e10-q

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2002

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

For the transition period from ________ to ________

Commission file number: 000-31529

ADVANCED SWITCHING COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		54-1865834
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

8330 BOONE BOULEVARD
VIENNA, VA 22812
(703) 448-5540

(Address, including zip code, and telephone number, including area code, of
registrant’s principal executive offices)

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

As of April 30, 2002, there were 43,045,005 shares outstanding of the Registrant’s Common Stock, par value $.0025.

ADVANCED SWITCHING COMMUNICATIONS, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION


Item 1 - Financial Statements

	Condensed Consolidated Statements of Net Assets	2

	Condensed Consolidated Statements of Loss and Changes in Net Assets	3

	Condensed Consolidated Statements of Cash Flows	4

	Condensed Consolidated Statements of Comprehensive Loss	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

	Risk Factors	14

Item 3 - Quantitative and Qualitative Disclosures About Market Risk		18

PART II — OTHER INFORMATION

Item 1 - Legal Proceedings		18

Item 2 - Changes in Securities And Uses of Proceeds		19

Item 3 - Defaults upon Senior Securities		19

Item 4 - Submission of Matters to a Vote of Security Holders		19

Item 5 - Other Information		19

Item 6 - Exhibits and Reports on Form 8-K		19

Signatures		21

Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Net Assets
(unaudited)


		March 31,		December 31,
(in thousands)		2002		2001

		(Liquidation		(Going Concern
		Basis)		Basis)
Current assets:
	Cash and cash equivalents	$	43,572	$	36,848
	Marketable securities		31,187		38,403
	Accounts receivable		243		1,167
	Inventory		1,011		987
	Other current assets		566		690

Total current assets			76,579		78,095

Property, plant and equipment, net			1,250		1,250
Marketable securities			—		2,542
Other assets			1,102		1,055

Total assets		$	78,931	$	82,942

Current liabilities:
	Accounts payable	$	1,015	$	1,011
	Accrued loss on purchase commitments		2,265		2,265
	Reserve for estimated costs during period of liquidation		1,402		—
	Accrued compensation and related benefits		372		891
	Accrued severance		4,290		394
	Accrued settlement costs		3,500		—
	Accrued warranty costs		1,366		1,366
	Other accrued liabilities		604		475
	Accrued loss on lease obligations, current		883		1,193
	Current portion of debt		2		2

Total current liabilities			15,699		7,597

Accrued loss on lease obligations, long-term			1,152		1,067
Long-term Debt			3		3

Net assets available to common shareholders		$	62,077	$	74,275

See notes to condensed consolidated financial statements.

Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Loss and Changes in Net Assets
(unaudited)


			Quarter Ended March 31,
(in thousands, except per share amounts)		2002			2001
		(Liquidation Basis)			(Going Concern Basis)

Net Revenue		$	92		$	13,508
Cost of Goods Sold			805			7,089

Gross Margin			(713	)		6,419

Research & Development (1)			2,574			4,295
Sales & Marketing (1)			1,982			3,944
General & Administrative (1)			6,407			992
Amortization of Stock Compensation (1)			109			570

Operating Expenses			11,072			9,801

Operating Loss			(11,785	)		(3,382	)

Other Income, net			(463	)		(1,526	)

Earnings Before Taxes			(11,322	)		(1,856	)
Taxes			—			—

Net Loss			(11,322	)		(1,856	)
Net Assets, Beginning of Period			74,275			128,598
Adjustment to Liquidation Basis			(1,249	)		—
Amortization of Stock Compensation			109			570
Exercise of Options			305			116
Unrealized (Losses) Gains			(41	)		36
Payments in Connection with Initial Public Offering			—			(188	)

Net Assets, End of Period		$	62,077		$	127,276

Net Loss Per Share:
Basic and Diluted Net Loss Per Share		$	(0.27	)	$	(0.04	)

Weighted Average Shares			42,648			42,268


(1) Amortization of Stock Compensation
	Research and Development	$	69		$	282
	Sales and Marketing		27			226
	General and Administrative		13			62

		$	109		$	570

See notes to condensed consolidated financial statements.

Advanced Switching Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)


			(in thousands)
				March 31,

			2002				2001
		(Liquidation Basis)				(Going Concern Basis)
Operating Activities
	Net loss		$	(11,322	)	$	(1,856	)
	Adjustments:
	Accrued settlement costs			3,500			—
	Realized loss on marketable securities			—			8
	Depreciation and amortization			—			667
	Amortization of stock compensation			109			570
	Deferred rent			—			4
	Changes in operating assets and liabilities:
	Decrease (increase) in accounts receivable			924			(7,074	)
	Increase in inventory			(24	)		(2,889	)
	Decrease (increase) in other current assets			124			(593	)
	(Increase) decrease in other assets			(47	)		229
	Increase in accounts payable			2,269			1,367
	Decrease in accrued loss on purchase commitments			(2,265	)		—
	Increase in accrued liabilities			3,656			616

	Net cash used in operations			(3,076	)		(8,951	)

Investing Activities
	Purchase of property, plant & equipment			—			(1,683	)
	Purchase of securities			—			(29,815	)
	Sale of securities			9,720			11,423

	Net cash provided by (used in) investing			9,720			(20,075	)

Financing Activities
	Exercise of options			305			116
	Payments of lease obligations			(225	)		—
	Payment of debt			—			(34	)
	Payments in connection with initial public offering			—			(188	)

	Net cash provided by (used in) financing			80			(106	)

Net increase (decrease) in cash and cash equivalents				6,724			(29,132	)
Cash and cash equivalents, beginning of period				36,848			100,609

Cash and cash equivalents, end of period			$	43,572		$	71,477

See notes to condensed consolidated financial statements.

Advanced Switching Communications, Inc.
Condensed Consolidated Statements Of Comprehensive Loss
(unaudited)


	(in thousands)
	Quarter Ended March 31,
	2002			2001
	(Liquidation Basis)			(Going Concern Basis)
Net loss, including adjustments to liquidation basis	$	(12,571	)	$	(1,856	)
Unrealized (loss) gain on marketable securities		(41	)		44

Comprehensive loss	$	(12,612	)	$	(1,812	)

See notes to condensed consolidated financial statements.

Advanced Switching Communications, Inc.
Notes to Condensed, Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to those rules and regulations, although Advanced Switching Communications, Inc. (“the Company”) believes that the disclosures made are adequate to make the information presented not misleading.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments and reclassifications (all or which are of a normal, recurring nature) that are necessary for fair presentation for the periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 18, 2002.

Due to continuing losses resulting from the decline in sales, the Company announced on February 5, 2002 that its Board of Directors has adopted a plan of complete liquidation and dissolution, which was approved by the Company’s stockholders on April 9, 2002. As a result, the Company plans to sell its assets, including inventory, property and equipment and intellectual property, discharge its liabilities, and distribute the net proceeds to its stockholders. As a result, the Company’s financial statements as of March 31, 2002, and for the quarter then ended have been prepared on a liquidation basis. Accordingly, assets have been valued at estimated net realizable value and liabilities include estimated costs associated with carrying out the plan of liquidation.

2. Inventories

Inventories consisted of the following at March 31, 2001 and December 31, 2000 (in thousands):


	March 31,		December 31,
	2002		2001

Raw materials, net	$	224	$	139
Work in process, net		52		61
Finished goods, net		735		787

	$	1,011	$	987

3. Accrued Loss on Purchase Commitments

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

In connection with the $2.3 million, the Company recently received a letter from Benchmark Electronics, Inc., the contract manufacturer. In its letter, Benchmark asserted that we were liable for non-cancelable, non-returnable or customized items that were procured on our behalf based upon forecasts provided to Benchmark and for costs associated with the termination of our relationship. Benchmark was seeking additional compensation in the amount of $0.9 million. In April 2002, the Company paid the $2.3 million to Benchmark and received a release from any additional amounts in the current claim and from any future claims.

Advanced Switching Communications, Inc.
Notes to Condensed, Consolidated Financial Statements
(Continued)

4. Reserve for Estimated Costs During Period of Liquidation

The reserve for estimated costs during period of liquidation provides for the administrative costs expected to be incurred in winding down the operations of the Company including, but not limited to, legal fees, accounting fees, and insurance costs.

5. Accrued Severance

As of December 31, 2001, we had a total of 91 employees, all of whom were based in the United States. Forty-five of our employees were engaged in research and development, 16 in operations, 17 in marketing and sales and 13 in finance and administrative functions. Subsequent to our board of directors’ decision on February 4, 2002 to liquidate and wind down our operations, we terminated all of our employees with most terminations being effective on April 6, 2002. Six employees’ termination dates will occur in the months of May through August of 2002 as these individuals are needed to assist in the wind down of our business affairs. The accrued severance of $4.3 million represents the estimated severance to be paid by the Company in shutting down its operations.

6. Accrued Settlement Costs

In October 2001, we announced that we had received notice from Qwest Communications Corporation purporting to terminate our procurement agreement with it. From the third quarter of 2000 through the first quarter of 2001, Qwest made equipment purchases from us totaling over $15.7 million ($13.8 million under the procurement agreement) and was our largest customer during this period representing approximately 28% of our total sales. In its purported notice of termination, Qwest asserted that the Company was in material breach of our procurement agreement. In a letter dated October 23, 2001, the Company responded to Qwest’s earlier letter, rejecting any breach on our part and reiterating our rights under the procurement agreement. On May 10, 2002, the Company entered into a settlement agreement with Qwest. Pursuant to the settlement, ASC will pay $3.5 million to Qwest to resolve all disputes relating to the equipment purchase contract, including Qwest's demand for a refund in connection with all equipment that the Company sold to Qwest. This amount has been included as accrued settlement costs in the accompanying condensed consolidated statements of net assets.

7. Commitments and Contingencies

On February 19, 2002, we received a letter from Dishnet, a customer that had purchased approximately $1 million worth of equipment from us. In that letter, Dishnet claimed that the equipment performed unsatisfactorily and sought compensation in the amount of $30 million in connection with damages and losses suffered as a result of the failure of the equipment to perform. On March 5, 2002, the Company responded to Dishnet informing them we believe that we have fulfilled our obligations to Dishnet, that Dishnet’s damages claims are without merit and that Dishnet is not entitled to a refund. On April 17, 2002, Dishnet responded by reiterating their position but offered to enter a

Advanced Switching Communications, Inc.
Notes to Condensed, Consolidated Financial Statements
(Continued)

settlement and release for $13 million. We continue to believe that this matter will not have a material impact upon the financial statements.

On February 21, 2002, a complaint was filed in the United States District Court for the Eastern District of Virginia against us and certain of our current and former officers and directors. The plaintiffs in this action purport to act on behalf of a class of other shareholders. The complaint alleges violations of the federal securities laws in connection with our initial public offering and subsequent public statements. Thereafter, substantially similar complaints were filed in the same court. On May 10, 2002, the Court consolidated all the shareholder complaints against us and appointed several people to be lead plaintiffs. We believe the claims asserted in the complaints are without merit and intend to contest these claims vigorously. However, the outcome of the suits cannot be predicted.

Electronic Instrumentation & Technology, Inc., a former manufacturer of ours, filed a complaint in the Circuit Court of Loudoun County, Virginia in the fourth quarter of 2001. In the complaint, EIT claimed that we did not purchase certain products from EIT and that we were in breach of our purchase agreement. EIT sought compensation in the amount of $83,000, plus additional interest and attorneys fees. We dispute the amount of EIT’s claim, and we intend to contest EIT’s claim vigorously. However, the outcome of the suit cannot be predicted, but we do not believe it will have a material impact upon the financial statements.

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

8. Net Loss Per Share

Basic and diluted net loss per share applicable to common shareholders has been computed using the weighted-average shares of common stock outstanding during the period. There were no common stock equivalents included in the calculation, as their effect would have been anti-dilutive for the periods presented.

The following table presents the potential common stock equivalents that are not included in the diluted net loss per share calculation on the Statements of Operations (shares in thousands).


	Three Months Ended
			March 31,
	2002			2001
Securities
Options outstanding		5,379			5,778
Warrants outstanding		359			359

Total		5,738			6,137

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

From our inception in September 1997 through the fourth quarter of 1998, we were a development stage company, had no revenue and our operating activities related primarily to research and development, developing and testing prototype products, building our technical support infrastructure, staffing our marketing, sales and customer service organizations, and establishing relationships with suppliers, manufacturers and potential customers. We commenced shipments of our products in the first quarter of 1999. Since our inception, we have incurred significant losses and, as of March 31, 2002, we had an accumulated deficit of $100.0 million.

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

In October 2001, we announced that we had received notice from Qwest Communications Corporation purporting to terminate our procurement agreement with it. From the third quarter of 2000 through the first quarter of 2001, Qwest made equipment purchases from us totaling over $15.7 million ($13.8 million under the procurement agreement) and was our largest customer during this period representing approximately 28% of our total sales. In its purported notice of termination, Qwest asserted that we were in material breach of our procurement agreement. In a letter dated October 23, 2001, we responded to Qwest’s earlier letter, rejecting any breach on our part and reiterating our rights under the procurement agreement. On May 10, 2002, the Company entered into a settlement agreement with Qwest. Pursuant to the settlement, ASC will pay $3.5 million to Qwest to resolve all disputes relating to the equipment purchase contract, including Qwest’s demand for a refund in connection with all equipment that the Company sold to Qwest.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

We marketed and sold our products primarily through a direct sales and marketing organization and, to a lesser extent through resellers and original equipment manufacturers. We depended on a relatively small number of customers for a large percentage of our revenue in any particular quarter. For the year ended December 31, 2001, two customers each accounted for revenue in excess of 10% of total revenue. However, due to the lack of significant revenue in the last three quarters of 2001, we had not achieved profitability on a quarterly or an annual basis, and based on current projections we anticipated incurring significant losses for the foreseeable future. This was one of many factors which led to the Company’s plan of liquidation. As a result of the plan of liquidation announced early in the first quarter of 2002, the Company’s sales volume was insignificant.

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

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

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

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

From July 1, 2001 to December 31, 2001, we had reduced our workforce by approximately 50%. On February 6, 2002, in connection with the plan of liquidation, we gave notice to our remaining 87 employees

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

terminating most of them effective April 6, 2002. The rest of the employees terminations occur through the beginning of August 2002 as they have been retained for a longer period to wind down the operations of the Company.

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

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and may result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements of our Form 10-K filed with the Securities and Exchange Commission on March 19, 2002.

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

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

Research and development costs are charged to operations as incurred.

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

We record a provision for uncollectible amounts once it has been determined that the collection of a receivable is not probable. Total accounts receivable at March 31, 2002 were net of an allowance for doubtful accounts of $3.1 million.

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

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


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

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The Company evaluates the potential impairment of long-lived assets based upon projections of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

Amortization of stock compensation represents the amortization of costs incurred in connection with option grants to employees whose exercise prices are below the deemed fair value of our common stock at the date of grant. These costs are amortized over the vesting period. As a result of the plan of liquidation, all unamortized stock compensation was offset against paid in capital during the quarter ended March 31, 2002.

Results of Operations

Quarters Ended March 31, 2002 and 2001

Revenue. Our revenue decreased by approximately $13.4 million, from $13.5 million for the quarter ended March 31, 2001 to $92,000 for the quarter ended March 31, 2002. This decrease was due to the decision to shut down the Company and liquidate the net assets of the Company based upon a continued decline in the telecommunications industry and, specifically, in our customer base over the last three quarters of 2001.

Cost of Revenue. Cost of revenue decreased by approximately $6.3 million, from $7.1 million for the quarter ended March 31, 2001 to $0.8 million for the quarter ended March 31, 2002. This is directly related to the insignificant level of sales in 2002 resulting from our decision to shut down the Company. The $0.8 million incurred in the quarter ended March 31, 2002 related primarily to salary, benefits and accrued severance costs for employees in our operations group as well as fixed overhead charges.

Research and Development Expenses. Our research and development expenses decreased by approximately $1.7 million, or 40%, from $4.3 million for the quarter ended March 31, 2001 to $2.6 million for the quarter ended March 31, 2002, representing 44% and 21% of total operating expenses for the quarters ended March 31, 2001 and 2002, respectively. The decrease was due to the Company ceasing its development efforts and terminating all but two of its research and development employees on February 5, 2002. The $2.6 million incurred in the current quarter related primarily to salary, benefits and accrued severance costs for employees.

Sales and Marketing Expenses. Our sales and marketing expenses decreased by approximately $1.9 million, or 50%, from $3.9 million for the quarter ended March 31, 2001 to $2.0 million for the quarter ended March 31, 2002, representing 40% and 16% of total operating expenses for the quarters ended March 31, 2001 and 2002, respectively. The decrease was due principally to the Company ceasing all sales and marketing efforts effective February 5, 2002. The $2.0 million of costs incurred in the first quarter of 2002 related primarily to salary, benefits and accrued severance costs for employees.

General and Administrative Expenses. Our general and administrative expenses increased by $6.7 million, or 672%, from $992,000 for the quarter ended March 31, 2001 to $7.7 for the quarter ended March 31, 2002, representing 10% and 62% of total operating expenses for the quarters ended March 31, 2001 and 2002, respectively. Included in the $7.7 million for the quarter ended March 31, 2002, was $2.1 million for salary, benefits and accrued severance costs. Also included was $700,000 of estimated insurance costs to be incurred as a result of the Company’s decision to liquidate as well as $549,000 of fees accrued for legal,

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

accounting and other professional services needed to handle any claims and to assist in the shutdown of the Company.

In October 2001, we announced that we had received notice from Qwest Communications Corporation purporting to terminate our procurement agreement with it. From the third quarter of 2000 through the first quarter of 2001, Qwest made equipment purchases from us totaling over $15.7 million ($13.8 million under the procurement agreement) and was our largest customer during this period representing approximately 28% of our total sales. In its purported notice of termination, Qwest asserted that we were in material breach of our procurement agreement. In a letter dated October 23, 2001, we responded to Qwest’s earlier letter, rejecting any allegations of breach on our part and reiterating our rights under the procurement agreement. On May 10, 2002, the Company entered into a settlement agreement with Qwest. Pursuant to the settlement, ASC will pay $3.5 million to Qwest to resolve all disputes relating to the equipment purchase contract, including Qwest's demand for a refund in connection with all equipment that the Company sold to Qwest. This amount was accrued for in general and administrative expenses during the first quarter of 2002.

Other Income, Net. Other income, net of expenses decreased by $1.1 million, or 70%, from $1.5 million for the quarter ended March 31, 2001 to $463,000 for the quarter ended March 31, 2002. Other income, net consists of interest earned on our cash balances and marketable securities and interest expense associated with our bank debt. The decrease in other income, net was primarily due to a lower balance of cash and marketable securities available for investment. Our cash and marketable securities at March 31, 2001 was $101.8 million compared to cash and marketable securities of $74.8 million at March 31, 2002. The decrease is also due to a shift in the investment portfolio into more liquid investments in preparing to distribute the net assets of the Company as we wind down the affairs of the business. In the first quarter of 2001, we invested in a mix of commercial and government securities with an average rate of return of approximately 5.5% over the entire portfolio. In the first quarter of 2002, we invested solely in government agency securities with an overall rate of return of approximately 1.9%.

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 quarter ended March 31, 2002 was $3.1 million. Net cash used in operating activities for the quarter ended March 31, 2001 was $9.0 million. Net cash used in operating activities for each period consisted primarily of the net loss for the period as well as increases in working capital, primarily accounts receivable, inventory, and accrued liabilities.

Net cash provided by investing activities for the quarter ended March 31, 2002 was $9.7 million, which was due solely to the sale of marketable securities. Net cash used in investing activities for the quarter ended March 31, 2001 was $20.1 million, due primarily to purchases of marketable securities as well as purchases of property and equipment.

Net cash provided by financing activities for the quarter ended March 31, 2002 was $80,000 due to stock option proceeds offset by payments on our lease obligations. Net cash used in financing activities for

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the quarter ended March 31, 2001 was $106,000 due to payments of our outstanding debt and of fees associated with our initial public offering.

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

As of March 31, 2002, our principal source of liquidity consisted of $74.8 million in cash, cash equivalents and marketable securities. As announced on February 5, 2002 and approved by the shareholders of the Company on April 9, 2002, the board of directors approved a resolution to liquidate our Company and distribute the net assets to our stockholders. We believe the funds available are more than adequate to satisfy our remaining obligations.

RISK FACTORS

This Report on Form 10-Q contains certain forward looking statements, including statements concerning our future financial results from the sale of assets and settlement of liabilities, dissolution proceedings, and distribution of proceeds to stockholders. Some of our assets may be difficult for us to convert into cash, and we can make no assurance that we will receive any material amounts in respect of such assets. No assurance can be given that the amount to be received in liquidation will equal or exceed the price or prices at which our common stock traded prior to our dissolution. In addition, you should keep in mind that the risks described below are not the only risks that we face. The risks described below are the risks that we currently believe are material to us. However, additional risks not presently known to us, or risks that we currently believe are immaterial, may also impair our ability to distribute proceeds to our stockholders. You should also refer to the other information set forth in this Form 10-Q and in our Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2002, including the discussions set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as our financial statements and the related notes.

Risks Related To Our Liquidation and Dissolution

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

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

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

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

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

complaint alleges violations of the federal securities laws in connection with our initial public offering and subsequent public statements. Thereafter, substantially similar complaints were filed in the same court. We believe the claims asserted in the complaints are without merit and intend to contest these claims vigorously. However, the outcome of the suits cannot be predicted. The existence of these claims could delay the making of any distributions to our stockholders or reduce the amount available for distribution in connection with the proposed plan of liquidation.

Anticipated timing of liquidation may not be achieved.

We intend to proceed with the orderly sale of our assets and file a certificate of dissolution with the Secretary of State of the State of Delaware in May 2002. Although we anticipate that we will substantially complete the sale of our assets within a 12 month period, our board of directors may determine that it is in the best interests of our stockholders that some assets be placed into a liquidating trust, which could delay the receipt by stockholders of the final proceeds of the liquidation.

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

We cannot assure you that the plan of liquidation will result in greater returns to stockholders than our continuing as a going concern or through a business combination or other transaction with a third party.

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

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

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

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

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

Our common stock is currently listed on Nasdaq National Market. Thus, we are subject to financial and market-related tests and other qualitative standards established by Nasdaq to maintain our listing. On September 10, 2001, Nasdaq notified us that we had failed to maintain the $1.00 minimum bid price requirement for continued listing. We had been given until December 10, 2001 to come into compliance with this requirement. However, the Nasdaq had temporarily waived the enforcement of this requirement until January 2002, which gave us additional time to come into compliance. Since December 31, 2001, we have met the minimum bid requirement, but we cannot predict whether we will be able to maintain compliance with the minimum bid requirement or Nasdaq’s other requirements for continued listing. Even

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

if we are able to comply with the $1.00 minimum bid requirement for continued listing, the plan of liquidation has been approved by the stockholders and it is likely that we will not be able to maintain compliance with Nasdaq’s other listing requirements or that Nasdaq will take action to delist our securities from their National Market System. If our common stock were delisted from Nasdaq for either of these reasons, trading, if any, would thereafter be conducted on the over-the-counter market in the so-called “pink sheets” or on the “Electronic Bulletin Board” of the National Association of Securities Dealers, Inc. Consequently, stockholders may find it more difficult to dispose of, or to obtain accurate quotations as to the price of our common stock thereby reducing the liquidity of our stock, making it difficult for a stockholder to buy or sell our stock at competitive market prices, or at all, and we may lose support from institutional investors, brokerage firms and market makers that currently buy and sell our stock and provide information to investors about us. Delisting could also cause the price of our stock to decrease further. In addition, it is likely that we will close our stock transfer books and restrict transfers of our common stock after filing the certificate of dissolution with the State of Delaware.

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

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

Risks Related To The Securities Market

Our stock price has been and may continue to be volatile.

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

Future sales of our common stock in the public market could cause our stock price to fall.

Sales of a large number of shares of our common stock in the public market, or the perception that such sales could occur, could cause the market price of our common stock to decline. As of March 31, 2002, we had approximately 42.9 million shares of common stock outstanding. We have filed with the Securities and Exchange Commission a registration statement on Form S-8 covering 10.2 million shares reserved under our stock option plans. Sales of a large number of shares could have an adverse effect on the market price for our common stock.

Insiders own a substantial number of Advanced Switching Communications shares and could limit your ability to influence the outcome of key transactions, including changes of control.

As of March 31, 2002, the executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 59.0% of our outstanding common stock. These stockholders, if acting together, would be able to influence significantly matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions and adoption of the plan of liquidation.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Recent Accounting Pronouncements

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

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

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

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Statement updates, clarifies and simplifies existing accounting pronouncements. This statement is not expected to have a material impact upon the financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

We do not currently use derivative financial instruments for speculative trading or hedging purposes. In addition, our cash equivalents and marketable securities consist of highly liquid investments. All of our marketable securities of $31.2 million had remaining maturities at March 31, 2002 of less than 365 days. We have the ability to hold these investments until maturity, and therefore do not expect the value of these investments to be affected to any significant degree by a sudden change in interest rates.

Exchange Rate Sensitivity

Currently, all of our sales and expenses are denominated in United States Dollars. Therefore, we have not engaged in any foreign exchange hedging activities to date. We do not expect to conduct transactions in foreign currencies in the future.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In October 2001, we announced that we had received notice from Qwest Communications Corporation purporting to terminate our procurement agreement with it. From the third quarter of 2000 through the first quarter of 2001, Qwest made equipment purchases from us totaling over $15.7 million ($13.8 million under the procurement agreement) and was our largest customer during this period representing approximately 28% of our total sales. In its purported notice of termination, Qwest asserted that we were in material breach of our procurement agreement. In a letter dated October 23, 2001, we responded to Qwest’s earlier letter, rejecting any breach on our part and reiterating our rights under the procurement agreement. On May 10, 2002, the Company entered into a settlement agreement with Qwest. Pursuant to the settlement, ASC will pay $3.5 million to Qwest to resolve all disputes relating to the equipment purchase contract, including Qwest's demand for a refund in connection with all equipment that the Company sold to Qwest.

On February 21, 2002, a complaint was filed in the United States District Court for the Eastern District of Virginia against us and certain of our current and former officers and directors. The plaintiffs in this action purport to act on behalf of a class of other shareholders. The complaint alleges violations of the federal securities laws in connection with our initial public offering and subsequent public statements. Thereafter, substantially similar complaints were filed in the same court. On May 10, 2002, the Court consolidated all the shareholder complaints against us and appointed several people to be the lead plaintiffs. We believe the claims asserted in the complaints are without merit and intend to contest these claims vigorously. However, the outcome of the suits cannot be predicted. The existence of these claims could delay the making of any distributions to our stockholders or reduce the amount available for distribution in connection with the proposed plan of liquidation.

On February 19, 2002, we received a letter from Dishnet, a customer which had purchased approximately $1 million worth of equipment from us. In that letter, Dishnet claimed that the equipment performed unsatisfactorily and sought compensation in the amount of $30 million in connection with damages and losses suffered as a result of the failure of the equipment to perform. On March 5, 2002, we responded to Dishnet informing them we believe that we have fulfilled our obligations to Dishnet, that

Dishnet’s damages claims are without merit and that Dishnet is not entitled to a refund. On April 17, 2002, Dishnet responded by reiterating their position but offered to enter a settlement and release for $13 million. We continue to believe that this matter will not have a material impact upon the financial statements. The existence of Dishnet’s claims could delay the making of final distributions to our stockholders or reduce the amount available for distribution in connection with the proposed plan of liquidation.

Electronic Instrumentation & Technology, Inc., a former manufacturer of ours, filed a complaint in the Circuit Court of Loudoun County, Virginia in the fourth quarter of 2001. In the complaint, EIT claimed that we did not purchase certain products from EIT and that we were in breach of our purchase agreement. EIT sought compensation in the amount of $83,000, plus additional interest and attorneys fees. We dispute the amount of EIT’s claim, and we intend to contest EIT’s claim vigorously. However, the outcome of the suit cannot be predicted. The existence of EIT’s claims could delay the making of final distributions to our stockholders or reduce the amount available for distribution in connection with the proposed plan of liquidation.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On April 9, 2002, the shareholders of the Company approved the plan of complete liquidation and dissolution in its entirety.

          For: 31,494,299
          Against: 682,944
          Abstained: 76,310

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


(a)		Exhibits


None


(b)		Reports On Form 8-K


•		Dated May 15, 2002: Filing of Press Release Announcing Settlement with Customer
•		Dated April 12, 2002: Filing of Press Announcing Stockholder Approval of Plan of Dissolution and Liquidation of the Company
•		Dated February 28, 2002: Filing of Press Release Announcing Results of Fourth Quarter And Year Ending December 31, 2001
•		Dated February 12, 2002: Filing of Press Release Announcing Timing of Fourth Quarter 2001 Results and Preliminary Estimate of Liquidation Proceeds
•		Dated February 5, 2002: Filing of Press Release Announcing Plan of Liquidation

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		ADVANCED SWITCHING COMMUNICATIONS, INC.

		By: /s/ James D. Kuhn James D. Kuhn Controller (Principal Financial and Accounting Officer)

Dated:	May 15, 2002