=======================================================================


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


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

                For the quarterly period ended September 25, 1998

                                       OR

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

For the transition period from                          to                      

Commission file number        0-25684                                   

                          PREMISYS COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                               94-3153847         
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
       incorporation or organization)

                 48664 Milmont Drive, Fremont, California 94538
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (510) 353-7600
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes     X                No         

The number of shares  outstanding of the issuer's common stock, par value $0.01,
as of October 23, 1998 was 24,053,389 shares.


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<PAGE>



                                             
                          PREMISYS COMMUNICATIONS, INC.

                                      INDEX

 PART I.   Financial Information                                   Page No.

           Item 1. Financial Statements

                   Condensed Consolidated Balance Sheet - June
                   30, 1998 and September 30, 1998                     3

                   Condensed Consolidated Statement of Operations
                   - Three Month Periods ended September 30, 1997      4
                   and 1998

                   Condensed Consolidated Statement of Cash Flows
                   - Three Month Periods ended September 30, 1997
                   and 1998                                            5

                   Notes to Condensed Consolidated Financial
                   Statements                                          6

           Item 2. Management's Discussion and Analysis of
                   Financial Condition and Results of Operations       8

           Item 3. Quantitative and Qualitative Disclosures About
                   Market Risk                                        20

 PART II.  Other Information

           Item 2. Changes in Securities                              21

           Item 5. Other Information                                  21

           Item 6. Exhibits and Reports on Form 8-K                   22

           Signatures                                                 23










<PAGE>



I.    FINANCIAL  INFORMATION

ITEM 1.     Financial Statements


                          Premisys Communications, Inc.
                      Condensed Consolidated Balance Sheet
                      (in thousands except per share data)

                                                  June 30,    September 30,
                                                    1998           1998
                                                                (unaudited)
                             ASSETS
 Current assets:
   Cash and cash equivalents                     $  31,006     $  14,020
   Short-term investments                           74,975        85,148
   Accounts receivable, net                         12,208        14,698
   Inventories                                       3,859         6,578
   Deferred tax assets                               7,355         7,355
   Prepaid expenses and other assets                   657           346
                                                 ----------    ----------
     Total current assets                          130,060       128,145

 Property and equipment, net                         8,392         8,464
 Other assets                                          305           280
                                                 ----------    ----------
                                                 $ 138,757     $ 136,889
                                                 ==========    ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities:
    Accounts payable                             $    6,969    $    7,245
    Accrued liabilities                              10,207         9,311
    Income taxes payable                                735         3,075
    Current portion of long-term debt                    70            93
                                                 -----------   -----------
      Total current liabilities                      17,981        19,724
                                                 -----------   -----------

  Put warrants                                          ---        21,250
                                                 -----------   -----------

  Stockholders' equity:
    Common Stock, $0.01 par value, 100,000 shares
      authorized;  25,974 and 25,274 shares issued
      and outstanding                                   260           262
    Additional paid-in capital                       85,230        56,354
    Retained earnings                                35,286        39,299
                                                 -----------   -----------
      Total stockholders' equity                    120,776        95,915
                                                 -----------   -----------
                                                 $  138,757    $  136,889
                                                 ===========   ===========



See notes to condensed consolidated financial statements


<PAGE>




                          Premisys Communications, Inc.
          Condensed Consolidated Statement of Operations - (unaudited)
                      (in thousands, except per share data)


                                        Three Months Ended September 30,
                                        --------------------------------
                                                1997         1998
                                                ----         ----
Revenues                                       $19,285     $25,011
Cost of revenues                                 7,218       8,388
                                           ------------  ----------
        Gross profit                            12,067      16,623
                                           ------------  ----------

Operating expenses:
  Research and development                       3,024       4,748
  Selling, general and administrative            5,507       6,493
                                           ------------  ----------
    Total operating expenses                     8,531      11,241
                                           ------------  ----------

Income from operations                           3,536       5,382

Interest and other income, net                     713         988
                                           ------------  ----------
Income before income taxes                       4,249       6,370
Provision for income taxes                       1,572       2,357
                                           ------------  ----------
Net income                                     $ 2,677     $ 4,013
                                           ============  ==========
Net income per share:
   Basic                                       $  0.11     $  0.15
   Diluted                                     $  0.10     $  0.15
                                           ============  ==========
Shares used in computing net income per share:
   Basic                                        25,308      25,910
   Diluted                                      27,287      27,025
                                           ============  ==========


See notes to condensed consolidated financial statements


<PAGE>



                          Premisys Communications, Inc.
          Condensed Consolidated Statement Of Cash Flows - (unaudited)
                                 (in thousands)



                                             Three Months Ended September 30,
                                                   1997            1998

Cash flows from operating activities:
  Net income                                      $2,677          $4,013
  Adjustments to reconcile net income to
  net cash  provided by operating
  activities:
      Depreciation                                   467             678
      Changes in assets and liabilities:
       Accounts receivable                           789         (2,490)
       Inventories                                   732         (2,719)
       Prepaid expenses and other assets           1,249             336
       Accounts payable                            2,287             276
       Accrued liabilities                         2,068           (873)
       Income taxes payable                          ---           2,340
                                             ------------   -------------
Net cash provided by operating activities         10,269           1,561
                                             ------------   -------------

Cash flows from investing activities:
  Purchase of property and equipment               (587)           (750)
  Purchase of short-term investments            (10,201)        (10,173)
                                             ------------   -------------
Net cash used in investing activities           (10,788)        (10,923)
                                             ------------   -------------

Cash flows from financing activities:
   Proceeds from issuance of Common Stock,           889           1,317
  net
   Repurchase of Common Stock                        ---         (8,941)
                                             ------------   -------------

Net cash provided by (used in) financing             889         (7,624)
  activities
                                             ------------   -------------

Net increase (decrease)  in cash                     370        (16,986)
Cash and cash equivalents at beginning of         28,923          31,006
  period
                                             ------------   -------------

Cash and cash equivalents at end of period       $29,293         $14,020
                                             ============   =============

See notes to condensed consolidated financial statements


<PAGE>



                          Premisys Communications, Inc.
                    Notes to Condensed Consolidated Financial Statements


NOTE 1 - Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim  financial  information and with the  instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting  principles for complete
financial statements.  In the opinion of management,  the accompanying unaudited
condensed consolidated financial statements have been prepared on the same basis
as the audited  consolidated  financial  statements and include all adjustments,
consisting  only  of  normal  recurring  adjustments,  necessary  for  the  fair
statement of the Company's financial condition as of September 30, 1998, and the
results of its  operations  and its cash flows for the three month periods ended
September  30,  1997 and  1998.  These  financial  statements  should be read in
conjunction with the Company's audited financial  statements as of June 30, 1997
and 1998 and for each of the three  years in the  period  ended  June 30,  1998,
including notes thereto,  included in the Company's  Annual Report on Form 10-K.
Operating  results for the three month period ended  September  30, 1998 are not
necessarily  indicative  of the results that may be expected for the year ending
June 30, 1999.

     The Company has a 52/53 week fiscal accounting year that ends on the Friday
closest to June 30.  Accordingly,  fiscal periods shown herein as ending on June
30, 1998 and September 30, 1997 and 1998 for  financial  statement  presentation
purposes actually reflect amounts for the fiscal periods ended on June 26, 1998,
September 26, 1997 and September 25, 1998, respectively.


NOTE 2 - Inventories (in thousands)
                                                 June 30,      September 30,
                                                   1998            1998
                                                               (unaudited)
Inventories
  Raw materials                                   $    582         $ 1,061
  Work-in-process                                      676           1,555
  Finished goods                                     2,601           3,962
                                                 -----------   -------------
                                                 $   3,859         $ 6,578
                                                 ===========   =============


NOTE 3 - Earnings Per Share

     The Company adopted  Statement of Financial  Accounting  Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. SFAS
128 requires  presentation  of both Basic EPS and Diluted EPS on the face of the
statement of  operations.  Basic EPS is computed by dividing  net income  (loss)
available to common stockholders by the weighted average number of common shares
outstanding  during  the  period.  Diluted  EPS  gives  effect  to all  dilutive
potential common shares  outstanding  during a period. In computing Diluted EPS,
the  average  stock  price for the period is used in  determining  the number of
shares assumed to be purchased  under the treasury stock method from exercise of
stock options

     Following is a presentation of the Basic and Diluted EPS  computations  for
the periods presented below:



                                 Three Month Period Ended
                      September 30, 1997             September 30, 1998
                   ---------------------------   ---------------------------
                    Net      Shares   Per         Net      Shares   Per
                    Income            Share       Income            Share
                                      Amount                        Amount
                   ---------------------------   ---------------------------
                             (in thousands except per share data)
Basic EPS
Net income
available
to common
stockholders        $2,677    25,308   $0.11      $4,013    25,910   $0.15

Effect of
Dilutive
Securities
Common stock
equivalents           ----     1,979                ----     1,115
                   ------------------            ------------------

Diluted EPS
Net income (loss)
available to
common
stockholders and
assumed
conversions         $2,677    27,287   $0.10      $4,013    27,025   $0.15
                   ===========================   ===========================



Options to purchase  609,778  and  2,284,309  shares of Common  stock which were
outstanding  during the three month periods  ended  September 30, 1997 and 1998,
respectively,  were not included in the  computation  of Diluted EPS because the
exercise prices of the options were greater than the average market price of the
common shares in each period.

NOTE 4 - Significant Events

     On August 31, 1998, the Company's Board of Directors authorized repurchase,
at management's discretion,  of up to 4.0 million shares of the Company's Common
Stock over the  subsequent  12 months at market  prices not to exceed $14.00 per
share and as the market and business  conditions  warrant.  By October 21, 1998,
the Company had  repurchased  for cash 2.1 million shares of its Common Stock at
market prices ranging from $6.69 to $10.94 per share.  As of September 17, 1998,
pursuant to the  authorized  stock  repurchase  program,  the  Company  sold 2.0
million put warrants and purchased  1.5 million call options.  The Company had a
maximum potential  obligation related to the put warrants of $21.3 million.  The
put warrants and call options  expire in equal amounts (50% each) on January 29,
1999 and September 15, 1999.

     On September 17, 1998, the Company's Board of Directors ("Board") adopted a
Stockholder  Rights Plan ("Plan") designed to protect the long-term value of the
Company for its stockholders during any future unsolicited  acquisition attempt.
Pursuant  to the Plan,  the Board  declared a dividend  of one  preferred  share
purchase  right  ("Right")  for  each  share  of  the  Company's   Common  Stock
outstanding  on October 5, 1998 (the  "Record  Date") and further  directed  the
issuance of one such right with  respect to each share of the  Company's  common
stock that is issued after the Record Date, except in certain circumstances.  If
a  person  or a  group  (an  "Acquiring  Person")  acquires  20% or  more of the
Company's common stock, or announces an intention to make a tender offer for the
Company's  common stock,  the  consummation of which would result in a person or
group becoming an Acquiring  Person,  then the rights will be  distributed  (the
"Distribution   Date").   After  the  Distribution   Date,  each  Right  becomes
exercisable to purchase one one-hundredth  (1/100) of a share of Series A Junior
Participating  Preferred  Stock at an exercise price of $80.00.  The Rights will
generally  expire on September 18, 2008. The Company may redeem the Rights until
the occurrence of certain events at a price of $0.001 per Right.


<PAGE>


ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Results of Operations

      This Form 10-Q contains  forward-looking  statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended,  and Section 27A
of the  Securities  Act of 1933, as amended.  These  forward-looking  statements
involve a number of risks and uncertainties which are described  throughout this
Form  10-Q,  including  demand  from and the  Company's  relationships  with its
strategic  partners  and  major  customers,   including  ADC  Telecommunications
("ADC"),  Motorola,  Inc.  ("Motorola") and Paradyne  Corporation  ("Paradyne");
limited order backlog and quarterly  fluctuations;  delays and  cancellations of
actual and projected customer orders; new product  development and introductions
by the Company and its competitors,  including  products based on the technology
recently  licensed  by the  Company  from  Positron  Fiber  Systems  Corporation
("Positron") and Switched  Network  Technologies  ("SNT");  deregulation of, and
legislation   regarding  the  domestic  and   international   telecommunications
industry;  continued success of competitive local exchange carriers ("CLECs") in
taking market share from incumbent carriers in the U.S. business  communications
services market;  timely release and market acceptance of the Company's SlimLine
and StreamLine products; rapidly changing technologies and the Company's ability
to respond thereto; the growth of demand for telecommunications services such as
wireless, cellular and the Internet; competition; changes in the mix of products
or customers or in the level of operating expenses;  and other factors described
throughout this Form 10-Q,  including  under  "Revenues" and "Other Factors That
May Affect Future Operating Results," and in the Company's Annual Report on Form
10-K for the year  ended June 30,  1998.  The actual  results  that the  Company
achieves may differ materially from any  forward-looking  statements due to such
risks and  uncertainties.  The Company has  identified  using an asterisk  ("*")
various  sentences  within  this Form 10-Q which  contain  such  forward-looking
statements,  and words such as "believes,"  "anticipates," "expects," "intends,"
"will"  and  similar  expressions  are  intended  to  identify   forward-looking
statements,  but are not the exclusive means of identifying such statements.  In
addition,  the section  labeled "Other Factors That May Affect Future  Operating
Results," which does not include  asterisks for improved  readability,  consists
primarily of forward-looking statements. The Company undertakes no obligation to
revise  any   forward-looking   statements   in  order  to  reflect   events  or
circumstances that may arise after the date of this report. Readers are urged to
carefully  review and  consider the various  disclosures  made by the Company in
this report and in the Company's  other reports  filed with the  Securities  and
Exchange Commission,  including its Form 10-K, that attempt to advise interested
parties of the risks and factors that may affect the Company's business.


Revenues
                                        Three Months Ended September 30,
                                      --------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Revenues                               $19,285,000      30%     $25,011,000

      Revenues consist primarily of gross sales of products,  less discounts and
sales  returns  and  allowances.  A majority of the  revenue  increase  from the
quarter ended  September  30, 1997 to the quarter  ended  September 30, 1998 was
attributable  to an increase in unit volumes of platforms and modules sold. This
increase in unit  volumes in the  quarter  ended  September  30, 1998 versus the
quarter  ended  September 30, 1997 was primarily due to an increase in shipments
to Paradyne and Motorola,  which was partially offset by a decrease in shipments
to ADC. See "Other Factors That May Affect Future Operating Results Relationship
with Paradyne." However, revenues decreased $6,232,000, or 20%, from $31,243,000
in the quarter ended June 30, 1998 to $25,011,000 in the quarter ended September
30, 1998.  This decrease in revenues in the first fiscal  quarter of 1999 versus
the fourth fiscal quarter of 1998 was due primarily to reduced  shipments of the
Company's  products to one CLEC customer of ADC, one of the Company's  strategic
distribution  partners.  *The Company expects that revenues in the December 1998
quarter will  increase  somewhat  compared  with those  reported for the quarter
ended September 30, 1998.  *However,  these expectations are subject to a number
of uncertainties,  which include but are not limited to the following: the level
of business  which the Company  expects to ship through its marketing  partners,
Paradyne,  Motorola, ADC and Alcatel U.S.A. ("Alcatel");  the growth in business
shipped direct to  international  customers;  and the shipment in the quarter of
orders for the Company's new products, the SlimLine and StreamLine. In the prior
two quarters shipments of the SlimLine and StreamLine products have been delayed
pending the  resolution of design issues  identified in customer and  production
testing.  *There  is a risk that  additional  issues  which  will  restrict  the
availability  of these products will be identified as the unit volumes  produced
and shipped to customers grow in the December 1998 quarter.

      The following table sets forth,  for the periods  indicated,  the revenues
generated by customers which accounted for 10% or more of the Company's revenues
in the quarters ended September 30, 1997 and 1998, other domestic customers as a
group and  international  customers  as a group,  in  absolute  dollars and as a
percentage of total revenues.


                                           Source of Revenues

                                   Three Months Ended September 30,
                            -----------------------------------------------


                                  1997          %          1998          %
                                  ----         --          ----         --
ADC                         $  7,008,000      36%        (a)           ---
Paradyne                       2,668,000      14%       9,037,000      36%
Motorola                        (a)           ---       3,157,000      13%
Other Domestic Customers       8,212,000      43%      11,856,000      47%
Direct International
Customers                      1,397,000       7%         961,000       4%
                            ======================   ======================
Total Revenues               $19,285,000     100%     $25,011,000     100%
                            ======================   ======================
(a) - Amounts  not  separately  provided  (but are  instead  included  in "Other
Domestic Customers") as revenues for the period were less than 10% of the total.

      The Company  sells a  substantial  majority  of its  products to a limited
number of customers  which  generally  resell the  Company's  products to public
carriers and end users.  For the  quarters  ended  September  30, 1997 and 1998,
customers  individually  representing  10%  or  more  of the  Company's  revenue
generated 50% and 49% of the Company's total revenues,  respectively.  *The loss
of any  one or more of the  Company's  major  customers  would  have a  material
adverse  effect on the  Company's  business and operating  results.  *Any of the
telecommunications  equipment  suppliers  that  market  and sell  the  Company's
products could elect to cease marketing and selling the Company's products,  and
there can be no assurance that these telecommunications equipment suppliers will
continue to place  orders  with the Company or that the Company  will be able to
obtain orders from new telecommunications  equipment suppliers or end users. See
"Other Factors That May Affect Future Operating  Results - Indirect  Channels of
Distribution," "-Slowdown in Telecommunications Carriers' Capital Expenditures,"
"-Limited Order Backlog" and "-Relationship with Paradyne."

     During the quarter ended September 30, 1998, direct international  revenues
accounted for 4% of the Company's  revenues,  compared to 7% for the same period
in fiscal 1998.  The Company  believes  this  reduction in direct  international
revenues is attributable to the current economic  situations in Asia and Russia.
Certain of the Company's  domestic  customers  also sell Premisys  products into
international markets. *The Company intends to expand its operations outside the
United  States and  anticipates  that  international  sales will increase in the
future both in absolute  dollars and as a percentage  of revenues.  However,  in
order to sell its  products  internationally,  the Company  must meet  standards
established by  international  telecommunications  committees and authorities in
various countries.  *Conducting business outside of the United States is subject
to  certain  risks,  including  longer  payment  cycles,  unexpected  changes in
regulatory  requirements and tariffs,  more volatile economic conditions,  risks
associated with foreign  currency  exchange rates,  difficulties in staffing and
managing  foreign   operations,   greater  difficulty  in  accounts   receivable
collection and potentially adverse tax consequences. See "Other Factors That May
Affect Future Operating Results - Industry Standards and Regulatory Matters."

Gross Profit
                                        Three Months Ended September 30,
                                      --------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Gross Profit                           $12,067,000      38%     $16,623,000
As a percentage of revenues                63%                      66%

      Cost of  revenues  consists of  component  costs,  compensation  costs and
overhead  related  to  the  Company's  manufacturing   operations  and  warranty
expenses.  Gross profit increased from the three months ended September 30, 1997
to the quarter  ended  September  30, 1998  primarily as a result of higher unit
shipment  volumes.  The gross margin  increased from the quarter ended September
30, 1997 to the quarter ended  September  30, 1998,  due primarily to a shift in
customer mix. *The Company expects its gross margins for the remainder of fiscal
1999 to decline  somewhat from the 66% reported in the quarter  ended  September
30,  1998,  due  primarily  to  anticipated  changes in product  mix.  *However,
achievement   of  the  Company's   expectations   is  subject  to  a  number  of
uncertainties,  including  customer mix,  market  acceptance of the SlimLine and
StreamLine  products,  the mix and  volume of  products  sold and the  Company's
ability to realize expected revenue levels.

Research and Development Expenses
                                        Three Months Ended September 30,
                                      -------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Research and development expenses       $3,024,000      57%     $4,748,000
As a percentage of revenues                16%                     19%

      Research and development expenses consist of personnel costs,  consulting,
testing, supplies and depreciation expenses. All software development costs have
been  expensed  in  the  period  in  which  they  were  incurred.  Research  and
development  expenses  increased  $1,724,000,  or 57%,  from the  quarter  ended
September  30, 1997 to the quarter ended  September 30, 1998.  This increase was
primarily  due to  increased  personnel  expenses  and  to a  lesser  extent  to
increased  expenses for outside  services and materials used associated with the
development  of the  Company's  SlimLine  and Q-155  products.  The  increase in
research and development  expenses as a percentage of the Company's  revenues in
the quarter ended September 30, 1998 versus the quarter ended September 30, 1997
was primarily the result of lower than anticipated revenue growth in the quarter
ended  September  30,  1998.  *The  Company  expects  that during the  remaining
quarters  of fiscal 1999 these  expenses  will  increase in absolute  dollars as
compared to the quarter ended September 30, 1998. *However,  the Company expects
that the rate of growth of these expenses will be less than the sequential  rate
of growth in  revenues  during the  remaining  quarters of fiscal  1999.  *These
expectations are subject to a number of  uncertainties,  including the Company's
level  of  revenues  and the  level  of  personnel  dedicated  to  research  and
development activities.

Selling, General and Administrative Expenses
                                        Three Months Ended September 30,
                                      -------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Selling, general and administrative     $5,507,000      18%     $6,493,000
expenses
As a percentage of revenues                29%                     26%

      Selling expenses consist  principally of compensation  costs for sales and
marketing personnel (including sales commissions and bonuses),  travel expenses,
customer support expenses, trade show expenses and advertising expenses. General
and  administrative  expenses  consist  primarily of  compensation  expenses for
administration,  finance, and general management personnel, as well as legal and
audit fees. Selling,  general and administrative expenses increased $986,000, or
18%,  from the quarter ended  September 30, 1997 to the quarter ended  September
30,  1998.  This  increase  was  primarily a result of  increased  staffing  and
associated  expenses,  and,  to a lesser  extent,  travel and  customer  support
expenses.  The  decrease in selling,  general and  administrative  expenses as a
percentage  of the Company's  revenues in the quarter  ended  September 30, 1998
versus  the  quarter  ended  September  30,  1997 was the  result of lower  than
anticipated selling,  general and administrative  expenses, in large part due to
lower than anticipated  revenue growth, in the quarter ended September 30, 1998.
*The  Company  expects that these  expenses  will  increase in absolute  dollars
versus the quarter ended  September  30, 1998 during the  remaining  quarters of
fiscal 1999. *However, the Company expects that the sequential rate of growth of
these  expenses  will be less  than the rate of growth in  revenues  during  the
remaining  quarters of fiscal 1999. *These  expectations are subject to a number
of uncertainties, including, among other things, the Company's level of revenues
and the level of personnel  dedicated  to sales,  marketing  and  administrative
activities.

Interest and Other Income, Net
                                        Three Months Ended September 30,
                                      -------------------------------------
                                          1997       % Change      1998
                                          ----       --------      ----
Interest and other income, net          $713,000        39%      $988,000
As a percentage of revenues                4%                       4%

      Interest and other income,  net consists of interest  income less interest
expense,  and, to a much lesser extent,  foreign currency gains and losses.  The
increase in interest and other income,  net, for the quarter ended September 30,
1998 as compared to the quarter ended  September 30, 1997 was due to higher cash
balances.

Provision for Income Taxes
                                        Three Months Ended September 30,
                                      -------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Provision for income taxes              $1,572,000      50%     $2,357,000
As a percentage of income before           37%                     37%
  income taxes

      The Company's provision for income taxes represents  estimated federal and
state income  taxes.  The  Company's  effective  tax rate for the quarter  ended
September 30, 1998 remained at 37%, which was less than the combined federal and
state  statutory  rate as a  result  of  tax-exempt  interest  income  from  the
Company's municipal securities portfolio.

Net Income per Share
                                        Three Months Ended September 30,
                                      -------------------------------------
                                           1997       % Change     1998
                                           ----       --------     ----
Net income                              $2,677,000      50%     $4,013,000
Net income per share (diluted)             $.10         50%        $.15
Shares used in calculating diluted
  net income per share                  27,287,000      (1%)    27,025,000

      Net income per share  increased from $0.10 in the quarter ended  September
30, 1997 to $0.15 in the quarter ended September 30, 1998. This increase was due
primarily to an increase of 50% in net income  between the  three-month  periods
ended September 30, 1997 and 1998.

Liquidity and Capital Resources
                                         Three Months Ended September 30,
                                      --------------------------------------
                                           1997       % Change      1998
                                           ----       --------      ----
Net cash provided by operating
 activities                            $10,269,000     (85%)     $ 1,561,000
Period-end cash, cash equivalents
 and short-term investments            $83,795,000      18%     $ 99,168,000
Period-end working capital             $93,819,000      16%     $108,421,000

      At September  30, 1998,  the Company had  approximately  $99.2  million of
cash,  cash  equivalents  and  short-term  investments.  Net cash  totaling $1.6
million was  provided by  operating  activities  during the three  months  ended
September 30, 1998, most  significantly due to net income of $4.0 million and an
increase in income taxes payable of $2.3 million,  offset partially by increases
in inventory and accounts receivable, aggregating $5.2 million.

      Cash used in investing  activities during the three months ended September
30, 1998 consisted  principally of purchases of short-term  securities  totaling
$10.2 million.  Financing activities during the three months ended September 30,
1998 resulted in a net use of cash of $7.6  million.  The net use of cash is the
result of $8.9 million of cash used in the  repurchase of the  Company's  Common
Stock  partially  offset by cash  provided by the  issuance  of Common  Stock in
connection with the Company's employee benefit plans.

      As of September 30, 1998, the Company's  working capital was approximately
$108.4 million.  Except for the potential obligation related to put warrants, as
discussed  below and in the  Company's  Annual  Report on Form 10-K for the year
ended June 30, 1998, the Company has no significant capital spending or purchase
commitments  other  than  normal  purchase  commitments  and  commitments  under
facilities and capital  leases.  *The Company  believes that its available funds
and anticipated cash flows from operations will satisfy the Company's  projected
working  capital  and  capital  expenditure  requirements  for at least the next
twelve months.

     On August 31, 1998, the Company's Board of Directors authorized repurchase,
at management's discretion,  of up to 4.0 million shares of the Company's Common
Stock at market  prices  not to exceed  $14.00  per share and as the  market and
business  conditions  warrant.  By October 21, 1998, the Company had repurchased
for cash 2.1 million  shares at market  prices  ranging from $6.69 to $10.94 per
share.  As of September 17, 1998,  pursuant to the authorized  stock  repurchase
program,  the Company sold 2.0 million put warrants  and  purchased  1.5 million
call options.  The Company had a maximum potential obligation related to the put
warrants of $21.3  million.  The put warrants  and call options  expire in equal
amounts (50% each) on January 29, 1999 and September 15, 1999.


<PAGE>



Other Factors That May Affect Future Operating Results

      As referenced in the first paragraph of this Item 2, this section consists
primarily  of forward  looking  statements  but does not include  asterisks  for
improved readability.

      INDIRECT  CHANNELS OF DISTRIBUTION.  Substantially all of the sales of the
Company's  products are through  indirect  channels of  distribution.  Thus, the
Company's  ability to affect and judge the  timing and size of  individual  user
orders is more limited than for manufacturers  selling directly to the end users
of their  products.  Any of the  strategic  partners  that  market  and sell the
Company's  products  could elect to cease  marketing  and selling the  Company's
products,  and there can be no  assurance  that these  strategic  partners  will
continue to place  orders  with the Company or that the Company  will be able to
obtain orders from new strategic partners or end users. See "-Relationship  with
Paradyne."  Strategic  partners  could  develop  products that could be sold for
selected  applications for which the Company's products are currently  provided,
which could reduce the level of demand from these  telecommunications  equipment
suppliers  for the  Company's  products.  See  "Competition."  In addition,  the
Company's  revenues for a given quarter may depend to a significant  degree upon
planned product shipments for a single carrier's  equipment  deployment project.
For example, in the quarters ended September 30 and December 31, 1997, March 31,
1998 and  June 30,  1998,  shipments  of the  Company's  products  to CLEC,  MCI
Communications  Corporation ("MCI"), through ADC, one of the Company's strategic
distribution partners, represented more than 10% of the Company's total revenues
for such quarters.  Revenues derived from particular  carrier projects have been
and continue to be  difficult  to forecast due to a relatively  long sales cycle
and delays in the timing of such projects.  For example, the Company's financial
results  for the first  quarter  of fiscal  1999 were  adversely  affected  when
product shipments for MCI were lower than expected.  The Company's  business and
operating  results were also  adversely  affected in the quarter ended March 31,
1997 as a result of deployment delays by particular  carriers.  Such delays that
have  occurred  in the  past,  and have had a  material  adverse  effect  on the
Company,  may occur in the future  and would  have a similar  impact if they did
occur.  Delays can be caused by late  deliveries  by other  vendors,  changes in
implementation  priorities,  slower  than  anticipated  growth in demand for the
services that the equipment  supports or in the capital  expenditures of the end
user customer,  consolidation among carriers and delays in obtaining  regulatory
approvals  for new  tariffs.  See  "-Slowdown  In  Telecommunications  Carriers'
Capital  Expenditures" and "-Mergers of the Company's  Customers."  Revenues can
also be affected by delays in initial shipments of new products and new software
releases  developed by the  Company.  See  "-Rapidly  Evolving  Technology."  In
developing  countries,  delays and  reductions in the planned  deployment of the
Company's products can also be caused by sudden declines in the local economy or
capital  availability  and by new import  controls.  Suppliers of the  Company's
products have in the past and may in the future build  significant  inventory in
order to facilitate more rapid  deployment of anticipated  major projects or for
other reasons.  Decisions by such suppliers to sell from their  inventory  could
lead to reductions in purchases  from the Company.  These  reductions,  in turn,
could cause fluctuations in the Company's  operating results and have an adverse
effect on the Company's  business and operating  results in the periods in which
the inventory is utilized. In addition,  the Company has in the past experienced
delays as a result of the need to modify  its  products  to comply  with  unique
customer  specifications.  While  such  delays  have not to date had a  material
adverse effect on the Company's business or operating  results,  there can be no
assurance that any future delays would not have such an adverse effect.

      SLOWDOWN IN TELECOMMUNICATIONS CARRIERS' CAPITAL EXPENDITURES.  Currently,
the primary targeted end user customers for the Company's products are CLECs and
interexchange carriers ("IXCs").  These carriers have been expanding their local
networks at a rapid pace in the past two years to provide  services to small and
medium-sized  businesses  that have  historically  been served  inadequately  by
incumbent local exchange carriers ("ILECs").  Based on industry information,  it
now appears likely that the pace of capital  expenditure growth by the CLECs and
IXCs will slow  significantly.  The Company  believes that there are a number of
reasons for this potential  slowdown.  The largest U.S. CLECs and the IXCs which
have been entering  local markets have already built out major portions of their
planned  local  networks  using the  billions in capital  raised in the past two
years.  The Company  believes  that the smaller U.S.  CLECs may have  difficulty
continuing to raise capital in the current environment of the financial markets.
Capital  spending by carriers serving  businesses in the Japan,  Southeast Asia,
Eastern Europe and Latin America markets are also being  negatively  impacted by
the continuing  financial  crisis in Japan and Asia and looming  problems in the
economies  of the  other  markets.  Besides  reducing  the rate of growth of the
markets into which the Company sells, the Company believes that this slowdown in
capital spending increases the intensity of price competition for these markets.
While the Company has recently  introduced its StreamLine and SlimLine products,
which are more price  competitive  than its IMACS  platform,  these new products
must compete with an increasing  number of low priced  integrated access devices
("IADs").  As  a  result  of  the  anticipated  slowdown  in  telecommunications
carriers' capital  expenditures and related increase in price  competition,  the
Company may find it more  difficult to achieve  expected  levels of revenues and
profitability.

      MERGERS OF THE  COMPANY'S  CUSTOMERS.  A number of the largest CLECs which
use the Company's  products have either merged or announced  plans to merge with
larger  carriers over the next several  quarters.  MCI has merged with WorldCom,
Inc.  ("WorldCom");  Teleport  Communications Group ("Teleport") has merged with
AT&T  Corporation  ("AT&T");  and GTE Network  Services ("GTE") has announced an
intention to merge with Bell Atlantic Corporation ("Bell Atlantic"). The Company
believes  that part of the impetus for each of these  mergers is to increase the
combined  carrier's  ability to compete for local  access  markets.  In the long
term,  the Company  believes  that this should cause  capital  spending on local
access,  in  which  the  Company's  products  serve  a vital  function,  to grow
significantly.  However,  over the next several  quarters,  as these mergers are
implemented, it is likely that capital expenditures will be temporarily deferred
as the newly combined  companies evaluate  inventories of undeployed  equipment,
potential  overlaps in network  deployment  plans,  strategies for on-net versus
off-net  deployments,  and  assignment of  responsibilities  for  deployments in
targeted local markets. This risk of a deferral in expenditures on local access,
including  expenditures for the Company's products,  has already materialized in
the case of MCI. Not only may this risk be realized repeatedly with the Teleport
merger and the  up-coming  GTE  merger,  but the  slowdown in  expenditures  may
persist for multiple quarters following the mergers. In addition,  the increased
buying power wielded by these merged carriers and by merged equipment suppliers,
such as Alcatel and DSC Communications  Corp.  ("DSC"), is likely to place added
competitive price pressure on equipment manufacturers such as Premisys.

      QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate on a
quarterly  and  annual  basis due to factors  such as the timing of new  product
announcements  and  introductions  by the Company,  its major  customers and its
competitors,  delays  in  equipment  deployment,  market  acceptance  of  new or
enhanced versions of the Company's products,  changes in the product or customer
mix of revenues, changes in the level of operating expenses, competitive pricing
pressures,  the gain or loss of significant  customers,  increased  research and
development  expense  associated  with  new  product  introductions,   component
shortages  (see  "-Dependence  on  Certain  Suppliers"),  and  general  economic
conditions.  The Company's  planned  product  shipments  for a single  carrier's
equipment  deployment  project  can  be a  significant  portion  of a  quarter's
revenues, and delays in the timing of such a project (which have occurred in the
past,  including  the quarter  ended March 31, 1997) or  reductions  in expected
shipments to a single carrier (which occurred in the quarter ended September 30,
1998) could and have had a material adverse effect on the Company's business and
operating  results.  All of the above  factors are  difficult for the Company to
forecast,  and  these or other  factors  can  materially  adversely  affect  the
Company's  business  and  operating  results  for one  quarter  or a  series  of
quarters.  The Company's  expense  levels are based in part on its  expectations
regarding  future  revenues  and in the short term are fixed to a large  extent.
Therefore,  the Company may be unable to adjust  spending in a timely  manner to
compensate for any unexpected  future  revenue  shortfall.  In the quarter ended
March 31, 1997, the Company  experienced such an unforecasted  revenue shortfall
and was not able to compensate for it through expense reduction,  which resulted
in a net loss.  Any  significant  decline in demand  relative  to the  Company's
expectations  or any  material  delay of customer  orders  would have a material
adverse effect on the Company's  business and operating  results.  The Company's
operating  results  may also be affected  by  seasonal  trends.  Such trends may
include lower  revenues in the summer  months during the Company's  first fiscal
quarter when many businesses  experience lower sales, and in the Company's third
fiscal quarter,  as compared to its second fiscal quarter, as a result of strong
calendar year end  purchasing  patterns from certain of the Company's  strategic
customers.

      COMPETITION.   The  market  for  telecommunications   products  is  highly
competitive and subject to rapid  technological  change. The Company's principal
competition to date has been from major telecommunications  equipment suppliers,
such as Newbridge  Networks  Corporation and Tellabs,  Inc., which offer a broad
line of products including access devices for business applications. The Company
expects  substantial  additional  competition from existing  competitors as they
develop  products  to compete  with the  functionality  and  flexibility  of the
Company's  products.  As shipments  of the  Company's  SlimLine  and  StreamLine
products increase,  it expects to face additional  competition from channel bank
and  CSU/DSU  vendors  as well as  with  new  startups  focusing  on the  access
equipment  market.  See  "-Relationship  With  Paradyne." The Q-155 product will
likely compete with broadband  access products  offered or announced by a number
of vendors.  Certain of the  telecommunications  equipment suppliers that market
and  distribute the Company's  products may in the future develop  products that
could be sold for selected  applications  for which the  Company's  products are
currently  provided.  Successful,  timely  development  or  acquisition  of such
products  could  reduce  the  level  of  demand  from  these  telecommunications
equipment  suppliers for the  Company's  products.  In addition,  certain of the
telecommunications  equipment suppliers which market the Company's products have
recently either  acquired or expressed an interest in acquiring  companies which
have products or technologies  that may be adapted to compete with the Company's
products in the future.

      LIMITED ORDER BACKLOG.  The Company typically  operates with limited order
backlog,  and a majority  of its  revenues  in each  quarter  result from orders
booked in that quarter.  Also,  the Company has from  time-to-time  recognized a
majority of its  revenues  from sales  booked and shipped in the last month of a
quarter. Due to the delivery requirements of its customers,  the Company expects
to continue to experience  limited order  backlog.  The Company's  manufacturing
procedures are designed to assure rapid response to customer demand, but may, in
some  circumstances,  create risk of excess or inadequate  inventory,  which may
have an adverse  affect on the  Company's  business and operating  results.  The
Company's  agreements  with its customers  typically  allow  customers to cancel
orders or delay scheduled  shipments  without  penalty until a relatively  short
period of time before planned shipment. The Company has experienced cancellation
of orders from time to time,  and expects to receive  order  cancellations  from
time to time in the future,  which could adversely affect the Company's revenues
for a quarter or series of quarters.  Because a substantial  portion of customer
orders are  filled  within the fiscal  quarter of  receipt,  and  because of the
ability of customers to revise or cancel  orders and change  delivery  schedules
without  significant  penalty,  the Company  believes that its backlog as of any
given date is not  necessarily  indicative of actual revenues for any succeeding
period.

      RAPIDLY EVOLVING TECHNOLOGY.  The  telecommunications  equipment market is
characterized  by  rapidly  changing   technologies  and  frequent  new  product
introductions,  which  include  cell and  packet  technologies  and new  digital
subscriber line  technologies  ("xDSL").  The Company's success will depend to a
substantial  degree  upon its  ability to respond to changes in  technology  and
customer requirements.  This will require the timely selection,  development and
marketing  of new products  and  enhancements  on a  cost-effective  basis.  For
example, the Company has licensed certain technology from Positron for inclusion
in the Company's  Q-155  products,  which were  announced in June 1997,  and are
expected to begin field  trials in the quarter  ending  December 31, 1998 and to
begin  shipping by the end of the quarter  ending March 31, 1999.  Also,  in the
quarter ended March 31, 1998, the Company licensed cell and packet  technologies
from SNT. The Company  intends to ship products based upon the SNT technology in
calendar 1999. However,  there can be no assurance that the Company will be able
to successfully develop new products or new enhancements to existing products on
a timely and  cost-effective  basis.  In  addition,  failure  to achieve  market
acceptance of new products could have a material adverse effect on the Company's
operating  results.  The introduction of new and enhanced products also requires
that the Company  manage  transitions  from older  products in order to minimize
disruptions  in customer  orders,  avoid  excess  inventory  of old products and
ensure that adequate  supplies of new products can be delivered to meet customer
orders.  In the past,  certain of the Company's newly  introduced  products have
contained undetected errors and incompatibilities with installed products, which
has resulted in losses and delays in market acceptance of such products.  As the
functionality  and  complexity of the Company's  products  continue to grow, the
Company has experienced and may in the future experience an increased  incidence
of such errors or failures as well as delays in introducing its products.

      RELATIONSHIP WITH PARADYNE.  The Company has a strategic relationship with
Paradyne,  formerly a wholly-owned  subsidiary of AT&T,  that involves the joint
development,  marketing and sale of the Company's IMACS product by Paradyne. The
Company's  agreement  with Paradyne  provides  Paradyne  exclusive  distribution
rights with respect to the products  covered by the agreement to AT&T  entities,
as defined under the  agreement.  At the time that the Company  entered into its
OEM agreement  with Paradyne,  Paradyne was a 100%-owned  subsidiary of AT&T. In
1996, AT&T separated into three  publicly-held  stand-alone  businesses,  one of
which - Lucent - would focus on the  communications  equipment  market.  In June
1996,  Lucent  concluded a stock purchase  agreement for the sale of Paradyne to
the Texas Pacific Group. In the quarter ended March 31, 1997, Paradyne announced
new products  which are  extensions  of its existing  line of CSU/DSU  products.
Premisys  believes that the higher  capacity  models of  Paradyne's  916x series
offer  features that are similar to those of the Company's  IMACS and StreamLine
products.  See "-Competition" and "-Rapidly Evolving Technology." In the quarter
ended December 31, 1997,  the Company  entered into an OEM agreement with Lucent
for the purchase of the SlimLine and StreamLine products directly from Premisys.
Although  sales to  Paradyne  declined  34% from  fiscal  1997 to  fiscal  1998,
shipments  to  Paradyne  continued  to  represent a  significant  portion of the
Company's  revenues in fiscal 1998 as well as the first  quarter of fiscal 1999.
Neither  Paradyne nor Lucent are subject to any minimum  purchase  requirements,
and there can be no assurance  that they will  continue to place orders with the
Company.  Significant  reductions in shipments to Paradyne could have a material
adverse effect on the Company's business and operating results.

      INDUSTRY  STANDARDS AND REGULATORY  MATTERS.  The market for the Company's
products is also characterized by the need to meet a significant number of voice
and data  communications  regulations and standards,  including those defined by
the  Federal  Communications   Commission,   Underwriters   Laboratories,   Bell
Communications Research ("Bellcore") and, internationally, various countries and
international   standards   committees.   Regulations  can  be  changed  by  new
legislation, as occurred with the enactment of the Telecommunications Reform Act
of 1996; these changes can impact service offerings and  competitiveness  in the
communications marketplace, and thus could have an effect on the timing and size
of the industry's investment in access equipment.  New standards are evolving as
new  technologies,  such as ATM and xDSL,  are  deployed.  As  existing  and new
standards evolve, the Company will be required to modify its products or develop
and  support  new  versions  of its  products.  It is also  important  that  the
Company's  products  be easily  integrated  with  carriers'  network  management
systems.  The  failure  of the  Company's  products  to  comply,  or  delays  in
compliance,  with the various  existing and evolving  industry  standards  could
delay  introduction  of the  Company's  products,  which  could  have a material
adverse  effect on the Company's  business and operating  results.  In addition,
government  regulatory policies are likely to continue to have a major impact on
the pricing of existing as well as new public network services and therefore are
expected to affect demand for such services and the telecommunications  products
that support such services.

      DEPENDENCE  ON KEY  PERSONNEL.  The  Company's  success  to date  has been
significantly  dependent on the  contributions  of its senior officers and other
key employees.  Certain of the Company's  senior  officers,  including its Chief
Executive  Officer,  Senior Vice  President,  Sales and Marketing and its Senior
Vice President,  Finance and Administration,  and Chief Financial Officer,  have
only  recently  assumed  their current  positions.  In addition,  the Company is
currently  seeking  to  fill  the  recently  vacated  position  of  Senior  Vice
President,  Engineering.  The loss of the  services of any one of the  Company's
senior  officers or key employees  could have a material  adverse  effect on the
Company's business and operating results.  The Company's success also depends to
a  significant   extent  on  its  ability  to  attract  and  retain   additional
highly-skilled  technical,  managerial  and sales and marketing  personnel,  the
competition for whom is intense.

      LIMITED  PROTECTION OF  INTELLECTUAL  PROPERTY.  The Company relies upon a
combination  of  patent,   trade  secret,   copyright  and  trademark  laws  and
contractual  restrictions  to establish  and protect  proprietary  rights in its
products.  There  can be no  assurance  that  these  statutory  and  contractual
arrangements  will prove sufficient to deter  misappropriation  of the Company's
technologies or independent third-party development of similar technologies. The
telecommunications  industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent  infringement.
In the event of litigation to determine the validity of any  third-party  claims
asserting that the Company's  products  infringe or may infringe the proprietary
rights of such third  parties,  such  litigation,  whether or not  determined in
favor of the  Company,  could result in  significant  expense to the Company and
divert the efforts of the Company's  technical  and  management  personnel  from
productive  tasks.  In the event of an adverse  ruling in such  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.

      DEPENDENCE ON CERTAIN SUPPLIERS.  Certain components used in the Company's
products are  currently  available  from only one  supplier.  In  addition,  the
Company relies on contract  manufacturers  to produce its printed  circuit board
assemblies.  Use  of  contract  manufacturers  can  expose  Premisys  to  supply
interruptions  due  to  production,   quality  or  financial   problems  of  its
contractors.  Shortages or delays in the delivery of the components  used in the
Company's  products  (which have  occurred  in the past) or  extended  delays in
deliveries  of printed  circuit board  assemblies  could result in delays in the
shipment of the Company's products and/or increase  component costs.  Failure of
the Company to order sufficient  quantities of any required component in advance
could prevent the Company from increasing  production of products in response to
customer  orders in excess of amounts  projected  by the  Company.  Although the
Company  typically  maintains  some reserve  inventory of components and printed
circuit board assemblies,  this inventory would not cover a significant delay in
the delivery of such items.

      YEAR 2000 RISKS. The Company has a formal Year 2000 Conformance Project in
place that focuses on three key  readiness  areas:  (1) internal  infrastructure
readiness,   addressing   internal   information   systems  and  non-information
technology systems;  (2) supplier readiness,  addressing the preparedness of our
supplier  base;  and (3) product  readiness,  addressing  the Company's  product
functionality,  which  includes  customer  support of the installed  base of the
Company's  product.  For each  readiness  area,  a task force is  systematically
performing a Company-wide risk assessment,  conducting  testing and remediation,
and  communicating  with employees,  suppliers,  customers and other third party
business  partners to raise  awareness of the Year 2000  problem.  Following are
overviews of each readiness area and the Company's progress thereon for becoming
ready for the Year 2000.

       Internal infrastructure readiness: An assessment of internal and computer
software and hardware has been  completed  with the assistance of a third party.
The  Company  has  migrated  to  an  upgraded  version  of  its  enterprise-wide
accounting and  manufacturing  system,  which is Year 2000 compliant.  For other
systems,  the Company has identified all  non-compliant  systems,  established a
project for prioritized  system  compliance,  and is in the process of executing
under such  compliance  project.  Other systems are scheduled to be compliant no
later than May 1999.  In addition to  applications  and  information  technology
hardware,  the Company is testing and developing  remediation plans for embedded
systems, facilities and other operations.

      Supplier  readiness:  This  program  is  focused  on  minimizing  the risk
associated with suppliers in two areas: (1) a supplier's  business capability to
continue  providing  products and services,  and (2)  compliance of a supplier's
products with Year 2000.  Suppliers have been  identified and contacted based on
their  criticality  to the Company.  The Company has received  responses  from a
significant  number of its preferred  suppliers.  Most of the respondents are in
the process of developing  remediation  plans.  Supplier issues that potentially
affect the Company's products are targeted to be resolved by July 1999.

      Product readiness: The Company has completed a comprehensive program which
focused on identifying  and resolving Year 2000 issues existing in the Company's
products.  The program  encompassed a number of key efforts  including  testing,
evaluation,  engineering  and  manufacturing  implementation.  In addition,  the
program  focused  on  customer   support  of  the  installed   base,   including
coordination  of retrofit  activity  and testing  existing  customer  electronic
transaction  capability.  Based on these efforts,  the Company believes that its
products are Year 2000 compliant.

      General and Risk Factors:  The Company's Year 2000 project is currently in
the  assessment  phase and,  with  respect to certain  information  systems  and
products,  in the  remediation  phase.  The Company  believes  that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and  infrastructure.  The Company is at the beginning stage of
assessment  for its operations and  infrastructure,  and cannot predict  whether
significant problems will be identified.  The Company has not yet determined the
extent of contingency planning that may be required.  Based on the status of the
assessment made and remediation plans developed to date, the Company is not in a
position  to state  the  total  cost of  remediation  of all Year  2000  issues,
however, the Company believes such costs will not exceed $500,000.  However, the
Company has not yet completed its  assessments,  developed  remediation  for all
problems,  developed any contingency plans, or completely  implemented or tested
any of its remediation  plans. As the Year 2000 project  continues,  the Company
may  discover  additional  Year  2000  problems,  may not be  able  to  develop,
implement,  or test remediation or contingency plans, or may find that the costs
of these activities exceed current  expectations.  In many cases, the Company is
relying on assurances from suppliers that new and upgraded  information  systems
and other products will be Year 2000  compliant.  The Company plans to test such
third-party  products,  but  cannot be sure that its tests will be  adequate  or
that,  if problems are  identified,  they will be addressed by the supplier in a
timely and  satisfactory  way. Because the Company uses a variety of information
systems   and  has   additional   systems   embedded  in  its   operations   and
infrastructure,  it cannot be sure that all of its systems will work together in
a Year 2000-compliant fashion.  Furthermore,  the Company cannot be sure that it
will not  suffer  business  interruptions,  either  because of its own Year 2000
problems or those of its  customers  or suppliers  whose Year 2000  problems may
make it difficult or  impossible  for them to fulfill their  commitments  to the
Company.  If the Company fails to satisfactory  resolve Year 2000 issues related
to its  products in a timely  manner,  it could be exposed to liability to third
parties.

      STOCK PRICE  FLUCTUATIONS.  All of the above factors are difficult for the
Company to  forecast,  and these or other  factors,  such as changes in earnings
estimates by securities  analysts,  can  materially  affect the Company's  stock
price for one quarter or a series of  quarters.  Further,  the stock  market has
experienced  extreme  price  and  volume  fluctuations  that  have  particularly
affected the market  prices of  securities  of many high  technology  companies.
These  fluctuations,   as  well  as  general  economic,   political  and  market
conditions,  may materially  adversely  affect the market price of the Company's
Common Stock.  There can be no assurance that the trading price of the Company's
Common Stock will remain at or near its current level.


ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk.

      The Company,  in the normal  course of  business,  is subject to the risks
associated  with foreign  currency  exchange  rates,  fluctuations in the market
value of its fixed income securities available-for-sale, and changes in interest
rates.  Please refer to Item 7A "Quantitative and Qualitative  Disclosures About
Market Risk" of the Company's  Form 10-K for the fiscal year ended June 26, 1998
for a more detailed discussion.

      There has been no significant  change in the Company's exposure to foreign
currency  fluctuations  during the quarter  ended  September 30, 1998 versus the
quarter ended June 30, 1998.

      The fair market value of the Company's fixed income  securities  portfolio
at September  30, 1998 was $90  million,  as compared to $89 million at June 30,
1998. In both comparison periods the corresponding  unrealized gain was included
as a component of  shareholders'  equity.  The average duration of the portfolio
increased from .99 years at June 30, 1998 to 1.26 years at September 30, 1998.

      The following table presents the hypothetical change in the aggregate fair
market value of the Company's fixed income securities portfolio at September 30,
1998 which  would  result if the  Federal  Funds Rate  changed as shown.  Market
changes  reflect  immediate  hypothetical  parallel shifts in the yield curve of
plus or minus 50 basis points (BPS), 100 BPS and 150 BPS.

                                  Decrease in Federal      Increase in Federal
                                      Funds Rate                Funds Rate
                              --------------------------------------------------
Change in Federal Funds Rate  (150 BPS) (100 BPS)(50 BPS) 50 BPS 100 BPS 150 BPS
(BPS)
--------------------------------------------------------------------------------
Change in Securities           $1,699    $1,122    $544   ($561)($1,113)($1,658)
Valuation ($000's)



<PAGE>




II.   OTHER INFORMATION

ITEM 2.  Changes in Securities

      On September 17, 1998, the Board of Directors adopted a stockholder rights
plan designed to protect the long-term value of the Company for its stockholders
during any future unsolicited  acquisition attempt. In connection with the plan,
the Board  declared a dividend of one preferred  share  purchase  right for each
share of the Company's common stock  outstanding on October 5, 1998 (the "Record
Date") and further  directed the issuance of one such right with respect to each
share of the Company's common stock that is issued after the Record Date, except
in certain circumstances. The rights will expire on September 17, 2008.

      The rights are initially  attached to the Company's  common stock and will
not trade  separately.  If a person or a group (an "Acquiring  Person") acquires
beneficial  ownership of 20% or more of the Company's common stock, or announces
an  intention  to make a  tender  offer  for the  Company's  common  stock,  the
consummation  of which would  result in a person or group  becoming an Acquiring
Person,  then the rights will be distributed (the "Distribution  Date") and will
thereafter trade separately from the common stock.

      After the Distribution  Date, each right may be exercised for 1/100th of a
share of a newly designated Series A Junior Participating  Preferred Stock at an
exercise price of $80. The preferred stock has been structured so that the value
of 1/100th of a share of such preferred stock will  approximate the value of one
share of common stock.

      In connection  with the adoption of the plan,  the Board of Directors also
amended two  provisions of the Company's  Bylaws.  Special  meetings of Premisys
shareholders  may now only be called by the  Chairman  of the  Board,  the Chief
Executive  Officer,  the  President or by a majority of the Board of  Directors.
Additionally,  vacancies on the Board of  Directors  may now be filled until the
next annual meeting of shareholders  only by majority vote of the Directors then
in office.

      The Company  filed a Form 8-K on September 23, 1998 to report the adoption
of the  stockholder  rights  plan  and the  amendments  to its  bylaws.  Further
information  regarding the Company's stockholder rights plan can be found in the
Company's  Form 8-A  filed  with  the  Securities  and  Exchange  Commission  on
September 23, 1998.

ITEM 5.  Other Information

      In October  1998,  Andrew  Aczel  resigned  as the  Company's  Senior Vice
President, Engineering.



<PAGE>



ITEM 6.  Exhibits and Reports on Form 8-K

A.   Exhibits

     Exhibit No.   Description of Exhibit
     10.50         OTC Issuer Stock Option Master Agreement with amendment dated
                   September 9, 1998
     27.01         Financial Data Schedule

B.   Reports on Form 8-K

     The Company  filed a report on Form 8-K on September  23, 1998.  The report
     included  information under Items 5 and 7 with respect to the adoption of a
     Stockholder Rights Plan and the amendment of the Company's Bylaws.





<PAGE>




                                   SIGNATURES

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



                                           PREMISYS COMMUNICATIONS, INC.


          November 9, 1998                        /S/ Robert W. Dilfer
--------------------------------------    -------------------------------------
                Date                                Robert W. Dilfer
                                             Vice President and Controller
                                           (Duly Authorized Officer and Chief
                                                  Accounting Officer)




<PAGE>





                                Index to Exhibits




Exhibit No.         Description of Exhibit

 10.50                OTC Issuer Stock Option Master  Agreement  with  amendment
                      dated September 9, 1998
 27.01                Financial Data Schedule