |          |       |       | 9,801 |         |        |       | 10,101 |         |         |       | 9,379 |         |        |       | 17,425 | 
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|Loss from operations          |                       |                                                                                  | (3,492                   | )     |                        |       | (6,654   | )     |           |       | (3,639   | )     |          |       | (3,821   | )     |           |       | (3,382   | )     |       |       | (17,147 | )      |       |        | (20,144 | )       |       |       | (20,324 | )     
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|Other income, net             |                       |                                                                                  | (604                     | )     |                        |       | (452     | )     |           |       | (347     | )     |          |       | (1,771   | )     |           |       | (1,526   | )     |       |       | (1,167  | )      |       |        | (930    | )       |       |       | (987    | )     
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|Net loss                      |                       | $                                                                                | (2,888                   | )     |                        | $     | (6,202   | )     |           | $     | (3,292   | )     |          | $     | (2,050   | )     |           | $     | (1,856   | )     |       | $     | (15,980 | )      |       | $      | (19,214 | )       |       | $     | (19,337 | )     
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|                             
|(1)                           | AMORTIZATION OF STOCK
|                              |                       | COMPENSATION AMOUNTS:                                                            |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |       
|                              |                       | Research and development                                                         |                          | $     | 54                     |       |          | $     | 153       |       |          | $     | 289      |       |          | $     | 290       |       |          | $     | 282   |       |         | $      | 273   |        |         | $       | 265   |       |         | $      | 240   |       
|                              |                       | Sales and marketing                                                              |                          |       | 64                     |       |          |       | 169       |       |          |       | 273      |       |          |       | 273       |       |          |       | 226   |       |         |        | 214   |        |         |         | 201   |       |         |        | 144   |       
|                              |                       | General and administrative                                                       |                          |       | 11                     |       |          |       | 40        |       |          |       | 72       |       |          |       | 72        |       |          |       | 62    |       |         |        | 41    |        |         |         | 41    |       |         |        | 39    |       
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |        |       |        | 
|                              |                       |                                                                                  |                          |       | $                      | 129   |          |       | $         | 362   |          |       | $        | 634   |          |       | $         | 635   |          |       | $     | 570   |         |        | $     | 528    |         |         | $     | 507   |         |        | $     | 423    | 
|                              |                       |                                                                                  |                          |       |                        |       |          |       |           |       |          |       |          |       |          |       |           |       |          |       |       |       |         |        |       |        |         |         |       |       |         |        |       |        | 

17



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##### 



|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |         |         | 
|--------------------------- | -------------------------------------------------------------------------------- | ------------------------ | ----- | ---------------------- | ---- | -------- | ----- | --------- | ----- | -------- | ----- | -------- | ---- | -------- | ----- | --------- | ---- | -------- | ----- | ---- | ---- |  | -------- | ------ | ----- |  | -------- | -------- | ------- |  | -------- | ------- | ------- | 
|                            |                                                                                  |                          |       | QUARTER ENDED         
|                            |                                                                                  |                          |       |                       
|                            |                                                                                  |                          |       | MAR. 31,               |      | JUNE 30, |       | SEPT. 30, |       | DEC. 31, |       | MAR. 31, |      | JUNE 30, |       | SEPT. 30, |      | DEC. 31,
|                            |                                                                                  |                          |       | 2000                   |      | 2000     |       | 2000      |       | 2000     |       | 2001     |      | 2001     |       | 2001      |      | 2001    
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |         
|                            |                                                                                  |                          |       | (DOLLARS IN THOUSANDS)
|AS A PERCENTAGE OF REVENUE: |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|Revenue                     |                                                                                  |                          | 100.0 | %                      |      |          | 100.0 | %         |       |          | 100.0 | %        |      |          | 100.0 | %         |      |          | 100.0 | %    |      |  | 100.0    | %      |       |  | 100.0    | %        |         |  | 100.0    | %      
|Cost of revenue             |                                                                                  |                          | 75.6  |                        |      |          | 72.8  |           |       |          | 66.0  |          |      |          | 60.0  |           |      |          | 52.5  |      |      |  | 736.4    |        |       |  | 2,253.0  |          |         |  | 830.2    |        
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|                            | Gross profit                                                                     |                          |       | 24.4                   |      |          |       | 27.2      |       |          |       | 34.0     |      |          |       | 40.0      |      |          |       | 47.5 |      |  |          | (636.4 | )     |  |          | (2,153.0 | )       |  |          | (730.2  | )      
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|Operating expenses:         |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|                            | Research and development,
excluding stock compensation
amortization amounts(1)   |                          |       | 53.1                   |      |          |       | 36.2      |       |          |       | 29.9     |      |          |       | 27.5      |      |          |       | 31.8 |      |  |          | 430.2  |       |  |          | 996.6    |         |  |          | 1,069.5 |        
|                            | Sales and marketing, excluding
stock compensation
amortization amounts(1)        |                          |       | 29.1                   |      |          |       | 64.1      |       |          |       | 26.1     |      |          |       | 25.3      |      |          |       | 29.2 |      |  |          | 290.7  |       |  |          | 433.2    |         |  |          | 401.5   |        
|                            | General and administrative,
excluding stock compensation
amortization amounts(1) |                          |       | 9.5                    |      |          |       | 6.1       |       |          |       | 5.3      |      |          |       | 10.9      |      |          |       | 7.3  |      |  |          | 143.9  |       |  |          | 205.4    |         |  |          | 1,002.0 |        
|                            | Impairment of long-lived assets                                                  |                          |       |                       |      |          |       |          |       |          |       |         |      |          |       |          |      |          |       |     |      |  |          |       |       |  |          |         |         |  |          | 1,608.1 |        
|                            | Restructuring charges                                                            |                          |       |                       |      |          |       |          |       |          |       |         |      |          |       |          |      |          |       |     |      |  |          |       |       |  |          | 139.2    |         |  |          | 201.5   |        
|                            | Amortization of stock
compensation(1)                                            |                          |       | 2.6                    |      |          |       | 4.6       |       |          |       | 5.8      |      |          |       | 4.7       |      |          |       | 4.2  |      |  |          | 47.7   |       |  |          | 101.4    |         |  |          | 106.5   |        
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|                            |                                                                                  | Total operating expenses |       |                        | 94.3 |          |       |           | 111.0 |          |       |          | 67.1 |          |       |           | 68.4 |          |       |      | 72.5 |  |          |        | 912.5 |  |          |          | 1,875.8 |  |          |         | 4,389.1 | 
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|Loss from operations        |                                                                                  |                          | (69.9 | )                      |      |          | (83.8 | )         |       |          | (33.1 | )        |      |          | (28.4 | )         |      |          | (25.0 | )    |      |  | (1,548.9 | )      |       |  | (4,028.8 | )        |         |  | (5,119.3 | )      
|Other income, net           |                                                                                  |                          | (12.1 | )                      |      |          | (5.7  | )         |       |          | (3.1  | )        |      |          | (13.2 | )         |      |          | (11.3 | )    |      |  | (105.4   | )      |       |  | (186.0   | )        |         |  | (248.6   | )      
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        
|Net loss                    |                                                                                  |                          | (57.8 | )%                     |      |          | (78.1 | )%        |       |          | (30.0 | )%       |      |          | (15.2 | )%        |      |          | (13.7 | )%   |      |  | (1,443.5 | )%     |       |  | (3,842.8 | )%       |         |  | (4,870.7 | )%     
|                            |                                                                                  |                          |       |                        |      |          |       |           |       |          |       |          |      |          |       |           |      |          |       |      |      |  |          |        |       |  |          |          |         |  |          |        

NET OPERATING LOSS CARRYFORWARDS

Our state and federal net operating loss carryforwards begin to expire in
2004 and 2012, respectively, to the extent that they are not used. We have not
recognized any benefit from the future use of loss carryforwards for these
periods, or for any other periods, since inception. Based upon our intention to
liquidate and distribute the net assets, the net operating loss carryforwards
are expected to expire unused.

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash used in operating activities for the year ended December 31, 2001
was $29.4 million. Net cash used in operating activities for the years ended
December 31, 2000 and 1999 was $16.2 million and $12.6 million, respectively.
Net cash used in operating activities for each year consisted primarily of the
net loss for the period as well as increases in working capital for both the
year ended December 31, 2001 and 2000.

Net cash used in investing activities for the year ended December 31, 2001
was $34.3 million. Net cash used in investing activities for the year ended
December 31, 2000 was $16.2 million. Net cash provided by investing activities
for the year ended December 31, 1999 was $2.2 million. Net cash used in
investing activities for 2001 and 2000 consisted primarily of purchases of
marketable securities as well as purchases of property and equipment. Net cash
provided by investing activities in 1999 was generated by proceeds from the
sale of marketable securities.

Net cash used in financing activities for the year ended December 31, 2001
was $67,000. Net cash provided by financing activities for the years ended
December 31, 2000 and 1999 was $100.0 million and $42.0 million, respectively.
In 2001, the net use of cash for financing activities was due to payments of
our outstanding debt, fees associated with our initial public offering and the
purchase of treasury shares offset by proceeds from option exercises. For 2000
and 1999, the net cash provided by financing activities consisted primarily of
proceeds from the issuance of our capital stock.

18



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##### 



At the end of 2001, we agreed to purchase approximately $2.3 million of
excess inventory components from our contract manufacturer. The components
represent non-cancelable, non-returnable or customized items that were procured
on our behalf based upon forecasts provided to the manufacturer. We also have
material commitments in obligations under our real estate lease agreements.

As of December 31, 2001, our principal source of liquidity consisted of
$77.2 million in cash, cash equivalents and marketable securities. As announced
on February 5, 2002, our board of directors approved a resolution to liquidate
our company and distribute the remaining net assets to our stockholders. We
believe the funds available are more than adequate to satisfy our remaining
obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which eliminates the pooling of interests method of accounting
for all business combinations initiated after June 30, 2001 and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. This accounting standard was effective for
business combinations initiated after June 30, 2001, for which we had none.

In June, 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses the financial accounting and reporting standards for
the acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill and certain intangible assets be
separately disclosed and no longer be amortized but tested for impairment on a
periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption,
with any impairments identified treated as a cumulative effect of a change in
accounting principle. We will adopt this Statement beginning January 1, 2002
and do not believe it will have a material impact upon the financial
statements.

In June 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for
Asset Retirement Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. We do not believe this statement
will have a material impact upon the financial statements.

In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective January 1, 2002. This
statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Effects of a Disposal of a Segment of a Business. This statements
provides a single accounting model for impairment of long-lived assets. We
will adopt this Statement beginning January 1, 2002 and do not believe it will
have a material impact upon the financial statements.

ITEM  7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2001, we had investments in marketable securities of
$40.9 million. Of the total, $38.4 million of these securities consisted of
highly liquid investments that had remaining maturities of less than 365 days
at December 31, 2001. The remaining $2.5 million of these securities had
maturities of greater than twelve months but less than 18 months at December
31, 2001. These investments are subject to interest rate risk and will
decrease in value if market interest rates increase. A hypothetical increase or
decrease in market interest rates by 10% from the December 31, 2001 rates would
not cause a material change in the fair value of these short-term investments.
We have the ability to hold these investments until maturity, and therefore we
do not expect the value of these investments to be affected to any significant
degree by the effect of a sudden change in market interest rates. Declines in
interest rates over time will, however, reduce our interest income.

As of December 31, 2001, we did not own any equity investments. Therefore,
we did not have any material equity price risk.

19



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Substantially all of our revenue was realized in U.S. dollars. In
addition, we do not maintain significant asset or cash account balances in
currencies other than the United States dollar. Therefore, we do not believe
that we currently have any significant direct foreign currency exchange rate
risk.

Item 8.  Financial Statements and Supplementary Data

Financial Statements meeting the requirements of Regulation S-X are set
forth beginning at page F-1. The Company is not subject to the provisions of
Item 302 of Regulation S-K concerning supplementary financial data.

Item 9.  Changes In and Disagreements with Accountants, on Accounting and Financial Disclosure

Not applicable.

Part III

Item 10.  Directors and Executive Officers of the Registrant

The following table sets forth information regarding our executive officers and directors.

|                         |  |     |    |          |  |                                                     
|------------------------ |  | --- | -- | -------- |  | ----------------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Asghar D. Mostafa        |  |     | 42 |          |  | Chairman, President and Chief Executive Officer     
|Harry J. DAndrea        |  |     | 45 |          |  | Chief Financial Officer                             
|Sherry L. Rhodes         |  |     | 46 |          |  | Vice President, General Counsel and Secretary       
|Gary L. Wingo            |  |     | 51 |          |  | Senior Executive Vice President,
    Worldwide Sales
|Robert Ted Enloe, III(1) |  |     | 63 |          |  | Director                                            
|Richard H. Kimball(1)    |  |     | 45 |          |  | Director                                            
|Arthur J. Marks(1)(2)    |  |     | 57 |          |  | Director                                            
|Edward W. Scott(2)       |  |     | 39 |          |  | Director                                            
|John W. Seazholtz(2)     |  |     | 65 |          |  | Director                                            



---

|(1) |  | Member of Audit Committee       
|--- |  | --------------------------------
|   
|(2) |  | Member of Compensation Committee

Asghar D. Mostafa has served as our President, Chief Executive Officer and
Chairman of our board of directors since our inception. Prior to co-founding
our company, Mr. Mostafa served as Vice President and general manager of 3Com
Corporations Broadband Access Communications Division from August 1995 to
August 1997. From February 1990 to May 1995, Mr. Mostafa was the founder,
President, and Chief Executive Officer of ISDN Systems Corporation. Previously,
he was Vice President of Product Development for the telecommunications
division of Data General Corporation as well as co-founder and director of
engineering for International Communications, Inc., a developer of T1
multiplexers. Mr. Mostafas employment as an executive officer of our company
will terminate on April 20, 2002.

Harry J. DAndrea has served as our Chief Financial Officer since June
1999. Prior to joining our company, Mr. DAndrea served as Chief Financial
Officer for Call Technologies, Inc. from 1998 to June 1999. He was also Chief
Financial Officer of Yurie Systems, Inc. (acquired by Lucent Technologies) from
1997 to 1998 and Chief Financial Officer of American Communications Services,
Inc. (now e.spire Communications) in 1996. From 1993 to 1995, Mr. DAndrea
served as Executive Vice President, Chief Financial Officer and Treasurer at
Caterair International Corporation. He has also held senior management
positions at Marriott Corporation. Mr. DAndrea serven executive officer
of our company will terminate on April 6, 2002.

Sherry L. Rhodeshas served as our Vice President, General Counsel since
March 2001. Prior to joining our company, Ms. Rhodes served as Vice President,
General Counsel for Commerce One Global Services (formerly, AppNet, Inc.) from
March 2000. She was Vice President, General Counsel of BioReliance Corporation
from

20



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##### 



December 1997 to March 2000, and Vice President, General Counsel of I-NET, Inc.
from October 1994 until December 1997. Ms. Rhodes employment as an executive
officer of our company will terminate on April 6, 2002.

Gary L. Wingohas served as our Senior Executive Vice President 
Worldwide Sales since July 2001.
Prior to joining our company, Mr. Wingo served as group vice president for
Nortel Networks, where he served as group vice president. Prior to that, Mr.
Wingo held positions as Nortels major account vice president for Sprint, vice
president for carrier networks and vice president for alternative access. Mr.
Wingo has also worked as vice president of sales for OKI Telecom. Mr. Wingos
employment as an executive officer of our company will terminate on April 6,
2002.

Robert Ted Enloe, IIIhas served as a director of our company since June
2000. Mr. Enloe has been managing partner of Balquita Partners, Ltd., a real
estate and securities investment partnership, since 1996. Mr. Enloe served as
Vice Chairman and a member of the Office of the Chief Executive of Compaq
Computer Corporation from April to July 1999. From 1975 to 1996 he was
president, and from 1992 to 1996 Chief Executive Officer, of Liberté Investors,
Inc. Mr. Enloe is also a director of Leggett & Platt, Inc.

Richard H. Kimballhas served as a director of our company since September
1999. Mr. Kimball is a Managing General Partner of Technology Crossover
Ventures, a venture capital firm he co-founded in 1995. Prior to that, Mr.
Kimball spent over ten years at Montgomery Securities serving as a securities
analyst and Managing Director. He is currently on the board of directors of
Vastera, Inc.

Arthur J. Markshas served as a director of our company since September
1999. Mr. Marks is currently a general partner of Valhalla Partners, a private
equity fund. From June 1984 to June 2001, Mr. Marks was a general partner of
New Enterprise Associates, a private equity fund that invests in early stage
companies in information technology and medical and life sciences. Mr. Marks
serves on the board of directors of Progress Software, TalkAmerica, Mobius
Management Systems and several private companies.

Edward W. Scotthas served as a director of our company since August 1998.
Since March 1996, Mr. Scott has been a co-founder and general partner of Baker
Communications Fund, L.P., a private equity fund that invests exclusively in
communications equipment, services and application providers. Prior to
co-founding Baker Communications, from December 1990 to March 1996 Mr. Scott
was a private equity investor with the Apollo Investment Fund, L.P.

John W. Seazholtzhas served as a director of our company since April
1998. Since May 2000, Mr. Seazholtz has been Chairman of the board of
directors of Westell Technologies, Inc. From May 1998 to April 2000, Mr.
Seazholtz was the President and CEO of Telesoft America, Inc. (a subsidiary of
Telesoft spa). Prior to Telesoft, he was the Chief Technology Officer for Bell
Atlantic Corporation from 1984 to April 1998. Mr. Seazholtz has also worked at
New Jersey Bell, Bell Telephone Laboratories and AT&T. Mr. Seazholtz also
serves on the board of directors of Odetics, Inc.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors and executive officers, and anyone who owns more than 10% of our
common stock, file with the Securities and Exchange Commission reports of
initial ownership and reports of changes in ownership of our common stock, and
to furnish us with copies of those reports. Based solely on a review of the
reports furnished to us, we believe that our directors, executive officers, and
10% stockholders complied with all filing requirements applicable to them with
respect to transactions during 2001 except as follows: a report on Form 4
reporting the acquisition of 91,000 shares of our common stock held by John W.
Seazholtz was not timely filed with the SEC, as the required report was filed
with the SEC on August 15, 2001; a report on Form 5 reporting the option grant
for 40,000 shares of our common stock on April 12, 2001 held by Harry J.
DAndrea was not timely filed with the SEC, as the required report was filed
with the SEC on March 11, 2002; a report on Form 5 reporting the option grant
for 30,000 shares of our common stock on April 12, 2001 held by Lawrence Kraft
was not timely filed with the SEC, as the required report was filed with the
SEC on March 8, 2002; a report on Form 5 reporting the option grant for 60,000
shares of our common stock on April 12, 2001 held by Asghar D. Mostafa was not
timely filed with the SEC, as the required report was filed with the SEC on
March 8, 2002; a report on Form 5 reporting the option grant for 30,000 shares
of our common stock on April 12, 2001 held

21



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##### 



by Sherry L. Rhodes was not timely filed with the SEC, as the required report
was filed with the SEC on March 8, 2002; and a report on Form 5 reporting the
option grant for 30,000 shares of our common stock on April 12, 2001 held by
Jeffrey Range was not timely filed with the SEC, as the required report was
filed with the SEC on March 8, 2002.

Item 11.  Executive Compensation

Summary Compensation Table

The table below sets forth, for the fiscal year ended December 31, 2001, the compensation earned by:



| |  |  | our chief executive officer; and                                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our next four most highly compensated executive officers,
collectively referred to below as the named executive officers.

In accordance with the rules of the Securities and Exchange Commission,
the compensation set forth in the table below does not include medical, group
life or other benefits which are available to all of our salaried employees,
and perquisites and other benefits, securities or property which do not exceed
the lesser of $50,000 or 10% of the persons salary and bonus shown in the
table. In the table below, columns required by the regulations of the
Securities and Exchange Commission have been omitted where no information was
required to be disclosed under those columns.

|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        |        |   |            |           |              |   |  |   |   |   | 
|-------------------- | ----------------------- | ----------------- | ---- | ---- | ---- | ------ | ------- | ------------------- | ------- | ------------ | ------- | ------------------ | - | ------------ | ------ | ------ | - | ---------- | --------- | ------------ | - |  | - | - | - | 
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        |        |   |            |           | Long-term    |   |  |   |  
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        |        |   |            |           | Compensation |   |  |   |  
|                     |                         |                   |      |      |      |        |         | Annual Compensation |         |              |         |                    |   | Awards       |        |        |   |           
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        |        |   |           
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        | Other  |   | Underlying |           |              |   | 
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |              |        | Annual |   | Securities |           | All Other   
|                     |                         |                   |      | Year |      | Salary |         | Bonus               |         | Compensation |         | Underlying Options |   | Compensation
|                     |                         |                   |      |      |      |        |         |                     |         |              |         |                    |   |             
|Asghar D. Mostafa(1) |                         |                   | 2001 |      |      | $      | 200,000 |                     |         | $            |        |                    |   |              |       |        |   |            | 60,000    |              |   |  |  |  
|                     | President and Chief     |                   |      | 2000 |      |        |         | 208,333             |         |              |         |                   |   |              |        |       |   |            |           |             |   |  |   |  |  
|                     |                         | Executive Officer |      |      | 1999 |        |         |                     | 164,583 |              |         |                    |  |              |        |        |  |            |           |              |  |  |   |   |  | 
|Jeffrey M. Range(2)  |                         |                   | 2001 |      |      |        | 180,000 |                     |         |              |        |                    |   |              |       |        |   |            | 30,000    |              |   |  |  |  
|                     | Vice President         |                   |      | 2000 |      |        |         | 166,385             |         |              |         | 50,000             |   |              |        |       |   |            |           | 120,000      |   |  |   |  |  
|                     | Worldwide Operations    |                   |      | 1999 |      |        |         |                    |         |              |         |                   |   |              |        |       |   |            |           |             |   |  |   |  |  
|Harry J. DAndrea(3) |                         |                   | 2001 |      |      |        | 175,667 |                     |         |              |        |                    |   |              |       |        |   |            | 40,000    |              |   |  |  |  
|                     | Chief Financial Officer |                   |      | 2000 |      |        |         | 162,917             |         |              |         | 50,000             |   |              |        |       |   |            |           | 20,000       |   |  |   |  |  
|                     |                         |                   | 1999 |      |      |        | 73,365  |                     |         |              |        |                    |   |              |       |        |   |            |          |              |   |  |  |  
|Gary L. Wingo (4)    |                         |                   | 2001 |      |      |        | 133,077 |                     |         |              | 250,000 | (6)                |   |              | 65,102 | (5)    |   |            | 1,000,000 |              |   |  |   |  
|                     | Vice President  Sales  |                   |      | 2000 |      |        |         |                    |         |              |         |                   |   |              |        |       |   |            |           |             |   |  |   |  |  
|                     |                         |                   | 1999 |      |      |        |        |                     |         |              |        |                    |   |              |       |        |   |            |          |              |   |  |  |  
|Sherry L. Rhodes (7) |                         |                   | 2001 |      |      |        | 183,333 |                     |         |              |        |                    |   |              |       |        |   |            | 180,000   |              |   |  |  |  
|                     | Vice President,         |                   |      | 2000 |      |        |         |                    |         |              |         |                   |   |              |        |       |   |            |           |             |   |  |   |  |  
|                     | General Counsel         |                   |      | 1999 |      |        |         |                    |         |              |         |                   |   |              |        |       |   |            |           |             |   |  |   |  |  



---

|(1) |  | Mr. Mostafas employment as an executive officer of our company will
terminate on April 20, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

22



---



##### 



|(2) |  | Mr. Range resigned as an executive officer of our company effective
February 1, 2002.                      
|--- |  | -----------------------------------------------------------------------------------------------------------
|   
|(3) |  | Mr. DAndreas employment as an executive officer of our company will
terminate on April 6, 2002.          
|   
|(4) |  | Mr. Wingos employment as an executive officer of our company will
terminate on April 6, 2002.             
|   
|(5) |  | Represents reimbursement of an amount that, after taxes, was sufficient to
cover temporary living expenses.
|   
|(6) |  | Represents a one-time signing bonus of $150,000, plus $100,000 of his
annual bonus.                        
|   
|(7) |  | Ms. Rhodes employment as an executive officer of our company will
terminate on April 6, 2002.             

Option Grants in Last Fiscal Year

The following table sets forth information with respect to stock options
granted by us to the named executive officers during the fiscal year ended
December 31, 2001. All of these options granted by us were granted under the
2000 Stock Incentive Plan and have a term of 10 years, subject to earlier
termination in the event the optionees services to our company cease. During
fiscal year 2001, we granted options to purchase a total of 4,114,500 shares of
common stock under our 2000 Stock Incentive Plan.

|                     |  |                   |           |                      |  |             |      |            |  |        |      |                 |  |                  |         |  |  |  |   |  |  |  |   | 
|-------------------- |  | ----------------- | --------- | -------------------- |  | ----------- | ---- | ---------- |  | ------ | ---- | --------------- |  | ---------------- | ------- |  |  |  | - |  |  |  | - | 
|                     |  |                   |           |                      |  |             |      |            |  |        |      |                 |  |                  |         |  | 
|                     |  | Individual Grants |           | Potential Realizable
|                     |  |                   |           | Value at Assumed    
|                     |  |                   |           |                      |  | % of Total  |      |            |  |        |      |                 |  | Annual Rates of 
|                     |  | Number of         |           | Options/SARs         |  |             |      |            |  |        |      |                 |  | Stock Price     
|                     |  | Securities        |           | Granted To           |  |             |      |            |  |        |      |                 |  | Appreciation for
|                     |  | Underlying        |           | Employees in         |  | Exercise or |      |            |  |        |      | Option Term (1)
|                     |  | Options/SARs      |           | Fiscal               |  | Base Price  |      | Expiration |  |       
|                     |  | Granted (#)       |           | Year                 |  | ($/sh)      |      | Date       |  | 5% ($) |      | 10% ($)        
|                     |  |                   |           |                      |  |             |      |            |  |        |      |                
|Asghar D. Mostafa(2) |  |                   | 60,000    |                      |  |             | 1.5  | %          |  | $      | 3.15 |                 |  |                  | 4/12/11 |  |  |  |  |  |  |  |  | 
|Jeffrey M. Range(3)  |  |                   | 30,000    | (4)                  |  |             | 0.7  |            |  |        | 3.15 |                 |  |                  | 4/12/11 |  |  |  |  |  |  |  |  | 
|Harry J. DAndrea(5) |  |                   | 40,000    |                      |  |             | 1.0  |            |  |        | 3.15 |                 |  |                  | 4/12/11 |  |  |  |  |  |  |  |  | 
|Gary L. Wingo(6)     |  |                   | 1,000,000 |                      |  |             | 24.3 |            |  |        | 1.22 |                 |  |                  | 7/23/11 |  |  |  |  |  |  |  |  | 
|Sherry L. Rhodes(7)  |  |                   | 150,000   |                      |  |             | 3.6  |            |  |        | 5.19 |                 |  |                  | 3/1/11  |  |  |  |  |  |  |  |  | 
|                     |  |                   | 30,000    |                      |  |             | 1.5  |            |  |        | 3.15 |                 |  |                  | 4/12/11 |  |  |  |  |  |  |  |  | 



---

|(1) |  | For the purposes of this calculation, value is based upon the difference
between the exercise price and $1.12 per share, the closing price of our
common stock on December 31, 2001, as reported by the Nasdaq Stock Market.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Mostafas employment as an executive officer of our company will
terminate on April 20, 2002.                                                                                                                           
|   
|(3) |  | Mr. Range resigned as an executive officer of our company effective
February 1, 2002.                                                                                                                                       
|   
|(4) |  | On February 1, 2002, 20,000 options were canceled.                                                                                                                                                                          
|   
|(5) |  | Mr. DAndreas employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                           
|   
|(6) |  | Mr. Wingos employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                              
|   
|(7) |  | Ms. Rhodes employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                              

Fiscal Year-End Option Values

The following table sets forth for each of the named executive officers
the number and value of securities underlying unexercised stock options that
were held by the named executive officer as of December 31, 2001. No stock
options were exercised by any named executive officers during 2001.

23



---



##### 



|                     |  |                                |         |                          |  |             |           |               |  |  |   |  |  |  |   | 
|-------------------- |  | ------------------------------ | ------- | ------------------------ |  | ----------- | --------- | ------------- |  |  | - |  |  |  | - | 
|                     |  | Number of Securities           |         | Value of Unexercised    
|                     |  | Underlying Unexercised Options |         | In-the-Money Options    
|                     |  | at December 31, 2001           |         | at December 31, 2001 (1)
|                     |  |                                |         |                         
|                     |  | Exercisable                    |         | Unexercisable            |  | Exercisable |           | Unexercisable
|                     |  |                                |         |                          |  |             |           |              
|Asghar D. Mostafa(2) |  |                                | 20,000  |                          |  |             | 40,000    |               |  |  |  |  |  |  |  | 
|Jeffrey M. Range(3)  |  |                                | 62,500  | (4)                      |  |             | 87,500    | (5)           |  |  |  |  |  |  |  | 
|Harry J. DAndrea(6) |  |                                | 120,833 |                          |  |             | 139,167   |               |  |  |  |  |  |  |  | 
|Gary L. Wingo(7)     |  |                                |        |                          |  |             | 1,000,000 |               |  |  |  |  |  |  |  | 
|Sherry L. Rhodes(8)  |  |                                | 10,000  |                          |  |             | 170,000   |               |  |  |  |  |  |  |  | 



---

|(1) |  | For the purposes of this calculation, value is based upon the difference
between the exercise price and $1.12 per share, the closing price of our
common stock on December 31, 2001, as reported by the Nasdaq Stock Market.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Mostafas employment as an executive officer of our company will
terminate on April 20, 2002.                                                                                                                           
|   
|(3) |  | Mr. Range resigned as an executive officer of our company effective
February 1, 2002.                                                                                                                                       
|   
|(4) |  | On February 1, 2002, 51,250 options were canceled.                                                                                                                                                                          
|   
|(5) |  | On February 1, 2002, 87,500 options were canceled.                                                                                                                                                                          
|   
|(6) |  | Mr. DAndreas employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                           
|   
|(7) |  | Mr. Wingos employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                              
|   
|(8) |  | Ms. Rhodes employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                              

Compensation of Directors

Directors currently do not receive cash compensation from us for their
services as members of our board of directors, although we are authorized to
pay members for attendance at meetings or a salary in addition to reimbursement
for expenses in connection with attendance at meetings. We have granted
options to some of our directors in the past, and we may continue to do so in
the future.

Robert Ted Enloe, III, Arthur J. Marks and Asghar D. Mostafa have been
appointed as a committee of our board of directors to act on behalf of our
board of directors in implementing the plan of complete liquidation and
dissolution and otherwise reviewing, evaluating, negotiating and recommending
to the board of directors what action should be taken with respect to the
liquidation and dissolution of our business. Mr. Enloe and Mr. Marks, as
non-employee members of this committee will receive $3,500 per day for their
services as non-employee members of this committee. Each member of this
committee will be reimbursed for all reasonable expenses or costs incurred by
him during his service as a member of this committee.

Employment Agreements

Asghar D. Mostafa. On August 31, 1998, we entered into an executive
employment agreement with Mr. Mostafa, our Chief Executive Officer and
President and Chairman of our board of directors. Pursuant to our board of
directors decision on February 4, 2002 to liquidate and wind down our
operations, Mr. Mostafas employment as an executive officer of our company
will terminate effective April 20, 2002. Under the employment agreement,
Mr. Mostafa is entitled to a severance payment to be paid in 24 equal monthly
installments in an amount equal to:



| |  |  | three years of his base salary at the time of termination, assuming
minimum increases;                  
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | two times the average aggregate bonuses previously paid to him
pursuant to his employment agreement; and
|
| |  |  | any deferred compensation or accrued vacation time.                                                     

Other Named Executive Officers. We have entered into key employee
employment agreements with each of Harry J. DAndrea, Sherry L. Rhodes, and
Jeffrey M. Range under which these officers are entitled to annual base
salaries of $187,000, $220,000, and $180,000, respectively. Pursuant to our
board of directors decision on

24



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##### 



February 4, 2002 to liquidate and wind down our operations, Mr. DAndrea and
Ms. Rhodes will be terminated as executive officers of our company on April 6,
2002. Under their key employee employment agreements, Mr. DAndrea and Ms.
Rhodes are each entitled to one years salary. Mr. Range resigned as an executive officer of
our company effective February 1, 2002.

On July 23, 2001, we entered into an employment agreement with Gary L.
Wingo, our Senior Vice President, Worldwide Sales. Under his employment
agreement, Mr. Wingo is entitled to an annual base salary of $300,000.
Pursuant to our board of directors decision on February 4, 2002 to liquidate
and wind down our operations, Mr. Wingo will be terminated as an executive
officer of our company effective April 6, 2002. Under his employment
agreement, Mr. Wingo is entitled to a lump sum equal to two times his base
salary for the calendar year prior to termination within thirty days after the
date of termination.

The table below sets forth information relating to our officers or
directors who are parties to agreements with us providing for the payment to
them of severance in the amounts specified in the event of a change of control
or the liquidation, dissolution or winding up of our business.

|                                                           |  |                  |    |                         |  |   |         | 
|---------------------------------------------------------- |  | ---------------- | -- | ----------------------- |  | - | ------- | 
|                                                           |  | Months in        |    |                         |  |  
|Name and Position                                          |  | Severance Period |    | Total Severance Payment
|                                                           |  |                  |    |                        
|Asghar D. Mostafa(1)
President and Chief Executive Officer |  |                  | 36 |                         |  | $ | 600,000 | 
|Gary L. Wingo(2)
Vice President  Sales                    |  |                  | 24 |                         |  |   | 600,000 | 
|Sherry L. Rhodes(3)
Vice President and General Counsel     |  |                  | 12 |                         |  |   | 220,000 | 
|Harry J. DAndrea(4)
Chief Financial Officer               |  |                  | 12 |                         |  |   | 187,000 | 



---

|(1) |  | Mr. Mostafas employment as an executive officer of our company will
terminate on April 20, 2002.
|--- |  | -------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Wingos employment as an executive officer of our company will
terminate on April 6, 2002.   
|   
|(3) |  | Ms. Rhodes employment as an executive officer of our company will
terminate on April 6, 2002.   
|   
|(4) |  | Mr. DAndreas employment as an executive officer of our company will
terminate on April 6, 2002.

Board Report on Executive Compensation

The Compensation Committee of our board of directors established our
general compensation policies, our compensation plans and the specific
compensation levels for senior executives, including our chief executive
officer. The Compensation Committee discussed our compensation policies and
established the specific compensation levels for our senior executives,
including our chief executive officer.

Compensation Philosophy and Review

The primary objectives of our executive compensation policies included the
following:



| |  |  | to attract, motivate, and retain talented employees and
executives;                                         
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | to maintain compensation levels that are consistent with our
financial objectives and operating performance;
|
| |  |  | to compensate competitively with the practices of similarly situated technology companies; and              
|
| |  |  | to create management incentives designed to enhance stockholder value.                                      

25



---



##### 



Compensation of Executive Officers

Our executive compensation consisted primarily of base salary, health
insurance and similar benefits, annual cash bonuses, and the award of stock
options. We had employment agreements with our named executive officers. Each
of these agreements entitled the executive to a specified base salary, a bonus
as determined by our Board, and a competitive award of stock options vesting
over time. The compensation of executives covered by employment agreements was
reviewed on an annual basis.

Chief Executive Officer Compensation

In establishing the salary for Mr. Mostafa, our Chief Executive Officer
and President, our board of directors relied on the strong belief that Mr.
Mostafa significantly and directly influenced our overall performance.
Accordingly, our board of directors sought to achieve the following
objectives:



| |  |  | establish a base salary competitive with that paid of other
chief executive officers of high growth companies in the peer group;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reward Mr. Mostafa for corporate performance in connection with his contribution to us; and                                     
|
| |  |  | reward Mr. Mostafa for
corporate performance for the prior fiscal year.                                                         

Based on these factors, in 2001 our board of directors set Mr. Mostafas salary
at $200,000.

Cash Based Incentive Compensation

Cash bonuses were awarded on a discretionary basis to executive officers
on the basis of their success in achieving designated individual goals and our
success in achieving specific company-wide goals, such as customer
satisfaction, revenue growth and earnings growth.

Long-Term Incentive Plans

Our board of directors believed that granting stock options to executive
officers was critical to the our success. These awards played a vital role in
attracting, retaining and rewarding our executive officers. Our board of
directors believed that options were also important in motivating executive
officers to achieve our goals.

Each executive officer was eligible to receive stock options under the
2000 Stock Incentive Plan. Our board of directors generally awarded stock
options to each executive officer when he or she joined us. Thereafter, our
board of directors, in its discretion, made periodic grants to reward or retain
executive officers and to provide incentives for future performance. Although
executive officers may have received stock options based on our financial
performance, as well as on his or her individual performance, there was no
established formula or criteria for grants under the Plan, and options could
have been granted on a subjective basis at intervals determined by our board of
directors.

Policy on Deductibility of Compensation

Section 162(m) of the Internal Revenue Code disallows the deduction of
compensation by a company to its Chief Executive Officer and any of its four
most highly compensated executive officers that is in excess of $1 million.
Compensation that is considered performance-based is excluded from the $1
million limit if, among other requirements, the compensation is payable only
upon attainment of pre-established, objective performance goals under a plan
approved by the stockholders.

Compensation Committee
Arthur J. Marks
Edward W. Scott
John W. Seazholtz

26



---



##### 



Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee were officers or
employees of ours at any time since our formation. No member of our
Compensation Committee served as a member of the board of directors or
compensation committee of any entity that had one or more executive officers
serving as a member of our board of directors or Compensation Committee

Stock Performance Graph

The following graph compares the yearly percentage change in the
cumulative total stockholder return on our common stock during the period from
our initial public offering through December 31, 2001, with the cumulative
total return on the S&P 500 Index and the Nasdaq Telecommunications Index. The
comparison assumes $100 was invested on October 4, 2000 (the date of our
initial public offering) in our common stock and in each of the indices and
assumes reinvestment of dividends, if any. The performance shown is not
necessarily indicative of future performance.

Comparison of Cumulative Total Return*
(Among Advanced Switching Communications, Inc., Nasdaq Composite Index and
Nasdaq Telecommunications Index)

(STOCK PERFORMANCE)

|                                |  |           |     |            |  |           |           |           |  |           |          |            |  |  |          |  |  |  |          |  |  |  |           | 
|------------------------------- |  | --------- | --- | ---------- |  | --------- | --------- | --------- |  | --------- | -------- | ---------- |  |  | -------- |  |  |  | -------- |  |  |  | --------- | 
|                                |  | 10/4/2000 |     | 12/31/2000 |  | 3/30/2001 |           | 6/29/2001 |  | 9/28/2001 |          | 12/31/2001
|                                |  |           |     |            |  |           |           |           |  |           |          |           
|ASCX                            |  |           | 100 |            |  |           | 27.083333 |           |  |           | 16.66667 |            |  |  | 16.11111 |  |  |  | 2.666667 |  |  |  | 6.2222222 | 
|NASDAQ Composite Index          |  |           | 100 |            |  |           | 71.153481 |           |  |           | 53.00135 |            |  |  | 62.22574 |  |  |  | 43.16696 |  |  |  | 56.173497 | 
|NASDAQ Telecommunications Index |  |           | 100 |            |  |           | 66.164125 |           |  |           | 46.83913 |            |  |  | 44.42636 |  |  |  | 28.99606 |  |  |  | 33.783051 | 

*     
 Assumes $100 invested on October 4, 2000, the effective date of our initial
public offering, in stock and index  including reinvestment of dividends.

Notwithstanding anything to the contrary set forth in any of our filings
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, that might incorporate other filings with the Securities and
Exchange Commission, including this annual report on Form 10-K, in whole or in
part, the Compensation Committee Report on Executive Compensation and the Stock
Price Performance Graph shall not be deemed incorporated by reference into any
such filings.

27



---



##### 



Item 12.  Security Ownership of Certain Beneficial Owners and Management

STOCK OWNERSHIP

The following table presents information, as of February 28, 2002, with
respect to the beneficial ownership of our common stock by:



| |  |  | each person who is known by us to beneficially own more than 5% of our common stock;            
| | - |  | ------------------------------------------------------------------------------------------------
|
| |  |  | each of our directors;                                                                          
|
| |  |  | each of our named executive officers (as defined in the Securities Act of 1933, as amended); and
|
| |  |  | all of our executive officers and directors as a group.                                         

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to
this table, each stockholders address is 8330 Boone Boulevard, Eighth Floor,
Vienna, Virginia 22182, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect
to all shares of our common stock shown as beneficially owned by them. The
percentage of shares beneficially owned are based on 42,808,568 shares of
common stock outstanding as of February 28, 2002. Shares of common stock
subject to options or warrants that are currently exercisable or exercisable
within 60 days of February 28, 2002 are deemed to be outstanding and
beneficially owned by the person holding the options or warrants for the
purpose of computing the number of shares beneficially owned and the percentage
ownership of that person. The shares subject to options or warrants held by a
person are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Entries denoted by an asterisk
represent amounts less than 1%.

|                                                           |  |              |            |               |  |  |      |  
|---------------------------------------------------------- |  | ------------ | ---------- | ------------- |  |  | ---- | -
|                                                           |  | NUMBER OF    |            | PERCENTAGE OF
|                                                           |  | SHARES       |            | SHARES       
|                                                           |  | BENEFICIALLY |            | BENEFICIALLY 
|BENEFICIAL OWNER                                           |  | OWNED        |            | OWNED        
|                                                           |  |              |            |              
|Baker Communications Fund, L.P. (1)                        |  |              | 10,891,528 |               |  |  | 25.4 | %
|Edward W. Scott (1)                                        |  |              | 10,891,528 |               |  |  | 25.4 | %
|Asghar D. Mostafa (2) (3)                                  |  |              | 10,651,835 |               |  |  | 24.9 | %
|Entities Affiliated with Technology Crossover
Ventures (4) |  |              | 3,177,920  |               |  |  | 7.4  | %
|Richard H. Kimball (4)                                     |  |              | 3,177,920  |               |  |  | 7.4  | %
|Arthur J. Marks (5)                                        |  |              |           |               |  |  | *    |  
|John W. Seazholtz (6)                                      |  |              | 228,943    |               |  |  | *    |  
|Robert Ted Enloe (7)                                       |  |              | 105,578    |               |  |  | *    |  
|Harry J. DAndrea (8) (9)                                  |  |              | 132,167    |               |  |  | *    |  
|Jeffrey M. Range (10) (11)                                 |  |              | 16,750     |               |  |  | *    |  
|Gary L. Wingo (12)                                         |  |              |           |               |  |  | *    |  
|Sherry L. Rhodes (13) (14)                                 |  |              | 55,625     |               |  |  | *    |  
|Directors and Officers as a group (11 persons) (15)        |  |              | 25,260,246 |               |  |  | 59.0 | %

28



---



##### 





---

|(1)  |  | Represents shares held by Baker Communications Fund, L.P. Baker
Capital Corp. is the general partner of Baker Communications Fund, L.P.
Edward W. Scott, a member of our board of directors, is a member of
Baker Capital Corp. Mr. Scott disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest therein. The
following natural persons jointly, but not individually, exercise
voting and/or dispositive power with respect to the shares held by
Baker Communications Fund, L.P.: John C. Baker; Ashley Leeds; Edward W.
Scott and Henry G. Baker. The address for Baker Communications Fund,
L.P. and Mr. Scott is c/o Baker Capital Corp., 540 Madison Avenue, New
York, New York 10022.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Includes 8,000,000 shares owned by Mostafa Investments Limited
Partnership, an investment partnership controlled by Asghar D. Mostafa,
and 2,621,835 shares owned by Mostafa Ventures Fund, LLC, an investment
limited liability company controlled by Asghar D. Mostafa. The shares
owned by Mr. Mostafa include 30,000 shares issuable upon the exercise
of options granted under our stock option plans. Excludes shares owned
by Mr. Mostafas brother, Iraj Mostafa, an employee of ours through
April 6, 2002.                                                                                                                                                                                                                
|    
|(3)  |  | Mr. Mostafas employment as an executive officer of our company
will terminate on April 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(4)  |  | Consists of 2,913,305 shares held by TCV III (Q), L.P., 23,075
shares held by TCV III (GP), 109,610 shares held by TCV III, L.P., and
131,930 shares held by TCV III Strategic Partners, L.P. (collectively,
the TCV Funds). Mr. Kimball, a member of our board of directors, is a
Managing Member of Technology Crossover Management III, L.L.C. which is
the General Partner of each of the TCV Funds. Mr. Kimball disclaims
beneficial ownership of such shares except to the extent of his
pecuniary interest therein. The address for each of these persons and
entities is c/o Technology Crossover Ventures, 528 Ramona Street, Palo
Alto, California 94301.                                                               
|    
|(5)  |  | The address of Mr. Marks is 10836 Pleasant Hill Drive, Potomac,
Maryland 20854.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(6)  |  | The address of Mr. Seazholtz is 399 Princeton Avenue, Brick, New
Jersey 08724.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(7)  |  | Consists of 69,078 shares held by Balquita Partners, Ltd., a
limited partnership controlled by Mr. Enloe, 500 shares owned by Mr.
Enloe, and 11,000 shares owned by the Enloe Descendants Trust, a trust
of which Mr. Enloe is Trustee. The shares owned by Mr. Enloe include
25,000 shares issuable upon the exercise of options granted under our
stock option plans. The address for Balquita Partners, Ltd., Mr. Enloe
and the Enloe Descendants Trust is c/o Balquita Partners, Ltd., 3102
Maple Avenue, Suite 200, Dallas, Texas 75201.                                                                                                                                                                                       
|    
|(8)  |  | Includes 129,167 shares issuable upon the exercise of options
granted under our stock option plans. Includes 2,000 shares held by
other investors over which Mr. D'Andrea exercises voting power
pursuant to powers of attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(9)  |  | Mr. DAndreas employment as an executive officer of our company
will terminate on April 6, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(10) |  | Includes 11,250 shares issuable upon the exercise of options
granted under our stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(11) |  | Mr. Range resigned as an executive officer of our company effective
as of February 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(12) |  | Mr. Wingos employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(13) |  | Includes 55,625 shares issuable upon the exercise of options
granted under our stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(14) |  | Ms. Rhodes employment as an executive officer of our company will
terminate on April 6, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(15) |  | Includes 391,042 shares issuable upon the exercise of options
granted under our stock option plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

29



---



##### 



Item 13.  Certain Relationships and Related Transactions

In the fiscal year ended December 31, 2001, the Company sold an aggregate
of approximately $160,000 of its products to Broadview Networks. Edward W.
Scott, a member of our board of directors, is a member of Baker Capital Corp.,
which is the general partner of Baker Communications Fund, L.P. Baker
Communications Fund, L.P. owns more than 10% of the outstanding stock of
Broadview Networks.

Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

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



| |                          
| | -------------------------
| | (1) Financial Statements:



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements listed in the accompanying Index to Consolidated
Financial Statements on page F-1 are filed as part of this report.



| |                                   
| | ----------------------------------
| | (2) Financial Statement Schedules:



| |                                  
| | ---------------------------------
| | Valuation and Qualifying Accounts



| |              
| | -------------
| | (3) Exhibits:

The documents required to be filed as exhibits to this Report under Item
601 of Regulation S-K are listed in the Exhibit Index included elsewhere in
this report, which list is incorporated herein by reference.

(b)  Reports on Form 8-K



| |                                                                            
| | ---------------------------------------------------------------------------
| | No such reports were filed during the three months ended December 31, 2001.

30



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Vienna, Commonwealth of Virginia, on this 18th day of March, 2002.

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

31



---



##### 



We, the undersigned officers and directors of Advanced Switching
Communications, Inc. hereby severally constitute Asghar D. Mostafa and Harry J.
DAndrea, and each of them individually, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, this report on Form 10-K filed herewith and any
and all subsequent amendments to said report, and generally to do all such
things in our names and behalf in our capacities as officers and directors to
enable Advanced Switching Communications, Inc. to comply with all requirements
of the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by said attorneys, or any of them, to said
report and any and all amendments thereto.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated.

|                          |  |                                              |  |               
|------------------------- |  | -------------------------------------------- |  | --------------
|Signature                 |  | Title                                        |  | Date          
|                          |  |                                              |  |               
|/s/ Asghar D. Mostafa     |  | President, Chief Executive Officer           |  |               
|Asghar D. Mostafa         |  | and Director (Principal Executive Officer)   |  | March 18, 2002
|                          | 
|/s/ Harry J. DAndrea     |  | Chief Financial Officer (Principal
Financial
|Harry J. DAndrea         |  | and
Accounting Officer)                      |  | March 18, 2002
|                          | 
|/s/ Robert Ted Enloe, III | 
|Robert Ted Enloe, III     |  | Director                                     |  | March 18, 2002
|                          | 
|/s/ Richard H. Kimball    | 
|Richard H. Kimball        |  | Director                                     |  | March 18, 2002
|                          | 
|/s/ Arthur J. Marks       | 
|Arthur J. Marks           |  | Director                                     |  | March 18, 2002
|                          | 
|/s/ Edward W. Scott       | 
|Edward W. Scott           |  | Director                                     |  | March 18, 2002
|                          | 
|/s/ John W. Seazholtz     | 
|John W. Seazholtz         |  | Director                                     |  | March 18, 2002

32



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                          |  |     
|--------------------------------------------------------- |  | ----
|                                                          |  | Page
|                                                          |  |     
|Independent Auditors Report                              |  | F-2 
|Consolidated Balance Sheets                               |  | F-3 
|Consolidated Statements of Operations                     |  | F-4 
|Consolidated Statements of Stockholders Equity (Deficit) |  | F-5 
|Consolidated Statements of Cash Flows                     |  | F-6 
|Consolidated Statements of Comprehensive Loss             |  | F-7 
|Notes to Consolidated Financial Statements                |  | F-8 

F-1



---



##### 



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Advanced Switching Communications, Inc.
McLean, Virginia

We have audited the accompanying consolidated balance sheets of Advanced
Switching Communications, Incorporated (the Company) as of December 31, 2001
and 2000, and the related consolidated statements of operations, comprehensive
loss, stockholders equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2001. Our audits also included the
consolidated financial statement schedule listed in the Index of Item 14.
These financial statements and the financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
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 audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Advanced Switching
Communications, Incorporated as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, 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.

As discussed in Note 14 to the consolidated financial statements, on
February 5, 2002, the Companys Board of Directors adopted a complete plan of
liquidation and dissolution, which is subject to the approval of the Companys
stockholders. The consolidated financial statements and consolidated financial
statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia
March 13, 2002

F-2



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                             |                                                                                                                               |   |                |         |      |   |         |         |  
|-------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ------- | ---- | - | ------- | ------- | -
|                                             |                                                                                                                               |   | (in thousands)
|                                             |                                                                                                                               |   | December 31,  
|                                             |                                                                                                                               |   |               
|                                             |                                                                                                                               |   | 2001           |         | 2000
|                                             |                                                                                                                               |   |                |         |     
|Current assets:                              |                                                                                                                               |   |                |         |      |   |         |        
|                                             | Cash and cash equivalents                                                                                                     |   | $              | 36,848  |      |   | $       | 100,609 |  
|                                             | Marketable securities                                                                                                         |   |                | 38,403  |      |   |         | 11,916  |  
|                                             | Accounts receivable, net                                                                                                      |   |                | 1,167   |      |   |         | 8,225   |  
|                                             | Inventory                                                                                                                     |   |                | 987     |      |   |         | 6,937   |  
|                                             | Other current assets                                                                                                          |   |                | 690     |      |   |         | 2,276   |  
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total current assets                         |                                                                                                                               |   | 78,095         |         |      |   | 129,963 |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Property, plant and equipment, net           |                                                                                                                               |   | 1,250          |         |      |   | 5,305   |        
|Marketable securities                        |                                                                                                                               |   | 2,542          |         |      |   |        |        
|Other assets                                 |                                                                                                                               |   | 1,055          |         |      |   | 2,080   |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total assets                                 |                                                                                                                               | $ | 82,942         |         |      | $ | 137,348 |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Current liabilities:                         |                                                                                                                               |   |                |         |      |   |         |        
|                                             | Accounts payable                                                                                                              |   | $              | 1,011   |      |   | $       | 5,383   |  
|                                             | Accrued loss on purchase commitments                                                                                          |   |                | 2,265   |      |   |         |        |  
|                                             | Accrued compensation and related benefits                                                                                     |   |                | 891     |      |   |         | 1,243   |  
|                                             | Accrued severance costs                                                                                                       |   |                | 394     |      |   |         |        |  
|                                             | Accrued warranty costs                                                                                                        |   |                | 1,366   |      |   |         | 1,118   |  
|                                             | Other accrued liabilities                                                                                                     |   |                | 475     |      |   |         | 820     |  
|                                             | Accrued loss on lease obligations, current                                                                                    |   |                | 1,193   |      |   |         |        |  
|                                             | Current portion of debt                                                                                                       |   |                | 2       |      |   |         | 96      |  
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total current liabilities                    |                                                                                                                               |   | 7,597          |         |      |   | 8,660   |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Accrued loss on lease obligations, long-term |                                                                                                                               |   | 1,067          |         |      |   |        |        
|Deferred rent                                |                                                                                                                               |   |               |         |      |   | 85      |        
|Long-term debt                               |                                                                                                                               |   | 3              |         |      |   | 5       |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total liabilities                            |                                                                                                                               |   | 8,667          |         |      |   | 8,750   |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Stockholders equity:                        |                                                                                                                               |   |                |         |      |   |         |        
|                                             | Common stock $0.0025 par value; 250,000
authorized; 42,419 and 42,236 outstanding
at December 31, 2001 and 2000,
respectively |   |                | 107     |      |   |         | 107     |  
|                                             | Preferred stock $0.01 par value; 10,000
authorized; none issued or outstanding at
December 31, 2001 and 2000, respectively    |   |                |        |      |   |         |        |  
|                                             | Treasury stock 515 and 490 shares at
cost as of December 31, 2001 and 2000,
respectively                                      |   |                | (273    | )    |   |         | (200    | )
|                                             | Additional paid-in capital                                                                                                    |   |                | 164,940 |      |   |         | 168,121 |  
|                                             | Retained deficit                                                                                                              |   |                | (87,364 | )    |   |         | (30,977 | )
|                                             | Accumulated comprehensive gain                                                                                                |   |                | 15      |      |   |         | 8       |  
|                                             | Deferred compensation                                                                                                         |   |                | (3,150  | )    |   |         | (8,461  | )
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total stockholders equity                   |                                                                                                                               |   | 74,275         |         |      |   | 128,598 |        
|                                             |                                                                                                                               |   |                |         |      |   |         |        
|Total liabilities & stockholders equity     |                                                                                                                               | $ | 82,942         |         |      | $ | 137,348 |        
|                                             |                                                                                                                               |   |                |         |      |   |         |         |  

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

F-3



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |       |    |        | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----------------------- | ------ | ------- | ------ | ---- | ------ | ------- | ----- | -- | ------ | 
|                                                                                               |                                                                                  |                            |                          |        | Year Ended December 31,
|                                                                                               |                                                                                  |                            |                          |        |                        
|                                                                                               |                                                                                  |                            |                          |        | 2001                    |        | 2000    |        | 1999
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |     
|Revenue                                                                                        |                                                                                  | $                          | 15,512                   |        |                         | $      | 37,381  |        |      | $      | 4,278   |      
|Cost of revenue                                                                                |                                                                                  |                            | 29,803                   |        |                         |        | 24,890  |        |      |        | 2,839   |      
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Gross profit (loss)                                                                            |                                                                                  |                            | (14,291                  | )      |                         |        | 12,491  |        |      |        | 1,439   |      
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Operating expenses:                                                                            |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|                                                                                               | Research and development, excluding stock
compensation amortization amounts(1)   |                            |                          | 18,286 |                         |        |         | 12,510 |      |        |         | 6,718 |   
|                                                                                               | Sales and marketing, excluding stock
compensation amortization amounts(1)        |                            |                          | 10,922 |                         |        |         | 12,821 |      |        |         | 3,209 |   
|                                                                                               | General and administrative, excluding
stock compensation amortization
amounts(1) |                            |                          | 7,590  |                         |        |         | 3,006  |      |        |         | 1,251 |   
|                                                                                               | Impairment of long-lived assets                                                  |                            |                          | 6,384  |                         |        |         |       |      |        |         |      |   
|                                                                                               | Restructuring charges                                                            |                            |                          | 1,496  |                         |        |         |       |      |        |         |      |   
|                                                                                               | Amortization of stock compensation(1)                                            |                            |                          | 2,028  |                         |        |         | 1,760  |      |        |         | 42    |   
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|                                                                                               |                                                                                  |                            | Total operating expenses |        |                         | 46,706 |         |        |      | 30,097 |         |       |    | 11,220 | 
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Loss from operations                                                                           |                                                                                  |                            | (60,997                  | )      |                         |        | (17,606 | )      |      |        | (9,781  | )    
|Other income, net                                                                              |                                                                                  |                            | (4,610                   | )      |                         |        | (3,173  | )      |      |        | (452    | )    
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Net loss                                                                                       |                                                                                  |                            | (56,387                  | )      |                         |        | (14,433 | )      |      |        | (9,329  | )    
|Accretion of transaction costs and accrued
dividends on redeemable convertible
preferred stock |                                                                                  |                            |                         |        |                         |        | (4,182  | )      |      |        | (2,589  | )    
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Net loss applicable to common shareholders                                                     |                                                                                  | $                          | (56,387                  | )      |                         | $      | (18,615 | )      |      | $      | (11,918 | )    
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Basic and diluted net loss per share                                                           |                                                                                  | $                          | (1.33                    | )      |                         | $      | (1.01   | )      |      | $      | (1.01   | )    
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|Weighted average shares used in computing net loss per share                                   |                                                                                  |                            | 42,357                   |        |                         |        | 18,515  |        |      |        | 11,789  |      
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|___________                                                                                    |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|(1) Amortization of stock compensation
amounts:                                                |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|                                                                                               |                                                                                  | Research and development   |                          | $      | 1,060                   |        |         | $      | 786  |        |         | $     | 5  |       
|                                                                                               |                                                                                  | Sales and marketing        |                          |        | 785                     |        |         |        | 779  |        |         |       | 35 |       
|                                                                                               |                                                                                  | General and administrative |                          |        | 183                     |        |         |        | 195  |        |         |       | 2  |       
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      
|                                                                                               |                                                                                  | $                          | 2,028                    |        |                         | $      | 1,760   |        |      | $      | 42      |      
|                                                                                               |                                                                                  |                            |                          |        |                         |        |         |        |      |        |         |      

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

F-4



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS)

|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |           |  |             |         |               |  |   |        |   |  |   |     |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | -------- | --- | ----------- |  | -------- | ------- | ------------- |  | ----------- | ---- | --------- |  | ----------- | ------- | ------------- |  | - | ------ | - |  | - | --- | - |  | - | ------- | -
|                                                                                                            |  | COMMON STOCK |        | ADDITIONAL |  |          |     |             |  |          |         |               |  |             |      |           |  | ACCUMULATED |         | STOCKHOLDERS'
|                                                                                                            |  |              |        | PAID-IN    |  | TREASURY |     | ACCUMULATED |  | DEFERRED |         | COMPREHENSIVE |  | EQUITY     
|                                                                                                            |  | SHARES       |        | AMOUNT     |  | CAPITAL  |     | STOCK       |  | DEFICIT  |         | COMPENSATION  |  | GAIN (LOSS) |      | (DEFICIT)
|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |          
|Balance, January 1, 1999                                                                                    |  |              | 11,960 |            |  | $        | 30  |             |  | $        |        |               |  | $           |      |           |  | $           | (5,542  | )             |  | $ |       |   |  | $ | 34  |   |  | $ | (5,478  | )
|Shares repurchased                                                                                          |  |              |       |            |  |          |    |             |  |          |        |               |  |             | (200 | )         |  |             |        |               |  |   |       |   |  |   |    |   |  |   | (200    | )
|Options granted for
consulting services                                                                     |  |              |       |            |  |          |    |             |  |          | 47      |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 47      |  
|Gain on sale of
securities                                                                                  |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   | (34 | ) |  |   | (34     | )
|Options exercised                                                                                           |  |              | 59     |            |  |          |    |             |  |          | 66      |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 66      |  
|Deferred compensation
expense associated with
equity awards                                                 |  |              |       |            |  |          |    |             |  |          | 803     |               |  |             |     |           |  |             |        |               |  |   | (803   | ) |  |   |    |   |  |   |        |  
|Amortization of deferred
compensation                                                                       |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   | 42     |   |  |   |    |   |  |   | 42      |  
|Dividends accrued on
redeemable, convertible
preferred stock                                                |  |              |       |            |  |          |    |             |  |          | (916    | )             |  |             |     |           |  |             | (1,035  | )             |  |   |       |   |  |   |    |   |  |   | (1,951  | )
|Preferred stock dividend                                                                                    |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             | (418    | )             |  |   |       |   |  |   |    |   |  |   | (418    | )
|Accretion of transaction
costs on redeemable,
convertible preferred
stock                                   |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             | (220    | )             |  |   |       |   |  |   |    |   |  |   | (220    | )
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             | (9,329  | )             |  |   |       |   |  |   |    |   |  |   | (9,329  | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |           |  |             |         |               |  |   |        |   |  |   |     |   |  |   |         |  
|Balance, December 31,
1999                                                                                  |  |              | 12,019 |            |  |          | 30  |             |  |          |        |               |  |             | (200 | )         |  |             | (16,544 | )             |  |   | (761   | ) |  |   |    |   |  |   | (17,475 | )
|Options exercised                                                                                           |  |              | 418    |            |  |          | 1   |             |  |          | 992     |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 993     |  
|Deferred compensation
expense associated with
equity awards                                                 |  |              |       |            |  |          |    |             |  |          | 9,460   |               |  |             |     |           |  |             |        |               |  |   | (9,460 | ) |  |   |    |   |  |   |        |  
|Amortization of deferred
compensation                                                                       |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   | 1,760  |   |  |   |    |   |  |   | 1,760   |  
|Issuance of warrants                                                                                        |  |              |       |            |  |          |    |             |  |          | 3,063   |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 3,063   |  
|Dividends accrued on
redeemable, convertible
preferred stock                                                |  |              |       |            |  |          |    |             |  |          | (3,433  | )             |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | (3,433  | )
|Accretion of transaction
costs and beneficial
conversion feature on
redeemable, convertible
preferred stock |  |              |       |            |  |          |    |             |  |          | (751    | )             |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | (751    | )
|Issuance of common stock in
initial public offering                                                         |  |              | 7,188  |            |  |          | 18  |             |  |          | 98,649  |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 98,667  |  
|Conversion of preferred
stock to common stock                                                               |  |              | 23,101 |            |  |          | 58  |             |  |          | 60,141  |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 60,199  |  
|Unrealized gain on
securities                                                                               |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   | 8   |   |  |   | 8       |  
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             | (14,433 | )             |  |   |       |   |  |   |    |   |  |   | (14,433 | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |           |  |             |         |               |  |   |        |   |  |   |     |   |  |   |         |  
|Balance, December 31,
2000                                                                                  |  |              | 42,726 |            |  |          | 107 |             |  |          | 168,121 |               |  |             | (200 | )         |  |             | (30,977 | )             |  |   | (8,461 | ) |  |   | 8   |   |  |   | 128,598 |  
|Shares issued                                                                                               |  |              | 208    |            |  |          |    |             |  |          | 292     |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | 292     |  
|Costs of initial public
offering                                                                            |  |              |       |            |  |          |    |             |  |          | (190    | )             |  |             |     |           |  |             |        |               |  |   |       |   |  |   |    |   |  |   | (190    | )
|Repurchase of shares
for treasury                                                                           |  |              |       |            |  |          |    |             |  |          |        |               |  |             | (73  | )         |  |             |        |               |  |   |       |   |  |   |    |   |  |   | (73     | )
|Amortization of deferred
compensation                                                                       |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   | 2,028  |   |  |   |    |   |  |   | 2,028   |  
|Termination of deferred
compensation awards                                                                 |  |              |       |            |  |          |    |             |  |          | (3,283  | )             |  |             |     |           |  |             |        |               |  |   | 3,283  |   |  |   |    |   |  |   |        |  
|Unrealized loss on
securities                                                                               |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   | (5  | ) |  |   | (5      | )
|Currency translation gain                                                                                   |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             |        |               |  |   |       |   |  |   | 12  |   |  |   | 12      |  
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |          |        |               |  |             |     |           |  |             | (56,387 | )             |  |   |       |   |  |   |    |   |  |   | (56,387 | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |           |  |             |         |               |  |   |        |   |  |   |     |   |  |   |         |  
|Balance, December 31, 2001                                                                                  |  |              | 42,934 |            |  | $        | 107 |             |  | $        | 164,940 |               |  | $           | (273 | )         |  | $           | (87,364 | )             |  | $ | (3,150 | ) |  | $ | 15  |   |  | $ | 74,275  |  
|                                                                                                            |  |              |        |            |  |          |     |             |  |          |         |               |  |             |      |           |  |             |         |               |  |   |        |   |  |   |     |   |  |   |         |  

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

F-5



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |   |  |  |  | 
|--------------------------------------------------------------------------- |  | ----------------------- | -------- | - |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  |  | 
|                                                                            |  | Year Ended December 31,
|                                                                            |  |                         |          |   |  |     
|                                                                            |  |                         |          |   |  | 2001 |         | 2000 |  | 1999
|                                                                            |  |                         |          |   |  |      |         |      |  |     
|(in thousands)                                                             
|OPERATING ACTIVITIES:                                                       |  |                         |          |   |  |      |         |      |  |      |         |  
|Net loss                                                                    |  | $                       | (56,387  | ) |  | $    | (14,433 | )    |  | $    | (9,329  | )
|Adjustments to reconcile net loss to net
cash used in operating activities: |  |                         |          |   |  |      |         |      |  |      |         |  
|Writeoff of inventory and capitalized software costs                        |  |                         | 20,050   |   |  |      |        |      |  |      |        |  
|Realized gain on marketable securities                                      |  |                         | (164     | ) |  |      | (466    | )    |  |      | (34     | )
|Depreciation and amortization                                               |  |                         | 3,106    |   |  |      | 1,545   |      |  |      | 657     |  
|Impairment of long-lived assets                                             |  |                         | 6,384    |   |  |      |        |      |  |      |        |  
|Amortization of stock compensation                                          |  |                         | 2,028    |   |  |      | 1,760   |      |  |      | 42      |  
|Warrant issuance costs                                                      |  |                         |         |   |  |      | 3,063   |      |  |      |        |  
|Bad debt expense                                                            |  |                         | 1,674    |   |  |      | 795     |      |  |      |        |  
|Deferred rent                                                               |  |                         | (85      | ) |  |      | 45      |      |  |      | 40      |  
|Accrued loss on lease obligations                                           |  |                         | 2,260    |   |  |      |        |      |  |      |        |  
|Consulting expense related to stock options                                 |  |                         |         |   |  |      |        |      |  |      | 46      |  
|Changes in operating assets and liabilities:                                |  |                         |          |   |  |      |         |      |  |      |         |  
|Accounts receivable                                                         |  |                         | 5,384    |   |  |      | (6,904  | )    |  |      | (2,116  | )
|Inventory                                                                   |  |                         | (10,036  | ) |  |      | (4,849  | )    |  |      | (2,081  | )
|Other current assets                                                        |  |                         | (213     | ) |  |      | (908    | )    |  |      | (1,339  | )
|Other assets                                                                |  |                         | 1,025    |   |  |      | (1,061  | )    |  |      | (1,018  | )
|Accounts payable                                                            |  |                         | (4,372   | ) |  |      | 3,200   |      |  |      | 1,635   |  
|Accrued liabilities                                                         |  |                         | (55      | ) |  |      | 2,045   |      |  |      | 833     |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|Net cash used in operating activities                                       |  |                         | (29,401  | ) |  |      | (16,168 | )    |  |      | (12,664 | )
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|INVESTING ACTIVITIES:                                                       |  |                         |          |   |  |      |         |      |  |      |         |  
|Purchases of property and equipment                                         |  |                         | (5,428   | ) |  |      | (4,752  | )    |  |      | (1,266  | )
|Proceeds from sales of marketable securities                                |  |                         | 75,215   |   |  |      | 22,684  |      |  |      | 3,481   |  
|Purchases of marketable securities                                          |  |                         | (104,080 | ) |  |      | (34,134 | )    |  |      |        |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|Net cash (used in) provided by investing activities                         |  |                         | (34,293  | ) |  |      | (16,202 | )    |  |      | 2,215   |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|FINANCING ACTIVITIES:                                                       |  |                         |          |   |  |      |         |      |  |      |         |  
|Net proceeds (payments) from issuance of common stock                       |  |                         | (190     | ) |  |      | 98,667  |      |  |      |        |  
|Proceeds from issuance of preferred stock                                   |  |                         |         |   |  |      | 500     |      |  |      | 42,336  |  
|Proceeds from exercise of stock options                                     |  |                         | 292      |   |  |      | 993     |      |  |      | 66      |  
|Principal payments on debt                                                  |  |                         | (96      | ) |  |      | (193    | )    |  |      | (191    | )
|Repurchase of treasury shares                                               |  |                         | (73      | ) |  |      |        |      |  |      | (200    | )
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|Net cash (used in) provided by financing activities                         |  |                         | (67      | ) |  |      | 99,967  |      |  |      | 42,011  |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|Net (decrease) increase in cash and cash equivalents                        |  |                         | (63,761  | ) |  |      | 67,597  |      |  |      | 31,562  |  
|Cash and cash equivalents, beginning of year                                |  |                         | 100,609  |   |  |      | 33,012  |      |  |      | 1,449   |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|Cash and cash equivalents, end of year                                      |  | $                       | 36,848   |   |  | $    | 100,609 |      |  | $    | 33,011  |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  
|SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION:                             |  |                         |          |   |  |      |         |      |  |      |         |  
|Interest paid                                                               |  | $                       | 4        |   |  | $    | 24      |      |  | $    | 86      |  
|                                                                            |  |                         |          |   |  |      |         |      |  |      |         |  

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

F-6



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)

|                                                |  |                         |         |      |  |      |         |   |  |   |        |  
|----------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                |  | Year Ended December 31,
|                                                |  |                        
|                                                |  | 2001                    |         | 2000 |  | 1999
|                                                |  |                         |         |      |  |     
|Net loss                                        |  | $                       | (56,387 | )    |  | $    | (14,433 | ) |  | $ | (9,329 | )
|Currency translation gain                       |  |                         | 12      |      |  |      |        |   |  |   |       |  
|Unrealized gain (loss) on marketable securities |  |                         | (5      | )    |  |      | 8       |   |  |   | (34    | )
|                                                |  |                         |         |      |  |      |         |   |  |   |        |  
|Comprehensive loss                              |  | $                       | (56,380 | )    |  | $    | (14,425 | ) |  | $ | (9,363 | )
|                                                |  |                         |         |      |  |      |         |   |  |   |        |  

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

F-7



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company was incorporated in the state of Delaware in September 1997.
The Company provided next-generation broadband access platforms to
telecommunications service providers. ASCs products enabled its customers to
transmit voice, data and multimedia traffic more rapidly and cost-effectively
while preserving their investments in existing communications systems. Through
December 31, 1999, the Company principally marketed its products in the United
States. The Company shipped its first product in March 1999.

On February 5, 2002, subsequent to its year-end, ASC announced that it had
ceased its operations and plans to liquidate in order to distribute the
remaining net assets to its shareholders. See also Note 14 to the financial
statements.

Principles of Consolidation

The consolidated financial statements include the statements of Advanced
Switching Communications, Inc. and its wholly-owned subsidiary in Hong Kong
(collectively ASC or the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue from product sales once the title of the
product has passed to the customer, which is generally upon shipment. When the
arrangement with the customer includes obtaining customer acceptance, revenue
is recognized when customer acceptance has been received. Revenue is recognized
in amounts expected to be realized upon final settlement.

ASC provides post-contract support under a warranty agreement for its
products. Upon shipment to its customers, ASC provides for the estimated cost
to repair or replace products to be returned under warranty. ASCs warranty
period is typically 12 months from the date of shipment to the end user. This
support is considered insignificant to the sale of the products and therefore
the Company recognizes any revenue associated with post-contract support in
conjunction with the sale of the product. The customer may purchase an
enhanced level of post-contract support for a period of up to three years.
Revenue associated with this enhanced support is recognized ratably over the
period the support is provided.

Research and Development

Research and development costs are charged to operations as incurred.

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly-liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investments with original maturity dates greater than three months but less
than 12 months to be short-term investments. To date, all marketable securities
have been classified as available-for-sale and have been carried at fair value
with unrealized gains and losses reported as a separate component of
comprehensive income. The fair value of marketable securities was determined
based on quoted market prices at the reporting date for those instruments. The
cost of securities sold is based on specific identification. Premiums and
discounts are amortized over the period from acquisition to maturity and are
included in investment income, along with interest and dividends.

At December 31, 2001, the Company held U.S. mortgage-backed and corporate debt
securities with an amortized cost of $40,942,000 and a fair value of
$40,945,000, resulting in an unrealized holding gain of $3,000. At

F-8



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

December 31,
2000, the Company held U.S. mortgage-backed and corporate debt securities with
an amortized cost of $11,908,000 and a fair value of $11,916,000, resulting in
an unrealized holding gain of $8,000.

Allowance for Doubtful Accounts

The Company records a provision for uncollectible amounts once it has
determined that the collection of a receivable is not probable. Total accounts
receivable at December 31, 2001 were net of an allowance for doubtful accounts
of $2,529,000 of which $1,674,000 was recorded as an expense in 2001. Total
accounts receivable at December 31, 2000 were net of an allowance for doubtful
accounts of $855,000.

Inventories

Inventories are stated at the lower of cost (average cost basis) or market
(net realizable value).

Property and Equipment

Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line method, based upon
the following asset lives:

|                                                                                                                  |  |                                                                        
|----------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|Computer and telecommunications equipment
Computer software
Furniture and office equipment
Leasehold improvements |  | 3 years
3 years
5-7 years
Shorter of lease term or useful life of asset

Impairment of Long-Lived Assets

The Company evaluates the potential impairment of long-lived assets based
upon projections of undiscounted cash flows whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. During the year ended December 31, 2001, the Company determined
that certain of its property and equipment were impaired and recorded a charge
of $6.4 million (See Note 3).

Income Taxes

Income taxes are accounted for using the liability method. Under this
method, deferred tax assets and liabilities are recorded based on temporary
differences between the financial statement amounts and the tax bases of assets
and liabilities measured using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company periodically
evaluates the realizability of its net deferred tax assets and records a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Significant estimates
include valuations of inventory, allowance for doubtful accounts, valuation of
property and equipment, warranty accruals and accrued loss on lease
obligations. Future actual results could be different from these estimates.

Accounting for Stock-Based Compensation

As permitted under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123), the Company
accounts for stock option grants to employees and directors in

F-9



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, ASC recognizes no compensation expense for stock
option grants with an exercise price equal to or greater than the fair value of
the shares at the date of grant. Stock options issued to consultants of the
Company are accounted for under SFAS 123, which requires an expense to be
recognized using an option-pricing model.

Fair Value of Financial Instruments

The carrying value of the Companys cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and accrued liabilities
approximate their fair values due to their relatively short maturities. The
fair value of long-term marketable securities is estimated based on current
interest rates, degrees of risk and remaining maturities.

The fair value of short and long-term debt is estimated based on current
interest rates available to the Company for debt instruments with similar
terms, degrees of risk and remaining maturities. The carrying amounts of these
obligations approximate their fair values due to the variable nature of the
debt.

Concentration of Credit Risk, Product and
Significant Customers and Supplier Information

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
investments in marketable securities and accounts receivable. The Company
places its temporary cash investments in money market funds and debt
instruments with high credit-quality issuers with no more than 10% of the
portfolio due from any one issuer. The Companys accounts receivable are
derived from
revenue earned from customers located primarily in the United States. The
Company performs ongoing credit evaluations of its customers financial
condition and, generally, requires no collateral from its customers. The
Company maintains an allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable.

During the year ended December 31, 2001, two customers accounted for 56%
and 10% of the Companys revenue and at December 31, 2001, these two customers
had a total of $1,000 in net receivable balances outstanding. During the year
ended December 31, 2000, two customers accounted for 36% and 19% of the
Companys revenue and at December 31, 2000, these two customers accounted for
0% and 64% of total trade accounts receivable. One of the significant
customers in 2000 (19% of total revenue) was also a significant customer in
2001 (56% of total revenue). During the year ended December 31, 1999, two
different customers accounted for 53% and 22% of the Companys revenue and at
December 31, 1999, these two customers accounted for 49% and 29% of total trade
accounts receivable.

The Company is currently dependent on one contract manufacturer and some
of the key components in the Companys product come from single or limited
sources of supply. If we are unable to manufacture and ship our products on a
timely basis, this could result in lost or delayed revenue or increased
manufacturing costs.

Net Loss Per Share

The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128, basic net loss per
share is computed by dividing the net loss applicable to common shareholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period, if dilutive. Common equivalent
shares consist of incremental common shares issuable upon the exercise of stock
options and warrants and, for 1999, upon conversion of Class A, B, C, D and E
Convertible Preferred Stock.

The Company has excluded all potential common shares from the calculation
of diluted loss per common share because all such securities are anti-dilutive
for all periods presented. The total number of potential common shares excluded
from the calculations of diluted net loss per share was 6,648,000, 6,077,000
and 22,272,000, for the years ended December 31, 2001, 2000 and 1999,
respectively.

F-10



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which eliminates the pooling of interests method of accounting
for all business combinations initiated after June 30, 2001 and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. This accounting standard was effective for
business combinations initiated after June 30, 2001, for which the Company had
none.

In June, 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses the financial accounting and reporting standards for
the acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill and certain intangible assets be
separately disclosed and no longer be amortized but tested for impairment on a
periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption,
with any impairments identified treated as a cumulative effect of a change in
accounting principle. The Company will adopt this Statement beginning January
1, 2002 and does not believe it will have a material impact upon the financial
statements.

In June 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for
Asset Retirement Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not believe this
statement will have a material impact upon the financial statements.

In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective January 1, 2002. This
statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Effects of a Disposal of a Segment of a Business. This statements
provides a single accounting model for impairment of long-lived assets. The
Company will adopt this Statement beginning January 1, 2002 and does not
believe it will have a material impact upon the financial statements.

2. INVENTORIES

Inventories consisted of the following at December 31, (in thousands):

|                |  |      |     |      |  |   |       | 
|--------------- |  | ---- | --- | ---- |  | - | ----- | 
|                |  | 2001 |     | 2000
|                |  |      |     |     
|Raw materials   |  | $    | 139 |      |  | $ | 796   | 
|Work in process |  |      | 61  |      |  |   | 20    | 
|Finished goods  |  |      | 787 |      |  |   | 6,121 | 
|                |  |      |     |      |  |   |       | 
|                |  | $    | 987 |      |  | $ | 6,937 | 
|                |  |      |     |      |  |   |       | 

During the year ended December 31, 2001, the Company recorded charges of $19.1
million to reduce the inventory to market value, which was estimated to be
lower than its original cost. Included in the $19.1 million writedown was $2.3
million for future purchase commitments at December 31, 2002 for inventory
components to be received in 2002. These commitments were executed in order
to close out remaining obligations in an agreement with our contract
manufacturer. In determining the amount of the charges recorded, the Company
considered its revised quarterly projections, the mix of product, the current
financial stability of its potential customers, its ability to liquidate
components or compete with product available in the secondary markets, the
general state of the economy and the subsequent announcement of its plans to
liquidate. The amount of these charges has been reflected in Cost of Revenue
in the Statements of Operations.

F-11



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

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

|                                |  |      |        |      |  |   |        |  
|------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                |  | 2001 |        | 2000
|                                |  |      |        |     
|Computer software and equipment |  | $    | 3,695  |      |  | $ | 4,189  |  
|Office equipment                |  |      | 2,446  |      |  |   | 2,650  |  
|Furniture and fixtures          |  |      | 607    |      |  |   | 857    |  
|Equipment under capital leases  |  |      | 8      |      |  |   | 9      |  
|                                |  |      |        |      |  |   |        |  
|                                |  |      | 6,756  |      |  |   | 7,705  |  
|Less accumulated depreciation   |  |      | (5,506 | )    |  |   | (2,400 | )
|                                |  |      |        |      |  |   |        |  
|Property and equipment, net     |  | $    | 1,250  |      |  | $ | 5,305  |  
|                                |  |      |        |      |  |   |        |  

During the year ended December 31, 2001, the Companys current and
projected financial position required it to review its long-lived assets for
impairment. The Companys analysis indicated that its long-lived assets were
impaired and resulted in a charge of approximately $6.4 million, an amount
equal to the difference between the assets estimated fair market value less
costs of disposal and the then-current carrying value of the assets. This
charge is shown separately in the Statements of Operations.

Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $3,106,000, $1,545,000, and $657,000, respectively.

4. SOFTWARE DEVELOPMENT COSTS

After determining its technology feasibility, the Company had purchased from a
software vendor an element management system to be sold as a feature in its
products. Based upon revised revenue projections at the end of the third
quarter of 2001, the Company determined that the asset had been impaired and,
therefore, a charge was recorded in the amount of $1.9 million to reduce the
carrying amount of the asset to zero.

5. INCOME TAXES

No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.

At December 31, 2001 and 2000, the Company had approximately $78.7 and
$24.3 million of federal and state net operating loss carryforwards available
to offset future taxable income. The Federal and State net operating loss
carryforwards begin to expire in 2012 and 2004, respectively. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.

As of December 31, 2001 and 2000, the Company had gross deferred tax
assets of approximately $31.5 and $9.7 million, respectively, related primarily
to net operating loss carryforwards that are available to reduce future taxable
income through 2020. Management
believes that, based on a number of factors including the proposed plan of
liquidation announced subsequent to year-end, the available objective evidence
creates sufficient uncertainty regarding the realizability of the deferred tax
assets such that a full valuation allowance has been recorded.

F-12



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

6. RESTRUCTURING

In July 2001 and October 2001, the Company announced reductions-in-force
in order to consolidate operating activities, streamline the internal
operations, and realign the Companys operations to a shared services model.
As a result, the Company recorded restructuring and other related charges of
$1.5 million, consisting of $1.45 million for severance and severance related
outplacement services and $50,000 for other related restructuring charges.
Employees terminated include individuals at all levels within the Company in
both professional services and support functions. As of December 31, 2001, all
of the employees identified in the July and October workforce reduction plans
had been terminated and the Company paid approximately $1.1 million in
severance and severance related costs. The remaining $0.4 million liability is
expected to be paid out by February 2003.

7. LONG-TERM DEBT

Amounts borrowed consisted of the following at December 31, (in
thousands):

|                                                                                                                                                                                                             |  |      |    |      |  |   |     |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | ---- |  | - | --- | -
|                                                                                                                                                                                                             |  | 2001 |    | 2000
|                                                                                                                                                                                                             |  |      |    |     
|Bank note payable, interest at
prime plus 0.5% (10.0% at December
31, 2000), due in monthly
installments of $2 plus interest
through April 2001, collateralized
by substantially all of the
Companys assets |  | $    |   |      |  | $ | 6   |  
|Bank note payable, interest at
prime plus 0.75% (10.25% at
December 31, 2000), due in monthly
installments of $10 plus interest
through June 2001, collateralized
by substantially all of the
Company assets |  |      |   |      |  |   | 88  |  
|                                                                                                                                                                                                             |  |      |    |      |  |   |     |  
|                                                                                                                                                                                                             |  |      |   |      |  |   | 94  |  
|Amounts under capital lease (Note 6)                                                                                                                                                                         |  |      | 5  |      |  |   | 7   |  
|Less current portion                                                                                                                                                                                         |  |      | (2 | )    |  |   | (96 | )
|                                                                                                                                                                                                             |  |      |    |      |  |   |     |  
|Long-term portion                                                                                                                                                                                            |  | $    | 3  |      |  | $ | 5   |  
|                                                                                                                                                                                                             |  |      |    |      |  |   |     |  



8. COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment under various noncancelable
operating and capital leases with various expiration dates through 2005. The
terms of the facility leases provide for rental payments on a graduated scale.
The facility leases for the Companys headquarters expire in August 2002 and
November 2005. The Company also leases a small office in Florida for which the
lease term expires in April 2004. This lease provides for a 3% escalation on
each anniversary date. In addition, the Company leased office space for sales
personnel in various cities throughout the U.S. and in Hong Kong. These leases
are on a month-to-month arrangement or were for a period of no longer than one
year. The Company recognizes rent expense on a straight-line basis over the
lease periods. Rental expense for all operating leases for the years ended
December 31, 2001, 2000 and 1999 was $1,545,000, $1,132,000, and $673,000,
respectively.

F-13



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 2001, are as follows:

|                     |                |        |    |   |  |           |       | 
|-------------------- | -------------- | ------ | -- | - |  | --------- | ----- | 
|                     |                |        |    |   |  | Operating
|                     | Capital Leases | Leases
|                     |                |       
|(in thousands)       |                |       
|2002                 |                | $      | 2  |   |  | $         | 1,064 | 
|2003                 |                |        | 2  |   |  |           | 680   | 
|2004                 |                |        | 1  |   |  |           | 664   | 
|2005                 |                |        |   |   |  |           | 600   | 
|Thereafter           |                |        |   |   |  |           |      | 
|                     |                |        |    |   |  |           |       | 
|                     |                |        | 5  |   |  | $         | 3,008 | 
|                     |                |        |    |   |  |           |       | 
|Less current portion |                |        | (2 | ) |  |           |       | 
|                     |                |        |    |   |  |           |       | 
|Long-term portion    |                | $      | 3  |   |  |           |       | 
|                     |                |        |    |   |  |           |       | 

In connection with the lease of the Companys headquarters, the Company
was initially required to maintain $1,000,000 in an escrow account with the
bank that has issued a letter of credit to the landlord. This escrow
requirement terminates at the sooner of the end of the lease term or the time
at which ASC has maintained a net worth in excess of $5,000,000 for 24
consecutive months. In the event that the escrow has not been reduced
beforehand, the amount will be reduced to $500,000 at the end of the 48th
month, which occurred at the end of 2001. The remaining escrow amount has been
recorded in long-term other assets for the year ended December 31, 2001

In connection with the leased space in Florida, the Company maintains a
$60,000 letter of credit which is an account with a bank. This letter of
credit will expire on April 3, 2002 at which time the Company is required to
provide a security deposit in the amount of $30,000, in accordance with the
terms of the lease agreement.

In the fourth quarter of 2001, the Company recorded a charge of $2.2
million associated with excess leased
office space. This charge represents the Companys total operating
commitments of $3.0 million as noted in the above table, net of estimated
sublease income.

In March 2000, the Company received a letter from Nortel Networks
Corporation alleging that our products infringe one of Nortels patents
relating to inverse multiplexing over ATM. Management intends to contest this
claim vigorously. Management is of the opinion that any liability or loss
associated with this claim will not have a material adverse effect on the
Companys operations or liquidity.

In October 2001, the Company received a notice from Qwest Communications
Corporation (Qwest) purporting to terminate the procurement agreement between
the two companies. From the third quarter of 2000 through the first quarter of
2001, Qwest made equipment purchases from ASC exceeding $15 million and was the
Companys largest customer during this period. In its notice of termination,
Qwest claimed that ASC had breached the procurement agreement. Since October
2001, the companies have exchanged letters. In all of its letters, the Company
has refuted the claims of Qwest and reiterated our right to additional purchase
orders from Qwest in excess of $10 million. In a recent letter, Qwest asserted
that it had revoked its acceptance of the equipment previously purchased and
requested a refund of the amounts paid. ASC has declined to pay a refund,
reiterating that Qwest is not entitled to a refund. The Company intends to
vigorously defend any claims asserted by Qwest.

On February 21, 2002, subsequent to year-end, a complaint was filed in the
United States District Court for the Eastern District of Virginia against us
and certain of our current and former officers and directors. The plaintiffs in
this action claim to own a total of 100 shares and purport to act on behalf of
a class of other shareholders. The complaint alleges violations of the federal
securities laws in connection with our initial public offering and subsequent
public statements. Thereafter, substantially similar complaints were filed in
the same court. The Company believes the claims asserted in the complaints are
without merit and intend to contest these claims vigorously. However, the
outcome of the suits cannot be predicted. The existence of these claims could
delay the making of any distributions to our stockholders or reduce the amount
available for distribution in connection with the proposed plan of liquidation.

F-14



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##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

We recently received a letter from Dishnet, a customer which had purchased
approximately $1 million worth of equipment from us. In that letter, Dishnet
claimed that the equipment performed unsatisfactorily and sought compensation
in the amount of $30 million in connection with damages and losses suffered as
a result of the failure of the equipment to perform. We believe that we have
fulfilled our obligations to Dishnet, that Dishnets damages claims are without
merit and that Dishnet is not entitled to a refund. We do not believe that
this matter will have a material impact upon the financial statements.

At the end of 2001, we agreed to purchase approximately $2.3 million of
excess inventory components from our contract manufacturer. The components
represent non-cancelable, non-returnable or customized items that were procured
on our behalf based upon forecasts provided to the manufacturer.

In connection with the $2.3 million, the Company recently received a
letter from Benchmark Electronics, Inc., the contract manufacturer. In its
letter, Benchmark asserted that we were liable for non-cancelable,
non-returnable or customized items that were procured on our behalf based upon
forecasts provided to Benchmark and for costs associated with the termination
of our relationship. Benchmark is seeking additional compensation in the
amount of $0.9 million, but we dispute the amount of Benchmarks claim. At
this time, we cannot predict whether Benchmark will pursue this matter and, if
so, how it will be resolved.

Electronic Instrumentation & Technology, Inc., a former manufacturer of
ours, recently filed a complaint in the Circuit Court of Loudoun County,
Virginia. In the complaint, EIT claimed that we did not purchase certain
products from EIT and that we were in breach of our purchase agreement. EIT
sought compensation in the amount of $83,000, plus additional interest and
attorneys fees. We dispute the amount of EITs claim, and we intend to contest
EITs claim vigorously. However, the outcome of the suit cannot be predicted.
The existence of EITs claims could delay the making of final distributions to
our stockholders or reduce the amount available for distribution in connection
with the proposed plan of liquidation.

The Company is involved in various other claims arising in the normal
course of business. Management is of the opinion that any liability or loss
associated with such matters will not have a material adverse effect on the
Companys financial condition, results of operations or liquidity.

9. REDEEMABLE CONVERTIBLE PREFERRED STOCK

There were no issuances of preferred stock during the year ended December
31, 2001. Issuances of redeemable convertible preferred stock during the years
ended December 31, 2000, 1999 and 1998 were as follows (in thousands).

|      |  |            |       |        |  |          |       |          |  |        |        |     |  |   |       |  |  |                |  | 
|----- |  | ---------- | ----- | ------ |  | -------- | ----- | -------- |  | ------ | ------ | --- |  | - | ----- |  |  | -------------- |  | 
|      |  | Shares     |       |        |  |          |       |          |  |        |        |     |  |  
|      |  |            |       |        |  |          |       | Issuance |  | Date  
|Class |  | Authorized |       | Issued |  | Proceeds |       | Costs    |  | Issued
|      |  |            |       |        |  |          |       |          |  |       
|A     |  |            | 10    |        |  |          | 10    |          |  | $      | 2,382  |     |  | $ |      |  |  | June 1998     
|B     |  |            | 14    |        |  |          | 11    |          |  |        | 2,740  |     |  |   |      |  |  | June 1998     
|C     |  |            | 4,154 |        |  |          | 2,173 |          |  |        | 5,893  |     |  |   | 789   |  |  | August 1998   
|      |  |            |       |        |  |          | 1,662 |          |  |        | 4,506  |     |  |   | 11    |  |  | June 1999     
|      |  |            |       |        |  |          | 154   | (1)      |  |        |       | (1) |  |   |      |  |  | September 1999
|D     |  |            | 4,700 |        |  |          | 4,094 |          |  |        | 35,002 |     |  |   | 1,822 |  |  | September 1999
|      |  |            |       |        |  |          | 585   |          |  |        | 5,000  |     |  |   | 338   |  |  | October 1999  
|E     |  |            | 100   |        |  |          | 68    |          |  |        | 500    |     |  |   |      |  |  | June 2000     
|      |  |            |       |        |  |          |       |          |  |        |        |     |  |   |       |  |  |                |  | 



---

(1)       This tranche of Class C Redeemable Convertible Preferred shares was
issued in accordance with the anti-dilutive provisions for Class C at the
time of the sale of Class D Redeemable Convertible Preferred shares. As
there were no proceeds in connection with the Class C shares, the number of
shares valued at the liquidation price per share was treated as a dividend
in order to record the Class C at its liquidation value in the balance
sheet.

F-15



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

At the time the Company completed its initial public offering on October
10, 2000, all outstanding shares of redeemable, convertible preferred stock
plus accrued dividends were converted into shares of common stock. Until then,
the holders of the Redeemable Convertible Preferred Stock had various rights
and preferences as follows:

Voting

Each share of Class A, B, C, D and E had voting rights equal to an
equivalent number of shares of Common Stock into which it was convertible and
voted together as one class with the Common Stock.

Dividends

Holders of Class A, B, C, D and E Redeemable Convertible Preferred Stock
were entitled to receive cumulative dividends at the per annum rate of 6.5%,
6.5%, 8%, 8% and 8% of the original purchase price paid, respectively, whether
or not declared, payable quarterly in arrears, when and if declared by the
Board of Directors. The holders of Class A, B, C and D had rights to receive a
pro rata share of dividends paid to holders of common stock. No dividends on
Convertible Preferred Stock or Common Stock had been declared from inception
through October 10, 2000. All accrued dividends were included in the
Convertible Preferred Stock balances at the respective balance sheet dates.

Liquidation

In the event of any involuntary liquidation, dissolution or winding up of
the Company the holders of Class A, B, C, D and E Convertible Preferred Stock
were entitled to receive an amount of $250, $250, $2.71, $8.55 and $7.40 per
share, respectively, plus any accrued dividends, whether or not declared, prior
to and in preference to any distribution to the holders of Common Stock.

Conversion

Each share of Class A and B Convertible Preferred Stock was convertible,
at the option of the holder, upon the occurrence of a triggering event which
was defined as follows: (1) the closing of a public offering of Common Stock
generating aggregate proceeds of $50,000,000, or (2) the Company entered into a
merger consolidation or other similar combination, or (3) the Company achieved
an annual gross revenue of more than $25,000,000. Each share of Class C, D and
E Redeemable Convertible Preferred Stock could have been converted at any time
at the option of the holder. Each share of Class C, D and E Redeemable
Convertible Preferred Stock automatically converted upon: (1) the closing of a
public offering of Common Stock generating aggregate proceeds of $50,000,000 or
(2) the Company entered into a merger, consolidation or other similar
combination for a total purchase price of the equity of the Company of at least
$250,000,000. Upon the conversion of Class C shares, Class A and B shares
automatically converted into shares of common stock. Class A, B, C, D and E
preferred shares were convertible into common shares based on the following
calculation: the sum of the original issuance price per share multiplied by the
number of shares outstanding plus the cumulative accrued dividends, divided by
the applicable conversion ratio. The original issue price per share is $250,
$250, $2.7117, $8.55 and 7.40 for Classes A, B, C, D and E, respectively. The
conversion ratios were 4.275, 1.00, 1.356, 4.275 and 7.40 for Classes A, B, C,
D and E, respectively.

Redemption

The Class A and B shares were redeemable at the option of the holder upon
the same triggering event under which it was convertible, at a cash price equal
to the applicable liquidation preference. Shares of Class C, D and E were
redeemable at the option of the holder any time on or after August 31, 2005 at
a cash price equal to the applicable liquidation preference.

F-16



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

Beneficial Conversion

At the time of issuance of the Class E shares, the deemed fair value of
the underlying common shares was $13.00 per share. Therefore, $378,000 was
initially calculated to additional paid-in capital as a presumed beneficial
conversion feature. As the Class E shares were convertible at any time, the
entire amount of $378,000 was immediately accreted to the Series E Convertible
Redeemable Preferred Stock on June 30, 2000.

10. COMMON STOCK

In February 1998, the Companys Board of Directors approved a 20-for-1
stock split of the issued and outstanding common stock and in July 1998, the
Companys Board of Directors approved a 10-for-1 stock split of the issued and
outstanding common stock. In September 1999, the Companys Board of Directors
approved a 2-for-1 stock split of the issued and outstanding common stock. The
2-for-1 split became effective in November 1999. All share and per share
amounts for common stock have been adjusted accordingly.

The Company issued 339,000 and 31,000 options to purchase shares of Common
Stock to consultants and other service providers of the Company in 1998 and
1999, respectively. The fair value of the options issued was determined to be
$46,000 and $47,000 in 1998 and 1999, respectively, using the Black-Scholes
option pricing model and has been recognized in general and administrative
expenses. For the year ended December 31, 2000, the Company issued 24,000
options to a consultant under a six month contract for services. The fair
value of the options issued was determined to be $82,000 and was being
amortized over a six month period in research and development expense.
However, the contract was terminated in November 2000. As a result, the total
amount recognized under this contract was $28,000.

Warrants

In March 2000, in connection with the signing of a purchase agreement with
a customer, the Company issued to Intermedia Communications, Inc. a warrant to
purchase 125,000 shares of common stock at an exercise price of $15.00 per
share. Under the original warrant agreement, the warrant vested and became
exercisable as product
payments were made. In June 2000, the Company amended and restated the warrant
agreement to provide for immediate vesting of the warrant and to permit
Intermedia to exercise the warrant after seven years, or earlier depending on
the timing and amount of products purchased. The Company accounted for the
warrant as a cost of establishing a relationship with a potential customer and
recorded a one-time charge of $1,131,000 in June 2000 as a sales and marketing
cost. The Company determined the cost associated with the warrant under the
Black-Scholes option pricing model using the following assumptions: volatility
of 70%; risk-free interest rate of 6.3%; no expected dividend yield and a term
of seven years.

In June 2000, in connection with the signing of a purchase agreement with
Broadband Office, Inc. for the sale of ASC products, the Company issued a
warrant to purchase 222,000 shares at an exercise price of $8.00 per share. The
warrant vests immediately and is exercisable at any time over the next 36
months. The Company views the issuance of this warrant as a cost of developing
a long-term business relationship and, therefore,the associated expense was
recorded as a sales and marketing cost. Therefore, in June, the Company
recognized the cost as an operating expense in the amount of $1,850,000. The
cost was determined using the Black-Scholes option pricing model and the
following assumptions: volatility of 70%; risk-free interest rate of 6.0%; no
expected dividend yield and a term of three years.

In August 2000, in connection with the signing of a vendor agreement, the
Company issued a warrant to purchase 12,500 shares at an exercise price of
$13.00 per share. The warrant vests immediately and is exercisable at any time
over the next 36 months. The Company recognized the cost as a sales and
marketing expense in the amount of $82,000. The cost was determined using the
Black-Scholes option pricing model and the following assumptions: volatility of
70%; risk-free interest rate of 6.0%; no expected dividend yield and a term of
three years.

None of the warrants issued have been exercised.

In October 2000, the Company completed its initial public offering of
7,187,500 shares, including the underwriters exercise of the overallotment
option. The Company raised proceeds of $98.7 million, net of offering costs of
$9.1 million.

F-17



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

11. STOCK OPTIONS

In February 1998 and July 1998, the Company adopted the Advanced Switching
Communications, Inc. 1998 and Second 1998 Nonqualified Stock Option Plans
(collectively the 1998 Plan) to offer key employees, board members and third
parties who provide valuable services to the Company the option to purchase
shares of Common Stock. Under the 1998 Plan, the Company issues options to
eligible participants at an exercise price determined by the Board of
Directors, at the date of grant. Options vest 25% annually over a period of
four years from the date of grant and expire ten years from the date of grant.
Vesting may accelerate under certain circumstances including an initial public
offering, change of ownership, liquidation or dissolution of the Company.
Options are no longer granted under the 1998 plan. As a result of the initial
public offering, 675,000 shares became fully vested.

In December 1999, the Company adopted the Advanced Switching
Communications, Inc. 1999 Nonqualified Stock Option Plan (the 1999 Plan). The
1999 Plan provides for option grants to employees, board members and third
parties to purchase shares of Common Stock at an exercise price determined by
the Board of Directors at the date of grant. Options vest 25% on the first
anniversary of the grant date at which time the remaining options vest monthly
over a three-year period. Options granted under the 1999 Plan expire ten years
from the date of grant. Vesting may accelerate under certain circumstances such
as liquidation or dissolution of the Company. The maximum number of options
available for grants under the 1999 Plan was 3,198,000 at December 31, 1999. In
February 2000, the board of Directors approved an increase to 4,498,000.
Options are no longer granted under the 1999 plan.

In August 2000, the Company adopted the Advanced Switching Communications,
Inc. 2000 Stock Incentive Plan (the 2000 Plan). The 2000 Plan provides for
options grants to employees, board members and third
parties to purchase shares of Common stock. The maximum number of options
available for grant under this plan is 6,000,000. The 2000 Plan will be
administered by a committee of non-employee directors. Options vest 25% on the
first anniversary of the grant date at which time the remaining options vest
monthly over a three-year period. Options granted under the 2000 Plan expire
ten years from the date of grant. In the event of a change in control, or upon
such other events as may be determined by the committee, the committee may
provide, in its sole discretion, that each outstanding option will immediately
become fully exercisable. At December 31, 2001, 2,155,000 options were
available for grant under the 2000 plan. However, the Company does not intend
to approve any future option grants.

The following table presents activity under the Plans (in thousands):

|                           |                   |  |                  |        |       |   |                           |      | 
|-------------------------- | ----------------- |  | ---------------- | ------ | ----- | - | ------------------------- | ---- | 
|                           |                   |  |                  |        |       |   | Weighted Average Exercise
|                           |                   |  | Number of Shares |        | Price
|                           |                   |  |                  |        |      
|Balance, January 1, 1999   |                   |  | 1,651            |        |       | $ | 1.05                      |     
|                           | Options Granted   |  |                  | 1,914  |       |   |                           | 1.65 | 
|                           | Options Exercised |  |                  | (59    | )     |   |                           | 1.14 | 
|                           | Options Cancelled |  |                  | (260   | )     |   |                           | 1.50 | 
|                           |                   |  |                  |        |       |   |                           |     
|Balance, December 31, 1999 |                   |  | 3,246            |        |       | $ | 1.36                      |     
|                           | Options Granted   |  |                  | 3,344  |       |   |                           | 8.05 | 
|                           | Options Exercised |  |                  | (418   | )     |   |                           | 2.38 | 
|                           | Options Cancelled |  |                  | (455   | )     |   |                           | 2.07 | 
|                           |                   |  |                  |        |       |   |                           |     
|Balance, December 31, 2000 |                   |  | 5,717            |        |       | $ | 5.14                      |     
|                           | Options Granted   |  |                  | 4,114  |       |   |                           | 2.32 | 
|                           | Options Exercised |  |                  | (208   | )     |   |                           | 1.40 | 
|                           | Options Cancelled |  |                  | (3,335 | )     |   |                           | 6.89 | 
|                           |                   |  |                  |        |       |   |                           |     
|Balance, December 31, 2001 |                   |  | 6,288            |        |       | $ | 2.48                      |     
|                           |                   |  |                  |        |       |   |                           |     

F-18



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 2001 (amounts in thousands, except dollars):

|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            |            |          |      |          |  |         |         |  |  |          |           |  |  |   |         | 
|------------------------ | ------- | ----------- |  | ---------------- |  | -------------- | - | ----------- |  | -------------- | ------------------- | --------- | -------------------------- | ---------- | -------- | ---- | -------- |  | ------- | ------- |  |  | -------- | --------- |  |  | - | ------- | 
|                         |         |             |  |                  |  |                |   |             |  |                | Options Outstanding |           | Vested Options Exercisable
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                           
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            |            | Weighted |      |          |  |         |         |  |  |          |           |  |  |  
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            |            | Average  |      | Weighted |  |         |         |  |  | Weighted
|                         |         |             |  |                  |  |                |   |             |  |                | Number of Shares    |           | Remaining                  |            | Average  |      | Number   |  | Average
|Range of Exercise Prices |         | Outstanding |  | Contractual Life |  | Exercise Price |   | Exercisable |  | Exercise Price
|                         |         |             |  |                  |  |                |   |             |  |               
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            | (in years) |          |      |          |  |         |         |  |  |          |           |  | 
|                         | $0.4000 |             |  |                 |  |                | $ | 0.4000      |  |                |                     | 1,053,500 |                            |            |          | 9.77 |          |  | $       | 0.4000  |  |  |          | 90,086    |  |  | $ | 0.4000  | 
|                         | $0.6000 |             |  |                 |  |                | $ | 0.6000      |  |                |                     | 240,000   |                            |            |          | 6.15 |          |  | $       | 0.6000  |  |  |          | 240,000   |  |  | $ | 0.6000  | 
|                         | $0.6300 |             |  |                 |  |                | $ | 0.7000      |  |                |                     | 120,000   |                            |            |          | 9.76 |          |  | $       | 0.6708  |  |  |          | 2,917     |  |  | $ | 0.7000  | 
|                         | $1.0000 |             |  |                 |  |                | $ | 1.5000      |  |                |                     | 2,283,850 |                            |            |          | 8.17 |          |  | $       | 1.2483  |  |  |          | 804,200   |  |  | $ | 1.1991  | 
|                         | $1.5500 |             |  |                 |  |                | $ | 2.0000      |  |                |                     | 590,806   |                            |            |          | 8.11 |          |  | $       | 1.9476  |  |  |          | 263,968   |  |  | $ | 1.9716  | 
|                         | $2.4000 |             |  |                 |  |                | $ | 3.6000      |  |                |                     | 786,388   |                            |            |          | 9.15 |          |  | $       | 3.0789  |  |  |          | 199,152   |  |  | $ | 3.0569  | 
|                         | $3.7000 |             |  |                 |  |                | $ | 5.1875      |  |                |                     | 505,057   |                            |            |          | 8.91 |          |  | $       | 4.4465  |  |  |          | 96,897    |  |  | $ | 3.9535  | 
|                         | $5.7500 |             |  |                 |  |                | $ | 7.5000      |  |                |                     | 328,958   |                            |            |          | 8.60 |          |  | $       | 6.9681  |  |  |          | 102,111   |  |  | $ | 6.9755  | 
|                         | $8.9688 |             |  |                 |  |                | $ | 13.0000     |  |                |                     | 349,044   |                            |            |          | 8.63 |          |  | $       | 10.1361 |  |  |          | 161,264   |  |  | $ | 10.0759 | 
|$                        | 15.0000 |             |  |                 |  |                | $ | 16.3750     |  |                |                     | 30,563    |                            |            |          | 8.76 |          |  | $       | 15.0225 |  |  |          | 12,145    |  |  | $ | 15.0566 | 
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            |            |          |      |          |  |         |         |  |  |          |           |  |  |   |        
|                         | $0.4000 |             |  |                 |  |                | $ | 16.3750     |  |                |                     | 6,288,166 |                            |            |          | 8.62 |          |  | $       | 2.4814  |  |  |          | 1,972,740 |  |  | $ | 2.6251  | 
|                         |         |             |  |                  |  |                |   |             |  |                |                     |           |                            |            |          |      |          |  |         |         |  |  |          |           |  |  |   |        

Valuation of Option Grants

At various dates during the year ended December 31, 1999, the Company
granted a total of 710,408 options to employees at exercise prices below the
estimated fair market value at the dates of grant. The Company recorded
compensation expense of $42,000 for the year ended December 31, 1999 resulting
in a remaining deferred compensation balance of $761,000 at December 31, 1999.

The Company also granted a total of 2,764,064 options at exercise prices
below the estimated fair market value at the dates of grant for the year ended
December 31, 2000. The total expense associated with these options was
$9,460,000 which will be amortized over the option vesting period of four
years. For the year ended December 31, 2000, the Company recorded compensation
expense of $1,760,000 which results in a remaining deferred compensation
balance of $8,461,000 at December 31, 2000.

For the year ended December 31, 2001, the Company recognized $2,028,000 of
compensation expense related to the amortization of deferred compensation. No
options were issued to outside consultants during the year ended December 31,
2001.

Had compensation cost for the Companys stock-based compensation plans
been determined based on the fair market value at the grant dates for the
awards under SFAS No. 123, the Companys historical net loss and net loss per
share for the year ended December 31, 1999 would not have changed significantly
from the amounts reported based upon the fact that a charge was recorded for
options whose exercise price was below the deemed fair market value of the
options at the grant date. In addition, all other options granted were at
prices in excess of the deemed fair market value at the grant date. For the
years ended December 31, 2001 and 2000, had compensation cost been determined
pursuant to SFAS No. 123, the Companys net loss would have been as follows:

|                                            |             |  |                         |         |      |  |   |         |  
|------------------------------------------- | ----------- |  | ----------------------- | ------- | ---- |  | - | ------- | -
|                                            |             |  | Year Ended December 31,
|                                            |             |  |                        
|                                            |             |  | 2001                    |         | 2000
|                                            |             |  |                         |         |     
|Net loss applicable to common shareholders: |             |  |                         |         |      |  |   |        
|                                            | As reported |  | $                       | (54,122 | )    |  | $ | (18,615 | )
|                                            |             |  |                         |         |      |  |   |        
|                                            | Pro forma   |  | $                       | (58,376 | )    |  | $ | (19,523 | )
|                                            |             |  |                         |         |      |  |   |        
|Net loss per share  basic and diluted:     |             |  |                         |         |      |  |   |        
|                                            | As reported |  | $                       | (1.28   | )    |  | $ | (1.01   | )
|                                            |             |  |                         |         |      |  |   |        
|                                            | Pro forma   |  | $                       | (1.38   | )    |  | $ | (1.05   | )
|                                            |             |  |                         |         |      |  |   |        

F-19



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing model with the following weighted average
assumptions:

|                        |  |              |      |              |  |              |      |   |  |  |      |  
|----------------------- |  | ------------ | ---- | ------------ |  | ------------ | ---- | - |  |  | ---- | -
|                        |  | Year         |      | Year         |  | Year        
|                        |  | Ended        |      | Ended        |  | Ended       
|                        |  | December 31, |      | December 31, |  | December 31,
|                        |  | 2001         |      | 2000         |  | 1999        
|                        |  |              |      |              |  |             
|Risk-free interest rate |  |              | 4.55 | %            |  |              | 6.12 | % |  |  | 5.76 | %
|Expected dividend yield |  |              |     |              |  |              |     |   |  |  |     |  
|Volatility factor       |  |              | 144  | %            |  |              | 70   | % |  |  |     |  
|Expected life           |  | 1 year       |      | 5 years      |  | 5 years     

The weighted average fair value at date of grant for options granted
during the years ended December 31, 2001, 2000 and 1999 was $2.32, $3.05, and
$0.27 per share, respectively.

12. EMPLOYEE BENEFIT PLAN

The Company sponsors a 401(k) defined contribution profit sharing plan
covering substantially all employees. Employees can contribute up to 15%
(subject to statutory limitations) of their total compensation. Profit sharing
contributions made by the Company are discretionary and are determined annually
by the Board of Directors. Employer contributions, if any, vest to the
employees according to a schedule entitling full vesting after four years.
There have been no Company contributions to the plan since inception. Subject
to the shareholders approving the liquidation, which is expected to occur in
April 2002, the 401(k) plan will be terminated in accordance with the plan
provisions.

13. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION

The Company operates in one industry segment, the development of
next-generation broadband access platforms. There were no sales to any
individual country outside the United States where such sales accounted for 10%
or more of total revenue for all periods presented. For the year ended
December 31, 2001, total sales to customers within the United States were
$15,369,000 and total sales to international customers were $143,000. For the
year ended December 31, 2000, total sales to customers within the United States
were $35,476,000 and total sales to international customers were $1,905,000.
For the year ended December 31, 1999, total sales to customers within the
United States were $3,848,000 and total sales to international customers were
$430,000.

14. SUBSEQUENT EVENT

Due to the continuing losses resulting from the decline in sales, the
Company announced on February 5, 2002 that its Board of Directors has adopted a
plan of complete liquidation and dissolution, which will be submitted to the
Companys stockholders for approval. Subject to approval of the plan by holders
of a majority of the Companys outstanding shares, the Company plans to sell
its assets, including inventory, property and equipment and intellectual
property, discharge its liabilities, and distribute the net proceeds to its
stockholders. In the event of stockholder approval of the plan, ASC would be
required to adopt a liquidation basis of accounting. Accordingly, assets would
be valued at estimated net realizable value and liabilities would include
estimated costs associated with carrying out the plan of liquidation.

In connection with the plan of liquidation, on February 5, 2002 the
Company laid off all of its remaining employees with most termination dates effective
on April 6, 2002 and April 20, 2002. Several individuals have termination
dates that range from May to August of 2002 as they will be needed to wind down
the operations. The costs associated with this layoff of approximately
$4,011,000 will be recorded as a charge in fiscal 2002.

F-20



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

Assuming the plan of liquidation had been approved by stockholders on December
31, 2001 for balance sheet purposes and on October 1, 2001 for the purpose of
presenting the statement of operations, the historical results would have been
adjusted as follows (in thousands):

Balance Sheet

|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |        | 
|-------------------------------------------------------- | ---------------------------------------- | - | ------------ | ------ | -------------- |  | ------------ | ------- | ---- | - | -------- | ------ | 
|                                                         |                                          |   |              |        |                |  | (Unaudited) 
|                                                         |                                          |   |              |        |                |  |             
|                                                         |                                          |   |              |        |                |  |              |         |      |   | Adjusted
|                                                         |                                          |   | December 31, |        | Pro Forma      |  | December 31,
|                                                         |                                          |   | 2001         |        | Adjustments(4) |  | 2000        
|                                                         |                                          |   |              |        |                |  |             
|Current Assets:                                          |                                          |   |              |        |                |  |              |         |      |   |          |       
|Cash & Cash Equivalents                                  |                                          | $ | 36,848       |        |                |  |              |         |      | $ | 36,848   |       
|Marketable Securities                                    |                                          |   | 38,403       |        |                |  |              |         |      |   | 38,403   |       
|Accounts Receivable, Net                                 |                                          |   | 1,167        |        |                |  |              |         |      |   | 1,167    |       
|Inventory                                                |                                          |   | 987          |        |                |  |              |         |      |   | 987      |       
|Other Current Assets                                     |                                          |   | 690          |        |                |  |              |         |      |   | 690      |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         | Total Current Assets                     |   |              | 78,095 |                |  |              |         |      |   |          | 78,095 | 
|Property, Plant and Equipment, net                       |                                          |   | 1,250        |        |                |  |              |         |      |   | 1,250    |       
|Marketable Securities                                    |                                          |   | 2,542        |        |                |  |              |         |      |   | 2,542    |       
|Other Assets                                             |                                          |   | 1,055        |        |                |  |              |         |      |   | 1,055    |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         | Total Assets                             |   | $            | 82,942 |                |  |              |         |      |   | $        | 82,942 | 
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|Current Liabilities:                                     |                                          |   |              |        |                |  |              |         |      |   |          |       
|Accounts Payable                                         |                                          | $ | 1,011        |        |                |  |              |         |      |   | 1,011    |       
|Accrued Liabilities                                      |                                          |   | 5,391        |        |                |  |              |         |      |   | 5,391    |       
|Reserve for Estimated Costs During
Period of Liquidation |                                          |   |             |        |                |  | 5,511        | (1,2)   |      |   | 5,511    |       
|Current Portion of Debt                                  |                                          |   | 2            |        |                |  |              |         |      |   | 2        |       
|Current Portion of Lease Obligations                     |                                          |   | 1,193        |        |                |  |              |         |      |   | 1,193    |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         | Total Current Liabilities                |   |              | 7,597  |                |  |              |         |      |   |          | 13,108 | 
|Long-Term Portion of Lease
Obligations                   |                                          |   | 1,067        |        |                |  |              |         |      |   | 1,067    |       
|Long-Term Debt                                           |                                          |   | 3            |        |                |  |              |         |      |   | 3        |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         |                                          |   | 8,667        |        |                |  |              |         |      |   | 14,178   |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|Stockholders Equity:                                    |                                          |   |              |        |                |  |              |         |      |   |          |       
|Common Stock                                             |                                          |   | 107          |        |                |  | (107         | )(3)    |      |   |         |       
|Treasury Stock                                           |                                          |   | (273         | )      |                |  | 273          | (3)     |      |   |         |       
|Additional Paid-In Capital                               |                                          |   | 165,064      |        |                |  | (165,064     | )(3)    |      |   |         |       
|Retained Deficit                                         |                                          |   | (87,364      | )      |                |  | 87,364       | (3)     |      |   |         |       
|Unrealized gains                                         |                                          |   | 3            |        |                |  | (3           | )(3)    |      |   |         |       
|Currency Translation                                     |                                          |   | 12           |        |                |  | (12          | )(3)    |      |   |         |       
|Deferred Compensation                                    |                                          |   | (3,274       | )      |                |  | 3,274        | (3)     |      |   |         |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         | Total Stockholders Equity               |   |              | 74,275 |                |  |              | (74,275 | )(3) |   |          |       | 
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|                                                         | Total Liabilities &
Stockholders Equity |   | $            | 82,942 |                |  |              |         |      |   |          |        | 
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       
|Net Assets Available to Common
Shareholders              |                                          |   |              |        |                |  |              |         |      | $ | 68,764   |       
|                                                         |                                          |   |              |        |                |  |              |         |      |   |          |       

F-21



---



##### 



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)

Statements of Operations

|                                              |                    |      |         |                |   |           |        |              |  |       |         |               |   | 
|--------------------------------------------- | ------------------ | ---- | ------- | -------------- | - | --------- | ------ | ------------ |  | ----- | ------- | ------------- | - | 
|                                              |                    |      |         |                |   |           |        | (Unaudited) 
|                                              |                    |      |         |                |   |           |        |             
|                                              |                    |      |         |                |   |           |        |              |  |       |         | Adjusted Year
|                                              |                    |      |         | Year Ended     |   |           |        |              |  | Ended
|                                              |                    |      |         | December 31,   |   | Pro Forma |        | December 31,
|                                              |                    | 2001 |         | Adjustments(4) |   | 2001(5)  
|                                              |                    |      |         |                |   |          
|Net Revenue                                   |                    | $    | 15,512  |                |   |           |       |              |  | $     | 15,512  |              
|Cost of Revenue                               |                    |      | 29,803  |                |   |           |       |              |  |       | 29,803  |              
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|                                              | Gross Margin       |      |         | (14,291        | ) |           |        |             |  |       |         | (14,291       | )
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|Research and Development                      |                    |      | 18,286  |                |   |           |       |              |  |       | 18,286  |              
|Sales and Marketing                           |                    |      | 10,922  |                |   |           |       |              |  |       | 10,922  |              
|General & Administrative                      |                    |      | 7,590   |                |   |           |       |              |  |       | 7,590   |              
|Impairment of Long-Lived Assets               |                    |      | 6,384   |                |   |           |       |              |  |       | 6,384   |              
|Restructuring Charges                         |                    |      | 1,496   |                |   |           |       |              |  |       | 1,496   |              
|Amortization of Stock Compensation            |                    |      | 2,028   |                |   |           |       |              |  |       | 2,028   |              
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|                                              | Operating Expenses |      |         | 46,706         |   |           |        |             |  |       |         | 46,706        |  
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|                                              | Operating Loss     |      |         | (60,997        | ) |           |        |             |  |       |         | (60,997       | )
|Other Income, net                             |                    |      | (4,610  | )              |   |           |       |              |  |       | (4,610  | )            
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|Earnings Before Income Taxes                  |                    |      | (56,387 | )              |   |           |       |              |  |       | (56,387 | )            
|Income Taxes                                  |                    |      |        |                |   |           |       |              |  |       |        |              
|Adjustment to Liquidation Basis of Accounting |                    |      |         |                |   |           | (5,511 | ) (1,2)      |  |       | (5,511  | )            
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|Net Loss                                      |                    |      | (56,387 | )              |   | $         | (5,511 | )            |  | $     | (50,876 | )            
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              
|Basic and Diluted Loss Per Share              |                    | $    | (1.33   | )              |   | $         | (0.13  | )            |  | $     | (1.41   | )            
|                                              |                    |      |         |                |   |           |        |              |  |       |         |              

Notes to Pro Forma Statements (Unaudited):



|(1) |  | Estimated costs of professional fees of $1,500 associated with
liquidating the net assets and dissolving the Company.                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Estimated employee costs of $4,011 during the liquidation period
and severance costs for all remaining employees and officers of the
Company.                                                    
|   
|(3) |  | The Company will no longer report a Balance Sheet but instead will
report a Consolidated Statement of Net Assets Available in Liquidation,
which does not include a stockholders equity section.
|   
|(4) |  | The pro forma adjustments do not address the period from January 1,
2002 through February 4, 2002 nor do they include any estimates for
pending or threatened litigation or claims.              
|   
|(5) |  | The Company will no longer report a Consolidated Statement of
Operations but instead will report a Consolidated Statement of Loss and
Changes in Net Assets.                                     

F-22



---



##### 



Schedule II

Advanced Switching Communications, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands)

|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|-------------------------- |  | ------------ | ----- | --------- |  | ---------- | ------ | ------ |  | ------ | - | ---------- |  | - | ------ | 
|                           |  | Balance At   |       |           |  |            |        |        |  |        |   | Balance At
|Reserves Deducted From     |  | Beginning of |       | Additions |  |            |        |        |  | End of
|Assets to Which They Apply |  | Period       |       | At Cost   |  | Deductions |        | Period
|                           |  |              |       |           |  |            |        |       
|2001                       |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Accounts receivable        |  | $            | 855   |           |  | $          | 1,674  |        |  | $      |  |            |  | $ | 2,529  | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Inventory                  |  | $            | 1,040 |           |  | $          | 19,048 |        |  | $      |  |            |  | $ | 20,088 | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|2000                       |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Accounts receivable        |  | $            |      |           |  | $          | 855    |        |  | $      |  |            |  | $ | 855    | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Inventory                  |  | $            | 175   |           |  | $          | 865    |        |  | $      |  |            |  | $ | 1,040  | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|1999                       |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Accounts receivable        |  | $            |      |           |  | $          |       |        |  | $      |  |            |  | $ |       | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 
|Inventory                  |  | $            |      |           |  | $          | 175    |        |  | $      |  |            |  | $ | 175    | 
|                           |  |              |       |           |  |            |        |        |  |        |   |            |  |   |        | 

33



---



##### 



Item 16. Exhibits and Financial Statement Schedules.

The following documents are filed as exhibits to this registration
statement:

|        |  |                                                                                                                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                             
|2.1     |  | Plan of Complete Liquidation and Dissolution (Filed herewith)                                                                                                                                                               
|       
|3.1     |  | Certificate of Incorporation of the Registrant, as amended and restated
(Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (File No. 333-40624))                                           
|       
|3.2     |  | By-laws of the Registrant, as amended and restated (Incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form S-1
(File No. 333-40624))                                                                
|       
|4.1     |  | Form of certificate of common stock (Incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-1 (File No.
333-40624))                                                                               
|       
|4.2     |  | Warrant to Purchase Common Stock granted to ICI Capital LLC
(Incorporated by reference to Exhibit 4.2 to the Registration Statement
on Form S-1 (File No. 333-40624))                                                       
|       
|10.1    |  | Executive Employment Agreement, dated as of August 31, 1998, between
the Registrant and Asghar D. Mostafa (Incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-1 (File No.
333-40624))        
|       
|10.2    |  | Form of Key Employee Employment Agreement (Incorporated by reference to
Exhibit 10.21 to the Registration Statement on Form S-1 (File No.
333-40624))                                                                       
|       
|10.3    |  | Advanced Switching Communications, Inc. 1998 Nonqualified Stock Option
Plan (Incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-1 (File No. 333-40624))                                      
|       
|10.4    |  | Advanced Switching Communications, Inc. Second 1998 Nonqualified Stock
Option Plan (Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 (File No. 333-40624))                               
|       
|10.5    |  | Advanced Switching Communications, Inc. 1999 Nonqualified Stock Option
Plan (Incorporated by reference to Exhibit 10.5 to the Registration
Statement on Form S-1 (File No. 333-40624))                                      
|       
|10.6    |  | Advanced Switching Communications, Inc. 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 (File No. 333-40624))                                                
|       
|10.7    |  | 8% Convertible Redeemable Class D Preferred Stock Securities Purchase
and Stockholder Agreement (Incorporated by reference to Exhibit 10.7 to
the Registration Statement on Form S-1 (File No. 333-40624))                  
|       
|10.8    |  | Amendment to the 8% Convertible Redeemable Class D Preferred Stock
Securities Purchase and Stockholders Agreement (Incorporated by
reference to Exhibit 10.8 to the Registration Statement on Form S-1
(File No. 333-40624))
|       
|10.9    |  | Second Amendment to the 8% Convertible Redeemable Class D Stock
Securities Purchase and Stockholders Agreement (Incorporated by
reference to Exhibit 10.9 to the Registration Statement on Form S-1
(File No. 333-40624))   
|       
|10.9A   |  | Waiver of IPO Purchase Rights, dated August 30, 2000 (Incorporated by
reference to Exhibit 10.9A to the Registration Statement on Form S-1
(File No. 333-40624))                                                            
|       
|10.10   |  | Form of Key Employee Stock Agreement (Incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1 (File No.
333-40624))                                                                            
|       
|10.10A  |  | Form of Amendment to Key Employee Stock Agreement (Incorporated by
reference to Exhibit 10.10A to the Registration Statement on Form S-1
(File No. 333-40624))                                                              
|       
|10.11   |  | Form of Indemnification Agreement, between the Registrant and each of
its directors and officers (Incorporated by reference to Exhibit 10.11
to the Registration Statement on Form S-1 (File No. 333-40624))                

34



---



##### 



|      |  |                                                                                                                                                                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|10.12 |  | Stockholders Agreement, dated as of August 31, 1998, between the
Registrant and Mostafa Investments Limited Partnership (Incorporated by
reference to Exhibit 310.12 to the Registration Statement on Form S-1
(File No. 333-40624))                                          
|     
|10.13 |  | American Center Lease Agreement between Met Life International Real
Estate Equity Shares, Inc. and Keyvan Rafie dated May 29, 1992
(Incorporated by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 (File No. 333-40624))                                 
|     
|10.14 |  | American Center Lease Agreement between Met Life International Real
Estate Equity Shares, Inc. and Advanced Switching Communications, Inc.
dated September 27, 1997 (Incorporated by reference to Exhibit 10.14 to
the Registration Statement on Form S-1 (File No. 333-40624))
|     
|10.15 |  | Assignment of Lease and Acceptance between Keyvan Rafie and Advanced
Switching Communications, Inc. (Incorporated by reference to Exhibit
10.15 to the Registration Statement on Form S-1 (File No. 333-40624))                                                                
|     
|10.16 |  | Procurement Agreement Between Qwest Communications Corporation and
Advanced Switching Communications, Inc. (Incorporated by reference to
Exhibit 10. 1 to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001)                                              
|     
|10.17 |  | Employment Agreement of Gary S. Wingo (Incorporated by reference to
Exhibit 10. 1 to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001)                                                                                                                    
|     
|10.18 |  | Separation Agreement and General Release of Ronald S. Westernik
(Incorporated by reference to Exhibit 10. 2 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001)                                                                                          
|     
|10.19 |  | Separation Agreement and General Release of James R. Loehndorf, Jr.
(Incorporated by reference to Exhibit 10. 3 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001)                                                                                      
|     
|10.20 |  | Separation Agreement and General Release of Glen A. Hunt (Incorporated
by reference to Exhibit 10. 4 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001)                                                                                                 
|     
|10.21 |  | Separation Agreement and General Release of Larry Kraft (Filed herewith)                                                                                                                                                                                                       
|     
|10.22 |  | Termination Letter of Harry J. DAndrea (Filed herewith)                                                                                                                                                                                                                       
|     
|10.23 |  | Termination Letter of Gary L. Wingo (Filed herewith)                                                                                                                                                                                                                           
|     
|10.24 |  | Termination Letter of Sherry L. Rhodes (Filed herewith)                                                                                                                                                                                                                        
|     
|10.25 |  | Termination Letter of Asghar D. Mostafa (Filed herewith)                                                                                                                                                                                                                       
|     
|10.26 |  | Morgan Stanley Fee Letter (Filed herewith)                                                                                                                                                                                                                                     
|     
|10.27 |  | Amendment to Morgan Stanley Fee Letter (Filed herewith)                                                                                                                                                                                                                        
|     
|23.1  |  | Consent of Deloitte & Touche LLP (Filed herewith)                                                                                                                                                                                                                              
|     
|24.1  |  | Power of Attorney (Included on signature page)                                                                                                                                                                                                                                 

35