<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------
                                    FORM 10-Q
(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended December 31, 1998

                                       OR

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

For the transition period from _________to__________

                         Commission file number 0-24156

                               FORE SYSTEMS, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

          Delaware                                        25-1628117  
          --------                                        ----------  
(State or Other Jurisdiction of                         (I.R.S Employer 
 Incorporation or Organization)                       Identification No.)

              1000 FORE Drive, Warrendale, Pennsylvania 15086-7502
              ----------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's Telephone Number, Including Area Code: (724) 742-4444
                                                           --------------

         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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

          Class                              Outstanding at February 1, 1999
----------------------------                 -------------------------------
Common Stock, $.01 par value                         111,239,447 Shares



<PAGE>   2

                                    FORM 10-Q

                               FORE SYSTEMS, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                Page
                                                                                               Number

<S>                        <C>                                                                  <C>
PART I.                    FINANCIAL INFORMATION

         Item 1.           Financial Statements

                           FORE Systems, Inc. Consolidated Balance
                           Sheet as of December 31, 1998 and
                           March 31, 1998                                                        3

                           FORE Systems, Inc. Consolidated Statement
                           of Operations for the three months and
                           nine months ended December 31, 1998 and 1997                          4

                           FORE Systems, Inc. Consolidated Statement
                           of Cash Flows for the three months and
                           nine months ended December 31, 1998 and 1997                          5

                           Notes to Unaudited Consolidated Financial
                           Statements                                                            6-12

         Item 2.           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations                         13-20

         Item 3.           Quantitative and Qualitative Disclosures about Market Risk            20

PART II.                   OTHER INFORMATION

         Item 1.           Legal Proceedings                                                     21

         Item 6.           Exhibits and Reports on Form 8-K                                      21-22

         Signature                                                                               23

         Exhibit Index                                                                           24
</TABLE>



<PAGE>   3

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

                               FORE SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEET

                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                             (UNAUDITED)
                                                                             DECEMBER 31,       MARCH 31,
                                                                               1998                1998
                                                                          ---------------     ---------------


<S>                                                                         <C>                <C>      
                                     ASSETS
Current assets:
      Cash and cash equivalents                                                 $189,432           $ 127,231
      Short-term investments                                                     172,048             186,999
      Accounts receivable, net of allowance for doubtful
         accounts of $6,521 at December 31, 1998 and
         $7,194 at March 31, 1998                                                124,163             111,347
      Inventories                                                                 87,053              70,388
      Deferred income taxes                                                       36,533              36,620
      Prepaid expenses and other current assets                                   18,101              12,127
                                                                          ---------------     ---------------
         Total current assets                                                    627,330             544,712
Fixed assets, net                                                                 70,848              71,495
Other non-current assets                                                           6,642               5,000
                                                                          ---------------     ---------------

                     Total assets                                               $704,820           $ 621,207
                                                                          ===============     ===============


                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accounts payable                                                          $ 48,811           $  37,240
      Accrued payroll and related costs                                           18,350              18,560
      Income taxes payable                                                        12,695              13,789
      Deferred revenue                                                            46,194              28,719
      Other current liabilities                                                   21,999              15,881
                                                                          ---------------     ---------------
         Total current liabilities                                               148,049             114,189
                                                                          ---------------     ---------------

Commitments and contingencies
Stockholders' equity:
      Common stock, par value $.01 per share; 300,000,000
         shares authorized; shares issued:
         111,158,727 at December 31, 1998 and 100,302,143
         at March 31, 1998                                                       640,871             423,782
      Retained earnings (accumulated deficit)                                    (79,720)             88,285
      Treasury stock, at cost:
         165,714 shares at December 31, 1998 and 137,310
         shares at March 31, 1998                                                 (3,253)             (3,252)
      Cumulative translation adjustment                                             (590)               (101)
      Valuation allowance for short-term investments                                (537)             (1,696)
                                                                          ---------------     ---------------
         Total stockholders' equity                                              556,771             507,018
                                                                          ---------------     ---------------

                     Total liabilities and stockholders' equity                 $704,820           $ 621,207
                                                                          ===============     ===============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       -3-


<PAGE>   4

                               FORE SYSTEMS, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

                                    UNAUDITED

                      (IN THOUSANDS, EXCEPT PER-SHARE DATA)

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED                      NINE MONTHS ENDED             
                                                               DECEMBER 31,                           DECEMBER 31,       
                                                       --------------------------             ---------------------------           
                                                         1998              1997                  1998             1997 
                                                       ---------        ---------             ---------         --------- 
                                                                                                                                    
<S>                                                    <C>              <C>                   <C>               <C>                 
Revenue                                                $ 158,724        $ 122,083             $ 444,208         $ 327,161           
                                                                                                                                    
Cost of sales                                             74,013           53,944               201,185           144,322           
                                                       ---------        ---------             ---------         ---------           
                                                                                                                                    
Gross profit                                              84,711           68,139               243,023           182,839           
                                                       ---------        ---------             ---------         ---------           
Operating expenses:                                                                                                                 
          Research and development                        20,760           17,765                58,372            50,802           
          Sales and marketing                             44,929           32,577               125,064            92,016           
          General and administrative                       7,901            6,182                22,162            16,686           
          Purchased research and development                --               --                 199,316              --             
          Restructuring charges                             --               --                   5,100              --             
                                                       ---------        ---------             ---------         ---------           
            Total operating expenses                      73,590           56,524               410,014           159,504           
                                                       ---------        ---------             ---------         ---------           
                                                                                                                                    
Income (loss) from operations                             11,121           11,615              (166,991)           23,335           
                                                                                                                                    
Interest income, net                                       3,869            3,413                10,930             9,706           
Other income (expense)                                       491              199                   233               296           
                                                       ---------        ---------             ---------         ---------           
                                                                                                                                    
Income (loss) before provision for income taxes           15,481           15,227              (155,828)           33,337           
                                                                                                                                    
Provision for income taxes                                 4,335            5,177                12,177            11,335           
                                                       ---------        ---------             ---------         ---------           
                                                                                                                                    
Net income (loss)                                      $  11,146        $  10,050             $(168,005)        $  22,002           
                                                       =========        =========             =========         =========           
                                                                                                                                    
Net income (loss) per share - basic                    $    0.10        $    0.10             $   (1.61)        $    0.22           
                                                       =========        =========             =========         =========           
                                                                                                                                    
Net income (loss) per share - diluted                  $    0.10        $    0.10             $   (1.61)        $    0.22           
                                                       =========        =========             =========         =========           
</TABLE>
                                                     
                                                                 

   The accompanying notes are an integral part of these financial statements.

                                       -4-

<PAGE>   5



                               FORE SYSTEMS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                    UNAUDITED

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                              DECEMBER 31,                     DECEMBER 31,
                                                                       -------------------------       -------------------------
                                                                          1998            1997           1998             1997
                                                                       ---------       ---------       --------        ---------

<S>                                                                    <C>             <C>             <C>             <C>      
Cash flows from operating activities:
      Net income (loss)                                                $  11,146       $  10,050       $(168,005)      $  22,002
      Adjustments to reconcile net income (loss)
          to net cash provided by (used in) operating activities:
              Depreciation and amortization                                9,641           6,915          26,796          18,570
              Deferred income tax benefit                                  4,441            (739)          5,442          (1,710)
              Purchased research and development                            --              --           199,316            --
              Income tax benefit related to stock options                    456            --             5,112           1,376
              Cumulative translation adjustment                             (242)           (423)           (489)           (268)
              Change in operating assets and liabilities:
                  Accounts receivable                                    (11,792)          4,108         (12,814)        (12,616)
                  Inventories                                            (13,584)         (1,694)        (16,286)        (12,151)
                  Prepaid expenses and other current assets                   (6)            935         (10,286)         (5,434)
                  Accounts payable                                        12,455         (10,523)            (20)         (1,821)
                  Accrued liabilities                                      3,246           1,094             510           6,245
                  Prepaid income taxes and income taxes payable           (1,590)          5,504          (1,094)         10,512
                  Deferred revenue                                         9,280           3,860          17,463           6,862
                                                                       ---------       ---------       ---------       ---------
Net cash provided by operating activities                                 23,451          19,087          45,645          31,567
                                                                       ---------       ---------       ---------       ---------
Cash flows from investing activities:
      Purchases of short-term investments                                (64,076)        (53,775)       (139,744)       (152,710)
      Redemption and sale of short-term investments                       68,983          21,133         155,854         146,296
      Investment in other non-current assets                                 145            --            (1,642)           --
      Capitalization of software development costs                          (413)           (527)         (2,055)         (1,112)
      Acquisition of businesses, net of cash acquired                       --              --               844            --
      Purchases of fixed assets                                           (6,890)        (13,954)        (22,479)        (37,101)
                                                                       ---------       ---------       ---------       ---------
Net cash used in investing activities                                     (2,251)        (47,123)         (9,222)        (44,627)
                                                                       ---------       ---------       ---------       ---------
Cash flows from financing activities:
      Principal payments on notes payable and capital lease
          obligations                                                       --              --              --               (21)
      Purchase of treasury stock                                            --              --                (1)           --
      Proceeds from issuance of Common stock                               4,338           3,484          25,779          12,814
                                                                       ---------       ---------       ---------       ---------
Net cash provided by financing activities                                  4,338           3,484          25,778          12,793
                                                                       ---------       ---------       ---------       ---------

Increase (decrease) in cash and cash equivalents                          25,538         (24,552)         62,201            (267)

Cash and cash equivalents at beginning of period                         163,894         153,709         127,231         129,424
                                                                       ---------       ---------       ---------       ---------

Cash and cash equivalents at end of period                             $ 189,432       $ 129,157       $ 189,432       $ 129,157
                                                                       =========       =========       =========       =========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       -5-


<PAGE>   6




              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

NOTE 1.  Interim Financial Statements

         The accompanying unaudited interim consolidated financial statements of
FORE Systems, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, these statements include all adjustments,
consisting of normal and recurring adjustments, considered necessary for a fair
presentation of the results for such periods. The results of operations for the
three and nine month periods ending December 31, 1998 are not necessarily
indicative of results which may be achieved for the entire fiscal year ending
March 31, 1999. The unaudited consolidated interim financial statements should
be read in conjunction with the financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1998 as filed with the Securities and Exchange Commission.

NOTE 2.  Inventories (in thousands)

         Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method, and include raw material
components, processing costs and manufacturing overhead costs.
Inventories are summarized as follows:

<TABLE>
<CAPTION>
                                    December 31, 1998           March 31, 1998
                                    -----------------           --------------
<S>                                 <C>                         <C>    
Raw Materials                            $ 22,956                  $15,120
Work in Process                            12,358                   11,512
Finished Goods                             51,739                   43,756
                                         --------                  -------
Total Inventories                        $ 87,053                  $70,388
                                         ========                  =======
</TABLE>

NOTE 3.  Lease Commitments

          In December 1998, the Company entered into agreements to construct and
lease manufacturing and operating facilities on land adjacent to the Company's
headquarters, which was purchased by the Company. The lessor has committed to
fund a maximum of $20.5 million for the construction of the building. Upon
completion of construction, the Company will lease the facilities under an
eight-year operating lease and has options to renew the lease for two additional
five-year terms (subject to certain conditions). Future annual minimum rental
payments under the lease are approximately $1.5 million and are expected to
commence in fiscal year 2000. During the construction period, the Company
guaranties the repayment of 90% of certain project costs expended or financed by
the lessor, which amount is estimated not to exceed $18 million, and under
certain circumstances guaranties the repayment of 100% of all project costs
expended or financed by the lessor. During the lease period, the Company
guaranties all of its obligations under the lease.

          The Company may, at its option, purchase the facilities during or at
the expiration of the term of the lease at an amount equal to the remaining
balance of any debt of the lessor related to the construction of the facilities
plus any applicable prepayment penalties. The Company has the right to obtain a
purchaser for the facility upon the termination of the lease. If the Company
exercises this remarketing option and obtains a buyer for the facility, the
Company guaranties to the lessor a residual value for the facility of
approximately $14 million, an amount that was determined at the lease inception
date. Should the Company not exercise the remarketing option, the Company will
be required to purchase the facility at the termination of the lease for
approximately $19 million.

         As part of the above lease transaction, the Company will pledge
approximately $19.5 million of marketable securities (valued as of completion of
construction) as collateral for specified obligations of the lessor. The Company
under its investment policy will manage these securities. In addition, under the
terms of the lease, the Company is required to comply with certain financial
covenants including the maintenance of a minimum tangible net worth. Other
restrictive covenants limit indebtedness and the payment of dividends.

          The lease transaction entered into in December 1998 is tied to the
lease for the Company's existing headquarters facilities. As such, the lease
contains cross default provisions with the previous lease, and the Company must
exercise purchase options, renewal options and remarketing options with respect
to all buildings at the headquarters. Should the Company elect to purchase, or
be required to purchase, all facilities at its headquarters, the total purchase
price would approximate $43 million.



                                       -6-
<PAGE>   7

NOTE 4.  Legal Proceedings

         In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during the
period from July 19, 1996 through April 1, 1997, inclusive. Pursuant to court
order, the lawsuits were consolidated and a consolidated amended complaint was
filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. In
December, 1998, plaintiffs filed a second consolidated amended complaint and the
Company and the individual defendants responded by filing a motion to dismiss,
or, in the alternative, for summary judgment. The Company believes the
allegations in the consolidated amended complaint are completely without merit
and intends to defend this action vigorously. Management believes that the
ultimate outcome of these claims will not have a material adverse effect on the
results of operations or financial position of the Company.

         The Company was served, in October 1998, with a complaint filed by Bell
Communications Research, Inc. in the United States District Court for the
District of Delaware. The complaint alleges that the Company infringes four
patents owned by the plaintiff and seeks compensatory and injunctive relief. The
Company subsequently filed its answer to the complaint. The Company believes the
allegations in the complaint are completely without merit and intends to defend
this action vigorously.

         From time to time, the Company receives notifications alleging that it
is or may be infringing the intellectual property rights of third parties. At
the present time, the Company is in separate discussions with several such third
parties regarding the alleged infringement by the Company of certain patents
owned by such third parties.

         In the opinion of management, the ultimate outcome of the complaint
filed by Bell Communications Research, Inc. or of any of the above referenced
potential intellectual property claims by third parties will not have a material
adverse effect on the results of operations or the financial position of the
Company. However, in the course of defending any of these matters, the Company
may incur substantial legal and other expenses, and certain managers of the
Company may expend substantial amounts of time and effort, diverting the
attention of such managers from other activities. In addition, because the
ultimate outcome of matters of this type can be difficult to predict with
accuracy, it is possible that an unfavorable resolution of any of these matters
could materially adversely affect the Company's results of operations or its
financial position in a particular future period or periods.

NOTE 5.  Business Combination

         On September 11, 1998, the Company acquired Berkeley Networks, Inc., a
California corporation ("Berkeley"), by means of a merger (the "Merger") of a
wholly-owned subsidiary of the Company, Fastwire Acquisition Corporation, a
Delaware corporation ("Fastwire"), with and into Berkeley. Berkeley, which
designs and develops multi-gigabit routing switch platforms based on Windows NT
and advanced stateful inspection switching ASICs, was a development stage
enterprise that had generated no significant revenues and had not shipped a
completed product at the time the acquisition was completed.

         The Company issued a total of approximately 8.6 million shares of
Common stock to the former shareholders of Berkeley and granted to former
holders of options to purchase Berkeley Common stock a total of approximately
0.6 million substitute stock options to purchase the Company's Common stock.
Pursuant to the terms of the Merger, additional consideration of up to a total
of $30,000,000 in cash (the "Earn-Out Payments") was to be paid by the Company
based on Berkeley achieving certain technological advances and/or attaining
certain revenue goals in the period commencing on September 11, 1998 and ending
on the second anniversary thereof. Since the acquisition date, the Company has
made Earn-Out Payments of approximately $8.8 million, based on the payment
schedule established by the terms of the Merger, to the former equity holders of
Berkeley.

                                       -7-

<PAGE>   8
         The transaction was accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities were recorded
based upon their fair values at the date of the acquisition. The Company has
obtained an independent third-party appraisal of the value of intangible assets
and purchased research and development acquired. The results of operations of
Berkeley are included in the financial statements of the Company from the date
of the acquisition.

         The purchase price paid in Company stock and options and including the
Earn-Out Payments made to date of $8.8 million totaled $196.6 million.
Additional costs incurred in connection with the closing of the transaction
($6.5 million) and restructuring charges of the acquired company for certain
assets, closing of facilities and employee termination costs ($2.0 million)
results in a total purchase price of $205.1 million. The Company may be required
to pay up to an additional $10 million based on the achievement of certain
technological advances prior to March 31, 1999 and an additional $10 million
based on the attainment of certain revenue goals prior to September 11, 2000.
Depending on the amount and nature of any additional consideration paid, the
amount of intangible assets and corresponding periodic amortization would be
increased.

         The table below summarizes the purchase price allocation, excluding the
additional $20 million that may be recorded based on certain technological 
advances and/or certain revenue goals being achieved over the next 2 years:

<TABLE>
<CAPTION>
                                                       Value
                                                     ---------
<S>                                                  <C>      
     Current assets                                  $   1,311
     Property, plant and equipment                       2,168
     Assembled work force                                1,700
     Purchased research and development                199,316
     Liabilities                                        (4,671)
     Deferred tax asset                                  5,355
                                                    ----------
     Total purchase price                             $205,179
                                                    ----------
</TABLE>

         As of the acquisition date, it was determined that technological
feasibility of the in-process technology had not been established, Berkeley had
generated no significant revenue, had not shipped a 


                                      -8-
<PAGE>   9

completed product and the technology had no alternative future use. Accordingly,
no value was assigned to existing technology. Therefore, in accordance with
generally accepted accounting principles, the Company has expensed the amount of
purchase price allocated to purchased research and development of approximately
$199 million.

         The value assigned to purchased research and development was determined
by identifying three research projects in areas for which technological
feasibility had not been established as of the date of the acquisition. These
projects were the E4, the E8 and the EZ Switch (collectively the "projects").
The E4 is a stackable Ethernet/Fast Ethernet/Gigabit Ethernet switch offering
"pay-as-you-go" bandwidth scalability and designed for medium size LAN
backbones. The E8 is a modular platform expected to deliver high network
performance to enterprise LAN backbones, and designed to meet the demands of the
corporate data center and to operate at a processing rate of more than 38
million packets per second. The EZ Switch is a workgroup edge switch which will
be targeted toward the low-cost stackable market and will allow for low-cost
forwarding devices to employ higher-end processing and memory architectures
toward the route calculation and distribution functions.

         The value assigned to purchased research and development was determined
by estimating the costs to develop the purchased research and development into
commercially viable products; estimating the resulting net cash flows from such
projects; and discounting the net cash flows back to their present value. The
discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the purchased research and
development. At the acquisition date, the efforts remaining to develop the
purchased research and development into commercially viable products principally
related to the completion of all planning, designing, prototyping, high-volume
manufacturing, verification and testing activities that are necessary to
establish that the products can be produced to meet their design specifications
including functions, features and technical performance requirements.

         The projects identified made up 100% of the total charge for purchased
research and development. Commercial versions of the E4 and the E8 were first
shipped to customers late in the quarter ended December 31, 1998. Development of
the EZ Switch is not yet complete. Management expects that development of the EZ
Switch will be completed prior to March 31, 2000. If such development is
completed on schedule, management expects that sales of the product will
commence prior to March 31, 2000. Research and development costs related to the
E4, the E8 and the EZ switch projects incurred through the acquisition date and
the quarter ended December 31, 1998 were $12.6 million and $15.4 million,
respectively. Estimated costs to complete these projects are $2.3 million.

         Estimated revenues for the purchased in-process products commence in
fiscal year 1999 and increase through fiscal year 2002, at which time they are
assumed to decrease through fiscal year 2004, as newer products are released.
These assumptions are based on management's estimates of market size and growth
(which are supported by independent market data), expected trends in technology
and the nature and expected timing of new product introductions by the Company
and its competitors. The estimated gross margins as a percentage of revenues are
expected to be higher on a stand alone basis as compared to historical gross
margin percentages due to the product features and selling into a less price
sensitive market. The estimated selling, general and administration costs were
assumed to be lower as a percentage of revenue on a stand alone basis as
compared to historical percentages due to the type of markets and purchasing
patterns of the customers. Research and development costs were based on costs
estimated to complete the projects and maintenance costs after the products are
completed. The assumed income tax rate was 28%. The discount rate used in
discounting the net cash flows from purchased research and development averaged
30%.

         In connection with this acquisition, the Company allocated the fair
values of the net assets acquired, including purchased research and development,
based upon an independent third party appraisal. Significant assumptions used to
determine the value of the purchased research and development included 


                                      -9-
<PAGE>   10


financial projections for revenues, gross margin, selling and administrative
costs and research and development costs and an applicable income tax rate. The
company believes that the assumptions used in the forecasts were reasonable at
the time of the business combination. No assurance can be given, however, that
the underlying assumptions used to estimate expected project revenues,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary
materially from the projected results.

         Since the acquisition date the E4, E8 and EZ Switch have progressed
generally as expected under the assumptions used in the valuation. Revenues and
costs from these projects have not differed materially from the original
projections and estimates used in the assumptions.

         In addition, the Company incurred restructuring charges during the
quarter ended September 30, 1998 of $5.1 million related primarily to the
closing of the Company's facilities and certain employee termination costs. The
decision to close such facilities and to terminate such employees was made in
connection with the acquisition of Berkeley in order to rationalize and better
align the Company's resources following the acquisition. Cost savings are
expected to result from the changes related to the restructuring activities.

         The Company has received a letter from the Securities and Exchange
Commission (the "Commission") requesting additional information with respect to
the calculation and treatment of such purchased research and development, as
well as information concerning a restructuring charge of $5.1 million which the
Company recorded in connection with the acquisition of Berkeley. The Company
believes that it has appropriately assigned fair values in connection with the
acquisition of Berkeley, including purchased research and development, and that
it has appropriately recorded restructuring charges in accordance with generally
accepted accounting principles. However, the Commission, in recent public
statements and in communications with other companies in the computer networking
and other technology industries, has challenged the valuation methodologies used
in valuing purchased research and development. The Company, as a result of
discussions with the Commission, may be required to restate its financial
statements for the periods ended September 30, 1998 and December 31, 1998 with
respect to the treatment of the in process research and development acquired
from Berkeley and/or in connection with the restructuring charges related to
such acquisition. Any such restatement would increase goodwill and intangibles
and result in charges against the Company's earnings in future periods, and may
have a material adverse effect on the Company's results of operations in such
future periods.

         The following unaudited pro forma information has been prepared
assuming that the acquisition of Berkeley had taken place at the beginning of
the respective periods presented. The amount of the aggregate purchase price
allocated to purchased research and development and the restructuring charges
has been excluded from the pro forma information as they are non-recurring
items. The pro forma financial information is not necessarily indicative of the
combined results that would have occurred had the acquisition taken place at the
beginning of the period, nor is it necessarily indicative of the results that
may occur in the future.

<TABLE>
<CAPTION>
                                     Pro Forma of the Nine Months 
                                     Ended December 31,

                                     1998                       1997

<S>                                  <C>                        <C>    
Revenue                              $444,313                   $327,161
Income from operations                 29,432                     18,876 
Net income                             27,047                     17,669
Earnings per share - basic           $    .25                   $    .18
Earnings per share - diluted         $    .24                   $    .17

</TABLE>


NOTE 6.  New Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities" ("SFAS 133"). This
new standard requires recognition of all derivatives as either assets or
liabilities at fair value. Based upon the hedging strategies currently used and
the level of activity related to derivative instruments, the Company does not
anticipate the effect of adoption to have a material impact on either financial
position or results of operations. The Company will implement SFAS 133 in fiscal
year 2001, as required.

         In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company is currently
evaluating the impact of SFAS 131. During the first quarter of fiscal year 1999,
the company adopted SFAS 130. This statement establishes standards for reporting
and the display of comprehensive income and its components in a primary
financial statement. At December 31, 1998 and December 31, 1997, the components
of comprehensive income were as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,      1998                       1997

<S>                                  <C>                        <C>    
Net Income                           $   11,146                 $ 10,050
Change in currency translation
 adjustment                          $     (242)                $   (423)
Change in unrealized gain (loss)
 on available-for-sale investments   $      343                 $   (306)
                                     ----------                 --------

Comprehensive income                 $   11,247                 $  9,321
                                     ==========                 ========
</TABLE>


                                           -10-
<PAGE>   11
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,       1998                       1997

<S>                                  <C>                        <C>
Net Income (loss)                    $ (168,005)                $ 22,002
Change in currency translation
 adjustment                          $     (489)                $   (268)
Change in unrealized gain (loss)
 on available-for-sale investments   $    1,159                 $    (56)  
                                     ----------                 --------

Comprehensive income (loss)          $ (167,335)                $ 21,678
                                     ==========                 ========
</TABLE>



NOTE 7.  Earnings Per Share (in thousands except per-share data)

         In February 1997, Statement of Financial Accounting Standards No. 128
"Earnings per share"("SFAS 128") was issued by the FASB. Under SFAS 128, "basic
earnings per share" is calculated based upon the weighted average number of
common shares actually outstanding and "diluted earnings per share" is
calculated based upon the weighted average number of common shares outstanding
and other potential common shares if they are dilutive. Since the Company had a
net loss for the nine month period ended December 31, 1998, the dilutive effect
of other potential common shares has been excluded from the calculation. Common
share equivalents consisting of common shares issuable on exercise of
outstanding options are computed using the treasury method.


<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,                       1998             1997

<S>                                                   <C>              <C>     
Net income available to common stockholders           $ 11,146         $ 10,050
                                                      --------         --------

Shares used for basic per share computation
     weighted average shares outstanding               109,791           99,564

Effect of dilutive securities:

     Stock options                                       5,399            2,969
                                                      --------         --------

Shares used for diluted per share computation          115,190          102,533
                                                      ========         ========

Net income per share:

     Basic                                            $    .10         $    .10
                                                      ========         ========

     Diluted                                          $    .10         $    .10
                                                      ========         ========
</TABLE>




                                      -11-



<PAGE>   12
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,                         1998           1997

<S>                                                    <C>            <C>      
Net income (loss) available to common stockholders     $(168,005)     $  22,002
                                                       ---------      ---------

Shares used for basic per share computation
     weighted average shares outstanding                 104,572         99,000

Effect of dilutive securities:

     Stock options                                          --            2,850
                                                       ---------      ---------

Shares used for diluted per share computation            104,572        101,850
                                                       =========      =========

Net income (loss) per share:

     Basic                                             $   (1.61)     $     .22
                                                       =========      =========

     Diluted                                           $   (1.61)     $     .22
                                                       =========      =========
</TABLE>








                                      -12-

<PAGE>   13

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

RESULTS OF OPERATIONS

GENERAL

     Certain statements made herein, including, without limitation, statements
regarding increased market acceptance of ATM and LAN switching products,
statements regarding the Company's pricing strategies and resulting effects on
revenue and gross margins and statements regarding the Company's sales and
marketing strategies, may be deemed to be forward-looking statements that
involve risks and uncertainties. In addition, statements containing the words
"believes", "estimates", "expects" and words of similar import may be deemed to
be forward-looking statements. Such forward-looking statements should be read in
conjunction with certain cautionary statements set forth herein and the list of
risk factors set forth in the Company's Annual Report on Form 10-K for the year
ended March 31, 1998 (the "Form 10-K") and the Company's Current Report on Form
8-K dated September 11, 1998 in connection with the acquisition of Berkeley
Networks, Inc. ("Berkeley"). Such factors could cause actual results to differ
materially from those expressed in any forward-looking statements contained
herein.

     On September 11, 1998, the Company acquired Berkeley by means of a merger
(the "Merger") of Fastwire Acquisition Corporation, a wholly-owned subsidiary of
the Company ("Fastwire"), with and into Berkeley pursuant to an Agreement and
Plan of Reorganization, dated as of August 25, 1998, by and among the Company,
Berkeley and Fastwire (the "Reorganization Agreement"). Based in Milipitas,
California, Berkeley designs and develops multi-gigabit routing switch platforms
based on Windows NT and advanced stateful inspection switching ASICs.

     The Company issued a total of approximately 8.6 million shares of Common
stock to the former shareholders of Berkeley and granted to former holders of
options to purchase Berkeley Common stock a total of approximately 0.6 million
substitute stock options to purchase the Company's Common stock. Pursuant to the
Reorganization Agreement, additional consideration of up to a total of
$30,000,000 in cash (the "Earn-Out Payments") was to be paid by the Company
based on Berkeley achieving certain technological advances and/or attaining
certain revenue goals in the period commencing on September 11, 1998 and ending
on the second anniversary thereof. Since the closing date, the Company has made
Earn-Out Payments of approximately $8.8 million, based on the payment schedule
established by the Reorganization Agreement, to the former equity holders of
Berkeley. The Company accounted for the acquisition under the purchase method of
accounting.

QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH QUARTER AND NINE
MONTHS ENDED DECEMBER 31, 1997

     REVENUE. Revenue increased by 30% to $158.7 million in the quarter ended
December 31, 1998, from $122.1 million in the quarter ended December 31, 1997.
The distribution of revenue from sales to domestic and foreign customers was 73%
and 27%, respectively, in the quarter ended December 31, 1998. This compares
with 68% and 32%, respectively, in the corresponding quarter in 1997. In the
quarter ended December 31, 1998, the distribution of revenue from sales to
foreign customers by geographic region was 19%, 4% and 4% for Europe (which
includes Middle East and Africa), Pacific Rim and other, respectively.
Geographic mix for the corresponding quarter in 1997 was 20%, 9% and 3%,
respectively. Revenue increased by 36% to $444.2 million for the nine month
period ended December 31, 1998, as compared to $327.2 million in the
corresponding nine month period in 1997. The distribution of revenue from sales
to domestic and foreign customers was 72% and 28%, respectively, in the nine
month period ended December 31, 1998. This compares with 70% and 30%,
respectively, in the corresponding period in 1997. The distribution of revenue
from sales to foreign customers by geographic region for the nine month period
ended December 31, 1998 was 19%, 5% and

                                      -13-
<PAGE>   14

4% for Europe (which includes Middle East and Africa), Pacific Rim and other,
respectively. Geographic mix for the corresponding nine month period in 1997 was
18%, 7% and 5%, respectively. The increase in revenue dollars was attributable
to the increased market acceptance of ATM and, to a lesser extent, LAN switching
products.

     The Company measures overall unit volume for its switching products based
on the number of ATM ports or network connections shipped. The total number of
ATM ports shipped in the quarter ended December 31, 1998 was 53,500 (48,000
enterprise ports, 5,500 service provider ports), as compared with 45,000 (40,000
enterprise ports, 5,000 service provider ports) in the previous year's
corresponding period. The total installed base of ATM ports as of December 31,
1998 was 465,000, as compared with 263,000 at December 31, 1997. The total
number of LAN switching ports shipped in the quarter ended December 31, 1998 was
159,500, as compared with 135,000 in the previous year's corresponding period.
The total number of adapter cards shipped in the quarter ended December 31, 1998
was 21,400, as compared with 12,700 in the previous year's corresponding period.
The total installed base of adapter cards as of December 31, 1998 was 168,500 as
compared with 93,000 at December 31, 1997. In the quarter ended December 31,
1998, revenue mix, as a percentage of revenue, among ATM switching products, LAN
switching products, adapter cards and other revenue (principally service support
and development contracts) was 63%, 24%, 4% and 9%, respectively. Revenue mix
for the corresponding quarter in 1997 was 59%, 28%, 4% and 9%, respectively.
Average selling price per ATM port during the quarter ended December 31, 1998
was $1,900, as compared to $1,600 in the corresponding quarter in 1997. Average
selling price per LAN switching port was $235 in the quarter ended December 31,
1998 as compared to $300 in the corresponding quarter in 1997. Average selling
price for adapter cards shipped during the quarter ended December 31, 1998 was
$300, as compared to $400 in the previous year's quarter ended December 31,
1997. In January of 1998, the Company reduced the price of certain of its ATM
workgroup products by up to 40%.

     GROSS PROFIT. Gross profit increased to $84.7 million or 53.4% as a
percentage of revenue in the quarter ended December 31, 1998, as compared to
gross profit of $68.1 million or 55.8% as a percentage of revenue in the
corresponding quarter in 1997. Gross profit of $243.0 million or 54.7% as a
percentage of revenue for the nine month period ended December 31, 1998,
compares to gross profit of $182.8 million or 55.9% as a percentage of revenue
during the same period in the previous year. The dollar increase in gross profit
was largely attributable to the increase in revenue. The gross margin percentage
decline in the three month and nine month periods ended December 31, 1998 was
directly attributable to a single government contract. Gross margin percentage
for the quarter ended December 31, 1998 excluding this government contract would
have been 55.5%. This seven-year government contract commenced in August 1998
and the impact on future gross margin cannot be determined because the contract
includes fixed prices for certain products but does not include any volume
commitment. The Company intends to price its products competitively. There can
be no assurance that the gross profit percentage can be maintained at the
current level.

     RESEARCH AND DEVELOPMENT. Research and development expense was $20.8
million or 13.1% of revenue in the quarter ended December 31, 1998, as compared
to $17.8 million or 14.5% of revenue in the corresponding quarter in 1997.
Research and development expense for the nine month period ended December 31,
1998 was $58.4 million or 13.1% of revenue, as compared to $50.8 million or
15.6% of revenue in the year ago nine month period. The increase in research and
development expense in dollars was largely attributable to increased purchases
of research and development materials, increased hiring of engineering employees
and increases in depreciation. The decrease in research and development expense
as a percentage of revenue was primarily attributable to increased revenue
absorbing a greater portion of the Company's expenses. The number of employees
of the Company engaged in research and development increased to 451 at December
31, 1998, from 415 at December 31, 1997. The Company plans to make appropriate
expenditures for research and development, but does not expect the overall
expenditures to increase materially as a percentage of revenue.

     SALES AND MARKETING. Sales and marketing expense was $44.9 million or 28.3%
of revenue for the quarter ended December 31, 1998, as compared to $32.6 million
or 26.7% of revenue in the

                                      -14-
<PAGE>   15

corresponding quarter in 1997. Sales and marketing expense for the nine month
period ended December 30, 1998 was $125.1 million or 28.2% of revenue, as
compared to $92.0 million or 28.1% of revenue in the year ago nine month period.
Comparing the quarter ended December 31, 1998 versus the corresponding quarter
in 1997, the increase in sales and marketing expense in dollars and as a
percentage of revenue for the quarter ended December 31, 1998 was largely the
result of hiring additional sales, marketing and support personnel (including
training and documentation), increased marketing promotion costs and increases
in depreciation. The number of employees of the Company engaged in sales and
marketing activities increased to 924 at December 31, 1998, from 725 at December
31, 1997. The Company has and expects to continue to increase sales and
marketing expenses in dollars, but not as a percentage of revenue, both
domestically and internationally as a part of its continuing effort to expand
its markets, introduce new products, build marketing staff and programs and
expand its international presence.

     GENERAL AND ADMINISTRATIVE. General and administrative expense was $7.9
million or 5.0% of revenue in the quarter ended December 31, 1998, as compared
to $6.2 million or 5.1% of revenue in the corresponding quarter in 1997. General
and administrative expense for the nine month period ended December 31, 1998 was
$22.2 million or 5.0% of revenue, as compared to $16.7 million or 5.1% of
revenue in the year ago nine month period. The dollar increase in general and
administrative expense was largely due to increased salary costs, increased
hiring of administrative staff, including those engaged in systems
administration, accounting and human resources and increased costs for
professional services and depreciation. The number of employees of the Company
engaged in general and administrative activities increased to 219 at December
31, 1998, from 167 at December 31, 1997. The Company plans to make appropriate
expenditures in the general and administrative organization as necessary, but
does not expect the overall expenditures to increase materially as a percentage
of revenue.

     PURCHASED RESEARCH AND DEVELOPMENT. In connection with the acquisition of
Berkeley, the Company allocated $199.3 million of the purchase price to
purchased research and development that had not reached technological
feasibility as of September 11, 1998. The Company expensed such amount as a
non-recurring charge in the fiscal quarter ended September 30, 1998.

      RESTRUCTURING CHARGES. In connection with the acquisition of Berkeley, the
Company recorded a restructuring charge of $5.1 million related primarily to the
closing of duplicate facilities and certain employee termination costs. The
Company expensed such amount as a non-recurring charge in the fiscal quarter
ended September 30, 1998.

     INTEREST INCOME. Interest income, net of interest expense, was $3.9 million
and $10.9 million, respectively, in the quarter and nine months ended December
31, 1998, as compared to $3.4 million and $9.7 million in the corresponding
quarter and nine month period in 1997.

     INCOME TAXES. In the quarter ended December 31, 1998, the provision for
income taxes was $4.3 million, or an effective rate of 28%, as compared to $5.2
million, or an effective rate of 34%, in the previous year's quarter ended
December 31, 1997. The provision for income taxes recorded in the nine month
period ended December 31, 1998 was $12.2 million, or an effective rate of 28%,
exclusive of the effect of one-time non-deductible purchased research and
development expense, as compared to $11.3 million, or an effective rate of 34%,
in the corresponding nine month period in 1997. The decrease in the effective
tax rate is primarily the result of certain tax advantages associated with the
operation of the Dublin, Ireland manufacturing facility.

     NET INCOME (LOSS). Net income for the three month period ended December 31,
1998 was $11.1 million or $.10 per diluted share compared to net income of $10.1
million or $0.10 per diluted share for the corresponding period in the previous
fiscal year. Net loss for the nine month period ended December 31, 1998 was
$168.0 million or $1.61 per diluted share compared to net income of $22.0
million or $0.22 per diluted

                                      -15-
<PAGE>   16

share for the corresponding period in 1997. Net loss for the nine month periods
ended December 31, 1998 included purchased research and development expenses of
$199.3 million and restructuring charges of $5.1 million. Excluding these
charges and any tax effect, the net income for the nine month period ended
December 31, 1998 was $35.0 million or $.32 per diluted share.

YEAR 2000

      The Company continues to evaluate the possible impact of Year 2000 on its
products, internal information technology systems and non-information technology
systems and third party suppliers. The Company believes that all of its current
products are Year 2000 compliant, in that they will be able to distinguish
accurately between 20th century and 21st century dates. However, certain
products previously sold by the Company are not Year 2000 compliant, and the
Company has instituted an upgrade program for such non-compliant products. The
Company believes that the costs associated with such program will not have a
material adverse effect on its financial position or results of operations. The
failure of any of the Company's products to be Year 2000 compliant could result
in increased warranty claims and other liabilities.

     The Company believes that most of its internal information technology
systems are Year 2000 compliant. However, the Company continues to evaluate its
internal information technology systems and is in the process of implementing
upgrades to certain systems. In addition, the Company is also assessing other
non-information technology equipment and systems and related business processes
used in its operations. The Company plans to have a full assessment of such
equipment, systems and processes completed in the first quarter of calendar year
1999 and test and deploy solutions during the first and second quarters of
calendar year 1999. The Company expects that all of its equipment, systems and
processes will be Year 2000 compliant early in the third quarter of calendar
year 1999. The Company believes that the costs of converting or replacing
equipment, systems and related business processes that are not Year 2000
compliant will not have a material adverse effect on the Company's financial
position or results of operations.

     The Company is also assessing the possible effect on its operations of the
Year 2000 readiness of its suppliers of products and services, as well as its
customers. The Company has submitted questionnaires to its suppliers in order to
solicit information concerning the Year 2000 readiness of such suppliers. The
Company has material relationships with certain third party manufacturers and a
Year 2000 problem which results in any such manufacturer being unable to deliver
products to the Company could materially adversely affect the Company. There can
be no assurance that the information systems and other business processes of the
Company's suppliers and customers will be Year 2000 compliant, and it is
possible that various business functions which require the interaction of the
Company's systems with those of suppliers or customers will fail or malfunction
in the Year 2000. Such failure or malfunction could materially adversely affect
the Company's financial position or results of operation.

     In addition, it is possible that the Company's revenue may be adversely
affected if current and prospective customers divert their spending resources
away from networking equipment over the next two years in order to correct or
replace information systems which are not Year 2000 compliant.

     The Company expects to finalize a preliminary estimate of Year 2000 project
costs related to the Company's products and internal information and
non-information technology equipment and systems during the first quarter of
calendar year 1999. Year 2000 related project costs incurred to date are
immaterial to the Company's financial position and results of operation.
Although the Company expects its products and systems to be Year 2000 compliant
on or before December 31, 1999, it cannot predict with complete accuracy the
outcome of its Year 2000 program. If its Year 2000 program is not successful or
if the systems of suppliers and customers material to the Company fail or
malfunction in the Year 2000, the Company's financial position or
results of operations may be materially adversely affected. The Company is
currently preparing a contingency plan to address possible risks to

                                      -16-
<PAGE>   17

its internal systems and the consequences of Year 2000 issues among its
suppliers and expects such plan to be completed during calendar year 1999. The
Company has not yet estimated the costs of implementing the contingency plan,
and it is possible that such costs may have a material adverse effect on the
Company's financial position or results of operations.

FUTURE GROWTH SUBJECT TO RISKS

     The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's 1998 Annual
Report on Form 10-K and the Company's Current Report on Form 8-K dated September
11, 1998. This Quarterly Report on Form 10-Q should be read in conjunction with
the 1998 Form 10-K, particularly the section entitled "Certain Risk Factors,"
and such Current Report on Form 8-K.

     The networking industry is highly competitive and is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions which could render the Company's products noncompetitive
or obsolete. Because the Company's business strategy is based upon the belief
that ATM will be the technology of choice for the information technology
infrastructure, the Company's business, financial position and results of
operations would be materially adversely affected if ATM fails to gain broad
commercial acceptance or if other networking technologies gain competitive
advantages over ATM. Even if ATM achieves broad commercial acceptance, there can
be no assurance that the Company can continue to successfully develop and
introduce new products and enhancements given the fact that many of the
Company's competitors have significantly greater financial, technological and
personnel resources than does the Company.

     The networking industry has experienced consolidation as industry
participants have sought to expand into new technologies and markets. Several
recent transactions, such as the acquisition by Northern Telecom Limited of Bay
Networks, Inc. and the pending acquisition by Lucent Technologies Inc. of Ascend
Communications, Inc. have intensified this trend. Such consolidations may result
in the creation of stronger, more powerful competitors, which could increase the
competitive risks faced by the Company.

     The Company has in the past and may in the future make acquisitions of
companies and technologies in order to compete more effectively. The Company
completed the acquisition of Berkeley in September 1998 and in connection
therewith, recorded $199.3 million as purchased research and development
expense. The Company has received a letter from the Commission requesting
additional information with respect to the calculation and treatment of such
purchased research and development, as well as information concerning a
restructuring charge of $5.1 million which the Company recorded in connection
with the acquisition of Berkeley. The Company believes that it has appropriately
assigned fair values in connection with the acquisition of Berkeley, including
purchased research and development, and that it has appropriately recorded
restructuring charges in accordance with generally accepted accounting
principles. However, the Commission , in recent public statements and in
communications with other companies in the computer networking and other
technology industries, has challenged the methodologies used in valuing
purchased research and development and in accounting for acquisition-related
restructuring charges. The Company, as a result of discussions with the
Commission, may be required to restate its financial statements for the periods
ended September 30, 1998 and December 31, 1998 with respect to the treatment of
the in process research and development acquired from Berkeley and/or in
connection with the restructuring charges related to such acquisition. Any such
restatement would result in charges against the Company's earnings in future
periods, and may have a material adverse effect on the Company's results of
operations in such future periods.

     Acquisitions are subject to numerous risks, including the risk that
research and development and other expenses will materially increase without
necessarily leading to the successful introduction of new products or
enhancements. The introduction of a new line of products based on multi-service
WAN adaptation and concentration technology for the service provider market,
previously announced by the

                                      -17-
<PAGE>   18

Company in connection with an acquisition, has been delayed, and there can be no
assurance that this product will be introduced or, if it is introduced, that it
will be successful in the marketplace. There can be no assurance that the
Company can successfully introduce and market new products resulting from the
acquisition of Berkeley or identify other acquisition opportunities or that any
acquisitions that are completed will be successfully integrated with the
Company's operations.

     Although the Company has historically experienced increasing sales on an
annual basis, the Company's rate of revenue growth may be slower than that of
certain other networking industry participants. The Company's rate of revenue
growth may continue to decline, and there can be no assurance that the Company
will experience revenue growth in the future at historic rates or at all.

     The Company has experienced fluctuating operating results on a quarterly
and annual basis and may continue to do so. These fluctuations are caused by
many factors, including a disproportionate share of sales occurring late in a
given quarter, manufacturing lead times and the need to match resources with
anticipated demand for newly introduced products, the introduction of new
products and technologies by competitors, the pattern and seasonality of
customer purchasing cycles, variations in the mix of products sold and sales
channels, price competition, manufacturing lead times and changes in economic
conditions. These factors make it difficult to predict operating results for any
given period, and have led to, and are likely to continue to lead to, volatility
in the market price of the Company's Common stock.

     The Company competes in international markets and is, accordingly, subject
to numerous risks. Sales to foreign customers in fiscal 1998 decreased in
dollars and as a percentage of revenue in comparison with fiscal 1997 and have
continued to decline as a percentage of revenue in the first three quarters of
fiscal 1999. There can be no assurance that such sales will not decline. In
addition, the Company's international business may be adversely affected by
foreign regulatory requirements, changes in demand resulting from fluctuations
in currency exchange rates and local purchasing practices, difficulties in
distribution, slower payment of invoices, increases in duty rates, foreign
political and economic conditions and constraints upon international trade.

     The Company's gross margins in the three months and the nine months ended
December 31, 1998 were adversely affected by a government contract. This
government contract has a duration of seven years, and if the government were to
purchase significant quantities of products thereunder, the Company's gross
margins will continue to be adversely affected in future periods. In addition,
gross margins have been adversely affected and may continue to be adversely
affected by competitive pricing pressures and a change in the mix of products
sold toward lower-margin workgroup and desktop products for both ATM and
Ethernet. In addition, the Company's operating margins may be adversely affected
by the need to hire additional sales, marketing and other personnel. The Company
plans its operating expense levels based primarily on forecasted revenue, and a
shortfall in revenue would be likely to lead to operating results being lower
than expected. Any such failure to meet expectations could result in a decrease
in the market price of the Company's Common stock.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed most of its working capital and capital
expenditure requirements to date primarily through cash proceeds from public
offerings and cash generated from operations.

     Net cash provided by operations was $45.6 million for the nine month period
ended December 31, 1998. Net cash provided by operations was the result of net
income (net of purchased research and development expenses) and an increase to
deferred revenue offset somewhat by increases to inventories, accounts
receivable and prepaid expenses and other current assets. Net cash provided by
operations was $31.6 million for the nine month period ended December 31, 1997.
Net cash provided by operations was the result of net income and increases to
prepaid income taxes and income taxes payable, accrued liabilities and deferred
revenue offset somewhat by increases to accounts receivable and inventories. The
increase in accounts receivable and inventories was due to increased revenue.
The Company's investing activities to date have been primarily for the purchase
of fixed assets to support the Company's growth.

     At December 31, 1998, the Company had cash and cash equivalents of
approximately $189.4 million, short-term investments of $172.0 million and an
unused line of credit of $20 million.

                                      -18-
<PAGE>   19
     In December 1998, the Company entered into agreements to construct and
lease manufacturing and operating facilities on land adjacent to the Company's
headquarters, which was purchased by the Company. The lessor has committed to
fund a maximum of $20.5 million for the construction of the building. Upon
completion of construction, the Company will lease the facilities under an
eight-year operating lease and has options to renew the lease for two additional
five-year terms (subject to certain conditions). Future annual minimum rental
payments under the lease are approximately $1.5 million and are expected to
commence in fiscal year 2000. During the construction period, the Company
guaranties the repayment of 90% of certain project costs expended or financed by
the lessor, which amount is estimated not to exceed $18 million, and under
certain circumstances guaranties the repayment of 100% of all project costs
expended or financed by the lessor. During the lease period, the Company
guaranties all of its obligations under the lease.

     The Company may, at its option, purchase the facilities during or at the
expiration of the term of the lease at an amount equal to the remaining balance
of any debt of the lessor related to the construction of the facilities plus any
applicable prepayment penalties. The Company has the right to obtain a purchaser
for the facility upon the termination of the lease. If the Company exercises
this remarketing option and obtains a buyer for the facility, the Company
guaranties to the lessor a residual value for the facility of approximately $14
million, an amount that was determined at the lease inception date. Should the
Company not exercise the remarketing option, the Company will be required to
purchase the facility at the termination of the lease for approximately $19
million.

     As part of the above lease transaction, the Company will pledge
approximately $19.5 million of marketable securities (valued as of completion of
construction) as collateral for specified obligations of the lessor. The Company
under its investment policy will manage these securities. In addition, under the
terms of the lease, the Company is required to comply with certain financial
covenants including the maintenance of a minimum tangible net worth. Other
restrictive covenants limit indebtedness and the payment of dividends.

     The lease transaction entered into in December 1998 is tied to the lease
for the Company's existing headquarters facilities. As such, the lease contains
cross default provisions with the previous lease, and the Company must exercise
purchase options, renewal options and remarketing options with respect to all
buildings at the headquarters. Should the Company elect to purchase, or be
required to purchase, all facilities at its headquarters, the total purchase
price would approximate $43 million.

     The Company may be required to pay up to $21.2 million based on the
achievement of certain technological advances and/or the attainment of certain
revenue goals over the next 2 years. Since the acquisition date, the Company has
paid approximately $8.8 million to former equity holders of Berkeley.

     The Company believes that the proceeds from its public offerings, together
with its existing sources of liquidity and internally generated cash, will
satisfy the Company's projected cash needs through at least the next twelve
months. The Company may require additional sources of liquidity to fund future
growth, including additional equity offerings or debt financing.

     In July and August 1997, the Company was notified that it was a party to
seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during the
period from July 19, 1996 through April 1, 1997, inclusive. Pursuant to court
order, the lawsuits were consolidated and a consolidated amended complaint was
filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. In
December, 1998, plaintiffs filed a second consolidated amended complaint and the
Company and the individual defendants responded by filing a motion to dismiss,
or, in the alternative, for summary judgement. The Company believes the
allegations in the consolidated amended complaint are completely without merit
and intends to defend this action vigorously. Management believes that the
ultimate outcome of these claims will not have a material adverse effect on the
results of operations or financial position of the Company.

     To date, inflation has not had a material impact on the Company's financial
results.


NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities" ("SFAS 133"). This
new standard requires recognition of all derivatives as either

                                      -19-
<PAGE>   20

assets or liabilities at fair value. Based upon the hedging strategies currently
used and the level of activity related to derivative instruments, the Company
does not anticipate the effect of adoption to have a material impact on either
financial position or results of operations. The Company will implement SFAS 133
in fiscal year 2001, as required.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company is currently evaluating the
impact of SFAS 131. During the first quarter of fiscal year 1999, the company
adopted SFAS 130. This statement establishes standards for reporting and the
display of comprehensive income and its components in a primary financial
statement.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.









                                      -20-

<PAGE>   21



PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

         In July and August 1997, the Company was notified that it was a party
to seven nearly identical class action lawsuits, filed in the United States
District Court for the Western District of Pennsylvania, alleging certain
violations of federal securities laws by the Company and certain of its
officers, who were named as defendants in the suits, arising from alleged
misstatements or omissions by the Company. Plaintiffs seek compensatory damages
for injuries allegedly incurred by purchasers of the Company's stock during the
period from July 19, 1996 through April 1, 1997, inclusive. Pursuant to court
order, the lawsuits were consolidated and a consolidated amended complaint was
filed by the lead plaintiffs. The Company and the individual defendants
subsequently filed their answer to the consolidated amended complaint. In
December, 1998, plaintiffs filed a second consolidated amended complaint and the
Company and the individual defendants responded by filing a motion to dismiss,
or, in the alternative, for summary judgement. The Company believes the
allegations in the consolidated amended complaint are completely without merit
and intends to defend this action vigorously. Management believes that the
ultimate outcome of these claims will not have a material adverse effect on the
results of operations or financial position of the Company.

         The Company was served, in October 1998, with a complaint filed by Bell
Communications Research, Inc. in the United States District Court for the
District of Delaware. The complaint alleges that the Company infringes four
patents owned by the plaintiff and seeks compensatory and injunctive relief. The
Company subsequently filed its answer to the complaint. The Company believes the
allegations in the complaint are completely without merit and intends to defend
this action vigorously.

         Although management believes that the ultimate outcome of pending legal
proceedings will not have a material adverse effect on the Company's financial
position or results of operations, litigation is subject to inherent
uncertainties, and an unfavorable outcome may have a material adverse effect on
the results of operations in a particular future period or periods.


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

                  a)   Exhibits.

                  The exhibits listed below are filed or incorporated by
                  reference as part of this quarterly report on Form 10-Q:

                  3.1 Amended and Restated Certificate of Incorporation of FORE
                  Systems, Inc. (as amended by Certificate of Amendment dated
                  May 6, 1996) (incorporated by reference to Exhibit 3.1 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  March 31, 1996).

                  3.2 Second Amended and Restated Bylaws of FORE Systems, Inc.
                  (as amended through March 5, 1997) (incorporated by reference
                  to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended March 31, 1997).

                  10.1 Participation Agreement, dated as of December 14, 1998,
                  by and among FORE Systems, Inc., Wilmington Trust Company,
                  Mellon Financial Services Corporation #4 and Mellon Bank, N.A.

                  10.2 Lease and Open End Mortgage, dated as of December 14,
                  1998, by and between FORE Systems, Inc. and Wilmington Trust
                  Company.

                                      -21-
<PAGE>   22
                  10.3 Guaranty, dated as of December 14, 1998, by and among
                  FORE Sytems, Inc., Mellon Bank, N.A. and Mellon Financial
                  Services Corporation #4.

                  10.4 Guaranty Agreement, dated as of December 14, 1998, by and
                  among FORE Systems Holding Corporation, Mellon Bank, N.A. and
                  Mellon Financial Services Corporation #4.

                  10.5 Pledge and Security Agreement, dated as of December 14,
                  1998, by and among FORE Systems Holding Corporation, Mellon
                  Bank, N.A., Mellon Financial Services Corporation #4 and
                  Mellon Bank, N.A., as custodian.


                  27.1 Financial Data Schedule.

                  b)       Reports on Form 8-K.

                  On October 1, 1998, the Company filed a Current Report on Form
                  8-K in connection with the issuance of a press release
                  announcing preliminary financial results for its second fiscal
                  quarter ended September 30, 1998.



                                      -22-



<PAGE>   23


                                    SIGNATURE

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



                                               FORE SYSTEMS, INC.
                                               (Registrant)


Date:  February 16, 1999                       /s/ Bruce E. Haney
                                               ------------------
                                               Bruce E. Haney
                                               Senior Vice President and Chief
                                               Financial Officer
                                               (Authorized Officer and Principal
                                               Financial Officer)












                                      -23-



<PAGE>   24
                                              EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                Description                         
-----------                -----------                         
<S>                        <C>
10.1                       Participation Agreement, dated as of December 14,
                           1998, by and among FORE Systems, Inc., Wilmington
                           Trust Company, Mellon Financial Services Corporation
                           #4 and Mellon Bank, N.A.

10.2                       Lease and Open End Mortgage, dated as of December 14,
                           1998, by and between FORE Systems, Inc. and
                           Wilmington Trust Company.

10.3                       Guaranty, dated as of December 14, 1998, by and among
                           FORE Systems, Inc., Mellon Bank, N.A. and Mellon
                           Financial Services Corporation #4.

10.4                       Guaranty Agreement, dated as of December 14, 1998, by
                           and among FORE Systems Holding Corporation, Mellon
                           Bank, N.A. and Mellon Financial Services Corporation
                           #4.

10.5                       Pledge and Security Agreement, dated as of December
                           14, 1998, by and among FORE Systems Holding
                           Corporation, Mellon Bank, N.A., Mellon Financial
                           Services Corporation #4 and Mellon Bank, N.A., as
                           custodian.


27.1                       Financial Data Schedule
</TABLE>







                                      -24-