<PAGE>
 
                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-K/A

           (X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                      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:  000-23774

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

           Delaware                                     94-3092033
------------------------------------               --------------------
    (State or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                 Identification No.)
     

     1701 Harbor Bay Parkway, Alameda, CA                   94502
------------------------------------------------------------------------------
   (Address of principal executive offices)               (Zip code)

      Registrant's telephone number, including area code:  (510) 769-6001

       Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
                                   Par Value


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    
                                    ---        ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of December 31, 1997 the approximate aggregate market value of voting stock
held by non-affiliates of the Registrant was $4,320,434,003 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market on that date).  Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates.  The
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of February 28, 1998, 191,906,397 shares of the Registrant's Common Stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual stockholders meeting to be held
on May 21, 1998 are incorporated by reference into Part III of this Report on
Form 10-K.
<PAGE>
                                    PART IV
     
     The undersigned registrant hereby amends the following item of its Annual 
Report on Form 10-K for the fiscal year ended December 31, 1997, as set forth in
the pages attached hereto.
     
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Report:
     1.   Consolidated Financial Statements

     The following consolidated financial statements of Ascend Communications,
Inc. are filed as part of this Report:

<TABLE> 
<CAPTION> 
                                                                                               Page
                                                                                               ----
<S>                                                                                            <C> 
Report of Independent Auditors                                                                 F-1
Consolidated Balance Sheets at December 31, 1997 and 1996                                      F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995                                                               F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996
 and 1995                                                                                      F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995     F-5
Notes to Consolidated Financial Statements                                                     F-6
</TABLE>
     2.  Consolidated Financial Statement Schedule
    
     The following consolidated financial statement schedule of Ascend
Communications, Inc. is filed as part of this Report and should be read in
conjunction with the consolidated financial statements of Ascend Communications,
Inc.

<TABLE>
<CAPTION>
Schedule                                                                                       Page
--------                                                                                       ----
<S>                                                                                            <C>
II Valuation and Qualifying Accounts                                                           S-1
</TABLE> 
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.


                                       2
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Ascend Communications, Inc.

We have audited the accompanying consolidated balance sheets of Ascend
Communications, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statment schedule based on
our audits. We did not audit the financial statements of Cascade Communications
Corp. ("Cascade") which statements reflect total assets constituting 29% in 1996
and total revenues constituting 38% in 1996 and 47% in 1995 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Cascade, is based solely on the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ascend Communications,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

                                                               ERNST & YOUNG LLP

 
Walnut Creek, California
January 22, 1998

                                      
<PAGE>
 
                        REPORT OF INDEPENDENT ACCOUNTANTS
                                        


To the Board of Directors and Stockholders of
Cascade Communications Corp.:


We have audited the accompanying consolidated balance sheet of Cascade 
Communications Corp. as of December 31, 1996 and the related consolidated 
statements of income, cash flows and stockholders' equity (deficit) (none of 
which are presented herein) for the years ended December 31, 1996 and 1995.  
These financial statements are the responsibility of the Company's management.  
Our responsibility is to express an opinion on these financial statements based 
on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the consolidated financial position of Cascade 
Communications Corp. as of December 31, 1996 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.


                                          COOPERS & LYBRAND L.L.P.



Boston, Massachusetts
January 22, 1997,
except for Note M as to which
the date is March 30, 1997


<PAGE>
 
                        REPORT OF INDEPENDENT ACCOUNTANTS
                                        


To the Board of Directors and Stockholders of
Cascade Communications Corp.:


Our report on the consolidated financial statements of Cascade Communications 
Corp. (none of which are presented herein) is included in this Annual Report on 
Form 10-K/A of Ascend Communications, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule included in the 1996 Annual Report on Form 10-K of Cascade
Communications Corp. (not separately presented herein).

In our opinion, the financial statement schedule referred to above, when 
considered in relation to the basic financial statements taken as a whole, 
presents fairly, in all material respects, the information required to be 
included therein.


                                       COOPERS & LYBRAND L.L.P.



Boston, Massachusetts
January 22, 1997


<PAGE>

                          ASCEND COMMUNICATIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                    (in thousands, except per share data)
<TABLE> 
<CAPTION> 

                                                                                     December 31,
                                                                            ------------------------------
                                                                                 1997               1996
                                                                            ------------        ----------
<S>                                                                       <C>                 <C> 
ASSETS
Current assets:
   Cash and cash equivalents .......................................        $   240,817         $   312,369
   Short-term investments ..........................................            234,610             173,101
   Accounts receivable, less allowance for uncollectible accounts of
      $11,300 and $2,632 at December 31, 1997 and 1996, respectively            234,183             185,094
   Inventories .....................................................             99,637              68,544
   Deferred income taxes ...........................................             85,057              42,862
   Other current assets ............................................             20,283              25,371
                                                                            -----------         -----------
         Total current assets ......................................            914,587             807,341

Investments ........................................................            101,212              35,771
Furniture, fixtures and equipment, net .............................            114,351              73,046
Other assets .......................................................              7,744               5,969
                                                                            -----------         -----------
         Total assets ..............................................        $ 1,137,894         $   922,127
                                                                            ===========         ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ................................................        $    54,414         $    60,823
   Accrued compensation and related liabilities ....................             25,315              29,426
   Accrued liabilities .............................................             88,909              64,645
                                                                            -----------         -----------
         Total current liabilities .................................            168,638             154,894

Commitments and contingencies (Notes 7 and 9)

Stockholders' equity:
   Preferred stock, $.001 par value:
         Authorized shares - 2,000
         No shares issued or outstanding ...........................               --                  --
   Common stock, $.001 par value:
         Authorized shares - 400,000
         191,216 shares issued and outstanding
         (182,525 - 1996) ..........................................                191                 182
   Additional paid-in capital ......................................            878,749             534,063
   Retained earnings ...............................................             90,610             233,536
   Notes receivable from stockholders ..............................               (294)               (548)
                                                                            -----------         -----------
         Total stockholders' equity ................................            969,256             767,233
                                                                            -----------         -----------
         Total liabilities and stockholders' equity ................        $ 1,137,894         $   922,127
                                                                            ===========         =========== 
</TABLE> 
 See accompanying notes


                                      F-2
<PAGE>
 
                         ASCEND COMMUNICATIONS, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per share data)

<TABLE> 
<CAPTION> 
                                                       Year Ended December 31,
                                             --------------------------------------------------
                                                  1997               1996               1995
                                             -----------         -----------        -----------
<S>                                          <C>                <C>                 <C> 
Net sales ...........................        $ 1,167,352         $   890,273        $   287,438
Cost of sales .......................            413,570             311,745            101,859
                                             -----------         -----------        -----------
   Gross profit .....................            753,782             578,528            185,579
Operating expenses:
   Research and development .........            155,996              93,669             36,083
   Sales and marketing ..............            249,129             156,286             56,034
   General and administrative .......             35,267              29,855             16,084
   Purchased research and development            231,100                --                 --
   Costs of mergers .................            150,271              13,900               --
                                             -----------         -----------        -----------
      Total operating expenses ......            821,763             293,710            108,201
                                             -----------         -----------        -----------
Operating income (loss) .............            (67,981)            284,818             77,378
Interest income .....................             23,029              17,186              8,360
                                             -----------         -----------        -----------
Income (loss) before income taxes ...            (44,952)            302,004             85,738
Provision for income taxes ..........             79,422             118,114             32,793
                                             -----------         -----------        -----------

Net income (loss) ...................        $  (124,374)        $   183,890        $    52,945
                                             ===========         ===========        ===========

Net income (loss) per share - diluted        $     (0.66)        $      0.94        $      0.30
                                             ===========         ===========        ===========
Number of shares used in per share
   calculation - diluted ............            189,129             196,246            175,216
                                             ===========         ===========        ===========

Net income (loss) per share - basic .        $     (0.66)        $      1.03        $      0.33
                                             ===========         ===========        ===========
Number of shares used in per share
   calculation - basic ..............            189,129             178,630            162,181
                                             ===========         ===========        ===========
</TABLE> 
See accompanying notes

                                      F-3
<PAGE>
                           ASCEND COMMUNICATIONS, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                       Retained        Notes
                                                      Common Stock      Additional     Earnings      Receivable
                                                    -----------------    Paid-in     (Accumulated      From
                                                    Shares     Amount     Capital       Deficit)      Stockholders       Total
                                                    ------     ------   ----------   ------------    -------------       -----
<S>                                               <C>         <C>      <C>           <C>            <C>                <C>
Balance at December                                                                                                 
   31, 1994 .................................       154,532     $155      $105,601     $  (1,808)         $(794)       $ 103,154 
Tax benefit related to                                                                                                           
   stock options ............................            --       --        13,946            --             --           13,946 
Payments from                                                                                                                    
   stockholders .............................            --       --            --            --            246              246 
Issuance of warrants to                                                                                                          
   purchase shares of                                                                                                            
   common stock, NetStar ....................            --       --           134            --             --              134 
Issuance of common stock                                                                                                         
   under employee stock option                                                                                                   
   and stock purchase plans .................         3,329        3         4,407            --             --            4,410 
Issuance of common stock in                                                                                                      
   initial public offering, net                                                                                                  
   of issuance costs, NetStar ...............         1,347        1        24,715            --             --           24,716 
Issuance of common stock in                                                                                                       
   public offering, net of                                                                                                      
   issuance costs ...........................        12,650       13       211,730            --             --          211,743 
Net income ..................................            --       --            --        52,945             --           52,945 
                                                    -------     ----      --------     ---------          -----        ---------
Balance at December                                                                                                              
   31, 1995 .................................       171,858      172       360,533        51,137           (548)         411,294 
Tax benefit related to                                                                                                           
   stock options ............................            --       --       104,823            --             --          104,823 
Effect of poolings ..........................         3,129        3        12,122        (1,491)            --           10,634 
Exercise of warrants, NetStar ...............           399       --         7,904            --             --            7,904 
Issuance of common stock                                                                                                         
   under employee stock option                                                                                                   
   and stock purchase plans .................         6,695        7        42,373            --             --           42,380 
Issuance of common stock ....................           444       --         6,308            --             --            6,308
Net income ..................................            --       --            --       183,890             --          183,890 
                                                    -------     ----      --------     ---------          -----        ---------
Balance at December                                                                                                              
   31, 1996 .................................       182,525      182       534,063       233,536           (548)         767,233 
Tax benefit related to                                                                                                           
   stock options ............................            --       --        59,294            --             --           59,294 
Effect of poolings ..........................         1,350        1        22,510       (18,552)            --            3,959 
Purchase of Sahara ..........................         2,386        3       213,097            --             --          213,100 
Issuance of common stock                                                                                                         
   under employee stock option                                                                                                   
   and stock purchase plans .................         4,955        5        49,785            --             --           49,790
Payments from stockholders ..................            --       --            --            --            254              254 
Net loss ....................................            --       --            --      (124,374)            --         (124,374)
                                                    -------     ----      --------     ---------          -----        ---------
Balance at December                                                                                                              
   31, 1997 .................................       191,216     $191      $878,749     $  90,610          $(294)       $ 969,256 
                                                    =======     ====      ========     =========          =====        =========
</TABLE> 
See accompanying notes

                                      F-4
<PAGE>
                            ASCEND COMMUNICATIONS, INC.

                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (in thousands)
<TABLE> 
<CAPTION> 
                                                                                                      Year Ended December 31,
                                                                                              -------------------------------------
                                                                                                   1997          1996          1995
                                                                                              ---------     ----------    ---------
<S>                                                                                           <C>           <C>            <C> 
Operating activities:
Net income (loss) ........................................................................    $(124,374)    $ 183,890     $  52,945
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
     Depreciation ........................................................................       45,733        22,463         8,586
     Costs of mergers ....................................................................      150,271        13,900            --
     Purchased research and development ..................................................      231,100            --            --
     Deferred income taxes ...............................................................      (29,778)      (27,529)       (9,440)
     Changes in operating assets and liabilities:
        Accounts receivable ..............................................................      (58,418)     (133,946)      (35,043)
        Inventories ......................................................................      (42,797)      (37,331)      (20,175)
        Other current assets .............................................................        6,337       (20,869)       (1,773)
        Other assets .....................................................................       (2,905)       (2,366)       (4,346)
        Accounts payable and accrued liabilities .........................................     (105,951)       76,901        34,576
        Accrued compensation and related liabilities .....................................       (4,111)        1,839         8,362
                                                                                              ---------     ---------     ---------
           Net cash provided by operating activities .....................................       65,107        76,952        33,692
                                                                                              ---------     ---------     ---------
Investing activities:
     Purchases of investments ............................................................     (483,122)     (272,631)     (197,148)
     Maturities and sales of investments .................................................      356,172       211,237        93,339
     Purchases of furniture, fixtures and equipment, net .................................     (105,343)      (72,121)      (23,815)
     Effect of business combinations .....................................................      (13,704)        9,169            --
                                                                                              ---------      ---------    ----------
        Net cash used in investing activities ............................................     (245,997)     (124,346)     (127,624)
                                                                                              ---------      --------     ---------
Financing activities:
     Proceeds from issuance of common stock, net .........................................       49,790        54,524       241,003
     Tax benefit related to options ......................................................       59,294       104,823        13,946
     Proceeds from notes receivable from stockholders ....................................          254            --           246
     Proceeds from (repayment of) notes payable ..........................................           --        (2,108)        3,729
                                                                                              ---------     ---------     ---------
        Net cash provided by financing activities ........................................      109,338       157,239       258,924
                                                                                              ---------     ---------     ---------
Net increase (decrease) in cash and cash equivalents .....................................      (71,552)      109,845       164,992
Cash and cash equivalents, beginning of year .............................................      312,369       202,524        37,532
                                                                                              ---------     ---------     ---------
Cash and cash equivalents, end of year ...................................................    $ 240,817     $ 312,369     $ 202,524
Supplemental disclosure of cash flow information:                                             =========     =========     =========
     Income tax payments .................................................................    $  45,395     $  54,270     $  17,980
                                                                                              =========     =========     =========
Supplemental schedule of noncash investing and financing
  activities information:
     Exercise of warrants in exchange for retirement of
        notes payable ....................................................................    $      --     $   2,068     $      --
                                                                                              =========     =========     =========
</TABLE> 
See accompanying notes

                                      F-5
                                      
<PAGE>
                            ASCEND COMMUNICATIONS, INC.

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

1.   Accounting Policies

    The Company - Ascend Communications, Inc. ("Ascend" of the "Company")
develops, manufactures and sells wide area networking solutions for
telecommunications carriers, Internet service providers and corporate customers
worldwide that enable them to build: (i) Internet access systems consisting of
point-of-presence termination ("POP") equipment for Internet service providers
("ISPs") and remote site Internet access equipment for Internet subscribers;
(ii) telecommunications carriers and ISP backbone networks utilizing high speed
Frame Relay, Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP")
switches for application; (iii) extensions and enhancements to corporate
backbone networks that facilitate access to these networks by remote offices,
telecommuters and mobile computer users; and (iv) videoconferencing and
multimedia access facilities. The Company's products support existing digital
and analog networks.

    Basis of Presentation - The consolidated financial statements include the
accounts of Ascend and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.

    As more fully described in Note 8, the Company merged with Cascade
Communications Corp. ("Cascade") in June 1997. The Company merged with NetStar,
Inc. ("Netstar") in August 1996. These mergers have been accounted for as
poolings of interests, and the historical consolidated financial statements of
the Company for all periods prior to these mergers have been restated to include
the financial positions, results of operations and cash flows of Cascade and
NetStar.

    Cash and Cash Equivalents - Cash and cash equivalents consist of demand
deposits and commercial paper in highly liquid short-term instruments with
original maturities of three months or less from the date of purchase and are
stated at cost, which approximates market. Substantially all of the Company's
cash and cash equivalents are maintained by five major financial institutions.

    Short-Term Investments and Investments - The Company places its investments
with high credit, quality financial institutions. Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Available-for-sale
securities are carried at acquired costs which approximate fair value, with
unrealized gains and losses, net of tax, recorded in stockholders' equity until
disposition. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale debt and equity securities are included in
interest and other income. At December 31, 1997 and 1996, the Company's
investments are all classified as available-for-sale and consisted primarily of
obligations of the U.S. government ($22,386,000 - 1997 and $32,327,000 - 1996),
states and political subdivisions ($277,251,000 - 1997 and $156,948,000 - 1996),
U.S. corporate securities ($36,185,000 - 1997 and $14,494,000 - 1996) and
foreign debt securities ($0 - 1997 and $5,103,000 - 1996). As of December 31,
1997, $77,612,000 of the Company's investments are due between one and five
years and $23,600,000 of these securities are due between five and ten years.
Unrealized gains and losses for 1997, 1996 and 1995 were not material.

    Accounts Receivable - The Company sells and distributes a substantial
percentage of its products to Internet service providers, value-added resellers
and distributors, and local and long-distance telecommunications carriers,
throughout North America, Europe and Asia and the Pacific Basin. Accounts
receivable are principally from these customers. The Company conducts ongoing
credit evaluations of its customers and maintains an allowance for doubtful
accounts. The Company does not require collateral and has historically not
experienced significant losses on trade receivables.

    Inventories - Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. The Company provides for obsolete
inventories in the period when obsolescence is determined to have occurred.

                                      F-6
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

1.   Accounting Policies (continued)

      Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
recorded at cost. Depreciation is provided using the straight-line method over
estimated useful lives of three to four years.

      Major Customers and Revenues by Geographic Area - One customer accounted
for 14% of net sales in 1997. No customer accounted for more than 10% of net
sales in 1996 or 1995. Net sales were derived from customers based in the
following geographic areas (in thousands):

<TABLE> 
<CAPTION> 
                                                 Year Ended December 31,
                                    ---------------------------------------------
                                       1997               1996             1995
                                    -------------     ------------    -----------
<S>                                 <C>               <C>             <C> 
North America ..................      $  805,012      $  576,996      $  221,982
Europe .........................         157,960         129,126          31,531
Asia and Pacific Basin .........         189,675         170,747          32,499
Latin and South America ........          14,705          13,404           1,426
                                    -------------     ------------    -----------
                                      $1,167,352      $  890,273      $  287,438
                                    =============     ============    ===========
</TABLE> 
    Revenue Recognition - The Company recognizes revenue from product sales upon
shipment provided that no significant customer and post-contract support
obligations remain and collection of the related receivable is deemed probable.
The Company defers recognition of revenue on initial shipments of certain new
products until such products have been tested in the marketplace. The Company
accounts for all costs relating to customer and post- contract support
obligations, which are not significant in amount, at the time of shipment by
accruing such costs. In addition, the Company provides for potential product
returns and estimated warranty costs in the period of the sale.

    Key Suppliers - The Company is dependent on single or limited source
suppliers for certain components used in its products. The Company has generally
been able to obtain adequate supplies of these components. In addition, the
Company believes that there are alternative suppliers for the components used in
its products. However, an extended interruption in the supply of the components
currently obtained from single or limited source suppliers could adversely
affect the Company's business and results of operations.

    Research and Development - Costs to develop the Company's products are
expensed as incurred in accordance with Statement of Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, which
establishes accounting and reporting standards for research and development.

                                      F-7
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

1.   Accounting Policies (continued)

      Stock-Based Compensation. In accordance with Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the
Company applies Accounting Principles Bulletin ("APB") Opinion No. 25 and
related Interpretations in accounting for its stock option and purchase plans
and, accordingly, has not recognized compensation cost in connection with such
plans. Note 5 to the consolidated financial statements contains a summary of the
pro forma effects to reported net income (loss) and net income (loss) per share
for 1997, 1996 and 1995 as if the Company had elected to recognize compensation
cost based on the fair value of the options granted at grant date as prescribed
by FAS 123.

      Net Income (Loss) Per Share - In 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings per Share ("FAS 128"). FAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options and warrants. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Net income (loss) per share - diluted, as reported, includes
the effect of dilutive employee stock options and warrants (using the treasury
stock method). For 1997, the effect of options and warrants has been excluded as
their effect would be anti-dilutive. All net income (loss) per share amounts
presented have been restated to conform to FAS128 requirements, where
appropriate.

      Recent Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive Income ("FAS
130"), and Statement No. 131, Disclosure about Segments of an Enterprise and
Related Information ("FAS 131"). The Company is required to adopt these
statements in fiscal year 1998. FAS 130 establishes new standards for reporting
and displaying comprehensive income and its components. FAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. Adoption of these
statements is expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.

      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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

      Reclassifications - Certain 1995 and 1996 balances have been reclassified
to conform to the 1997 presentation.

2.   Balance Sheet Details (in thousands)

     Inventories consist of:
<TABLE> 
<CAPTION> 
                                                         December 31,
                                                     ---------------------
                                                      1997          1996
                                                     -------       -------
<S>                                                  <C>           <C> 
Finished goods ...............................       $18,053       $10,778
Products in process ..........................        15,579         7,544
Raw materials and supplies ...................        66,005        50,222
                                                     -------       -------
                                                     $99,637       $68,544
                                                     =======       =======
</TABLE> 

                                      F-8
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2.   Balance Sheet Details (continued)

     Furniture, Fixtures and Equipment consist of:

<TABLE> 
<CAPTION> 
                                                               December 31,
                                                         ----------------------
                                                           1997          1996
                                                         --------      --------
<S>                                                      <C>           <C> 
Computer equipment ....................................  $ 87,640      $ 61,001
Laboratory equipment ..................................    47,779        22,284
Furniture and fixtures ................................    38,009        22,524
                                                         --------      --------
                                                          173,428       105,809
Less accumulated depreciation .........................   (59,077)      (32,763)
                                                         --------      --------
                                                         $114,351      $ 73,046
                                                         ========      ========
</TABLE> 

    Accrued Liabilities consist of:

<TABLE> 
<CAPTION> 
                                                              December 31,
                                                          ---------------------
                                                           1997          1996
                                                          -------       -------
<S>                                                       <C>           <C> 
Income taxes payable ..................................   $ 9,432       $ 6,298
Other accrued liabilities .............................    57,421        35,940
Customer deposits .....................................    22,056        22,407
                                                          -------       -------
                                                          $88,909       $64,645
                                                          =======       =======
</TABLE> 

3.   Notes Payable

      In June 1995, NetStar issued $4,200,000 of convertible notes payable
("Bridge Notes") in a private placement. In connection with this financing,
NetStar also issued warrants to the holders of the Bridge Notes to purchase
297,343 shares of common stock. During 1996, $2,068,000 of principal outstanding
under the Bridge Notes was exchanged for 130,713 shares of the Company's common
stock. The remaining $2,132,000 was repaid during 1996.

4.   Income Taxes

      The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, under which the
liability method is used to calculate deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and income tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The realization of deferred tax assets
is based on historical tax positions and expectations about future taxable
income.

                                      F-9
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

4.   Income Taxes (continued)

    The following is a geographical breakdown of consolidated income (loss)
before income taxes (including intercompany revenue and expenses) by income
tax jurisdiction (in thousands):

<TABLE> 
<CAPTION> 
                                        Year Ended December 31,
                                   --------------------------------
                                      1997       1996        1995
                                   ---------   --------    --------
<S>                                <C>         <C>         <C> 
United States ..............       $(50,392)   $299,355    $ 85,293
Foreign ....................          5,440       2,649         445
                                   --------    --------    --------
Total ......................       $(44,952)   $302,004    $ 85,738
                                   ========    ========    ========
</TABLE> 
    Significant components of the provision for income taxes attributable to
operations are as follows (in thousands):

<TABLE> 
<CAPTION> 
                                        Year Ended December 31,
                                   -----------------------------------
                                     1997         1996           1995
                                   --------     --------       -------
<S>                                <C>          <C>             <C> 
Current:                                     
     Federal ................      $ 89,899     $121,975       $34,523
     State ..................        17,338       22,728         7,532
     Foreign ................         1,963          940           178
                                   --------     --------       -------
Total current ...............       109,200      145,643        42,233
                                                               
Deferred:                                                      
     Federal ................       (25,381)     (23,985)       (8,266)
     State ..................        (4,397)      (3,544)       (1,174)
                                   --------     --------       -------
Total deferred ..............       (29,778)     (27,529)       (9,440)
                                   --------     --------       -------
Total provision .............      $ 79,422     $118,114       $32,793
                                   ========     ========       =======
</TABLE> 


                                     F-10
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

4.   Income Taxes (continued)

    A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows (in thousands):

<TABLE> 
<CAPTION> 
                                                       Year Ended December 31,
                                                --------------------------------------
                                                   1997         1996           1995
                                                ---------     ---------      ---------
<S>                                             <C>           <C>            <C>  
US federal taxes (benefit) at statutory rate    $ (15,733)    $ 105,701      $  30,009
State taxes, net of federal benefit ........       12,941        16,545          4,476
Tax-exempt interest ........................       (4,552)       (3,168)        (1,097)
Foreign Sales Corporation ..................       (3,465)       (5,304)          (714)
Costs of mergers ...........................       15,682         2,625             --
Purchased research and development .........       74,585            --             --
Other ......................................          (36)        1,715            119
                                                ---------     ---------      ---------
Total tax provision ........................    $  79,422     $ 118,114      $  32,793
                                                =========     =========      =========
Effective tax rate .........................           --          39.1%          38.2%
                                                =========     =========      =========
</TABLE> 

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                               December 31,
                                                          ---------------------
                                                            1997         1996
                                                          --------     --------
<S>                                                       <C>          <C> 
Deferred tax assets:
   Reserve for uncollectible accounts ...............     $ 11,147     $  2,548
   Reserve for warranties and inventories ...........       33,992       14,534
   Purchased research and development ...............        7,691          673
   Customer deposits ................................        8,736       12,238
   Net operating loss and tax credit carryovers
      of acquired companies .........................       12,799        8,272
   Accrued expenses .................................        6,934        2,331
   Depreciation .....................................          711          359
   Other ............................................        3,047        2,672
                                                          --------     --------
Total deferred tax assets ...........................       85,057       43,627
   Valuation allowance ..............................         --           (765)
                                                          --------     --------
Total net deferred tax assets .......................     $ 85,057     $ 42,862
                                                          ========     ========
</TABLE> 

The valuation allowance decreased by $765,000 in 1997.

                                     F-11
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5.   Stockholders' Equity

      Public Offering - In August 1995, the Company completed a public offering
of its common stock consisting of 12,650,000 shares at $17.625 per share, with
proceeds, net of issuance costs, of approximately $211,743,000 (issuance costs
were approximately $11,213,000).

      Stock Splits - In May, October and December of 1995, the Company's Board
of Directors approved two-for-one stock splits, payable in the form of a stock
dividend to all stockholders of record. All shares and per share data in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect these stock splits.

      Preferred Stock - The Company's Board of Directors has the authority to
issue these shares in one or more series and to fix the rights, preferences,
privileges and restrictions of ownership. At December 31, 1997 and 1996, there
were no outstanding shares of preferred stock.

      Notes Receivable - Notes receivable from stockholders resulted from the
purchase of common stock from the Company pursuant to the exercise of stock
options. Such notes are due on demand, bear interest at 5.4% and are secured by
certain common shares.

      1994 Employee Stock Purchase Plan - In March 1994, the Board of Directors
approved an Employee Stock Purchase Plan under which eligible employees may
purchase common stock at a price equal to 85% of the lower of the fair market
value of the common stock at the beginning or end of each offering period.
Participation in the offering is limited to 10% of an employee's compensation
(not to exceed amounts allowed by the Internal Revenue Code), may be terminated
at any time by the employee and automatically ends on termination of employment
with the Company. A total of 2,800,000 shares of common stock have been reserved
for issuance under this plan and the first offering commenced on the effective
date of the Company's initial public offering of shares of its common stock and
continued through January 31, 1995. Subsequent six-month offering periods
commenced on each February 1 and August 1 thereafter. During 1997, 1996 and
1995, 96,242, 86,870 and 252,120 shares of common stock were issued under this
plan, respectively.

      1989 Stock Option Plan - The Company has a Stock Option Plan under which a
total of 45,000,000 shares of common stock have been reserved for issuance to
employees, officers, directors and consultants of the Company. Options granted
to date are immediately exercisable and unvested shares are subject to
repurchase by the Company. Options and unvested shares typically vest ratably
over four years from the date of grant. In the event option holders cease to be
employed by the Company, all unvested options are forfeited and all vested
options may be exercised within a 30-day period after termination; the Company
also has the right to repurchase any unvested (but issued) shares if the holder
is no longer employed by the Company. As of December 31, 1997, options to
purchase approximately 3,660,658 shares of common stock were available for grant
under this plan.

      Stock options are granted at not less than the fair market value of common
stock on the date of grant. All options expire no later than ten years from the
date of grant, except options granted to 10% stockholders, which have a maximum
term of five years. The exercise price of stock options granted to a stockholder
possessing 10% or more of the total combined voting power of all classes of
stock may not be less than 110% of the fair market value of common stock on the
date of grant. As of December 31, 1997, no options had been granted to 10%
stockholders.

                                     F-12
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5.  Stockholders' Equity (continued)

    In October and November 1997, the Board of Directors approved stock option
repricing programs pursuant to which all employees of the Company (excluding
certain executive officers) could elect to exchange or amend their then
outstanding employee stock options for new employee stock options having
exercise prices of $34.94 per share and $24.44 per share, respectively (equal to
the then fair market values), with excercisability generally prohibited until
January 19, 1998 and February 27, 1998, respectively. A total 13,962,994 and
15,513,687 options with exercise prices ranging from $35.13 to $113.04 per
share and $24.75 to $104.46 per share, respectively, were exchanged or amended
under these programs.

    1994 Outside Directors Stock Option Plan - In March 1994, the Board of
Directors approved an Outside Directors Stock Option Plan under which directors
of the Company who are not officers or employees of the Company may receive
nonstatutory options to purchase shares of common stock of the Company. A total
of 2,000,000 shares of common stock have been reserved for issuance under this
plan. As of December 31, 1997, options to purchase 416,000 shares were available
for grant under this plan.

    1996 Restricted Stock Plan - In October 1996, the Board of Directors
approved a Restricted Stock Plan under which employees and consultants of the
Company who are not officers or directors of the Company may receive shares of
common stock of the Company. A total of 200,000 shares of common stock have been
reserved for issuance under this plan. As of December 31, 1997, 60,000 shares
of common stock were available for grant under this plan. The Company recorded
$434,000 of compensation during 1997 relating to this plan.

    The Company has adopted FAS 123, which was issued in October 1995. In
accordance with the provisions of FAS 123, the Company applies APB Opinion 25
and related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by FAS 123, net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated in the table
below (in thousands except per share amounts):

<TABLE> 
<CAPTION> 
                                                             Year ended December 31,
                                                       ---------------------------------
                                                          1997         1996        1995
                                                       ---------     --------    -------
<S>                                                    <C>           <C>         <C> 
Net income (loss) - as reported ...................    $(124,374)    $183,890    $52,945
Net income (loss) - pro forma .....................    $(275,758)    $118,136    $41,445
                                                                                       
Net income (loss) per share (diluted) - as reported    $   (0.66)    $   0.94    $  0.30
Net income (loss) per share (diluted) - pro forma .    $   (1.46)    $   0.60    $  0.24
                                                                                        
Net income (loss) per share (basic) - as reported .    $   (0.66)    $   1.03    $  0.33
Net income (loss) per share (basic) - pro forma ...    $   (1.46)    $   0.66    $  0.26
</TABLE> 

    The effect on net income (loss) and net income (loss) per share is not
expected to be indicative of the effects in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following assumptions:

<TABLE> 
<CAPTION> 
                                                             Year ended December 31,
                                                       ---------------------------------
                                                          1997         1996        1995
                                                       ---------     --------    -------
<S>                                                    <C>           <C>         <C> 
Expected volatility .............                      0.657         0.610       0.610
Risk-free interest rate .........                      6.24%         6.20%       6.05%
Expected life of options in years                      3.5           3.5         3.5  
Expected dividend yield .........                      0.00%         0.00%       0.00% 
</TABLE> 

                                     F-13
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5.  Stockholders' Equity (continued)

    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in these subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options. The following table summarizes
activity under the Company's Stock Option Plans from December 31, 1994 through
December 31, 1997 (all repricing activity is reflected as cancellations and
subsequent grants):

<TABLE> 
<CAPTION> 
                                                                     Weighted
                                                                     Average
                                                          Number of  Exercise
                                                           Options     Price
                                                        -----------  --------
<S>                                                     <C>           <C> 
Balance at December 31, 1994 .........................   13,491,994   $ 1.52
   Granted ...........................................   15,452,002    18.19
   Exercised .........................................   (2,906,739)    0.98
   Cancelled .........................................     (845,872)    5.99
                                                        -----------
Balance at December 31, 1995 .........................   25,191,385    11.66
   Granted ...........................................   10,353,380    58.52
   Exercised .........................................   (6,528,853)    5.71
   Cancelled .........................................     (456,636)   30.85
                                                        -----------
Balance at December 31, 1996 .........................   28,559,276    29.76
   Granted ...........................................   44,654,323    33.33
   Exercised .........................................   (4,775,087)    8.80
   Cancelled .........................................  (35,994,523)   42.53
                                                        -----------
Balance at December 31, 1997 .........................   32,443,989   $23.60
                                                        ===========
                                                                      
Outstanding options exercisable at December 31, 1997 .   28,607,600   $23.47
                                                        ===========
Options available for grant at December 31, 1997 .....    4,136,658
                                                        ===========
</TABLE> 

  The weighted average fair value of options granted during 1997, 1996 and 1995
is $33.42, $29.06 and $9.34 per share, respectively.

                                     F-14
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5.   Stockholders' Equity (continued)

The following table summarizes information concerning currently outstanding and
exercisable options:

<TABLE> 
<CAPTION> 
                                               Options Outstanding                   Options Exercisable
                                      ------------------------------------       ---------------------------
                                                     Weighted
                                                     Average     Weighted                          Weighted
                                                    Remaining     Average                          Average
                                        Number     Contractual    Exercise            Number      Exercise
        Exercise Prices               Outstanding     Life         Price           Exercisable      Price
--------------------------------     ------------  -----------   ---------       --------------   ---------
<S>         <C>   <C>                <C>             <C>         <C>             <C>              <C>  
$     0.01   --   $    5.81            4,683,766     5.61          $ 2.56            4,004,780    $  2.76
      7.07   --       18.81            4,580,008     6.97           13.16            3,737,772      13.05
     19.00   --       23.63            2,107,076     9.29           22.87            1,941,397      22.97
     23.69   --       24.44           15,541,785     8.88           24.44           14,254,876      24.44
     24.50   --       61.88            4,860,079     8.91           45.04            4,204,500      44.52
     62.32   --       89.46              671,275     8.53           69.30              464,275      67.55
                                      ----------                                    ----------
                                      32,443,989                                    28,607,600
                                      ==========                                    ==========
</TABLE> 

       Reserved for Future Issuance - As of December 31, 1997, the Company has
reserved the following shares of its common stock for future issuance:

<TABLE> 
<S>                                                                                 <C> 
Stock Option Plans..........................................................        36,580,647
Employee Stock Purchase Plan................................................         2,364,768
                                                                                    ----------
Total shares reserved.......................................................        38,945,415
                                                                                    ==========
</TABLE> 

6.   Retirement Plan

    In July 1993, the Company established a profit sharing plan, which has been
qualified under Section 401(k) of the Internal Revenue Code, covering
substantially all employees who meet certain minimum eligibility requirements.
Company contributions to the plan were $2,479,000 in 1997 (no contributions were
made in 1996 or 1995). Eligible employees can contribute amounts to the plan via
payroll withholdings, subject to certain limitations.

                                      F-15
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7.  Commitments

    Leases - The Company leases office and warehouse space under noncancelable
operating leases. Rent expense on these operating leases was approximately
$9,165,000, $6,449,000 and $2,351,000 for the years ended December 31, 1997,
1996 and 1995, respectively.

    Future minimum payments under noncancelable operating leases with initial
terms of one year or more consist of the following at December 31, 1997 (in
thousands):

<TABLE>
<CAPTION>
                                            Operating
                                             Leases
                                             -------

<S>                                          <C>
1998..................................       $ 9,359
1999..................................         7,732
2000..................................         6,829
2001..................................         6,199
2002..................................         3,354
2003 and beyond.......................        15,215
                                             -------
Total minimum lease payments..........       $48,688
                                             =======
</TABLE>

    In March 1996, the Company entered into an agreement to lease 13 acres of
land located in Alameda, California. Certain buildings currently being used for
the Company's headquarters have been constructed on the land. The lessor has
funded approximately $24.9 million for the land and construction of the
buildings. The lease has an initial term of five years and an option to renew
for two years, subject to the lessor's consent. The rent obligation for the
lease commenced in December 1996. At any time during the term of the lease, the
Company may purchase the land and buildings. If the Company does not exercise
its purchase option at the end of the lease or if the Company does not maintain
certain financial and other covenants, the Company has guaranteed a residual
value relating to the land and buildings of approximately $22.4 million.

    Line of Credit - The Company has a bank line of credit to borrow up to
$25,000,000 which expires in June 1999. Interest is computed at the bank's prime
rate or 0.5% over LIBOR, at the option of the Company. The line of credit
requires the Company to maintain certain financial ratios, minimum net worth and
profitability on a quarterly basis. There were no borrowings under the line of
credit agreement during 1997.

                                     F-16
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

8.   Business Combinations

     On June 30, 1997, the Company acquired Cascade, a developer and
manufacturer of wide area network switches, in a transaction that was accounted
for as a pooling of interests. The Company issued approximately 66.3 million
shares of its common stock to Cascade stockholders in exchange for all
outstanding Cascade shares. Outstanding options to purchase Cascade common stock
were converted to options to purchase approximately 8.5 million shares of Ascend
common stock. The historical consolidated financial results of Ascend for prior
periods have been restated to include the financial position and results of
operations of Cascade. The following table shows the historical results of
Ascend and Cascade for the periods prior to the consummation of the merger of
the two entities:

<TABLE>
<CAPTION>
                         Three Months
                            Ended
                           March 31,          Year Ended December 31,
                           ---------         ------------------------
Revenue:                     1997              1996            1995
                           ---------         --------        --------

<S>                        <C>               <C>             <C>
Ascend..................   $ 202,412         $549,297        $152,604
Cascade.................      90,328          340,976         134,834
                           ---------         --------        --------
  Total.................   $ 292,740         $890,273        $287,438
                           =========         ========        ========
---------------------------------------------------------------------

Net Income (loss):

Ascend..................   $  35,093         $113,111        $ 27,535
Cascade.................    (198,334)          70,779          25,410
                           ---------         --------        --------
  Total.................   $(163,241)        $183,890        $ 52,945
                           =========         ========        ========
</TABLE>

       In February 1997, the Company acquired all of the outstanding stock of
InterCon Systems Corporation, a developer of remote access client software
products for both corporate and ISP markets, in a transaction that was accounted
for as a purchase. The purchase price consisted of a cash payment of $12.0
million, the assumption of approximately $9.0 million of liabilities and
transaction costs of approximately $600,000. The total purchase price of $21.6
million was allocated to the net assets acquired based upon their estimated fair
market value. The estimated fair value of tangible net assets acquired was
$600,000. In addition, $18.0 million of the purchase price was allocated to
purchased research and development that had not reached technological
feasibility and that had no alternative future use, and $3.0 million was
allocated to purchased software.

     On April 1, 1997, the Company acquired Whitetree, Inc. ("Whitetree"), a
developer and manufacturer of high speed ATM switching products, in a
transaction that was accounted for as a pooling of interests. The Company issued
approximately 1.3 million shares of its common stock to Whitetree shareholders
in exchange for all outstanding Whitetree shares. In addition, the Company
assumed all outstanding Whitetree stock options to purchase approximately 99,000
shares of the Company's stock. The results of operations of Whitetree, which
have not been material in relation to those of the Company, are included in the
consolidated results of operations for periods subsequent to the acquisition.
The Company's historical consolidated financial statements prior to the
combination have not been restated to reflect the financial results of Whitetree
as these results were not material to the Company.

                                     F-17
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

8.   Business Combinations (continued)

     On January 28, 1997, Cascade completed its acquisition of Sahara Networks,
Inc. ("Sahara"), a privately held developer of scaleable high-speed broadband
access products, in a transaction that was accounted for as a purchase. Cascade
issued approximately 3.4 million shares of Cascade common stock (or 2.4 million
equivalent shares of the Company's common stock after exchange ratio) in
exchange for all the outstanding shares of Sahara. In addition, Cascade assumed
all outstanding Sahara stock options to purchase approximately 400,000 shares of
Cascade common stock. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the purchase price of approximately $219.0
million was allocated to the net assets acquired based upon their estimated fair
market value. The estimated fair value of the tangible net assets acquired was
approximately $6.0 million. In addition, approximately $213.0 million of the
purchase price was allocated to in-process research and development that had not
reached technological feasibility and that had no alternative future use.

     In August 1996, the Company acquired NetStar, a developer and manufacturer
of high performance, high speed IP network routers, in a transaction that was
accounted for as a pooling of interests. The Company issued approximately 3.9
million shares of its common stock to NetStar shareholders in exchange for all
outstanding NetStar shares. The Company`s historical consolidated financial
statements for prior periods have been restated to reflect the financial
position and results of operations of NetStar.

9.   Litigation

     The Company and various of its current and former officers and directors
are parties to a number of related lawsuits which purport to be class actions
filed on behalf of all persons who purchased or acquired the Company's stock
(excluding the defendants and parties related to them) for the period November
5, 1996 to September 30, 1997. The lawsuits, which are substantially identical,
allege that the defendants violated the federal securities laws by engaging in a
scheme to artificially inflate and maintain the Company's stock price by
disseminating materially false and misleading information concerning its
business and earnings and the development, efficiency, introduction and
deployment of its digital modems based on 56K-bps technology. 

     All of these actions are in the early stages of proceedings and the Company
is currently investigating the allegations. Based on its current information,
the Company believes the suits to be without merit and intends to defend itself
and its officers and directors vigorously. Although it is reasonably possible
the Company may incur a loss upon the conclusion of these claims, an estimate of
any loss or range of loss cannot be made. No provision for any liability that
may result upon adjudication has been made in the Company's consolidated
financial statements. In the opinion of management, resolution of this matter is
not expected to have a material adverse effect on the financial position of the
Company. However, depending on the amount and timing, an unfavorable
resolution of this matter could materially affect the Company's future results
or cash flows in a particular period. In connection with these legal
proceedings, the Company expects to incur substantial legal and other expenses.
Shareholder suits of this kind are highly complex and can extend for a
protracted period of time, which can substantially increase the cost of such
litigation and divert the attention of the Company's management.

                                     F-18
<PAGE>
 
                            ASCEND COMMUNICATIONS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

     On April 16, 1997, a civil action was filed against Sahara, its three
founders and ten employees of Sahara by General Datacomm Industries, Inc. in the
Superior Court for the State of Connecticut. The complaint alleges several
causes of action, including: breach of contract; tortious interference with
contractual relations; misappropriation of trade secrets; unfair competition and
violation of the Connecticut Unfair Trade Practices Act. The plaintiff seeks
relief of unspecified monetary damages, costs and injunctive relief. The Company
has not yet engaged in substantive discovery and the ultimate outcome of this
matter cannot yet be determined. The Company plans to vigorously defend this
lawsuit. No provision for any liability that may result from the action has been
recognized in the consolidated financial statements. In the opinion of
management, resolution of this litigation is not expected to have a material
adverse effect on the financial position of the Company. However, depending on
the amount and timing, an unfavorable resolution of this matter could materially
affect the Company's future results or cash flows in a particular period.

On April 18, 1997, the Company received a claim and request for royalties
alleging patent infringement on four separate patents. Subsequently, the claim
and request for royalties was amended to include four additional patents. The
Company is currently investigating the claims of such infringement and thus the
ultimate outcome of this claim cannot yet be determined. No provision for any
liability that may result from the claim has been recognized in the consolidated
financial statements. In the opinion of management, resolution of this matter is
not expected to have a material adverse effect on the financial position of the
Company. However, depending on the amount and timing, an unfavorable resolution
of this matter could materially affect the Company's future results or cash
flows in a particular period.

The Company is a party as a defendant in various other lawsuits, contractual
disputes and other legal claims, the results of which are not presently
determinable. However, in the opinion of management, after consultation with
legal counsel, the amount of losses that might be sustained, if any, from
these lawsuits would not materially affect the Company's financial position.
However, depending on the amount and timing, an unfavorable resolution of some
or all of these matters could materially affect the Company's future results
of operations or cash flows in a particular period

10.  Quarterly Information (unaudited)

     The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended December 31, 1997
(in thousands, except per share amounts):

<TABLE> 
<CAPTION> 
                                                                                              Quarter Ended
                                                                 ------------------------------------------------------------------
                                                                 March 31,           June 30,           Sept. 30,           Dec. 31,
                                                                 ------------------------------------------------------------------

<S>                                                             <C>                  <C>                <C>                <C> 
1997
Net sales ............................................          $ 292,740           $ 311,693           $ 270,372          $ 292,547
Gross profit .........................................            190,353             203,016             173,191            187,222
Operating income (loss) ..............................           (137,745)            (56,807)             57,511             69,060
Net income (loss) ....................................           (163,241)            (48,837)             40,128             47,576
Net income (loss) per share - diluted ................              (0.88)              (0.26)               0.20               0.24
Net income (loss) per share - basic ..................              (0.88)              (0.26)               0.21               0.25

1996
Net sales ............................................          $ 148,065           $ 205,581           $ 248,836          $ 287,791
Gross profit .........................................             95,717             132,722             161,907            188,182
Operating income .....................................             44,780              67,903              72,851             99,284
Net income ...........................................             29,821              44,424              45,157             64,488
Net income per share - diluted .......................               0.15                0.23                0.23               0.32
Net income per share - basic .........................               0.17                0.25                0.25               0.35
</TABLE>

The net income (loss) per share amounts have been restated to comply with
FAS128.

                                     F-19
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                        
ALLOWANCE FOR DOUBTFUL ACCOUNTS:

<TABLE> 
<CAPTION> 
                                    Balances at            Charged to                        Balances at 
                                     Beginning              Costs and                           End of
                                     of Period               Expenses        Deductions         Period
                                    -----------             ----------       ----------       -----------
<S>                                 <C>                     <C>              <C>              <C> 
Year Ended December 31, 1997        $ 2,632                 $ 9,300          $  (632)          $11,300
                                    =======                 =======          =======           =======
                                                             
Year Ended December 31, 1996        $ 1,202                 $ 1,435          $    (5)          $ 2,632
                                    =======                 =======          =======           =======
                                                             
Year Ended December 31, 1995        $   775                 $   538          $  (111)          $ 1,202
                                    =======                 =======          =======           =======
</TABLE> 


                                     S-1
<PAGE>
 
3. Exhibits


        No.                            Description
     --------    -------------------------------------------------------
              
   /(6)/   3.1   Certificate of Incorporation.
              
   /(1)/   3.2   By-Laws.
              
   /(1)/  10.1   First-Amended and Restated 1989 Stock Option Plan and forms of 
                 stock option agreements used thereunder.
              
   /(1)/  10.2   Ascend Communications, Inc. 1994 Employee Stock Purchase Plan.

   /(1)/  10.3   Ascend Communications, Inc. 1994 Outside Directors Stock
                 Option Plan.

   /(1)/  10.4   Loan Agreement and related agreements, dated October 21, 1993,
                 by and between the Registrant and First Interstate Bank of
                 California

   /(1)/  10.5   Lease dated August 8, 1991, by and between the Registrant and
                 Harbor Bay Isle Associates, the First Addendum thereto, dated
                 August 8, 1991, and the Second Addendum thereto, dated February
                 25, 1994.
 
   /(1)/  10.8   Form of Idenmnity Agreement for directors and officers.

   /(2)/  10.9   Loan Agreement and related agreements, dated July 29, 1994, by
                 and between the Registrant and First Interstate Bank of
                 California

   /(3)/ 10.10   Lease Agreement, Lease Rider and Second Lease Rider, dated May
                 17, 1995 by and between the Registrant and Resurgence
                 Properties, Inc.

   /(4)/ 10.11   Loan Agreement and related agreements, dated November 30, 1995,
                 by and between the Registrant and Wells Fargo Bank of
                 California. 

   /(5)/ 10.12   Lease agreement dated March 27, 1996, by and between the 
                 Registrant and Sumitomo Bank Leasing and Financing, Inc.

   /(6)/ 10.13   Ascend Communications, Inc. 1996 Restricted Stock Plan.


   /(8)/ 10.14   Cascade Communications Corp. Amended and Restated 1991 Stock 
                 Plan. 
<PAGE>
 
3. Exhibits (continued)

             No.                              Description
         -----------       ---------------------------------------------------- 
         /(9)/ 10.15       Cascade Communications Corp. 1994 Employee Stock
                           Purchase Plan.

         /(9)/ 10.16       Cascade Communications Corp. 1994 Non-Employee
                           Director Stock Plan.

         /(9)/ 10.17       Letter of Employment dated March 12, 1992 between the
                           Registrant and Daniel E. Smith.

 /(9)(10)(11)/ 10.18       Lease dated July 27, 1993 between Glenborough
                           Corporation and the Registrant; as amended by the
                           first amendment thereto dated February 24, 1994; as
                           amended by the second amendment thereto dated July
                           24, 1994; as amended by the third amendment thereto
                           dated November 10, 1994; as amended by the fourth
                           amendment thereto dated December 1, 1995.

        /(12)/ 10.19       Lease dated November 14, 1996 between the Registrant
                           and Nashoba View Associated, LLC.

              *10.20       Loan Agreement and related agreements, dated November
                           30, 1995, by and between the Registrant and Wells
                           Fargo Bank of California, as ammended by the first
                           ammendment thereto, date October 15, 1997.
  
            
              *11.1        Statement regarding computation of earnings (loss) 
                           per share

              *21.1        List of Subsidiaries of Ascend Communication
               
              *23.1        Consent of Independent Auditors

               23.2        Consent of Independent Accountants

              *27.0        Financial Data Schedule.

          
        /(1)/ Incorporated by reference from the Company's Registration
              Statement (No.33-77146), effective May 12, 1994.

        /(2)/ Incorporated by reference from the Company's Form 10-Q for the 
              quarter ended September 30, 1994.

        /(3)/ Incorporated by reference from the Company's Form 10-Q for the 
              quarter ended June 30, 1995.

        /(4)/ Incorporated by reference from the Company's 10-K for the year 
              ended December 31, 1995.

        /(5)/ Incorporated by reference from the Company's Form 10-Q for the 
              quarter ended March 31, 1996.



<PAGE>
 
3. Exhibits (continued)

        
        No.                         Description
     -------   --------------------------------------------------------
             
    /(6)/      Incorporated by reference from the Company's Form 10-Q for 
               the quarter ended June 30, 1996.
             
    /(7)/      Incorporated by reference from the Company's Form 10-K for
               the year ended December 31, 1996.
             
    /(8)/      Incorporated by reference from Cascade Communications Corp.'s
               Registration Statement on Form S-8 (File No. 33-93152) filed
               with the Securities Commission and Exchange Commission (the
               "Commission") on June 6, 1995.
             
    /(9)/      Incorporated by reference from Cascade Communications Corp.'s
               Registration Statement on Form S-1 (File No. 33-79330) filed
               with the Commission on May 26, 1994, as amended, which
               Registration Statement became effective on July 28, 1994.
             
   /(10)/      Incorporated by references to the corresponding exhibit
               previously filed as an exhibit to Cascade Communications
               Corp.'s Form 10-K filed for the fiscal year ended December 31,
               1994 on March 29, 1995.
             
   /(11)/      Incorporated by reference to the corresponding exhibit
               previously filed as an exhibit to Cascade Communications
               Corp.'s Form 10_K filed for the fiscal year ended December 31,
               1995, on March 1, 1996.
             
  /(12)/       Incorporated by reference to the corresponding exhibit
               previously filed as an exhibit to Cascade Communications
               Corp.'s Form 10-K filed for the fiscal year ended December 31,
               1996 on March 14, 1997.

 
        *      Previously Filed.


(b)     Reports on Form 8-K

        No reports on Form 8-K were filed during the fourth quarter ended
        December 31, 1997.

(c)     Exhibits

        See Item 14(a) 3 above.

(d)     Financial Statement Schedule

        See Item 14(a) 1 and 2 above.
<PAGE>
 
                                   SIGNATURES
                                        
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                            ASCEND COMMUNICATIONS, INC.
                       
DATE  May 29, 1998          by  /s/ Mory Ejabat
      --------------           ---------------------------------------
                                 Mory Ejabat, President, Chief Executive 
                                 Officer and Director


<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                               INDEX TO EXHIBITS

         No.                                   Description
     -----------        --------------------------------------------------------
     /(6)/ 3.1          Certificate of Incorporation.

     /(1)/ 3.2          By-Laws.

     /(1)/ 10.1         First Amended and Restated 1989 Stock Option Plan and 
                        forms of stock option agreements used thereunder.

     /(1)/ 10.2         Ascend Communications, Inc. 1994 Employee Stock Purchase
                        Plan.
    
     /(1)/ 10.3         Ascend Communications, Inc. 1994 Outside Directors Stock
                        Option Plan.

     /(1)/ 10.4         Loan Agreement and related agreements, dated October 21,
                        1993, by and between the Registrant and First Interstate
                        Bank of California.

     /(1)/ 10.5         Lease dated August 8, 1991, by and between the
                        Registrant and Harbor Bay Isle Associates, the First
                        Addendum thereto, dated August 8, 1991, and the Second
                        Addendum thereto, dated February 25, 1994.

     /(1)/ 10.8         Form of Indemnity Agreement for directors and officers.

     /(2)/ 10.9         Loan Agreement and related agreements, dated July 29,
                        1994, by and between the Registrant and First Interstate
                        Bank of California.

     /(3)/ 10.10        Lease Agreement, Lease Rider and Second Lease Rider,
                        dated May 17, 1995 by and between the Registrant and
                        Resurgence Properties, Inc.

     /(4)/ 10.11        Loan Agreement and related agreements, dated November
                        30, 1995, by and between the Registrant and Wells Fargo
                        Bank of California. 

     /(5)/ 10.12        Lease Agreement dated March 27, 1996, by and between the
                        Registrant and Sumitomo Bank Leasing and Financing, Inc.

     /(7)/ 10.13        Ascend Communications, Inc. 1996 Restricted Stock Plan.

     /(8)/ 10.14        Cascade Communications Corp. Amended and Restated 1991 
                        Stock Plan.
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                         INDEX TO EXHIBITS  (continued)

            No.                                Description
        -----------     --------------------------------------------------------

        /(9)/ 10.15     Cascade Communications Corp. 1994 Employee Stock
                        Purchase Plan.

        /(9)/ 10.16     Cascade Communications Corp. 1994 Non-Employee Director
                        Stock Plan .

        /(9)/ 10.17     Letter of Employment dated March 12, 1992 between the
                        Registrant and Daniel E. Smith .

/(9)(10)(11)/ 10.18     Lease dated July 27, 1993 between Glenborough
                        Corporation and the Registrant; as amended by the first
                        amendment thereto dated February 24, 1994; as amended by
                        the second amendment thereto dated July 24, 1994; as
                        amended by the third amendment thereto dated November
                        10, 1994; as amended by the fourth amendment thereto
                        dated December 1, 1995.

      /(12)/  10.19     Lease dated November 14, 1996 between the Registrant and
                        Nashoba View Associated, LLC.

             *10.20     Loan Agreement and related agreements, dated November
                        30, 1995, by and between the Registrant and Wells Fargo
                        Bank of California, as ammended by the first ammendment
                        thereto, dated October 15, 1997.

             *11.1      Statement regarding computation of earnings (loss) per
                        share. 

             *21.1      List of Subsidiaries of Ascend Communication

             *23.1      Consent of Independent Auditors

              23.2      Consent of Independent Accountants

             *27.0      Financial Data Schedule.

/(1)/   Incorporated by reference from the Company's Registration Statement (No.
        33-77146), effective May 12, 1994.

/(2)/   Incorporated by reference from the Company's Form 10-Q for the quarter 
        ended September 30, 1994.

/(3)/   Incorporated by reference from the Company's Form 10-Q for the quarter 
        ended June 30, 1995.

/(4)/   Incorporated by reference from the Company's Form 10-K for the year 
        ended December 31, 1995.

/(5)/   Incorporated by reference from the Company's Form 10-Q for the quarter 
        ended March 31, 1996.
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                        INDEX TO EXHIBITS  (continued)




      No.                                   Description
  -----------      -------------------------------------------------------
     /(6)/         Incorporated by reference from the Company's Form 10-Q for 
                   the quarter ended June 30, 1996.
 
     /(7)/         Incorporated by reference from the Company's Form 10-K for 
                   the year ended December 31, 1996.

     /(8)/         Incorporated by reference from Cascade Communications Corp.'s
                   Registration Statement on Form S-8 (File No. 33-93152) filed
                   with the Securities Commission and Exchange Commission (the
                   "Commission") on June 6, 1995.

     /(9)/         Incorporated by reference from Cascade Communications Corp.'s
                   Registration Statement on Form S-1 (File No. 33-79330) filed
                   with the Commission on May 26, 1994, as amended, which
                   Registration Statement became effective on July 28, 1994.

    /(10)/         Incorporated by reference to the corresponding exhibit
                   previously filed as an exhibit to Cascade Communications
                   Corp.'s Form 10-K filed for the fiscal year ended December
                   31, 1994 on March 29, 1995.

    /(11)/         Incorporated by reference to the corresponding exhibit
                   previously filed as an exhibit to Cascade Communications
                   Corp.'s Form 10-K filed for the fiscal year ended December
                   31, 1995 on March 1, 1996.

    /(12)/         Incorporated by reference to the corresponding exhibit
                   previously filed as an exhibit to Cascade Communications
                   Corp.'s Form 10-K filed for the fiscal year ended December
                   31, 1996 on March 14, 1997.

 
     *    Previously Filed.