CARRIER ACCESS CORP, 424B4, 1998-07-31

CARRIER ACCESS CORP
424B4, 1998-07-31
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

Filed Pursuant to Rule 424(b)(4)
File No. 333-53947

3,000,000 Shares
[LOGO OF CARRIER ACCESS(R) CORPORATION APPEARS HERE]
Common Stock
($.001 par value)

------------

The 3,000,000 shares of Common Stock, $.001 par value (the "Common Stock"),
of Carrier Access Corporation ("CAC" or the "Company") offered hereby (the
"Offering") are being offered by the Company. Prior to the Offering,
there has been no public market for the Common Stock. For information
relating to the factors considered in determining the initial public
offering price to the public, see "Underwriting." Assuming no
exercise of the Underwriters' over-allotment option, the Company's
officers, directors and affiliates will hold approximately 70%
of the outstanding Common Stock following the Offering.
Approximately 13% of the Company's Common Stock is being
offered to the public in the Offering.

The Common Stock has been approved for quotation on The Nasdaq National Market
under the symbol "CACS," subject to notice of issuance.

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS"
ON PAGE 6 HEREIN.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
----------- ------------ -----------
<S> <C> <C> <C>
Per Share.................................. $12.00 $0.84 $11.16
Total(2)................................... $36,000,000 $2,520,000 $33,480,000
</TABLE>

(1) Before deduction of expenses payable by the Company estimated at $900,000.
(2) The Company has granted the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase a maximum of 450,000
additional shares to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $41,400,000,
Underwriting Discounts and Commissions will be $2,898,000, and Proceeds to
Company will be $38,502,000.

The shares of Common Stock are offered by the several Underwriters when, as
and if issued, delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the
shares of Common Stock will be ready for delivery on or about August 5, 1998,
against payment in immediately available funds.

CREDIT SUISSE FIRST BOSTON

HAMBRECHT & QUIST

WARBURG DILLON READ LLC

Prospectus dated July 30, 1998.
<PAGE>

[INSIDE FRONT COVER]

[A diagram depicting the Company's Access Bank and Wide Bank product families.]

Carrier Access Corporation(R), DataSplit(R) and Access Bank(R) are registered
trademarks of the Company. Access Exchange and Wide Bank 28 are trademarks of
the Company. This Prospectus contains other product names, trade names and
trademarks of the Company and of other organizations.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>

GATEFOLD DESCRIPTION:

A diagram depicting the Company's logo surrounded by seven graphical
representations of applications of the Company's products: (i) a CLEC
deploying enhanced local voice services over T1 connections with CAC's Access
Bank I TR-08; (ii) an ISP deploying high bandwidth T1 Internet connections via
T3 access connections with CAC's Wide Bank 28; (iii) a CLEC deploying multi-
line voice and high-speed data services to small businesses with CAC's Access
Bank II and Wide Bank 28; (iv) a long distance carrier (IXC) deploying
integrated local voice and data services to a small business with CAC's Access
Exchange; (v) deployment of high bandwidth digital radio access between
businesses using CAC's Wide Bank 28; deployment of digital voice and high-
speed data services over unbundled copper with CAC's Access Bank II HDSL; and
(vii) expanded high-bandwidth access for ISPs with CAC's Wide Bank 28.

The title to the diagram contains the text, "Carrier Access Corporation
provides innovative multi-service digital access equipment to competitive
communications carriers." Below the diagram is a box with the title, "Benefits
of the Carrier Access Solution," followed by text in bullet point format:
"Enable Multiple Service Offerings," "Facilitate Rapid Deployment," "Reduce
Cost of Ownership," "Programmable Functionality," "Scaleability and
Manageability."
<PAGE>

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Except as set forth in
the financial statements or as otherwise specified herein, all information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) reflects a three-for-two forward split of the outstanding shares
of Common Stock effected prior to the effectiveness of the registration
statement related to the Offering made hereby and (iii) reflects the conversion
of all of the Company's outstanding shares of Redeemable Preferred Stock into
Common Stock upon the closing of the Offering made hereby. See "Description of
Capital Stock" and "Underwriting."

THE COMPANY

The Company's MDA products currently include the Access Bank and the Wide
Bank product families. The Access Bank I offers digital connectivity for local
and long distance carrier voice services, and converts a single T1 digital
network access line into 24 telephone circuits for voice, facsimile and modem
connections. The Access Bank II expands on the voice functions of the Access
Bank I and adds high-speed data ports for computer connectivity and dual T1
line interfaces for increasing data speeds and connecting digital phone
systems. The Access Exchange, introduced in April 1998, is a customer-located
access switch that enables long distance carriers ("IXCs") to offer local
services from their embedded base switching equipment. The Wide Bank 28 is a
highly-integrated M1-3 standard multiplexer designed to connect T1 equipment to
high-bandwidth T3 digital circuits, providing up to 28 T1 connections for
enhanced voice and high-speed data services. The Company's products are used
with optical fiber, HDSL on copper pairs, or digital radio transmission
technologies. The Company differentiates its products on their ability to
enable multiple service offerings, facilitate the rapid deployment of new
services, reduce cost of ownership, provide programmable software-based
functionality, scale cost-effectively at carrier and end user locations, and
satisfy the safety and regulatory requirements of both carriers and end users.

The Company's objective is to become the leading supplier of innovative
telecommunications solutions utilized by competitive carriers to enable
enhanced voice and high-speed digital access services. To achieve this
objective, the Company intends to extend its technology leadership, develop and
expand its integrated voice and data solutions, increase penetration of its
existing competitive carrier customer base, gain entry into new markets,
leverage third-party distribution channels and maintain rapid product
fulfillment and manufacturing

3
<PAGE>

efficiency. Based on information from its distributors, the Company believes
that over 100 competitive carriers have purchased the Company's products
through its distributors. Carriers which the Company believes have purchased at
least $50,000 of the Company's products in the six months ended June 30, 1998
include Allegiance Telecom, Inc., ("Allegiance"), Cablevision Systems Corp.
("Cablevision"), Cellular One Group ("Cellular One"), Commonwealth Telephone
Enterprises, Inc. ("Commonwealth"), e.spire Communications, Inc. (formerly
ASCI) ("e.spire"), Frontier Corporation ("Frontier"), GST
Telecommunications, Inc. ("GST"), ICG Communications, Inc. ("ICG"), Intermedia
Communications, Inc. ("Intermedia"), Logix Communications, Inc. ("Logix"), MGC
Communications, Inc. ("MGC"), NEXTLINK Communications, Inc. ("NEXTLINK"),
Pacific Bell, a division of SBC, Inc., PSINet, Inc. ("PSINet"), STAR
Telecommunications, Inc. ("STAR"), Teleport Communications Group, Inc. ("TCG"),
US LEC Corp. ("US LEC"), U S WEST, Inc. ("U S WEST"), WinStar Communications,
Inc. ("WinStar") and Worldcom Inc. ("Worldcom"). The aforementioned list of
carriers comprise a representative subset of the total number of carriers who
have purchased the Company's products. The Company's products are sold through
the Company's network of distributors throughout the United States.

The Company was incorporated in Colorado in September 1992 and was
reincorporated in Delaware on June 26, 1998. The Company's principal executive
offices are located at 5395 Pearl Parkway, Boulder, Colorado 80301, and its
telephone number at that location is (303) 442-5455.

4
<PAGE>

THE OFFERING

Common Stock offered......................
3,000,000 shares
Common Stock to be outstanding after the 23,045,492 shares
Offering(1)...............................
Use of proceeds........................... For general corporate
purposes, including working
capital, product development and
capital expenditures.
See "Use of Proceeds."
Nasdaq National Market symbol............. CACS

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue.......................... $ 2,058 $ 5,809 $18,719 $ 6,493 $16,292
Gross profit......................... 771 2,525 9,250 3,262 8,011
Income (loss) from operations........ 135 (100) 2,346 924 2,424
Net income (loss).................... 181 (76) 1,735 637 1,675
Pro forma net income(2).............. 113
Pro forma and historical income
(loss) per share
Basic and diluted.................. $0.01 $(0.03) $0.04 $0.03 $0.02
Weighted average common shares
outstanding(3)
Basic.............................. 13,665 13,881 14,132 14,089 14,379
Diluted............................ 13,665 13,881 14,713 14,518 15,273
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities........................... $ 8,796 $41,376
Working capital.......................................... 17,969 50,549
Total assets............................................. 23,015 55,595
Total liabilities........................................ 3,093 3,093
Redeemable preferred stock .............................. 18,674 --
Total stockholders' equity............................... 1,248 52,502
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes
1,779,905 shares of Common Stock issuable upon exercise of stock options
outstanding as of June 30, 1998 at a weighted average exercise price of
$3.84 per share, and 1,392,738 shares of Common Stock reserved for grant of
future options as of June 30, 1998 under the 1998 Stock Incentive Plan. See
"Capitalization," "Management--Benefit Plan," "Description of Capital
Stock" and Note 7 of Notes to Financial Statements.
(2) The Company was a subchapter S Corporation for income tax purposes prior to
January 1, 1996 and, accordingly, taxable income was reported in the
individual tax returns of the stockholders. Pro forma net income is
presented as if the Company had been a taxable entity during 1995.
(3) Weighted average common shares outstanding does not include the effect of
the conversion of the Redeemable Preferred Stock into 5,593,133 shares of
Common Stock upon completion of the Offering.
(4) Adjusted to reflect the conversion of the Redeemable Preferred Stock to
Common Stock upon completion of the Offering and the sale of 3,000,000
shares of Common Stock offered by the Company hereby at the initial public
offering price of $12.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses. See "Use of
Proceeds" and "Capitalization."

5
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include those discussed below and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as those discussed elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; FUTURE RESULTS OF OPERATIONS UNCERTAIN

The Company was incorporated in September 1992 and did not commence
commercial deployment of its distributed digital access equipment until the
summer of 1995. Prior to the summer of 1995 the Company derived substantially
all of its net revenue from providing systems integration services and other
consulting services. Accordingly, the Company has only a limited operating
history on which to base an evaluation of its current business and prospects.
The Company and its prospects must be considered in light of the risks,
uncertainties and difficulties frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving
markets. As a result of the Company's limited operating history, rapid growth
and the emerging nature of the markets in which it competes, the Company's
historical financial data is of limited value in evaluating the future
prospects of the Company. Further, the Company intends to significantly
increase its business development, sales and marketing and research and
development expenses to expand operations and enhance the Company's name
recognition. To the extent that such expenses precede or are not rapidly
followed by increased net revenue, the Company's business, financial condition
and results of operations may be materially adversely affected. There can be
no assurance that the Company will be able to increase or sustain its net
revenues or its rate of net revenue growth in future periods or be able to
sustain profitability on a quarterly or annual basis. See "--Significant
Fluctuations in Results of Operations," "--Dependence on Emerging Competitive
Carriers" and "-- Regulatory Uncertainty of Telecommunications Industry."

SIGNIFICANT FLUCTUATIONS IN RESULTS OF OPERATIONS

The Company's results of operations have fluctuated significantly in the
past and are likely to fluctuate significantly in the future, both on a
quarterly and annual basis, as a result of a variety of factors, many of which
are outside of the Company's control. Among other things, the Company's
results of operations have fluctuated in the past due to (i) the availability
of adequate supplies of key components and assemblies and the adequacy of
third-party manufacturing capabilities; (ii) delays in the introduction of new
products or product enhancements by the Company; (iii) customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company; (iv) the Company's ability to affect and judge the timing and
size of orders from its distributors; and (v) errors in the assembly of
electronic component kits and shipping errors. The Company's results of
operations may also fluctuate in the future due to a number of factors,
including, but not limited to, those listed above as well as (i) the timing
and size of orders which are received and which can be shipped in any
particular period; (ii) the commercial success of the Company's products;
(iii) changes in the financial stability of the Company's distributors,
competitive carrier customers or suppliers; (iv) changes in pricing policies
by the Company or its competitors; (v) seasonality in the placement of orders;
(vi) changes in the level of the Company's operating expenses; (vii) changes
in the Company's distribution channels; (viii) delays or deferrals of any
competitive carrier's or end user's implementation of the Company's products;
(ix) product life cycles; (x) customization or integration problems with end
user systems; (xi) changes in the Company's strategy; (xii) product failures
or errors; or (xiii) the level of international expansion. A significant
portion of the Company's net revenue has been, and the Company believes will
continue to be, derived from a limited number of large orders, and the timing
of such orders and their fulfillment has caused, and are expected to continue
to cause, material fluctuations in the Company's operating results. The
Company's distribution agreements generally allow distributors to cancel
orders without penalty until a relatively short period of time prior to
shipment. The Company has experienced cancellation and delays of orders from
time to time, and expects to continue to

6
<PAGE>

experience order cancellations and delays from time to time in the future,
which could adversely affect the Company's revenue and results of operations
for a quarter or series of quarters.

To achieve its quarterly net revenue objectives, the Company depends upon
obtaining orders in any given quarter for shipment during that quarter.
Product orders are typically shipped shortly after receipt and, consequently,
order backlog at the beginning of any quarter has in the past represented only
a small portion of that quarter's net revenue. Furthermore, the Company has
from time to time, including the four quarters of 1997 and the first two
quarters of 1998, recognized a substantial portion of its net revenue from
sales booked and shipped during the last two weeks of a quarter. Accordingly,
a delay in shipment near the end of a particular quarter may cause net revenue
in a particular quarter to fall significantly below the Company's expectations
and may materially adversely affect the Company's operating results for such
quarter, particularly since the Company cannot adjust spending quickly enough
to compensate for any net revenue shortfall. Conversely, to the extent that
significant net revenue occurs earlier than expected, operating results for
subsequent quarters may fail to keep pace with, or even decline from, results
of previous quarters. Moreover, any downturn in general economic conditions
could precipitate significant reductions in customer spending for
telecommunications equipment, which could result in delays or cancellations of
orders for the Company's products.

Net revenue is difficult to forecast because the markets for the Company's
products are rapidly evolving, and the sales cycle to the Company's
distributors and related competitive carrier customers, from initial
evaluation to purchase, can be lengthy and varies substantially among
distributors, competitive carrier customers and end users. Because
substantially all of the sales of the Company's products are through indirect
channels of distribution, the Company's ability to affect and judge the timing
and size of individual orders is more limited than for manufacturers selling
directly to the end users of their products. In addition, the Company's net
revenues for a given quarter may depend to a significant degree upon planned
product shipments for a single competitive carrier equipment deployment
project. As a result, the Company's ability to forecast net revenues
accurately (notwithstanding the forecasts of its distributors), may be
hindered, which could have a material adverse effect on the Company's results
of operations. A significant portion of the Company's expenses are relatively
fixed in the short term. Accordingly, if net revenue levels fall below
expectations, operating results are likely to be disproportionately adversely
affected. Due to one or more of these or other factors, the Company's
quarterly and annual revenues, expenses and results of operations are likely
to vary significantly in the future, and period-to-period comparisons should
not be relied upon as indications of future performance. Actual or potential
fluctuations in operating results may result in volatility in the price of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

DEPENDENCE ON EMERGING COMPETITIVE CARRIERS

The competitive carrier customers of the Company's products to date have
consisted primarily of CLECs and, to a lesser extent, IXCs, ISPs and wireless
carriers. The market for the services provided by these competitive carriers
has only begun to emerge since the passage of the Telecommunications Act of
1996 (the "1996 Act"), and many competitive carriers are still building their
infrastructure and rolling out their services. These competitive carriers
require substantial capital for the development, construction and expansion of
their networks and the introduction of their services. The ability of these
emerging competitive carriers to fund such expenditures often depends on their
ability to obtain sufficient financing. There can be no assurance that such
financing will be available to emerging competitive carriers on favorable
terms, if at all. The inability of the Company's current or potential emerging
competitive carrier customers to successfully raise needed funds, or any other
trends adversely affecting such carriers' operating results or profitability,
could adversely affect such carriers' capital spending programs. If the
Company's current or potential competitive carrier customers are forced to
defer or curtail their capital spending programs, the Company's sales may be
adversely affected, which would have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, many of the industries in which the competitive carriers operate
have recently experienced consolidation. In particular, many telecommunication
carriers have recently acquired or merged with ISPs. The loss of one or more
of the Company's competitive carrier customers, through industry consolidation
or otherwise, could have a material adverse effect on the Company's business,
financial condition or results of operations.

7
<PAGE>

REGULATORY UNCERTAINTY OF TELECOMMUNICATIONS INDUSTRY

Competitive carriers have been allowed to compete with incumbent local
exchange carriers ("ILECs") in the provisioning of local exchange services
primarily as a result of the adoption of regulations under the 1996 Act which
impose new duties on ILECs to open local telephone markets to competition.
Although the 1996 Act was designed to expand competition in the
telecommunications industry, the realization of the objectives of the 1996 Act
is subject to many uncertainties, including judicial and administrative
proceedings designed to define rights and obligations pursuant to the 1996
Act, actions or inactions by ILECs or other carriers that affect the pace at
which changes contemplated by the 1996 Act occur, resolution of questions
concerning which parties will finance such changes, and other regulatory,
economic and political factors. Any changes to legal requirements, the
adoption of new regulations by federal or state regulatory authorities under
the 1996 Act or any legal challenges to the 1996 Act could have a material
adverse effect upon the market for the Company's products. The Company is
aware of certain litigation challenging the validity of the 1996 Act and local
telephone competition rules adopted by the Federal Communications Commission
("FCC") for the purpose of implementing the 1996 Act. Such litigation may
serve to delay implementation of the 1996 Act, which could adversely affect
demand for the Company's products. Moreover, the Company's distributors or
competitive carrier customers may require, or the Company may otherwise deem
it necessary or advisable, that the Company modify its products to address
actual or anticipated changes in the regulatory environment. The inability of
the Company to modify its products or address such regulatory changes could
have a material adverse effect on the Company's business, financial condition
or results of operations.

INTENSE COMPETITION

The market for telecommunications equipment is characterized by intense
competition, with a large number of suppliers providing a variety of products
to diverse market segments within the telecommunications industry. The
Company's existing and potential competitors include many large domestic and
international companies, including certain companies that have substantially
greater financial, manufacturing, technological, sales and marketing,
distribution and other resources. The Company's principal competitors for its
Access Bank product family include Advanced Fibre Communications ("AFC"),
Cisco Systems, Inc. ("Cisco"), DSC Communications Corp. ("DSC"), General
Datacom Industries, Inc. ("General Datacom"), Lucent Technologies, Inc.
("Lucent"), NEC Corp. ("NEC"), Newbridge Networks Corp. ("Newbridge"),
Northern Telecom ("Nortel"), Pairgain Technologies, Inc. ("Pairgain"),
Paradyne Corp. ("Paradyne"), Premisys Communications, Inc. ("Premisys"), Pulse
Communications, Inc. ("Pulsecom"), Reltec Corp. ("Reltec"), Telco Systems
("Telco") and other small private companies. The Company's principal
competitors for its Wide Bank product family include Alcatel Alsthom Compagnie
Generale d'Electricite ("Alcatel"), NEC, Nortel and Telco. The Company expects
that many of its competitors who currently offer products competitive with
only one of the Company's product lines will eventually offer products
competitive with all of the Company's product lines. In addition, several
start-up companies have recently begun to manufacture products similar to
those offered by the Company. Due to the rapidly evolving markets in which the
Company competes, additional competitors with significant market presence and
financial resources, including large telecommunications equipment
manufacturers and computer hardware and software companies, may enter those
markets, thereby further intensifying competition. Additionally, one of the
Company's distributors is currently competing with the Company, and there can
be no assurance that additional distributors will not begin to develop or
market products in competition with the Company.

8
<PAGE>

Company's products and services. Some of the Company's competitors currently
offer financing alternatives to their customers, a service that the Company
does not provide at this time. The Company expects its competitors to continue
to improve the performance of their current products and to introduce new
products or technologies that provide added functionality and other features.
Successful new product introductions or enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's products and services, could result in continued
intense price competition or could make the Company's products and services or
technologies obsolete or noncompetitive. To be competitive, the Company will
be required to continue to invest significant resources in research and
development and sales and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company will be able to make the technological advances necessary to be
competitive. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Competition."

DEPENDENCE ON DISTRIBUTION CHANNELS

Substantially all of the sales of the Company's products are made through
distributors. In addition to product sales, the Company from time to time
relies on its distributors to provide installation, training and customer
support to the ultimate end users of the Company's products. As a result, the
Company's success depends on the continued sales and customer support efforts
of its network of distributors. Sales of the Company's products historically
have been made to a limited number of distributors. In 1995, Telco, C&L
Communications ("C&L"), Phillips Communications and Equipment ("Phillips") and
Telsource Corporation ("Telsource") accounted for 26%, 13%, 13% and 12% of net
revenue, respectively. In 1996, Telco, Phillips, Telsource and C&L accounted
for 47%, 18%, 18% and 11% of net revenue, respectively. In 1997, Walker &
Associates ("Walker"), ADC Telecommunications ("ADC") and Phillips accounted
for 36%, 20% and 14% of net revenue, respectively. In the first half of 1998,
Walker, Phillips and Telsource accounted for 47%, 19% and 15% of net revenue,
respectively. The Company expects that the sale of products will continue to
be made to a small number of distributors. Accordingly, the loss of, or
reduction in sales to, any of the Company's key distributors could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company depends on ADC to actively market
and promote the Company's solution for the HDSL market. If ADC does not
actively market or promote the Company's solution to the HDSL market, the
Company would need to seek another OEM for this market, which could take six
months or longer. The Company has limited knowledge of the financial condition
of certain of its distributors; however, it is aware that some of its
distributors have limited financial and other resources which could impair
their ability to pay the Company. Although the financial instability of these
distributors has not limited any distributor's ability to pay the Company for
its products to date, there can be no assurance that any bad debts incurred by
the Company will not exceed the Company's reserves therefor or that the
financial instability of one or more of the Company's distributors will not
materially adversely affect the Company's business, financial condition or
results of operations.

The Company generally provides its distributors with limited stock rotation
and price protection rights. Other than limited stock rotation rights, the
Company does not provide its distributors with general product return rights.
The Company has limited knowledge of the inventory levels of its products
carried by its OEMs and distributors, and the Company's OEMs and distributors
have in the past reduced, and may in the future reduce, planned purchases of
the Company's products due to overstocking. Moreover, distributors who have
overstocked the Company's products have in the past reduced, and may in the
future reduce, their inventories of the Company's products by selling such
products at significantly reduced prices. Any such reduction in planned
purchases or sales at reduced prices by distributors or OEMs in the future
could reduce the demand for the

9
<PAGE>

Company's products, create conflicts with other distributors or materially
adversely affect the Company's business, financial condition and results of
operations. In addition, three times a year, distributors are allowed to
return a maximum of fifteen percent of the Company's unsold products held in
stock by such distributor, which were purchased within the four month period
prior to such return date, for an equal dollar amount of new equipment. While
to date these returns have not had a material impact on the Company's results
of operations, there can be no assurance that the Company will not experience
significant returns in the future or that it will have made adequate
allowances to offset such returns. The Company is generally required to give
its distributors a 60 day notice of price increases. Orders entered by
distributors within the 60 day period are filled at the lower product price.
In addition, the Company grants certain of its distributors "most favored
customer" terms, pursuant to which the Company has agreed to not knowingly
grant another distributor the right to resell the Company's products on terms
more favorable than those granted to the existing distributor, without
offering the more favorable terms to the existing distributor. There can be no
assurance that these price protection and "most favored customer" clauses will
not cause a material decrease in the average selling prices and gross margins
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Lengthy Sales Cycle," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Sales and Marketing" and Note
8 of Notes to Financial Statements.

CHALLENGES OF MAINTAINING AND EXPANDING DISTRIBUTION CHANNELS; POTENTIAL FOR
CHANNEL CONFLICT

The Company's ability to achieve future net revenue growth will depend in
large part on its success in maintaining its current distributor
relationships, diversifying its distribution channels by selling to new
distributors, establishing relationships with OEMs and maintaining as well as
expanding the Company's current competitive carrier customer base. Most of the
Company's existing distributors currently distribute, or may in the future
distribute, the product lines of the Company's competitors. There can be no
assurance that the Company will be able to attract and retain a sufficient
number of its existing or future distributors or that the Company's
distributors will recommend, or continue to recommend, the Company's products
or that the Company's distributors will devote sufficient resources to market
and provide the necessary customer support for such products. In the event
that any of the Company's current distributors reduce their purchases of the
Company's products, or that the Company fails to obtain future distributors,
the Company's business, financial condition or results of operations could be
materially and adversely affected. In addition, there can be no assurance that
the Company's distributors will give a high priority to the marketing and
customer support of the Company's products as compared to competitive products
or alternative solutions or that the Company's distributors will continue to
offer the Company's products. The Company's distributor relationships are
established through formal agreements that generally do not grant exclusivity,
do not prevent the distributor from carrying competing product lines and do
not require the distributor to purchase any minimum dollar amount of the
Company's products. In addition, the Company's distribution agreements do not
attempt to allocate certain territories for its products among its
distributors. To the extent different distributors target the same end users
of the Company's products, distributors may come into conflict with one
another, which could damage the Company's relationship with, and sales to,
such distributors.

COMPETITIVE CARRIER CUSTOMER CONCENTRATION

10
<PAGE>

such termination, change, reduction or delay in orders could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence on Distribution Channels," "--Challenges of
Maintaining and Expanding Distribution Channels; Potential for Channel
Conflict" and "Business--Customers."

POSSIBLE DECLINE IN PRICES

The Company believes that average selling prices and gross margins for its
products will decline as such products mature, as volume price discounts in
contracts take effect and as competition intensifies, among other factors. To
offset declining selling prices, the Company believes that it must
successfully reduce the costs of production of its existing products and
introduce and sell new products and product enhancements on a timely basis at
a lower cost or sell products and product enhancements that incorporate
features that enable them to be sold at higher average selling prices. In
particular, the Company believes that it will need to achieve significant cost
reductions through engineering improvements and economies of scale in
production and purchasing. There can be no assurance that the Company will be
able to achieve the desired cost savings. To the extent that the Company is
unable to reduce costs sufficiently to offset any declining average selling
prices or unable to introduce enhanced products with higher selling prices,
the Company's gross margins will decline, and such decline would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Dependence on New Product Introductions and
Product Enhancements; Risks Associated with Transition to New Products" and
"--Risk of Product Defects, Returns and Liability."

DEPENDENCE ON EMERGING MARKET FOR MULTI-SERVICE DIGITAL ACCESS EQUIPMENT;
RISKS ASSOCIATED WITH MARKET ACCEPTANCE OF WIDE BANK PRODUCT FAMILY

The Company currently derives all of its net revenue from sales of its MDA
equipment and accessories and expects that this concentration will continue in
the foreseeable future. In 1997, the Company's Access Bank product family and
the Wide Bank product family accounted for approximately 80% and 16% of the
Company's net revenue, respectively. In the first half of 1998, the Company's
Access Bank product family and Wide Bank product family accounted for
approximately 70% and 25% of the Company's net revenue, respectively. As a
result, any decrease in the overall level of sales of, or the prices for, MDA
equipment due to product enhancements, new product introductions or
announcements by the Company's competitors, a decline in the demand for MDA
equipment, product obsolescence, price competition, technological change or
any other reason could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's future financial performance will depend in part on the general
growth of the MDA equipment market, and in particular on the successful
development, introduction and customer acceptance of new and enhanced versions
of its existing Access Bank and Wide Bank product families. The Company began
commercial development of the Wide Bank product family in November 1997 and
anticipates that this product family will account for an increasing share of
its net revenue. There can be no assurance that the market for this product
family will grow or the Company will be successful in introducing the Wide
Bank or any other products, or that any of these products will achieve
widespread customer acceptance. If the market for MDA equipment fails to grow
or grows more slowly than the Company currently anticipates, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "--Dependence on New Product Introductions and Product
Enhancements; Risks Associated with Transition to New Products" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS

Although the Company generally uses standard parts and components for its
products, many key components are purchased from sole or single source vendors
for which alternative sources are not currently available. The Company
currently purchases 20 key components from vendors for which there is
currently no substitute and purchases an additional 43 key components from
single vendors. In particular, the Company uses several independent
manufacturers to provide certain printed circuit boards ("PCBs"), chassis and
subassemblies. The inability to obtain sufficient quantities of these
components has in the past resulted in, and may in the future result in,
delays or reductions in product shipments which could materially adversely
affect the

11
<PAGE>

Company's business, financial condition and results of operations. In the
event of a reduction or interruption of supply, as much as six months could be
required before the Company would begin receiving adequate supplies from
alternative suppliers, if any. No assurance can be given that any such source
would become available to the Company or that any such source would be in a
position to satisfy the Company's production requirements on a timely basis,
if at all. In such event, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, the
manufacture of certain of these single or sole source components is extremely
complex, and the Company's reliance on the suppliers of these components
exposes the Company to potential production difficulties and quality
variations, which could negatively impact cost and timely delivery of the
Company's products. Any significant interruption in the supply, or degradation
in the quality, of any such component could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing."

DEPENDENCE ON COMPONENT AVAILABILITY

The Company's distributors frequently require rapid delivery after placing
an order. Because the Company does not maintain significant component
inventories, a delay in shipment by a supplier could lead to lost sales. Lead
times for materials and components vary significantly and depend on many
factors, some of which are beyond the Company's control, such as specific
supplier performance, contract terms and general market demand for components.
If orders vary from forecasts, the Company may experience inadequate inventory
of certain materials and components to fill orders. While the Company has not
experienced any material shortages of these components to date, any shortages
in the future, including those occasioned by increased sales, could result in
delays in fulfillment of customer orders. Such delays could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence on Distribution Channels," "--Challenges of
Maintaining and Expanding Distribution Channels; Potential for Channel
Conflict" and "Business--Manufacturing."

RISKS ASSOCIATED WITH MANUFACTURING

The Company currently uses several independent manufacturers to provide
certain PCBs, chassis and subassemblies. The Company's reliance on independent
manufacturers involves a number of risks, including the absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies and reduced control over delivery schedules, manufacturing yields
and costs. Some of the Company's manufacturers and suppliers are
undercapitalized, and there can be no assurance that such manufacturers or
suppliers will be able to continue to provide manufacturing services or
components to the Company. In the event that these manufacturers are unable or
unwilling to continue to manufacture the Company's components in required
volumes, the Company will have to identify and qualify acceptable additional
or alternative manufacturers, which could take in excess of six months. No
assurance can be given that any such source would become available to the
Company or that any such source would be in a position to satisfy the
Company's production requirements on a timely basis, if at all. Any
significant interruption in the supply of these components to the Company
would result in the allocation of products to customers, which in turn could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, since all of the Company's final assembly
and test are performed in one location, any fire or other disaster at the
Company's assembly facility would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."

DEPENDENCE ON KEY PERSONNEL AND AVAILABILITY OF SKILLED WORKFORCE

The Company's success depends to a significant degree upon the continued
contributions of its Chief Executive Officer, Chief Financial Officer and its
key management, sales, engineering, customer support and product development
personnel, many of whom would be difficult to replace. In particular, the loss
of either Roger Koenig, President and Chief Executive Officer, or Nancy
Pierce, Chief Financial Officer, both of whom co-founded the Company, could
materially and adversely affect the Company. In addition, in December 1997 the
Company's then-Vice President of Marketing resigned, in March 1998 the
Company's then-Vice President

12
<PAGE>

of Sales also resigned and certain members of the Company's senior management,
including Randy Shipley, Vice President-Sales and John Stahura, Vice
President-Operations, have only recently joined the Company. The Company is
currently in the process of recruiting a Vice President-Marketing. There can
be no assurance that if hired, the new Vice President-Marketing or other
recently hired employees, will be assimilated into the Company successfully.
The Company believes that its future success will depend in large part upon
its ability to attract and retain highly-skilled managerial, sales, customer
support and product development personnel. Competition for qualified personnel
in the Company's industry and geographic location is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The Company does not have employment contracts with any of its
key personnel. The loss of the services of any such persons, the inability to
attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineering personnel and qualified sales
personnel, could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, in the two months
following the resignation of the Company's then-Vice President of Sales in
March 1998, the Company experienced a significant increase in the turnover
rate of its sales department. Although the Company believes that it has
successfully reconstituted its sales force, there can be no assurance that the
Company will not experience similar problems in the future or, if it does,
that it will be able to successfully respond to such problems on a timely
basis. See "Business--Employees," "Management--Executive Officers and
Directors" and "--Executive Compensation."

RISKS ASSOCIATED WITH RAPID GROWTH

The Company has experienced rapid growth in net revenue and expansion of its
operations and anticipates that further significant expansion will be required
to address potential growth in its customer base and market opportunities.
Such growth has placed, and, if sustained, will continue to place, significant
strain on the Company's management, information systems, operations and
resources. For example, the Company has experienced errors in the assembly of
electronic component kits and shipping errors in the past primarily as a
result of its limited resources in the face of a period of rapid growth. The
Company's ability to manage any future growth will continue to depend upon the
successful expansion of its sales, marketing, research and development,
customer support, manufacturing and administrative infrastructure and the
ongoing implementation and improvement of a variety of internal management
systems, procedures and controls. Continued growth will also require the
Company to hire more engineering, sales and marketing and administrative
personnel, expand customer support capabilities, expand management information
systems and improve its inventory management practices. Recruiting qualified
personnel is an intensely competitive and time-consuming process. There can be
no assurance that the Company will be able to attract and retain the necessary
personnel to accomplish its growth strategies or that it will not experience
constraints that will adversely affect its ability to satisfy customer demand
in a timely fashion or to support satisfactorily its customers and operations.
There can be no assurance that the Company will be able to attract, manage and
retain additional personnel to support any future growth, if any, or will not
experience significant problems with respect to any infrastructure expansion
or the attempted implementation of systems, procedures and controls. If the
Company's management is unable to manage growth effectively, the Company's
business, financial condition and results of operations could be materially
adversely affected. The Company believes that it will require up to 50,000
additional square feet of office, manufacturing and research and development
space within the next 24 months. There can be no assurance that suitable
additional space will be available on commercially reasonable terms or at all.
See "--Dependence on Sole and Single Source Suppliers," "--Dependence on
Component Availability," "--Risks Associated with Manufacturing," "--
Dependence on Key Personnel and Availability of Skilled Workforce,"
"Business--Employees" and "Management--Executive Officers and Directors."

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND PRODUCT ENHANCEMENTS; RISKS
ASSOCIATED WITH TRANSITION TO NEW PRODUCTS

The Company's success will depend to a substantial degree upon its ability
to enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing end user
requirements and emerging industry standards; however, there can be no
assurance that the Company

13
<PAGE>

will be successful in identifying, developing, manufacturing, and marketing
product enhancements or new products that will respond to technological change
or evolving industry standards. The Company intends to continue to invest
significantly in product and technology development. The Company has in the
recent past experienced delays in the development and commencement of
commercial shipment of new products and enhancements, resulting in distributor
and end user frustration and delay or loss of net revenue. There can be no
assurance that the Company will not experience similar or other difficulties
in the future that could delay or prevent the successful development,
production or shipment of such new products and enhancements, or that its new
products and enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Announcements of currently planned
or other new product offerings by the Company or its competitors have in the
past caused, and may in the future cause, distributors or end users to defer
or cancel the purchase of existing Company products. The Company's inability
to develop on a timely basis new products or enhancements to existing
products, or the failure of such new products or enhancements to achieve
market acceptance, could have a material adverse effect on the Company's
business, financial condition and results of operations.

Certain of the Company's competitive carrier customers have purchased the
Company's MDA products with the expectation that the Company would develop an
integrated voice and data solution for commercial use during the fourth
quarter of 1998. While the Company intends to substantially invest in the
research and development of such a solution, there can be no assurance that
the Company will develop such a solution or that such a solution can be
developed in a cost-effective manner. In addition, the Company cannot project
the aggregate research and development expenditures for full deployment of its
integrated voice and data solution. If the Company is unable to develop an
integrated voice and data solution in a timely and cost-effective manner that
achieves market acceptance, the competitive carriers who purchased the
Company's MDA products with the expectation of such a development could
discontinue their use of the Company's MDA products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations to the extent such competitive carriers do not continue
to purchase the Company's products.

The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. The introduction of new or
enhanced products will also require the Company to manage the transition from
older products in order to minimize disruption in customer ordering patterns,
avoid excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. During the
first quarter of 1998, the Company reworked certain of its Wide Bank products
previously sold to a certain distributor in order to add new features which
were included in a subsequent release of such product. While these actions did
not cause the Company to record lower than anticipated net revenue for the
first quarter of 1998, the Company's gross margin was adversely affected.
There can be no assurance that the Company will continue to successfully
develop, introduce or manage the transition to new products.

RISK OF PRODUCT DEFECTS, RETURNS AND LIABILITY

The Company's products have in the past contained, and may in the future
contain, undetected or unresolved errors when first introduced or as new
versions are released. There can be no assurance that, despite extensive
testing by the Company, errors, defects or failures will not be found in the
Company's current or future products or enhancements after commencement of
commercial shipments, resulting in delay in or loss of market acceptance and
sales, product returns, diversion of development resources, injury to the
Company's reputation or increased service and warranty costs, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant delays in meeting deadlines
for announced product introductions or enhancements or performance problems
with such products could result in an undermining of customer confidence in
the Company's products, which would materially and adversely affect its
customer relationships as well. Although the Company has not experienced any
product liability claims to date, the sale and support of the Company's
products entails the risk of such claims, and there can be no assurance that
the Company will not be subject to such claims in the future. A successful
product liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's agreements with its distributors typically contain
provisions designed to

14
<PAGE>

limit the Company's exposure to potential product liability claims. However,
it is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective under the laws of certain
jurisdictions.

LENGTHY SALES CYCLE

The sale of the Company's MDA products averages approximately four months in
the case of competitive carriers, but can take significantly longer in the
case of ILECs and certain distributors and end users. This process is often
subject to delays over which the Company has little or no control, including a
distributor's or a competitive carrier's budgetary constraints, distributor or
competitive carrier internal acceptance reviews, the success and continued
internal support of competitive carrier's own development efforts, and the
possibility of cancellation or delay of projects by distributors or
competitive carriers. In addition, as competitive carriers have matured and
grown larger, their purchase process has become more institutionalized, and it
has become increasingly difficult, and required more of the Company's time and
effort, to gain the initial acceptance and adoption of its products by these
end users. Although the Company attempts to develop its products with the goal
of facilitating the time to market of its competitive carrier's products, the
timing of the commercialization of a new distributor or competitive carrier's
application or service based on the Company's products is primarily dependent
on the success and timing of a competitive carrier's own internal deployment
program. Delays can also be caused by late deliveries by other vendors,
changes in implementation priorities and slower than anticipated growth in
demand for the Company's products. A delay in, or a cancellation of, the sale
of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations and cause
the Company's results of operations to vary significantly from quarter to
quarter. See "Business--Sales and Marketing."

RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE

The telecommunications and data communications market is characterized by
rapidly changing technology, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements that may
render the Company's existing products obsolete. The Company expects that new
technologies will emerge as competition in the telecommunications and data
communications industry increases and the need for higher volume and more cost
efficient transmission equipment expands. Industry standards for distributed
digital access equipment and technology are still evolving. The introduction
of products embodying new technologies or the emergence of new industry
standards can render existing products obsolete or unmarketable. For example,
if the market were to broadly adopt telecommunications equipment based on
cable modems or cable telephony, sales of the Company's existing or future
products could be significantly diminished. As standards and technologies
evolve, the Company will be required to modify its products or develop and
support new versions of its products. The failure of the Company's products to
comply, or delays in achieving compliance, with the various existing and
evolving industry standards could adversely affect sales of the Company's
current products or delay introduction of the Company's future products.

DEPENDENCE ON CONTINUED GROWTH OF MARKET FOR TELECOMMUNICATIONS SERVICES

The Company's success will also depend on continued growth in the market for
telecommunications and data communications services. The global
telecommunications marketplace is evolving and it is difficult to predict its
potential size or future growth rate. There can be no assurance this market
will continue to grow or that increased regulation will not present barriers
to the sales of existing or future products. If this market fails to grow or
grows more slowly or in a different direction than the Company currently
anticipates, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "--Intense
Competition," "--Dependence on New Product Introductions and Product
Enhancements; Risks Associated with Transition to New Products" and "--Risk of
Product Defects, Returns and Liability."

15
<PAGE>

DEPENDENCE ON PROPRIETARY RIGHTS

The Company relies primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as confidentiality procedures and
contractual restrictions, to establish and protect its proprietary rights. As
of June 30, 1998, a total of two U.S. patents have been issued to the Company,
one additional patent has been allowed and a total of five U.S. patent
applications are pending. The Company also has three U.S. registered
trademarks and one U.S. trademark application pending. The Company has also
entered into confidentiality agreements with all of its employees and
consultants and enters into non-disclosure agreements with its suppliers and
distributors in order to limit access to and disclosure of its proprietary
information. There can be no assurance such measures will be adequate to deter
and prevent misappropriation of the Company's technologies or independent
third-party development of similar technologies. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use trade secrets or other
information that the Company regards as proprietary. Further, the Company may
be subject to additional risks as it enters into transactions in foreign
countries where intellectual property laws do not protect the Company's
proprietary rights as fully as do the laws of the U.S. There can be no
assurance that the Company's competitors will not independently develop
similar or superior technologies or duplicate any technology developed by the
Company. Any such events could have a material adverse effect on the Company's
business, financial condition and results of operations.

The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. As the number of entrants in the Company's markets increases and
the functionality of the Company's products is enhanced and overlaps with the
products of other companies, the Company may become subject to claims of
infringement or misappropriation of the intellectual property rights of
others. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to the Company. Although the Company has not received communications
from third parties asserting that the Company's products infringe or may
infringe proprietary rights of third parties, the Company has no assurance
that any future claims, if determined adversely to the Company, would not have
a material adverse effect on the Company's business, financial condition or
results of operations. In its distribution agreements, the Company agrees to
indemnify distributors and competitive carrier customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. In certain limited instances, the amount of such
indemnities may be greater than the net revenue the Company may have received
from the distributor. There can be no assurance that third parties will not
assert infringement or misappropriation claims against the Company in the
future with respect to current or future products. In the event litigation is
required to determine the validity of any third-party claims, such litigation,
whether or not determined in favor of the Company, could result in significant
expense to the Company, divert the efforts of the Company's technical and
management personnel, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
arrangements, if required, may not be available on reasonable commercial terms
acceptable to the Company, if at all. In the event of an adverse ruling in any
litigation, the Company might be required to discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses from third parties. In the event of a claim or
litigation against or by the Company or the failure of the Company to develop
or license a substitute technology on commercially reasonable terms, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business--Intellectual Property."

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

To date, the Company has not recorded material sales outside of the U.S. The
Company intends to expand its operations outside the U.S. and enter into
international markets, which will require significant management attention and
financial resources. There can be no assurance that the Company will be
successful in achieving significant sales of its distributed digital access
equipment in international markets. There may not be a demand in foreign
countries with respect to new products, if any, that the Company may offer in
the future. In addition, international sales are subject to a variety of
risks, including difficulties in establishing and managing

16
<PAGE>

international distribution channels, in servicing and supporting products sold
outside the U.S. and in translating products and related materials into
foreign languages. International operations are also subject to difficulties
in collecting accounts receivable, staffing, managing personnel and enforcing
intellectual property rights. The Company also anticipates that product
service and support will be more complicated and expensive with respect to
products sold in international markets. The Company may need to adapt its
products to conform to different technical standards that may exist in foreign
countries. Future customer purchase agreements may be governed by foreign
laws, which may differ significantly from U.S. laws. Other factors that can
adversely affect international operations include fluctuations in the value of
foreign currencies and currency exchange rates, changes in import/export
duties and quotas, introduction of tariff or non-tariff barriers and economic
or political changes in international markets. Any inability to obtain foreign
regulatory approvals on a timely basis could have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company's international sales increase, its net revenue may also be affected
to a greater extent by seasonal fluctuations resulting from lower levels of
sales which typically occur during the summer months in Europe and other parts
of the world. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Strategy."

POTENTIAL NEED FOR ADDITIONAL CAPITAL; RISKS RELATING TO POTENTIAL
ACQUISITIONS

The Company currently anticipates that the proceeds of the Offering,
together with its existing cash balances and available line of credit and cash
flows expected to be generated from future operations, will be sufficient to
meet the Company's liquidity needs for at least the next 12 months. However,
the Company may need to raise additional funds if its estimates of net
revenue, working capital and/or capital expenditure requirements change or
prove inaccurate or in order for the Company to respond to unforeseen
technological or marketing hurdles or to take advantage of unanticipated
opportunities. In addition, the Company expects to review potential
acquisitions that would complement its existing product offerings or enhance
its technical capabilities. While the Company has no present commitments or
agreements with respect to acquisitions, the Company may, from time to time,
pursue the acquisition of other companies, assets, products and technologies.
Acquisitions involve a number of operating risks that could materially
adversely affect the Company's results of operations, including the diversion
of management's attention to assimilate the operations, products and personnel
of the acquired companies, the amortization of acquired intangible assets, and
the potential loss of key employees of the acquired companies. Furthermore,
acquisitions may involve businesses in which the Company lacks experience.
Because management has limited experience in acquisitions and the Company has
no experience in integrating acquired companies or technologies into its
operations, there can be no assurance that the Company will be able to manage
one or more acquisitions successfully, or that the Company will be able to
integrate the operations, products or personnel gained through any such
acquisitions without a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

YEAR 2000 COMPLIANCE

Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date code field, and were not
designed to account for the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless
corrected so that they can process data related to the year 2000. The Company
relies on its systems, applications and devices in operating and monitoring
all major aspects of its business, including financial systems (such as
general ledger, accounts payable and accounts receivable modules), inventory
and receivables systems, customer services, infrastructure, embedded computer
chips, networks and telecommunications equipment and end products. The Company
also relies, directly and indirectly, on systems of external business
enterprises such as distributors, suppliers, creditors, financial
organizations, and of governmental entities, for accurate exchange of data.
Even if the internal systems of the Company are not materially affected by the
year 2000 issue, the Company could be affected through disruptions in the
operation of the enterprises with which the Company interacts. Based on the
information

17
<PAGE>

currently available, the Company believes that the costs associated with the
year 2000 issue, and the consequences of incomplete or untimely resolution of
the year 2000 issue, will not have a material adverse effect on its business,
financial condition and results of operations in any given year; however,
there can be no assurance that year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering there has been no public market for the Common Stock,
and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial offering
price was determined by negotiation among the Company and the Underwriters
based upon several factors and may not be indicative of the market price of
the Common Stock after the Offering. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
trading price of the Common Stock could be subject to wide fluctuations in
response to variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, regulatory developments and other
events or factors. In addition, the stock market in general and the market
prices of equity securities of many high technology companies in particular,
have experienced extreme price fluctuations, which often have been unrelated
to the operating performance of such companies. These broad market
fluctuations may materially adversely affect the market price of the Common
Stock. There can be no assurance that the trading price of the Common Stock
will not decline below its initial offering price to the public. See
"Underwriting."

CONTROL BY EXISTING STOCKHOLDERS

Following the completion of this Offering, members of the Board of Directors
and the executive officers of the Company, together with members of their
families and entities that may be deemed affiliates of or related to such
persons or entities, will beneficially own approximately 70% of the
outstanding shares of Common Stock of the Company. In particular, Mr. Koenig
and Ms. Pierce, the Company's Chief Executive Officer and Chief Financial
Officer, respectively, are married and will beneficially own approximately 60%
of the outstanding shares of Common Stock of the Company. Accordingly, these
stockholders will be able to elect all members of the Company's Board of
Directors and determine the outcome of all corporate actions requiring
stockholder approval, such as mergers and acquisitions. This level of
ownership by such persons and entities may have a significant effect in
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.

EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS

Upon completion of the Offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. The Company is also subject to certain provisions of Delaware
law which could have the effect of delaying, deterring or preventing a change
in control of the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder unless certain conditions
are met. In addition, the Company's certificate of incorporation and bylaws
contain certain provisions that, together with the ownership position of the
officers, directors and their affiliates, could discourage potential takeover
attempts and make more difficult attempts by stockholders to change
management,whichcould adversely affect the market price of the Common Stock.
See "Management--Executive Officersand Directors," "Certain Transactions,"
"Principal Stockholders" and "Description of Capital Stock."

18
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements under which certain
stockholders have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Credit Suisse First Boston Corporation. However,
Credit Suisse First Boston Corporation may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
these lock-up agreements. When determining whether or not to release shares
from the lock-up agreements, Credit Suisse First Boston Corporation will
consider, among other factors, the person's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time. As a result of these restrictions, based on
shares outstanding and options granted as of June 30, 1998, and assuming no
options are exercised between June 30, 1998 and the date of this Prospectus,
the following shares of Common Stock will be eligible for future sale. On the
date of this Prospectus, 3,147,900 shares (including the 3,000,000 shares
offered hereby) will be eligible for sale. An additional 56,421 shares will be
eligible for sale 90 days after the date of this Prospectus pursuant to Rule
701 of the Securities Act, and upon the expiration of the lock-up agreements
an additional 19,841,171 shares will be eligible for sale 180 days after the
date of this Prospectus, subject to certain limitations of Rule 144 of the
Securities Act. In addition, the Company intends to register on a registration
statement on Form S-8 under the Securities Act, within 90 days after the
effective date of the Offering, a total of 3,172,633 shares of Common Stock
subject to outstanding options or reserved for issuance under the 1998 Stock
Incentive Plan. Upon expiration of the lock-up agreements referred to above,
holders of approximately 5,593,126 shares of Common Stock will be entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock. See "Description of
Capital Stock--Registration Rights" and "Shares Eligible for Future Sale."

MANAGEMENT'S DISCRETION OVER PROCEEDS OF THE OFFERING

The primary purposes of the Offering are to create a public market for the
Common Stock, to facilitate future access to public markets and to obtain
additional equity capital. As of the date of this Prospectus, the Company has
no specific plans as to the use of the net proceeds from this Offering;
accordingly, the Company's management will have broad discretion as to the
application of such net proceeds. Pending any such uses, the Company plans to
invest the net proceeds in short-term investment grade, interest-bearing
securities. See "Use of Proceeds."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of shares of Common Stock in the Offering will incur immediate
and substantial dilution in the net tangible book value per share of the
Common Stock from the initial public offering price. To the extent that
outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. See "Dilution."

19
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale and issuance of the 3,000,000
shares of Common Stock offered hereby are approximately $32.6 million
(approximately $37.6 million if the Underwriters' over-allotment option is
exercised in full), at the initial public offering price of $12.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses. The Company intends to use the net proceeds for general
corporate purposes, including working capital, product development and capital
expenditures. In particular, the Company expects to use a portion of the net
proceeds to expand its facilities. The Company believes it will require up to
50,000 additional square feet of office, manufacturing and research and
development space in the next 24 months. A portion of the net proceeds may
also be used to acquire or invest in complementary businesses or products or
to obtain the right to use complementary technologies. The Company has no
agreements or commitments with respect to any such acquisition or investment,
and the Company is not currently engaged in any material negotiations with
respect to any such transaction. Pending such uses, the net proceeds of the
Offering will be invested in short-term, interest-bearing, investment grade
securities.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock and
does not anticipate paying cash dividends in the foreseeable future. Payments
of future dividends, if any, will be at the discretion of the Company's Board
of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. The Company's line of credit arrangement
prohibits the payment of dividends by the Company without the lender's prior
consent. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

20
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1998, (i) on an actual basis; (ii) on a pro forma basis giving effect to
the conversion of all outstanding shares of Redeemable Preferred Stock into
Common Stock upon the completion of the Offering; and (iii) as adjusted to
reflect the estimated net proceeds from the sale of 3,000,000 shares of Common
Stock offered by the Company hereby at the initial public offering price of
$12.00 and after deducting underwriting discounts and commissions and
estimated offering expenses. This table should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable Preferred Stock, $0.10 par value;
5,000,000 shares authorized, actual, 9,000,000
shares authorized, pro forma, and 5,000,000 shares
authorized, as adjusted; 3,728,755 shares issued and
outstanding actual, no shares issued and
outstanding, pro forma and as adjusted.............. $18,674 $ -- $ --
Stockholders' equity:
Common Stock, $0.001 par value; 60,000,000 shares
authorized, actual pro forma, and as adjusted;
14,452,368 shares issued and outstanding actual,
20,045,492 shares issued and outstanding pro forma
and 23,045,492 shares issued and outstanding as
adjusted(1)....................................... 19 25 28
Additional paid-in capital......................... 3,392 22,060 54,637
Deferred stock option compensation(2).............. (2,911) (2,911) (2,911)
Retained earnings.................................. 748 748 748
------- ------- -------
Total stockholders' equity and capitalization.... $19,922 $19,922 $52,502
======= ======= =======
</TABLE>
- --------
(1) Excludes 1,779,905 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1998 at a weighted average exercise
price of $3.84 per share, and 1,392,728 shares of Common Stock reserved
for grant of future options as of June 30, 1998 under the 1998 Stock
Incentive Plan. See "Management--Benefit Plan," "Description of Capital
Stock" and Note 7 of Notes to Financial Statements.
(2) Represents deferred compensation expense relating to common stock options
issued with exercise prices less than the estimated fair market value on
the date of grant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Stock-Based Compensation," and Note 7
of Notes to Financial Statements.

21
<PAGE>

DILUTION

The pro forma net tangible book value of the Company at June 30, 1998, after
giving effect to the conversion of the Redeemable Preferred Stock into Common
Stock upon completion of the Offering, was approximately $19.9 million, or
$0.99 per share. Pro forma net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding after giving effect to the conversion of all
outstanding Redeemable Preferred Stock. After giving effect to the sale of
3,000,000 shares of Common Stock offered hereby by the Company at the initial
public offering price of $12.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses, the Company's pro
forma net tangible book value at June 30, 1998, would have been approximately
$52.5 million, or $2.28 per share. This represents an immediate increase in
net tangible book value of $1.29 per share to existing stockholders and an
immediate dilution of $9.72 per share to new investors purchasing shares of
Common Stock in the Offering. The following table illustrates this dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................... $12.00
Pro forma net tangible book value per share prior to the
Offering....................................................... $ 0.99
Increase per share attributable to the Offering................. 1.29
------
Pro forma net tangible book value per share after the Offering.... $ 2.28
------
Net tangible book value dilution per share to new investors in the
Offering......................................................... $ 9.72
======
</TABLE>

The following table summarizes, as of June 30, 1998, on the pro forma basis
described above, the total number of shares and consideration paid to the
Company and the average price per share paid by existing stockholders and by
new investors purchasing shares of Common Stock in this Offering at the
initial public offering price of $12.00 per share (before deducting the
estimated underwriting discount and the estimated offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 20,045,492 87% $16,204,048 31% $ 0.81
New investors.............. 3,000,000 13% 36,000,000 69% 12.00
---------- --- ----------- ---
Totals................... 23,045,492 100% $52,204,048 100% $ 2.27
========== === =========== ===
</TABLE>

The foregoing computations are based on the number of shares of Common Stock
outstanding as of June 30, 1998 and exclude 1,779,905 shares of Common Stock
issuable upon the exercise of stock options outstanding at a weighted average
exercise price of $3.84 per share and 1,392,728 shares of Common Stock
reserved for future issuance under the 1998 Stock Incentive Plan. To the
extent that these options are exercised, there will be further dilution to new
investors. See "Management--Benefit Plan" and Note 7 of Notes to Financial
Statements.

22
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to and
should be read in conjunction with the Company's Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
statement of operations data for the years ended December 31, 1995, 1996 and
1997, and the balance sheet data at December 31, 1996 and 1997, are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in this Prospectus. The statement of operations data for
the year ended December 31, 1994 and the balance sheet data at December 31,
1994 and 1995 are derived from audited financial statements not included in
this Prospectus. The statement of operations data for the year ended December
31, 1993 and the balance sheet data at December 31, 1993 are derived from
unaudited financial statements not included in this Prospectus. The statement
of operations data for the six months ended June 30, 1997 and 1998 and the
balance sheet data at June 30, 1998 have been derived from the unaudited
financial statements of the Company included elsewhere in this Prospectus. The
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of the Company's management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. The
historical results are not necessarily indicative of the operating results to
be expected in the future.
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenue............. $ 384 $ 741 $2,058 $5,809 $18,719 $6,493 $16,292
Cost of goods sold...... 140 379 1,287 3,284 9,469 3,231 8,281
------ ------ ------ ------ ------- ------ -------
Gross profit............ 244 362 771 2,525 9,250 3,262 8,011
Operating expenses:
Sales and marketing.... 75 170 269 844 2,395 959 1,995
Research and
development........... 77 129 164 874 2,848 773 1,993
General and
administrative........ 50 87 203 907 1,578 606 1,320
Amortization of
deferred stock
compensation(1)....... -- -- -- -- 83 -- 279
------ ------ ------ ------ ------- ------ -------
Total operating
expenses............. 202 386 636 2,625 6,904 2,338 5,587
------ ------ ------ ------ ------- ------ -------
Income (loss) from
operations............. 42 (24) 135 (100) 2,346 924 2,424
Other income, net....... -- 29 46 24 180 4 308
------ ------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... 42 5 181 (76) 2,526 928 2,732
Income taxes (2)........ -- -- -- -- 791 291 1,057
------ ------ ------ ------ ------- ------ -------
Net income (loss)...... $ 42 $ 5 $ 181 $ (76) $ 1,735 $ 637 $ 1,675
Preferred stock dividend
requirement............ -- -- -- (285) (1,121) (284) (1,316)
------ ------ ------ ------ ------- ------ -------
Net income (loss)
available to common
stockholders........... $ 42 $ 5 $ 181 $ (361) $ 614 $ 353 $ 359
====== ====== ====== ====== ======= ====== =======
Pro forma net income.... $ 26 $ 3 $ 113
====== ====== ======
Pro forma and historical
income (loss) per
share--
Basic and diluted...... $ 0.01 $ 0.00 $ 0.01 $(0.03) $ 0.04 $ 0.03 $ 0.02
====== ====== ====== ====== ======= ====== =======
Weighted average common
shares outstanding(3):
Basic.................. 11,475 11,475 13,665 13,881 14,132 14,089 14,379
====== ====== ====== ====== ======= ====== =======
Diluted (4)............ 11,475 11,475 13,665 13,881 14,713 14,518 15,273
====== ====== ====== ====== ======= ====== =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
---- ---- ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities......... $13 $ 24 $ 128 $ 929 $ 8,620 $ 8,796
Working capital........................ 21 14 121 2,941 16,615 17,969
Total assets........................... 149 243 1,045 4,822 21,680 23,015
Total liabilities...................... 112 201 823 1,258 3,762 3,093
Redeemable preferred stock............. -- -- -- 3,722 17,358 18,674
Total stockholders' equity (deficit)... 37 42 222 (158) 560 1,248
</TABLE>
- --------
(1) Represents the amortization of deferred compensation expense relating to
common stock options issued with exercise prices less than the estimated
fair market value on the date of grant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Stock-Based
Compensation," and Note 7 of Notes to Financial Statements.
(2) The Company was a subchapter S Corporation for income tax purposes prior
to January 1, 1996 and, accordingly, taxable income was reported in the
individual tax returns of the stockholders. Pro forma net income is
presented as if the Company had been a taxable entity during 1993, 1994
and 1995.
(3) Weighted average common shares outstanding does not include the effect of
the conversion of the Redeemable Preferred Stock into 5,593,133 shares of
Common Stock upon completion of the Offering.
(4) The diluted net income (loss) per share computation includes potential
shares of Common Stock (Redeemable Preferred Stock and options to purchase
Common Stock), unless their effect would be antidilutive.

23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Risk Factors"
and "Business," as well as those discussed elsewhere in this Prospectus.

OVERVIEW

The Company is a leading provider of Multi-service Digital Access ("MDA")
equipment to competitive carriers for the provisioning of enhanced voice and
high-speed data services to end users such as small and medium-sized
businesses and government and educational institutions. CAC was incorporated
in September 1992 as a successor company to Koenig Communications, an
equipment systems integration and consulting company which had been in
operation since 1986. From inception through May 1995, the Company's operating
activities related primarily to providing systems integration and other
consulting services, establishing a research and development organization,
developing and testing prototype designs, building a national distribution
base, establishing a marketing and sales organization and developing customer,
vendor and manufacturing relationships.

From 1992 through June 30, 1995, the Company derived substantially all of
its net revenue from its systems integration and consulting business, in which
the Company purchased other vendors' products and configured the products in
combination with the Company's private-label DataSplit product, for each
customer's unique network requirements. In the summer of 1995, the Company
ceased its systems integration and consulting business and commenced its main
product sales with the introduction of the Access Bank I. In the fourth
quarter of 1997, the Company began commercial deployment of its Wide Bank
product. Accordingly, the Company has only a limited operating history on
which to base an evaluation of its business and prospects. The Company and its
prospects must be considered in light of the risks, uncertainties and
difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets. See
"Risk Factors--Limited Operating History; Future Results of Operations
Uncertain."

The Company's net revenue is derived from the sales of MDA equipment and
accessories. The Company recognizes revenue upon shipment of product from the
Company's factory to its distributors' warehouses. In 1997, the Company's
Access Bank product family and the Wide Bank product family accounted for
approximately 80% and 16%, respectively, of the Company's net revenue. In the
six months ended June 30, 1998, the Company's Access Bank product family and
Wide Bank product family accounted for approximately 70% and 25%,
respectively, of the Company's net revenue. See "Risk Factors--Dependence on
Emerging Market for Multi-service Digital Access Equipment; Risks Associated
With Market Acceptance of Wide Bank Product Family" and Note 1 of Notes to
Financial Statements.

Substantially all of the sales of the Company's products are through
distributors. In addition to product sales, the Company from time to time
relies on its distributors to provide installation, training and customer
support to the ultimate end users of the Company's products. As a result, the
Company's success depends on the continued sales and customer support efforts
of its network of distributors. Sales of the Company's products historically
have been made to a limited number of distributors. In 1995, Telco, C&L,
Phillips and Telsource accounted for 26%, 13%, 13% and 12% of net revenue,
respectively. In 1996, Telco, Phillips, Telsource and C&L accounted for 47%,
18%, 18% and 11% of net revenue, respectively. In 1997, Walker, ADC and
Phillips accounted for 36%, 20% and 14% of net revenue, respectively. In the
six months ended June 30, 1998, Walker, Phillips and Telsource accounted for
47%, 19% and 15% of net revenue, respectively. The Company expects that sales
of its products will continue to be made to a small number of key
distributors. Accordingly, the loss of, or reduction in sales to, any of the
Company's key distributors could have a material adverse effect on the

24
<PAGE>

Company's business, financial condition and results of operations. See "Risk
Factors--Dependence on Distribution Channels" and Note 7 of Notes to Financial
Statements.

In addition to being dependent on a small number of distributors for a
majority of its net revenue, the Company believes its products are distributed
to a limited number of competitive carrier customers who are primarily CLECs.
The Company believes that in 1997, 22 competitive carrier customers indirectly
accounted for 75% of its net revenue and that for the six months ended June
30, 1998, approximately 75 competitive carrier customers indirectly accounted
for 90% of its net revenue. In particular, the Company believes (based on
information from its distributors) that TCG, NEXTLINK, WinStar and e.spire
each accounted for a significant portion of the Company's net revenue in 1997
and the six months ended June 30, 1998. None of these competitive carrier
customers has any obligation to purchase additional products or services.
Accordingly, there can be no assurance that present or future competitive
carrier customers will not terminate their purchasing arrangements with the
Company's distributors or significantly reduce or delay the amount of the
Company's products that they order. Any such termination, change, reduction or
delay in orders could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company generally
provides its distributors with limited stock rotation and price protection
rights, and the Company has granted certain of its distributors "most favored
customer" terms. There can be no assurance that these stock rotation rights,
price protection rights or most favored customer provisions will not have a
material adverse effect on the Company's business, operating results or
financial condition. See "Risk Factors--Dependence on Distribution Channels,"
"--Challenges of Maintaining and Expanding Distribution Channels; Potential
for Channel Conflict," "--Competitive Carrier Customer Concentration" and
"Business--Customers."

The Company believes that average selling prices and gross margins for its
products will decline as such products mature, as volume price discounts in
distributor contracts take effect and as competition intensifies, among other
factors. In addition, discounts to distributors vary among product lines and
are based on volume shipments, both of which affect gross margins. The
Company's gross margin for its Access Bank product family is higher than the
gross margin for its Wide Bank product family. The Company believes its gross
margins are likely to fluctuate based on product mix and channel mix. Margins
will also likely be adversely affected from time to time by new product
introductions. See "Risk Factors--Significant Fluctuation in Results of
Operations" and "--Possible Decline in Prices."

RESULTS OF OPERATIONS

The following table sets forth statements of operations data of the Company
expressed as a percentage of net revenue for the periods indicated. The
Company does not believe its historical results of operations are indicative
of future results:

<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
FOR THE YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue............................. 100% 100% 100% 100% 100%
Cost of goods sold...................... 63 57 51 50 51
------ ------ ------ ----- -----
Gross margin............................ 37 43 49 50 49
Operating expenses:
Sales and marketing................... 13 14 12 15 12
Research and development.............. 8 15 15 12 12
General and administrative............ 9 16 8 9 8
Amortization of deferred stock
compensation......................... -- -- 1 -- 2
------ ------ ------ ----- -----
Total operating expenses............ 30 45 36 36 34
------ ------ ------ ----- -----
Income (loss) from operations........... 7 (2) 13 14 15
Other income, net....................... 2 0 0 0 2
------ ------ ------ ----- -----
Income (loss) before income taxes....... 9 (1) 13 14 17
Income taxes............................ 0 0 4 4 6
------ ------ ------ ----- -----
Net income (loss)....................... 9% (1)% 9% 10% 11%
====== ====== ====== ===== =====
</TABLE>

25
<PAGE>

SIX MONTHS ENDED JUNE 30, 1997 AND 1998

Net Revenue. Net revenue increased by approximately 151% from $6.5 million
in the six months ended June 30, 1997 to $16.3 million in the six months ended
June 30, 1998. The growth in net revenue was primarily attributable to sales
of products introduced since the first quarter of 1997 and increased sales of
existing products.

Gross Margin. The Company's cost of goods sold consists primarily of costs
associated with parts and components, outsourced manufacturing of certain
printed circuit boards, chassis and subassemblies and in-house labor
associated with assembly, testing, shipping and quality assurance. Gross
profit increased by approximately 146% from $3.3 million in the six months
ended June 30, 1997 to $8.0 million in the six months ended June 30, 1998.
Gross margin was approximately 50% and 49% for the six months ended June 30,
1997 and 1998, respectively. The absolute dollar increase in gross profit was
due to increases in sales, partially offset by increases in component costs,
compensation costs and overhead related to the Company's manufacturing
operations as well as warranty expenses. Gross margin declined in the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997
due primarily to introduction of the Wide Bank product, which carries a lower
gross margin, and, to a lesser extent, to the rework of previously shipped
Wide Bank products to add features included in a subsequent release.

Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for personnel engaged in sales and marketing of the Company's
products, as well as trade shows and promotional expenses. Sales and marketing
expenses increased approximately 108% from $959,000 for the six months ended
June 30, 1997 to $2.0 million for the six months ended June 30, 1998. This
increase was primarily due to sales commissions on a higher level of sales,
increased staffing levels, and increased spending on trade shows, travel and
entertainment and other marketing programs. The Company intends to hire
additional sales and marketing personnel and to continue to aggressively
pursue sales and marketing campaigns, and therefore expects these expenses to
increase in absolute dollars in the future.

Research and Development. Research and development expenses consist
principally of salaries and related personnel expenses, consultant fees, and
prototype expenses related to the design, development and testing of the
Company's MDA equipment. Research and development expenses increased
approximately 158% from $773,000 for the six months ended June 30, 1997 to
$2.0 million for the six months ended June 30, 1998. The increase in the level
of research and development expenses was due primarily to increased personnel,
consulting costs and depreciation expense related to new test and laboratory
capabilities. The Company expects the amount of research and development
expenses to continue to increase to fund the development of new products and
enhancements.

General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, accounting and
administrative personnel, recruiting expenses, professional fees and other
general corporate expenses. General and administrative expenses increased
approximately 118% from $606,000 for the six months ended June 30, 1997 to
$1.3 million for the six months ended June 30, 1998 primarily as a result of
increased personnel. The Company expects general and administrative expenses
to increase in absolute dollars as the Company adds personnel and incurs
additional costs related to the expansion of its business and operation as a
public company.

Other Income, Net. Other income increased from $4,000 in the six months
ended June 30, 1997 to $308,000 in the six months ended June 30, 1998. The
increase was a result of sublease rental income and an increase in interest
income received on cash equivalent investments and other marketable
securities.

Income Taxes. The provision for income taxes was $1.1 million for the six
months ended June 30, 1998 compared to $291,000 for the six months ended June
30, 1998. The effective tax rate of 39% in the six months ended June 30, 1998
approximated the federal statutory rate of 34% plus a provision for state
taxes less research and development tax credits and non-deductible deferred
stock compensation. The Company expects its effective tax rate to increase in
the future due to the expiration of the research and development tax credit.
See Notes 1 and 5 of Notes to Financial Statements.

26
<PAGE>

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

Net Revenue. Net revenue increased by approximately 222% from $5.8 million
for 1996 to $18.7 million for 1997 and by approximately 182% from $2.1 million
for 1995 to $5.8 million in 1996. The increase in 1997 was due to new product
introductions and increased distributor sales of the Company's existing
products. The increase in 1996 was a result of a full year of production and
sale of the Company's Access Bank I product, which began shipping in mid-1995.
In 1995, approximately $313,000 of the Company's net revenues were related to
the Company's systems integration and consulting business, which the Company
no longer operates.

Gross Margin. Gross profit in 1995, 1996 and 1997 was approximately
$771,000, $2.5 million, and $9.3 million, respectively. Gross margin was 37%,
43% and 49%, respectively, for these years. Gross profit increased between the
periods primarily as a result of increased production. Gross margin improved
as a result of volume purchase discounts and efficiencies associated with
increased manufacturing volume for new and existing products. The Company
believes that these annual margin improvements are not indicative of future
results.

Sales and Marketing. Sales and marketing expenses increased approximately
214% from $269,000 in 1995 to $844,000 in 1996 and approximately 184% to $2.4
million in 1997. The increase in 1996 stemmed from increased sales commissions
on higher sales and increased spending on personnel, advertising and trade
shows as the Company began marketing the Access Bank II. The increase in 1997
reflected the expansion of the sales force as well as costs associated with
increased marketing activity with respect to the introduction of the Wide Bank
and other products in the second half of 1997, customer support, advertising
and trade shows.

Research and Development. Research and development expenses in 1995, 1996
and 1997 were approximately $164,000, $874,000 and $2.8 million, respectively.
Research and development expenses increased $710,000, or 433%, from 1995 to
1996. This increase was due primarily to an increase in the number of
personnel engaged in the development of new products, including the Access
Bank II. Research and development expenses increased approximately $2.0
million, or 226%, from 1996 to 1997. This increase was principally due to
personnel added to expand the Company's product line, which included the Wide
Bank 28, new modules for the Access Bank I and Access Bank II products, new
software features and line cards for the Access Bank I and Access Bank II
products and new power and other equipment accessories.

General and Administrative. General and administrative expenses in 1995,
1996 and 1997 were approximately $203,000, $907,000 and $1.6 million,
respectively. General and administrative expenses increased $704,000, or 347%,
from 1995 to 1996 and $671,000, or 74%, from 1996 to 1997. The increases in
each year were principally due to increases in personnel and facilities costs
necessary to support the expansion of the Company's business.

Other Income, Net. The Company recognized other income of approximately
$46,000 and $24,000 for 1995 and 1996, respectively. The other income in 1995
and 1996 includes sublease rental income and, in 1995, the sale of the
Company's domain name. The Company had other income of $180,000 for 1997,
consisting of sublease rental and interest income.

Income Taxes. The Company did not provide for income taxes in 1995 because
it was a subchapter S Corporation for income tax purposes and did not record a
tax benefit in 1996 due to the uncertainty relating to the utilization of the
net operating loss carryforward. The effective tax rate of 31% in 1997 was
less than the combined federal and state statutory rate primarily as a result
of the utilization of the research and development tax credit, which was
extended through June 1998, and a change in the valuation allowance for
deferred tax assets. The Company expects its tax rate to increase after June
1998 as a result of the expiration of the research and development tax credit.
See Notes 1 and 5 of Notes to Financial Statements.

STOCK-BASED COMPENSATION

As discussed in Note 1 (1) to the Financial Statements, the Company accounts
for its stock-based compensation plans in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
Related Interpretations. Since inception, the Company has generally granted
stock

27
<PAGE>

options with exercise prices equal to the fair value of the underlying Common
Stock, as determined by the Company's Board of Directors and based on the
Company's other equity transactions. During the year ended December 31, 1997
and the six months ended June 30, 1998, the Company granted options to
employees with exercise prices less than the fair value per share based upon
the Company's previous preferred stock offerings and the estimated price per
share in the Offering. Accordingly the Company will record compensation
expense totaling approximately $3.2 million. Such compensation expense will be
recognized pro rata over the forty-eight month vesting period of the options.
This compensation expense totaled approximately $83,000 for the year ended
December 31, 1997 and $279,000 for the six months ended June 30, 1998, and
will total $680,000 for the year ended December 31, 1998. Related compensation
expense will total approximately $818,000 for the years ended December 31,
1999, 2000 and 2001. It is the intention of the Company to generally grant
future stock options with exercise prices equal to the fair value of the
underlying Common Stock on the date of grant and account for such grants in
accordance with generally accepted accounting principles.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain quarterly financial data for the
eight quarters ending with the quarter ended June 30, 1998, including such
amounts expressed as a percentage of total net revenue. This quarterly
information is unaudited, has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are
not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue....................... $ 1,369 $ 1,317 $ 2,496 $ 3,996 $ 5,636 $ 6,591 $ 7,243 $ 9,049
Cost of goods sold................ 863 485 1,256 1,975 2,752 3,486 3,768 4,513
-------- -------- -------- -------- -------- -------- -------- -------
Gross profit...................... 506 832 1,240 2,021 2,884 3,105 3,475 4,536
Operating expenses:
Sales and marketing.............. 259 341 432 528 615 820 975 1,020
Research and development......... 257 287 372 400 923 1,153 843 1,150
General and administrative....... 242 254 251 355 456 516 531 789
Amortization of deferred stock
compensation.................... -- -- -- -- 40 43 104 175
-------- -------- -------- -------- -------- -------- -------- -------
Total operating expenses........ 758 882 1,055 1,283 2,034 2,532 2,453 3,134
Income (loss) from operations..... (252) (50) 185 738 850 573 1,022 1,402
Other income (expense), net....... 19 48 10 (6) 18 158 168 140
-------- -------- -------- -------- -------- -------- -------- -------
Income (loss) before income taxes. (233) (2) 195 732 868 731 1,190 1,542
Income taxes...................... -- -- 61 229 273 228 450 607
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss)................. $ (233) $ (2) $ 134 $ 503 $ 595 $ 503 $ 740 $ 935
======== ======== ======== ======== ======== ======== ======== =======
AS A PERCENTAGE OF NET REVENUE:
Net revenue....................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold................ 63 37 50 49 49 53 52 50
-------- -------- -------- -------- -------- -------- -------- -------
Gross margin...................... 37 63 50 51 51 47 48 50
Operating expenses:
Sales and marketing.............. 19 26 18 14 11 12 14 11
Research and development......... 18 22 15 10 16 17 12 13
General and administrative....... 18 19 10 9 8 7 7 9
Amortization of deferred stock
compensation.................... -- -- -- -- 1 1 1 2
-------- -------- -------- -------- -------- -------- -------- -------
Total operating expenses........ 55 67 43 33 36 38 34 35
Income (loss) from operations..... (18) (4) 7 18 15 9 14 15
Other income (expense), net....... 1 4 0 0 0 2 2 2
-------- -------- -------- -------- -------- -------- -------- -------
Income (loss) before income taxes. (17) 0 7 18 15 11 16 17
Income taxes...................... 0 0 2 5 4 3 6 7
-------- -------- -------- -------- -------- -------- -------- -------
Net income (loss)................. (17)% 0% 5% 13% 11% 8% 10% 10%
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>

28
<PAGE>

The Company's net revenue has increased each quarter since the three months
ended December 31, 1996, primarily as result of new product introductions,
product enhancements and increased distributor sales of the Company's existing
products. Although the Company cannot quantify the extent of the impact,
during the three month periods ended March 31, 1997, June 30, 1997 and
September 30, 1997, the Company's net revenues and gross profit were adversely
affected by the resale of certain of the Company's products into the market at
significantly reduced prices by an OEM. This OEM no longer distributes the
Company's products. Gross margin varied significantly for the three months
ended September 30, 1996, December 31, 1996 and March 31, 1997. In the three
months ended December 31, 1996, the Company introduced a new software feature
(embedded in a chip set) that facilitated the upgrade of the Company's Access
Bank I product to include TR-08 functionality. A large quantity of these chip
sets, which carried a higher gross margin than the Company's other products,
was sold in that quarter. Operating expenses during these time periods also
generally increased, principally due to increased costs related to personnel
and facilities necessary to support the expansion of Company's business.
Research and development expenses during the quarter ended December 31, 1997
increased significantly from the previous quarter primarily as a result of the
Company's purchase of third party software used to facilitate interoperability
with existing industry standards. Consistent with the Company's accounting
policies, these software costs were expensed in the period in which they were
incurred because the technological feasibility of the related product had not
been determined at the time of the purchase.

The Company's results of operations have fluctuated significantly in the
past and are likely to fluctuate significantly in the future, both on a
quarterly and annual basis, as a result of a variety of factors, many of which
are outside of the Company's control. Among other things, the Company's
results of operations have fluctuated in the past due to (i) the availability
of adequate supplies of key components and assemblies and the adequacy of
third-party manufacturing capabilities; (ii) delays in the introduction of new
products or product enhancements by the Company; (iii) customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company; (iv) the Company's ability to affect and judge the timing and
size of orders from its distributors; and (v) errors in the assembly of
electronic component kits and shipping errors. The Company's results of
operations may also fluctuate in the future due to a number of factors,
including, but not limited to, those listed above as well as (i) the timing
and size of orders which are received and which can be shipped in any
particular period; (ii) the commercial success of the Company's products;
(iii) changes in the financial stability of the Company's distributors,
competitive carrier customers or suppliers; (iv) changes in pricing policies
by the Company or its competitors; (v) seasonality in the placement of orders;
(vi) changes in the level of the Company's operating expenses; (vii) changes
in the Company's distribution channels; (viii) delays or deferrals of any
competitive carrier's or end user's implementation of the Company's products;
(ix) product life cycles; (x) customization or integration problems with end
user systems; (xi) changes in the Company's strategy; (xii) product failure or
error; or (xiii) the level of international expansion. A significant portion
of the Company's net revenue has been, and the Company believes will continue
to be, derived from a limited number of large orders, and the timing of such
orders and their fulfillment has caused, and are expected to continue to
cause, material fluctuations in the Company's operating results. The Company's
distribution agreements generally allow distributors to cancel orders without
penalty until a relatively short period of time prior to shipment. The Company
has experienced cancellation and delays of orders from time to time, and
expects to continue to experience order cancellations and delays from time to
time in the future, which could adversely affect the Company's revenue and
results of operations for a quarter or series of quarters. Fluctuations in
operating results may result in volatility in the price of the Company's
Common Stock. Due to all of the foregoing factors, it is possible that in some
future quarter, the Company's results of operations will be below the
expectations of market analysts and investors. In such event, the market price
of the Company's Common Stock would likely be materially adversely affected.
See "Risk Factors--Significant Fluctuations in Results of Operations."

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through cash
generated from operations, private sales of preferred stock totaling
approximately $15.6 million (net of issuance costs) and periodic borrowings
under its credit facilities.

29
<PAGE>

Net cash used by operating activities for 1995, 1996 and 1997 totaled
approximately $224,000, $1.7 million and $3.5 million, respectively. Net cash
provided by operating activities for the six months ended June 30, 1998
totaled $959,000. In all periods except during the first six months of 1998,
cash used by operating activities was primarily due to increases in inventory
and accounts receivable, partially offset by increases in accounts payable and
other liabilities, and, in each period except 1996, by net income. Cash
provided by operating activities for the six months ended June 30, 1998 was
due to net income, partially offset by an increase in accounts receivable, and
a decrease in accounts payable.

Cash used by investing activities was approximately $93,000, $639,000 and
$3.6 million in 1995, 1996 and 1997, respectively. In each year, cash used in
investing activities was primarily attributable to purchases of equipment,
and, in 1997, by purchases of securities available for sale. Cash used by
investing activities for the six months ended June 30, 1998 of approximately
$1.6 million was primarily attributable to purchases of securities and
purchases of equipment.

Cash provided by financing activities was approximately $422,000, $3.1
million, $12.3 million and $50,000 for 1995, 1996, 1997 and the six months
ended June 30, 1998, respectively. Cash provided by financing activities was
primarily from short term borrowings in 1995, proceeds from the issuance of
preferred stock and short term borrowings in 1996 and 1997, and proceeds from
the issuance of common stock in the six months ended June 30, 1998. Cash
provided by financing activities in 1997 was somewhat offset by repayment of
short term borrowings.

At June 30, 1998, the Company's principal sources of liquidity included cash
and marketable securities available for sale of approximately $8.8 million and
a bank credit facility of $5.0 million, which bears interest at the bank's
prime rate. This working capital line of credit is limited to a borrowing base
determined by the balance of the Company's eligible receivables and inventory.
At June 30, 1998 there were no outstanding borrowings under the working
capital line. See Note 4 of Notes to Financial Statements.

The Company's inventory levels increased in 1995, 1996 and 1997 and
decreased at June 30, 1998 due to an inventory reserve of $210,000. The
increase in the Company's inventory levels during 1995, 1996 and 1997 was
largely due to the Company's attempt to address the risks of component
availability, the Company's attempt to avail itself of volume purchase
discounts and the Company's need to procure an increasing number of components
to manufacture an increasing number of product offerings. Prior to 1998, the
Company procured 100% of all the components used in manufacturing its
products. In 1998, the Company began to partially use turnkey manufacturing
for certain of its components and subassemblies. The Company believes that as
it continues to use turnkey manufacturers, its inventory levels will decrease
in the future. See "Risk Factors--Dependence on Component Availability" and
"Business--Marketing."

At December 31, 1997, the Company's working capital was approximately $16.6
million and had increased to $18.0 million at June 30, 1998. The Company has
no significant capital spending or purchase commitments other than normal
inventory purchase commitments and commitments under facilities leases.
However, the Company believes that it will require up to 50,000 additional
square feet of office, manufacturing and research and development space in the
next 24 months, which will materially increase the amount of its operating
lease commitments. There can be no assurance that suitable space will be
available on commercially reasonable terms or at all. See Note 9 of Notes to
Financial Statements.

The Company believes that the proceeds from the Offering, together with
available funds, anticipated cash flows from operations and its line of
credit, will satisfy the Company's projected working capital and capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating
and investing activities may use cash. Consequently, any such growth could
require the Company to obtain additional financing. See "Risk Factors--
Potential Need for Additional Capital; Risks Relating to Potential
Acquisitions."

30
<PAGE>

BUSINESS

OVERVIEW

Carrier Access Corporation ("CAC" or the "Company") is a leading provider of
Multi-service Digital Access ("MDA") equipment to competitive
telecommunications carriers, including competitive local exchange carriers
("CLECs"), and also provides equipment to wireless carriers, Internet service
providers ("ISPs") and other carriers, based on the number of access lines
provided to competitive carriers. The Company's MDA equipment is used for the
provisioning of enhanced voice and high-speed data services by carriers to end
users such as small and medium-sized businesses and government and educational
institutions. The Company's MDA equipment provides a "last mile" solution for
the voice and data connectivity needs of competitive carriers and end users
throughout the United States. Mass deployment of digital last mile
connectivity from end user to carrier networks is enabled through the
Company's cost-effective, compact, scaleable and easily installed customer
premises and central office telecommunications equipment. The Company's
products allow competitive carriers to leverage their existing digital
infrastructure to cost-effectively connect end users to their networks. The
Company's MDA products utilize high bandwidth digital deployment targeted at
end users requiring between 6 and 672 telephone line equivalents of bandwidth.
The Company's MDA products enable a broad variety of enhanced carrier service
offerings including high-speed Internet access, virtual private networks,
switched local and long distance voice, Caller ID, distinctive ringing, direct
inward dialing, automated call routing and other widely-used
telecommunications services. Based on information from its distributors, the
Company believes that over 100 competitive carriers have purchased the
Company's products through its distributors. Carriers which the Company
believes have purchased at least $50,000 of the Company's products in the six
months ended June 30, 1998 include Allegiance Telecom, Inc., Cablevision
Systems Corp., Cellular One Group, Commonwealth Telephone Enterprises, Inc.,
e.spire Communications, Inc., Frontier Corporation, GST Telecommunications,
Inc., ICG Communications, Inc., Intermedia Communications, Inc., Logix
Communications, Inc., MGC Communications, Inc., NEXTLINK Communications, Inc.,
Pacific Bell, a division of SBC, Inc., PSINet, Inc., STAR Telecommunications,
Inc., Teleport Communications Group, Inc., US LEC Corp., U S WEST, Inc.,
WinStar Communications, Inc. and Worldcom Inc. The aforementioned list of
carriers comprise a representative subset of the total number of carriers who
have purchased the Company's products.

INDUSTRY BACKGROUND

Increasing demand for enhanced voice and high-speed data communications,
together with technological advances, has created a significant market for the
provisioning of communications services to businesses and government and
educational institutions. In addition, as a result of recent deregulation, a
variety of telecommunications service providers (commonly called "carriers")
have emerged in this market to offer local telecommunications services in
competition with the incumbent local exchange carriers (the "ILECs"). These
new competitive carriers are seeking to differentiate themselves and to
capitalize on the growing demand for enhanced voice and high-speed data
communications by deploying advanced technologies and continuing to build
alternative networks. In order to reduce the cost of providing these services,
competitive carriers are attempting to leverage their existing network
infrastructure, in which they have made a substantial investment. As a result,
competitive carriers are focused on deploying new equipment that enables them
to quickly and cost-effectively provide reliable enhanced voice and high-speed
data services.

Emergence of Competitive Carriers. Historically, the telecommunications
industry in the United States was highly regulated, with both local and long
distance service providers operating as monopolies. As a result of the passage
of the Telecommunications Act of 1996, competitive carriers have emerged to
compete with the ILECs in the provisioning of local exchange services. The
market for local exchange services consists of two types of carriers: ILECs
who own the existing local telephone wire, and carriers such as CLECs and
other competitive carriers who do not, but are capitalizing on recent
regulatory changes to lease existing lines and offer local services.
Currently, over 100 CLECs in the United States have entered the market for
local telephone services and are building their own networks. In addition,
many CLECs, through the acquisition of ISPs, have sought to expand their
service offerings to include data. Competitive carriers are offering customers
competitively priced, highly reliable telecommunications services by deploying
local access networks which are more flexible and cost-effective than
traditional copper-based local networks operated by the ILECs. To do so,

31
<PAGE>

competitive carriers have invested substantial resources over the past several
years to build an infrastructure which enables them to link their customers to
existing local telephone lines, and as a result, continually seek ways to
increase revenue and market share while reducing initial and ongoing costs.
One method utilized by carriers has been the delivery of multiple, rather than
individual, voice and data circuits which can be aggregated on single high-
speed digital connections. In addition, many carriers have invested in
switching and transmission technologies to increase capacity and efficiency in
the backbones of their telecommunications networks. According to New Paradigm
Resources Group, Inc., a CLEC research organization, competitive carriers
installed approximately 1.8 million access lines in 1997. Additionally, CLECs
have invested over $5 billion in equipment to build their local access
networks in 1997.

Increasing Demand for Enhanced Voice and High-Speed Data Connectivity. The
volume of data traffic transmitted over telecommunications networks has grown
dramatically in recent years. Growing demand for new services, such as high-
speed Internet access, as well as the increasing use of the Internet and
corporate intranets as vehicles to communicate and disseminate information,
has driven demand for digital telecommunications equipment which integrate
enhanced voice and high-speed data. Due to the mission critical nature of
their enhanced voice and high-speed data traffic, businesses and government
and educational institutions are driving demand for additional bandwidth and
higher transmission rates.

Competitive Carriers Targeting Underserved Business Markets. According to
the Small Business Administration, there were approximately 6.2 million
businesses in the United States in 1996, 90% of which had less than 20
employees and 99% of which had less than 500 employees. According to
International Data Corporation ("IDC"), the number of telephone lines a
business uses is related to the number of people it employs; however, there is
generally not a one-to-one correlation. For example, businesses with fewer
than 100 employees typically use fewer than 20 lines. Small and medium-sized
businesses typically access the Internet via dial-up modems, and generally do
not have access to or have not implemented high-speed digital connections.
According to IDC, dial-up access represented approximately 90% of all small
business corporate access connections for Internet usage in 1997. However,
small and medium-sized businesses are increasingly demanding the enhanced
service offerings that are available to large businesses, including high-speed
Internet access, virtual private networks and direct inward dialing services.
To cost-effectively meet this demand and capture an increasing share of the
market to provide such services, competitive carriers are bundling enhanced
voice and high-speed data services. Bundled services also enable competitive
carriers to offer a single point of contact and consolidated billing. However,
equipment capable of providing such bundled services has typically been
provided by large telecommunications equipment vendors that designed their
products for high-line density installations. As a result, legacy
telecommunications equipment providers have been unable to effectively serve
installations requiring lower line densities.

Adoption of Digital Access Equipment in the "Last Mile." The access portion
of the local exchange network, which is known as the "last mile" and connects
end users to the carrier network, was originally constructed with copper
twisted-pair wiring designed to support low bandwidth voice traffic. Due to
the increased level of enhanced voice and high-speed data traffic that now
must pass over these analog lines, carriers have begun to install higher speed
digital transmission technologies in the last mile. Digital transmission has
distinct advantages over analog transmission, including increased speed, lower
cost, higher reliability and quality, and better manageability. The
transmission components of today's high-speed digital telecommunications
access networks in the United States are T1 connections, which transmit at
1.544 Mbps (the equivalent of 24 voice circuits), and T3 connections, which
transmit at 45 Mbps (and can aggregate up to 28 T1 connections or the
equivalent of 672 voice circuits). By offering T1 and T3 connectivity,
carriers enable increased usage of enhanced voice and high-speed data which,
in turn, can expand their revenue base. New digital technologies have been
introduced in recent years to increase the speed and quality of digital
transmission over copper wires in the last mile and provide alternative means
of accessing the wireline network backbone. While the costs of deploying these
solutions varies between carriers, technological developments such as Digital
Loop Carriers ("DLC") and HDSL have made digital services more accessible in
recent years. However, traditional equipment for the provisioning of digital
service is expensive, takes up a considerable amount of space at the carrier's
location or the customer's premises, and is difficult and time consuming to
install and maintain.

32
<PAGE>

Need for New Digital Access Equipment. Competitive carriers, facing growing
pressure to increase service revenues by delivering enhanced voice and high-
speed data services quickly, reliably and cost-effectively, are investing
heavily in new digital access technologies and equipment. More specifically,
these carriers are seeking multi-service digital access equipment that
addresses the following needs:

Enhanced Services. Digital access equipment must allow competitive carriers
to provide enhanced voice and high-speed data services, such as high-speed
Internet access, virtual private networks, switched local and long distance
voice, Caller ID, distinctive ringing, direct inward dialing, automated call
routing and other widely used telecommunications services increasingly being
demanded by their end user customers.

Rapid Deployment. To allow competitive carriers to rapidly deploy new
service offerings to their customers, digital access equipment must be easy to
install and test and must integrate with customer premises and central office
equipment.

Lowest Cost. Compared to current offerings, digital access equipment must
be cost-effective throughout its lifetime, and reduce installation and ongoing
capital expenditures with regard to operations, service management and
maintenance.

High Quality. To enable competitive carriers to compete effectively,
digital access equipment must provide enhanced voice and high-speed data
services with quality and reliability which equals or exceeds comparable ILEC
offerings.

Scaleability. To serve the rapidly growing enhanced voice and high-speed
data requirements of competitive carriers and end users such as small and
medium-sized businesses, digital access equipment must be scaleable.

Safety and Regulatory Requirements. Because the equipment resides at both
the carrier's facility and the customer's premises, digital access equipment
must enable competitive carriers to satisfy all applicable regulatory
requirements and remain compliant with industry safety standards.

THE CARRIER ACCESS SOLUTION

The Company is a leading provider of Multi-service Digital Access ("MDA")
equipment to competitive telecommunications carriers. The Company's MDA
equipment is used for the provisioning of enhanced voice and high-speed data
services by carriers to end users such as small and medium-sized businesses
and government and educational institutions. The Company's MDA products enable
a broad variety of enhanced carrier service offerings and provide a "last
mile" solution for the voice and data connectivity needs of its competitive
carriers and end users throughout the United States. Mass deployment of
digital last mile connectivity from end user to carrier networks is enabled
through the Company's cost-effective, compact, scaleable and easily installed
customer premises and central office telecommunications equipment. The
Company's products allow competitive carriers to leverage their existing T1
and T3 digital transmission infrastructure, including optical fiber SONET,
HDSL and digital radio, and to cost-effectively connect end users to their
networks. The Company's MDA products utilize high bandwidth digital deployment
targeted at end users requiring between 6 and 672 telephone line equivalents
of bandwidth. Based on information from its distributors, the Company believes
that over 100 competitive carriers have purchased the Company's products
through its distributors. The Company believes that its MDA products offer the
following features and benefits:

Enable Multiple Service Offerings. The Company's MDA products allow
competitive carriers to provide enhanced voice and high-speed data services to
their end users. Competitive carriers are using the Company's solutions to
cost-effectively offer bundled voice and data services such as high-speed
Internet access, virtual private networks, switched local and long distance
voice, Caller ID, distinctive ringing, direct inward dialing, automated call
routing and other widely used telecommunications services. The Company's MDA
products are currently used in a wide variety of competitive carrier
applications, including local exchange services, long

33
<PAGE>

distance bypass, high bandwidth Internet connections, cellular/PCS service
connections, high bandwidth digital radio and computer telephony interfaces.

Facilitate Rapid Deployment of New Services. The Company's MDA products are
designed to allow competitive carriers to increase revenues and market share
by offering their customers new services more quickly than traditional access
products. The Company's products are easy to install, and work with existing
central office equipment and customer premises phone systems and data
equipment, facilitating the rapid deployment of new services. Technicians can
install and service the Company's products without specialized equipment or
training, enabling installation in less than one hour, which the Company
believes is significantly less installation time than that required for
traditional equipment. Self-testing and telephone line tests are also
incorporated into the products to accelerate installation time and reduce or
eliminate the need for test equipment.

Reduce Cost of Ownership. Due to reduced labor, space and power requirements
and increased reliability, the Company believes that its MDA products offer a
lower cost of ownership to competitive carriers than traditional access
products. The compact size of the Company's MDA equipment allows it to be wall
or rack-mounted in minimal space, such as telephone wiring closets located at
customer premises or in carrier co-location spaces, reducing the need to lease
costly additional equipment space. The Company's MDA products are designed
with a high level of integration, which lowers manufacturing costs, decreases
power consumption, decreases the need for the customer to invest in new
circuits, and extends product life. Safety and protection requirements are
achieved without the use of fuses, substantially increasing reliability and
reducing long-term service costs. Such built-in product reliability features,
as well as self-test facilities, heat dissipation improvements and battery
backup reduce costly service calls. Additionally, the Company's MDA equipment
can be monitored and managed remotely, decreasing service costs. Remote
configuration also allows customer upgrades with reduced on-site technical
support.

Provide Programmable Software-Based Functionality. The Company's products
incorporate an advanced software-based architecture which enables a broad
range of functions with a minimum of components. Valuable service functions
such as integrated line testing are provided without increasing product costs.
In addition, several of the Company's MDA products are based on digital signal
processing ("DSP") software, which allows the Company to add advanced features
with little or no hardware redesign, thereby facilitating the customer's
ability to rapidly deploy new services and meet regulatory requirements.

Scale Through Ease of Reconfiguration and Upgradeability. The Company's MDA
products are modular and flexible, providing a migration path for carriers
which allows them to leverage their existing infrastructure as end user
requirements and industry standards evolve. The Company's Access Bank products
are designed to enable carriers to reduce the cost of connecting an end user
with less than 12 lines to a T1 connection, then scale to meet the needs of
carriers as their customers add additional lines. All of the Company's line
cards within a product family are based on a common design, enabling Access
Banks to be easily upgraded to provide additional lines and interfaces, as
well as support enhanced voice and high-speed data features. Similarly, the
Company's Wide Bank family of products allows for cost-effective scaleability
from four to 28 T1 connections to a single aggregated T3 connection.

Satisfy Carrier and End User Safety and Regulatory Requirements. The
Company's products are designed to meet all of the safety requirements for
carrier and customer premises installations, thereby reducing carriers'
exposure to liability related to their customers' on-site equipment. The
Company's product lines are fully certified to comply with National Electrical
Code requirements (U.L. 1459) on all line interfaces. U.L. 1459 listing has
become an important requirement for carriers installing equipment within
customer buildings, and is designed to prevent the product and the telephone
wiring from creating building fires. Additionally, a member of the Company's
Wide Bank product family has been certified as compliant with Bellcore's
Network Equipment Building System ("NEBS") standards, which facilitates
deployment in carrier central office locations.

34
<PAGE>

STRATEGY

The Company's objective is to become the leading supplier of innovative
telecommunications solutions utilized by competitive carriers to provide
enhanced voice and high-speed digital access services. Key elements of the
Company's strategy include the following:

Extend Technology Leadership. Based on competing products available in the
market, the Company believes that its MDA products were among the first to be
designed to meet rigorous carrier requirements, yet still be well-suited for
installation on customer premises. The software-intensive and modular design
of the Company's products allows the Company to meet the changing needs of
competitive carriers by adding new features and functionality without costly
research and development. The compact design of the Company's MDA products
also facilitates rapid product deployment, which the Company regards as a key
advantage over competitors' equipment. The Company intends to maintain and
extend its technological leadership by improving its MDA products, while
maintaining the lowest overall cost to its customers.

Provide Integrated Voice and Data Solutions. The Company believes that, due
to the increasing product and integration complexity of telecommunications
equipment, carriers and end users are increasingly seeking fully integrated
voice and data systems solutions from the carrier point of presence to the
customer premises. Accordingly, the Company has developed its MDA products in
close cooperation with its competitive carrier customers to ensure that its
solutions incorporate the specific technologies, features and functionalities
necessary to maintain a competitive advantage in the Company's selected
markets. The Company intends to develop and expand its integrated MDA
solutions to meet the evolving voice and data needs of its customers.

Increase Penetration of Existing Competitive Carrier Customer Base. The
Company is a leading provider of digital access equipment solutions to CLECs
in the United States. Based on information from its distributors, the Company
believes that over 100 competitive carriers have purchased its products
through its distributors including many of the largest CLECs. The Company
believes that a significant opportunity exists to increase sales to its
existing CLEC customers as they grow. To do so, the Company intends to
maintain a high level of customer support, extend the MDA product families
sold to existing customers, and leverage the sales success achieved in key
geographic locations. The Company also intends to introduce new products which
will enable CLECs to more cost-effectively provide combined voice and high-
speed data services to end users. Additionally, the Company intends to expand
its sales and marketing efforts in order to increase sales to other carriers
such as IXCs, ISPs and wireless carriers. Based on customer comments and
subsequent product purchase decisions by its end-users, the Company believes
that, similar to CLECs, customers in these markets make purchase decisions
based on product reliability, flexibility, cost-effectiveness and ease of use.

Gain Entry into New Markets. The Company believes that, due to the
price/performance advantages of its MDA products, several of its current
solutions are applicable within any telecommunications network, regardless of
size. Consequently, the Company intends to expand the marketing of its
products to ILECs, primarily through strategic relationships and joint sales
strategies. Certain of the Company's products have already met the safety and
certification requirements necessary for installation in ILEC central offices.
In addition, although the international competitive carrier markets are still
in the early stages of development, the Company intends to work with overseas
distributors and strategic partners to provide access solutions to targeted
international carriers.

Leverage Third Party Distribution Channels. The Company intends to increase
the penetration of its products in new and existing markets by strengthening
and expanding its network of third party distributors. Third party
distributors and OEMs, as well as VARs and systems integrators who do not
currently purchase the Company's products, are an integral part of the
Company's distribution strategy because, in conjunction with the Company, they
are responsible for identifying potential end users, selling the Company's
products as part of a complete solution, and customizing and integrating the
Company's products at the end user premises. The Company intends to direct its
marketing activities toward enhancing relationships with its current
distributors, as well the recruitment of additional distributors in key
markets.

35
<PAGE>

Maintain Rapid Product Fulfillment and Manufacturing Efficiency. The Company
has historically fulfilled a majority of its equipment orders within 30 days,
which it views as a key competitive advantage in an industry where competitive
carriers are under continuous pressure to rapidly deploy new services. The
Company intends to continue to design and manufacture its products to
facilitate rapid order fulfillment and network deployment. In addition, the
Company operates in a competitive, high-growth industry where minimizing costs
through manufacturing efficiencies is critical. To increase yield, quality and
reliability, while reducing cost, the Company currently performs in-house
final assembly and test processes, such as automated software-based printed
circuit board testing. Additionally, the Company has developed third-party
manufacturing relationships designed to decrease production costs, realize
rapid order fulfillment and accelerate time-to-market. The Company intends to
continue improving the flexibility and efficiency of its operations.

PRODUCTS

The Company's MDA products currently include the Access Bank and the Wide
Bank product families. The Access Bank I offers digital connectivity for local
and long distance carrier voice services, and converts a single T1 digital
network access line into 24 telephone circuits for voice, facsimile and modem
connections. The Access Bank II expands on the voice functions of the Access
Bank I and adds high-speed data ports for computer connectivity and dual T1
line interfaces for increasing data speeds and connecting digital phone
systems. The Access Exchange is a customer-located access switch that enables
long distance carriers to offer local services from their embedded base
switching equipment. The Wide Bank 28 is a highly-integrated M1-3 standard
multiplexer designed to connect T1 equipment to high-bandwidth T3 digital
circuits, providing up to 28 T1 connections for enhanced voice and high-speed
data services. The Company's products are used with optical fiber, HDSL on
copper pairs or digital radio. The Company differentiates its products on
their ability to enable multiple service offerings, facilitate the rapid
deployment of new services, reduce cost of ownership, provide programmable
software-based functionality, scale cost-effectively at carrier and end user
locations, and satisfy the safety and regulatory requirements of carriers and
end users. The retail list prices of the Company's Access Bank family of
products range from $3,495 to $7,000, depending upon configuration, and the
retail list prices of the Company's Wide Bank family of products range from
$3,000 to $10,000, depending upon configuration.

<TABLE>
<CAPTION>
PRODUCT FEATURES/FUNCTIONALITY CUSTOMER APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCESS BANK I
. Converts a T1 digital line to . Economical local service delivery by CLECs
Released 12 or 24 analog telephone lines
June 1995 . Programmable signaling and 5 . Long distance service delivery using T1
circuit types support popular access
voice services
. Removable 12-channel voice . Digital voice networking equipment
cards connectivity such as voice over IP and
frame relay
. Integration of T1 network . ISP modem pool connections to T1
interface, signaling software,
test functions, and ringing
power
. Enhanced voice service quality . Branch office/remote site connectivity to
and high-speed modem connections T1
. Local CLASS service delivery . Rapid deployment of temporary telephone
such as Caller ID and services
distinctive ringing
. Compact one-rack unit size for . Computer telephony line interfaces
wall or rack mounting
. Low power consumption with
compact eight-hour battery
backup option
. Solid state protection (no
fuses) for increased reliability
. Three-mile high-quality loop
range
- -------------------------------------------------------------------------------

ACCESS BANK I TR-08
All Access Bank I functions plus: . Economical local service delivery by CLECs
Released . Direct connection to local . Expansion of line capacity for local
switch line-side T1 ports switches
November 1996 . Supports Bellcore standard TR-
08 signaling modes
. Complete 12 or 24 line digital
loop carrier remote terminal
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
PRODUCT FEATURES/FUNCTIONALITY CUSTOMER APPLICATIONS
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ACCESS BANK II
All Access Bank I functions plus:
Released . Bandwidth expansion to two T1s . Multi-line voice plus high-
(3.0 Mbps) speed data services to
businesses
November 1996 . Second T1 for PBX connection, . Branch office voice and data
network protection or bandwidth connectivity
expansion
. Supports fractional T1 data . Protection of mission critical
services voice and data
. Built-in standards-based data . Integration of fax, modem, and
management and diagnostics high-speed data on digital PBX
T1s
. Digital cross-connect system
functionality
. Built-in remote management
. Optional Ethernet SNMP LAN
management connection
- --------------------------------------------------------------------------------

ACCESS BANK II HDSL . Provides multi-line voice and
(SOLD BY ADC AS high-speed data services over
EZT1/D1/HDSL) All Access Bank II features plus: existing copper infrastructure
. One T1 port replaced by ADC 4-
Released wire HDSL network interface
. Remotely managed from ADC
SONEPLEX HDSL central office
May 1998 transmission platform
. Provides CLECs with T1 quality
performance
monitoring and maintenance
functions comparable to leased
Type II T1 services
- --------------------------------------------------------------------------------

ACCESS EXCHANGE
All Access Bank II features plus: . Allows long distance carriers
to provide local service from
existing switches
Released . Automatic call routing . Provides automatic call routing
functions and T1 connectivity
for existing phone systems
April 1998 . Programmable digit translation . Integrates high-speed
fractional T1 data connectivity
. Combines T1 access with
existing phone lines
. Connects branch offices to
virtual private voice and
enterprise data networks
- --------------------------------------------------------------------------------

ACCESS BANK LINE
CARDS AND . Telephone, fax and modem
ACCESSORIES connections
. FXS and FXO Loop Start and . Business phone system
Ground Start Signaling connections
Released . DPO and DPT Reverse Battery . Business tie line connections
Signaling
June 1995- . E&M and TO 4-Wire Tie Lines . Analog leased line modem
February 1997 connections
. Programmable signaling . Direct inward dialing services
conversion
. Optional battery back-up and . Private line automatic ringdown
charger connections
. Central office line connections
to T1s
. International dial-back
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

WIDE BANK 28
. Converts M1-3 standards-based . Consolidates multiple T1s into
protected T3 circuit to four to T3 services to reduce monthly
28 T1 circuits access costs for ISPs, CLECs,
wireless carriers and end users
Released . Modular design provides for T1 . Provides redundant T3 service
circuit growth and redundancy distribution from digital radio
connections
November 1997 . T3 electronic and circuit . T1 service expansion from fiber
protection multiplexers
. Built-in circuit and network . Connection of T3 LEC services
testing to ISP remote access servers
. Built-in T1 network interface
units (NIUs) reduce equipment,
labor and space requirements
. Fuseless circuit protection
increases reliability
. Ethernet SNMP management
enables centralized management
. One-rack unit size minimizes
collocation costs
- --------------------------------------------------------------------------------

WIDE BANK 28 NEBS
All features of the Wide Bank 28 . Co-location of T3 service
plus: connections in carrier central
offices
Released . Compliance with Network
Building System (NEBS) criteria
for installation in central
office locations
May 1998 . Hardened for strenuous
environmental conditions
</TABLE>

37
<PAGE>

THE ACCESS BANK FAMILY OF PRODUCTS

Access Bank I

The Company's Access Bank I provides an economical, compact, and reliable
solution for converting T1 digital access services from ILECs and CLECs to 12
or 24 individual analog telephone circuits at end user locations. The T1
Channel Service Unit ("CSU"), ringing generator, power converters, ringback
tone generator, and channel bank controller are all integrated into a Line
Interface Unit ("LIU"). The design of the Access Bank I incorporates an
integrated CSU, which allows customers to plug in a T1 line without having to
connect other peripheral devices or customized circuit cards to address
specific network requirements. Five different types of 12-channel telephone
line interface circuit cards provide popular voice service delivery options.
Interface circuit cards allow for the delivery of enhanced local services such
as Caller ID and distinctive ringing. The Access Bank I operates with a
variety of high-speed modems, and automatically adjusts matching
characteristics to different modems and line conditions in order to provide a
clean, high-quality transmission path. The Access Bank I is principally used
by competitive carriers for economical local service delivery, long distance
service delivery using T1 access, digital voice networking equipment
connectivity, ISP modem pool connections to T1, branch office connectivity to
T1, and rapid deployment of temporary telephone services. Systems integrators
use Access Bank I to convert T1 connections to a variety of analog service
connections for applications such as remote access router interfaces, frame
relay and IP voice telephone system connectivity, and computer telephony
interfaces.

Access Bank I TR-08

The Access Bank I TR-08 provides a Bellcore Standard TR-08 digital loop
carrier software protocol for T1 connections directly to the line side T1
ports of local switches. Local exchange carriers use the Access Bank I TR-08
for economical local service delivery and expansion by competitive carriers of
line capacity for local switches. The Access Bank I TR-08 provides low-cost,
compact, wiring closet deployment of carrier-class enhanced voice features
such as Caller ID and distinctive ringing to competitive carriers utilizing
Nortel, Lucent, Siemens and other local exchange switches. Access Bank I TR-08
enables inexpensive carrier provisioning of physically separate single shelf
groups for 12 or 24 managed telephone lines from a T1.

Access Bank II

The Access Bank II enables carriers to provide multi-line voice and data
over one or two T1 access lines. Carriers use the Access Bank II for multi-
line voice plus high-speed data services, branch office voice and data
connectivity, the protection of mission critical voice and data, and the
integration of fax, modem, and high-speed data on digital PBX T1s. The Access
Bank II includes two T1 network interfaces with fully integrated CSU and Data
Service Units ("DSU"), offering up to 3.0 Mbps of total throughput. Dual T1
interfaces can accommodate future bandwidth requirements and integration of
fax, modem and high-speed data on digital PBX T1s, and can provide protection
for end users' mission critical voice and data applications. The two built-in
data interfaces offer connectivity for high-speed Internet routers, frame
relay devices, video and other high-speed data applications. By combining
digital data with voice over one or two T1 lines, bandwidth can be utilized
more efficiently, saving on communications access costs. The Access Bank II
also includes sophisticated management capabilities such as an optional
Ethernet SNMP LAN management connection for configuration and monitoring.

Access Bank II HDSL

The Access Bank II HDSL (sold by ADC as EZT1/D1/HDSL) is used by competitive
carriers to provide multi-line voice and high-speed data services over
carriers' existing copper infrastructure. Access Bank II HDSL represents the
integration of ADC's HDSL technology into the Access Bank II, creating an end-
to-end digital deployment solution for competitive carriers from wiring
centers to customer locations. This solution enables competitive carriers to
decrease their monthly access costs while providing T1 quality digital service
delivery over low-cost unbundled copper access loops.

38
<PAGE>

Access Exchange

The Access Exchange, released in April 1998, performs the functions of the
Access Bank II and includes software for automatic call routing and number
translation on a call-by-call basis. This product allows long distance
carriers to combine local voice services with long distance and high-speed
data services on their existing switch infrastructure.

WIDE BANK FAMILY OF PRODUCTS

Wide Bank 28

The Wide Bank 28 connects a high bandwidth digital T3 access line to four to
28 T1 service connections. The Wide Bank 28 allows competitive carriers to
consolidate multiple T1s into T3 services to reduce monthly access costs for
ISPs, CLECs, wireless carriers and end users; provide redundant T3 service
distribution from digital radio connections; provide T1 service expansion from
fiber multiplexers; and connect T3 LEC services to ISP remote access servers.
The Company's Wide Bank 28 is used by wireless carriers to provide T3 to 28 T1
conversion, T1 circuit grooming, network protection, and remote management of
their high-bandwidth digital wireline and digital radio connections. These
connections typically provide the backbone links between mobile radio
(cellular or PCS) transmission sites. Up to seven quad Digital Signal Cross-
Connect Level 1 (T1) interface cards support up to 28 T1 connections. Cards
can therefore be quickly and easily added to meet bandwidth requirements. An
identical spare quad T1 provides software-controlled redundancy. The Wide Bank
28 also incorporates T1 Network Interface Unit ("NIU") functionality to
eliminate additional equipment and installation labor costs for carriers.
Redundancy options on the Wide Bank 28 include programmable T1 and T3
software-based functionality and electronics protection through the use of an
additional quad T1 card or T3 controller card respectively. The unit
incorporates solid-state fuseless protection, hot-swappable cards, multiple T1
and T3 line tests for fault isolation and built-in bit error rate testing. The
Wide Bank 28 is housed in a compact, single rack-unit case. Twenty-one Wide
Bank 28 multiplexers can be mounted in a standard rack for high channel
density, or wall-mounted for lower density applications.

Wide Bank 28 NEBS

The Wide Bank 28 NEBS offers the features and performance of the standard
version of the Wide Bank 28 in compliance with NEBS criteria. Wide Bank 28
NEBS allows carriers to install the Wide Bank 28 in central office locations
where the product is designed to operate under electrical and physical
environmental stresses such as electromagnetic interference, high and low
temperatures and earthquake and vibration conditions.

TECHNOLOGY AND SYSTEM ARCHITECTURE

The Company's Access Bank system architecture is designed to offer
advantages in cost, performance, reliability, size and power consumption as
compared to competitive products. The Company employs a unique proprietary
architecture based on its subscriber line interface circuit ("SLIC")
technology and power conversion. The Company's SLIC technology is based on a
dual current source technique which provides: (i) the ability to use
unconditioned power sources for the telephone line current, (ii) fuseless
overvoltage protection against accidental power crosses and lightening
strikes, (iii) high efficiency ringing generation, (iv) signaling using solid
state components and (v) the ability to automatically adapt to different
telephone line conditions. SLICs are a fundamental component of any telephone
service delivery system because they are the interfaces between the telephone
network and the physical copper lines, and are found in digital loop carrier
systems, central office switching systems and PBX systems.

The Company has also developed its products around a software-intensive
architecture to allow for maximum design and upgrade flexibility. For its
Access Bank II product family, DSP-software based control structures allow the
products to perform a variety of advanced voice, data and management functions
with a minimal amount of electronics. These include, for example, software-
based automatic route selection, data testing capabilities and digital cross-
connect and network protection. DSP often allows the Company to expand the

39
<PAGE>

features of its products through software upgrades rather than hardware
redesign. DSP has enabled the integration of high bandwidth data connections
with voice and the ability to perform digital loop carrier software protocols
and signaling conversions.

The following diagram depicts the key technology features of the Access Bank
II, which incorporates all of the features of the Access Bank product family.

LOGO

The Company's unique Wide Bank 28 architecture has incorporated the
functionality that traditionally would require separate devices into a single
compact architecture. For example, the Wide Bank 28 enables hitless T3 network
integration, integrated T1 NIUs and bit error rate testing capabilities. This
has been accomplished through the use of high-level integration of hardware
components, software-based functionality and innovations in high density
circuit packages.

40
<PAGE>

The following diagram depicts the key technology features of the Wide Bank
28.

LOGO

CUSTOMERS

The Company primarily sells its products through third-party distributors to
competitive carriers such as CLECs, ISPs and wireless carriers who provide
enhanced voice and high-speed data services to end users such as small and
medium-sized businesses. Set forth below is a list of the Company's third-party
distributors, as well as a partial list of competitive carriers and end users
who the Company believes have each purchased the Company's products based on
information from its distributors and product sales. The Company believes that
all of these competitive carrier customers and end users are currently using
the Company's products and are representative of the Company's overall
competitive carrier customers and end users.

41
<PAGE>

DISTRIBUTORS COMPETITIVE CARRIER CUSTOMERS AND END USERS
- --------------------------------------------------------------------------------
<S> <C> <C>
ADC Telecommunications, ACC Long Distance Intermedia
Inc. (OEM) Allegiance Telecom, Communications, Inc.
Advantage Telcom Inc. Logix Communications,
ALLTEL Supply, Inc. ALLTEL Supply, Inc. Inc.
MGC Communications,
Inc.
C&L Communications BTI Telecommunications Services
Graybar Electric Cellular One Group
Company, Inc. Cablevision Systems National
Microage Inc. Corp. Telecommunications
Phillips Communications Cisco Systems, Inc. NEXTLINK
& Equipment Co. Commonwealth Telephone Communications, Inc.
Solunet, Inc. Enterprises, Inc. Nextel Communications,
Sprint North Supply CTSI Inc.
Telsource Corporation e.spire Communications, Pacific Bell, a division of SBC, Inc.
Walker & Associates Inc. (formerly ACSI) Prodigy, Inc.
Williams Extreme Technologies, PSINet, Inc.
Telecommunications Inc. STAR
Systems, Inc. Frontier Corporation Telecommunications,
Graybar Electric Inc.
Company, Inc. Teleport Communications Group, Inc.
GST Telecommunications, Tharaldson Property
Inc. Management, Inc.
ICG Communications, US LEC Corp.
Inc.
</TABLE>

U S WEST, Inc.
The Company's customer base is highly concentrated and a small number of
distributors have historically accounted for a majority of the Company's net
revenue. For the year ended December 31, 1997, Walker, ADC and Phillips
accounted for approximately 36%, 20%, and 14% of the Company's net revenue,
respectively. In the six months ended June 30, 1998, Walker, Phillips and
Telsource accounted for 47%, 19% and 15%, respectively, of net revenue. In
addition to being dependent on a small number of distributors for a majority of
its net revenue, the Company believes its products are distributed to a limited
number of competitive carrier customers who are primarily CLECs. The Company
believes that in 1997, 22 competitive carrier customers accounted for
approximately 75% of its net revenue and that for the first half of 1998, 75
competitive carrier customers accounted for approximately 90% of net revenue.
See "Risk Factors--Dependence on Distribution Channels" and Note 8 of Notes to
Financial Statements.
WinStar Communications,
Inc.
Worldcom Inc.

The following customer case studies illustrate how certain of the Company's
competitive carrier customers have deployed its products:

CLEC. As TCG, a leading CLEC, began rolling out switches for local voice
services, it needed to deploy telephone lines quickly to businesses and high
density residential customers. T1 access lines (called "Type II T1"), leased
from the ILECs, would allow TCG to cost-effectively connect its metropolitan
wiring centers to end users. TCG could use the TR-08 ports of its local
switches to provide enhanced voice services such as Caller ID, distinctive
ringing and calling party disconnect, and minimize its switching equipment
costs. However, traditional T1 digital loop carrier equipment that supported
TR-08 protocols and offered these enhanced service offerings were too expensive
and too large to install at small and medium-sized business locations. TCG's
solution was CAC's Access Bank I TR-08. The Access Bank I TR-08 allowed TCG to
economically offer its customers up to 24 enhanced voice lines over Type II T1
connections to end users. Access Bank I TR-08 decreased installation time and
per-line costs, mounted in end user wiring closets with a minimum of space,
provided a small battery backup option, offered high speed modem connectivity
to end user lines, and reliably satisfied telephone wiring safety requirements
at end user sites.

42
<PAGE>

The following diagram depicts a CLEC such as TCG deploying enhanced local
voice services over T1 connections with CAC's Access Bank I TR-08.

LOGO

ISP. PSINet, a leading ISP, faced growing demand from its business customers
for high bandwidth TI Internet connections. By consolidating up to 28 T1
access circuits into T3 connections to its point of presence, PSINet believed
that it could decrease its access costs by a factor of three or more, while
providing service growth for its customers. Traditional M1-3 T1 to T3
muliplexers that were necessary for deployment could not monitor T1 and T3
service delivery, required long installation times and required large amounts
of space in valuable co-located ILEC racks at end user sites. PSINet chose
CAC's Wide Bank 28 to consolidate T1 service connections into T3 circuits as
elements of its network. By deploying the Wide Bank 28, PSINet utilizes SNMP
network management to monitor and test T1 and T3 customer services remotely.
Its compact one rack unit size and plug-in installation capabilities provided
substantial savings, inexpensive installation space and labor, and enabled
PSINet to cost-effectively satisfy end user demand for T1 Internet service
connections, while meeting end user service availability expectations.

The following diagram depicts an ISP such as PSINet deploying high bandwidth
T1 Internet connections via T3 access connections with CAC's Wide Bank 28.

LOGO
CLEC. Logix, an emerging CLEC, desired to offer a wide variety of digital
services, including local telephone, long distance, Internet access and
enterprise data services. Logix planned to target business customers with 8 to
24 lines that required reliable and cost-effective equipment at end user
sites. In addition, Logix required easy installation with a minimum of
maintenance or training. To decrease monthly customer access costs, both
enhanced voice and high speed data services were to be combined on T1 access
lines from ILEC co-location wiring centers at end user sites. Logix also
required a managed solution which would allow it to consolidate a large number
of T1 access lines to single high speed T3 connections at its wiring centers
in order to reduce transmission costs and simplify its network maintenance.
Logix's solution was deploying CAC's Access Bank II at end user sites and the
Wide Bank 28 in ILEC wiring centers. CAC's Wide Bank 28 allowed Logix to
consolidate up to 28 remote business sites into each protected T3 connection,
providing up to 672 circuits. The deployment of Access Bank II equipment
permitted the combination of up to 24 enhanced voice lines with managed high
speed Internet or enterprise connection data services on T1 access lines. With
CAC's equipment deployed, Logix's customers are able to combine voice services
with new high speed data services at very cost-effective rates.

43
<PAGE>

The following diagram depicts a CLEC such as Logix deploying multi-line
voice and high-speed data services to small businesses with CAC's Access Bank
II and Wide Bank 28.

LOGO
SALES, MARKETING AND CUSTOMER SUPPORT

Sales. The Company employs a leveraged sales model currently consisting of
12 third-party distributors and an internal sales engineering support group,
which supports its distributors and provides pre- and post-sales support to
its competitive carrier customers and end users. Sales from third party
distributors accounted for substantially all of the Company's revenues for the
year ended December 31, 1997 and the six months ended June 30, 1998. See "Risk
Factors--Dependence on Distribution Channels," and "--Challenges of
Maintaining and Expanding Distribution Channels; Potential for Channel
Conflict."

Third Party Distributors. The Company's distributors are responsible for
identifying potential competitive carrier customers, selling the Company's
products as part of a complete solution and, in some cases, customizing and
integrating the Company's products at end users' sites. The Company
establishes relationships with distributors through written agreements which
provide prices, discounts and other material terms and conditions under which
the distributor is eligible to purchase the Company's products for resale.
Such agreements generally do not grant exclusivity to the distributors, do not
prevent the distributors from carrying competing product lines, and do not
require the distributors to sell any particular dollar amount of the Company's
products, although the contracts may be terminated at the election of the
Company if specified sales targets and end user satisfaction goals are not
attained. The Company generally provides its distributors with limited stock
rotation and price protection rights. Other than limited stock rotation
rights, the Company does not provide its distributors with general product
return rights. The Company has limited knowledge of the financial condition of
certain of its distributors; however, it is aware that some of its
distributors have limited financial and other resources which could impair
their ability to pay the Company. Although the financial instability of these
distributors has not limited any distributor's ability to pay the Company for
its products to date, there can be no assurance that any bad debt incurred by
the Company will not exceed the Company's reserves therefor or that the
financial instability of one or more of the Company's distributors will not
materially adversely affect the Company's business, financial condition or
results of operations. The Company has limited knowledge of the inventory
levels of its products carried by its OEMs and distributors, and the Company's
OEMs and distributors have in the past reduced, and may in the future reduce,
planned purchases of the Company's products due to overstocking. Moreover,
distributors who have overstocked the Company's products have in the past
reduced, and may in the future reduce, their inventories of the Company's
products by selling such products at significantly reduced prices. Any such
reduction in planned purchases or sales at reduced prices by distributors or
OEMs in the future could reduce the demand for the Company's products, create
conflicts with other distributors or materially adversely affect the Company's
business, financial condition and results of operations. In addition, three
times a year, distributors are allowed to return a maximum of fifteen percent
of the Company's unsold products held in stock by such distributor, which were
purchased within the four month period prior to such return date, for an equal
dollar amount of new equipment. While to date these returns have not had a
material impact on the Company's results of operations, there can be no
assurance that the Company will not experience significant returns in the
future or that it will have made adequate allowances to offset such returns.
The Company is generally required to give its distributors a 60 day notice of
price increases. Orders entered by distributors within the 60 day period are
filled at the lower product price. In addition, the Company grants certain of
its distributors

44
<PAGE>

"most favored customer" terms, pursuant to which the Company has agreed to not
knowingly grant another distributor the right to resell the Company's products
on terms more favorable than those granted to the existing distributor,
without offering the more favorable terms to the existing distributor. There
can be no assurance that these price protection and "most favored customer"
clauses will not cause a material decrease in the average selling prices and
gross margins of the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Dependence on Distribution Channels" and "--
Challenges of Maintaining and Expanding Distribution Channels; Potential for
Channel Conflict."

Sales Engineering Support. The Company's sales engineering support group is
responsible for platform configuration, price quotations and telephone sales
activities. The Company's sales support and sales engineering strategy focuses
on assisting carriers and end users in rapidly integrating the Company's
products into their networks. The sales engineering support group identifies
carrier and end user leads and, based on initial presentations, provides
evaluation units for trial in carrier and end user networks. After successful
trial and approval, the carrier or end user is provided with product
installation and maintenance training. The sale of the Company's products
averages approximately four months in the case of competitive carriers, but
can take significantly longer in the case of ILECs and certain distributors
and end users. Initially, the Company's sales engineering support group is
involved in educating carriers and end users on the functionality and benefits
which may be derived from using the Company's products. Subsequently, members
of both the Company's sales engineering and research and development
organizations are involved in providing the carrier or end user with the
required training and technical support to integrate the Company's products
into a new application or service.

Marketing. The Company's marketing organization develops strategies for
product lines and, along with the Company's sales force, develops key account
strategies and defines product and service functions and features. Marketing
is responsible for sales support, RFPs and RFQs, in-depth product
presentations, interfacing with operations, setting price levels to achieve
targeted margins, developing new services/business opportunities and writing
proposals in response to customer requests for information or quotations. In
order to create awareness, market demand and sales opportunities, the Company
engages in a number of marketing activities which include exhibiting products
and customer applications at industry trade shows, advertising in selected
publications aimed at targeted markets, public relations activities with trade
and business press, publication of technical articles and the distribution of
sales literature, technical specifications and documentation.

Customer Service and Support. Based on customer support calls, the Company
believes that ongoing customer support is critical to maintaining and
enhancing relationships with carriers, end users and distributors. The carrier
and end user support group has five functions: (i) new product development,
which provides for product ideas and enhancements based on customer
requirements through the pre- and post-sales support effort, (ii) inbound
technical support, which focuses on pre- and post-sales calls made to the
Company from its customers, (iii) outbound application support and response to
RFPs and RFQs, (iv) training, including installation and application
development training for customers, sales engineers and employees and (v)
reporting and analysis based on the automated trouble ticket and returned
material systems.

COMPETITION

The market for telecommunications equipment is characterized by intense
competition, with a large number of suppliers providing a variety of products
to diverse market segments within the telecommunications industry. Management
believes that the principal competitive factors in the Company's markets
include: performance and reliability; flexibility, scaleability and ease-of-
use; breadth of features and benefits; and, initial and lifetime cost. The
Company believes that it competes favorably with respect to each of these
factors.

The Company's existing and potential competitors include many large domestic
and international companies, including certain companies that have
substantially greater financial, manufacturing, technological, sales and
marketing, distribution and other resources. The Company's principal
competitors for its Access Bank product family include AFC, Cisco, DSC,
General Datacom, Lucent, NEC, Newbridge, Nortel, Pairgain,

45
<PAGE>

Paradyne, Premisys, Pulsecom, Reltec, Telco and other small private companies.
The Company's principal competitors for its Wide Bank product family include
Alcatel, NEC, Nortel and Telco. The Company expects that many of its
competitors who currently offer products competitive with only one of the
Company's product lines will eventually offer products competitive with all of
the Company's product lines. In addition, several start-up companies have
recently begun to manufacture products similar to those offered by the
Company. Due to the rapidly evolving markets in which the Company competes,
additional competitors with significant market presence and financial
resources, including large telecommunications equipment manufacturers and
computer hardware and software companies, may enter those markets, thereby
further intensifying competition. Additionally, one of the Company's
distributors is currently competing with the Company, and there can be no
assurance that additional distributors will not begin to develop or market
products in competition with the Company.

Many of the Company's current and potential competitors are substantially
larger than the Company and have significantly greater financial, sales and
marketing, technical, manufacturing and other resources and more established
channels of distribution. As a result, such competitors may be able to respond
more rapidly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than the Company. Such competitors may enter the
Company's existing or future markets with solutions which may be less costly,
provide higher performance or additional features or be introduced earlier
than the Company's solutions. Many telecommunications companies have large
internal development organizations which develop software solutions and
provide services similar to the Company's products and services. Some of the
Company's competitors currently offer financing alternatives to their
customers, a service that the Company does not provide at this time. The
Company expects its competitors to continue to improve the performance of
their current products and to introduce new products or technologies that
provide added functionality and other features. Successful new product
introductions or enhancements by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
products and services, could result in continued intense price competition or
could make the Company's products and services or technologies obsolete or
noncompetitive. To be competitive, the Company will be required to continue to
invest significant resources in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make
the technological advances necessary to be competitive. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Intense Competition."

MANUFACTURING

The Company's manufacturing operations consist of materials planning and
procurement, final assembly, product assurance testing, quality control, and
packaging and shipping. The Company procures components for PCBs for assembly.
The Company currently uses several independent manufacturers to provide
certain PCBs, chassis and subassemblies. The Company has developed a
manufacturing process that enables it to configure its products to be adapted
to different customer hardware and software applications at the final assembly
stage. This flexibility is designed to reduce both the Company's manufacturing
cycle time and the Company's need to maintain a large inventory of finished
goods. The Company believes that the efficiency of its manufacturing process
to date is largely due to the Company's product architecture and the Company's
commitment to manufacturing process design.

46
<PAGE>

The Company spends significant engineering resources producing customized
software and hardware to assure consistently high product quality. The Company
tests its products both during and after the assembly process using
internally-developed product assurance testing procedures. These procedures
consist of automated board and automated system testing as well as
environmental testing. Through June 30, 1998, the Company had experienced a
return rate for defective products of less than 2%. Although the Company
generally uses standard parts and components for its products, many key
components are purchased from sole or single source vendors for which
alternative sources are not currently available. There can be no assurance
that the Company will not experience supply problems in the future from any of
its manufacturers. Any such difficulties could have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Risk Factors--Dependence on Sole and Single Source Suppliers" and "--Risks
Associated with Manufacturing."

RESEARCH AND PRODUCT DEVELOPMENT

The Company focuses its development efforts on providing enhanced
functionality to its existing products, including total network solutions and
performance and the development of additional software-based features and
functionality. Extensive product development input is obtained from customers
and the Company's monitoring of end user needs and changes in the marketplace.
The Company's current product development focus has been on developing MDA
access products and completing new products such as the recently introduced
Access Exchange, and the Company's integrated voice and data solution which is
still under development.

Management believes that the Company's success will depend, in part, on its
ability to develop and introduce in a timely fashion new products and
enhancements to its existing products. The Company has in the past made, and
intends to continue to make, significant investments in product and
technological development. The Company's engineering, research and development
expenditures totaled approximately $164,000, $874,000, $2.8 million and $2.0
million in 1995, 1996, 1997 and the first six months of 1998, respectively.
The Company performs its research and product development activities at its
principal offices in Boulder, Colorado. As of June 30, 1998, the Company had
40 employees in its design engineering department. The Company's inability to
develop on a timely basis new products or enhancements to existing products,
or the failure of such new products or enhancements to achieve market
acceptance, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on New Product Introductions and Product Enhancements; Risks Associated with
Transition to New Products," "--Risk of Product Defects, Returns and
Liability," "--Risks Associated with Rapid Technological Change" and "--
Dependence on Continued Growth of Market for Telecommunications Services."

INTELLECTUAL PROPERTY

The Company relies upon a combination of patent, copyright and trademark and
trade secret laws as well as confidentiality procedures and contractual
restrictions to establish and protect its proprietary rights. The Company has
also entered into confidentiality agreements with its employees and
consultants and enters into non-disclosure agreements with its suppliers and
distributors so as to limit access to and disclosure of its proprietary
information. There can be no assurance such measures will be adequate to deter
and prevent misappropriation of the Company's technologies or independent
third-party development of similar technologies. The laws of certain foreign
countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and
thus make the possibility of piracy of the Company's technology and products
more likely.

As of June 30, 1998, a total of two U.S. patents have been issued to the
Company, one additional patent has been allowed and a total of five U.S.
patent applications are pending. The issued patents cover various aspects of:
(i) voice and data circuits, (ii) switching technologies and (iii) redundancy.
The U.S. patents begin to expire commencing in the year 2015. The Company also
has one U.S. trademark application pending and three trademarks registered.
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to the

47
<PAGE>

Company. Although the Company has not received communications from third
parties asserting that the Company's products infringe or may infringe
proprietary rights of third parties, the Company has no assurance any future
claims, if determined adversely to the Company, would not have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Risk Factors--Dependence on Proprietary Rights."

EMPLOYEES

At June 30, 1998, the Company employed 125 full-time employees in eight
states. Of these employees, 40 were involved in design engineering, 40 in
manufacturing engineering and operations, 28 in sales, marketing and technical
support and training and 17 in general administration and finance.
Additionally, the Company employs a limited number of engineering employees on
a part-time basis. No employees are covered by any collective bargaining
agreements. The Company believes that its relationships with its employees are
good. The loss of any of the key management or technical personnel could have
a material adverse effect on the Company. See "Risk Factors--Dependence on Key
Personnel and Availability of Skilled Workforce" and "--Risks Associated with
Rapid Growth."

FACILITIES

The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 38,000 square feet
of office space in Boulder, Colorado. The Company occupies these premises
under a lease expiring December 31, 2005. As of June 30, 1998, the annual base
rent for this facility was approximately $400,000. The Company has planned an
expansion of approximately 22,000 square feet of office space at this location
scheduled for completion in late 1998 or early 1999.

In addition to its principal office space in Boulder, Colorado, the Company
leases approximately 9,550 square feet of additional office space in Boulder,
which is currently subleased. The Company also leases facilities and offices
in Butler, NJ, Dallas, TX and Greensboro, NC, for its field sales and support
organization. The Company believes that its current facilities and planned
expansions are adequate to meet its needs through the next 12 months. However,
the Company believes that it will require up to 50,000 additional square feet
of office, manufacturing and research and development space in the next 24
months. Although the Company believes that suitable additional space will be
available, there can be no assurance that suitable additional space will be
available on commercially reasonable terms or at all. See "Risk Factors--Risks
Associated with Rapid Growth" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Liquidity and Capital
Resources."

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

48
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger L. Koenig...................... 44 President, Chief Executive Officer and
Chairman of the Board of Directors
Nancy G. Pierce...................... 40 Vice President-Finance and
Administration, Chief Financial
Officer, Treasurer and Secretary and
Director
Shrichand B. Dodani.................. 40 Vice President, Engineering
J. Randy Shipley..................... 43 Vice President, Sales
John W. Stahura...................... 43 Vice President, Operations
Douglas Carlisle .................... 41 Director
Joseph Graziano (1)(2)............... 54 Director
Ryal Poppa (1)(2).................... 64 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee

ROGER L. KOENIG. Mr. Koenig has served as President, Chief Executive Officer
and Chairman of the Board of Directors of the Company since its inception in
September 1992. Prior to co-founding the Company, Mr. Koenig served as the
President and Chief Executive Officer of Koenig Communications, an equipment
systems integration and consulting firm. Prior to founding Koenig
Communications, Mr. Koenig held a number of positions with IBM/ROLM Europe, a
telecommunications equipment manufacturer, including Engineering Section
Manager for Europe. Mr. Koenig received a B.S. in Electrical Engineering from
Michigan State University and an M.S. in Engineering Management from Stanford
University.

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

SHRICHAND B. DODANI. Mr. Dodani has served as Vice President, Engineering
since April 1998, after having served as Vice President, Manufacturing and
Engineering from August 1997 through April 1998. Mr. Dodani served as Vice
President, Engineering and Sales of Aztek Engineering from March 1996 through
August 1997. From August 1993 through March 1996, Mr. Dodani served as a Vice
President for Nortel Asia Pacific and as director for Nortel European
Transmission System, both of which are subsidiaries of Nortel. From August
1988 through August 1993, Mr. Dodani served as Segment Manager (Director of
Product Management) in Europe and the U.S. for Alcatel Network Systems. Mr.
Dodani received a B.S. in Physics and Math from Gujarat University, India and
an M.B.A. and an M.S. in Computer Science from the University of Texas.

J. RANDY SHIPLEY. Mr. Shipley has served as Vice President, Sales of the
Company since April 1998. From April 1997 to April 1998, Mr. Shipley served as
Senior Vice President, National Distribution for e.spire, a CLEC. From
September 1986 to April 1997, Mr. Shipley served in several capacities, the
final position being Vice President, Data Network Systems Integration, for
Williams Telecommunications Systems, Inc., a diversified telecommunications
company.

49
<PAGE>

JOHN W. STAHURA. Mr. Stahura has served as Vice President, Operations of the
Company since April 1998. From July 1996 to April 1998, Mr. Stahura served as
President of Vaner, Inc., an electronics power conversion company. From May
1990 to May 1996, Mr. Stahura served as Vice President, Operations for
Solidstate Controls, Inc., a power conversion company. From January 1984 to
May 1990, Mr. Stahura served as Director of Operations for Keltec Florida
Manufacturing, an electronics manufacturing company. Mr. Stahura received a
B.S. in Mathematics from the U.S. Naval Academy.

DOUGLAS CARLISLE. Mr. Carlisle has served as a Director of the Company since
September 1997. Mr. Carlisle has been a General Partner of Menlo Ventures
since September 1984. Mr. Carlisle has served as a director of numerous public
and private companies over the past 15 years. Mr. Carlisle received a B.S.E.E.
in Electrical Engineering from the University of California, Berkeley and a
J.D. and an M.B.A. from Stanford University.

JOSEPH GRAZIANO. Mr. Graziano has served as a Director of the Company since
July 1996. Mr. Graziano served as Executive Vice President, Chief Financial
Officer of Apple Computer, Inc. during the period from June 1989 through
December 1995. Mr. Graziano also served as a Director at Apple Computer from
June 1993 through October 1995. Mr. Graziano also serves as a Director of
IntelliCorp., Inc., an enterprise software company, Pixar Animation Studios
and CIDCO, a developer of advanced telephony products, and several private
companies in the software and telecommunications industries. Mr. Graziano
received a B.S.B.A. in Business Administration from Merrimack College. Mr.
Graziano is also a Certified Public Accountant.

RYAL POPPA. Mr. Poppa has served as a Director of the Company since May
1996. Mr. Poppa has been a private investor since June 1996. Mr. Poppa was the
Chairman of the Board of Directors, President and Chief Executive Officer of
Storage Technology Corporation, a data storage company, from January 1985 to
May 1996. Mr. Poppa also currently serves as a Director of Metrocall, a paging
company, and Redcape Policy Software, Inc., an enterprise software company.
Mr. Poppa received a B.A. in Business Administration from Claremont McKenna
College.

There are no family relationships between any of the executive officers and
directors, other than that between Mr. Koenig and Ms. Pierce. See "Certain
Transactions."

BOARD COMMITTEES

The Company currently has authorized seven directors. Each director holds
office until the next annual meeting of stockholders or until his or her
successor is duly elected and qualified. The officers serve at the discretion
of the Board.

The Audit Committee reviews and supervises the Company's financial controls,
including selecting the Company's auditors, reviewing the books and accounts
of the Company, meeting with the officers of the Company regarding the
Company's financial controls, acting upon recommendations of auditors and
taking such further action as the Audit Committee deems necessary to complete
an audit of the books and accounts of the Company, as well as other matters
which may come before it or as directed by the Board of Directors. The Audit
Committee currently consists of two directors, Mr. Graziano and Mr. Poppa.

The Compensation Committee reviews and approves the compensation and
benefits for the Company's executive officers, administers the Company's stock
plans and performs such other duties as may from time to time be determined by
the Board of Directors. The Compensation Committee currently consists of two
directors, Mr. Graziano and Mr. Poppa.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee of the Company's Board of
Directors are Mr. Graziano and Mr. Poppa. No executive officer of the Company
serves on the board of directors or compensation committee of

50
<PAGE>

any entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.

DIRECTOR COMPENSATION

The Company currently does not compensate any member of the Company's Board
of Directors and does not intend to pay cash compensation to non-employee
directors. However, members of the Board of Directors are eligible to receive
discretionary option grants and stock issuances under the Company's 1998 Stock
Incentive Plan (the "1998 Plan"). In addition, following the completion of the
Offering, non-employee directors will each receive an initial 15,000-share
automatic option grant upon becoming a director. Each initial 15,000-share
option grant will vest in four successive equal annual installments upon the
individual's completion of each year of service on the Board of Directors over
the four year period measured from the option grant date. Each director will
also receive a 3,500-share option grant on the date of each annual meeting of
stockholders pursuant to the 1998 Plan. The 3,500-share option grant will vest
upon the individual's completion of one year of Board Service measured from
the option grant date. All such option grants will be granted at the fair
market value on the date of grant. The 1998 Plan also permits the plan
administrator to activate a director fee option grant program. Should this
program be activated in the future, each non-employee Board member will have
the opportunity to apply all or a portion of any annual retainer fee otherwise
payable in cash to the acquisition of a below-market option grant. See "--
Benefit Plan."

Mr. Graziano and Mr. Poppa were each granted an option to purchase 75,000
shares of Common Stock in connection with their respective appointments to the
Board of Directors on July 1, 1996 and May 21, 1996. Each option is
immediately exercisable and vests in four equal annual installments upon the
completion of each year of service measured from the date of grant. Each
option has an exercise price of $0.33 per share. These options were exercised
by Mr. Graziano and Mr. Poppa on September 15, 1997.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation eliminates, subject to certain
exceptions, directors' personal liability to the Company or its stockholders
for monetary damages for breaches of fiduciary duties. The Certificate of
Incorporation does not, however, eliminate or limit the personal liability of
a director for (i) any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided in
Section 174 of the Delaware General Corporation Law or (iv) any transaction
from which the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers to the fullest extent permitted under the Delaware
General Corporation Law and may indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law. In
addition, the Company has entered into indemnification agreements with its
directors and officers. The indemnification agreements contain provisions that
require the Company, among other things, to indemnify its directors and
executive officers against certain liabilities (other than liabilities arising
from intentional or knowing and culpable violations of law) that may arise by
reason of their status or service as directors or executive officers of the
Company or other entities to which they provide service at the request of the
Company and to advance expenses they may incur as a result of any proceeding
against them as to which they could be indemnified. The Company believes that
these Bylaw provisions and indemnification agreements are necessary to attract
and retain qualified directors and officers. The Company has obtained an
insurance policy covering directors and officers for claims that such
directors and officers may otherwise be required to pay or for which the
Company is required to indemnify them, subject to certain exclusions.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.

51
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation of the Company's Chief Executive Officer and the other four most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ended December 31, 1997 (the "Last
Fiscal Year") and whose salary and bonus exceeded $100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(1) COMPENSATION($)(2)
- --------------------------- ---- ---------- --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Roger L. Koenig
President, Chief
Executive Officer and
Chairman of the Board
of Directors........... 1997 143,269 -- -- --
Nancy G. Pierce
Vice President-Finance
and Administration,
Chief Financial
Officer, Treasurer and
Secretary(3)........... 1997 94,615 -- -- --
Shrichand B. Dodani(4)
Vice President
Engineering............ 1997 43,538 -- 187,500 --
Arthur L. Schultz(5)
Vice President, Sales.. 1997 118,269 76,375 37,500 --
Kevin C. Leibl(6)
Vice President,
Marketing.............. 1997 111,732 65,983 112,500 10,008
</TABLE>
- --------
(1) The options listed in the table were granted under the Company's 1995
Stock Option Plan. See "--Option Grants During Last Fiscal Year" for a
description of the terms of these options. The options outstanding under
the 1995 Stock Option Plan have been incorporated into the 1998 Stock
Incentive Plan but continue to be governed by their existing terms. See
"--Benefit Plan--1998 Stock Incentive Plan."
(2) All Other Compensation represents $10,008 paid to Mr. Leibl for relocation
expenses.
(3) Ms. Pierce is expected to earn over $100,000 in fiscal year 1998.
(4) Mr. Dodani commenced employment with the Company in August 1997. His
annualized salary for the Last Fiscal Year was $125,000.
(5) Mr. Schultz resigned from the Company on March 23, 1998.
(6) Mr. Leibl resigned from the Company on December 1, 1997, effective May 15,
1998.

52
<PAGE>

OPTION GRANTS DURING LAST FISCAL YEAR

The following table sets forth information concerning the stock option
grants made to each of the Named Executive Officers in the Last Fiscal Year.
No stock appreciation rights were granted during the Last Fiscal Year.

OPTION GRANTS DURING LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL VALUE OF
RATES OF OPTIONS
STOCK PRICE BASED
APPRECIATION FOR ON OFFERING
INDIVIDUAL GRANTS OPTION TERM($)(4) PRICE($)(5)
------------------------------------------------------ --------------------- -------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE PER DATE OF
NAME GRANTED(#)(1) FISCAL YEAR(%)(2) SHARE($)(3) EXPIRATION 5% 10%
---- ------------- ----------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger L. Koenig......... -- -- -- -- -- -- --
Nancy G. Pierce......... -- -- -- -- -- -- --
Shrichand B. Dodani..... 37,500 4.04 0.33 8/29/02 3,419 7,555 437,625
150,000 16.17 0.33 8/29/02 13,676 30,220 1,750,500
Arthur L. Schultz....... 37,500 4.04 0.83 10/1/02 8,599 19,002 418,875
Kevin C. Leibl.......... 112,500 12.13 0.33 1/15/02 10,257 22,655 1,312,875
</TABLE>
- --------
(1) All options were granted under the 1995 Stock Option Plan. Each option is
immediately exercisable for all the option shares, but any unvested shares
purchased upon exercise of the option are subject to repurchase by the
Company, at the option exercise price paid per share, should the
optionee's service with the Company cease prior to vesting of such shares.
With the exception of Mr. Dodani's 37,500-share option grant, which vested
completely upon the date of grant, all options granted to the Named
Executive Officers in the Last Fiscal Year vest as follows: Twenty-five
percent (25%) of the option shares will vest upon the optionee's
continuation in service through one year following the grant date and the
balance of the shares vest in twelve (12) successive equal quarterly
installments upon optionee's continued service at the completion of each
of the next twelve (12) quarters thereafter. The date of Mr. Dodani's
37,500-share option grant and his 150,000-share option grant was August
30, 1997. The date of Mr. Schultz's 37,500-share option grant was October
2, 1997. The date of Mr. Leibl's 112,500-share option grant was January
16, 1997.
(2) Based on an aggregate of 927,675 options granted in the Last Fiscal Year.
(3) The exercise price per share of options granted represents fair market
value of the Common Stock on the dates the respective options were granted
as determined by the Board of Directors. No public market existed for the
Common Stock on the respective dates of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% rates of stock price appreciation are mandated by the rules of the
Securities and Exchange Commission, and there can be no assurance provided
to any executive officer or any other holder of the Company's securities
that the actual stock price appreciation over the five-year option term
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price appreciates over the option term, no value will be
realized from the option grant.
(5) Based on an initial public offering price of $12.00 per share.

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<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information concerning option exercises and
option holdings for the Last Fiscal Year, with respect to each of the Named
Executive Officers. No stock options or stock appreciation rights were
exercised during the Last Fiscal Year by the Named Executive Officers and no
stock appreciation rights were outstanding at the end of the Last Fiscal Year.

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES OPTIONS
UNDERLYING VALUE OF UNEXERCISED BASED ON
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT OFFERING PRICE
AT FISCAL YEAR END(#) FISCAL YEAR END($)(2) ($)(3)
---------------------------- ---------------------------- ------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger L. Koenig......... -- -- -- -- --
Nancy G. Pierce......... -- -- -- -- --
Shrichand B. Dodani..... 187,500 -- 262,500 -- 2,187,625
Arthur L. Schultz....... 112,500 -- 138,750 -- 1,256,625
Kevin C. Leibl.......... 112,500 -- 157,500 -- 1,312,875
</TABLE>
- --------
(1) The options are immediately exercisable for all the option shares, but any
shares purchased under the options will be subject to repurchase by the
Company at the original exercise price per share upon the optionee's
cessation of service prior to vesting in such shares. As of December 31,
1997, the Company's repurchase right had lapsed as to 37,500 shares for
Mr. Dodani, 28,125 shares for Mr. Schultz and no shares for Mr. Leibl.
(2) Based on $1.73 per share, the fair market value of the Common Stock at the
end of the Last Fiscal Year, as determined by the Board of Directors, less
the option exercise price payable for such shares.
(3) Based on an initial public offering price of $12.00 per share.

BENEFIT PLAN

1998 Stock Incentive Plan. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") is intended to serve as the successor equity incentive program to
the Company's existing 1995 Stock Option Plan (the "Predecessor Plan"). The
1998 Plan was adopted by the Board in May 1998 and was approved by the
stockholders in June 1998. The Discretionary Option Grant and Stock Issuance
Programs under the 1998 Plan became effective immediately upon the Board's
adoption of the Plan (the "Plan Effective Date"). The Automatic Option Grant
Program will become effective on the date the Underwriting Agreement for the
Offering is executed (the "Underwriting Date").

A total of 3,750,000 shares of Common Stock has been authorized for issuance
under the 1998 Plan. Such share reserve consists of the number of shares
available for issuance under the Predecessor Plan on the Plan Effective Date,
including the shares subject to outstanding options. To the extent any shares
of Common Stock issued under the Predecessor Plan are repurchased by the
Company after the Underwriting Date, at the exercise price paid per share, in
connection with the holder's termination of service, those repurchased shares
will be added to the reserve of Common Stock available for issuance under the
1998 Plan. In addition, the number of shares of Common Stock reserved for
issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 1999, by an
amount equal to two and one-half percent (2.5%) of the total number of shares
of Common Stock outstanding on the last trading day of the preceding calendar
year, but no such annual increase shall exceed 562,500 shares.

On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Compensation Committee, as Plan Administrator, elects to extend one
or more features of the 1998 Plan to those options. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be
in effect for grants made under the Discretionary Option Grant Program of the
1998 Plan.

54
<PAGE>

The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price determined by
the Plan Administrator on the grant date, (ii) the Stock Issuance Program
under which such individuals may, in the Plan Administrator's discretion, be
issued shares of Common Stock directly through the purchase of such shares at
a price not less than their fair market value at the time of issuance or as a
bonus tied to the performance of services, (iii) the Salary Investment Option
Grant Program which may, in the Plan Administrator's sole discretion, be
activated for one or more calendar years and, if so activated, will allow
executive officers and other highly compensated employees the opportunity to
apply a portion of their base salary to the acquisition of special below-
market stock option grants, (iv) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to purchase shares of Common Stock at an
exercise price equal to their fair market value on the grant date and (v) the
Director Fee Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow non-employee Board members the opportunity to apply a portion of
the annual retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants. In no event may any one
participant in the 1998 Plan receive option grants, separately exercisable
stock appreciation rights or direct stock issuances for more than 500,000
shares of Common Stock in the aggregate per calendar year.

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have the discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The Compensation Committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option
Grant Program in the event that program is activated for one or more calendar
years, but neither the Compensation Committee nor the Board will exercise any
administrative discretion with respect to option grants made under the Salary
Investment Option Grant Program or under the Automatic Option Grant or
Director Fee Option Grant Program for the non-employee Board members. All
grants under those three latter programs will be made in strict compliance
with the express provisions of each such program.

In the event that the Company is acquired by merger or sale of all or
substantially all of its assets or securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's outstanding
securities, each outstanding option under the Discretionary Option Grant
Program which is not to be assumed by the successor corporation or otherwise
continued in effect will automatically accelerate in full, and all unvested
shares under the Discretionary Option Grant and Stock Issuance Programs will
immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are assigned to the successor corporation or otherwise
continued in effect. The Plan Administrator will have complete discretion to
grant options under the Discretionary Option Grant Program which will become
exercisable on an accelerated basis for all of the option shares upon (i) an
acquisition or other change in control of the Company, whether or not those
options are assumed or continued in effect, or (ii) the termination of the
optionee's service within a designated period (not to exceed 18 months)
following an acquisition or other change in control in which those options are
assumed or continued in effect. The vesting of outstanding shares under the
Stock Issuance Program may be accelerated upon similar terms and conditions.
The Plan Administrator is also authorized under the Discretionary Option Grant
and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
immediately vest in connection with a change in the majority of the Board by
reason of one or more contested elections for Board membership, with such
vesting to occur either at the time of such change in control or upon the
subsequent termination of the individual's service within a designated period
following such change in control. The Board has the discretion to cause the

55
<PAGE>

options incorporated from the Predecessor Plan to vest on an accelerated basis
upon an acquisition of the Company by merger or asset sale. The Plan
Administrator will have discretion to extend one or more of the other
acceleration provisions of the 1998 Plan to those options.

In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will become exercisable for the option shares in a series of 12
equal monthly installments over the calendar year for which the salary
reduction is to be in effect and will be subject to full and immediate vesting
upon certain changes in the ownership or control of the Company.

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Underwriting Date will
automatically receive an option grant for 15,000 shares of Common Stock on the
date such individual joins the Board, provided such individual has not been in
the prior employ of the Company. In addition, on the date of each annual
meeting of stockholders held after the Underwriting Date, each non-employee
Board member who is to continue to serve as a non-employee Board member will
automatically be granted an option to purchase 3,500 shares of Common Stock,
provided such individual has served on the Board for at least six months.

Each automatic grant for the non-employee Board members will have a term of
ten years, subject to earlier termination following the optionee's cessation
of Board service. Each automatic option will be immediately exercisable for
all of the option shares; however, any unvested shares purchased under the
option will be subject to repurchase by the Company, at the exercise price
paid per share, should the optionee's Board service cease prior to vesting in
those shares. The shares subject to each initial 15,000-share automatic option
grant will vest in series of four successive equal annual installments upon
the individual's completion of each year of Board service over the four-year
period measured from the option grant date. The shares subject to each annual
3,500-share automatic grant will vest upon the individual's completion of one
year of Board service measured from the option grant date. However, the shares
subject to each automatic grant will immediately vest in full upon certain
changes in control or ownership of the Company or upon the optionee's death or
disability while serving as a Board member.

Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
shares at the time of grant (the fair market value of the option shares on the
grant date less the aggregate exercise price payable for those shares) will be
equal to the portion of the retainer fee invested in that option. The option
will become exercisable for the option shares in a series of 12 equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.

56
<PAGE>

The 1998 Plan and the Predecessor Plan also include non-competition
provisions which give the Plan Administrator discretion to cancel options,
reacquire options and recover profits on the sale of shares from service
providers and former service providers who compete with the Company while
still providing services or within one year after termination of services.

The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale, (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or (iii) a change in the majority of the Board
effected through one or more contested elections for Board membership.

The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earlier of
(i) May 2008, (ii) the date on which all shares available for issuance under
the 1998 Plan have been issued as fully-vested shares and (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE OF
CONTROL ARRANGEMENTS

The Company does not currently have any employment contracts in with any of
its executive officers.

In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by an executive officer originally granted under
the Predecessor Plan may, in the sole discretion of the Board of Directors or
a Committee, be terminated as of a certain date or become immediately vested
in full. Each outstanding option held by an executive officer under the 1998
Plan will automatically accelerate in full and all unvested shares of Common
Stock issued to such individuals pursuant to the exercise of options granted
or direct stock issuances made under such plans will immediately vest in full,
except to the extent such options are to be assumed by, and the Company's
repurchase rights with respect to those shares are to be assigned to, the
successor corporation. In the event an optionee engages in competitive
activities while providing services to the Company or within one year after
terminating his or her employment or consulting arrangement with the Company,
the Board may in its sole discretion terminate any option granted to such
optionee, and may also repurchase any shares which have been acquired by such
optionee pursuant to an option exercise at a price equal to the exercise
price. In addition, the Compensation Committee as Plan Administrator of the
1998 Plan will have the authority to provide for the accelerated vesting of
the shares of Common Stock subject to outstanding options held by the Chief
Executive Officer or any other executive officer or the shares of Common Stock
purchased pursuant to the exercise of options or subject to direct issuances
held by such individual, in connection with the termination of the officer's
employment following: (i) a merger or asset sale in which those options are
assumed or the Company's repurchase rights with respect to unvested shares are
assigned or (ii) certain hostile changes in control of the Company. See "--
Benefit Plan--1998 Stock Incentive Plan."

57
<PAGE>

CERTAIN TRANSACTIONS

Since June 1996, the Company has raised capital primarily through the sale
of its Redeemable Preferred Stock. In June 1996, the Company sold 1,210,861
shares of Series A Preferred Stock at a price of $2.86 per share. In September
1997, the Company sold 2,517,894 shares of Series B Preferred Stock at a price
of $4.99 per share. The following table summarizes the shares of Preferred
Stock purchased by executive officers, directors and 5% percent stockholders
of the Company and persons associated with them since June 1995.

<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED PREFERRED TOTAL SHARES ON AN
INVESTOR PREFERRED STOCK PREFERRED STOCK AS-CONVERTED BASIS(1)
-------- --------------- --------------- ---------------------
<S> <C> <C> <C>
Entities affiliated with
Needham & Company,
Inc.(2)................. 559,440 320,642 1,320,123
Entities affiliated with
Menlo Ventures(3)....... -- 1,047,094 1,570,641
Entities affiliated with
New Enterprise
Associates(4)........... -- 1,013,026 1,519,539
Roger L. Koenig(5)....... 67,839 -- 101,758
Nancy G. Pierce(6)....... 67,839 -- 101,758
Shrichand B. Dodani(7)... 17,483 -- 26,224
Joseph Graziano(8)....... 61,189 16,171 116,040
Ryal Poppa............... 104,895 27,721 198,924
</TABLE>
- --------
(1) Reflects a three-for-two stock split which will be automatically effected
upon the conversion of the Series A and Series B Preferred Stock to Common
Stock upon the closing of the Offering.
(2) Represents shares originally purchased by Needham Capital Partners L.P.,
Needham Omni Fund, L.P., Needham Emerging Growth Partners, L.P. and
Needham Capital SBIC, L.P (collectively, the "Needham Partnerships").
Subsequent to the June 1996 closing of the Company's Series A Preferred
Stock financing, the Needham Omni Fund, L.P. (the holder of 34,965 shares
of Series A Preferred Stock) was renamed the Galleon Omni Fund, Ltd. and
its affiliation with the other Needham Partnerships was severed.
(3) Represents shares purchased by Menlo Ventures VII, L.P. and by Menlo
Entrepreneurs Fund VII, L.P. (the "Menlo Partnerships"). Mr. Carlisle, a
Director of the Company, is a managing member of MV Management VII, LLC,
the General Partner of each of the Menlo Partnerships.
(4) Represents shares held by New Enterprise Associates VII, L.P., NEA
Presidents Fund, L.P. and NEA Ventures 1997, L.P.
(5) Represents shares acquired by Mr. Koenig in exchange for cancellation of
indebtedness owed to Mr. Koenig by the Company. See "--Other Relationships
and Transactions." Mr. Koenig subsequently sold 5,000 shares of Series A
Preferred Stock to an unaffiliated third party.
(6) Represents shares acquired by Ms. Pierce in exchange for cancellation of
indebtedness owed to Ms. Pierce by the Company. See "--Other Relationships
and Transactions."
(7) Represents shares purchased by Mr. Dodani from a third party stockholder
in February 1997 at a price of $2.86 per share.
(8) Series A Preferred Stock was purchased by the Joseph A. and Mari Ann J.
Graziano Trust dated March 13, 1984, of which Mr. Graziano, a Director of
the Company, is Trustee.

The Series A and Series B Preferred Stock have the following rights,
preferences and privileges: (i) liquidation preferences pursuant to which
Series A and Series B Preferred holders are entitled to receive $2.86 and
$4.99, respectively, for each share of Series A and Series B Preferred Stock
in the case of a liquidation event; (ii) the right to participate in certain
distributions to common stockholders receiving their respective liquidation
preferences; (iii) redemption rights which guarantee each holder a 15.0%
annual rate of return on their investment if the Company has not completed a
public offering (a) in the case of Series A Preferred Stock, prior to June 24,
2000 and (b) in the case of Series B Preferred Stock, the earlier of (1) the
redemption date of the Series A Preferred Stock or (2) September 15, 2001;
(iii) special voting rights pursuant to which they can prevent any measures
taken by the Company that could dilute or otherwise harm their investment in
the

58
<PAGE>

Company, including (a) changes to the articles of incorporation or bylaws, (b)
any dissolution or liquidation of the Company; (c) any merger, consolidation,
sale, recapitalization, or liquidation of substantially all of the Company's
assets; (d) any other material transaction; or (e) issuance of new classes of
stock; (iv) antidilution protection; (v) registration rights such that (a) if
the Company proposes to register any of its securities under the Securities
Act, such holders are entitled to notice of such registration and are entitled
to include their registrable securities therein; (b) if at any time beginning
six months after the date of this Prospectus, the Company receives a request
from holders of at least 50% of the registrable securities then outstanding
(the "Investor Shares"), the Company is obligated to cause such shares to be
registered under the Securities Act (holders of the Investor Shares have the
right to cause two such demand registrations); (c) holders of Investor Shares
may require the Company to register all or a portion of their registrable
securities on Form S-3 under the Securities Act, provided that the offering
size would exceed $500,000, when such form becomes available for use by the
Company. All the rights of such holders are subject to certain conditions,
including the right of the underwriters of any such offering to limit the
number of shares included in any such registration; and (vi) rights of co-sale
with respect to transfer of shares by the founders of the Company. See
"Description of Capital Stock--Registration Rights."

OTHER RELATIONSHIPS AND TRANSACTIONS

Roger L. Koenig, the Company's President and Chief Executive Officer, and
Nancy Pierce, the Company's Vice President--Finance and Administration, Chief
Financial Officer, Treasurer and Secretary, are married to each other.

In the past, the Company has granted options to certain of its executive
officers and directors and the Company intends to continue to grant options to
its executive officers and directors in the future. See "Management--Director
Compensation," "--Option Grants in Last Fiscal Year" and "Principal
Stockholders."

Beginning in 1993, and from time to time thereafter, Mr. Koenig and Ms.
Pierce jointly extended loans to the Company in order to provide working
capital to the Company. Such loans were evidenced by promissory notes bearing
interest at 9.5% per annum. As of June 19, 1996, the principal amount and
accrued interest on these loans was $388,039. In connection with the Company's
Series A Preferred Stock financing in June 1996, these loans were converted
into an aggregate of 135,678 shares of Series A Preferred Stock at a price of
$2.86 per share. Of such shares, 67,839 were issued to Mr. Koenig and 67,839
shares were issued to Ms. Pierce. See Notes 3 and 5 of Notes to Financial
Statements.

In connection with the Company's September 1997 Series B Preferred Stock
financing, the Company and the purchasers of its Series A and Series B
Preferred Stock, including Mr. Koenig, Ms. Pierce, Mr. Dodani, Mr. Graziano
and Mr. Poppa, entered into an Amended and Restated Shareholder Agreement (the
"Shareholder Agreement"). Pursuant to the Shareholder Agreement, the parties
agreed to vote their shares of Preferred Stock (and, in the case of Mr. Koenig
and Ms. Pierce, shares of Common Stock) for the election of the following
persons as directors of the Company: (i) two representatives designated by Mr.
Koenig and Ms. Pierce; (ii) one representative designated by the holders of a
majority of the outstanding Series A Preferred Stock; (iii) one representative
designated by the holders of a majority of the outstanding Series B Preferred
Stock; and (iv) two "outside directors" nominated by the Board of Directors.
The Shareholder Agreement will terminate upon the closing of this Offering.

The Company has entered into an Indemnification Agreement with each of its
executive officers and directors containing provisions that may require the
Company, among other things, to indemnify its officers and directors against
certain liabilities that may arise by reason of their status or service as
officers or directors (other than liabilities arising from willful misconduct
of a culpable nature) and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified. See
"Management--Limitation on Liability and Indemnification."

59
<PAGE>

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions, including
loans, if any, between the Company and its officers, directors and principal
stockholders and their affiliates will be approved by a majority of the Board
of Directors, including a majority of the independent and disinterested
outside directors of the Board of Directors and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.

60
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1998 by (i) all persons who are
beneficial owners of 5% or more of the Common Stock, (ii) each of the
Company's Directors, (iii) each of the Named Executive Officers and (iv) all
current Directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(2)
NUMBER OF -----------------
SHARES AFTER
BENEFICIALLY PRIOR TO THE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED (2) OFFERING OFFERING
- ---------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Menlo Ventures (3)..... 1,570,641 7.8% 6.8%
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Entities affiliated with New Enterprise
Associates (4)................................. 1,519,539 7.6 6.6
2490 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Needham & Company, Inc.
(5)............................................ 1,267,675 6.3 5.5
445 Park Avenue
New York, NY 10012
Roger L. Koenig (6)............................. 13,923,116 69.5 60.4
Nancy G. Pierce (7)............................. 13,923,116 69.5 60.4
KELD, LLC (8)................................... 10,500,000 52.4 45.6
Shrichand B. Dodani (9)......................... 251,224 1.2 1.1
J. Randy Shipley (10)........................... 150,000 * *
John W. Stahura (11)............................ 112,500 * *
Douglas Carlisle (3)............................ 1,570,641 7.8 6.8
Joseph Graziano (12)............................ 191,040 * *
Ryal Poppa (13)................................. 273,924 1.4 1.2
Arthur L. Schultz (14).......................... -- * *
Kevin C. Leibl (15)............................. 23,968 * *
All Directors and executive officers as a group
(eight persons)(16)............................ 16,472,445 80.2% 70.0%
</TABLE>
- --------
* Less than 1%.
(1) Except as otherwise noted, the address of each person listed on the table
is c/o Carrier Access Corporation, 5395 Pearl Parkway, Boulder, Colorado
80301.
(2) Number and percentage of shares beneficially owned is based on 20,045,492
shares outstanding as of June 30, 1998 and assumes no exercise of the
underwriters' overallotment option. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days of June 30, 1998 are deemed to be outstanding
and to be beneficially owned by the person holding such options for the
purpose of computing the number of shares beneficially owned and the
percentage of such person or entity holding such securities but are not
outstanding for the purpose of computing the percentage of any other
person or entity. Except as indicated by footnotes to the table, and
subject to the applicable community property laws, based on information
provided by the persons shown in the table, such persons have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Represents 1,503,006 shares held of record by Menlo Ventures VII, L.P.
and 67,635 shares held of record by Menlo Entrepreneurs Fund VII, L.P.
(collectively, the "Menlo Partnerships"). Mr. Carlisle, a director of the
Company, is a managing member of MV Management VII, LLC, the General
Partner of each of the Menlo Partnerships, and has shared voting and
investment power with respect to the shares held by the

61
<PAGE>

Menlo Partnerships. However, Mr. Carlisle disclaims beneficial ownership of
all such shares, except to the extent of his pecuniary interest therein as
a result of his indirect general partnership interest in each of the Menlo
Partnerships.
(4) Represents 1,503,006 shares held of record by New Enterprise Associates
VII, L.P., 15,030 shares held of record by NEA Presidents Fund, L.P. and
1,503 shares held of record by NEA Ventures 1997, L.P.
(5) Represents 292,929 shares held of record by Needham Capital Partners L.P.,
607,614 shares held of record by Needham Emerging Growth Partners, L.P.
and 367,132 shares held of record by Needham Capital SBIC, L.P.
(6) Represents 1,711,558 shares held by Mr. Koenig, 1,711,558 shares held by
Ms. Pierce and 10,500,000 shares held by KELD, LLC. Mr. Koenig is a
managing member of KELD, LLC and has shared voting and investment power
over the shares held by KELD, LLC.
(7) Represents 1,711,558 shares held by Ms. Pierce, 1,711,558 shares held by
Mr. Koenig and 10,500,000 shares held by KELD, LLC. Ms. Pierce is a
managing member of KELD, LLC and has shared voting and investment power
over the shares held by KELD, LLC.
(8) Mr. Koenig and Ms. Pierce are managing members of KELD, LLC and have
shared voting and investment power over the shares held by KELD, LLC.
(9) Includes 225,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 150,000 of which are subject to the
Company's right of repurchase.
(10) Includes 150,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, all of which are subject to the Company's
right of repurchase.
(11) Includes 112,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, all of which are subject to the Company's
right of repurchase.
(12) Includes 75,000 shares of Common Stock issued upon exercise of immediately
exercisable options, 37,500 of which are subject to the Company's right of
repurchase. See "Management--Director Compensation."
(13) Includes 75,000 shares of Common Stock issued upon exercise of immediately
exercisable options, 37,500 of which are subject to the Company's right of
repurchase. See "Management--Director Compensation."
(14) Mr. Schultz resigned from the Company on April 10, 1998.
(15) Mr. Leibl resigned from the Company on December 1, 1997, effective May 15,
1998.
(16) Includes 487,500 shares of Common Stock issuable upon exercise of
immediately exercisable options, 450,000 of which are subject to the
Company's right of repurchase. Also includes 75,000 shares issued pursuant
to early option exercises which are subject to the Company's right of
repurchase.

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DESCRIPTION OF CAPITAL STOCK

Immediately following the closing of the Offering, the authorized capital
stock of the Company will consist of 60,000,000 shares of Common Stock, $0.001
par value, and 5,000,000 shares of Preferred Stock, $0.001 par value, after
giving effect to the amendment of the Company's Certificate of Incorporation
to delete references to the Convertible Preferred Stock following conversion
of such stock. The following description of capital stock gives effect to the
Restated Certificate of Incorporation to be filed upon closing of the
Offering. Immediately following the completion of the Offering, and assuming
no exercise of the Underwriters' over-allotment option, an aggregate of
23,045,492 shares of Common Stock will be issued and outstanding, and no
shares of Preferred Stock will be issued or outstanding.

The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Restated Certificate of Incorporation and Bylaws and by the provisions of
applicable Delaware law.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock that may come into existence,
the holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and the shares of Common Stock to be outstanding
upon completion of this Offering will be fully paid and nonassessable.

PREFERRED STOCK

The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or
all of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of Preferred Stock may possess voting,
dividend, liquidation and redemption rights superior to that of the Common
Stock. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. Issuance of a new series of Preferred Stock,
while providing desirable flexibility in connection with possible acquisition
and other corporate purposes, could have the effect of entrenching the
Company's Board of Directors and make it more difficult for a third party to
acquire, or discourage a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue any shares or designate any series of Preferred Stock.

REGISTRATION RIGHTS

Pursuant to the Amended and Restated Investor Rights Agreement dated as of
September 16, 1997 among the Company and the holders of Series A and Series B
Preferred Stock (the "Rights Agreement"), the holders of approximately
5,593,126 shares of Common Stock (the "Registrable Securities") after this
Offering will be entitled to certain rights with respect to the registration
of the Registrable Securities under the Securities Act. Under the Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of other
stockholders, the holders of Registrable Securities are entitled to notice of
such registration and are entitled to include their Registrable Securities
therein. In addition, if at any time beginning six months after the date of
this Prospectus the Company receives a request from holders of at least 50% of
the Registrable Securities then outstanding (the "Investors' Shares"), the
Company is obligated to

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cause such shares to be registered under the Securities Act. Holders of
Investors' Shares have the right to cause two such demand registrations.
Further, holders of Registrable Securities may require the Company to register
all or a portion of their Registrable Securities on Form S-3 under the
Securities Act (provided that the offering size would exceed $500,000), when
such form becomes available for use by the Company, and subject to certain
other conditions and limitations. The holders' rights with respect to all such
registrations are subject to certain conditions, including the right of the
underwriters of any such offering to limit the number of shares included in
any such registration. The Company has agreed to pay all expenses related to
registrations made pursuant to the Rights Agreement, except for underwriting
discounts and commissions or other compensations to effect the sale of the
Registrable Securities.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW

Certificate of Incorporation and Bylaws

The Company's Restated Certificate of Incorporation authorizes the Board to
establish one or more series of undesignated Preferred Stock, the terms of
which can be determined by the Board at the time of issuance. See "--Preferred
Stock." The Restated Certificate of Incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders
and not by a consent in writing. In addition, the Bylaws permit stockholders
of the Company to call a special meeting of stockholders only by a consent
signed by holders of at least 50% of the outstanding Common Stock. Otherwise,
only the Company's President, or a majority of the Board may call a special
meeting of stockholders. The Bylaws also require that stockholders give
advance notice to the Company's Secretary of any nominations for director or
other business to be brought by stockholders at any stockholders' meeting and
require a supermajority vote of members of the Board and/or stockholders to
amend certain Bylaw provisions. These provisions of the Restated Certificate
of Incorporation and Bylaws could discourage potential acquisition proposals
and could delay or prevent a change in control of the Company. Such provisions
also may have the effect of preventing changes in the management of the
Company. See "Risk Factors--Control by Existing Stockholders" and "-- Effects
of Certain Anti-Takeover Provisions."

Delaware Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three (3) years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an

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interested stockholder as any entity or person beneficially owning 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer and Trust Incorporated.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has not been any public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in
the public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the company to raise
equity capital in the future.

Upon completion of this Offering, the Company will have 23,045,492 shares of
Common Stock outstanding, assuming no exercise of options and no repurchase of
option shares by the Company after June 30, 1998. Of these shares, the
3,000,000 shares sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Affiliates"), may generally only be sold
pursuant to an effective registration statement under the Securities Act or in
compliance with the limitations of Rule 144 as described below.

SALES OF RESTRICTED SHARES

The remaining 20,045,492 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
("Restricted Shares"). Restricted Shares generally may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of the contractual
restrictions described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 147,900 shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 56,421 shares will be eligible for sale 90 days after the
date of this Prospectus, and (iii) 19,841,171 shares will be eligible for sale
upon expiration of lock-up agreements 180 days after the date of this
Prospectus.

All of the officers and directors and certain stockholders and optionholders
of the Company have entered into lock-up agreements generally providing that
they will not offer, pledge, sell, offer to sell, contract to sell, sell any
option or contract to purchase, purchase any option to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock, for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Credit Suisse First Boston Corporation, subject to certain
limited exceptions. Credit Suisse First Boston Corporation may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Credit Suisse First Boston Corporation
currently has no plans to release any portion of the shares subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Credit Suisse First Boston Corporation will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time.

In general, under Rule 144 as currently in effect, beginning 90 days after
this Offering, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner other than a person who may be deemed an
Affiliate), would be entitled to sell within any three-month period a number
of shares of Common Stock that does not exceed the greater of 1% of the then-
outstanding shares of Common Stock of the Company (approximately 230,455
shares after giving effect to this Offering) and the average weekly trading
volume of the Common Stock on The Nasdaq National Market during the four
calendar weeks preceding the filing of a Form 144 notice with respect to such
sale. Sales under Rule 144 of the Securities Act are also subject to certain
restrictions relating to manner of sale, notice and the availability of
current public information about the Company. Under Rule 144(k), a person who
is not

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deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
other than an Affiliate), would be entitled to sell such shares immediately
following this Offering without regard to the volume limitation, manner of
sale, public information or notice provisions of Rule 144 of the Securities
Act. However, the transfer agent may require an opinion of counsel that a
proposed sale of shares comes within the terms of Rule 144 prior to effecting
a transfer of such shares.

OPTIONS

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
Company became subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Securities and Exchange Commission has
indicated that Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such options (including
exercises after the date of this Offering). Securities issued in reliance on
Rule 701 are Restricted Shares and, subject to the contractual restrictions
described above, beginning 90 days after the date of this Prospectus, may be
sold (i) by persons other than Affiliates, subject only to the manner of sale
provisions of Rule 144 and (ii) by Affiliates, under Rule 144 without
compliance with its one-year minimum holding period requirements.

As of June 30, 1998, options to purchase a total of 1,779,905 shares of
Common Stock were outstanding and exercisable under the Predecessor Plan. An
additional 1,392,728 shares of Common Stock were available as of June 30, 1998
for future option grants under the Predecessor Plan. See "Management--Benefit
Plan," and Note 7 of Notes to Consolidated Financial Statements. The Company
intends to file, within 90 days of the effective date of this Offering, a
registration statement on Form S-8 under the Securities Act to register all
shares of Common Stock subject to outstanding stock options and Common Stock
issued or issuable pursuant to the Predecessor Plan and the 1998 Plan. Such
registration statement is expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale
in the public markets, subject to the lock-up agreements, if applicable.

REGISTRATION RIGHTS

Upon completion of this Offering, the holders of approximately 5,593,126
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by an Affiliate) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."

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UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated July 30, 1998 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation, Hambrecht & Quist LLC and Warburg Dillon Read LLC are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Company the following respective numbers of shares of
Common Stock:

<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................. 920,000
Hambrecht & Quist LLC.............................................. 920,000
Warburg Dillon Read LLC............................................ 920,000
Needham & Company, Inc............................................. 120,000
Volpe Brown Whelan & Company, LLC.................................. 120,000
---------
Total............................................................ 3,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.

The Company has granted the Underwriters an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
450,000 additional shares at the initial public offering price, less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.

The Company has been advised by the Representatives that the Underwriters
propose to offer shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and, through the
Representatives, to certain dealers at such price less a concession of $.50
per share, and the Underwriters and such dealers may allow a discount of $.10
per share on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Representatives.

The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares of Common
Stock being offered hereby.

The Company, its officers, directors and substantially all other current
stockholders of the Company have agreed not to offer, pledge, sell, offer to
sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, or, in the case of the
Company, file with the Commission a registration statement relating to, any
shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock or publicly
disclose the intention to do any of the foregoing without the prior written

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consent of Credit Suisse First Boston Corporation, for a period of 180 days
after the date of this Prospectus, except under certain circumstances.

The Underwriters have reserved for sale, at the initial public offering
price, up to 150,000 shares of the Common Stock for employees, directors and
certain other persons associated with the Company who have expressed an
interest in purchasing such shares of Common Stock in the Offering. The number
of shares available for sale to the general public in the Offering will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same terms as the other shares offered hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.

The Company's Common Stock has been approved for listing on the Nasdaq Stock
Market's National Market under the symbol "CACS," subject to official notice
of issuance.

Prior to the Offering, there has been no public market for the Common Stock.
Accordingly, the initial public offering price for the shares was determined
by negotiation between the Company and the Representatives. In determining
such price, consideration was given to various factors, including the
information set forth in this Prospectus and otherwise available to the
Representatives, the history and prospects for the Company's business, the
ability of the Company's management, the prospects for future earnings of the
Company, the present state of the Company's development and its current
financial condition, market conditions for initial public offerings, the
market for securities of companies in businesses similar to those of the
Company, the general condition of the securities markets and other relevant
factors. There can be no assurance, however, that the initial public offering
price will correspond to the price at which the Common Stock will trade in the
public market subsequent to the Offering or that an active trading market for
the Common Stock will develop and continue after the Offering.

The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the Common Stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the Common Stock
originally sold by such syndicate member is purchased in a stabilizing
transaction or syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.

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NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale of
the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (i) such purchaser is
entitled under applicable provincial securities laws to purchase such Common
Stock without the benefit of a prospectus qualified under such securities
laws, (ii) where required by law, that such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.

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LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Denver, Colorado. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.

EXPERTS

The financial statements and schedule of the Company as of December 31, 1996
and 1997 and for each of the years in the three year period ended December 31,
1997 have been included herein and in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
thereof may be obtained from the Commission upon payment of certain fees
prescribed by the Commission. Such reports and other information may also be
inspected without charge at a World Wide Web site maintained by the
Commission. The address of such site is http://www.sec.gov.

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GLOSSARY OF TECHNICAL TERMS

CLASS....... Custom Local Area Signaling Services. CLASS are Bellcore
standard enhanced telephone services for local customer line
connections. CLASS uses channel interoffice signaling to provide
enhanced switching services such as caller ID, call forwarding,
call waiting, distinctive ringing, automatic callback, automatic
recall, and selective call rejection.

CLEC........ Competitive Local Exchange Carrier. A telecommunications carrier
that provides its customers with local transport of private
lines, data access lines, and switched access telecommunications
services within local calling areas, in competition with the
regulated Incumbent Local Exchange Carriers. CLECs typically do
not own the physical copper wiring and right-of-ways that
provide connections to customer sites.

CSU......... Channel Service Unit. A device used to connect a digital phone
line, such as a T1, coming from a carrier to network access
equipment located on the customer premises. A CSU may also be
built into the network interface of access equipment.

DI.......... Drop and Insert (also called D&I). A process in which one or
more channels in a transmission are groomed (dropped) at an
intermediate point and different channels are inserted in their
place.

DID......... Direct Inward Dialing. A voice switching service that allows an
outside caller to reach an internal business extension of a PBX
without having to pass through an operator or attendant. DID
requires that the Central Office (CO) pass the dialed digits
down the line to the customer phone system, which then completes
the call to the extension. Unique types of telephone line
interface equipment are required to connect to DID services.

DLC......... Digital Loop Carrier. A digital transmission system designed for
providing local loops to subscribers or access networks. Digital
Loop Carrier systems carry multiple channels of 64 Kbps
digitized voice or data.

DPO......... Dial Pulse Origination. Equipment that sends dialed digits
consisting of tones or pulses. May be used at the Central Office
end of a DID service connection.

DPT......... Dial Pulse Termination. Equipment that receives and processes
dialed digits consisting of tones or pulses. May be used at the
customer end of a DID service connection.

DS1......... Digital Service Level 1 (also called T1). DS1 describes a
digital signal interface standard for the transmission of 1.544
Mbps data on two copper wire pairs. It is typically formatted as
twenty-four 64 Kbps voice or data channels multiplexed into a
193-bit frame, along with overhead data. A variation of DS1 is
called DSX-1, which is intended for short connection distances,
and has somewhat different electrical specifications.

DSP......... Digital Signal Processor. A specialized digital microprocessor
that performs rapid calculations on digitized waveforms such as
voice signals. DSPs are able to perform mathematical and data
manipulations on digital telecommunications signals in real time
in order to add desired functionality through software, rather
than added hardware.

DSU......... Data Service Unit. A communications device that connects a
customer data interface to network circuit. The DSU transmits
and receives signals and provides buffering, flow control, and
data communications testing.

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E&M.........
In telephony, an arrangement of four to eight wires that
provides two-way signaling and communications from switch-to-
switch or switch-to-network. The term E&M originates from Ear
and Mouth, used to label the signaling and voice wires. The M
lead transmits ground or battery to the distant end of the
circuit, while incoming signals are received as either a
grounded or open condition on the E lead. Digital E&M signaling
formats are commonly used on T1 service connections, even though
they may never be converted to physical E&M signaling wires.

FXO......... Foreign Exchange Office. A type of telephone line interface that
sinks battery current and detects ringing voltage provided by a
connected Central Office (CO) line or PBX extension. FXO
circuits provide a method to transport dial tone lines, and may
be designed to extend support of PBX or CO line features to
remote locations.

FXS......... Foreign Exchange Station. A type of telephone line interface
that delivers loop-start or ground-start dial tone line
connections to telephones, off-premises extensions, facsimile
machines, modems, PBXs and other conventional analog telephony
devices. FXS interfaces can be designed to support the delivery
of Calling Party Disconnect (CPD) and CLASS features such as
caller ID and distinctive ringing.

HDSL........ High bit-rate Digital Subscriber Line. A technology that enables
digital network services to be carried over existing twisted-
pair copper wire pairs between the central office (CO) and the
customer site. HDSL differs from other DSL technologies (such as
ADSL) in that it allows data to flow at equal rates in both
directions at 1.544 Mbps. HDSL is commonly used by ILECs to
deploy T1 services to customers.

ILEC........ Incumbent Local Exchange Carrier. A regulated common
telecommunications carrier that provides its customers with
local transport of private lines, data access lines, and
switched access telecommunications services within local calling
areas. ILECs typically own physical copper wiring and right-of-
ways that provide connections to customer sites.

ISP......... Internet Service Provider. A company that provides access to the
Internet for corporate customers and consumers by providing
Internet Protocol (IP) service connections to the Internet
backbone.

IXC......... Inter-Exchange Carrier. A company providing long distance
switched services between many Local Exchange Carriers (LECs)
and Local Access and Transport Areas (LATAs).

KBPS........ Kilobits per second. A transmission rate for digital data
expressed in thousands of bits per second.

LAN......... Local Area Network. A short distance network providing data
communications typically between computers and peripheral
devices such as printers.

LATA........ Local Access and Transport Area. One of 196 local geographical
areas in the US within which a local telephone company may offer
telecommunications services.

LIU......... Line Interface Unit.

M1-3........ Multiplexer, DS1 to DS3 (or T1 to T3). A device that converts or
"multiplexes" 28 digital T1 signals at 1.544 Mbps to and from
one T3 signal at 44.736 Mbps.

MBPS........
Megabits per second. A transmission rate for digital data
expressed in millions of bits per second.

73
<PAGE>

NEBS........
Network Equipment Building Standards. A Bell Company Research
(Bellcore) standard defining a rigid and extensive set of
performance, quality, environmental, and safety requirements for
telecommunications equipment installed inside switching offices.

NIU......... Network Interface Unit. A protection and test device installed
between a Local Exchange Carrier (LEC) network and the customer
premise. The NIU typically includes protection for high-voltage
surges and electronics so the LEC can test the integrity of the
local digital connection.

PBX......... Private Branch Exchange. A privately-owned telephone switching
system located within the customer premises. PBXs are commonly
used in office buildings and campuses to connect calls between
internal extension users and to telephone company lines.

PCB.........
Printed Circuit Board. A fiberglass laminated board with etched
copper traces for mounting electronic circuits. PCB often refers
to the complete assembly with parts.

POTS........ Plain Old Telephone Service. Basic "dial-tone" telephone service
making voice calls. POTS does not include enhanced services such
as caller ID, centrex, and direct inward dialing.

PSTN........
Public Switched Telephone Network. PSTN refers to the collection
of local exchange and long distance carrier facilities that
interconnect to provide a common telephone service within a
country. It is the domestic telecommunications network commonly
accessed by ordinary telephones, modems, and PBXs. The PSTN also
connects the mobile telephone switching office with the local
exchange carrier (LEC) to facilitate incoming and outgoing calls
over the wireline network to and from wireless subscribers.

SLIC........ Subscriber Line Interface Circuit. An electronic circuit found
in large numbers in most digital telephone service delivery
systems, such as digital loop carrier systems, central office
switching systems, and PBXs. SLICs provide the interface
electronics between the digital network and the physical copper
telephone lines. Desired functions are battery current feeding,
overvoltage protection, ringing application, signaling of call
states, hybrid transmission conversion, and testing access to
lines.

SNMP........
Simple Network Management Protocol. A standard network
management software protocol based on TCP/IP. SNMP allows
monitoring, test, and configuration information to be routed
from central management locations to many remote and local
elements in a network, as needed to manage the network.

SONET....... Synchronous Optical Network. The electronics and network
architecture that enables the transmission of digitized voice or
data on fiber optic channels at speeds up to 10 billion bits per
second.

T1..........
T1, also called DS1, describes a digital signal interface
standard for the transmission of 1.544 Mbps data on two copper
wire pairs. It is typically formatted as twenty-four 64 Kbps
voice or data channels multiplexed into a 193-bit frame, along
with overhead data. Electrical T1 signals can travel up to 6,000
feet on twisted copper wire pairs, under ideal conditions. T1 is
commonly converted to fiber optic and digital radio transmission
media for long telecommunications distances. T1 has become a
ubiquitous telecommunications interface standard in North
America.

T3..........
A digital transmission interface (also called DS3) with a
capacity of 44.736 Mbps. One T3 line can carry 28 T1 lines, the
equivalent 672 voice circuits. T3 connections are commonly

74
<PAGE>

established with two coaxial cables for distances up to a few
hundred feet. Network connections are transported over fiber-
optic cable or high-bandwidth digital radio links.

TO.......... Transmission Only. A private line telephone line interface for
"transmit only" devices such as leased-line modems and radio
equipment.

TR-08....... A Bellcore standard defining the transmission and management
requirements for digital loop carrier equipment providing up to
96 calls over a group of four T1 lines. The standard was
developed from AT&T SLC-96 digital loop carrier protocols
carried on T1 lines.

VIRTUAL
PRIVATE A public data network that transports private data reliably,
NETWORK .... securely and seamlessly to the end user.

75
<PAGE>

CARRIER ACCESS CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998
(unaudited).............................................................. F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998 (unaudited)......... F-4
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1998
(unaudited).............................................................. F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998 (unaudited)......... F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
CARRIER ACCESS CORPORATION:

We have audited the accompanying balance sheets of Carrier Access
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Carrier Access Corporation
as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP
Boulder, Colorado
February 6, 1998,
except for note 1 (k)
which is as of
May 28, 1998

F-2
<PAGE>

CARRIER ACCESS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND JUNE 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
JUNE 30, PRO FORMA
1996 1997 1998 JUNE 30, 1998 (1)
------ ------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 929 $ 6,104 $ 5,549
Marketable securities
available for sale............ -- 2,516 3,247
Accounts receivable, less
allowance for doubtful
accounts and returns of $20,
$398 and $706 in 1996, 1997
and at June 30, 1998,
respectively.................. 1,027 4,645 5,015
Inventory, net (note 2)........ 2,211 6,784 6,658
Deferred income taxes (note
5)............................ -- 237 463
Prepaid expenses and other..... 32 91 130
------ ------- -------
Total current assets......... 4,199 20,377 21,062
------ ------- -------
Property and equipment, net of
accumulated depreciation and
amortization (note 3).......... 388 1,267 1,905
Software development costs, net
of accumulated amortization.... 235 -- --
Other assets.................... -- 36 48
------ ------- -------
Total assets................. $4,822 $21,680 $23,015
====== ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 601 $ 2,685 $ 1,144
Accrued warranty costs......... 56 286 444
Accrued payroll costs.......... 179 381 570
Cooperative advertising........ -- 159 297
Note payable to bank (note 4).. 249 -- --
Deferred rent concessions
(note 10)..................... 139 217 241
Income taxes payable........... -- -- 379
Other liabilities.............. 34 34 18
------ ------- -------
Total current liabilities.... 1,258 3,762 3,093
------ ------- -------
Redeemable preferred stock (note
6):
Series A convertible, $0.10
par value; 1,210,861 shares
authorized, issued and
outstanding; liquidation
value of $4,629 at June
30,1998....................... 3,722 4,291 4,617
Series B convertible, $0.10
par value; 2,725,998 shares
authorized; 2,517,894 shares
issued and outstanding;
liquidation value of $14,097
at June 30, 1998.............. -- 13,067 14,057
Stockholders' equity (deficit)
(note 7):
Common stock, $.001 par value;
60,000,000 shares authorized;
14,025,000, 14,299,689 and
14,452,367 shares issued and
outstanding in 1996, 1997 and
1998, respectively
(20,045,492 shares pro
forma)........................ 19 19 19 $ 25
Additional paid-in capital..... -- 1,296 3,392 22,060
Deferred stock option
compensation.................. -- (1,144) (2,911) (2,911)
Retained earnings (deficit).... (177) 389 748 748
------ ------- ------- -------
Total stockholders' equity
(deficit)................... (158) 560 1,248 $19,922
=======
Commitments (note 9)............
------ ------- -------
Total liabilities and
stockholders' equity
(deficit)................... $4,822 $21,680 $23,015
====== ======= =======
</TABLE>
- --------
(1) Reflects the conversion of all redeemable preferred stock into common
stock, on the basis described in note 6, only upon completion of the
offering described in the prospectus.

See accompanying notes to financial statements.

F-3
<PAGE>

CARRIER ACCESS CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue...................... $ 2,058 $ 5,809 $ 18,719 $ 6,493 $ 16,292
Cost of sales.................... 1,287 3,284 9,469 3,231 8,281
------- ------- -------- ------- --------
Gross profit................. 771 2,525 9,250 3,262 8,011
Operating expenses:
Sales and marketing............ 269 844 2,395 959 1,995
Research and development....... 164 874 2,848 773 1,993
General and administrative..... 203 907 1,578 606 1,320
Amortization of deferred stock
compensation (note 7)......... -- -- 83 -- 279
------- ------- -------- ------- --------
Total operating expenses..... 636 2,625 6,904 2,338 5,587
------- ------- -------- ------- --------
Income (loss) from
operations.................. 135 (100) 2,346 924 2,424
Other income, net................ 46 24 180 4 308
------- ------- -------- ------- --------
Income (loss) before income
taxes....................... 181 (76) 2,526 928 2,732
Income tax expense (note 5)...... -- -- 791 291 1,057
------- ------- -------- ------- --------
Net income (loss)............ 181 (76) 1,735 637 1,675
Preferred stock dividend
requirement (note 6)............ -- (285) (1,121) (284) (1,316)
------- ------- -------- ------- --------
Net income (loss) available
to common stockholders...... $ 181 $ (361) $ 614 $ 353 $ 359
======= ======= ======== ======= ========
Pro forma information (note 1):
Historical net income.......... $ 181
Pro forma adjustment to income
tax expense................... (68)
-------
Pro forma net income......... $ 113
=======
Pro forma and historical income
(loss) per share:
Basic and diluted.............. $ 0.01 $ (0.03) $ 0.04 $ 0.03 $ 0.02
======= ======= ======== ======= ========
Weighted average common shares
outstanding:
Basic.......................... 13,665 13,881 14,132 14,089 14,379
======= ======= ======== ======= ========
Diluted........................ 13,665 13,881 14,713 14,518 15,273
======= ======= ======== ======= ========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

CARRIER ACCESS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
-------------- PAID-IN STOCK OPTION RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
------ ------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1995................... 11,475 $ 16 $ (3) -- $ 29 $ 42
Issuance of common stock
for cash............... 2,400 3 29 -- -- 32
Distribution to
stockholders........... -- -- -- -- (32) (32)
Net income.............. -- -- -- -- 181 181
------ ------- -------- ----- --------- -----------
BALANCES AT DECEMBER 31,
1995................... 13,875 19 26 -- 178 223
Conversion from
subchapter S to C
corporation (note 5) .. -- -- 178 -- (178) --
Exercise of stock
options................ 150 -- 5 -- -- 5
Preferred stock dividend
requirement (note 6)... -- -- (209) -- (76) (285)
Distribution to
stockholders........... -- -- -- -- (25) (25)
Net loss................ -- -- -- -- (76) (76)
------ ------- -------- ----- --------- -----------
BALANCES AT DECEMBER 31,
1996................... 14,025 19 -- -- (177) (158)
Exercise of stock
options................ 275 -- 69 -- -- 69
Deferred stock
compensation related to
stock options issued at
less than fair value
(note 7)............... -- -- 1,227 (1,227) -- --
Amortization of deferred
stock compensation
(note 7)............... 83 83
Preferred stock dividend
requirement (note 6)... -- -- -- -- (1,121) (1,121)
Distribution to
stockholders........... -- -- -- -- (48) (48)
Net income.............. -- -- -- -- 1,735 1,735
------ ------- -------- ----- --------- -----------
BALANCES AT DECEMBER 31,
1997................... 14,300 19 1,296 (1,144) 389 560
Exercise of stock op-
tions.................. 152 -- 50 -- -- 50
Deferred stock compensa-
tion related to stock
options issued at less
than fair value (note
7)..................... -- -- 2,046 (2,046) -- --
Amortization of deferred
stock compensation
(note 7)............... -- -- -- 279 -- 279
Preferred stock dividend
requirement (note 6)... -- -- -- -- (1,316) (1,316)
Net income.............. -- -- -- -- 1,675 1,675
------ ------- -------- ------- --------- -----------
BALANCES AT JUNE 30,
1998 (UNAUDITED)....... 14,452 $ 19 $ 3,392 $(2,911) $ 748 $ 1,248
====== ======= ======== ======= ========= ===========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

CARRIER ACCESS CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------------- ----------------
1995 1996 1997 1997 1998
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).................. $ 181 $ (76) $ 1,735 $ 637 $ 1,675
Adjustments to reconcile net
income (loss) to net cash used by
operating activities:
Depreciation and amortization
expense......................... 19 120 421 47 183
Provision for doubtful accounts
and returns..................... -- 20 382 91 308
Provision for inventory
obsolesence..................... -- -- -- -- 210
Compensation expense related to
stock options issued at less
than fair value................. -- -- 83 -- 279
Accrued interest payable
converted to preferred stock.... -- 18 -- --
Deferred income tax benefit...... -- -- (237) (90) (226)
Changes in operating assets and
liabilities:
Accounts receivable............. (84) (912) (4,000) (2,132) (678)
Inventory....................... (535) (1,544) (4,573) (440) (84)
Prepaid expenses and other...... (4) (20) (59) (40) (39)
Accounts payable................ 142 364 2,083 869 (1,541)
Accrued warranty costs.......... -- 45 230 111 158
Accrued payroll costs........... 48 148 203 59 189
Cooperative advertising......... -- -- 159 -- 138
Deferred rent concessions....... -- 139 78 54 24
Income taxes payable............ -- -- -- 382 379
Other liabilities............... 9 3 -- (28) (16)
----- ------- ------- ------- -------
Net cash provided (used by)
operating activities.......... (224) (1,695) (3,495) (480) 959
----- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of equipment.............. (93) (401) (1,065) (237) (821)
Sales (purchases) of securities
available for sale................ -- -- (2,514) -- (731)
Software development costs......... -- (238) -- -- --
Other.............................. -- -- (38) (21) (12)
----- ------- ------- ------- -------
Net cash used by investing
activities.................... (93) (639) (3,617) (258) (1,564)
----- ------- ------- ------- -------
Cash flows from financing
activities:
Cash overdraft..................... 170 (170) -- -- --
Proceeds from issuance of
preferred stock, net.............. -- 3,049 12,514 -- --
Proceeds from issuance of common
stock............................. 32 -- -- -- --
Proceeds from exercise of stock
options........................... -- 5 69 5 50
Distributions to stockholders...... (32) (25) (48) (48) --
Proceeds from short-term
borrowings........................ 252 276 1,900 -- --
Payments on short-term borrowings.. -- -- (2,148) (5) --
----- ------- ------- ------- -------
Net cash provided by financing
activities.................... 422 3,135 12,287 (48) 50
----- ------- ------- ------- -------
Net increase in cash and cash
equivalents................... 105 801 5,175 (786) (555)
Cash and cash equivalents at
beginning of period................ 23 128 929 929 6,104
----- ------- ------- ------- -------
Cash and cash equivalents at end of
period............................. $ 128 $ 929 $ 6,104 $ 143 $ 5,549
===== ======= ======= ======= =======
Supplemental disclosure of cash flow
and financing activities
information:
Cash paid for interest............. $ -- $ 2 $ 22 $ $ --
===== ======= ======= ======= =======
Cash paid for income taxes......... $ -- $ -- $ 948 $ $ 886
===== ======= ======= ======= =======
Conversion of debt and accrued
interest payable into preferred
stock............................. $ -- $ 388 $ -- $ -- $ --
===== ======= ======= ======= =======
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1997 AND JUNE 30, 1998
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Business and Basis of Presentation--Carrier Access Corporation ("CAC" or
the "Company") is a leading provider of Multi-service Digital Access ("MDA")
equipment to competitive telecommunications carriers, including competitive
local exchange carriers, Internet service providers and wireless carriers. The
Company's MDA equipment is used for the provisioning of enhanced voice and
high-speed data services by carriers to end users such as small and medium-
sized businesses and government and educational institutions. The Company
sells its products through distributors.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

The financial statements, and related notes, as of June 30, 1998 and for the
six months ended June 30, 1997 and 1998 are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
condition, results of operations and cash flows of the Company. The operating
results for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.

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

Marketable securities available for sale represent U.S. Government Agency
and Corporate bonds with maturities of greater than three months and are
recorded at the lower of amortized cost or market value. At December 31, 1997
and June 30, 1998, amortized cost approximates market value.

c. Inventory--Inventory is recorded at the lower of cost or market, using
standard costs, which approximate average cost. Costs includes freight,
certain warehousing costs and other allocable overhead.

d. Property and equipment--Property, equipment and leasehold improvements
are recorded at cost and are depreciated and amortized using the straight-line
method over useful lives ranging from three to thirty years or the lease term.
Depreciation and amortization expense for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998 totaled $19,502,
$114,687, $185,701, $46,736 and $182,795, respectively.

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

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

F-7
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

f. Software Development Costs--During 1996, the Company capitalized various
costs related to the development of incidental software included in products
intended for future sale in the amount of $237,761. Due to technological
feasibility (establishment of a detail program or working model) generally
occurring when the product is available for general release, the Company
anticipates that it will no longer capitalize software development costs. As a
result, no such costs were capitalized in 1997 or in the six months ended June
30, 1998.

Software development costs were recorded at the lower of cost or net
realizable value and were amortized based on the greater of the amount
computed using the ratio of the current year gross revenue to the total of the
current and anticipated future gross revenue for the product or the straight-
line method over a seven-year period. Amortization expense for the year ended
December 31, 1996 and 1997 totaled $2,831 and $234,930, respectively. During
1997, forecasted revenue for the product which utilized the software
underlying the capitalized development costs was significantly decreased. As a
result, the balance of the remaining unamortized costs exceeded their net
realizable value. Accordingly, all remaining capitalized costs were written-
off during 1997.

g. Advertising Costs--In addition to its own advertising activities, the
Company accrues a specified percentage of the previous month's sales over
certain contractual minimums to reimburse distributors for a portion of their
advertising costs. Any unused allowance expires if not used during the
following six months. Cooperative advertising expense for the year ended
December 31, 1997 and the six months ended June 30, 1998 totaled $217,687 and
$149,571, respectively, and is included in sales and marketing expenses. The
Company had no cooperative advertising expense during the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997.

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

i. Long-Lived Assets--The Company accounts for long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (SFAS 121), which requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. An impairment loss is generally recognized
when estimated undiscounted future cash flows expected to be generated by the
asset is less than its carrying value. Measurement of impairment loss is based
on the fair value of the asset, which is generally determined using valuation
techniques such as the discounted present value of expected future cash flows.

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

Prior to January 1, 1996, the Company elected to be treated as a S
Corporation for income tax purposes. Accordingly, no provision for federal and
state income taxes has been included in the accompanying financial

F-8
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

statements for 1995 as all income and losses were reported in the individual
tax returns of the Company's stockholders. On January 1, 1996, the Company
elected C Corporation status under the Internal Revenue Code. Distributions to
stockholders, including distributions in 1997, represent the distribution of
taxable income generated while the Company was an S Corporation for income tax
purposes.

The Company has presented pro forma net income for the year ended December
31, 1995 as if the Company had been a taxable entity and its taxable income
had been subject to income taxes at the applicable federal and state tax
rates.

k. Income (Loss) Per Share, Common Stock Split and Re-Incorporation--Income
(Loss) per share is presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires the presentation of basic and diluted EPS. Under SFAS 128, basic EPS
excludes dilution for potential common shares and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted, which resulted in the issuance of
common stock. In 1997 and the six months ended June 30, 1998, diluted income
per share includes the impact of common stock options and excludes the impact
of redeemable preferred stock, as the effect of the assumed conversion of the
preferred stock and the elimination of the related dividend requirement would
be antidilutive. Due to the loss in 1996, potential common stock instruments
were antidilutive. There were no dilutive instruments in 1995.

On May 28, 1998 the Company's Board of Directors approved a three-for-two
forward split of the Company's Common Stock. In addition, the Board also
approved re-incorporation as a Delaware corporation, which included an
increase to 60 million authorized common shares and a change to a par value of
$.001 per share. All share and per share information included in the
accompanying financial statements and notes thereto have been restated for the
stock split.

l. Stock-Based Compensation--The Company accounts for its stock-based
employee compensation plan using the intrinsic value based method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company has provided pro
forma disclosures of net income (loss) and income (loss) per share, as if the
fair value based method of accounting for the plan, as prescribed by Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), had been applied. Pro forma disclosures include the
effects of employee stock options granted during the years ended December 31,
1995, 1996 and 1997.

Stock options issued to consultants and others for services are recorded at
fair value as prescribed by SFAS 123. Charges to operations associated with
these option grants were not significant during the years ended December 31,
1995, 1996 and 1997 and the six-month periods ended June 30, 1997 and 1998.

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

n. Reclassifications--Certain reclassifications have been made to conform
prior year financial statements to the 1997 presentation.

F-9
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. INVENTORY

The components of inventory as of December 31, 1996 and 1997 and June 30,
1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $ 978 $3,320 $2,083
Work-in-process....................................... 43 351 730
Finished goods........................................ 1,190 3,113 4,055
Reserve for obsolesence............................... -- -- (210)
------ ------ ------
$2,211 $6,784 $6,658
====== ====== ======
</TABLE>

3. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 1996 and 1997 and June 30, 1998
consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
---- ------ -----------
<S> <C> <C> <C>
(UNAUDITED)
Machinery and software............................... $448 $1,349 $ 1,803
Real property........................................ -- -- 266
Furniture, fixtures and other........................ 117 160 228
Leasehold improvements............................... 13 134 167
---- ------ -----------
578 1,643 2,464
Less accumulated depreciation........................ (190) (376) (559)
---- ------ -----------
$388 $1,267 $ 1,905
==== ====== ===========
</TABLE>

4. DEBT AND RELATED PARTY TRANSACTIONS

In June 1996, the Company converted total notes payable to stockholders,
bearing interest at 9.5%, of $370,612, and $17,427 of related accrued interest
payable, into 135,678 shares of Series A preferred stock at a price of $2.86
per share, in connection with the private placement of preferred shares
discussed in Note 6.

In April 1996, the Company entered into two credit agreements with a bank
that provided for a $500,000 revolving line of credit and a $300,000 equipment
loan. In May 1997, the $500,000 revolving line of credit was converted into a
note bearing interest at the bank prime plus 1%, (9.5% at December 31, 1997).
The note matured in 1998, and was secured by substantially all of the assets
of the Company. The equipment loan also bore interest at prime plus 1%,
matured in 2001, and was also secured by substantially all of the assets of
the Company. Outstanding borrowings at December 31, 1996 totaled $248,750.
There were no borrowings outstanding at December 31, 1997. These agreements
had been terminated as of June 30, 1998.

The Company has a credit agreement with a bank which provides for a $5.0
million revolving line of credit. The revolving line of credit bears interest
at prime (8.5% at December 31, 1997), matures in 1999, and is secured by
substantially all of the assets of the Company. No borrowings were outstanding
under the revolving line of credit at December 31, 1997.

The Company's credit agreements contain certain restrictive covenants,
including the maintenance of various financial ratios.

F-10
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. INCOME TAXES

Income tax expense (benefit) consists of the following for the year ended
December 31, 1997 and the six months ended June 30, 1997 and 1998 (in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, ------------
1997 1997 1998
------------ ---- ------
(UNAUDITED)
<S> <C> <C> <C>
Current.............................................. $1,028 $381 $1,283
Deferred............................................. (237) (90) (226)
------ ---- ------
Income tax expense................................. $ 791 $291 $1,057
====== ==== ======
</TABLE>

A reconciliation of expected income tax expense (benefit) computed using the
statutory Federal tax rate of 34% to actual income tax expense for the years
ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and
1998, is as follows (in thousands):

<TABLE>
<CAPTION>
YEARS
ENDED SIX MONTHS
DECEMBER ENDED JUNE
31, 30,
----------- ------------
1996 1997 1997 1998
----- ---- ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected income tax expense (benefit)............... $ (26) $859 $315 $ 929
Change in valuation allowance for deferred tax
assets............................................. 26 (67) -- --
Research and development tax credit................. -- (112) (56) (94)
State income taxes, net of federal tax benefit...... (2) 64 25 121
Amortization of deferred stock compensation, not
deductible for tax purposes........................ -- 32 -- 95
Other............................................... 2 15 7 6
----- ---- ---- ------
Actual income tax expense......................... $ -- $791 $291 $1,057
===== ==== ==== ======
</TABLE>

No tax benefit was recorded for the year ended December 31, 1996 due to the
Company's net loss and the uncertainty relating to the ultimate utilization of
the Company's net operating loss carryforward.

F-11
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The tax effects of significant temporary differences that result in deferred
tax assets and liabilities at December 31, 1996 and 1997 and June 30, 1998 are
as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
----- ----- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accounts receivable, primarily due to
differences in accounting for doubtful
accounts...................................... $ 8 $ 151 $268
Reserve for inventory obsolescence............. -- -- 80
Accrued expenses, due to differences in the
period of recognition for financial statement
and income tax purposes....................... 37 143 213
Net operating loss carryforward................ 77 -- --
Research and development tax credit
carryforward.................................. 33 -- --
Valuation allowance............................ (67) -- --
----- ----- ----
Net deferred tax asset....................... $ 88 $ 294 $561
Deferred tax liabilities:
Software development costs, capitalized for
financial statement purposes.................. (88) -- --
Equipment, primarily due to differences in
depreciation.................................. -- (43) (84)
Other.......................................... -- (14) (14)
----- ----- ----
Total deferred tax liabilities............... (88) (57) (98)
----- ----- ----
Net deferred tax asset....................... $ -- $ 237 $463
===== ===== ====
</TABLE>

6. REDEEMABLE PREFERRED STOCK

During 1995, the Company authorized a new class of preferred stock,
consisting of 5,000,000 convertible Series A preferred shares with a par value
of $0.10 per share. The preferred shares may be converted, at the option of
the holder, into shares of common stock which are subject to the three-for-two
forward split. Accordingly, upon conversion the holders of preferred stock
would receive three shares of common stock for every two shares of preferred
stock. The preferred shares have the same voting rights as the Company's
common stock and will be automatically converted into common stock upon the
closing of a public offering of the Company's common stock meeting certain
thresholds. The preferred shares may be redeemed at the option of a majority
of the preferred shareholders, any time after four years from the date of
issuance, provided that the Company has not achieved certain financial results
or completed a public offering of common stock, both as defined.

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

During 1997, the Company amended its articles of incorporation to authorize
a new class of preferred stock, consisting of 2,725,998 convertible Series B
preferred shares with a par value of $0.10 per share. The preferred shares may
be converted, at the option of the holder, into the same number of shares of
common stock. The preferred shares have the same voting rights as the
Company's common stock and will be automatically converted into common stock
upon the closing of a public offering of the Company's common stock meeting
certain thresholds. On September 16, 1997, the Company completed a private
placement of 2,517,894 shares of Series B preferred stock at a price of $4.99
per share, for net proceeds of $12,514,291. In the event of the Company's
liquidation, or redemption of the preferred shares, the Series B stockholders
are entitled to $4.99 per share plus unpaid dividends equal to 15% of the
liquidation value per annum.

F-12
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1997 and June 30, 1998, the Company has 5,000,000 authorized
shares of preferred stock; however, as a result of the amendment of its
articles of incorporation in connection with the issuance of the Series B
preferred stock, the authorized number of Series A preferred stock was reduced
from 5,000,000 to 1,210,861 shares. The remaining 1,063,141 authorized but
unissued shares are undesignated and may be issued as either Series A or
Series B preferred shares in the future.

7. STOCKHOLDERS' EQUITY

Common Stock

Common stock issued at inception was recorded at the historical cost basis
of assets contributed by the Company's founders, which amount was less than
the par value of the shares issued.

Stock Options

Pursuant to the Company's 1995 stock option plan (the "Plan") a committee
appointed by the Company's Board of Directors may grant incentive and
nonqualified options to employees, consultants and directors. The Plan, as
amended in 1998, authorizes the grant of options to purchase up to 3,750,000
shares of authorized but unissued common stock. Incentive stock options have a
ten-year term and non-qualified stock options have a five-year term. All stock
options vest 25% on the first anniversary date of the grant and 6.25% each
calendar quarter thereafter. Of the 2,437,500 options granted as of December
31, 1997, 1,323,750 were nonqualified.

The following summarizes stock option activity under the Plan:

<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1995...................... -- --
Granted................................................... 540,000 $ 0.14
---------
Options outstanding at December 31, 1995.................... 540,000 0.14
Granted................................................... 970,500 0.33
Exercised................................................. (150,000) 0.03
Canceled.................................................. (596,250) 0.33
---------
Options outstanding at December 31, 1996.................... 764,250 0.25
Granted................................................... 927,675 0.50
Exercised................................................. (274,689) 0.25
Canceled.................................................. (73,284) 0.33
---------
Options outstanding at December 31, 1997.................... 1,343,952 0.42
Granted................................................... 1,075,135 6.29
Exercised................................................. (152,678) .33
Canceled.................................................. (486,504) 1.07
---------
Options outstanding at June 30, 1998 (unaudited)............ 1,779,905 3.84
=========
Options available for grant at June 30, 1998 (unaudited).... 1,392,728
=========
</TABLE>

F-13
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following summarizes information about outstanding options at June 30,
1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER REMAINING
OUTSTANDING AT CONTRACTUAL NUMBER
EXERCISE JUNE 30, LIFE VESTED AND
PRICE 1998 (YEARS) EXERCISABLE
-------- -------------- ----------- -----------
<S> <C> <C> <C>
$0.03 112,500 7.4 77,343
0.33 493,993 8.2 113,503
0.83 172,312 9.3 3,750
1.73 38,250 4.5 --
3.33 143,400 4.7 --
4.00 301,500 4.8 --
4.67 59,250 4.8 --
5.67 74,700 4.9 --
10.00 151,500 5.0 --
11.00 232,500 5.0 --
</TABLE>

As discussed in Note 1, the Company applies APB 25 and related
interpretations in accounting for stock options issued to employees and
directors. As a result, for options issued with exercise prices below the
estimated fair market value on the date of grant, the Company will recognize
compensation expense totaling approximately $1,227,000 for options granted
during the year ended December 31, 1997 and $2,046,000 for options granted
during the six months ended June 30, 1998. Such deferred compensation expense
will be amortized to operations over the forty-eight month option vesting
period. Such amortization expense totaled approximately $83,000 and $279,000
for the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively.

The weighted average fair values of options granted during 1995, 1996 and
1997 were $0.02 and $0.05 and $0.30 per share, respectively, using the Black-
Scholes option-pricing model with the following assumptions: no expected
dividends, no volatility, expected life of the options of three years and a
risk-free interest rate of 6%. Had compensation cost for the Company's stock-
based compensation plan been determined based upon the fair value of options
on the grant dates, consistent with the provisions of SFAS 123, the Company's
1995, 1996 and 1997 pro forma net income (loss) would have been as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ------ -----
<S> <C> <C> <C>
Net income (loss) available to common stockholders:
As reported.............................................. $ 113 $ (361) $ 614
Pro forma................................................ 111 (366) 577
Income (loss) per common share:
As reported and pro forma:
Basic.................................................. $0.01 $(0.03) $0.04
Diluted................................................ 0.01 (0.03) 0.04
</TABLE>

F-14
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OR CREDIT RISK

The Company's customers are distributors and an OEM, who resell the
Company's products to end users. The Company recognized revenue from the
following significant customers for the years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1998 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED SIX
DECEMBER 31, MONTHS
------------------ ENDED JUNE
1995 1996 1997 30, 1998
---- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Walker & Associates.............................. $-- $ -- $6,840 $7,655
ADC Telecommunications........................... -- -- 3,802 --
Phillips Communications and Equipment............ 275 1,027 2,698 3,090
Telco Systems.................................... 530 2,756 1,161 --
Telsource Corporation............................ 248 1,017 1,253 2,364
C&L Communications............................... 277 631 650 415
</TABLE>

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

9. EMPLOYEE BENEFIT PLAN

In May 1996, the Company adopted a defined contribution employee benefit
plan (the Plan) under Section 401(k) of the Internal Revenue Code which is
available to all employees who meet the Plan's eligibility requirements.
Employees may contribute up to the maximum limits allowed by the Internal
Revenue Code. The Company may make discretionary employer matching
contributions to the Plan. No contributions were made to the Plan by the
Company in 1995, 1996, 1997 or the six months ended June 30, 1998.

10. COMMITMENTS

The Company leases office space under various noncancelable operating leases
which expire through 2005. Future obligations under these leases are as
follows (in thousands):

<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $ 504
1999........................................................... 525
2000........................................................... 493
2001........................................................... 458
2002........................................................... 481
Thereafter..................................................... 1,591
------
$4,052
======
</TABLE>

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

Rent expense for the years ended December 31, 1995, 1996 and 1997 totaled
$89,928, $549,105 and $547,130, respectively. Rent expense for each of the six
months ended June 30, 1997 and 1998 was $273,563.

F-15
<PAGE>

CARRIER ACCESS CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Company also subleases office space under various noncancelable
operating leases which expire through 2000. Future rental income under these
subleases are as follows (in thousands):

<TABLE>
<S> <C>
Year ending December 31:
1998............................................................. $131
1999............................................................. 142
2000............................................................. 75
----
$348
====
</TABLE>

F-16
<PAGE>

LOGO APPEARS HERE
<PAGE>

- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 31
Management................................................................ 49
Certain Transactions...................................................... 58
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Notice to Canadian Residents.............................................. 70
Legal Matters............................................................. 71
Experts................................................................... 71
Additional Information.................................................... 71
Glossary of Technical Terms............................................... 72
Index to Financial Statements............................................. F-1
</TABLE>

UNTIL AUGUST 24, 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

[LOGO OF CARRIER ACCESS(R) CORPORATION APPEARS HERE]

3,000,000 Shares
Common Stock
($.001 par value)

PROSPECTUS

CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
WARBURG DILLON READ LLC

- -------------------------------------------------------------------------------