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, 2000

COMMISSION FILE NUMBER 000-31529

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

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

8330 BOONE BOULEVARD, 8TH FLOOR
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 March 15, 2001 on the Nasdaq
Stock Market, the aggregate market value of registrants common stock held by
non-affiliates of the registrant was approximately $38,705,226.

As of March 15, 2001, there were 42,273,369 shares of registrants common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement, which is expected to
be filed with the Securities and Exchange Commission within 120 days after the
end of the registrants fiscal year, are incorporated by reference into Part
III of this Report.

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TABLE OF CONTENTS

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|Part I  
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|Item 1   |  | Business                                                                              |  |  | 3   | 
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|         |  | Risk Factors                                                                          |  |  | 15  | 
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|Item 2   |  | Properties                                                                            |  |  | 24  | 
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|Item 3   |  | Legal Proceedings                                                                     |  |  | 24  | 
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|Item 4   |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 24  | 
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|Part II 
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|Item 5   |  | Market for the Registrants Common Stock and Related Matters                          |  |  | 26  | 
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|Item 6   |  | Selected Consolidated Financial and Operating Data                                    |  |  | 27  | 
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|Item 7   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |  | 28  | 
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|Item 7A  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 35  | 
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|Item 8   |  | Financial Statements and Supplementary Data                                           |  |  | 35  | 
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|Item 9   |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure  |  |  | 35  | 
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|Part III
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|Item 10  |  | Directors and Executive Officers of the Registrant                                    |  |  | 35  | 
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|Item 11  |  | Executive Compensation                                                                |  |  | 35  | 
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|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 35  | 
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|Item 13  |  | Certain Relationships and Related Transactions                                        |  |  | 36  | 
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|Part IV 
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|Item 14  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |  | E-1 | 
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|         |  | Index To Financial Statements                                                         |  |  | F-1 | 

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PART I

ITEM 1 BUSINESS

Overview

Advanced Switching Communications, Inc. designs, builds and markets a line
of broadband access equipment for telecommunications service providers. With
our MultiStream technology and integrated family of network access
solutions, communications companies can rapidly and cost effectively deliver
the power of the Internet and advanced broadband services to their customers
around the world. By combining advanced, multi-service switching with robust
multiplexing, our technology and products enable carriers to rapidly and
cost-effectively deliver voice, data, multimedia and Internet-based traffic
across a wide range of facilities, including the most advanced, high speed
optical networks. We plan to add Internet Protocol (IP) capabilities to our
product portfolio in 2001. We create unique value by focusing on the access
portion of the global communications network  which is becoming increasingly
jammed with a widening variety of disparate data traffic. Our products are
deployed at central offices and points of presence that comprise the entry
points to a service providers access network. By extending the benefits of
packet technology beyond the network core to the access portion of the network,
our products reduce transmission and operating costs, increase the efficiency
of core network equipment, provide access to fiber optic core networks and
allow our customers to develop networks for advanced IP-based broadband
services. We market our products to telecommunications service providers
worldwide, focusing on established and emerging multi-service carriers

Industry Background

Internet Driving Data Traffic

Growth in broadband applications  Internet access, electronic commerce,
virtual private networks, intranets, extranets, integrated messaging, streaming
media, interactive conferencing and other content-based services  is driving
enormous growth in data traffic. In the past two years, the volume of Internet
traffic has increased nearly ten-fold, according to a recent study. This
explosion of data traffic, coupled with existing demand for voice traffic, is
placing significant strains on the existing network infrastructure,
particularly on the access portion of the communications network. Both
established and emerging service providers are deploying new network technology
that drives the benefits of packet switching closer to their customers,
reducing the access network bottleneck. Packet-based networks, which
transport voice and data in small digital bundles, or packets, use available
network bandwidth more efficiently than traditional circuit-switched telephone
networks, which were designed for voice traffic and built long before the
advent of the Internet. Packet-based networks offer a highly flexible,
cost-effective and efficient means to provide communications services,
including data, voice and multimedia. In the current economic environment,
carriers of all sizes face a need to spend wisely, speed return on investment,
streamline deployment and eliminate unnecessary equipment from their networks.
As a result, both established and emerging carriers are aggressively pursuing
equipment solutions that allow them to offer broadband services while
capitalizing on their investment in existing network infrastructure as they
migrate to the new world of ubiquitous IP networking.

Limitations of Existing Local Access Networks

Telecommunications service providers typically situate high-speed packet
transmission equipment at the core or backbone of their networks, but rely on
voice-oriented technology for their access networks. The access portion of the
network lies between the connection to the end-user, which often is referred to
as the last mile, and the edge of the network core. Access networks comprise
a system of central offices and points of presence, facilities that serve as
staging areas for the delivery of telecom services to the end user. Access
networks in most cases still employ the copper infrastructure originally built
to transmit analog voice signals. As a result of the technological constraints
of voice-oriented technology, existing access network architectures consist of
separate voice and data networks that operate with different transmission
protocols. These multiple or overlay networks are unable to efficiently satisfy
the demand for enhanced services. While the bandwidth capabilities of local
area networks (at customer premises) and fiber-based core networks have
dramatically increased, the access networks that link the two have not kept
pace.

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Existing access equipment alternatives do not adequately meet the needs of
service providers because:



| |  |  | Traditional access network equipment does not support broadband
services.                                                                                                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Existing packet-based solutions, known as edge switching equipment,
that do support broadband services are generally large, inflexible and
costly adaptations of core network products that are difficult to
install, operate and upgrade.

IP Migration

Communications companies face the reality that their business customers
want and use multiple types of broadband services that are transported over
different types of networks  Frame Relay and ATM are examples. As advanced
communications capabilities become increasingly important to business success,
these customers are building mission-critical applications on top of the
services they purchase from carriers. The result businesses change services
reluctantly and only with the greatest of care. Communications companies seek
ways to offer services over a single network architecture, because a unified
network would enable them to lower costs, speed provisioning and increase
profitability. To date, the typical protocol used to unify different network
architectures has been ATM, as it has the capability to piggyback other
protocols and services onto a single network backbone, while still being able
to offer customers guaranteed levels of service quality. ATM is known for
its ability to place controls on data traffic to ensure it is prioritized and
reaches its destination properly. One of ATMs strengths is its ability to
combine multiple services onto a single network, without impacting the quality
of the individual services. But ATMs quality of service advantages come at the
cost of additional processing that can add to the overall cost of transport and
cap network speeds.

With the dramatic growth of the Internet, the question for many
communications companies going forward will be to how best carry Internet
Protocol (or IP) traffic across their networks. Most of todays desktop
applications that require communications capabilities are based on IP. While
ATM can and does often carry IP traffic, it does incur additional processing
that limits its overall efficiency, especially when compared to IP. While
there is a movement to use native IP instead of ATM as a way to unify networks,
IP has its own limitations in the area of quality of service. The Internet
today, the most well-known IP network, operates as a best efforts network.
This means that the service provider makes a best effort to deliver customer
traffic to its destination but makes no guarantees on the speed or quality of
the service. While best efforts may seem to work for e-mail and basic
communications services today, most enhanced broadband services, like VPNs,
rely heavily on these service guarantees.

In the long run, we believe that the best network architecture is one that
enables carriers to transmit IP with guaranteed quality of service. A new
transmission protocol, Multi-Protocol Label Switching (MPLS) holds the promise
of achieving that goal, because MPLS incorporates ATM-like traffic controls
that many carriers want, without ATMs processing overhead and speed
limitations.

At ASC, we believe that carriers will migrate to an IP over MPLS (IP/MPLS)
network architecture in the coming years. However, their customers, todays
businesses, will change their services gradually, only when they are certain
sufficient levels of service quality are present. To prepare for this
transition, we are developing a family of next generation access equipment that
will provide carriers a smooth migration to the IP/MPLS environment and provide
new revenue opportunities by enabling carriers to offer their customers a range
of enhanced IP-based services, without requiring their customers to make
business-jarring changes.

Access Equipment Requirements for Broadband Service Providers

Increased demand for broadband services is forcing service providers to
invest in equipment that accelerates the delivery of broadband services to
customers. Service providers must reduce time-to-market, offer significant cost
advantages and provide differentiated and expanded service offerings in order
to win customers and gain market share. As a result, todays service providers
require multi-service access equipment with the following characteristics:



| |  |  | Scalability.With demand for broadband services growing rapidly
across all market segments, service
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| |   |  | providers need equipment suitable for all sized markets. In order for
service providers to grow their customer base profitably and increase the
breadth and number of available service offerings, this equipment must
scale in a linear fashion regardless of customer density.                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Multi-Service Support.Todays networks carry multiple
transmission types or protocols, including frame relay, ATM, IP and
time division multiplexing, or TDM. Global multi-billion dollar service
markets have been built around each of these protocols. Service
providers require a solution that adapts these multiple access
protocols to a single packet-based network. A unified solution can
dramatically streamline provisioning, create structural cost advantages
and simplify network architectures.                                                                                                                                                                                             
|
| |  |  | IP/MPLS Capabilities.With rapid acceptance of IP in enterprise
and core networks coupled with the development of new IP-enabled
network services, we believe IP/MPLS will be the protocol preferred by
most carriers in the future. As a result, we believe service providers
require the flexibility to incorporate IP technology into their
networks while preserving their investment in the existing network
infrastructure.                                                                                                                                                                                                                                                                            
|
| |  |  | Cost Effectiveness.Under pressure to increase profitability,
service providers are seeking equipment with low initial cost that will
allow them to build their packet networks rapidly and target customers
and markets that might otherwise go unserved. In addition, widely
deployed equipment must allow service providers to maintain low
operating costs by reducing the time and expense involved in
provisioning and upgrading services.                                                                                                                                                                                                                                                             
|
| |  |  | Space and Other Physical Requirements.The demand for broadband
services is causing service providers to extend their networks closer
to their customers in larger numbers of central offices, points of
presence and new locations, such as basements of multi-tenant units or
wireless communications towers. Space in these locations is limited and
expensive and may have insufficient power and cooling capacity
necessary to operate traditional networking equipment. Equipment
deployed at these sites must be compact and must have minimal power and
cooling requirements. However, this equipment must also comply with the
rigorous industry standards established for central office equipment.
|
| |  |  | Interoperability with Existing Systems.Service providers require
equipment that operates in conjunction with the exacting standards of
todays carrier network systems and preserves the value of their
existing networks. In addition, they seek a network architecture that
is not easily disrupted and that will maximize the performance of their
core network equipment, such as switches and routers.                                                                                                                                                                                                                                                                                                 
|
| |  |  | Rapid Provisioning and Response Times.Competitors in todays
telecommunications market are racing to expand their networks and
increase their market share. Service providers require a solution that
enables them to rapidly offer reliable integrated services on a wide
scale. Once deployed, their equipment must support quick response times
to end-user requests. Moreover, service providers need equipment that
can be configured from a remote terminal so that they can avoid sending
a technician to physically modify the equipment to add or change a
customers service.                                                                                                                     

The ASC Solution

Our product line is 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
have developed our MultiStream technology and our product line to meet the
protocol flexibility, price-point, scalability and interoperability
requirements of broadband service providers worldwide. Our innovative products
are easily integrated into the access network architecture and offer the
following benefits and features:



| |  |  | Enhanced Revenue Opportunities.Our product design and
multi-service capabilities help service providers generate additional
revenue by: 1) penetrating new markets; 2) expanding the types of
services and variety of service packages they can offer; and 3)
allowing them to provision services more rapidly. The relatively low
initial investment required to deploy our equipment enables service
providers to increase revenue growth by rapidly building and expanding
their network.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Migration to IP/MPLS.Our products will support an IP/MPLS
migration, beginning with the expected                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |  | introduction in 2001 of IP functionality into our product line. We expect
to test our most advanced offering, the A-4500, a powerful MultiStream
switch, multiplexer and IP router in the second half of this year and launch it commercially in 2002. We
also plan to introduce IP capability into our existing product set later
this year. Carriers anticipating a network migration to all-IP networks
will be able to preserve their existing investment because ASC products
will accommodate todays prevalent network protocols while providing a
smooth migration to IP as it becomes accepted and more widely deployed in
the network core.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Highly Scalable, Product Architecture.Our existing products are
designed to proportionally meet our customers network requirements. In
small markets, a carrier can deploy services with a single card in a
stackable platform and add platforms as it succeeds in adding traffic.
In large markets, carriers can deploy our multiple card A-4000 system
using the same individual cards from the stackable platforms,
preserving their investment as their customer base grows. Our scalable
product architecture allows service providers to target small and
medium sized markets that are prohibitively expensive to service using
other, less scalable technologies. We anticipate that customers whose
network requirements exceed the capacity offered by our existing A-4000
would be able to meet future needs with the A-4500.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Multi-Service Capabilities.Our products ports, the points of
entry that transmit and receive data to and from physical access lines,
are individually software configurable to support various transmission
protocols, including frame relay, ATM, and time division multiplexing
(TDM) (for voice). Our products also support enhancements to frame
relay and ATM, known as multi-link frame relay and inverse multiplexing
over ATM (IMA), respectively, that allow service providers to use
existing network capacity more efficiently and provide new broadband
services. By converting these protocols into a single network protocol,
we can significantly simplify a service providers core network and
reduce costs. In addition, new protocols can be added through software
instead of hardware. Our software-configurable ports eliminate the need
for service providers to pre-determine the number of ports dedicated to
each specific protocol or service. Service providers that use our
products can remotely configure ports for new services as end users
request them. In addition, a service provider can change a customers
service using software, with minimal service disruption and without
dispatching personnel to physically change a customers connection.
|
| |  |  | Reduced Operating Costs.Our products convert different end-user
services to a single format or protocol for transmission to the core
network, eliminating the need to deploy multiple core networks, one for
each service offered. Our products also aggregate the local access
lines that carry these services into fewer high-speed optical or
electrical connections to the core network, allowing core network
equipment to operate more efficiently. This service conversion and
access line aggregation reduces the costs of building and operating a
service provider network. Additionally, converging access services into
a single network protocol eliminates the complexity and expense of
deploying multiple overlay networks for each protocol or service
offered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Interoperability with Existing Systems.Since our products operate
with all leading core network components, service providers can
preserve and leverage the value of their existing investments. Our
products utilize industry standard protocols and have built-in software
flexibility to add new protocols as they are adopted and standardized
in the marketplace.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Space and Physical Design Advantages.The compact design and high
port density of our equipment means that it occupies minimal space at
central offices, multi-tenant office buildings, or other points of
presence. In addition, the lower power requirements and the low heat
output of our products allow service providers to deploy services to
locations previously excluded from the network because of the physical
limitations of the space. Finally, our products comply with Network
Equipment Building System (NEBS) level 3 standards, the most stringent
network facility standard set forth by Bellcore for central office
equipment. This means that they can be deployed in virtually any
central office in a service providers network.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Strategy

Our objective is to become a leading provider of network access solutions
that enable service providers worldwide to speed the profitable deployment of
IP-based and other advanced broadband services and applications

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to their customers. To achieve our objective, we enable service providers
to continue building high-speed networks that extend packet technology outward
from the network core to the access network and thereby eliminate the need for
and added cost of operating multiple single-protocol networks. Key elements of
our strategy include:

Broaden Customer Base Domestically and Internationally.We have won
strategic customer accounts with both established and emerging multi-service
carriers that have deployed our products in a variety of applications. In the
fourth quarter of 2000, we saw a shift in the mix of our customers toward more
established carriers, including Qwest Communications International, Inc., our
largest customer in the quarter. We will attempt to leverage this success to
generate increased sales by focusing global sales efforts on more established
carriers, publicizing strategic wins and developing marketing materials and
campaigns targeted at this market segment. For example, many established
multi-service carriers are positioning themselves to offer integrated
voice-data-multimedia services over a single network infrastructure, while some
are expanding and extending their packet-based networks to satisfy customers
bandwidth and networking demands. We will attempt to capitalize on these
developments by targeting incumbent local exchange carriers (ILECs),
inter-exchange carriers (IXCs), mobile wireless carriers, postal, telephone and
telegraph organizations (PTTs) abroad and other types of established service
providers building packet-based networks. We also will continue to seek
opportunities among emerging carriers, including competitive local exchange
carriers, independent DSL service providers and other new entrants building
packet-based networks.

Leverage Technology Leadership from Access into Core.We believe we have
established a technology leadership position in the market for broadband access
technology and products. Our family of products is designed for deployment in
hundreds or thousands of points of presence, central offices or multi-tenant
office buildings within a service providers network. Once our products are
installed in a service providers network, we can simplify its network
architecture and operations. To address evolving network needs, we will
continue to extend the capabilities of our product line by leveraging our
unique software-upgradeable design to support new protocols, specifically
IP/MPLS, greater numbers of end-users and higher speed optical connections, as
well as enhanced switching and routing capabilities. Moreover, as we add new
features and products, our solutions will gradually assume more functionality
previously relegated to core platforms, extending core capabilities to the
access portion of service provider networks.

Provide Customers with a Smooth Migration Path to a New Generation of
Networks, including IP/MPLS.Our existing product line is designed to support
the current infrastructures and services in the market with a software-based
architecture that supports new protocols and services without major hardware
changes. Today, the predominant network protocol used to provide integrated
multi-protocol services is ATM. We believe that IP will eventually assume
predominance. We plan to leverage our flexible architecture to allow our
customers to rapidly capture market share using ATM as a network protocol and
cost-effectively evolve their networks to support the IP/MPLS and optical-based
services of the future. We intend to accomplish this goal by integrating IP
capabilities into our existing products as well as our new product, the
A-4500.

Expand Our Global Sales Efforts and Our Customer Service and Support
Capabilities.We sell our products through our direct sales force and through
more than a dozen sales channel partners we have established in the United
States, Europe, Asia and Latin America. We plan to continue to expand our
direct sales force domestically and internationally, including expansion in our
overseas markets. There can be no assurance that these attempts will be
successful, or that there will be not interim interruptions or setbacks in our
rate of growth or absolute growth. To support our direct sales efforts, we
will continue to develop relationships with multiple distribution partners,
systems integrators, resellers and original equipment manufacturers to help
build acceptance of our products. We plan to complement our product line by
expanding our professional service and support organization designed to ensure
effective product implementations and high levels of customer satisfaction.

Continue to Outsource Product Manufacturing.Our manufacturing strategy
is based on the use of one or more contract manufacturers for the assembling,
testing, packaging, warehousing and shipping of our products. By continuing to
outsource the manufacturing of our products, we can continue to focus our
resources on product design and development, and executing sales and marketing
initiatives. In addition, outsourcing allows us to achieve economies of scale
in operating and purchasing while reducing the significant capital investments
required for manufacturing equipment and inventory management. Currently, we
use one primary contract manufacturer, Benchmark Electronics.

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Products

Our product family of broadband access equipment includes the A-1000,
A-2000, A-1240, A-3010, A-7010 and A-4000. Our unique, scalable architecture
provides cost effective access solutions at a variety of port densities, large
or small. Each of our compact, stackable MultiStream products, the A-1000, the
A-2000, the A-1240, and the A-3010 operates as a complete stand-alone system or
as a card or component in the A-4000, which contains 18 slots to house
these individual cards. The A-7010, introduced in late 2000, operates as a card
in the A-4000. The following table summarizes our product line. All of the
products set forth below are currently commercially available, except the
A-4500, a powerful MultiStream switch, multiplexer and IP router with
high-speed optical switching capabilities which is expected to be available for
testing in 2001and commercially available in 2002.

Single-Slot Products

|        |  |                                                                                                            |  |                                                                                    |  |                                                                                                                                                                     |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Product |  |                                                                                                            |  |                                                                                    |  |                                                                                                                                                                     |  | 
|Name    |  | Protocols Supported                                                                                        |  | Available Ports                                                                    |  | Applications                                                                                                                                                        |  | 
|A-1000  |  | ATM
Frame Relay
Inverse Multiplexing over ATM (IMA)
Multilink frame relay (MFR)
ATM-frame relay conversion |  |  12 T1/E1
 1 T3/E3                                                               |  | Low customer density points
of presence.                                                                                                                            |  | 
|        |  |                                                                                                            |  |                                                                                    |  |                                                                                                                                                                     |  | 
|       
|       
|       
|       
|A-2000  |  | ATM
Frame Relay
ATM-frame relay conversion                                                                 |  |  4 T3/E3
 1 OC-3c                                                                |  | Low customer density points
of presence or as
aggregation platform behind
multiple A-1000s, A-1240s,
and A-3010s or other
equipment with T3/E3 network
connections. |  | 
|        |  |                                                                                                            |  |                                                                                    |  |                                                                                                                                                                     |  | 
|       
|       
|       
|       
|A-1240  |  | ATM
Frame Relay
IMA
MFR
ATM-frame relay conversion
TDM (via ATM Circuit Emulation)
VLAN (over Ethernet)    |  |  24 T1/E1
 1 T3/E3
 1 10/100 BaseT
Ethernet                                     |  | Low to medium customer
density points of presence.
In-building points of
presence.                                                                                  |  | 
|        |  |                                                                                                            |  |                                                                                    |  |                                                                                                                                                                     |  | 
|       
|       
|       
|       
|A-3010  |  | ATM
Frame Relay
IMA
MFR
ATM-frame relay conversion
TDM (via ATM Circuit Emulation)
VLAN (over Ethernet)    |  |  28 T1/E1 (over
channelized T3/E3)
 1 T3/E3 (unchann.)
 1 10/100 BaseT
Ethernet |  | Low to medium customer
density points of presence.                                                                                                                  |  | 

Multi-Slot Products

|        |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|------- |  | ------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | 
|Product |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|Name    |  | Protocols Supported                                                                        |  | Available Ports                                                        |  | Applications                                                                    |  | 
|A-4000  |  | ATM                                                                                        |  | Access ports                                                           |  | Aggregation at high customer                                                    |  | 
|        |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|       
|       
|       
|       
|        |  | Frame Relay
IMA                                                                            |  |  up to 392 T1/E1                                                      |  | density points of presence
and at sites used to                                
|        |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|       
|       
|       
|       
|        |  | MFR                                                                                        |  |  56 T3/E3
Network ports                                               |  | aggregate traffic from                                                         
|        |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|       
|       
|       
|       
|        |  | ATM-frame relay conversion
TDM (via ATM Circuit Emulation)                                 |  |  4 OC-3c/ STM-1 or
 16 T3/E3 or
 4 OC-12c/ STM-4
with A-7010        |  | multiple smaller points of
presence or buildings.                              
|        |  |                                                                                            |  |                                                                        |  |                                                                                 |  | 
|       
|       
|       
|       
|A-4500  |  | IP/MPLS
ATM
Frame Relay
IMA
MFR
ATM-frame relay conversion
TDM (via ATM Circuit Emulation) |  | Scales from speeds of
DS-0 or 64 Kbps to
OC-48 and OC-192 or
9.95 Gbps |  | Switching at high customer
density points of presence
and at network hub sites. |  | 

8



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Technology and Product Architecture

Our product architecture, both existing and planned, is designed to give
service providers a platform to offer broadband services today while providing
a smooth migration path to the next generation of IP-based networks.

MultiStream Technology

Our unique MultiStream technology is the foundation of our revolutionary
approach to network access. With MultiStream, carriers can use a single
physical connection to provide their customers with a wide variety of advanced
transport services  ATM, Frame Relay, Multi-link Frame Relay (MFR), IP over
ATM, IP over Frame Relay and IMA. That means that customers can benefit from
more applications, faster speeds and lower costs.

Coupled with our powerful family of integrated network access switches and
multiplexers, MultiStream technology enables carriers to offer their customers
a wide variety of enhanced broadband services and applications at the most
competitive prices. The applications enabled by ASC include those that
customers want the most  virtual private networks, intranets, extranets,
relationship management tools and many content-based services.

A key component of MultiStream technology is a multi-service switch fabric
that we have designed explicitly for the needs of access networks. Our switch
fabric natively supports both cell-based (fixed length), and frame-based
(variable length) packet-oriented protocols without requiring conversion
between the protocols. Because cell-based protocols prioritize traffic and
ensure that time sensitive voice traffic is not delayed, the predominant
approach to providing integrated voice-data services in todays access networks
centers around cell-based protocols, such as ATM. Our products switch fabric
anticipates a migration to an IP approach. With native support of both cell-
and frame-based packet protocols, our switch fabric adapts to the needs of
todays access networks, while providing flexibility to evolve.

System-on-a-Card Design

The fundamental building block of our existing broadband access systems is
our system-on-a-card design. We have engineered compact entry-level systems
that contain all of the components necessary for a service provider to deliver
broadband services. With traditional systems, customers must make a
considerable upfront investment in costly equipment before installing the
components that connect to end-users. Our customers can stack our individual
single-slot products as the number of their end-users grows, and eventually
move to our A-4000 multi-slot product with considerably lower upfront costs
than with traditional equipment. In addition, the cards used in our single-slot
products may be removed and inserted into our A-4000 multi-slot product,
allowing our customers to preserve their initial investments.

Protocol Independent Ports

In traditional system architectures, the support of each service or
protocol is dependent on a separate hardware component. Many products were
designed to support a single type of service. Other products have incorporated
multiple services in a single system through separate physical components that
support different services. Our universal ports create a new paradigm by
eliminating the need for hardware dedicated to specific services. Through
software, our universal ports can be remotely configured for different
services. Because they are protocol-independent and software-configurable, our
ports can greatly simplify network planning and significantly reduce capital
expenditures on hardware, as service providers no longer need to install
separate components for different services.

Common Software Architecture

Our software architecture is scalable and identical for our existing
single-slot and existing multi-slot systems. One of our key-enabling features
is a high-performance and efficient software system that scales from a
stackable to our A-4000 multi-slot product. This system supports distributed
call control processing, bandwidth resource allocation and network
administration and management while providing a common view of management
information regardless of the size of the system. Another key feature we have
built into this design is a software

9



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system that determines where specific functions occur either locally or
remotely across a system. Both of these software features preserve a consistent
look and feel to the user. This facilitates network management and service
provisioning and allows customers to preserve their investment in network
management systems and our existing hardware as they grow their network into
higher densities and new services with the A-4000.

NxT1/E1 Capability

Most local access networks are based on connections that come in two
sizes: T1/E1 or T3/E3. There is a significant difference in capacity and cost
between the T1/E1, which represents 1.5/2.0 Mbps, and the T3/E3, which
represents 45/34 Mbps. Moreover, service providers typically take longer to
provision or deliver T3/E3 connections. In many smaller markets these larger
connections may not be readily available. ASCtechnology bridges the capacity
and cost gaps between T1/E1 and T3/E3. This technology bundles multiple
physical T1/E1s onto one logical connection that operates like a single large
pipe. The total capacity of a bundle equals the sum of the combined links.
However, if one of the T1/E1 connections should fail, the software adjusts the
capacity downward and continues using the remaining active T1/E1 lines,
providing a built-in source of network redundancy.

Our solution uses bundling technology for both ATM traffic, which is
called inverse multiplexing over ATM, or IMA, and frame relay traffic, which is
called multi-link frame relay, or MFR. Because all of our product ports are
configured with software, we believe we are the only equipment provider who can
support both IMA bundles and MFR bundles simultaneously on the same card. In
addition, the software configurability of our broadband access platforms allows
the service provider to add T1/E1 connections and increase the connection size
without interrupting service.

Service providers can apply our solution in two ways:



| |  |  | End-user applications and services. Service providers can bundle
connections from the central office or point of presence to the end-user
to offer a menu of access speeds between a T1/E1 and a T3/E3.                                                                                                                                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Internal service provider network connections.Our technology can
also be applied to connections from the central office to the network or
between points of presence, allowing the service provider to (1) save
money and avoid wasted capacity with a bundled connection instead of a
T3/E3 and (2) speed time to market by utilizing more readily available
T1/E1 connections when a T3/E3 connection is unavailable or will not be
available for several months.

Customers

We market to telecommunications and data communications service providers
worldwide, with a focus on established multi-service carriers building
packet-based networks.

Established Multi-Service Carriers

Established multi-service carriers are moving away from traditional
voice-oriented architectures and extending packet platforms into the far
reaches of their networks. Many are driving to offer integrated
voice-data-multimedia services over a single network infrastructure, while some
are expanding and extending their data networks to satisfy their customers
bandwidth and networking demands by adding services such as DSL. Our network
access solutions can be used by multi-service carriers to extend their networks
to new locations, offer additional and differentiated services and migrate to
an advanced architecture. Our customers that are multi-service carriers
include: Intermedia Communications Inc. and Qwest Communications.

Emerging Broadband Carriers

Other prospective customers include several different kinds of emerging
broadband carriers  recently deregulated independent telco operators, new
fixed wireless service providers, Internet service providers, competitive local
exchange carriers and independent DSL service providers. Many of these
carriers rely on packet network architectures to provide advanced broadband
services. Our customers that are emerging broadband service providers include:
Broadview Networks, Dishnet DSL, mPower Communications, Focal Communications
and

10



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Network Plus.

Sales and Marketing

We sell our family of network access solutions primarily through a direct
sales force domestically and internationally. We also drive awareness and
customer acceptance of our products through strategic relationships with
original equipment manufacturers, distributors and resellers. Because of our
focus on the access network, we have established co-marketing relationships
with a wide range of equipment providers operating either inside service
provider networks closer to the core or at the end-user location. We seek to
partner widely to deliver a complete, end-to-end solution to service providers.
To that end, we have a variety of co-marketing arrangements designed to extend
our reach into our service provider segments. As of December 31, 2000, our
sales and marketing organization consisted of 50 persons in 15 locations around
the world.

Sales

Direct Sales.Our direct sales force is regionally dispersed throughout
the United States, Europe, Asia and Latin America. Our sales force comprises
regional sales directors, managers and system engineers who manage customer
relationships and sell our products into different levels of the service
provider organization.

Distribution Channel Sales.We are developing relationships with more
than a dozen distribution partners and resellers around the world to extend our
market reach to additional service providers, including regional service
providers and independent telephone companies. These relationships will also
provide an additional product fulfillment channel. As of December 31, 2000, we
had agreements with Solunet, Technica Corporation, Walker Associates and
Westcon in the US and EquIP technologies in the United Kingdom.

Original Equipment Manufacturer Sales.We intend to use our relationships
with a limited number of original equipment manufacturers to expand our market
reach, especially in segments or application areas where we are part of a
complete solution. We currently have agreements with Advanced Fibre
Communications, Inc., AccessLan and Alidian.

International Sales.We are currently building our international sales
organization, primarily in Europe, Asia and Latin America. In addition, we seek
to develop strategic relationships with key system integrators and resellers to
build acceptance for our products. We anticipate that we will rely on these
types of relationships to a greater degree internationally than domestically.

Marketing

We have a variety of marketing programs and initiatives to support the
sale and distribution of our products. We target these activities to
prospective and existing customers, distribution partners and resellers, and
the trade press and analysts. Marketing activities include preparation of sales
tools, business cases, competitive analyses and other marketing collateral,
sales training, publication of customer deployments, new product information
and educational articles in industry journals, maintenance of our World Wide
Web site as well as an Intranet site, participation in technical conferences,
advertising in industry journals and other venues, and direct marketing to
prospective customers. We also participate in leading industry tradeshows
domestically and internationally.

Customer Service

Providing a high level of service and support is critical to establishing
and developing long-term customer relationships. Our expanding customer service
and support efforts are divided into three distinct functions that ensure full
market acceptance and effective implementation of our products. First, product
quality assurance seeks to ensure that the highest quality product is available
for sale to customers. Second, project management provides the technical
leadership, support and training to help existing or potential customers
understand new products in order to bring the product to revenue-generating
capability as quickly as possible. Finally, network support provides our
customers with ongoing support once the equipment has been sold and installed.
As our product base continues to expand, we intend to offer an enhanced level
of customer support on a post-product sale basis. Our customer service and
support organization comprises headquarters-based software, project and
application engineers and field-based

11



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network engineers. Services are delivered through Web-based support, by
phone or in person.

Research and Development

We have assembled a team of highly experienced networking professionals
recruited from industry-leading communications companies. Our product
development staff has successfully developed hardware and software products and
has expertise in the areas of voice, frame relay, ATM, IP, MPLS,
switching/routing, network management and provisioning for carrier-class
networks. The team includes hardware and software engineers, many with advanced
degrees and proven product successes for wide area switching and routing
systems. As of December 31, 2000, we employed 84 people in our research and
development staff, with plans to continue expanding all functional areas of our
research and development organization. Research and development expenses
totaled $3.7 million in 1998, $6.7 million in 1999 and $12.5 million in 2000.

Manufacturing

Our manufacturing operations consist of prototype development, materials
planning and procurement, final assembly, testing, systems integration, order
fulfillment and quality control. This subcontracting activity extends from
prototypes to full production and includes activities such as material
procurement, final assembly, test, control and shipment to our customers. We
design, specify and monitor all of the tests that are required to meet internal
and external quality standards. We maintain relationships with strategic
technology suppliers in tandem with Benchmark and utilize distribution channels
to help manage supply.

We currently subcontract the manufacturing and testing of substantially
all of our products through purchase orders with Benchmark Electronics. We have
not, however, entered into any long-term agreements with Benchmark Electronics.
Our reliance on Benchmark Electronics as our principal manufacturer exposes us
to a number of risks, including reduced control over manufacturing capacity,
product completion and delivery times, product quality and manufacturing costs.
If Benchmark Electronics is unable or unwilling to manufacture a sufficient
quantity of products for us, on the time schedules and with the quality that we
demand, we may not be able to fulfill customer orders on a timely basis and may
be forced to engage additional or replacement manufacturers. We have identified
potential alternative manufacturers if Benchmark terminates its relationship
with us. However, qualifying a new contract manufacturer and commencing a
volume production is expensive and time consuming. If we are required or choose
to change contract manufacturers, our revenue may decline and our customer
relationships may be damaged.

Competition

Our product line is focused on providing the next-generation access
solution for the access network. Many vendors have product lines that compete
in the broadband access equipment market. We believe that the principal
competitive factors for next-generation access equipment are:



| |  |  | scalability to high and low customer density locations with a cost-effective solution;
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | multi-service capability with service interworking;                                   
|
| |  |  | inherent support of voice, data, and multimedia traffic;                              
|
| |  |  | ability to support new protocols and services with software upgrades;                 
|
| |  |  | product innovation and speed to market;                                               
|
| |  |  | ability to react quickly to customer demands and requirements; and                    
|
| |  |  | price.                                                                                

Many of our current and potential competitors, including Alcatel, Cisco
Systems, Lucent Technologies, Marconi (Fore) and Nortel Networks, are large
public companies that have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do. As a result,
these competitors are able to devote

12



---



greater resources to the development, promotion, sale and support of their
products. In addition, competitors with large market capitalization or cash
reserves are much better positioned than we are to acquire other companies,
including our competitors, and thereby acquire new technologies or products
that may displace our product lines.

Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many
of our competitors have more extensive customer bases and broader customer
relationships than we do, including relationships with many of our current and
potential customers. Moreover, these competitors often have broader product
offerings than we do. These companies can leverage their customer relationships
and broader product offerings and adopt aggressive pricing policies to gain
market share. As a result, we may not be able to maintain a competitive
position against current or future competitors. Our failure to maintain and
enhance our competitive position within the market could seriously harm our
business, results of operations and financial condition.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual restrictions to protect our proprietary rights. We have
one U.S. patent, and we have filed a corresponding application under the Patent
Cooperation Treaty relating to the management of tunneling protocols. There can
be no assurance that these patent applications will be approved, that any
issued patents will protect our intellectual property or that third parties
will not challenge them. Furthermore, there can be no assurance that others
will not independently develop similar or competing technology or design around
any patents that may be issued. We also have four pending trademark
applications in the United States and three domain names.

We enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. There can be no
assurance that these precautions will prevent misappropriation or infringement
of our intellectual property. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our proprietary rights, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States.

The broadband access equipment industry is characterized by the existence
of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In particular, leading
companies in the data communications and networking markets have extensive
patent portfolios with respect to networking technology. In March 2000 we
received a letter from Nortel Networks Corporation alleging that a specific
feature of our products infringes one of Nortels patents relating to inverse
multiplexing over ATM. We believe that our products do not infringe the
relevant Nortel patent and we intend to contest this claim vigorously.
However, we cannot assure you that we will prevail in our objection to this
claim or any other claim Nortel may make with respect to other patents it owns,
nor can we assure you that this dispute will not result in litigation or that
an adverse result or judgment will not adversely affect our financial
condition. The Nortel claim could be time-consuming, result in costly
litigation and diversion of technical and management personnel, or require us
to develop non-infringing technology. If Nortel succeeds in its claim, we would
need to enter into royalty or license agreements. These royalty or license
agreements, if required, may not be available on acceptable terms, if at all.
If there is a successful claim of infringement or if we fail to develop
non-infringing technology or license the proprietary rights on a timely basis,
our ability to use certain technologies, products and brand names may be
limited and our business may be harmed.

From time to time, other third parties, including leading companies, have
asserted against others and may assert against us patent, copyright, trademark
and other intellectual property rights. We expect that we may increasingly be
subject to infringement claims as the numbers of products and competitors in
the market for broadband access equipment grow and the functionality of
products overlaps. If third parties assert claims or initiate litigation
against us or our manufacturers, suppliers or customers alleging infringement
of their proprietary rights with respect to our existing or future products, we
will be subject to risks similar to those described in the preceding paragraph.

We have agreed and may agree in the future to indemnify certain of our
customers against claims that our products infringe upon the proprietary rights
of others. We could incur substantial costs in defending ourselves and

13



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our customers against infringement claims. In the event of a claim of
infringement, we and our customers may be required to obtain one or more
licenses from third parties. We cannot assure you that we or our customers
could obtain necessary licenses from third parties at a reasonable cost or at
all.

We have licensed, and may license in the future, elements of our
trademarks, trade dress and similar proprietary rights to third parties. We
attempt under such licenses to ensure that these parties maintain the quality
of our brand, however, such third parties may take actions that could
materially and adversely affect the value of our proprietary rights or
reputation.

Litigation may be necessary in the future to enforce or defend our
proprietary rights or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of management and technical
resources. In addition, any inability to protect our proprietary rights may
harm our business and financial prospects.

We license from third parties software that is used in our products or is
required to develop new products or product enhancements. In the future,
third-party licenses may not be available to us on commercially reasonable
terms or at all. Third parties who hold exclusive rights to software technology
that we seek to license may include our competitors. If we are unable to obtain
any necessary third-party licenses, we would be required to redesign our
product or obtain substitute technology, which may perform less well, be of
lower quality or be more costly.

Government Regulation

In the United States, our products must comply with various regulations
and standards defined by the Federal Communications Commission, or FCC, and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications authorities
in various countries as well as with recommendations of the International
Telecommunication Union. Moreover, the encryption technology contained in our
products is subject to U.S. export controls, which limit our ability to
distribute some versions of our products outside of the United States and
Canada. If we do not comply with existing or evolving standards and regulations
or if we fail to obtain timely domestic or foreign regulatory approvals or
certificates, we would not be able to sell our products where these standards
or regulations apply, which may prevent us from sustaining our revenue or
maintaining profitability.

The jurisdiction of the FCC extends to the communications industry, to our
customers and to the products and services that our customers sell. Future FCC
regulations, or regulations set forth by other regulatory bodies, may adversely
affect the broadband access services industry. Regulation of our customers may
have a material adverse affect on our business, results of operations and
financial condition. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers
penetration into broadband access markets. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes may entail may cause
order cancellations or postponements of product purchases by our customers,
which would materially adversely affect our business, results of operations and
financial condition.

Employees

As of December 31, 2000, we had a total of 166 employees, of whom 160 were
based in the United States and 6 were based internationally. Eighty-four of
our employees are engaged in research and development, 16 in operations, 50 in
marketing and sales and 16 in finance and administrative functions.
Additionally, we hire consultants as necessary. We believe that our future
success will depend in significant part on our ability to attract and retain
highly skilled technical, marketing and management personnel. None of our
employees are represented by a labor union or subject to a collective
bargaining agreement. We believe that our relations with our employees are
good.

14



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RISK FACTORS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to the other information contained in this report or
incorporated by reference herein, the following factors should be considered
carefully in deciding to invest in our Company or to maintain or increase your
investment. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our business
operations. If any of these risks actually occur, this could seriously harm
our business, financial condition or results of operations. In that event, the
market price for our common stock could decline and you may lose all or part of
your investment.

Risks Related To Our Business and Financial Performance

Our Limited Operating History May Make It Difficult To Value And Evaluate
Our Business And Our Future Prospects

We commenced operations in September 1997 and commercially released our
first product in the first quarter of 1999. Your evaluation of the risks and
uncertainties of our business will be difficult because of our limited
operating history. In addition, our limited operating history means that we
have less insight into how technological and market trends may affect our
business. The revenue and income potential of our business and market are
unproven. You must consider our business and prospects in light of the risks
and difficulties typically encountered by companies in their early stages of
development, particularly those in new, rapidly evolving and highly competitive
markets such as the market for broadband access solutions.

We Have Incurred Substantial Losses To Date And May Not Be Able To Achieve
Or Maintain Profitability, Which Could Cause Our Stock Price To Decline

Since we began operations, we have incurred net losses in every fiscal
period. We incurred a net loss of $14.4 million in 2000 and our accumulated
deficit through December 31, 2000 was $31.0 million. We expect to incur net
losses in the future. Our operating losses have been due in part to the
commitment of significant resources to our research and development and sales
and marketing organizations. We expect our expenses to continue to increase in
an effort to develop our business and, as a result, we will need to generate
significant revenue to achieve profitability. We cannot be certain if or when
we will become profitable. Our failure to become profitable within the
timeframe expected by investors may adversely affect the market price of our
common stock.

Unexpected Fluctuations In Our Operating Results May Cause Our Stock Price
To Decline

Our operating results are difficult to forecast and may fluctuate
significantly from quarter to quarter. As a result of our limited operating
history, we do not have historical financial data for a significant number of
periods upon which to forecast quarterly financial performance. It is likely
that in some future quarters, our operating results may fall below the
expectations of investors or securities analysts, which could cause the price
of our common stock to fall substantially.

If We Fail To Increase Our Revenue, Or If We Experience Delays in
Generating Revenue, We Will Continue To Incur Substantial Operating Losses

We plan to significantly increase our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution
channels. We also plan to expand our general and administrative capabilities
to address the demands resulting from this offering and the continued growth of
our business. Our operating expenses are largely based on anticipated personnel
requirements and revenue trends, and a high percentage of our expenses are, and
will continue to be, fixed. In addition, we may be required to spend more in
research and development than originally budgeted in order to respond to
industry trends and our plans may be subject to substantial fluctuations and
deviation in any particular time period. As a result, if we fail to increase
our revenue, or if we experience delays in generating revenue, we will continue
to incur substantial operating losses.

15



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There Is Intense Competition In The Market For Broadband Access Solutions
And If We Fail To Compete Successfully, Our Revenue Could Decline And We Could
Experience Additional Losses

The market for broadband access solutions is new, rapidly evolving and
very competitive. We expect competition in this market to increase as a result
of a number of factors, including the entrance of new or larger competitors and
the introduction of new products or technologies. This competition could, among
other things:



| |  |  | divert sales from us;                                                                 
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | force us to charge lower prices;                                                      
|
| |  |  | force us to revise our marketing plans and strategies; and                            
|
| |  |  | adversely affect our strategic relationships with manufacturers, resellers and others.

If any of these risks occurred, our revenues could decline, our gross margins
could decrease, our expenses could increase and we could experience additional
losses. Our principal competitors may be different depending on the market we
target, and include large networking equipment companies such as Alcatel, Cisco
Systems, Lucent Technologies, Marconi (Fore) and Nortel Networks, as well as
companies such as Accelerated Networks, ADC Kentrox, and Tiara Networks.

Many of our current and potential competitors are large public companies
that have longer operating histories and significantly greater financial,
technical, marketing and other resources than we do. As a result, these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, competitors with large market
capitalization or cash reserves are much better positioned than we are to
acquire other companies, including our competitors, and thereby acquire new
technologies or products that may displace our product lines.

We Purchase Several Of Our Key Components From Single Sources, And We
Could Lose Revenue And Market Share If We Are Unable To Obtain A Sufficient
Supply Of Those Components

Several key components of our products are currently available from single
or limited sources with whom we have no guaranteed supply agreements,
including:



| |  |  | programmable chips supplied by Lucent Technologies;                             
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | asynchronous transfer mode, or ATM, chips supplied by Conexant Systems Inc.; and
|
| |  |  | circuit emulation chips supplied by PMC-Sierra, Inc.                            

If we are unable to obtain a sufficient supply of these or other critical
components from our current vendors:



| |  |  | we may be unable to manufacture and ship our products on a
timely basis, which could result in lost or delayed revenue, harm to
our reputation, increased manufacturing costs and exposure to claims
by our customers; and   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may be forced either to develop alternative sources of
supply or to modify the design of our products to use more readily
available components, which may take a long time and may involve
significant additional expense.

For example, during the first quarter of 2000, we encountered delays in
receiving programmable chips used in our A-1240 product, which resulted in
production delays. In addition, our vendors may increase their prices for these
components. Accordingly, the lack of alternative sources for these components
may also force us to pay higher prices for these components, which would cause
our gross margins to decrease.

16



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We Are Entirely Dependent On Our Line Of Broadband Access Platform
Products And Our Products May Not Be Readily Accepted

Widespread commercial acceptance of our products is critical to our future
success. To date, our A-1000, A-2000, A-1240, A-3010, and A-4000 products are
the only products that we have sold and we expect that revenue from these
products will account for a substantial portion of our revenue for the
foreseeable future. We intend to develop and introduce new products and
enhancements to existing products in the future. If our target customers do not
adopt, purchase and successfully deploy our current and planned products, our
revenue will not grow significantly. The acceptance of our products may be
hindered by:



| |  |  | the failure of prospective customers to recognize the value
of broadband access platform products;                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the reluctance of our prospective customers to replace or
expand their current access equipment, which may be supplied by more
established vendors, with our products; and
|
| |  |  | the emergence of new technologies or industry standards that
could cause our products to be less competitive or become obsolete.                                          

Because Most Of Our Sales Are Made Under Short-Term Purchase Orders, We
May Expend Significant Resources And Be Unable To Recover The Costs If Our
Customers Fail To Purchase Additional Products

Our contracts and purchase orders are separately negotiated with each of
our customers and the terms may vary widely. A majority of our sales are made
under short-term purchase orders for one or a few of our products at one time
instead of long-term contracts for large scale deployment of our products.
These purchase orders do not ensure that they will purchase any additional
products other than those specifically listed in the order. Moreover, since we
believe that these purchase orders represent the early portion of longer-term
customer programs, we expend significant financial and personnel resources and
expand our operations to be able to fulfill these programs. If our customers
fail to purchase additional products to expand their programs as we expect, we
may be unable to recover the costs we incurred.

Our Customer Contracts Allow Our Customers To Terminate Without
Significant Penalties

Our contracts are generally non-exclusive and contain provisions allowing
our customers to terminate them without significant penalties. Our contracts
also may specify the achievement of shipment, delivery and installation
commitments. If we fail to meet these commitments in a timely manner, our
customers may choose to terminate their contracts with us or impose monetary
penalties. If our customers elect to terminate their contracts with us, our
future revenues would be reduced.

We Depend Upon A Single Contract Manufacturer To Manufacture Substantially
All Of Our Products. If That Manufacturer Is Unable Or Unwilling To
Manufacture A Sufficient Quantity Of Our Products, Our Revenue May Decline And
Our Customer Relationships May Be Damaged

We currently subcontract the manufacturing and testing of all of our
products to Benchmark Electronics, an independent manufacturer with whom we
have no long-term agreement. Our reliance on a single manufacturer exposes us
to a number of risks, including reduced control over manufacturing capacity,
product completion and delivery times, product quality and manufacturing costs.
If, as we anticipate, we experience increased demand for our products and
introduce new products and product enhancements, the challenges we face in
managing our relationship with Benchmark will be increased. If Benchmark is
unable or unwilling to manufacture a sufficient quantity of products for us, on
the time schedules and with the quality that we demand:



| |  |  | we may not be able to fulfill customer orders on a timely basis; and
| | - |  | --------------------------------------------------------------------

17



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| |  |  | we may be forced to engage additional or replacement manufacturers, which is expensive and time consuming.
| | - |  | ----------------------------------------------------------------------------------------------------------

If that occurs, our revenue may decline and our customer relationships may be
damaged.

If We Fail To Predict Our Manufacturing And Component Requirements
Accurately, We Could Incur Additional Costs Or Experience Manufacturing Delays

We provide forecasts of our demand to our contract manufacturer and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our requirements, we may have excess
inventory, which could increase our costs and harm our relationships with our
contract manufacturer and component vendors by reducing our future orders. If
we underestimate our requirements, we may have an inadequate inventory of
components. Inadequate inventory could interrupt manufacturing of our products
and result in delays in shipments. In addition, lead times for materials and
components that we order are long and depend on factors such as the procedures
of, or contract terms with, a specific supplier and demand for each component
at a given time. In the case of some components in short supply, component
vendors have imposed strict allocations that limit the number of these
components they will supply to a given customer in a specified time period.
These vendors may choose to increase allocations to larger, more established
companies, which could reduce our allocations and harm our ability to
manufacture our products.

Due To The Long And Unpredictable Sales Cycle For Our Products, The Timing
Of Revenue Is Difficult To Predict And May Cause Our Operating Results To
Fluctuate Unexpectedly

The sales and deployment cycle for our products is lengthy and varies
substantially from customer to customer; it may extend for six months or more.
Established carriers, who comprise an increasing portion of our customer base,
tend to have longer sales cycles and more strenuous evaluation criteria. The
length of our sales cycle may cause our revenue and operating results to vary
unexpectedly from quarter to quarter. A customers decision to purchase our
products involves a significant commitment of its resources and a lengthy
evaluation and product qualification process. Consequently, we may incur
substantial expenses and devote senior management attention to potential
relationships that never materialize, in which event our investments will
largely be lost and we may miss other opportunities.

Our Customers May Experience Economic Pressures Which Could Adversely
Affect Our Results

Demand for our products depends on our customers requirements, which, may
be subject to abrupt changes in response to their own competitive pressures,
capital requirements and financial performance expectations. Unanticipated
reductions in the capital spending plans of our actual or potential customers
could have a material adverse effect on our business.

Because We Derive A Substantial Portion Of Our Revenue From A Limited
Number Of Customers, Any Loss Of Or Delay In Receiving Revenue From Those
Customers Could Significantly Damage Our Financial Performance

We have historically derived a significant portion of our revenue from a
relatively small number of customers. If any of these customers stop or delay
purchasing products or services from us, our financial performance would be
negatively impacted. Broadband Office and Qwest Communications, Inc.,
accounted for 36% and 19% of our revenue for the year ended December 31, 2000.
Most of our customers are not contractually obligated to purchase future
products or services from us, and they may discontinue doing so at any time.
In addition, although our largest customers will probably vary from period to
period, we anticipate that a small number of customers will continue to
represent a large percentage of our revenue in any given fiscal period.
Accordingly, the failure to obtain a significant order from a customer within
the fiscal period expected by us could have a significant adverse effect on our
financial performance for that fiscal period.

We Anticipate That The Average Selling Prices Of Our Products Will
Decline, Which Could Reduce Our Gross Margins And Revenue

Our industry has experienced rapid erosion of average product selling
prices. We anticipate that the

18



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average selling prices of our products will decline in response to competitive
pressures, increased sales discounts, new product introductions by our
competitors or other factors. We are seeking to improve our product design to
reduce our costs and increase our sales. If we are unable to do so, declines
in average selling prices will reduce our gross margins and revenue.

If Network Service Providers Choose A Protocol Other Than ATM For Their
Core Networks And We Are Not Able To Adapt To The Change, Our Target Market Could Be Reduced

While we have designed a product that is adaptable to many communications
protocols, our initial architecture is based on an ATM infrastructure. In the
service providers networks ATM competes with other protocols such as time
division multiplexing (TDM) and Internet protocol (IP). We believe that an
eventual migration to an IP-based protocol is likely. To the extent that
network service providers choose a protocol other than ATM for their core
networks, we may not be able to react in time or adapt to the change and our
target market could be substantially reduced.

If We Are Not Successful In Developing And Marketing, Or If We Are Delayed
In Introducing, New And Enhanced Products And Features That Keep Pace With
Technology And Our Customers Needs And Expectations, Our Sales And Competitive
Position Will Suffer

The market for broadband access solutions is characterized by rapidly
changing technologies, frequent new product introductions and evolving customer
requirements and industry standards. In order to remain competitive, we will
need to introduce on a timely basis new products or product enhancements that
offer significantly improved performance and features, at lower prices, and we
may not be successful in doing so. Some prior versions of our products were
released behind schedule. We anticipate that our new A-4500 will be
available for testing in 2001 and will be commercially available in 2002.
Delays in introducing new products and features, or the introduction of new
products which do not meet the evolving demands of our customers, could damage
our reputation and cause a loss of or delay in revenue.

If We Do Not Expand Our Direct And Indirect Sales Channels, We May Be
Unable To Increase Market Awareness And Sales Of Our Products, Which May
Prevent Us From Achieving And Maintaining Profitability

Our products and services require a technical sales effort targeted at
several key people within each of our prospective customers organizations.
Our sales efforts require the attention of sales personnel and specialized
system engineers with extensive experience in networking technologies.
Competition for these individuals is intense, and we may not be able to hire
sufficient numbers of qualified sales personnel and specialized system
engineers. We also plan to expand our relationships with resellers and
original equipment manufacturers. If we fail to develop or cultivate
relationships with significant resellers or original equipment manufacturers,
or if these resellers and original equipment manufacturers are not successful
in their sales efforts, our business may be harmed. Many of our resellers also
sell our competitors products. Failure to expand these channels could
adversely affect our revenues and operating results.

If We Do Not Expand Our Customer Service And Support Organization, We May
Be Unable To Increase Our Sales

In response to our growing base of product installations, we will need to
increase our customer service and support organization to support new and
existing customers. We generally do not enter into service contracts as part
of our sales process, and our products have not required extensive servicing to
date. However, as our product base continues to expand, we intend to offer an
enhanced level of customer support on a post-product sale basis both to
generate additional revenue opportunities and to distinguish us from our
competitors. Our products are complex and require highly trained customer
service and support personnel. Hiring customer service and support personnel
is difficult in our industry due to the limited number of people available with
the necessary technical skills. If we are unable to expand our customer
service and support organization and train our personnel rapidly, we may not be
able to increase sales.

19



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If We Are Not Able To Hire And Retain Qualified Personnel, Or If We Lose Key
Personnel, We May Be Unable To Manage Or Grow Our Business

The growth of our business and revenue depends in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly qualified sales and engineering personnel. Qualified personnel
are in great demand throughout our industry, particularly in the Washington,
D.C. metropolitan area. We may not be successful in hiring and retaining the
skilled personnel that we need.

Our future success also depends to a significant degree on the skills and
efforts of Asghar Mostafa, our co-founder, Chairman of the Board and Chief
Executive Officer, and on the ability of our other executive officers and
members of senior management to work effectively as a team. The loss of the
services of Mr. Mostafa or one or more of our other executive officers or
senior management members could have a material adverse effect on our financial
performance and ability to compete.

Our Company Has Grown Rapidly And Unevenly And We May Be Unable To Manage
Our Growth Effectively, Which Could Result In Lost Sales Or Disruptions To Our
Business

Our failure to effectively manage our recent and anticipated growth could
have a material adverse effect on the quality of our products, our ability to
retain key personnel and our financial performance. This growth has strained,
and may further strain, our management, operational systems and other
resources. To manage our growth effectively, we must be able to enhance our
financial and accounting systems and controls, integrate new personnel and
manage expanded operations. We may not be able to do so.

We Are Beginning To Expand Our International Business, Which Exposes Us to
Additional Risks That We Do Not Face In Our U.S. Business

In 2000, we derived approximately 5% of our revenue from sales outside the
United States, and we expect that percentage to increase as our business grows.
An expanded international business exposes us to a number of risks that we do
not have to address in our U.S. operations. These risks include:



| |  |  | longer sales cycles;                                                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | challenges and costs inherent in managing geographically dispersed operations;                                              
|
| |  |  | protectionist laws and business practices that favor local competitors;                                                     
|
| |  |  | difficulties in finding and managing local resellers;                                                                       
|
| |  |  | diverse and changing governmental laws and regulations, including
greater regulation of the telecommunications industry; and
|
| |  |  | foreign currency exchange rate fluctuations.                                                                                

If we are unsuccessful in addressing these risks, our international
business will not achieve the revenue or profits we expect.

If Our Products Do Not Comply With Evolving Industry Standards, We May
Lose Sales And Incur Additional Expenses

Our success depends in part on both the adoption of industry standards for
technologies in the broadband access solutions market and our products
compliance with those industry standards as different standards emerge, evolve
and achieve acceptance. The absence of industry standards for a particular
technology may prevent widespread adoption of products based on that
technology. In addition, because many technological developments occur prior
to the adoption of related industry standards, we may develop products that do
not comply with the industry standards that are eventually adopted, which would
hinder our ability to sell those products.

20



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Moreover, if a competitor obtains a leadership position in selling
broadband access products, that competitor may have the ability to establish de
facto standards within the industry.

If Our Products Contain Defects Or Fail To Perform Properly Or Work
Effectively With Our Customers Networks, We Could Lose Revenue And Incur
Damage To Our Reputation And Liability To Our Customers

Our products must work effectively with our customers existing networks,
which typically include products from a variety of different vendors and
utilize multiple protocol standards. The complexity of these networks makes it
difficult for us to ensure that our products will function properly within
these networks and also makes it difficult for us to identify the source of any
problems, which occur in the operation of our products. Despite testing by us
and our customers, our products may contain undetected software or hardware
errors, which result in product failures or poor product performance. We have
experienced such errors in the past in connection with new products and product
upgrades. We expect that such errors will be found from time to time in new or
enhanced products after we have already shipped the products. If our products
contain defects or fail to work properly, we may:



| |  |  | suffer a loss of or delay in revenue;                                        
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | incur additional expenses in our efforts to identify and remedy the problems;
|
| |  |  | suffer damage to our reputation; and                                         
|
| |  |  | be exposed to damage claims by our customers.                                

Claims By Nortel Networks Or Other Companies That We Are Infringing Their
Proprietary Rights Could Hinder Or Block Our Ability To Sell Our Products,
Subject Us To Significant Monetary Liability And Divert The Time And Attention
Of Our Management

The broadband access equipment industry is characterized by the existence
of a large number of patents and frequent claims and related litigation
regarding patent and other intellectual property rights. In particular,
leading companies in the data communications and networking markets have
extensive patent portfolios with respect to networking technology. Nortel
Networks Corporation has alleged that our products may infringe one or more of
Nortels patents. We believe that our products do not infringe Nortels
patents, and we intend to contest Nortels claim vigorously. However, we
cannot assure you that we will prevail in our objection to this claim or any
other claim Nortel may make with respect to other patents it owns, nor can we
assure you that this dispute will not result in litigation or that an adverse
result or judgment will not adversely affect our financial condition. The
Nortel claim could be time-consuming, result in costly litigation and diversion
of technical and management personnel, or require us to develop non-infringing
technology. If Nortel succeeds in its claim, we would need to enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be available on acceptable terms, if at all.

We expect that we may increasingly be subject to infringement claims as
the numbers of products and competitors in the market for broadband access
equipment grows and the functionality of products overlaps. If there is a
successful claim of infringement or if we fail to develop non-infringing
technology or license proprietary rights on a timely basis that may become
necessary, our ability to use technologies, products, and brand names may be
limited and our business may be harmed.

Our Competitive Position Would Be Adversely Affected If We Were Unable To
Protect Our Proprietary Rights

Our success and competitiveness are dependent to a significant degree on
the protection of our proprietary rights. We rely primarily on a combination
of copyrights, trademarks, trade secret laws and contractual restrictions and,
to a lesser extent, on patents to protect our proprietary rights. We have one
U.S. patent, and we have filed a corresponding application under the Patent
Cooperation Treaty relating to the management of tunneling protocols.

21



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There can be no assurance that these patent applications will be approved, that
any issued patents will protect our intellectual property or that third parties
will not challenge them.

We enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite these
precautions, we cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property. Others may be able to copy or reverse engineer aspects
of our products, to obtain and use information that we regard as proprietary or
to independently develop similar technology. If we are unable to protect our
trademarks and other proprietary rights against unauthorized use by others, our
reputation and brand name may be damaged and our competitive position may be
significantly harmed.

If We Make Acquisitions Or Strategic Investments, Our Stockholders Could
Be Diluted, We Could Incur Additional Debt, And We Could Assume Additional
Contingent Liabilities

We intend to consider investments in complementary companies, products or
technologies. While we have no current agreements to do so, we may buy
businesses, products or technologies in the future. If we make an acquisition
or investment, we may:



| |  |  | issue stock that would dilute your stock ownership;                            
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | incur debt, which would restrict our cash flow;                                
|
| |  |  | assume liabilities, which may result in additional costs;                      
|
| |  |  | incur amortization expenses related to goodwill and other intangible assets; or
|
| |  |  | incur large and immediate write-offs.                                          

We May Not Be Able To Successfully Integrate Or Manage The Acquisitions Or
Investments We Make

We have not completed any acquisitions or investments to date, so, as a
company, we have no experience in this area. Therefore, acquisitions or
investments made by us could involve numerous risks, including:



| |  |  | problems combining the purchased operations, technologies or products;                     
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | unanticipated costs;                                                                       
|
| |  |  | diversion of managements attention from our core business;                                
|
| |  |  | adverse effects on existing business relationships with suppliers and customers;           
|
| |  |  | risks associated with entering markets in which we have no or limited prior experience; and
|
| |  |  | potential loss of key employees, particularly those of the purchased organizations.        

We may not be able to successfully integrate businesses, products,
technologies or personnel that we might acquire in the future. Any failure to
do so could disrupt our business and seriously harm our financial condition.

We May Need Additional Capital To Fund Our Operations, Which May Not Be
Available

At December 31, 2000, we had approximately $112.5 million in cash, cash
equivalents and marketable securities. We believe that these amounts, combined
with proceeds from our recently completed offering and cash anticipated to be
available from future operations, will enable us to meet our working capital
and capital expenditure requirements for at least the next 12 months. However,
if cash from available sources is insufficient, or if cash is used to acquire
complementary companies, products or technologies, or for other uses not
presently planned, we

22



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may need additional capital. The development and marketing of new and enhanced
products and the expansion of our sales channels and associated support
personnel will require a significant commitment of resources. In addition, if
the market for broadband access solutions develops at a slower pace than
anticipated, if we are unable to complete development and introduction of our
new products on schedule, or if we fail to establish significant market share
and achieve a meaningful level of revenue, we may continue to incur significant
operating losses and utilize significant amounts of capital. As a result, we
could be required to raise substantial additional capital. Additional capital
may not be available to us at all, or if available, may be available only on
unfavorable terms. Any inability to raise additional capital when we require
it would materially adversely affect our business, results of operations and
financial condition.

Risks Related To The Securities Market

Our Stock Price May Be Volatile

An active public market for our common stock may not be sustained. The
market for technology stocks has been extremely volatile. The following
factors could cause the market price of our common stock to fluctuate
significantly:



| |  |  | our loss of a major customer;                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | the addition or departure of key personnel;                                                           
|
| |  |  | variations in our quarterly operating results;                                                        
|
| |  |  | announcements by us or our competitors of significant
contracts, new products or product enhancements;
|
| |  |  | acquisitions, distribution partnerships, joint ventures or capital commitments;                       
|
| |  |  | changes in financial estimates by securities analysts;                                                
|
| |  |  | our sales of common stock or other securities in the future;                                          
|
| |  |  | changes in market valuations of broadband access technology companies;                                
|
| |  |  | changes in market valuations of networking and telecommunications companies; and                      
|
| |  |  | fluctuations in stock market prices and volumes.                                                      

In addition, 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.

There May Be Sales Of A Substantial Amount Of Our Common Stock That Could
Cause Our Stock Price To Fall

Shares of our common stock began trading on the Nasdaq National Market on
October 5, 2000. Certain of our current stockholders hold a substantial number
of shares which are currently subject to lock-up agreements or other
restrictions limiting such stockholders ability to sell such shares. These
stockholders may be able to sell such shares in the public market in the near
future.

23



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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 December 31, 2000, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially own approximately 70.8% 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.

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. We lease an
additional 21,000 square feet in the same building under a lease that expires
on August 31, 2002. We also lease sales offices in Tampa, Boston, Denver,
Dallas and Atlanta. We believe that our facilities are adequate to meet our
current needs, and that additional facilities will be available as we expand in
the future.

ITEM 3 LEGAL PROCEEDINGS

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

ITEM 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, 2000.

Executive Officers

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                  
|                      
|                      
|                      
|                      
|Ronald S. Westernik    |  |     | 45 |          |  | Director, Senior Vice President-Business Development and
Strategy
|                      
|                      
|                      
|                      
|James R. Loehndorf, Jr |  |     | 45 |          |  | Vice President and Chief Scientist                               
|                      
|                      
|                      
|                      
|Harry J. DAndrea      |  |     | 44 |          |  | Chief Financial Officer                                          
|                      
|                      
|                      
|                      
|Glen A. Hunt           |  |     | 52 |          |  | Vice President-Engineering                                       
|                      
|                      
|                      
|                      
|Lawrence Kraft         |  |     | 34 |          |  | Vice President-Marketing                                         
|                      
|                      
|                      
|                      
|Jeffrey M. Range       |  |     | 40 |          |  | Vice President-Worldwide Operations                              
|                      
|                      
|                      
|                      
|Robert Stewart         |  |     | 47 |          |  | Chief Communications Officer                                     
|                      
|                      
|                      
|                      
|Sherry L. Rhodes       |  |     | 45 |          |  | Vice President, General Counsel and Secretary                    

Asghar D. Mostafahas served as our President, Chief Executive Officer and
Chairman of the 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

24



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division of Data General Corporation as well as co-founder and director of
engineering for International Communications, Inc., a developer of T1
multiplexers.

Ronald S. Westernikhas served as our Senior Vice President-Business
Development and Strategy since July 1999, as a director since our inception,
and previously served as our Vice President-Marketing from our inception to
June 1999. Prior to co-founding our company, Mr. Westernik was Vice President
of Marketing for the Broadband Access Communications Division at 3Com from June
1996 to June 1997. Mr. Westernik also spent 17-years with AT&T Corp., where he
held several positions including Director of Strategy and Planning for Systems
Marketing.

James R. Loehndorf, Jr.has served as our Vice President and Chief
Scientist since our inception. Prior to co-founding our company, Mr. Loehndorf
was Systems Architect for the Broadband Access Communications Division at 3Com
from October 1996 to September 1997. From May 1989 to October 1996, Mr.
Loehndorf was a senior member of the technical staff at Ameritech Corporations
Science and Technology Group, responsible for Ameritechs ADSL strategy. He
also served as a data-communications systems architect at ITT/Courier from May
1978 to May 1989.

Harry J. DAndreahas 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 serves on the board of
directors of Informax, Inc.

Glen A. Hunthas served as our Vice President-Engineering since June 1999
and as our Vice President-Product Development from January 1999 to June 1999.
Mr. Hunt joined our company from Netrix Corporation where he was Executive
Director of Network Products from July 1992 to January 1997 and Vice President
of Marketing from January 1997 to December 1998. Previously, he was Director of
Advanced Network Management for Sprint from April 1988 to June 1992 and
Director of Product Development at Dynatech Corporation from April 1985 to
March 1988.

Lawrence Krafthas served as our Vice President-Marketing since June 1999.
Prior to joining our company, Mr. Kraft was Vice President of Marketing for
NetFax Corporation from July 1998 to October 1998. Previously, he was Manager
of Product Marketing at U.S. Robotics (now 3Com) from August 1995 to October
1997, vice president of marketing at ISC from June 1995 to August 1995, and
held various positions with Sprint Corporation from June 1992 to June 1995,
including Group Product Manager for SprintLink Internet services.

Jeffrey M. Rangehas served as our Vice President-Worldwide Operations
since January 2000. Mr. Range joined our company from Newbridge Networks, Inc.,
where he held several management positions including Vice President, NSA
Operations from September 1996 to November 1999. Mr. Range also served as Vice
President, Corporate Planning and Logistics for Newbridge Networks, Inc. in
Canada from September 1993 to September 1996.

Robert Stewarthas served as our Chief Communications Officer since
December 2000. Prior to joining our Company, Mr. Stewart served as Senior Vice
President for Communications at Teligent, Inc. from May 1997 to November 2000.
Mr. Stewart served as Director of Public Policy Communications for MCI, Inc.
from September 1995 to April 1997 and as Director of Communications for the
Washington office of Pacific Telesis Group, prior to its acquisition by SBC
Communications, from December 1993 to August 1995. Previously, he was a
Washington correspondent for the Los Angeles Times.

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 December 1997 to March 2000, and Vice President, General Counsel of I-NET,
Inc. from October 1994 until December 1997.

25



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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. Prior to
that date, there was no public market for the common stock. For the period from
October 5 through December 31, 2000, the high and low sale prices per share of
our common stock on the Nasdaq Stock Market were $22.016 and $3.75, respectively.

As of March 15, 2001, there were approximately 102 holders of record of
our common stock. On March 15, 2001, the last sale price reported on the Nasdaq
Stock Market for our common stock was $3.00 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.

Recent Sales of Unregistered Securities.

On March 10, 2000, we issued to one of our customers a warrant to purchase
125,000 shares of common stock at an exercise price of $15.00 per share. This
warrant was amended and restated on June 30, 2000. The warrant has vested, and
if not sooner exercised, this warrant will remain outstanding until June 30,
2007. The warrant may be exercised earlier depending on the timing and amount
of products purchased. The issuance of this warrant was exempt from
registration pursuant to Section 4(2) of the Securities Act.

On June 21, 2000, we issued to one of our customers a warrant to purchase
222,000 shares of common stock at an exercise price of $8.00 per share. The
warrant vested immediately upon issuance and is exercisable at any time until
June 21, 2003. The issuance of this warrant was exempt from registration
pursuant to Section 4(2) of the Securities Act.

On June 30, 2000, we issued 67,567 shares of Class E preferred stock to
Robert Ted Enloe, III for a purchase price of $500,000 or $7.40 per share.
These shares were converted into 69,078 shares of common stock at the
completion of the initial public offering on October 10, 2000. The issuance of
these shares was exempt from registration pursuant to Section 4(2) of the
Securities Act.

On August 25, 2000, we issued to one of our vendors a warrant to purchase
12,500 shares of common stock at an exercise price of $13.00 per share. The
warrant vested immediately upon issuance and is exercisable until August 25,
2003. The issuance of this warrant was exempt from registration pursuant to
Section 4(2) of the Securities Act.

From July 1, 2000 to October 4, 2000, we issued 120,250 unregistered
shares of common stock pursuant to the exercise of stock options at exercise
prices ranging from $1.50 to $9.00 per share, a weighted-average exercise price
of $5.44 per share. All of these stock options were granted under our stock
option plans prior to our initial public offering. The issuance of these shares
was exempt from registration pursuant to Section 4(2) of, or Rule 701
promulgated under, the Securities Act.

On October 10, 2000, we issued a total of 23,100,902 shares of common
stock upon conversion of our outstanding convertible preferred stock. The
issuance of these shares was exempt from registration pursuant to Section
3(a)(9) of the Securities Act.

26



---



ITEM 6      SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |        |     |        | 
|------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | -------------------------- | ------------------------ | --- | -------------- | --- | ------------ | ----- | ---------------------------------------- | ----- | ------- | ----- | -- | ------ | ------- | ------ | --- | ------ | 
|                                                                                                 |                                                                                    |                            |                          |     | Period from   
|                                                                                                 |                                                                                    |                            |                          |     | Inception     
|                                                                                                 |                                                                                    |                            |                          |     | (September 10,
|                                                                                                 |                                                                                    |                            |                          |     | 1997)          |     | Year Ended  
|                                                                                                 |                                                                                    |                            |                          |     | through        |     | December 31,
|                                                                                                 |                                                                                    |                            |                          |     | December 31,   |     |             
|                                                                                                 |                                                                                    |                            |                          |     | 1997           |     | 1998         |       | 1999                                     |       | 2000   
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |        
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       | (in thousands, except per share amounts)
|Statement of Operations Data:                                                                   
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Revenue                                                                                          |                                                                                    | $                          |                         |     |                | $   |             |       |                                          | $     | 4,278   |       |    | $      | 37,381  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Cost of revenue                                                                                  |                                                                                    |                            |                         |     |                |     |             |       |                                          |       | 2,839   |       |    |        | 24.890  |       
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|Gross profit                                                                                     |                                                                                    |                            |                         |     |                |     |             |       |                                          |       | 1,439   |       |    |        | 12,491  |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Operating expenses:                                                                             
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Research and development, excluding
stock   compensation amortization
amounts(1)   |                            |                          | 111 |                |     |              | 3,717 |                                          |       |         | 6,718 |    |        |         | 12,510 |    
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Sales and marketing, excluding stock
compensation   amortization
amounts(1)        |                            |                          | 73  |                |     |              | 799   |                                          |       |         | 3,209 |    |        |         | 12,821 |    
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | General and administrative, excluding
stock   compensation amortization
amounts(1) |                            |                          | 125 |                |     |              | 611   |                                          |       |         | 1,251 |    |        |         | 3,006  |    
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Amortization of stock
compensation(1)                                              |                            |                          |    |                |     |              |      |                                          |       |         | 42    |    |        |         | 1,760  |    
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|                                                                                                 |                                                                                    |                            | Total operating expenses |     |                | 309 |              |       |                                          | 5,127 |         |       |    | 11,220 |         |        |     | 30,097 | 
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|Loss from operations                                                                             |                                                                                    |                            | (309                     | )   |                |     | (5,127       | )     |                                          |       | (9,781  | )     |    |        | (17,606 | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Other income, net                                                                                |                                                                                    |                            | 16                       |     |                |     | 16           |       |                                          |       | 452     |       |    |        | 3,173   |       
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|Net loss                                                                                         |                                                                                    |                            | (293                     | )   |                |     | (5,111       | )     |                                          |       | (9,329  | )     |    |        | (14,433 | )     
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|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 | )     
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|Basic and diluted net loss per share                                                             |                                                                                    | $                          | (0.05                    | )   |                | $   | (0.48        | )     |                                          | $     | (1.01   | )     |    | $      | (1.01   | )     
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|Shares used in computing net loss per
share                                                      |                                                                                    |                            | 5,742                    |     |                |     | 11,389       |       |                                          |       | 11,789  |       |    |        | 18,515  |       
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|(1) Amortization of stock compensation
amounts:                                                 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                                                                    | Research and development   |                          | $   |               |     |              | $     |                                         |       |         | $     | 5  |        |         | $      | 786 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                                                                    | Sales and marketing        |                          |     |               |     |              |       |                                         |       |         |       | 35 |        |         |        | 779 |       
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 |                                                                                    | General and administrative |                          |     |               |     |              |       |                                         |       |         |       | 2  |        |         |        | 195 |       
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       
|                                                                                                 |                                                                                    | $                          |                         |     |                | $   |             |       |                                          | $     | 42      |       |    | $      | 1,760   |       
|                                                                                                 |                                                                                    |                            |                          |     |                |     |              |       |                                          |       |         |       |    |        |         |       



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

27



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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 Form 10-K and similar discussions in
our registration statement declared effective by the SEC on October 4, 2000,
discuss some of the important risk factors that may affect our business,
results of operations and financial condition. You should carefully consider
those risks, in addition to the other information in this report and in our
other filings with the SEC before deciding to invest in our company or to
maintain or increase your investment. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason. The information
contained in this Form 10-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 disclosure made by us in this report
and in our other reports filed with the SEC that discuss our business in
greater detail.

OVERVIEW

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

From our inception in September 1997 through the fourth quarter of 1998,
we were a development stage company and had no revenue and our operating
activities related primarily to research and development, developing and
testing prototype products, building our technical support infrastructure,
staffing our marketing, sales and customer service organizations, and
establishing relationships with suppliers, manufacturers and potential
customers. We commenced shipments of our products in the first quarter of
1999. Since our inception, we have incurred significant losses, and as of
December 31, 2000, we had an accumulated deficit of $31.0 million.

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

We market and sell our products primarily through a direct sales and
marketing organization and, to a lesser extent through resellers and original
equipment manufacturers. We depend on a relatively small number of customers
for a large percentage of our revenue in any particular quarter. For the year
ended December 31, 2000, Broadband Office accounted for 36% of our revenue and
Qwest Communications, Inc. accounted for 19% of our revenue. For the year
ended December 31, 1999, 2nd Century Communications and AccessLan accounted for
22% and 53% of our revenue, respectively. While the level of sales to any
specific customer is anticipated to vary from period to period, we expect that
we will continue to have significant customer concentration in the foreseeable
future. In addition to the customer concentration we have experienced, we have
a lengthy sales cycle for our products, which may extend for six months or
more, and there is often a significant delay between the time we incur expenses
and the time we realize the related revenue. Moreover, we have historically
derived a significant portion of our revenue from sales that occur near the end
of a fiscal quarter. As a result, delays in anticipated sales are more likely
to result in deferral of the associated revenue beyond the end of a particular
quarter, which could have a significant impact on our operating results for
that quarter.

Despite increased revenues, we have not achieved profitability on a
quarterly or an annual basis, and anticipate that we will continue to incur net
losses. We expect to continue to incur significant sales and marketing,
research

28



---



and development and general and administrative expenses and, as a result,
we will need to generate significant revenues to achieve and maintain
profitability.

Our cost of revenue includes all costs associated with the production of
our products, including cost of materials, manufacturing and assembly costs
paid to contract manufacturers, manufacturing start-up expenses and
manufacturing personnel, including related overheads. Because we outsource our
manufacturing and assembly requirements, a significant portion of our
manufacturing expenses consist of payments to third-party contract
manufacturers. Manufacturing engineering and documentation controls are
performed at our facility in Vienna, Virginia. During the fourth quarter of
1999 we engaged a new contract manufacturer, Benchmark Electronics, and
modified our manufacturing arrangements to increase the scope of activities
outsourced. Prior to that time, we retained responsibility for negotiating
with various suppliers and purchasing product components, and the
responsibility of our manufacturer was limited to assembling and testing the
products. Under our present turnkey arrangements, we have outsourced number of
additional tasks for which we had previously been responsible, including:



| |  |  | determining the supply of components necessary to build the product;
| | - |  | --------------------------------------------------------------------
|
| |  |  | negotiating with, and ordering components from, suppliers; and      
|
| |  |  | purchasing and maintaining an inventory of product components.      

Our gross margin for the year ended December 31, 2000 was negatively
affected by:



| |  |  | increased manufacturing costs associated with (1) early production
of one of our products, the A-1240, which at such time was our most
complex product, and (2) the changes in our manufacturing process
described above; and,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | strategic price reductions implemented to penetrate a high volume,
high growth target market, which should not account for a significant
portion of our revenue in 2001.                                                      

We expect that continued increases in production volumes and further
improvement in the design of the A-1240 will allow more efficient production of
the product and will continue to improve margins in comparison to the margins
we experienced in 2000. We also expect our new manufacturing arrangements to
contribute to improved margins in the near future as Benchmark becomes more
familiar with our products, and we begin to benefit from additional purchasing
power as a result of increases in production volume. In addition, as our
products gain acceptance in new target markets, we expect our margins to
benefit from reduced costs due to volume and product design changes.

We believe that our gross margins will continue to be adversely affected
primarily by the following factors:



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

We will attempt to improve margins by increasing sales of software
options, which generally have a higher gross margin than hardware components,
and by increased volume and improved management of our arrangements with our
contract manufacturers. There can be no assurance that we will successfully
improve our margins. Research and development expenses consist primarily of
salaries and related personnel costs, prototype costs and other costs related
to the design, development, testing and enhancement of our products. To date,
we have expensed our research and development costs as they were incurred.
Several components of our research and development effort require significant
expenditures, the timing of which can cause quarterly variability in our
expenses. We incur significant expenses in connection with the purchase of
testing equipment for our products. We believe that research and development is
critical to our strategic product development objectives and intend to enhance
our technology to meet the changing requirements of our customers. As a
result, in the future, we expect our research and development expenses to
increase in absolute dollars, but decline as a percentage of revenue.

Sales and marketing expenses consist primarily of salaries and related
personnel costs, commissions, promotional, travel and other marketing expenses
and recruiting expenses. We intend to increase our direct sales efforts,
continue to explore effective ways to expand our operations internationally,
hire additional sales and

29



---



marketing personnel, initiate additional marketing programs and establish
sales offices in new locations. As a result, in the future, we expect our
sales and marketing expenses to increase in absolute dollars, but decline as a
percentage of revenue.

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

Amortization of stock compensation represents the amortization of costs
incurred in connection with option grants 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 which represents the period to which the
employees services relate.

RESULTS OF 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.

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

30



---



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, the
Company 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. 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.

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.

Net Operating Loss Carryforwards.As of December 31, 2000, we had
approximately $24.3 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. See   Net Operating Loss Carryforwards on page 33 below.

YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998

Revenue. We did not generate any revenue in 1998. In 1999 our revenue was
$4.3 million from sales of our A-1000, A-2000 and A-1240 products.

Cost of Revenue. We did not incur any cost of revenue in 1998. In 1999
our cost of revenue was $2.8 million, and our gross margin was 33.6%.

Research and Development Expenses. Our research and development expenses
increased by approximately $3.0 million, or 81%, from $3.7 million in 1998 to
$6.7 million in 1999, representing 72% and 60% of total operating expenses for
1998 and 1999, respectively. The increase in research and development expenses
was due principally to an increase in the number of research and development
personnel and related costs associated with the development of the A-1000,
A-1240, A-2000, A-3010 and A-4000 products as well as enhancements to the
features and functionality of those products.

Sales and Marketing Expenses. Our sales and marketing expenses increased
by approximately $2.4 million, or 302%, from $799,000 in 1998 to $3.2 million
in 1999, representing 16% and 29% of total operating expenses for 1998 and
1999, respectively. The increase in sales and marketing expenses reflects the
hiring of additional sales and marketing personnel, sales based commissions and
marketing program costs including web development costs, trade shows,
advertising and product launch activities.

General and Administrative Expenses. Our general and administrative
expenses increased by approximately $640,000, or 105%, from $611,000 in 1998 to
$1.3 million in 1999, representing 12% and 11% of total operating expenses for
1998 and 1999, respectively. The increase was due to the hiring of additional
general and administrative personnel and expenses necessary to support our
growing operations.

Other Income, Net. Other income, net of expenses increased by
approximately $436,000 from $16,000 in 1998

31



---



to $452,000 in 1999. 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 1999,
partially offset by increased interest expense on bank debt.

Net Operating Loss Carryforwards. As of December 31, 1999, we had
approximately $14.7 million of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income. See  Net Operating Loss Carryforwards on page 35 below.

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, |      
|                              |                                                                                      |                            |                          |       | 1999                   |       | 1999     |       | 1999      |       | 1999     |      
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |      
|                              |                                                                                      |                            |                          |       | (DOLLARS IN THOUSANDS)
|STATEMENT OF OPERATIONS DATA:
|                             
|                             
|                             
|                             
|Revenue                       |                                                                                      | $                          | 186                      |       |                        | $     | 216      |       |           | $     | 1,201    |       |   | $     | 2,675 
|                             
|                             
|                             
|                             
|Cost of revenue               |                                                                                      |                            | 161                      |       |                        |       | 176      |       |           |       | 727      |       |   |       | 1,775 
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|                              | Gross profit                                                                         |                            |                          | 25    |                        |       |          | 40    |           |       |          | 474   |   |       |        | 900  
|                             
|                             
|                             
|                             
|Operating expenses:          
|                             
|                             
|                             
|                             
|                              | Research and development,
  excluding stock compensation
  amortization amounts(1)   |                            |                          | 1,410 |                        |       |          | 1,611 |           |       |          | 1,548 |   |       |        | 2,149
|                             
|                             
|                             
|                             
|                              | Sales and marketing, excluding
  stock compensation
  amortization amounts(1)        |                            |                          | 561   |                        |       |          | 731   |           |       |          | 698   |   |       |        | 1,219
|                             
|                             
|                             
|                             
|                              | General and administrative,
  excluding stock compensation
  amortization amounts(1) |                            |                          | 238   |                        |       |          | 246   |           |       |          | 397   |   |       |        | 370  
|                             
|                             
|                             
|                             
|                              | Amortization of stock
  compensation(1)                                              |                            |                          |      |                        |       |          |      |           |       |          |      |   |       |        | 42   
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|                              |                                                                                      |                            | Total operating
expenses |       |                        | 2,209 |          |       |           | 2,588 |          |       |   | 2,643 |        |       |    | 3,780
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|Loss from operations          |                                                                                      |                            | (2,184                   | )     |                        |       | (2,548   | )     |           |       | (2,169   | )     |   |       | (2,880 | )    
|                             
|                             
|                             
|                             
|Other income, net             |                                                                                      |                            | 75                       |       |                        |       | 17       |       |           |       | 19       |       |   |       | 341   
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|Net loss                      |                                                                                      | $                          | (2,109                   | )     |                        | $     | (2,531   | )     |           | $     | (2,150   | )     |   | $     | (2,539 | )    
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|                             
|                             
|                             
|                             
|                             
|(1) AMORTIZATION OF STOCK    
|                             
|                             
|                             
|                             
|                              |                                                                                      | COMPENSATION AMOUNTS:     
|                             
|                             
|                             
|                             
|                              |                                                                                      | Research and development   |                          | $     |                       |       |          | $     |          |       |          | $     |  |       |        | $     | 5 
|                             
|                             
|                             
|                             
|                              |                                                                                      | Sales and marketing        |                          |       |                       |       |          |       |          |       |          |       |  |       |        |       | 35
|                             
|                             
|                             
|                             
|                              |                                                                                      | General and administrative |                          |       |                       |       |          |       |          |       |          |       |  |       |        |       | 2 
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       
|                              |                                                                                      | $                          |                         |       |                        | $     |         |       |           | $     |         |       |   | $     | 42    
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |   |       |       

|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |       |     |       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------ | -------------------------- | ------------------------ | ----- | ---------------------- | ----- | -------- | ----- | --------- | ----- | -------- | ----- | --- | ----- | ------ | ----- | --- | ----- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                              |                                                                                      |                            |                          |       | QUARTER ENDED         
|                              |                                                                                      |                            |                          |       |                       
|                              |                                                                                      |                            |                          |       | MAR. 31,               |       | JUNE 30, |       | SEPT. 30, |       | DEC. 31,
|                              |                                                                                      |                            |                          |       | 2000                   |       | 2000     |       | 2000      |       | 2000    
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |         
|                              |                                                                                      |                            |                          |       | (DOLLARS IN THOUSANDS)
|STATEMENT OF OPERATIONS DATA:
|                             
|                             
|                             
|                             
|Revenue                       |                                                                                      | $                          | 4,994                    |       |                        | $     | 7,939    |       |           | $     | 11,016   |       |     | $     | 13,433 |      
|                             
|                             
|                             
|                             
|Cost of revenue               |                                                                                      |                            | 3,777                    |       |                        |       | 5,779    |       |           |       | 7,271    |       |     |       | 8,063  |      
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|                              | Gross profit                                                                         |                            |                          | 1,217 |                        |       |          | 2,160 |           |       |          | 3,745 |     |       |        | 5,370 |    
|                             
|                             
|                             
|                             
|Operating expenses:          
|                             
|                             
|                             
|                             
|                              | Research and development,
  excluding stock compensation
  amortization amounts(1)   |                            |                          | 2,651 |                        |       |          | 2,877 |           |       |          | 3,292 |     |       |        | 3,690 |    
|                             
|                             
|                             
|                             
|                              | Sales and marketing, excluding
  stock compensation
  amortization amounts(1)        |                            |                          | 1,453 |                        |       |          | 5,090 |           |       |          | 2,878 |     |       |        | 3,401 |    
|                             
|                             
|                             
|                             
|                              | General and administrative,
  excluding stock compensation
  amortization amounts(1) |                            |                          | 476   |                        |       |          | 485   |           |       |          | 580   |     |       |        | 1,465 |    
|                             
|                             
|                             
|                             
|                              | Amortization of stock
  compensation(1)                                              |                            |                          | 129   |                        |       |          | 362   |           |       |          | 634   |     |       |        | 635   |    
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|                              |                                                                                      |                            | Total operating
expenses |       |                        | 4,709 |          |       |           | 8,814 |          |       |     | 7,384 |        |       |     | 9,191 | 
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|Loss from operations          |                                                                                      |                            | (3,492                   | )     |                        |       | (6,654   | )     |           |       | (3,639   | )     |     |       | (3,821 | )    
|                             
|                             
|                             
|                             
|Other income, net             |                                                                                      |                            | 604                      |       |                        |       | 452      |       |           |       | 347      |       |     |       | 1,771  |      
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|Net loss                      |                                                                                      | $                          | (2,888                   | )     |                        | $     | (6,202   | )     |           | $     | (3,292   | )     |     | $     | (2,050 | )    
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|                             
|                             
|                             
|                             
|                             
|(1) AMORTIZATION OF STOCK    
|                             
|                             
|                             
|                             
|                              |                                                                                      | COMPENSATION AMOUNTS:     
|                             
|                             
|                             
|                             
|                              |                                                                                      | Research and development   |                          | $     | 54                     |       |          | $     | 153       |       |          | $     | 289 |       |        | $     | 290 |      
|                             
|                             
|                             
|                             
|                              |                                                                                      | Sales and marketing        |                          |       | 64                     |       |          |       | 169       |       |          |       | 273 |       |        |       | 273 |      
|                             
|                             
|                             
|                             
|                              |                                                                                      | General and administrative |                          |       | 11                     |       |          |       | 40        |       |          |       | 72  |       |        |       | 72  |      
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      
|                              |                                                                                      | $                          | 129                      |       |                        | $     | 362      |       |           | $     | 634      |       |     | $     | 635    |      
|                              |                                                                                      |                            |                          |       |                        |       |          |       |           |       |          |       |     |       |        |      

32



---



|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |        |      |       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|--------------------------- | ------------------------------------------------------------------------------------ | ------------------------ | -------- | ---------------------- | ------- | -------- | -------- | --------- | ------- | -------- | ------ | ----- | ----- |  | ------ | ---- | ----- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                            |                                                                                      |                          |          | QUARTER ENDED         
|                            |                                                                                      |                          |          |                       
|                            |                                                                                      |                          |          | MAR. 31,               |         | JUNE 30, |          | SEPT. 30, |         | DEC. 31, |       
|                            |                                                                                      |                          |          | 1999                   |         | 1999     |          | 1999      |         | 1999     |       
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |       
|                            |                                                                                      |                          |          | (DOLLARS IN THOUSANDS)
|AS A PERCENTAGE OF REVENUE:
|                           
|                           
|                           
|                           
|Revenue                     |                                                                                      |                          | 100.0    | %                      |         |          | 100.0    | %         |         |          | 100.0  | %     |       |  | 100.0  | %    |      
|                           
|                           
|                           
|                           
|Cost of revenue             |                                                                                      |                          | 86.6     |                        |         |          | 81.5     |           |         |          | 60.5   |       |       |  | 66.4  
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |       
|                            | Gross profit                                                                         |                          |          | 13.4                   |         |          |          | 18.5      |         |          |        | 39.5  |       |  |        | 33.6
|                           
|                           
|                           
|                           
|Operating expenses:        
|                           
|                           
|                           
|                           
|                            | Research and development,
  excluding stock compensation
  amortization amounts(1)   |                          |          | 758.1                  |         |          |          | 745.8     |         |          |        | 128.9 |       |  |        | 80.3
|                           
|                           
|                           
|                           
|                            | Sales and marketing, excluding
  stock compensation
  amortization amounts(1)        |                          |          | 301.6                  |         |          |          | 338.4     |         |          |        | 58.1  |       |  |        | 45.6
|                           
|                           
|                           
|                           
|                            | General and administrative,
  excluding stock compensation
  amortization amounts(1) |                          |          | 128.0                  |         |          |          | 113.9     |         |          |        | 33.1  |       |  |        | 13.8
|                           
|                           
|                           
|                           
|                            | Amortization of stock
  compensation(1)                                              |                          |          |                       |         |          |          |          |         |          |        |      |       |  |        | 1.6 
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |       
|                            |                                                                                      | Total operating
expenses |          |                        | 1,187.7 |          |          |           | 1,198.1 |          |        |       | 220.1 |  |        |      | 141.3
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |       
|Loss from operations        |                                                                                      |                          | (1,174.3 | )                      |         |          | (1,179.6 | )         |         |          | (180.6 | )     |       |  | (107.7 | )   
|                           
|                           
|                           
|                           
|Other income, net           |                                                                                      |                          | 40.3     |                        |         |          | 7.9      |           |         |          | 1.6    |       |       |  | 12.7  
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |       
|Net loss                    |                                                                                      |                          | (1,134.0 | )%                     |         |          | (1,171.7 | )%        |         |          | (179.0 | )%    |       |  | (94.9  | )%  
|                            |                                                                                      |                          |          |                        |         |          |          |           |         |          |        |       |       |  |       

|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |       |      |      | 
|--------------------------- | ------------------------------------------------------------------------------------ | ------------------------ | ----- | ---------------------- | ---- | -------- | ----- | --------- | ----- | -------- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                            |                                                                                      |                          |       | QUARTER ENDED         
|                            |                                                                                      |                          |       |                       
|                            |                                                                                      |                          |       | MAR. 31,               |      | JUNE 30, |       | SEPT. 30, |       | DEC. 31,
|                            |                                                                                      |                          |       | 2000                   |      | 2000     |       | 2000      |       | 2000    
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |         
|                            |                                                                                      |                          |       | (DOLLARS IN THOUSANDS)
|AS A PERCENTAGE OF REVENUE:
|                           
|                           
|                           
|                           
|Revenue                     |                                                                                      |                          | 100.0 | %                      |      |          | 100.0 | %         |       |          | 100.0 | %    |      |  | 100.0 | %   
|                           
|                           
|                           
|                           
|Cost of revenue             |                                                                                      |                          | 75.6  |                        |      |          | 72.8  |           |       |          | 66.0  |      |      |  | 60.0  |     
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |       |     
|                            | Gross profit                                                                         |                          |       | 24.4                   |      |          |       | 27.2      |       |          |       | 34.0 |      |  |       | 40.0 |     
|                           
|                           
|                           
|                           
|Operating expenses:        
|                           
|                           
|                           
|                           
|                            | Research and development,
  excluding stock compensation
  amortization amounts(1)   |                          |       | 53.1                   |      |          |       | 36.2      |       |          |       | 29.9 |      |  |       | 27.5 |     
|                           
|                           
|                           
|                           
|                            | Sales and marketing, excluding
  stock compensation
  amortization amounts(1)        |                          |       | 29.1                   |      |          |       | 64.1      |       |          |       | 26.1 |      |  |       | 25.3 |     
|                           
|                           
|                           
|                           
|                            | General and administrative,
  excluding stock compensation
  amortization amounts(1) |                          |       | 9.5                    |      |          |       | 6.1       |       |          |       | 5.3  |      |  |       | 10.9 |     
|                           
|                           
|                           
|                           
|                            | Amortization of stock
  compensation(1)                                              |                          |       | 2.6                    |      |          |       | 4.6       |       |          |       | 5.8  |      |  |       | 4.7  |     
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |       |     
|                            |                                                                                      | Total operating
expenses |       |                        | 94.3 |          |       |           | 111.0 |          |       |      | 67.1 |  |       |      | 68.4 | 
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |       |     
|Loss from operations        |                                                                                      |                          | (69.9 | )                      |      |          | (83.8 | )         |       |          | (33.1 | )    |      |  | (28.4 | )   
|                           
|                           
|                           
|                           
|Other income, net           |                                                                                      |                          | 12.1  |                        |      |          | 5.7   |           |       |          | 3.1   |      |      |  | 13.2  |     
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |       |     
|Net loss                    |                                                                                      |                          | (57.8 | )%                     |      |          | (78.1 | )%        |       |          | (30.0 | )%   |      |  | (15.2 | )%  
|                            |                                                                                      |                          |       |                        |      |          |       |           |       |          |       |      |      |  |      

Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. In addition, we plan
to increase significantly our operating expenses to fund greater levels of
research and development, expand our sales and marketing operations, broaden
our customer support capabilities and develop new distribution channels. We
also plan to expand our general and administrative capabilities to address the
increased reporting and other administrative demands which will result from
becoming a public company and the growth of our business. Our operating
expenses are largely based on anticipated organizational growth and revenue
trends and a high percentage of our expenses are, and will continue to be,
fixed. As a result, any delay in generating or recognizing revenue could cause
significant variations in our operating results from quarter to quarter and
could result in substantial operating losses. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. You should not rely on our results or
growth for one quarter as any indication of our future performance. In future
quarters, if our operating results are below the expectations of public market
analysts and investors, the price of our common stock will likely decrease.

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. Managements evaluation of
the available evidence in assessing realizability of the tax benefits of such
loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize the tax benefits currently. The net operating loss carryforwards
could be limited in future years if there is a significant change in our
ownership.

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash used in operating activities for the year ended December 31, 2000
was $16.2 million. Net cash used in operating activities for the years ended
December 31, 1999 and 1998 was $12.6 million and $4.2 million,

33



---



respectively. Net cash used in operating activities for each year consists
primarily of the net loss for the period as well as increases in accounts
receivable and inventory for both the year ended December 31, 1999 and 2000.

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 was
$4.9 million for the year ended December 31, 1998. Net cash used in investing
activities for all periods consisted primarily of purchases of marketable
securities as well as purchases of property and equipment. Net cash provided by
investing activities consisted of proceeds from the sale of marketable
securities.

Net cash provided by financing activities for the year ended December 31,
2000 was $100.0 million. Net cash provided by financing activities for the years
ended December 31, 1999 and 1998 was $42.0 million and $10.5 million,
respectively. For each period, the net cash provided by financing activities
consists primarily of proceeds from the issuance of our capital stock.

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

As of December 31, 2000, our principal source of liquidity consisted of
$112.5 million in cash, cash equivalents and marketable securities. Our
management intends to invest our cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities. The
development and marketing of new and enhanced products and the expansion of our
sales channels and associated support personnel will require a significant
commitment of resources. Our future capital requirements will depend upon a
number of factors, including the rate of growth of our sales, the timing and
level of research and development activities and sales and marketing campaigns.
As of December 31, 2000, we did not have any material commitments for capital
expenditures. However, we expect to incur capital expenditures as we expand our
operations in the near future. Although we do not have any current plans or
commitments to do so, from time to time, we may also consider the acquisition
of, or evaluate investments in, products and businesses complementary to our
business. Any acquisition or investment may require additional capital.

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

Any inability to raise additional capital when we require it would
materially adversely affect our business, results of operations and financial
condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2001.

34



---



In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. This summarizes certain areas of the
Staffs views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. This interpretation is
generally effective for applicable transactions beginning July 1, 2000. We do
not expect this interpretation to have a material impact on our financial
statements.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2000, we had investments in marketable securities of
$11.9 million. All of these securities consisted of highly liquid investments
that had remaining maturities of less than 365 days at December 31, 2000.
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, 2000 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, 2000, we did not own any equity investments. Therefore,
we did not have any material equity price risk.

Substantially all of our revenue is currently 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. In the future, a portion of our international sales may be denominated in
currencies other than U.S. dollars, which would then expose us to gains and
losses based upon exchange rate fluctuations.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and supplementary financial data meeting the
requirements of Regulation S-X and S-K are set forth beginning at page F-1.

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

None.

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated by reference to our
definitive proxy statement which is expected to be filed with the SEC by April
30, 2001.

ITEM 11 EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our
definitive proxy statement which is expected to be filed with the SEC by April
30, 2001.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to our
definitive proxy statement which

35



---



is expected to be filed with the SEC by April 30, 2001.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to our
definitive proxy statement which is expected to be filed with the SEC by April
30, 2001.

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 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 Index of Exhibits 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,
2000.

36



---



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 30th day of March, 2001.    .



| | ADVANCED SWITCHING COMMUNICATIONS, INC.
| | ---------------------------------------



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

37



---



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, the Annual 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 Act, this Annual Report on
Form 10-K has been signed below by the following persons in the capacities
indicated on this 30th day of March, 2001.

|                                                |  |                                                                               |  |               
|----------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                       |  | Title                                                                         |  | Date          
|                                                |  |                                                                               |  |               
|/s/ Asghar D. Mostafa
Asghar D. Mostafa         |  | President, Chief
Executive Officer and
Director (Principal
Executive Officer) |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Harry J. DAndrea
Harry J. DAndrea         |  | Chief Financial Officer
(Principal Financial
and Accounting Officer)          |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Henry G. Baker
Henry G. Baker               |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Robert Ted Enloe, III
Robert Ted Enloe, III |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Richard H. Kimball
Richard H. Kimball       |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Arthur J. Marks
Arthur J. Marks             |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Edward W. Scott
Edward W. Scott             |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ John W. Seazholtz
John W. Seazholtz         |  | Director                                                                      |  | March 30, 2001
|                                                |  |                                                                               |  |               
|                                               
|                                               
|                                               
|                                               
|/s/ Ronald S. Westernik
Ronald S. Westernik     |  | Director                                                                      |  | March 30, 2001

38



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                             |  |     
|-------------------------------------------- |  | ----
|                                             |  | Page
|                                             |  |     
|Independent Auditors Report                 |  | F-2 
|                                            
|                                            
|                                            
|                                            
|Balance Sheets                               |  | F-3 
|                                            
|                                            
|                                            
|                                            
|Statements of Operations                     |  | F-4 
|                                            
|                                            
|                                            
|                                            
|Statements of Stockholders Equity (Deficit) |  | F-5 
|                                            
|                                            
|                                            
|                                            
|Statements of Cash Flows                     |  | F-6 
|                                            
|                                            
|                                            
|                                            
|Statements of Comprehensive Loss             |  | F-7 
|                                            
|                                            
|                                            
|                                            
|Notes to 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 balance sheets of Advanced Switching
Communications, Incorporated (the Company) as of December 31, 2000 and 1999,
and the related statements of operations, comprehensive loss, stockholders equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule on page F-19. 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 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 financial statements present fairly, in all material
respects, the financial position of Advanced Switching Communications,
Incorporated as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth herein.

/s/ DELOITTE & TOUCHE

McLean, VA
January 29, 2001

F-2



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |        |         |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------- | ------------ | ------- | ------ | ------ | ------- | ------- | -
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         | DECEMBER 31,
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |             
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         | 2000         |         | 1999  
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |       
|Current assets:                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Cash and cash equivalents                 |                                                                                                                                   | $                                    | 100,609 |              |         | $      | 33,012 |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Marketable securities                     |                                                                                                                                   |                                      | 11,916  |              |         |        |       |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Accounts receivable                       |                                                                                                                                   |                                      | 8,225   |              |         |        | 2,116  |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Inventories                               |                                                                                                                                   |                                      | 6,937   |              |         |        | 2,088  |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Other current assets                      |                                                                                                                                   |                                      | 2,276   |              |         |        | 1,368  |        
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   | Total current assets                 |         |              | 129,963 |        |        |         | 38,584  |  
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Property and equipment, net                                                                                                                                                                                                                                                      |                                           |                                                                                                                                   | 5,305                                |         |              |         | 2,092  |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Other assets                                                                                                                                                                                                                                                                     |                                           |                                                                                                                                   | 2,080                                |         |              |         | 1,019  |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   | 137,348                              |         |              |         | 41,695 |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | STOCKHOLDERS EQUITY (DEFICIT)           
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Current liabilities:                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Accounts payable                          |                                                                                                                                   |                                      | 5,383   |              |         |        | 2,183  |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Accrued compensation and related benefits |                                                                                                                                   |                                      | 1,243   |              |         |        | 833    |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Accrued warranty costs                    |                                                                                                                                   |                                      | 1,118   |              |         |        | 143    |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Other accrued liabilities                 |                                                                                                                                   |                                      | 820     |              |         |        | 160    |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 | Current portion of long-term debt         |                                                                                                                                   |                                      | 96      |              |         |        | 196    |        
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   | Total current liabilities            |         |              | 8,660   |        |        |         | 3,515   |  
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Long-term debt, less current portion                                                                                                                                                                                                                                             |                                           |                                                                                                                                   | 5                                    |         |              |         | 98     |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Deferred rent                                                                                                                                                                                                                                                                    |                                           |                                                                                                                                   | 85                                   |         |              |         | 40     |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   | 8,750                                |         |              |         | 3,653  |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Commitments and contingencies
Class A redeemable convertible preferred stock $1.00 par
  value; 10 authorized; 10 issued; 0 and 10 outstanding at
  December 31, 2000 and 1999, respectively, liquidation
  value of $0 and $2,382 at December 31, 2000 and 1999,
  respectively |                                           |                                                                                                                                   |                                     |         |              |         | 2,617  |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Class B redeemable convertible preferred stock $1.00 par
  value; 14 authorized; 11 issued and 0 and 11 outstanding,
  respectively, liquidation value of $0 and $2,740 at
  December 31, 2000 and 1999, respectively                                                            |                                           |                                                                                                                                   |                                     |         |              |         | 3,010  |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Class C redeemable convertible preferred stock $0.01 par
  value; 4,154 authorized; 3,989 issued; 0 and 3,989
  outstanding at December 31, 2000 and 1999, respectively,
  liquidation value of $0 and $11,639 at
  December 31, 2000 and 1999, respectively                     |                                           |                                                                                                                                   |                                     |         |              |         | 10,989 |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Class D redeemable convertible preferred stock $0.01 par
  value; 4,700 authorized; 4,679 issued; 0 and 4,679
  outstanding at December 31, 2000 and 1999, respectively,
  liquidation value of $0 and $40,954 at
  December 31, 2000 and 1999, respectively                     |                                           |                                                                                                                                   |                                     |         |              |         | 38,901 |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Class E redeemable convertible preferred stock $0.01 par
  value; 100 authorized; 0 and 68 issued at December 31,
  2000 and 1999, respectively, 0 outstanding at December 31,
  2000 and 1999, respectively                                                                     |                                           |                                                                                                                                   |                                     |         |              |         |       |       
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|Stockholders equity (deficit):                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Common stock $0.0025 par value; 250,000 authorized;
  42,236 and 11,530 outstanding at December 31, 2000
  and 1999, respectively |                                      |         | 107          |         |        |        | 30      |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Additional paid-in-capital                                                                                                        |                                      |         | 168,123      |         |        |        |        |        
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Accumulated deficit                                                                                                               |                                      |         | (30,979      | )       |        |        | (16,544 | )      
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Treasury stock, 490 shares                                                                                                        |                                      |         | (200         | )       |        |        | (200    | )      
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Deferred stock compensation                                                                                                       |                                      |         | (8,461       | )       |        |        | (761    | )      
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                 |                                           | Accumulated comprehensive gain                                                                                                    |                                      |         | 8            |         |        |        |        |        
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   | Total stockholders equity (deficit) |         |              | 128,598 |        |        |         | (17,475 | )
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       
|                                                                                                                                                                                                                                                                                 |                                           | $                                                                                                                                 | 137,348                              |         |              | $       | 41,695 |       
|                                                                                                                                                                                                                                                                                 |                                           |                                                                                                                                   |                                      |         |              |         |        |       

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

F-3



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

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

|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |       |   |       | 
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------- | ---------------------------- | ------ | ------------------------ | ------ | ------- | ----- | ---- | ------ | ------ | ----- | - | ----- | 
|                                                                                                   |                                                                                      |                            |                              |        | YEARS ENDED DECEMBER 31,
|                                                                                                   |                                                                                      |                            |                              |        |                         
|                                                                                                   |                                                                                      |                            |                              |        | 2000                     |        | 1999    |       | 1998
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |     
|Revenue                                                                                            |                                                                                      | $                          | 37,381                       |        |                          | $      | 4,278   |       |      | $      |       |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cost of revenue                                                                                    |                                                                                      |                            | 24,890                       |        |                          |        | 2,839   |       |      |        |       |      
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Gross profit                                                                                       |                                                                                      |                            | 12,491                       |        |                          |        | 1,439   |       |      |        |       |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Operating expenses:                                                                               
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Research and development,
  excluding stock compensation
  amortization amounts(1)   |                            |                              | 12,510 |                          |        |         | 6,718 |      |        |        | 3,717 |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Sales and marketing, excluding
  stock compensation
  amortization amounts(1)        |                            |                              | 12,821 |                          |        |         | 3,209 |      |        |        | 799   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | General and administrative,
  excluding stock compensation
  amortization amounts(1) |                            |                              | 3,006  |                          |        |         | 1,251 |      |        |        | 611   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Amortization of stock
  compensation(1)                                              |                            |                              | 1,760  |                          |        |         | 42    |      |        |        |      |  
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|                                                                                                   |                                                                                      |                            | Total operating expenses     |        |                          | 30,097 |         |       |      | 11,220 |        |       |   | 5,127 | 
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Loss from operations                                                                               |                                                                                      |                            | (17,606                      | )      |                          |        | (9,781  | )     |      |        | (5,127 | )    
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Other income (expenses):                                                                          
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Interest income                                                                      |                            |                              | 3,197  |                          |        |         | 539   |      |        |        | 87    |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Interest expense                                                                     |                            |                              | (24    | )                        |        |         | (87   | )    |        |        | (71   | )
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|                                                                                                   |                                                                                      |                            | Total other income
(expense) |        |                          | 3,173  |         |       |      | 452    |        |       |   | 16    | 
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Net loss                                                                                           |                                                                                      |                            | (14,433                      | )      |                          |        | (9,329  | )     |      |        | (5,111 | )    
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Accretion of transaction costs and
  accrued dividends on redeemable
  convertible preferred stock |                                                                                      |                            | (4,182                       | )      |                          |        | (2,589  | )     |      |        | (367   | )    
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Net loss applicable to common
  shareholders                                                       |                                                                                      | $                          | (18,615                      | )      |                          | $      | (11,918 | )     |      | $      | (5,478 | )    
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Basic and diluted loss per
  share                                                                 |                                                                                      | $                          | (1.01                        | )      |                          | $      | (1.01   | )     |      | $      | (0.48  | )    
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|Weighted average shares used in
  net loss per share
  calculations                                |                                                                                      |                            | 18,515                       |        |                          |        | 11,789  |       |      |        | 11,389 |      
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |      
|                                                                                                   |                                                                                     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|(1) AMORTIZATION OF STOCK COMPENSATION:                                                           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                      | Research and development   |                              | $      | 786                      |        |         | $     | 5    |        |        | $     |  |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                      | Sales and marketing        |                              |        | 779                      |        |         |       | 35   |        |        |       |  |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                                      | General and administrative |                              |        | 195                      |        |         |       | 2    |        |        |       |  |      
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      
|                                                                                                   |                                                                                      | $                          | 1,760                        |        |                          | $      | 42      |       |      | $      |       |      
|                                                                                                   |                                                                                      |                            |                              |        |                          |        |         |       |      |        |        |      

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

F-4



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

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

|                                                                                                            |  |              |        |            |  |          |     |             |  |         |         |   |  |   |      |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | -------- | --- | ----------- |  | ------- | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                                            |  | COMMON STOCK |        | ADDITIONAL
|                                                                                                            |  |              |        | PAID-IN    |  | TREASURY |     | ACCUMULATED
|                                                                                                            |  | SHARES       |        | AMOUNT     |  | CAPITAL  |     | STOCK       |  | DEFICIT
|                                                                                                            |  |              |        |            |  |          |     |             |  |        
|Balance, January 1, 1998                                                                                    |  |              | 9,580  |            |  | $        | 24  |             |  | $       | 147     |   |  | $ |     |   |  | $ | (293    | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Shares issued                                                                                               |  |              | 2,380  |            |  |          | 6   |             |  |         | 36      |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Options granted for consulting services                                                                     |  |              |       |            |  |          |    |             |  |         | 46      |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Dividends accrued on redeemable, convertible preferred stock                                                |  |              |       |            |  |          |    |             |  |         | (229    | ) |  |   |     |   |  |   | (100    | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Accretion of transaction costs on redeemable, convertible preferred stock                                   |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (38     | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Unrealized gain on securities                                                                               |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (5,111  | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |         |         |   |  |   |      |   |  |   |         |  
|Balance, December 31, 1998                                                                                  |  |              | 11,960 |            |  |          | 30  |             |  |         |        |   |  |   |      |   |  |   | (5,542  | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Shares repurchased                                                                                          |  |              |       |            |  |          |    |             |  |         |        |   |  |   | (200 | ) |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Options granted for consulting services                                                                     |  |              |       |            |  |          |    |             |  |         | 47      |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Gain on sale of securities                                                                                  |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Options exercised                                                                                           |  |              | 59     |            |  |          |    |             |  |         | 66      |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation expense associated with equity awards                                                 |  |              |       |            |  |          |    |             |  |         | 803     |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Dividends accrued on redeemable, convertible preferred stock                                                |  |              |        |            |  |          |    |             |  |         | (916    | ) |  |   |      |   |  |   | (1,035  | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Preferred stock dividend                                                                                    |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (418    | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Accretion of transaction costs on redeemable, convertible preferred stock                                   |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (220    | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (9,329  | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |         |         |   |  |   |      |   |  |   |         |  
|Balance, December 31, 1999                                                                                  |  |              | 12,019 |            |  |          | 30  |             |  |         |        |   |  |   | (200 | ) |  |   | (16,544 | )
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Options exercised                                                                                           |  |              | 418    |            |  |          | 1   |             |  |         | 992     |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Deferred compensation expense associated with equity awards                                                 |  |              |       |            |  |          |    |             |  |         | 9,460   |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of warrants                                                                                        |  |              |       |            |  |          |    |             |  |         | 3,063   |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Dividends accrued on redeemable, convertible preferred stock                                                |  |              |       |            |  |          |    |             |  |         | (3,433  | ) |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Accretion of transaction costs and beneficial conversion feature on redeemable, convertible preferred stock |  |              |       |            |  |          |    |             |  |         | (751    | ) |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Issuance of common stock in initial public offering                                                         |  |              | 7,188  |            |  |          | 18  |             |  |         | 98,649  |   |  |   |      |   |  |   |         |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Conversion of preferred Stock to common stock                                                               |  |              | 23,101 |            |  |          | 58  |             |  |         | 60,141  |   |  |   |      |   |  |   |         |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Unrealized gain on securities                                                                               |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   |        |  
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net loss                                                                                                    |  |              |       |            |  |          |    |             |  |         |        |   |  |   |     |   |  |   | (14,433 | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |         |         |   |  |   |      |   |  |   |         |  
|Balance, December 31, 2000                                                                                  |  |              | 42,726 |            |  | $        | 107 |             |  | $       | 168,121 |   |  | $ | (200 | ) |  | $ | (30,977 | )
|                                                                                                            |  |              |        |            |  |          |     |             |  |         |         |   |  |   |      |   |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                |  |              |        |               |  |             |     |               |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------- |  | ----------- | --- | ------------- |  | - | ------- | -
|                                                                                                                |  |              |        |               |  | ACCUMULATED |     | STOCKHOLDER'S
|                                                                                                                |  | DEFERRED     |        | COMPREHENSIVE |  | EQUITY     
|                                                                                                                |  | COMPENSATION |        | GAIN (LOSS)   |  | (DEFICIT)  
|                                                                                                                |  |              |        |               |  |            
|Balance, January 1, 1998                                                                                        |  | $            |       |               |  | $           |    |               |  | $ | (122    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Shares issued                                                                                                   |  |              |       |               |  |             |    |               |  |   | 42      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Options granted for
 consulting services                                                                        |  |              |       |               |  |             |    |               |  |   | 46      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Dividends accrued on
 redeemable, convertible
 preferred stock                                                  |  |              |       |               |  |             |    |               |  |   | (329    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Accretion of transaction
 costs on redeemable,
 convertible preferred
 stock                                    |  |              |       |               |  |             |    |               |  |   | (38     | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Unrealized gain on
 securities                                                                                  |  |              |       |               |  |             | 34  |               |  |   | 34      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Net loss                                                                                                        |  |              |       |               |  |             |    |               |  |   | (5,111  | )
|                                                                                                                |  |              |        |               |  |             |     |               |  |   |         |  
|Balance, December 31,
 1998                                                                                     |  |              |       |               |  |             | 34  |               |  |   | (5,478  | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Shares repurchased                                                                                              |  |              |       |               |  |             |    |               |  |   | (200    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Options granted for
 consulting services                                                                        |  |              |       |               |  |             |    |               |  |   | 47      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Gain on sale of
 securities                                                                                     |  |              |       |               |  |             | (34 | )             |  |   | (34     | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Options exercised                                                                                               |  |              |       |               |  |             |    |               |  |   | 66      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Deferred compensation
 expense associated with
 equity awards                                                   |  |              | (803   | )             |  |             |    |               |  |   |        |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Amortization of deferred
 compensation                                                                          |  |              | 42     |               |  |             |    |               |  |   | 42      |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Dividends accrued on
 redeemable, convertible
 preferred stock                                                  |  |              |       |               |  |             |     |               |  |   | (1,951  | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Preferred stock dividend                                                                                        |  |              |       |               |  |             |    |               |  |   | (418    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Accretion of transaction
 costs on redeemable,
 convertible preferred
 stock                                    |  |              |       |               |  |             |    |               |  |   | (220    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Net loss                                                                                                        |  |              |       |               |  |             |    |               |  |   | (9,329  | )
|                                                                                                                |  |              |        |               |  |             |     |               |  |   |         |  
|Balance, December 31,
 1999                                                                                     |  |              | (761   | )             |  |             |    |               |  |   | (17,475 | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Options exercised                                                                                               |  |              |       |               |  |             |    |               |  |   | 993     |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Deferred compensation
 expense associated with
 equity awards                                                   |  |              | (9,460 | )             |  |             |    |               |  |   |        |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Amortization of deferred
 compensation                                                                          |  |              | 1,760  |               |  |             |    |               |  |   | 1,760   |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Issuance of warrants                                                                                            |  |              |       |               |  |             |    |               |  |   | 3,063   |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Dividends accrued on
 redeemable, convertible
 preferred stock                                                  |  |              |       |               |  |             |    |               |  |   | (3,433  | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Accretion of transaction
 costs and beneficial
 conversion feature on
 redeemable, convertible
 preferred stock |  |              |       |               |  |             |    |               |  |   | (749    | )
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Issuance of common stock in
 initial public offering                                                            |  |              |        |               |  |             |     |               |  |   | 98,667  |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Conversion of preferred
 Stock to common stock                                                                  |  |              |        |               |  |             |     |               |  |   | 60,199  |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Unrealized gain on
 securities                                                                                  |  |              |       |               |  |             | 8   |               |  |   | 8       |  
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Net loss                                                                                                        |  |              |       |               |  |             |    |               |  |   | (14,433 | )
|                                                                                                                |  |              |        |               |  |             |     |               |  |   |         |  
|Balance, December 31, 2000                                                                                      |  | $            | (8,461 | )             |  | $           | 8   |               |  | $ | 128,598 |  
|                                                                                                                |  |              |        |               |  |             |     |               |  |   |         |  

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

F-5



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |        |        |  
|-------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------------- | ------- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | -
|                                             |                                                                             |                                                     |         | YEAR ENDED DECEMBER 31,
|                                             |                                                                             |                                                     |         |                        
|                                             |                                                                             |                                                     |         | 2000                    |         | 1999 |         | 1998  
|                                             |                                                                             |                                                     |         |                         |         |      |         |       
|OPERATING ACTIVITIES:                       
|                                            
|                                            
|                                            
|                                            
|                                             | Net loss                                                                    |                                                     | $       | (14,433                 | )       |      | $       | (9,329 | )      |   | $      | (5,111 | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Adjustments to reconcile net loss to net
cash used in operating activities:
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Realized gain on marketable
securities              |         |                         | (466    | )    |         |        | (34    | ) |        |        | (45    | )
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Depreciation and amortization                       |         |                         | 1,545   |      |         |        | 657    |   |        |        | 216    |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Amortization of stock compensation                  |         |                         | 1,760   |      |         |        | 42     |   |        |        |       |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Warrant issuance costs                              |         |                         | 3,063   |      |         |        |       |   |        |        |       |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Bad debt expense                                    |         |                         | 795     |      |         |        |       |   |        |        |       |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Deferred rent                                       |         |                         | 45      |      |         |        | 40     |   |        |        |       |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Consulting expense related to stock
options         |         |                         |        |      |         |        | 47     |   |        |        | 46     |  
|                                            
|                                            
|                                            
|                                            
|                                             | Changes in operating assets and
liabilities:                               
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Accounts receivable                                 |         |                         | (6,904  | )    |         |        | (2,116 | ) |        |        |       |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Inventory                                           |         |                         | (4,849  | )    |         |        | (2,081 | ) |        |        | (7     | )
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Other current assets                                |         |                         | (908    | )    |         |        | (1,339 | ) |        |        | (28    | )
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Accounts payable                                    |         |                         | 3,200   |      |         |        | 1,635  |   |        |        | 513    |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Accrued liabilities                                 |         |                         | 2,045   |      |         |        | 833    |   |        |        | 246    |  
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                             | Other assets                                        |         |                         | (1,061  | )    |         |        | (1,018 | ) |        |        | (1     | )
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|Net cash used in operating activities        |                                                                             |                                                     | (16,168 | )                       |         |      | (12,633 | )      |        |   | (4,171 | )     
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|INVESTING ACTIVITIES:                       
|                                            
|                                            
|                                            
|                                            
|                                             | Purchases of property and equipment                                         |                                                     |         | (4,752                  | )       |      |         | (1,266 | )      |   |        | (1,583 | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from sales of marketable
securities                                |                                                     |         | 22,684                  |         |      |         | 3,481  |        |   |        |       |       
|                                            
|                                            
|                                            
|                                            
|                                             | Purchases of marketable securities                                          |                                                     |         | (34,134                 | )       |      |         |       |        |   |        | (3,362 | )     
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|                                             |                                                                             | Net cash (used in) provided by
investing activities |         |                         | (16,202 | )    |         |        | 2,215  |   |        |        | (4,945 | )
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|FINANCING ACTIVITIES:                       
|                                            
|                                            
|                                            
|                                            
|                                             | Net proceeds from issuance of common stock                                  |                                                     |         | 98,667                  |         |      |         |       |        |   |        | 40     |       
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from issuance of preferred
stock                                   |                                                     |         | 500                     |         |      |         | 42,336 |        |   |        | 10,270 |       
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from exercise of stock
options                                     |                                                     |         | 993                     |         |      |         | 66     |        |   |        |       |       
|                                            
|                                            
|                                            
|                                            
|                                             | Proceeds from issuance of notes
payable                                     |                                                     |         |                        |         |      |         |       |        |   |        | 408    |       
|                                            
|                                            
|                                            
|                                            
|                                             | Principal payments on notes payable                                         |                                                     |         | (193                    | )       |      |         | (191   | )      |   |        | (251   | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Repurchase of treasury shares                                               |                                                     |         |                        |         |      |         | (200   | )      |   |        |       |       
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|                                             |                                                                             | Net cash provided by
financing activities           |         |                         | 99,967  |      |         |        | 42,011 |   |        |        | 10,467 |  
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|Net increase in cash and cash
equivalents    |                                                                             |                                                     | 67,597  |                         |         |      | 31,563  |        |        |   | 1,351  |       
|                                            
|                                            
|                                            
|                                            
|Cash and cash equivalents, beginning of
year |                                                                             |                                                     | 33,012  |                         |         |      | 1,449   |        |        |   | 98     |       
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|Cash and cash equivalents, end of year       |                                                                             | $                                                   | 100,609 |                         |         | $    | 33,012  |        |        | $ | 1,449  |       
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       
|SUPPLEMENTAL SCHEDULE OF CASH FLOW          
|                                            
|                                            
|                                            
|                                            
|                                             | INFORMATION:                                                               
|                                            
|                                            
|                                            
|                                            
|                                             | Interest paid                                                               |                                                     | $       | 24                      |         |      | $       | 86     |        |   | $      | 27     |       
|                                             |                                                                             |                                                     |         |                         |         |      |         |        |        |   |        |       

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

F-6



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

STATEMENTS OF COMPREHENSIVE LOSS
(AMOUNTS IN THOUSANDS)

|                                                |  |                         |         |      |  |      |        |   |  |   |        |  
|----------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                |  | YEAR ENDED DECEMBER 31,
|                                                |  |                        
|                                                |  | 2000                    |         | 1999 |  | 1998
|                                                |  |                         |         |      |  |     
|Net loss                                        |  | $                       | (14,433 | )    |  | $    | (9,329 | ) |  | $ | (5,111 | )
|                                               
|                                               
|                                               
|                                               
|Unrealized gain (loss) on marketable
securities |  |                         | 8       |      |  |      | (34    | ) |  |   | 34     |  
|                                                |  |                         |         |      |  |      |        |   |  |   |        |  
|Comprehensive loss                              |  | $                       | (14,425 | )    |  | $    | (9,363 | ) |  | $ | (5,077 | )
|                                                |  |                         |         |      |  |      |        |   |  |   |        |  

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

F-7



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Advanced Switching Communications, Inc. (ASC or the Company) was
incorporated in the state of Delaware in September 1997. The Company provides
next-generation broadband access platforms to telecommunications service
providers. ASCs products enable 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. Through
December 31, 1998, the Company was considered to be in the development stage
and was principally engaged in research and development, raising capital and
building its management team. The Company shipped its first product in March
1999.

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, 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. At December 31,
1999, the Company held no such securities.

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, 2000 was net of an allowance for doubtful accounts
of $855,132 which represents the total expense recorded in 2000. There was no
allowance for doubtful

F-8



---



accounts at December 31, 1999.

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 |  |  | 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

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. Actual results could
differ 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 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

F-9



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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, 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. 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 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 5,717,000, 22,272,000,
and 7,870,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.

F-10



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because the Company currently holds no derivative instruments and does not
engage in hedging activities, SFAS No. 133 will not have a material impact on
its financial position, results of operations or cash flows. The Company will
be required to implement SFAS No. 133 effective January 1, 2001.

In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25. With the exception of certain provisions which require earlier
application, this interpretation is effective for all applicable transactions
beginning July 1, 2000. The adoption of this Interpretation did not have a
material impact on its financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101. This summarizes certain areas of the
Staffs views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition principles comply with SAB 101.

2. INVENTORIES

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

|                |  |      |       |      |  |   |       | 
|--------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                |  | 2000 |       | 1999
|                |  |      |       |      |  |   |       | 
|Raw materials   |  | $    | 796   |      |  | $ | 1,065 | 
|               
|               
|               
|               
|Work in process |  |      | 20    |      |  |   | 798   | 
|               
|               
|               
|               
|Finished goods  |  |      | 6,121 |      |  |   | 225   | 
|                |  |      |       |      |  |   |       | 
|                |  | $    | 6,937 |      |  | $ | 2,088 | 
|                |  |      |       |      |  |   |       | 

3. PROPERTY AND EQUIPMENT

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

|                                |  |      |        |      |  |   |       |  
|------------------------------- |  | ---- | ------ | ---- |  | - | ----- | -
|                                |  | 2000 |        | 1999
|                                |  |      |        |      |  |   |       |  
|Computer software and equipment |  | $    | 4,189  |      |  | $ | 1,454 |  
|                               
|                               
|                               
|                               
|Office equipment                |  |      | 2,650  |      |  |   | 1,074 |  
|                               
|                               
|                               
|                               
|Furniture and fixtures          |  |      | 857    |      |  |   | 419   |  
|Equipment under capital leases  |  |      | 9      |      |  |   | 23    |  
|                                |  |      |        |      |  |   |       |  
|                                |  |      | 7,705  |      |  |   | 2,970 |  
|                               
|                               
|                               
|                               
|Less accumulated depreciation   |  |      | (2,400 | )    |  |   | (878  | )
|                                |  |      |        |      |  |   |       |  
|Property and equipment, net     |  | $    | 5,305  |      |  | $ | 2,092 |  
|                                |  |      |        |      |  |   |       |  

Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$1,545,000, $657,000 and $216,000, respectively.

4. INCOME TAXES

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

At December 31, 2000 and 1999, the Company had approximately $24.3 million
and $14.7 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

F-11



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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, 2000 and 1999, the Company had gross deferred tax
assets of approximately $9.7 million and $5.9 million, respectively, related
primarily to net operating loss carryforwards that are available to reduce
future taxable income through 2020. The net deferred tax asset at December 31,
2000 includes $1.2 million and $0.7 million of temporary differences related to
warrant and stock compensation costs, respectively, which were recorded for
book purposes but not currently deductible for tax purposes. There were no such
temporary differences at December 31, 1999. Management believes that, based on
a number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets such that a
full valuation allowance has been recorded.

5. LONG-TERM DEBT

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

|                                                                                                                                                                                                                  |  |      |     |      |  |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | - | ---- | -
|                                                                                                                                                                                                                  |  | 2000 |     | 1999
|                                                                                                                                                                                                                  |  |      |     |     
|Bank note payable, interest at
prime plus 2% (11.5% at  December
31, 2000), due in monthly
installments of   $5 plus interest
through November 2000,
  collateralized by the Companys
furniture                  |  | $    |    |      |  | $ | 53   |  
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|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   |      |  |   | 26   |  
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|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  |      |  |   | 204  |  
|                                                                                                                                                                                                                  |  |      |     |      |  |   |      |  
|                                                                                                                                                                                                                  |  |      | 94  |      |  |   | 283  |  
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|Amounts under capital lease (Note 6)                                                                                                                                                                              |  |      | 7   |      |  |   | 11   |  
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|                                                                                                                                                                                                                 
|Less current portion                                                                                                                                                                                              |  |      | (96 | )    |  |   | (196 | )
|                                                                                                                                                                                                                  |  |      |     |      |  |   |      |  
|Long-term portion                                                                                                                                                                                                 |  | $    | 5   |      |  | $ | 98   |  
|                                                                                                                                                                                                                  |  |      |     |      |  |   |      |  

6. COMMITMENTS

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 leases 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 are for a period of no longer than 1 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, 2000, 1999 and 1998 was $1,132,000, $673,000, and $355,000, respectively.

F-12



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 2000, are as follows:

|                     |  |                |    |                  |  |   |       | 
|-------------------- |  | -------------- | -- | ---------------- |  | - | ----- | 
|                     |  | Capital Leases |    | Operating Leases
|                     |  |                |    |                 
|2001                 |  | $              | 2  |                  |  | $ | 1,181 | 
|                    
|                    
|                    
|                    
|2002                 |  |                | 2  |                  |  |   | 1,011 | 
|                    
|                    
|                    
|                    
|2003                 |  |                | 2  |                  |  |   | 625   | 
|                    
|                    
|                    
|                    
|2004                 |  |                | 1  |                  |  |   | 639   | 
|                    
|                    
|                    
|                    
|2005                 |  |                |   |                  |  |   | 600   | 
|                    
|                    
|                    
|                    
|Thereafter           |  |                |   |                  |  |   |      | 
|                     |  |                |    |                  |  |   |       | 
|                     |  |                | 7  |                  |  | $ | 4,056 | 
|                     |  |                |    |                  |  |   |       | 
|Less current portion |  |                | (2 | )               
|                     |  |                |    |                  |  |   |       | 
|                    
|                    
|                    
|                    
|Long-term portion    |  | $              | 5  |                 
|                     |  |                |    |                  |  |   |       | 

In connection with the lease of the Companys headquarters, the Company is
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. The escrow amount has been
allocated equally to both short-term and long-term other assets for the year
ended December 31, 2000.

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.

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 operations or liquidity.

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK

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      | 
|      |  |            |       |        |  |          |       |          |  |        |        |     |  |   |       |  |  |  |                | 
|      |  |            | 8,978 |        |  |          | 8,757 |          |  | $      | 56,023 |     |  | $ | 2,960 | 
|      |  |            |       |        |  |          |       |          |  |        |        |     |  |   |       |  |  |  |                | 



---

(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.

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

F-13



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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.

At December 31, 1999, the Company had reserved 612,000, 3,010,000,
8,584,000 and 9,580,000 shares of Common Stock for the conversion of Class A,
B, C and D convertible preferred stock, 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.

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

F-14



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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.

8. 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 during the year ended December 31, 2000 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-15



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

9. 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 the1998 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 will no longer be 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 will no longer be 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.

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

|                           |                   |  |                  |       |                |   |                  |      | 
|-------------------------- | ----------------- |  | ---------------- | ----- | -------------- | - | ---------------- | ---- | 
|                           |                   |  |                  |       |                |   | Weighted Average
|                           |                   |  | Number of Shares |       | Exercise Price
|                           |                   |  |                  |       |               
|Balance, January 1, 1998   |                   |  |                 |       |                | $ |                 |     
|                          
|                          
|                          
|                          
|                           | Options Granted   |  |                  | 1,651 |                |   |                  | 1.05 | 
|                          
|                          
|                          
|                          
|                           | Options Exercised |  |                  |      |                |   |                  |     | 
|                          
|                          
|                          
|                          
|                           | Options Cancelled |  |                  |      |                |   |                  |     | 
|                           |                   |  |                  |       |                |   |                  |     
|Balance, December 31, 1998 |                   |  | 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             |     
|                           |                   |  |                  |       |                |   |                  |     

F-16



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

The following table summarizes information about stock options outstanding at
December 31, 2000 (amounts in thousands, except dollars):



|            |            |             |       |                  |                     |                  |                |             |            |                |       |      |      |      |       |     |     |     |       |      |      |      | 
|----------- | ---------- | ----------- | ----- | ---------------- | ------------------- | ---------------- | -------------- | ----------- | ---------- | -------------- | ----- | ---- | ---- | ---- | ----- | --- | --- | --- | ----- | ---- | ---- | ---- | 
|            |            |             |       |                  | Options Outstanding |                  | Vested Options
|            |            |             |       |                  |                     |                  | Exercisable   
|Range of    |            | Number of   |       | Weighted Avg.    |                     |                  |                |             |            |               
|Exercise    |            | Shares      |       | Remaining        |                     | Weighted Average |                | Number      |            | Weighted Avg. 
|Prices      |            | Outstanding |       | Contractual Life |                     | Exercise Price   |                | Exercisable |            | Exercise Price
|            |            |             |       |                  |                     |                  |                |             |            |               
|            |            | $0.60       |       |                  | 240                 |                  |                |             | 7.15 years |                |       | $    | 0.60 |      |       |     | 240 |     |       | $    | 0.60 |     
|           
|           
|           
|           
|            |            |             | 1.00  |                  |                     | 784              |                |             |            | 7.49 years     |       |      |      | 1.00 |       |     |     | 574 |       |      |      | 1.00 | 
|           
|           
|           
|           
|            |            |             | 1.50  |                  |                     | 993              |                |             |            | 8.34 years     |       |      |      | 1.50 |       |     |     | 237 |       |      |      | 1.50 | 
|           
|           
|           
|           
|            | 1.75-2.00  |             |       | 1,007            |                     |                  |                | 8.98 years  |            |                |       | 1.99 |      |      |       | 146 |     |     |       | 1.97 |     
|           
|           
|           
|           
|            | 2.70-3.70  |             |       | 392              |                     |                  |                | 9.34 years  |            |                |       | 3.23 |      |      |       | 28  |     |     |       | 3.70 |     
|           
|           
|           
|           
|            | 4.44-5.75  |             |       | 243              |                     |                  |                | 9.93 years  |            |                |       | 5.47 |      |      |       | 30  |     |     |       | 5.75 |     
|           
|           
|           
|           
|            | 6.75-10.06 |             |       | 904              |                     |                  |                | 9.29 years  |            |                |       | 7.82 |      |      |       | 46  |     |     |       | 9.35 |     
|           
|           
|           
|           
|10.81-16.38 |            |             | 1,154 |                  |                     |                  | 9.72 years     |             |            |                | 13.05 |      |      |      | 156   |     |     |     | 12.80 |     
|            |            |             |       |                  |                     |                  |                |             |            |                |       |      |      |      |       |     |     |     |       |     
|$0.60-16.38 |            |             | 5,717 |                  |                     |                  | 8.82 years     |             |            | $              | 5.14  |      |      |      | 1,457 |     |     | $   | 2.79  |     
|            |            |             |       |                  |                     |                  |                |             |            |                |       |      |      |      |       |     |     |     |       |     

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.

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 years ended December 31, 1999 and 1998 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 year ended December 31, 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,
|                                            |             |  | 2000        
|                                            |             |  |             
|Net loss applicable to common shareholders:
|                                           
|                                           
|                                           
|                                           
|                                            | As reported |  | $            | (18,615 | )
|                                            |             |  |              |        
|                                            | Pro forma   |  | $            | (19,523 | )
|                                            |             |  |              |        
|Net loss per share  basic and diluted:    
|                                           
|                                           
|                                           
|                                           
|                                            | As reported |  | $            | (1.01   | )
|                                            |             |  |              |        
|                                            | Pro forma   |  | $            | (1.05   | )
|                                            |             |  |              |        

F-17



---



ADVANCED SWITCHING COMMUNICATIONS, INC.

NOTES TO 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,
|                        |  | 2000         |      | 1999         |  | 1998        
|                        |  |              |      |              |  |             
|Risk free interest rate |  |              | 6.12 | %            |  |              | 5.76 | % |  |  | 5.33 | %
|                       
|                       
|                       
|                       
|Dividend yield          |  |              |     |              |  |              |     |   |  |  |     |  
|                       
|                       
|                       
|                       
|Expected volatility     |  |              | 70   | %            |  |              |     |   |  |  |     |  
|                       
|                       
|                       
|                       
|Expected life           |  |              | 5    |              |  |              | 5    |   |  |  | 5    |  

The weighted average fair value at date of grant for options granted
during the years ended December 31, 2000, 1999 and 1998 was $3.05, $0.27 and
$0.05 per share, respectively.

10. 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.

11. LOANS FROM EXECUTIVE OFFICERS AND STOCKHOLDERS

Between October 7, 1997 and September 7, 1999, the Company borrowed an
aggregate of approximately $11.4 million from certain executive officers and
stockholders. Each of these loans was evidenced by an interest-bearing
promissory note and was ultimately paid in full or converted into shares of
convertible preferred stock, as set forth in the table below.

|           |  |                                 |           |           |  |      |     |       |  |  |         |  |  |        |     |   |  |  |  |  |  |  |           | 
|---------- |  | ------------------------------- | --------- | --------- |  | ---- | --- | ----- |  |  | ------- |  |  | ------ | --- | - |  |  |  |  |  |  | --------- | 
|Loans      |  | Conversion into Preferred Stock
|           |  |                                
|Date       |  | Amount                          |           | Int. Rate |  | Date |     | Class |  |  |         |  |  | Shares
|           |  |                                 |           |           |  |      |     |       |  |  |         |  |  |       
|10/7/97    |  | $                               | 107,143   |           |  |      | 6.5 | %     |  |  | 6/26/98 |  |  |        | A   |   |  |  |  |  |  |  | 428       | 
|          
|          
|          
|          
|12/5/97    |  |                                 | 25,000    |           |  |      | 6.5 |       |  |  | 6/26/98 |  |  |        | A   |   |  |  |  |  |  |  | 100       | 
|          
|          
|          
|          
|12/5/97(2) |  |                                 | 12,500    |           |  |      | 6.5 |       |  |  |        |  |  |        |    |   |  |  |  |  |  |  |         
|          
|          
|          
|          
|2/6/98     |  |                                 | 250,000   |           |  |      | 6.5 |       |  |  | 6/26/98 |  |  |        | A   |   |  |  |  |  |  |  | 1,000     | 
|          
|          
|          
|          
|3/9/98     |  |                                 | 1,750,000 |           |  |      | 6.5 |       |  |  | 6/26/98 |  |  |        | A   |   |  |  |  |  |  |  | 7,000     | 
|          
|          
|          
|          
|6/11/98    |  |                                 | 250,000   |           |  |      | 6.5 |       |  |  | 6/26/98 |  |  |        | A   |   |  |  |  |  |  |  | 1,000     | 
|          
|          
|          
|          
|4/20/99    |  |                                 | 1,000,000 |           |  |      | 5.0 |       |  |  |         |  |  |       | (1) | 
|          
|          
|          
|          
|4/20/99    |  |                                 | 3,000,000 |           |  |      | 5.0 |       |  |  | 6/30/99 |  |  |        | C   |   |  |  |  |  |  |  | 1,106,332 | 
|          
|          
|          
|          
|9/7/99     |  |                                 | 2,500,000 |           |  |      | 5.0 |       |  |  | 9/10/99 |  |  |        | D   |   |  |  |  |  |  |  | 292,412   | 
|          
|          
|          
|          
|9/7/99     |  |                                 | 2,500,000 |           |  |      | 5.0 |       |  |  | 9/10/99 |  |  |        | D   |   |  |  |  |  |  |  | 292,412   | 



---

|(1) |  | This promissory note was cancelled and the principal amount was assumed
into the first $2,500,000 loan made to the Company on September 7, 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The Company repaid this loan in full together with accrued interest on July
7, 1998.                                                            

12. 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, 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.

F-18



---



Schedule II

Advanced Switching Communications, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 2000, 1999 and 1998
(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
|                           |  |            |              |  |           |   |            |  |       
|2000                       | 
|                          
|                          
|                          
|                          
|Inventory                  |  |            |              |  |           | $ | 175        |  |        | $ | 865    |            |  | $ |  |  |  | $ | 1,040 | 
|                           |  |            |              |  |           |   |            |  |        |   |        |            |  |   |   |  |  |   |       | 
|1999                       | 
|                          
|                          
|                          
|                          
|Inventory                  |  |            |              |  |           | $ |           |  |        | $ | 175    |            |  | $ |  |  |  | $ | 175   | 
|                           |  |            |              |  |           |   |            |  |        |   |        |            |  |   |   |  |  |   |       | 
|1998                       | 
|                          
|                          
|                          
|                          
|Inventory                  |  |            |              |  |           | $ |           |  |        | $ |       |            |  | $ |  |  |  | $ |      | 
|                           |  |            |              |  |           |   |            |  |        |   |        |            |  |   |   |  |  |   |       | 

F-19



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Index of Exhibits

Item 16. Exhibits and Financial Statement Schedules.

The following documents are filed as exhibits to this report:

|         |  |                                                                                                                                                 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  | Description                                                                                                                                     
|         |  |                                                                                                                                                 
|*3.1     |  | Certificate of Incorporation of the Registrant, as amended and restated                                                                         
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|        
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|*3.2     |  | By-laws of the Registrant, as amended and restated                                                                                              
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|*4.1     |  | Form of certificate of common stock                                                                                                             
|        
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|*4.2     |  | Warrant to Purchase Common Stock granted to ICI Capital LLC                                                                                     
|        
|        
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|*4.3     |  | Warrant to Purchase Common Stock granted to Broadband Office, Inc.
dated June 21, 2000                                                          
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|        
|        
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|+*10.1   |  | Executive Employment Agreement, dated as of August 31, 1998, between
the Registrant and Asghar D. Mostafa.                                      
|        
|        
|        
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|+*10.2   |  | Form of Key Employee Employment Agreement                                                                                                       
|        
|        
|        
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|+*10.3   |  | Advanced Switching Communications, Inc. 1998 Nonqualified Stock Option
Plan                                                                     
|        
|        
|        
|        
|+*10.4   |  | Advanced Switching Communications, Inc. Second 1998 Nonqualified Stock
Option Plan                                                              
|        
|        
|        
|        
|+*10.5   |  | Advanced Switching Communications, Inc. 1999 Nonqualified Stock Option
Plan                                                                     
|        
|        
|        
|        
|*10.6    |  | Advanced Switching Communications, Inc. 2000 Stock Incentive Plan                                                                               
|        
|        
|        
|        
|*10.7    |  | 8% Convertible Redeemable Class D Preferred Stock Securities Purchase
and Stockholder Agreement                                                 
|        
|        
|        
|        
|*10.8    |  | Amendment to the 8% Convertible Redeemable Class D Preferred Stock
Securities Purchase and Stockholders Agreement                               
|        
|        
|        
|        
|*10.9    |  | Second Amendment to the 8% Convertible Redeemable Class D Stock
Securities Purchase and Stockholders Agreement                                  
|        
|        
|        
|        
|*10.9A   |  | Waiver of IPO Purchase Rights, dated August 30, 2000                                                                                            
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|        
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|+*10.10  |  | Form of Key Employee Stock Agreement                                                                                                            
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|        
|        
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|+*10.10A |  | Form of Amendment to Key Employee Stock Agreement                                                                                               
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|        
|        
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|*10.11   |  | Form of Indemnification Agreement, between the Registrant and each of
its directors and officers                                                
|        
|        
|        
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|*10.12   |  | Stockholders Agreement, dated as of August 31, 1998, between the
Registrant and Mostafa Investments Limited Partnership                        
|        
|        
|        
|        
|*10.13   |  | American Center Lease Agreement between Met Life International Real
Estate Equity Shares, Inc. and Keyvan Rafie dated May 29, 1992              
|        
|        
|        
|        
|*10.14   |  | American Center Lease Agreement between Met Life International Real
Estate Equity Shares, Inc. and Advanced Switching Communications, Inc.
dated

58



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|       |  |                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------
|       |  | September 27, 1997                                                                                 
|      
|      
|      
|      
|*10.15 |  | Assignment of Lease and Acceptance between Keyvan Rafie and Advanced
Switching Communications, Inc.
|      
|      
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|      
|10.16  |  | Employment Agreement of Harry J. DAndrea                                                          
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|      
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|10.16a |  | Addendum to Employment Agreement of Harry J. DAndrea                                              
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|      
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|10.17  |  | Employment Agreement of Robert Stewart                                                             
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|      
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|10.18  |  | Employment Agreement of Sherry L. Rhodes                                                           
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|      
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|10.19  |  | Executive Separation Agreement of Lisa Adams                                                       
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|      
|23.1   |  | Consent of Deloitte & Touche LLP                                                                   
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|      
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|24.1   |  | Power of Attorney (included on signature page of this report)                                      
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|      
|      
|      
|27.1   |  | Financial data schedule                                                                            



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|* |  | Incorporated by reference to our Registration Statement on Form S-1, File No.
333-40624.
|- |  | ----------------------------------------------------------------------------------------
| 
| 
| 
| 
|+ |  | Management contract or compensatory plan or arrangement.                                

59