<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549



                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                   FOR THE SECOND QUARTER ENDED JUNE 30, 1997


                         COMMISSION FILE NUMBER 0-22202

                           PAIRGAIN TECHNOLOGIES, INC.

             (Exact name of registrant as specified in its charter)


                  DELAWARE                              33-0282809
        (State or other jurisdiction of      (IRS Employer Identification No.)
         incorporation of organization) 


              14402 FRANKLIN AVENUE, TUSTIN, CALIFORNIA 92780-7013
                    (Address of principal executive offices)

                                 (714) 832-9922
              (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
                               ---------     ---------



THERE WERE 68,080,915 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.0005
PER SHARE, OUTSTANDING ON JUNE 30, 1997.




<PAGE>   2



                           PAIRGAIN TECHNOLOGIES, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                               <C>
Part I.         Financial Information

        Item 1.      Financial Statements

                     Condensed Consolidated Balance Sheets
                       at June 30, 1997 and December 31, 1996                                           3

                     Condensed Consolidated Statements of Income
                       for the quarters and six months ended June 30, 1997 and 1996, restated           4

                     Condensed Consolidated Statements of Cash Flows
                       for the six months ended June 30, 1997 and 1996, restated                        5

                     Notes to Condensed Consolidated Financial Statements                               6

        Item 2.      Management's Discussion and Analysis
                       of Financial Condition and Results of Operations                                14

Part II.        Other Information

        Item 1.      Legal Proceedings                                                                 19

        Item 2.      Changes in Securities                                                             19

        Item 3.      Defaults upon Senior Securities                                                   19

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

        Item 5.      Other Information                                                                 20

        Item 6.      Exhibits and Reports on Form 8-K                                                  20

Signatures                                                                                             21

</TABLE>



                                       2


<PAGE>   3



                                 PART I: ITEM 1
                              FINANCIAL INFORMATION

                           PAIRGAIN TECHNOLOGIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

                                                        
<TABLE>
<CAPTION>

                                                                                   JUNE 30,             DECEMBER 31,
                                                                                     1997                   1996
                                                                                   --------             ------------
                                                                                  (UNAUDITED)
<S>                                                                                <C>                   <C>          
                                                       ASSETS
Current assets:
  Cash and cash equivalents                                                        $    90,854           $     48,416 
  Short-term investments (Note 4)                                                       64,197                 65,779 
  Accounts receivable                                                                   30,084                 23,888 
  Inventories (Note 5)                                                                  23,324                 26,149 
  Other current assets and deferred taxes                                               14,405                 13,857 
                                                                                   -----------            -----------   
TOTAL CURRENT ASSETS                                                                   222,864                178,089 
Property and equipment, net (Note 6)                                                    14,870                 10,390 
Note receivable and long-term investments (Note 7)                                       6,252                  6,252 
Other assets                                                                               295                    273 
                                                                                   ===========            ===========   
TOTAL ASSETS                                                                       $   244,281            $   195,004 
                                                                                   ===========            ===========   

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and other current liabilities                                   $    44,344            $    37,408 
  Bank line of credit (Note 8)                                                              --                     -- 
                                                                                   -----------            -----------   
TOTAL CURRENT LIABILITIES                                                               44,344                 37,408 

COMMITMENTS AND CONTINGENCIES

Stockholders' equity (Notes 1 and 9): 
  Preferred stock, $.001 par value:
    Authorized shares - 2,000,000
    Issued and outstanding shares - None                                                    --                     -- 
  Common stock, $.0005 par value:
    Authorized shares - 175,000,000
    Issued and outstanding shares - 68,080,915 and 66,278,293 at June 30,
      1997 and December 31, 1996, respectively                                              34                     33 
  Additional paid-in capital                                                           135,190                116,081 
  Deferred compensation                                                                   (199)                  (237)
  Unrealized gain on marketable securities                                                 170                     71 
  Retained earnings                                                                     64,742                 41,648 
                                                                                   -----------            -----------   
TOTAL STOCKHOLDERS' EQUITY                                                             199,937                157,596 
                                                                                   -----------            -----------   
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $   244,281            $   195,004 
                                                                                   ===========            ===========   

</TABLE>

            See notes to condensed consolidated financial statements.



                                       3

<PAGE>   4




                           PAIRGAIN TECHNOLOGIES, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                          THREE MONTHS ENDED                     SIX MONTHS ENDED
                                                               JUNE 30,                              JUNE 30,
                                                         1997              1996               1997               1996
                                                         ----              ----               ----               ----       
                                                                       (RESTATED)                            (RESTATED)
                                                                      (SEE NOTES 1                          (SEE NOTES 1
                                                                         AND 2)                                AND 2)

<S>                                                    <C>               <C>                <C>                <C>      
 REVENUES                                              $  66,369         $  47,241          $ 137,118          $  87,752
 Cost of revenues                                         33,583            24,574             69,363             46,046
                                                       ---------         ---------          ---------          ---------  

 Gross profit                                             32,786            22,667             67,755             41,706
                                                       ---------         ---------          ---------          ---------  

 Operating expenses:
    Research and development                               7,535             4,663             13,693              8,311
    Selling and marketing                                  5,941             4,363             10,741              8,087
    General and administrative                             2,469             2,472              4,902              4,807
    Merger expenses (Note 1)                                  --                --              2,642                 --
                                                       ---------         ---------          ---------          ---------   

 Total operating expenses                                 15,945            11,498             31,978             21,205
                                                       ---------         ---------          ---------          --------- 

 INCOME FROM OPERATIONS                                   16,841            11,169             35,777             20,501

 Interest and other income, net                            1,586               894              2,835              1,659
                                                       ---------         ---------          ---------          ---------  

 Income before income taxes                               18,427            12,063             38,612             22,160

 Provision for income taxes (Note 1)                       6,707             4,739             15,518              8,614
                                                       ---------         ---------          ---------          ---------  

 NET INCOME                                            $  11,720         $   7,324          $  23,094          $  13,546
                                                       =========         =========          =========          =========  

 Per share data (Note 1):
 Earnings per share                                    $    0.16         $    0.10          $    0.31          $    0.19
                                                       =========         =========          =========          =========  

 Weighted average number of common and common
  equivalent shares                                       74,736            73,552             75,138             72,662
                                                       =========         =========          =========          =========

</TABLE>

            See notes to condensed consolidated financial statements.


                                       4

<PAGE>   5


                           PAIRGAIN TECHNOLOGIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                       SIX MONTHS ENDED JUNE 30,
                                                                                      1997                   1996
                                                                                      ----                   ----          
                                                                                                         (RESTATED)
                                                                                                     (SEE NOTES 1 AND 2)
<S>                                                                        <C>                     <C>
Cash flows from operating activities:
Net income                                                                       $     23,094           $     13,546 
Adjustments to reconcile net income to net cash provided by operating
  activities:
     Depreciation and amortization                                                      3,350                  2,021 
     Merger expenses paid by former Avidia shareholders                                 1,184                     -- 
Change in operating assets and liabilities:
     Accounts receivable                                                               (6,196)                (4,328)
     Inventories                                                                        2,825                 (7,330)
     Other current assets                                                                (615)                   795 
     Other assets                                                                         (22)                   (19)
     Accounts payable and other current liabilities                                    19,826                 24,494 
                                                                                 ------------            -----------   
NET CASH PROVIDED BY OPERATING ACTIVITIES                                              43,446                 29,179 
                                                                                 ------------            -----------   

Cash flows from investing activities:
Net proceeds from short-term investments                                                1,161                  1,877 
Purchases of  long-term investments                                                        --                 (3,273)
Purchases of property and equipment                                                    (7,203)                (3,381)
                                                                                 ------------            -----------   
NET CASH USED IN INVESTING ACTIVITIES                                                  (6,042)                (4,777)
                                                                                 ------------            -----------  

Cash flows from financing activities:
Proceeds from issuance of common stock                                                  5,034                  3,551 
                                                                                 ------------            -----------  
NET CASH PROVIDED BY FINANCING ACTIVITIES                                               5,034                  3,551 
                                                                                 ------------            -----------   

Increase in cash and  cash equivalents                                                 42,438                 27,953 
Cash and cash equivalents at beginning of period                                       48,416                 24,576 
                                                                                 ------------           ------------   
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $     90,854           $     52,529 
                                                                                 ============           ============   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax paid                                                                  $      1,387            $        -- 
                                                                                 ============            ===========   

</TABLE>


            See notes to condensed consolidated financial statements.


                                       5

<PAGE>   6




                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.  THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

         PairGain Technologies, Inc., ("PairGain" or the "Company") designs,
manufactures, markets and supports products that allow telecommunications
carriers and private network owners to more efficiently provide high-speed
digital services to end users over the large existing infrastructure of
unconditioned copper wires. These services enable high-speed data transmission
for applications such as T1/E1, high-speed Internet access, telecommuting, wide
area networking and video conferencing.

         On February 27, 1997, the Company acquired Avidia Systems, Inc.
("Avidia"). (See Note 2) Avidia is engaged in the business of developing,
manufacturing and marketing xDSL aggregation products and network switching
products based on Asynchronous Transfer Mode ("ATM") technology.

         The accompanying condensed consolidated financial statements as of
December 31, 1996 and for the three and six months ended June 30, 1996 have been
restated to reflect the business combination between PairGain and Avidia
accounted for on a pooling-of-interests basis and are based on each company's
respective historical financial statements and notes thereto.

INTERIM PERIOD ACCOUNTING POLICIES

         In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position as of June 30,
1997, and consolidated results of operations for the three and six months ended
June 30, 1997, and June 30, 1996, and cash flows for the six months ended June
30, 1997, and June 30, 1996. Results of operations for the three and six months
ended June 30, 1997, are not necessarily indicative of results to be expected
for the full year ending December 31, 1997.

         Although the Company believes that the disclosures in the accompanying
financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"), and these financial
statements should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Form 10-K/A for the year ended
December 31, 1996 and the audited supplemental consolidated financial statements
included in Form S-3, as amended, filed with the SEC on May 1, 1997.



                                       6

<PAGE>   7



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

PRINCIPLES OF CONSOLIDATION

         The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries: PairGain Services Group, Inc.,
which provides support services for the Company's customers worldwide; PairGain
Canada Inc., a sales company focused on the Canadian market; PairGain
International Sales Corporation, a foreign sales corporation ("FSC") and Avidia.
All significant intercompany transactions have been eliminated in consolidation.

TRANSLATION OF FOREIGN CURRENCIES

         Foreign subsidiary financial statements are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Translations". The functional currency of the
Company's Canadian subsidiary is the U.S. dollar, therefore, translation gains
and losses are included in results of operations. Transaction and translation
gains and losses were not significant in 1997 or 1996.

USE OF ESTIMATES

         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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform with the
current year presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Pursuant to SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", the Company is required to estimate the fair value of all
financial instruments included on its balance sheet at June 30, 1997 and
December 31, 1996. The Company considers the carrying value of such amounts in
the financial statements to approximate their fair value due to the relatively
short period of time between origination of the instruments and their expected
realization or the overall immateriality of the amounts.

CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments with maturities at
the date of purchase of less than three months to be cash equivalents.




                                        7


<PAGE>   8



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

SHORT-TERM INVESTMENTS

         Effective January 1, 1994, the Company adopted the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The
adoption did not have a significant impact on the Company's consolidated
financial statements. Management determines the appropriate classification of
such securities at the time of purchase and reevaluates such classification as
of each balance sheet date. Based on its intent, the Company's investments are
classified as available-for-sale and are carried at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. The investments are adjusted for amortization of premiums and discounts
to maturity and such amortization is included in interest income. Realized gains
and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the
consolidated statements of income.

INVENTORIES

         Inventories are stated at lower of cost (determined on a first-in,
first-out basis) or market. The Company maintains allowances for estimated
obsolete and excess inventories based upon projected sales levels.

PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method. The estimated
useful life of equipment is three years. Leasehold improvements are amortized
over the lesser of five years or the life of the lease.

REVENUE RECOGNITION

         Revenue from product sales is recognized at the time of shipment.
Provision is made currently for estimated product returns. Revenue for
technology and licensing fees and royalty income is recognized when earned.

RESEARCH AND DEVELOPMENT COSTS

         Research and development costs are expensed as incurred.

MERGER EXPENSES

         All expenses related to the Company's business combination with Avidia
were charged against the operations of the Company in the quarter ended March
31, 1997.



                                       8


<PAGE>   9



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

INCOME TAXES

         Income taxes are provided at the rate expected to be in effect for the
entire year.

PER SHARE INFORMATION

         Earnings per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. Common share equivalents result from outstanding options and warrants
to purchase common stock and are calculated using the treasury stock method.

RECENTLY ISSUED ACCOUNTING STANDARDS

         The Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share", ("SFAS No. 128"), in March 1997, effective for financial statements
issued after December 15, 1997. The statement provides simplified standards for
the computation and presentation of earnings per share ("EPS"), making EPS
comparable to international standards. SFAS No. 128 requires dual presentation
of "Basic" and "Diluted" EPS, by entities with complex capital structures,
replacing "Primary" and "Fully diluted" EPS under Accounting Principles Board
("APB") Opinion No. 15.

         Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from common stock equivalents, similar to fully diluted
EPS, but uses only the average stock price during the period as part of the
computation.

         The Company will adopt the provisions of SFAS No. 128 within the 1997
year-end consolidated financial statements. Basic and diluted EPS, as computed
under SFAS No. 128, are shown in the table below:

<TABLE>
<CAPTION>
                                  Three Months Ended            Six Months Ended
                                     June 30, 1997               June 30, 1997
                              ---------------------------- ---------------------------

<S>                                   <C>                         <C>  
Basic EPS                                $0.17                       $0.34
Diluted EPS                              $0.16                       $0.31

</TABLE>


STOCK SPLITS

         All share and per share amounts have been adjusted to reflect the
two-for-one stock splits, effective June 18, 1996 and December 18, 1996, for all
periods presented. (See Note 9)




                                       9


<PAGE>   10



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

STATEMENT OF CASH FLOWS

         The Company recorded noncash tax benefits from exercises of common
stock options aggregating approximately $12.9 million and $6.2 million during
the six months ended June 30, 1997 and 1996, respectively. In the six months
ended June 30, 1997, the Company recorded a contribution to capital of $1.2
million related to the merger expenses paid by former Avidia shareholders.

ACCOUNTING FOR STOCK-BASED COMPENSATION

         The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees".

2.  ACQUISITION OF AVIDIA

         On February 27, 1997, the Company acquired Avidia pursuant to an
Agreement and Plan of Reorganization (the "Merger Agreement") among Avidia and
others, with Avidia surviving as a wholly-owned subsidiary of the Company (the
"Acquisition") in a transaction accounted for as a pooling-of-interests.
Pursuant to the Merger Agreement, the Company issued approximately 2,235,637
shares of PairGain Common Stock to Avidia stockholders in exchange for all
outstanding Avidia Common Stock and Preferred Stock and vested warrants to
purchase Avidia Common Stock. In addition, outstanding options and unvested
warrants to purchase Avidia Common Stock were exchanged for options and warrants
to purchase approximately 232,521 and 131,168 shares, respectively of the
Company's Common Stock. The Company's historical consolidated financial
statements have been restated to reflect the financial position and results of
operations of Avidia.

3.  CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND PRODUCTS

         The Company markets its products principally to telephone companies in
the United States and Canada. Credit is extended based on an evaluation of the
customer's financial condition and collateral is not required. Credit losses are
provided for in the financial statements and consistently have been minimal.

         A decision by a significant customer to substantially decrease or delay
purchases from the Company or the Company's inability to collect receivables
from these customers could have a material adverse effect on the Company's
financial condition and results of operations.

         Revenues from HiGain products represented approximately 72% and 82% of
the Company's total revenues for the six months ended June 30, 1997 and 1996,
respectively. A decline in demand for HiGain products, whether as a result of
competition, deployment of fiber cable, technological change or otherwise, could
have a material adverse effect on the Company's operating results.




                                       10

<PAGE>   11

                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

4.  SHORT-TERM INVESTMENTS

         Short-term investments as of June 30, 1997 and December 31, 1996 are
summarized as follows:

<TABLE>
<CAPTION>

                                                                   GROSS UNREALIZED    GROSS UNREALIZED
                                                     COST               GAINS               LOSSES            FAIR VALUE
                                                  ----------          ---------            --------           ----------    
                                                                            (IN THOUSANDS)
<S>                                                <C>                <C>                  <C>                <C>      
 JUNE 30, 1997
      Municipal bonds                              $  57,942          $      82            $     --           $  58,024
      Other short-term investments                     5,979                194                  --               6,173
                                                   ---------          ---------            --------           ---------    
                                                   $  63,921          $     276            $     --           $  64,197
                                                   =========          =========            ========           =========     

 DECEMBER 31, 1996
      Municipal bonds                              $  59,686          $      41           $      --           $  59,727
      Other short-term investments                     5,982                 70                  --               6,052
                                                   ---------          ---------            --------           ---------    
                                                   $  65,668          $     111           $      --           $  65,779
                                                   =========          =========           =========           =========    
</TABLE>


         There were no realized gains or losses during the six months ended June
30, 1997 and 1996. Unrealized gains on short-term investments, net of tax,
included as a separate component of stockholders' equity at June 30, 1997 and
December 31, 1996 were $170,000 and $71,000, respectively.

5.  INVENTORIES

         Inventories consist of the following:
<TABLE>
<CAPTION>

                                              JUNE 30,            DECEMBER 31,
                                                1997                  1996
                                         -------------------    ------------------
                                                      (IN THOUSANDS)

<S>                                           <C>                   <C>       
          Raw materials                       $    6,111            $    5,801
          Work in process                          6,856                 9,745
          Finished goods                          10,357                10,603
                                              ----------            ----------    

                                              $   23,324            $   26,149
                                              ==========            ==========     
</TABLE>

6.  PROPERTY AND EQUIPMENT

         Property and equipment consist of:



                                       11

<PAGE>   12



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                                           JUNE 30,            DECEMBER 31,
                                                                             1997                  1996
                                                                           --------            ------------  
                                                                                   (IN THOUSANDS)

<S>                                                                        <C>                   <C>       
          Machinery and equipment                                          $  22,408             $  16,991 
          Leasehold improvements                                               3,306                 1,520 
                                                                           ---------             ---------     
                                                                              25,714                18,511 
          Less accumulated depreciation and amortization                     (10,844)               (8,121)
                                                                          ==========             =========     
                                                                          $   14,870             $  10,390 
                                                                          ==========             =========     
</TABLE>


7.  NOTE RECEIVABLE AND LONG-TERM INVESTMENTS

         In July 1995, the Company entered into certain agreements with
Sourcecom Corporation of Westlake, California ("Sourcecom"). Sourcecom designs,
manufactures and markets remote networking devices which enable the integration
of Ethernet local area networks with wide area networking over copper wire. The
agreements provide for the incorporation of Sourcecom's networking technology
into the Company's current and future transmission products. Under the terms of
the agreements, the Company loaned Sourcecom $2.7 million and has rights to
purchase a minority ownership position. The note bears interest at the prime
rate less one percent (7.5% at June 30, 1997), payable monthly, with the
principal balance due July 1999.

         In April 1996, the Company purchased approximately 150,000 shares of
Sourcecom's Series A Preferred Stock for an aggregate of $273,000. In September
1996, the Company purchased approximately 321,000 shares of Sourcecom's Common
Stock for an aggregate of $271,000. Shares purchased have been adjusted to
reflect Sourcecom's two-for-one stock split, effective September 24, 1996.

         In June 1996, the Company made a minority investment in E/O Networks of
Hayward, California ("E/O"). E/O supplies low-density fiber optic access
equipment to public carriers both domestically and internationally. The Company
purchased approximately 545,000 shares of E/O's Series D Preferred Stock for an
aggregate of $3.0 million.

         These investments are accounted for using the cost method.

8.  BANK LINE OF CREDIT

         The Company maintains an unsecured line of credit with a bank. The line
allows maximum borrowings of $5,000,000, including the issuance of letters of
credit and foreign exchange contracts. The line bears interest at the prime rate
(8.5% at June 30, 1997). At June 30, 1997, the Company had no outstanding
borrowings under this line of credit. The debt agreement specifies certain
financial and other covenants. The Company was in compliance with the financial
and other covenants at June 30, 1997. The agreement expires May 1, 1998.


                                       12

<PAGE>   13



                           PAIRGAIN TECHNOLOGIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (continued)
                                   (Unaudited)

9. STOCKHOLDERS' EQUITY

STOCK SPLITS

         In June 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation (the "Amendment") to increase the
authorized Common Stock of the Company from 30 million shares, par value $.001,
to 60 million shares, par value $.0005, and to effect a two-for-one stock split
(the "Stock Split").

         In December 1996, the Company's stockholders approved an amendment to
the Company's Amended and Restated Certificate of Incorporation (the "Second
Amendment") to increase the authorized Common Stock of the Company from 60
million shares, par value $.0005, to 175 million shares, par value $.0005. The
Second Amendment was proposed to facilitate a two-for-one stock split (the
"Second Stock Split") which was effected in the form of a 100% stock dividend.

         All references in the accompanying consolidated financial statements
related to Common Stock, Common Stock options, Common Stock warrants and
earnings per share have been adjusted to reflect both stock splits.

STOCK OFFERINGS

         In a series of private placements during 1996, Avidia sold common and
preferred shares which converted in the Merger into 2,235,697 of the Company's
shares. The net proceeds raised were approximately $3,015,000.

WARRANTS

         In 1996, Avidia granted warrants to certain stockholders which
converted in the Merger into the right to purchase approximately 131,168 shares
of the Company's Common Stock at exercise prices of $3.77. Such warrants were
exercised in February 1997.

         In 1995, the Company granted warrants for the purchase of 40,000 shares
of its Common Stock at exercise prices of $5.00 to $6.25 per share in exchange
for services. Such warrants were outstanding at June 30, 1997 and expire
beginning in May 1998 through September 1999.



                                       13


<PAGE>   14
                                 PART I: ITEM 2

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

                           PAIRGAIN TECHNOLOGIES, INC.


     Except for the historical information contained herein, the matters
     discussed in this Form 10-Q are forward-looking statements which involve
     risk and uncertainties, including but not limited to economic, competitive,
     governmental and technological factors affecting the Company's operations,
     markets, products, services and prices and other factors discussed in the
     Company's filings with the Securities and Exchange Commission.



RESULTS OF OPERATIONS (quarter and six months ended June 30, 1997, compared to
     quarter and six months ended June 30, 1996)


REVENUES

         Revenues for the quarter ended June 30, 1997, were $66.4 million, an
increase of $19.1 million or 40% compared with the 1996 quarter. The increase in
revenue was primarily due to a 34% increase in the unit sales volume of the
Company's HiGain product, and to a smaller extent, increases in the unit sales
volume of the Company's PG-2 and Campus products, 41% and 107%, respectively.
These increases were partially offset by declines in the average sales prices of
all three product lines. Another contributing factor to the increase in revenues
was the successful introduction of the ETSI product line, which enabled
international sales to increase by 223% over the prior year quarter. Sales
outside of North America represented 12% of total revenues for the second
quarter of 1997, compared to 5% in the 1996 quarter.

         Revenues for the six months ended June 30, 1997, increased $49.4
million or 56%, to $137.1 million, compared to the six month period in the prior
year. The increase in revenues was primarily due to a 47% increase in the unit
sales volume of the Company's HiGain product. A less significant portion of the
increase was attributed to 63% and 85% increases in unit sales volume of the
Company's PG-2 and Campus products, respectively. International sales for the
first six months of 1997 increased 154% over the prior year period, and
represented 9% of total revenues, compared to 5% for the first half of 1996.

GROSS PROFIT

         Gross profit increased $10.1 million or 45% and $26.0 million or 62%
for the quarter and six months ended June 30, 1997, respectively, as compared
with the prior year periods. This growth in gross profit was principally
attributed to the increase in the Company's revenues.

         As a percentage of revenues, gross profit was 49% for the quarter and
six month period ended June 30, 1997 compared to 48% for the quarter and six
month period in 1996. Gross profit has 


                                       14


<PAGE>   15

remained consistently strong despite reductions in the average selling prices of
the Company's products primarily because of the Company's emphasis on cost
reduction through engineering design changes, reduced prices for components,
increased manufacturing efficiencies and increases in production volume.

         The Company expects that increased competition will continue to place
downward pressure on the average selling prices of its existing products.
Declining average selling prices may adversely affect gross product margins on
the Company's existing products if the Company is unable to fully offset such
price reductions by reductions in the Company's per unit cost. The Company's
ability to mitigate future declines in its gross product margin will depend in
part upon its ability to introduce and sell new products with higher gross
product margins and further reduce its per unit costs.

OPERATING EXPENSES

         Operating expenses increased $4.4 million, or 39%, for the three months
ended June 30, 1997 as compared with the same period in the prior year. For the
six month period, operating expenses, excluding merger expenses, increased $8.1
million, or 38%. Costs relating to the addition of personnel represented
approximately 60% and 63% of these increases. The majority of the increase in
operating expenses was in the area of research and development in order to
support the development of new products and cost reduction programs for the
Company's existing products. As a percentage of revenues, operating expenses,
excluding merger expenses, were 24% and 21%, respectively, for the three and six
month periods in 1997 compared to 24% for the 1996 periods.

         Research and development expense increased $2.9 million or 62% and $5.4
million or 65%, respectively, for the quarter and six months ended June 30,
1997, as compared with the same periods in the prior year. These increases were
primarily due to the addition of personnel including those specific to
technology development and costs for developmental tools, supplies, equipment
and consulting services. Research and development expense as a percentage of
revenues was 11% and 10% in the 1997 quarter and six month period, respectively,
compared to 10% and 9% in 1996.

         Selling and marketing expense increased $1.6 million or 36% and $2.7
million or 33%, respectively, for the quarter and six months ended June 30,
1997, as compared wit the same periods in the prior year. Additional sales and
marketing support personnel, advertising, trade show and travel costs primarily
accounted for the increase in expenditures. Selling and marketing expense as a
percentage of revenues was 9% and 8% in the 1997 quarter and six month period,
respectively, compared to 9% in each of the corresponding 1996 periods.

         General and administrative expense was virtually unchanged in the
quarter ended June 30, 1997, as compared with the prior year quarter. Expenses
for the six month period in 1997 increased $95,000 or 2% compared to the first
half of 1996. Increases in personnel associated costs and expenditures for
computer equipment, software and consulting fees related to upgrading the
Company's information system capabilities were offset by decreases in legal fees
and provisions for bad debts. As a percentage of revenues, general and
administrative expense dropped to 4% in the 1997 periods compared to 5% in 1996.



                                       15




<PAGE>   16

MERGER EXPENSES

         Expenses related to the acquisition of Avidia aggregating approximately
$2.6 million were charged against the operations of the Company in the quarter
ended March 31, 1997. These expenses consisted of $1.8 million in investment
banker fees, $588,000 in legal fees, $120,000 in accounting fees and $121,000 in
other expenses.

INCOME FROM OPERATIONS

         As a result of the above, income from operations for the quarter ended
June 30, 1997 increased 51% to $16.8 million, compared to $11.2 million for the
1996 quarter. Income from operations for the six months ended June 30, 1997
increased 75% to $35.8 million, compared to $20.5 million for the first half of
1996. As a percentage of revenues, income from operations was 25% and 26%,
respectively, for the quarter and six month period in 1997, compared to 24% for
the 1996 quarter and 23% for the first six months of 1996.

         Excluding merger expenses, income from operations for the first six
months of 1997 increased 87% over the prior year period, and was 28% of
revenues.

INTEREST AND OTHER INCOME, NET

         Net interest income increased to $1.6 million and $2.8 million for the
three and six months ended June 30, 1997, respectively, from $894,000 and $1.7
million in the corresponding 1996 periods. These increases resulted primarily
from higher average cash levels available for investment. There was no interest
expense during the first half of 1997 or 1996.

PROVISION FOR INCOME TAXES

         The provision for income taxes for the three and six months ended June
30, 1997, was $6.7 million and $15.5 million, respectively, compared to $4.7
million and $8.6 million for the three and six months ended June 30, 1996. The
Company changed its annual effective tax rate, before merger expenses, from 39%
to 38%, during the second quarter of 1997 due to higher tax benefits from the
Company's foreign sales corporation as a result of increased international
revenues, and tax exempt interest representing a higher proportion of income
before tax. The Company's effective tax rate, including merger expenses, for the
first six months in 1997 was 40% compared to 39% in the 1996 period due to the
non-deductibility of merger expenses. The Company expects to maintain a tax rate
of 38%, before merger expenses, for the remainder of 1997.

NET INCOME AND EARNINGS PER SHARE

         Net income for the three months ended June 30, 1997 was $11.7 million
compared to $7.3 million in the corresponding 1996 quarter. Net income for the
first six months of 1997 was $23.1 million, compared to $13.5 million in the
first half of 1996. Excluding merger expenses, net income for the first half of
1997 was $25.7 million, a 90% increase over the prior year period.


                                       16


<PAGE>   17

         Earnings per share for the three and six months ended June 30, 1997
were $0.16 and $0.31, respectively, compared to $0.10 and $0.19 for the quarter
and first half of 1996. Excluding merger expenses, earnings per share for the
first half of 1997 were $0.34.

         The weighted average number of common and common equivalent shares
outstanding was 74.7 million and 73.6 million for the three months ended June
30, 1997 and 1996, respectively. The weighted average number of common and
common equivalent shares outstanding was 75.1 million and 72.7 million for the
first half of 1997 and 1996, respectively. The increase in common and common
equivalent shares was primarily attributable to an increase in actual shares
outstanding as a result of the exercise of employee stock options.



                                       17


<PAGE>   18



LIQUIDITY AND CAPITAL RESOURCES

         As of June 30, 1997, the Company had $155.1 million in cash, cash
equivalents and short-term investments and $178.5 million in working capital.
These figures represent an increase of $40.9 million in cash, cash equivalents
and short-term investments and $37.8 million in working capital over the year
ended December 31, 1996. These increases were primarily attributable to cash
generated from operations of $43.4 million and $5.0 million from the exercise of
stock options, offset by capital expenditures of approximately $7.2 million. The
increase in the Company's accounts receivable to $30.1 million at June 30, 1997,
compared to $23.9 million at December 31, 1996, was primarily due to a larger
proportion of total revenue for the second quarter of 1997 being shipped towards
the end of the period. Accounts receivable days outstanding were 41 at June 30,
1997 compared to 35 at December 31, 1996. Gross inventories increased $1.4
million to $42.2 million at June 30, 1997, compared to $40.8 million at December
31, 1996. Reserves for inventory obsolescence, excess quantities, cost
reductions and test and evaluation inventories increased to $18.9 million at
June 30, 1997 compared to $14.6 million at December 1996. The primary reasons
for the increase in these reserves were: (a) an increase in excess and obsolete
inventories; (b) valuation reductions due to product cost reduction programs;
and (c) an increase in test and evaluation inventories of new products on trial
at customers. Annualized net inventory turns increased from 3.1 times for the
first half of 1996 to 5.9 times in the same period in 1997.

         Capital expenditures during the six month period ended June 30, 1997
were $7.2 million, consisting primarily of purchases of computer equipment, test
equipment, initial payments for a manufacturing and material handling system and
improvements to the Company's new engineering and production facility adjacent
to its Tustin facility. The material conveyor system is expected to cost $1.5
million by completion, which is anticipated in the fourth quarter of 1997. The
Company anticipates spending a total of $2.5 million in improvements to its new
facility where it plans to consolidate its personnel and warehouse and
distribution presently located in other Tustin and Santa Ana locations and to
allow for further expansion requirements. Capital expenditures in the first half
of 1996 aggregated approximately $3.3 million, primarily related to expenditures
for computer equipment, machinery and test equipment.

         Accounts payable and other current liabilities increased to $44.3
million at June 30, 1997 from $37.4 million at December 31, 1996. The primary
reason for the increase was an increase in income taxes payable, accounts
payable, accrued compensation and other accrued expenses.

         The Company believes that its current cash, cash equivalents and
short-term investment balances and internally generated cash flow will be
sufficient to meet its working capital and capital expenditure requirements
through 1997. To the extent that the Company's existing resources, together with
future earnings, are insufficient to fund the Company's future activities, the
Company may need to raise additional funds through public or private financings.




                                       18


<PAGE>   19

                           PART II. OTHER INFORMATION

                           PAIRGAIN TECHNOLOGIES, INC.


Item 1.  Legal Proceedings
         None.

Item 2.  Changes in Securities
         None.

Item 3.  Defaults upon Senior Securities
         None.

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

         At the Annual Meeting of Stockholders held on June 11, 1997, the
stockholders:

             o  elected one director to serve until the 2000 Annual Meeting;
             o  approved the proposal to amend the 1993 Stock Option/Stock
                Issuance Plan authorizing the reservation of an additional
                3,000,000 shares of the Company's Common Stock for issuance
                under the Plan; and
             o  approved the selection of Deloitte & Touche LLP as the Company's
                independent auditor for the fiscal year ending December 1997.

         Results of the voting are shown below:

         TO ELECT THE FOLLOWING DIRECTOR TO SERVE FOR A TERM OF THREE YEARS:

<TABLE>
<CAPTION>

                                Votes For             Votes Withheld
                          -----------------------  ----------------------

<S>                      <C>                       <C>    
 Howard  S. Flagg               57,035,613                961,187

</TABLE>

         TO APPROVE THE AMENDMENT TO THE 1993 STOCK OPTION/STOCK ISSUANCE PLAN:

<TABLE>
<CAPTION>
            For                    Against                 Abstain
    -----------------------  ----------------------  -----------------------

<S>                           <C>                     <C>    
          29,439,420              28,358,669                198,711
</TABLE>

         TO APPROVE THE SELECTION OF DELOITTE & TOUCHE LLP AS THE COMPANY'S
         INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 1997:

<TABLE>
<CAPTION>

            For                    Against                 Abstain
    -----------------------  ----------------------- -----------------------

<S>                         <C>                       <C>    
        57,820,808                 35,283                 140,709
</TABLE>



                                       19


<PAGE>   20




Item 5.  Other Information
         None.

Item 6. Exhibits and Reports on Form 8-K

               Exhibits:

                    11.1  Calculation of Per Share Earnings

                    27.1  Financial Data Schedule

                    27.2  Restated Financial Data Schedule

         (B) Reports on Form 8-K

              A Form 8-K/A was filed on April 25, 1997 to submit audited
              financial statements of Avidia Systems, Inc. for the year ended
              December 31, 1996 and pro forma combined financial information.




                                       20


<PAGE>   21





                                   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
under signed thereunto duly authorized.





                                          PairGain Technologies, Inc.
                                      -----------------------------------------
                                                  (Registrant)





Date:          August 11, 1997             /s/ Charles W. McBrayer
               ---------------       ------------------------------------------
                                               Charles W. McBrayer
                                     Vice President, Finance and Administration
                                              Chief Financial Officer
                                             (Duly Authorized Officer)





Date:          August 11, 1997                /s/ Robert R. Price
               ---------------        -----------------------------------------
                                                  Robert R. Price
                                               Corporate Controller
                                            (Chief Accounting Officer)



                                       21