<PAGE>
 
                                 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 June 30, 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:  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.)

                               ONE ASCEND PLAZA
                            1701 HARBOR BAY PARKWAY
                           ALAMEDA, CALIFORNIA 94502
                                (510) 769-6001

    (Address of principal executive offices, zip code and telephone number)

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

                              Yes    X    No   
                                     -        -

The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 197,823,660 as of July 31, 1998.

This report, including exhibits, consists of 31 pages.  The Index To Exhibits is
found on page 29.
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
                                   FORM 10-Q
                                        
                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 

PART I:  FINANCIAL INFORMATION                                              Page No.
                                                                            -------- 
<S>                                                                         <C> 
        Item 1:  Financial Statements (Unaudited)

                 Condensed Consolidated Balance Sheets as of
                 June 30, 1998 and December 31, 1997                               3
 
                 Condensed Consolidated Statements of Operations for                 
                 the Quarter and Six Months Ended June 30, 1998 and 1997           4 
                                                                                     
                 Condensed Consolidated Statements of Cash Flows for                 
                 the Six Months Ended June 30, 1998 and 1997                       5 
                                                                                     
                 Notes to Condensed Consolidated Financial Statements              6 
                                                                                     
        Item 2:  Management's Discussion and Analysis of Financial           
                 Condition and Results of Operations                               13 
 
 
PART II:  OTHER INFORMATION
 
        Item 4:  Submissions of Matters to a Vote of Security Holders              23   
                                                                                     
        Item 6:  Exhibits and Reports on Form 8-K                                  24  
 
                 A:  Exhibits                                                      24
 
                 B:  Reports on Form 8-K                                           27
 
        Signatures                                                                 28
 
        Index to Exhibits                                                          29
</TABLE>
<PAGE>
 
PART I:    FINANCIAL INFORMATION

ITEM I:    FINANCIAL STATEMENTS


                          ASCEND COMMUNICATIONS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                   UNAUDITED

                                (In Thousands)


<TABLE>
<CAPTION>

                                                                     June 30,           Dec. 31,         
                                                                       1998               1997           
                                                                    ----------         ----------        
<S>                                                                 <C>                <C>               
ASSETS                                                                                                   
Current assets:                                                                                          
  Cash and cash equivalents...............................      $   164,772        $   240,817           
  Short-term investments..................................          198,357            234,610           
  Accounts receivable, net................................          268,954            234,183           
  Inventories.............................................          131,902             99,637           
  Deferred income taxes...................................          107,229             85,057           
  Other current assets....................................           18,352             20,283           
                                                                -----------        -----------           
      Total current assets................................          889,566            914,587           
                                                                                                         
Investments...............................................          340,701            101,212           
Furniture, fixtures and equipment, net....................          139,759            114,351           
Other assets..............................................           20,203              7,744           
                                                                -----------        -----------           
      Total assets........................................      $ 1,390,229        $ 1,137,894           
                                                                ===========        ============          
                                                                                                         
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                     
Current liabilities:                                                                                     
  Accounts payable........................................      $    68,788        $    54,414           
  Accrued compensation and related liabilities............           21,596             25,315           
  Accrued liabilities.....................................          112,254             88,909           
                                                                -----------        -----------           
      Total current liabilities...........................          202,638            168,638           
                                                                                                         
Commitments                                                                                              
                                                                                                         
Stockholders' equity:                                                                                    
  Common stock............................................              196                191           
  Additional paid-in capital..............................          985,328            878,455           
  Retained earnings ......................................          202,067             90,610           
                                                                -----------        -----------           
      Total stockholders' equity..........................        1,187,591            969,256           
                                                                -----------        -----------           
      Total liabilities and stockholders' equity..........      $ 1,390,229        $ 1,137,894           
                                                                ===========        ===========           
</TABLE> 
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   UNAUDITED
                     (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>


                                                                Quarter Ended June 30,              Six Months Ended June 30,    
                                                            ----------------------------          ----------------------------
                                                               1998               1997              1998                1997  
                                                            ---------          ---------          ---------         ----------
<S>                                                         <C>                <C>                <C>               <C> 
Net sales...........................................        $ 327,355          $ 311,693          $ 632,469         $  604,433    
Cost of sales.......................................          117,119            108,677            226,929            211,064 
                                                            ---------          ---------          ---------         ---------- 
  Gross profit......................................          210,236            203,016            405,540            393,369 
Operating expenses:                                                                                                            
  Research and development..........................           46,443             40,221             87,431             74,889 
  Sales and marketing...............................           67,724             59,876            135,063            113,117 
  General and administrative........................            9,717              9,455             19,761             18,544 
  Purchased research and development................                -                  -                  -            231,100 
  Cost of mergers...................................                -            150,271                  -            150,271 
                                                            ---------          ---------          ---------         ---------- 
    Total operating expenses........................          123,884            259,823            242,255            587,921 
                                                            ---------          ---------          ---------         ---------- 
                                                                                                                               
Operating income (loss) ............................           86,352            (56,807)           163,285           (194,552) 
Interest income, net................................            5,923              6,302             10,887             11,578   
                                                            ---------          ---------          ---------         ---------- 
                                                                                                                     
Income (loss) before income taxes...................           92,275            (50,505)           174,172           (182,974)
Provision for ( benefit from) income taxes..........           33,190             (1,668)            62,715             29,104 
                                                            ---------          ---------          ---------         ---------- 
                                                                                                                               
Net income (loss)...................................        $  59,085          $ (48,837)         $ 111,457         $ (212,078)   
                                                            =========          =========          =========         ========== 
                                                                                                                       
Net income (loss) per share - Basic.................        $    0.30          $   (0.26)         $    0.58         $    (1.13)
                                                            =========          =========          =========         ========== 
                                                                                                                         
Net income (loss) per share - Diluted...............        $    0.29          $   (0.26)          $   0.55         $    (1.13)
                                                            =========          =========          =========         ========== 
Number of shares used in per share                                                                                             
  calculation - Basic...............................         194,755             188,386            193,802            187,099 
                                                            =========          =========          =========         ========== 
Number of shares used in per share                                                                                           
  calculation - Diluted.............................         206,625             188,386            203,886            187,099
                                                            =========          =========          =========         ========== 
</TABLE> 




SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   UNAUDITED
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                       Six Months Ended June 30,
                                                                   --------------------------------
                                                                      1998                 1997
                                                                   -----------          -----------
<S>                                                                <C>                  <C>    
Operating activities:                                               
                                                                    
Net income (loss)..........................................       $ 111,457             $  (212,078)
                                                                    
Adjustments to reconcile net income (loss) to net cash              
 provided by (used in) operating activities:                        
   Depreciation and amortization...........................          30,458                  22,304
   Purchased research and development......................              -                  231,100
   Deferred income taxes...................................         (22,172)                 (7,990)
                                                                    
   Changes in operating assets and liabilities:                     
     Accounts receivable...................................         (34,771)                (53,420)
     Inventories...........................................         (34,152)                (25,636)
     Other current assets..................................           1,931                  10,181
     Other assets..........................................         (13,815)                 (9,116)
     Accounts payable......................................          14,374                  46,646
     Accrued liabilities and accrued compensation..........          19,626                  77,309
                                                                  ---------             ----------- 
       Net cash provided by operating activities...........          72,936                  79,300
                                                                  ---------             ----------- 
                                                                    
Investing activities:                                               
   Purchases of investments................................        (484,034)               (174,024)
   Maturities and sales of investments.....................         280,798                 106,171
   Purchases of furniture, fixtures and equipment..........         (52,623)                (35,681)
   Effect of business combinations.........................               -                  (9,361)
                                                                  ---------             ----------- 
     Net cash used in investing activities.................        (255,859)               (112,895)
                                                                  ---------             ----------- 
                                                                    
Financing activities:                                               
   Proceeds from issuance of common stock, net.............          75,233                  32,609
   Tax benefit related to exercise of stock options........          31,645                  28,262
                                                                  ---------             ----------- 
     Net cash provided by financing activities.............         106,878                  60,871
                                                                  ---------             ----------- 
                                                                    
Net (decrease) increase in cash and cash equivalents.......         (76,045)                 27,276
Cash and cash equivalents, beginning of period.............         240,817                 312,369
                                                                  ---------             ----------- 
                                                                    
Cash and cash equivalents, end of period...................       $ 164,772             $   339,645
                                                                  =========             ===========
                                                                    
Supplemental non-cash investing and financing activities:           
 Liabilities assumed in business combination...............       $       -             $     9,600
                                                                  =========             ===========
                                                                    
Supplemental disclosure of cash flow information:                   
 Cash paid for income taxes                                       $  58,196             $     9,000
                                                                  =========             ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   UNAUDITED
                                        
GENERAL

Ascend Communications, Inc. (the "Company" or "Ascend") 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) high speed Frame Relay,
Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP") switches for
application in telecommunications carriers and ISP backbone networks; (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.  These
products support existing digital and analog networks.

On June 30, 1997, the Company acquired Cascade Communications Corp. ("Cascade"),
a leading developer and manufacturer of carrier class Frame Relay, ATM and IP
switching products. The transaction was accounted for as a pooling of interests.
The consolidated financial statements of Ascend for prior periods have been
restated to include the financial position and results of operations of Cascade
(see "Business Combinations").

On January 28, 1997, Cascade completed its acquisition of Sahara Networks, Inc.
("Sahara"), a privately held developer of scaleable high-speed broadband access
products. The acquisition was accounted for under the purchase method of
accounting. The operations of Sahara have been included for periods subsequent
to the acquisition.

The interim condensed consolidated financial statements of Ascend
Communications, Inc. have been prepared by the Company without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.

The information included in this report should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.

In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary to summarize fairly the financial
position, results of operations and cash flows for such periods.  The results
for the interim period ended June 30, 1998 are not necessarily indicative of the
results that may be expected for any future periods.

                                      6
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)


CONCENTRATION OF CREDIT RISK

The Company sells and distributes a substantial percentage of its products to
ISPs, 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
reserves for potential credit losses.

INVENTORIES

Inventories are stated at the lower of cost (determined by the first-in, first-
out method) or market.  Inventories consist of (in thousands):

<TABLE>
<CAPTION>
                                                      JUNE 30,      DEC. 31, 
                                                       1998           1997                            
                                                     ----------    ----------                        
<S>                                                  <C>           <C>                                 
Finished goods....................................    $  48,419      $ 18,053                         
Products in process...............................       42,576        15,579                              
Raw materials and supplies........................       40,907        66,005                              
                                                      ----------     --------                        

                                                      $ 131,902      $ 99,637                         
                                                      ==========     ========                        
</TABLE> 

COMMITMENTS

In March 1996, the Company entered into an agreement to lease 13 acres of land
and fund the construction of buildings, being used for the Company's
headquarters, located in Alameda, California. In March 1998, the Company
renegotiated the lease agreement to increase the lease commitment from
approximately $24.9 million to approximately $46.0 million to fund the purchase
of additional land and the construction of additional buildings on the land.
The lease term is five years, as of the date of the re-negotiation, with an
option to renew for two years, subject to the lessor's consent.  The rent
obligation commenced in December 1996 and has been adjusted as of April 1998.
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, the Company has guaranteed a residual value of approximately $41.0
million.

                                       7
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)

NET INCOME (LOSS) PER SHARE

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128. This Statement requires the presentation of basic and diluted net income
(loss) per share.  Basic net income (loss) per common share is computed using
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period.  Dilutive common equivalent shares consist of stock options and
warrants.  The Company has restated all prior period per share data presented as
required by SFAS No. 128.

The following table presents the calculation of basic and diluted earnings per
share for the quarters and six months ended June 30, 1998 and 1997 (in
thousands, except per share data):

<TABLE> 
<CAPTION> 
                                                          Quarter Ended June 30,           Six Months Ended June 30,          
                                                        ----------------------------     -----------------------------
                                                           1998              1997            1998              1997         
                                                        -----------       ---------      ----------         ----------  
<S>                                                      <C>               <C>            <C>                <C>  
 Common Stock.........................................      194,755          188,386        192,987            187,099          
 Common Stock Equivalents.............................       11,870                -         10,899                  -             
                                                         ----------       ----------      ---------          --------- 
                                                                                                                            
 Total................................................      206,625          188,386        203,886            187,099           
                                                         ==========       ==========     ==========         ==========
                                                                                                                            
 Net Income (Loss)....................................   $   59,085       $  (48,837)    $  111,457         $ (212,078)    
                                                         ==========       ==========     ==========         ==========
                                                                                                                            
 Shares used in computing net income (loss)                                                                                 
 per share calculation - Basic........................      194,755          188,386        193,802            187,099           
                                                         ==========       ==========     ==========         ==========
                                                                                                                            
 Shares used in computing net income (loss)                                                                                 
 per share calculation - Diluted......................      206,625          188,386        203,886            187,099           
                                                         ==========       ==========     ==========         ==========
                                                                                                                            
 Net income (loss) per share - Basic..................        $0.30       $    (0.26)    $     0.58         $    (1.13)          
                                                         ==========       ==========     ==========         ==========
                                                                                                                            
 Net income (loss) per share - Diluted................  $      0.29       $    (0.26)    $     0.55         $    (1.13)          
                                                        ===========       ==========     ==========         ==========
</TABLE> 

BUSINESS COMBINATIONS

On June 30, 1997, the Company acquired Cascade in a transaction that was
accounted for as a pooling of interests.  The Company issued approximately
66,346,000 shares of its common stock to Cascade shareholders in exchange for
all outstanding Cascade shares.  Outstanding options to purchase Cascade common
stock were converted to options to purchase approximately 8,455,000 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:

                                       8
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)

BUSINESS COMBINATIONS (continued)


<TABLE>
<CAPTION>
                                                                Three Months                  
                                                                   Ended                      
                                                               March 31, 1997                      
                                                               --------------
<S>                  <C>                                        <C> 
REVENUE:             Ascend...................................  $      202,412                 
                     Cascade..................................          90,328                       
                                                                --------------                
                       Total..................................  $      292,740                 
                                                                ==============                
                                                                                              
------------------------------------------------------------------------------               
                                                                                              
NET INCOME (loss):   Ascend...................................  $       35,093                 
                     Cascade..................................        (198,334)                      
                                                                --------------                
                       Total..................................  $     (163,241)                    
                                                                ==============                
</TABLE> 

In February 1997, the Company acquired all of the outstanding stock of InterCon.
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 acquisition was accounted for under the purchase
method of accounting.  Accordingly, the total purchase price of $21.6 million
was allocated to the net assets acquired based upon their estimated fair values.
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 has not reached technological feasibility and that
has no alternative future use, and $3.0 million was allocated to purchased
software.

On April 1, 1997, the Company acquired Whitetree in a transaction that was
accounted for as a pooling of interests.  The Company issued approximately
1,315,000 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.

                                       9
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)

BUSINESS COMBINATIONS (continued)

On January 28, 1997, Cascade completed its acquisition of Sahara, Inc.
("Sahara"), a privately held developer of scaleable high-speed broadband access
products. Cascade issued approximately 3.4 million shares of Cascade common
stock 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 has not reached technological feasibility and that has no
alternative future use.

LITIGATION

The Company and various of its current and former officers and directors are
parties to a number of consolidated lawsuits pending in the United Stated
District Courts for the Central District of California, 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. In addition, the Company and one
if its officers were recently named as defendants in a securities action filed
in the Superior Court of Alameda County, California. The Alameda County Action
purports to be brought in behalf of all purchasers of the Company's stock
between July 15, 1997 and September 29, 1997 (excluding the defendants). The
lawsuits allege that the defendants violated the federal or state 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.

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.


                                      10
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)

LITIGATION (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 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.

PURCHASE COMBINATION ANNOUNCED SUBSEQUENT TO QUARTER-END

On August 3, 1998, the Company announced that it had entered into a definitive
merger agreement to acquire Stratus Computer, Inc. ("Stratus"), subject to
customary closing conditions. Under the terms of the agreement, the Company will
acquire all of the outstanding shares of Stratus based upon an exchange ratio of
0.75 shares of Ascend for each share of Stratus.  The combination will be
accounted for as a purchase and is expected to be completed in the fourth
quarter of 1998.


                                      11
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                                  (Continued)

PURCHASE COMBINATION (continued)

Stratus is divided into four business units: a Telecom Carrier business unit
which includes SS7 switching technology (the intelligent management of a
telephone network), OSS software (Operations Systems Software) and fault-
tolerant platform; an Enterprise Computer business unit; and two business units
comprised of Financial and Enterprise Software (TCAM and S2). The Company plans
to divest of the non-telecom businesses.


                                      12
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

This Report contains forward-looking statements which reflect the current views
of the Company with respect to future events that will have an effect on its
future financial performance.  These statements include the words "expects,"
"believes," "estimates," and similar expressions.  These forward-looking
statements are subject to various risks and uncertainties, including those
referred to under "Factors That May Affect Future Results" and elsewhere herein,
that could cause actual future results to differ materially from historical
results or those currently anticipated.  Readers are cautioned not to place
undue reliance on these forward-looking statements.

The information set forth below should be read in conjunction with the unaudited
interim condensed consolidated financial statements and notes thereto included
in Part 1 - Item 1 of this Quarterly Report and the audited financial statements
and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1997
included in the Company's 1997 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain line items from the Company's Condensed
Consolidated Statements of Operations for the quarters and six month periods
ended June 30, 1998 and 1997, respectively:

<TABLE> 
<CAPTION> 
                                                             Quarter Ended June 30,             Six Months Ended June 30, 
                                                           ---------------------------         ---------------------------
                                                             1998               1997             1998               1997  
                                                           --------           --------         --------           --------
<S>                                                        <C>                <C>              <C>                <C>     
Net sales......................................              100  %             100  %           100  %             100  %
Cost of sales..................................               36                 35               36                 35   
                                                           --------           --------         --------           --------  
  Gross profit.................................               64                 65               64                 65        
Operating expenses:                                                                                                     
  Research and development.....................               14                 13               14                 12          
  Sales and marketing..........................               21                 19               21                 19         
  General and administrative...................                3                  3                3                  3         
  Purchased research and development...........                -                  -                -                 38         
  Cost of mergers..............................                -                 48                -                 25          
                                                           --------           --------         --------           --------     
    Total operating expenses...................               38                 83               38                 97        
                                                           --------           --------         --------           --------     
Operating income (loss)........................               26                (18)              26                (32)       
Interest income, net...........................                2                  2                2                  2        
                                                           --------           --------         --------           --------  
Income (loss) before income taxes..............               28                (16)              28                (30)       
Provision for income taxes.....................               10                  -               10                  5        
                                                           --------           --------         --------           --------   
                                                                                                                            
Net income (loss)..............................               18   %            (16) %            18  %             (35) %
                                                           ========           ========         ========           ========
</TABLE> 


                                      13
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
NET SALES

Net sales for the quarter ended June 30, 1998 were $327.4 million, an increase
of 5% over net sales of $311.7 million for the second quarter of 1997.  Net
sales for the six months ended June 30, 1998 were $632.5 million, an increase of
5% over net sales of $604.4 million for the six months ended June 30, 1997.  For
the quarter ended June 30, 1998, no individual customer accounted for more than
10% of net sales. UUNET, an Internet service provider, accounted for
approximately 13% of net sales for the quarter ended June 30, 1997. UUNET also
accounted for 12% and 16% of net sales for the six months ended June 30, 1998
and June 30, 1997, respectively. International sales accounted for approximately
34% of net sales for the quarter ended June 30, 1998 compared to 38% of net
sales for the same period in 1997.  This decrease is principally due to
decreased sales of the Company's products in Asia. International sales accounted
for approximately 30% of net sales for the six months ended June 30, 1998
compared to 34% of net sales for the same period in 1997. This decrease for the
first half of 1998 was principally due to decreased sales of the Company's
products in Europe and Asia.

The following table provides a breakdown of net sales by business unit as a
percentage of total Company net sales for the quarters and six month periods
ended June 30, 1998 and 1997, respectively:

<TABLE>
<CAPTION>


                                    QUARTER ENDED JUNE 30,           SIX MONTHS ENDED JUNE 30,                       
                                   --------------------------       ---------------------------
       BUSINESS UNIT                 1998              1997           1998               1997                   
---------------------------        --------          --------       --------           --------   
<S>                                <C>               <C>            <C>                <C>        
Access Switching............         42   %            55   %         43   %             57   %                 
Core Systems................         47                32             44                 31                     
Enterprise Access...........          6                 9              8                  8                     
Other.......................          5                 4              5                  4                     
                                   --------          --------       --------           --------   
  Total Company.............        100   %           100   %        100   %            100   %                
                                   ========          =========      ========           ========                  
</TABLE> 

ACCESS SWITCHING - The Access Switching business unit is composed of the MAX
family of products.   MAX products accounted for 42% and 55% of total Company
net sales for the quarters ended June 30, 1998 and 1997, respectively.  MAX
products accounted for 43% and 57% of total Company net sales for the six months
ended June 30, 1998 and 1997, respectively.  The decrease in net sales of MAX
products was primarily attributable to large shipments of TNT product to
customers in North America in the first two quarters of 1997.  The TNT was first
made available for commercial shipments in the first quarter of 1997 and demand
for the product had accumulated in anticipation of its general release.

CORE SYSTEMS - The Core Systems business unit offers the B-STDX family of Frame
Relay switches, the CBX500 and GX550 families of core ATM switches, the SA
family of broadband ATM switches and the GRF family of IP switches. Core Systems
products accounted for 47% and  32% of total Company net sales for the quarters
ended June 30, 1998 and 1997, respectively. Core Systems products accounted for
44% and 31% of total Company net sales for the six months ended June 30, 1998
and 1997, respectively.  The increase in net sales of Core Systems products is
primarily due to strong demand for ATM and Frame Relay worldwide and shipments
of the GX550.

ENTERPRISE ACCESS - The Enterprise Access business unit offers the Pipeline
family of remote access equipment as well as the Multiband MAX family of inverse
multiplexing equipment.

                                      14
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

ENTERPRISE ACCESS  (continued)

Enterprise Access products accounted for 6% and 9% of total Company net sales
for the quarters ended June 30, 1998 and 1997, respectively. Enterprise Access
products accounted for 8% of total Company net sales for the six months ended
June 30, 1998 and 1997.

GROSS MARGIN

Gross margin was 64% and 65% for the quarters and six months ended June 30, 1998
and 1997, respectively.  The decrease in gross margin was primarily due to
increased manufacturing period costs. In the future, the Company's gross margins
may be affected by several factors, including the mix of products sold, the
price of products sold, the introduction of new products with lower gross
margins, the distribution channels used, price competition, increases in
material costs and changes in other components of cost of sales.

RESEARCH AND DEVELOPMENT

Research and development expenses increased 15% to $46.4 million in the second
quarter of 1998 from $40.2 million in the second quarter of 1997. Research and
development expenses increased 17% to $87.4 million for the six months ended
June 30, 1998 from $74.9 million for the six months ended June 30, 1998.
Research and development expenses as a percent of net sales increased to 14% for
the second quarter of 1998 compared to 13% for the same quarter of 1997.
Research and development expenses as a percent of net sales increased to 14% for
the first six months of 1998 compared to 12% for the same period of 1997. These
increases were primarily due to the addition of engineering personnel, payments
for consulting services in connection with developing and enhancing the
Company's existing and new products, payments for consulting services related to
filing applications and product testing required to obtain governmental
approvals to resell the Company's products outside of North America, addition of
development laboratory equipment, and material costs associated with new product
prototypes.  In addition, research and development expenses increased, in part,
through the addition of engineering personnel and facilities as a result of the
Company's merger and acquisition activities.

SALES AND MARKETING

Sales and marketing expenses increased 13% to $67.7 million for the second
quarter of 1998 from $59.9 million for the second quarter of 1997. Sales and
marketing expenses increased 19% to $135.1 million for the first six months of
1998 from $113.1 million for the same period of 1997. Sales and marketing
expenses as a percent of net sales increased to 21% for the second quarter and
six months ended June 30, 1998 compared to 19% for the same periods in 1997.
These increases were primarily due to the addition of sales, marketing and
technical support personnel, increased commissions due to increased net sales,
spending for marketing materials and trade shows, expanded advertising and
promotional programs, and expenditures for demonstration and loaner equipment
used by customers, and expenses associated with opening additional sales offices
in North America, Europe and Asia and the Pacific Basin.  The growth in sales,
marketing and technical support personnel was primarily due to the need to
manage the activities of an increasing number of customers and new products.

                                      15
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased 3% to $9.7 million for the second
quarter of 1998 from $9.5 million for the second quarter of 1997. General and
administrative expenses increased 7% to $19.8 million for the first six months
of 1998 from $18.5 million for the first six months of 1997. These increases
were primarily due to the addition of finance, information systems and
administrative personnel, accruals for performance bonuses, increased facilities
costs and the cost of investor relations activities.  General and administrative
expenses as a percent of net sales were 3% for the quarters and six months
periods ended June 30, 1998 and 1997.

PURCHASED RESEARCH AND DEVELOPMENT

Purchased research and development costs were $231.1 million for the first six
months of 1997.  These costs were primarily attributable to the purchase of
technology and related assets associated with the acquisition of Sahara during
the first quarter of 1997. This acquisition provided technology and expertise
that the Company is using to enhance and expand the breadth of its offerings to
end-user markets.

COST OF MERGERS

For the quarter ended June 30, 1997, the Company charged to operations one-time
merger costs of approximately $150.3 million. These costs resulted from the
acquisitions of Cascade and Whitetree, and consist primarily of investment and
professional fees and other direct costs associated with the merger.  Of the
$150.3 million in one-time merger costs, approximately $44.9 are not deductible
for tax purposes.

INTEREST INCOME, NET

Interest income (net) decreased by approximately $.4 million to $5.9 million (2%
of net sales) for the second quarter of 1998 compared to $6.3 million for the
same quarter of 1997. Interest income (net) decreased by approximately $.7
million to $10.9 million (2% of net sales) for the first six months of 1998
compared to $11.6 million for same period of 1997. This decrease in interest
income (net) is due to shifting investments from taxable to non-taxable
securities.

PROVISION FOR INCOME TAXES

The Company's effective tax rate for the quarter ended June 30, 1998 and 1997
was 36% and 37.4%, respectively, exclusive of the effect of one-time non-
deductible in-process research and development expenses and certain merger
related expenses.  The effective tax rate for the six months ended June 30, 1998
and 1997 was 36% and 37.8%, respectively. The lower effective tax rate for 1998
is primarily attributable to reduction in the overall state effective tax rate
and utilization of various tax credits.  The Company anticipates its 1998
effective tax rate to be approximately 36.0%, however, the rate could change
upon a change in the estimated amount or geographic mix of the Company's
earnings, changes in U.S. tax law such as reinstatement of the research tax
credit, or the effect of future acquisitions.

                                      16
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1998, the Company's principal sources of liquidity included $703.8
million of cash and cash equivalents, short-term investments and investments,
and an unsecured $25.0 million revolving line of credit which expires in June
1999.  There were no borrowings under the line of credit during the six months
ended June 30, 1998.  The net decrease in cash and cash equivalents of $76.0
million for the period was principally due to $255.9 million of funds used in
investing activities, partially offset by $106.9 million of funds provided by
financing activities and  $72.9 million of funds provided by operating
activities.  The net cash provided by operating activities for the six months
ended June 30, 1998 was primarily due to increased net income, increases in
accrued liabilities and compensation, and accounts payable, partially offset by
increases in accounts receivable, inventories, deferred income taxes, and other
assets.

Net cash used in investing activities of $255.9 million for the six months ended
June 30, 1998 related primarily to net purchases, maturities and sales of
investments, and expenditures for furniture, fixtures and equipment.  Financing
activities provided $106.9 million for the six months ended June 30, 1998,
primarily due to proceeds from, and tax benefits related to, the exercise of
stock options and issuance of common stock in connection with the Company's
employee and outside director stock plans.

At June 30, 1998, the Company had $686.9 million in working capital.  The
Company currently has no significant capital commitments other than commitments
under facilities and operating leases.  The Company believes that its available
sources of funds and anticipated cash flow from operations will be adequate to
finance current operations, anticipated investments and capital expenditures for
at least the next twelve months.


FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company's quarterly and annual operating results are affected by a wide
variety of risks and uncertainties as discussed in the Company's 1997 Annual
Report on Form 10-K.  This Report on Form 10-Q should be read in conjunction
with that Form 10-K, particularly the section "Factors That May Affect Future
Results." These risks and uncertainties include but are not limited to
competition, the mix of products sold, the mix of distribution channels
employed, the Company's success in developing, introducing and shipping new
products, the Company's ability to attract and retain key employees, the
Company's success in integrating acquired operations, the Company's dependence
on single or limited source suppliers for certain components used in its
products, price reductions for the Company's products, risks inherent in
international sales, changes in the levels of inventory held by third-party
resellers, the timing of orders from and shipments to customers, seasonality and
general economic conditions.

                                      17
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                                        
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)

In particular, a substantial portion of the Company's sales of MAX and Pipeline
products is related to the Internet industry.  In North America, the Company
sells a substantial percentage of its products, particularly its MAX products,
to ISPs.  Additionally, a substantial portion of the Company's sales of core
systems products is related to the telecommunications carrier industry.  In
North America, the Company sells a substantial percentage of the core systems
products to public carriers.  There can be no assurance that these industries
and their infrastructure will continue to develop or that acceptance of the
Company's products by these industries will be sustained.  The Company believes
competition in the Internet and telecommunications carrier industry will
increase significantly in the future and could adversely affect the Company's
business, results of operations and financial condition.

The Company expects that its gross margins could be adversely affected in future
periods by price changes as a result of increased competition.  In addition,
increased sales of Pipeline products as a percentage of net sales may adversely
affect the Company's gross margins in future periods as these products have
lower gross margins than the Company's other products. Further, the Company's
use of third parties to distribute its products to other value-added resellers
may adversely affect the Company's gross margins.

The Company expects that international sales will continue to account for a
significant portion of the Company's net sales in future periods.  International
sales are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable and potentially adverse tax consequences.  The Company depends on
third party resellers for a substantial portion of its international sales.
Certain of these third party resellers also act as resellers for competitors of
the Company that can devote greater effort and resources to marketing
competitive products.  The loss of certain of these third party resellers could
have a material adverse effect on the Company's business and results of
operations.  Although the Company's sales are denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales and profitability in that country.  Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations may
contribute to fluctuations in the Company's results of operations.  In addition,
sales in Europe and certain other parts of the world typically are adversely
affected in the third quarter of each calendar year as many customers reduce
their business activities during the summer months.  These seasonal factors may
have an adverse effect on the Company's business, results of operations and
financial condition. In recent periods the Company's results of operations have
been adversely affected by general economic problems in Asia. There can be no
assurance these problems will not continue in future periods.

                                      18
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)

The Company typically operates with a relatively small backlog. As a result,
quarterly sales and operating results generally depend on the volume of, timing
of and ability to fulfill orders received within the quarter, which are
difficult to forecast.  In the Company's most recent quarters, the sequential
sales growth slowed from prior levels, and a disproportionate share of the sales
occurred in the last month of the quarter. The Company's ability to meet
financial expectations could be hampered if the nonlinear sales pattern
continues in future periods.  Accordingly, the cancellation or delay of even a
small percentage of customer purchases could adversely affect the Company's
results of operations in the quarter.  A significant portion of the Company's
net sales in prior periods has been derived from relatively large sales to a
limited number of customers, and therefore the failure of the Company to secure
expected large sales may have a material adverse impact on results of
operations. A significant portion of the Company's expense levels is relatively
fixed in advance based in large part on the Company's forecasts of future sales.
If sales are below expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall.

The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The introduction of new products requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, avoid excessive levels of older
product inventories and ensure that adequate supplies of new products can be
delivered to meet customer demand.  Furthermore, products such as those offered
by the Company may contain undetected or unresolved hardware problems or
software errors when they are first introduced or as new versions are released.
There can be no assurance that, despite extensive testing by the Company,
hardware problems or software errors will not be found in new products after
commencement of commercial shipments, resulting in delay in or loss of market
acceptance.  Future delays in the introduction or shipment of new or enhanced
products, the inability of such products to gain market acceptance or problems
associated with new product transitions could adversely affect the Company's
business, results of operations and financial condition.

Many computer systems were not designed to handle any dates beyond the Year
1999, and therefore computer hardware and software will need to be modified
prior to the Year 2000 in order to remain functional.  The Company is concerned
that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming Year 2000 problem.  This
may result in spending being diverted from networking solutions over the next
three years.  Additionally, the Company will have to devote resources to
providing the Year 2000 solution for its own products.  The Year 2000 issue
could lower demand for the Company's products while increasing the Company's
costs.  These factors could have a material adverse impact on the Company's
financial results.

The Company believes the majority of its major systems are currently Year 2000
compliant, and costs to transition the Company's remaining systems to Year 2000
compliance are not

                                      19
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)

anticipated to be material.  There can be no assurance that systems operated by
third parties that interoperate with or contain the Company's products will
timely achieve Year 2000 compliance.

Any failure of these third parties' systems to timely achieve Year 2000
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company mainly competes in four segments of the data networking market : (i)
wide area network ("WAN") and Internet access, (ii) WAN and Internet backbone
switching, (iii) remote LAN access and Internet subscriber access, and (iv)
videoconferencing and multimedia access. The Company competes in one or more of
these market segments with Cisco Systems, Inc., 3Com Corporation, Bay Networks,
Inc., Newbridge Networks, Inc., Shiva Corporation, Northern Telecom, Inc., and
many others. Some of these competitors have substantially greater financial,
marketing and technical resources than the Company. The Company expects
additional competition from existing competitors and from a number of other
companies, some of which may have substantially greater financial, marketing and
technical resources than the Company, that may enter the Company's existing and
future markets. Increased competition could result in price reductions, reduced
profit margins and loss of market share, each of which would adversely affect
the Company's business, results of operations and financial condition.

The Company's sales are, to a significant degree, made through
telecommunications carriers, value-added resellers ("VARs") and distributors.
Accordingly, the Company is dependent on the continued viability and financial
stability of these companies.  While the Company has contractual relationships
with many telecommunications carriers, VARs and distributors, these agreements
do not require these companies to purchase the Company's products and can be
terminated by these companies at any time.  There can be no assurance that any
of the telecommunications carriers, VARs or distributors will continue to market
the Company's products.  The telecommunications carrier customers, to the extent
they are resellers, VARs and distributors, generally offer products of several
different companies, including products that are competitive with the Company's
products.  Accordingly, there is a risk that these companies may give higher
priority to products of other suppliers, thus reducing their efforts to sell the
Company's products.  Any special distribution arrangement and product pricing
arrangement that the Company may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins.

The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel.  The Company does not have employment contracts with its key
personnel and does not maintain any key person life insurance policies.  The
loss of key personnel could adversely affect the Company.

The Company is currently experiencing rapid growth and expansion, which has
placed, and will continue to place, a significant strain on its administrative,
operational  and financial resources and increased demands on its systems and
controls.  This growth has resulted in a continuing increase in the level of
responsibility for both existing and new management personnel.  The Company
anticipates that its continued growth will require it to recruit and hire a
substantial number of new engineering, sales, marketing and managerial
personnel.  There can be no assurance that the Company will be successful at
hiring or retaining these personnel.  The Company's ability to manage its growth
successfully will also require the Company to continue

                                      20
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)

to expand and improve its operational, management and financial systems and
controls and to expand its manufacturing capacity. If the Company's management
is unable to manage growth effectively, the Company's business, results of
operations and financial condition may be materially and adversely affected.

The Company relies on a combination of patents, copyright, and trade secret laws
and non-disclosure agreements to protect its proprietary technology.  The
Company is currently involved in patent disputes the results of which are not
presently determinable.  Such disputes could result in significant expenses to
the Company and divert the efforts of the Company's technical management
personnel.

Although the Company generally uses standard parts and components for its
products, certain components, including certain key microprocessors and
integrated circuits, are presently available only from a single source or from
limited sources. The Company has no supply commitments from its vendors and
generally purchases components on a purchase order basis as opposed to entering
into long term procurement agreements with vendors. The Company has generally
been able to obtain adequate supplies of components in a timely manner from
current vendors or, when necessary to meet production needs, from alternate
vendors. The Company believes that, in most cases, alternate vendors can be
identified if current vendors are unable to fulfill needs. However, delays or
failure to identify alternate vendors, if required, or a reduction or
interruption in supply, or a significant increase in the price of components
could adversely affect the Company's results of operations and could impact
customer relations.

The Company has concluded the acquisition of four companies in 1997 and five
companies in 1996. On August 3, 1998, the Company announced that it had entered
into a definitive merger agreement to acquire Stratus Computer, Inc, subject to
customary closing conditions. Achieving the anticipated benefits of these
acquisitions or any other acquisitions the Company may undertake will depend in
part upon whether the integration of the acquired companies' products and
technologies, research and development activities, and sales, marketing and
administrative organizations is accomplished in an efficient and effective
manner, and there can be no assurance that this will occur.  Moreover, the
integration process may temporarily divert management attention from the day-to-
day business of the Company.  Failure to successfully accomplish the integration
of the acquired companies could have a material adverse effect on the Company's
business, financial condition and/or results of operations.

                                      21
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)

The Company's common stock has experienced significant price volatility, and
such volatility may occur in the future, particularly as a result of quarter-to-
quarter variations in the actual or anticipated financial results of the Company
or other companies in the networking industry, announcements by the Company or
competitors regarding new product introductions or other developments affecting
the Company and/or changes in financial estimates by public market analysts.  In
addition, the market has experienced extreme price and volume fluctuations that
have affected the market price of many technology companies' stocks and that
have been unrelated or disproportionate to the operating performance of these
companies.  These broad market fluctuations may adversely affect the market
price of the Company's common stock.  Recent periods of volatility in the market
price of the Company's securities resulted in securities class action litigation
against the Company and various officers and directors.  Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the results of
operations and financial condition of the Company.

In consideration of these factors, there can be no assurance that the Company
will be able to sustain growth in revenues or profitability, particularly on a
period-to-period basis.

                                      22
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


PART II:  OTHER INFORMATION

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

Ascend's Annual Meeting of Stockholders was held on May 21, 1998.  Proxies for
the meeting were solicited pursuant to Regulation 14A. At the meeting,
management's nominees for directors were elected.  A summary of the nominees and
voting results are as follows:

<TABLE>
<CAPTION>
                                          SHARES                           
                            ----------------------------------
      NOMINEE                VOTING FOR             WITHHELD                                            
--------------------        ------------          ------------                          
<S>                         <C>                   <C>                                   
Mory Ejabat                  165,755,048             1,803,717                                               
Robert K. Dahl               165,806,431             1,751,431                                          
Betsy S. Atkins              165,660,153             1,898,612                                          
Roger Evans                  165,904,969             1,653,796                                          
C. Richard Kramlich          165,842,207             1,716,558                                          
James P. Lally               165,833,636             1,725,129                                          
Martin Schoffstall           155,519,751            12,038,014                                        
Daniel E. Smith              154,919,772            12,638,993                                        
</TABLE> 

Other matters voted upon by the stockholders at the meeting were:


1.  A proposal to approve the implementation of the Corporation's 1998 Stock
    Incentive Plan was approved with 111,742,443 shares voting for, 50,606,951
    shares voting against, 799,260 shares abstaining and 4,355,111 broker non-
    votes.

2.  A proposal to approve amendments to the Corporation's 1994 Outside Directors
    Stock Option Plan (the "Directors Option Plan") to (i) decrease the initial
    stock option grant from 192,000 shares to 75,000 shares for Outside
    Directors first elected after the Annual Meeting; (ii) to decrease the stock
    option grant for each subsequent year of service on the Board of Directors
    from 48,000 shares to 25,000 shares for all Outside Directors following the
    Annual Meeting; (iii) to limit the number of shares granted for each initial
    stock option grant and the stock option grant for each subsequent year of
    service on the Board of Directors to the amount stated above effective after
    the Annual Meeting; and (iv) to increase the number of shares of Common
    Stock available for issuance under the Directors Option Plan from 2,000,000
    shares to 2,400,000 shares was approved with 136,122,533 shares voting for,
    30,563,882 shares voting against and 817,350 shares abstaining.

3.  A proposal to ratify the selection of Ernst & Young LLP as auditors for the
    fiscal year ending December 31, 1998 was approved with 166,699,849 shares
    voting for, 464,696 shares voting against and 339,220 shares abstaining.

                                      23
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.
                                        
Item 6:  Exhibits and Reports on Form 8-K:

                A:  Exhibits

<TABLE>
<CAPTION>

                     No.                                           Description       
             -----------------     ---------------------------------------------------------------------------                   
<S>                        <C>     <C>                                                                          
          (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)             10.1     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.                            
          
          (9)            10.15     Cascade Communications Corp. 1994 Employee Stock Purchase Plan.                               
</TABLE> 

                                      24
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


     A:  EXHIBITS (continued)

<TABLE>
<CAPTION>                 

                     No.                                           Description                        
             -----------------     ---------------------------------------------------------------------------       
<S>                      <C>       <C>                                                                          

          (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.                                                                        
                                                                                                                           
         (13)             10.2     Loan Agreement and related agreements, date November 30, 1995, by and                   
                                   between the Registrant and Wells Fargo Bank of California, as amended by                
                                   the first amendment thereto, dated October 15, 1997                                     
                                                                                                                           
         (14)            10.21     Lease agreement dated March 20, 1998, by and between the Registrant and                 
                                   Sumitomo Bank Leasing and Financing, Inc.                                               
                                                                                                                           
         (14)            10.22     Form of Change in Control Agreement for CEO and Executive Vice Presidents               
                                                                                                                           
         (14)            10.23     Form of Change in Control Agreement for Vice Presidents                                 
                                                                                                                           
         (15)            10.24     Ascend Communications, Inc. 1998 Stock Incentive Plan                                    

                          27.0     Financial Data Schedule.
</TABLE> 

         (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.

                                      25
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


     A:  EXHIBITS (continued)

<TABLE>
<CAPTION>                 

              No.                                         Description                                               
           --------      -------------------------------------------------------------------------------------        
<S>                      <C>                                                                          
              (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 Commisstion (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.                                                                       
                                                                                                                                    
             (13)        Incorporated by reference from the Company's Form 10-K for the year ended                                  
                         December 31, 1997.                                                                                         
                                                                                                                                    
             (14)        Incorporated by reference from the Company's Form 10-Q for the quarter ended                               
                         March 31, 1998                                                                                             
                                                                                                                                    
             (15)        Incorporated by refernce from the Company's Registration Statement on Form S-8                             
                         (File No. 333-54029) filed with the Commission on June 1, 1998.                                         
</TABLE> 

                                      26
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


B:  Reports on Form 8-K:

On July 2, 1998, the Company filed a Report on Form 8-K announcing that former
Federal Communications (FCC) Chairman, Reed E. Hundt, joined the Company's Board
of Directors. The Company also announced that Daniel E. Smith, Executive Vice
President and General Manager of the Core Systems Division, resigned from the
Company and the Board of Directors, effective July 6, 1998. Dr. Hassan Ahmed
replaced Daniel E. Smith as Executive Vice President and General Manager of the
Core Systems Division.

                                      27
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.


                                  SIGNATURES
                                        

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



                                           ASCEND COMMUNICATIONS, INC.



DATE  August 11, 1998                by    /s/ Michael F.G.Ashby
      ---------------                      -------------------------------------
     
                                           Michael F.G. Ashby, Executive Vice
                                           President and Chief Financial Officer
                                           (Principal Financial Officer)


DATE  August 11, 1998                by    /s/ Bernard V. Schneider
      ---------------                      -------------------------------------
 
                                           Bernard V. Schneider, Vice President
                                           and Treasurer

                                      28
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

                     No.                                           Description       
             -----------------     ---------------------------------------------------------------------------                   
<S>                        <C>     <C>                                                                          
          (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.                            
          
          (9)            10.15     Cascade Communications Corp. 1994 Employee Stock Purchase Plan.                               
</TABLE> 

                                      29
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

Index to Exhibits (continued)


<TABLE>
<CAPTION>                 

                     No.                                           Description                        
             -----------------     ---------------------------------------------------------------------------       
<S>                      <C>       <C>                                                                          

          (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.                                                                        
                                                                                                                           
         (13)            10.20     Loan Agreement and related agreements, date November 30, 1995, by and                   
                                   between the Registrant and Wells Fargo Bank of California, as amended by                
                                   the first amendment thereto, dated October 15, 1997                                     
                                                                                                                           
         (14)            10.21     Lease agreement dated March 20, 1998, by and between the Registrant and                 
                                   Sumitomo Bank Leasing and Financing, Inc.                                               
                                                                                                                           
         (14)            10.22     Form of Change in Control Agreement for CEO and Executive Vice Presidents               
                                                                                                                           
         (14)            10.23     Form of Change in Control Agreement for Vice Presidents                                 
                                                                                                                           
         (15)            10.24     Ascend Communications, Inc. 1998 Stock Incentive Plan                                    

                          27.0     Financial Data Schedule.
</TABLE> 

         (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.

                                      30
<PAGE>
 
                          ASCEND COMMUNICATIONS, INC.

Index to Exhibits (continued)


<TABLE>
<CAPTION>                 

                     No.                                           Description                        
             -----------------     ---------------------------------------------------------------------------       
<S>                                <C>                                                                          
                     (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.                                                            
                                                                                                                                   
                    (13)           Incorporated by reference from the Company's Form 10-K for the year ended                       
                                   December 31, 1997.                                                                              
                                                                                                                                   
                    (14)           Incorporated by reference from the Company's Form 10-Q for the quarter ended                    
                                   March 31, 1998                                                                                  
                                                                                                                                   
                    (15)           Incorporated by reference from the Company's Registration Statement on Form S-8                  
                                   (File No. 333-54029) filed with the Commission on June 1, 1998.                                  
</TABLE> 

                                      31