<PAGE>   1
                                    FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
(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: 0-10018
                       ---------

                         DSC COMMUNICATIONS CORPORATION
                        --------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                    54-1025763
--------------------------------            ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

           1000 Coit Road, Plano, Texas                  75075
--------------------------------------------------------------------------------
      (Address of principal executive offices)         (Zip Code)

                                 (972) 519-3000
             --------------------------------------------------------
               (Registrant's telephone number, including area code)

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

                               Yes X       No
                                  ----       ----

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                              Yes          No
                                 ----        ----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

                                                 Number of Shares Outstanding
        Title of Each Class                          as of July 31, 1998
--------------------------------            -----------------------------------
   Common Stock, $0.01 Par Value                         119,098,418

<PAGE>   2




Item 1.  Financial Statements.

                 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                     June 30,           December 31,
                                                                                      1998                1997
                                                                              ------------------   -------------------
                                                                                  (Unaudited)
<S>                                                                               <C>                 <C>
              Assets
------------------------------------------------------------------------------
CURRENT ASSETS
  Cash and cash equivalents ..............................................        $   158,940         $   277,200
  Marketable securities ..................................................            328,121             340,642
  Receivables ............................................................            392,740             436,093
  Inventories ............................................................            390,338             374,247
  Deferred income taxes ..................................................            100,032              79,879
  Other current assets ...................................................            132,252              86,969
                                                                                  -----------         -----------
       Total current assets ..............................................          1,502,423           1,595,030
                                                                                  -----------         -----------

PROPERTY AND EQUIPMENT, at cost ..........................................            921,032             870,943
  Less accumulated depreciation
   and amortization ......................................................           (454,918)           (427,333)
                                                                                  -----------         -----------
                                                                                      466,114             443,610
                                                                                  -----------         -----------

CAPITALIZED SOFTWARE DEVELOPMENT COSTS ...................................             82,692              72,341
COST IN EXCESS OF NET ASSETS OF
  BUSINESSES ACQUIRED, NET ...............................................            154,379             159,594
OTHER ....................................................................            157,738             168,940
                                                                                  -----------         -----------

           Total assets ..................................................        $ 2,363,346         $ 2,439,515
                                                                                  ===========         ===========

  Liabilities and Shareholders' Equity
------------------------------------------------------------------------------
CURRENT LIABILITIES
  Accounts payable .......................................................        $   107,085         $   110,135
  Accrued liabilities ....................................................            312,234             301,044
  Income taxes payable ...................................................                259              28,536
  Current portion of long-term debt ......................................             32,590              32,602
                                                                                  -----------         -----------
       Total current liabilities .........................................            452,168             472,317
                                                                                  -----------         -----------

LONG-TERM DEBT, net of current portion ...................................            598,154             629,206
NONCURRENT INCOME TAXES
 AND OTHER LIABILITIES ...................................................            124,070             122,172

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
  Common stock, $0.01 par value, issued -
  123,944 in 1998 and 122,377 in 1997;
   outstanding - 118,955 in 1998 and
   117,388 in 1997 .......................................................              1,239               1,231
  Additional capital .....................................................            765,630             755,963
  Unrealized gains on securities,
   net of income taxes ...................................................                375                 194
  Accumulated translation adjustment .....................................                567               2,494
  Retained earnings ......................................................            464,254             499,049
                                                                                  -----------         -----------
                                                                                    1,232,065           1,258,931

  Treasury stock, at cost, 4,989 shares ..................................            (43,111)            (43,111)
                                                                                  -----------         -----------
     Total shareholders' equity ..........................................          1,188,954           1,215,820
                                                                                  -----------         -----------
           Total liabilities and
             shareholders' equity ........................................        $ 2,363,346         $ 2,439,515
                                                                                  ===========         ===========
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.


                                  Page 2 of 17


<PAGE>   3
                 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                          Three Months Ended                  Six Months Ended
                                                               June 30,                           June 30,
                                                     ---------------------------         ----------------------------
                                                         1998             1997              1998              1997
                                                     ---------         ---------         ---------         ---------

<S>                                                  <C>               <C>               <C>               <C>
Revenue .....................................        $ 388,446         $ 382,883         $ 703,284         $ 729,086
Cost of revenue .............................          268,023           226,327           491,847           433,255
                                                     ---------         ---------         ---------         ---------
  Gross profit ..............................          120,423           156,556           211,437           295,831
                                                     ---------         ---------         ---------         ---------

Operating costs and expenses:
  Research and product development ..........           66,616            59,545           135,869           114,326
  Selling, general and administrative .......           62,719            57,335           122,119           115,386
  Other operating costs .....................            3,493             2,462             7,126             4,934
                                                     ---------         ---------         ---------         ---------
    Total operating costs and expenses ......          132,828           119,342           265,114           234,646
                                                     ---------         ---------         ---------         ---------

  Operating income (loss) ...................          (12,405)           37,214           (53,677)           61,185

Interest income .............................            7,702             4,513            16,031             9,551
Interest expense ............................          (12,647)           (4,988)          (26,701)          (10,812)
Other income (expense), net .................            9,904            30,708             9,117            33,910
                                                     ---------         ---------         ---------         ---------
    Income (loss) before income taxes .......           (7,446)           67,447           (55,230)           93,834
Income tax expense (benefit) ................           (2,755)           25,630           (20,435)           35,657
                                                     =========         =========         =========         =========
    Net income (loss) .......................        $  (4,691)        $  41,817         $ (34,795)        $  58,177
                                                     =========         =========         =========         =========

Basic income (loss) per share ...............        $   (0.04)        $    0.36         $   (0.29)        $    0.50
                                                     =========         =========         =========         =========
Diluted income (loss) per share .............        $   (0.04)        $    0.35         $   (0.29)        $    0.49
                                                     =========         =========         =========         =========

Average shares used in per share computation:
    Basic ...................................          118,350           117,124           118,276           117,072
    Diluted .................................          118,350           119,301           118,276           119,188
</TABLE>


See the accompanying Notes to Condensed Consolidated Financial Statements.


                                  Page 3 of 17

<PAGE>   4





                 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                                         June 30,
                                                           ---------------------------------------
                                                                 1998               1997
                                                           ----------------      -----------------

<S>                                                           <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss) ..................................        $ (34,795)        $  58,177
  Adjustments to reconcile net income (loss) to
    net cash provided by (used for) operating
    activities:
      Depreciation and amortization ..................           52,997            48,609
      Amortization of capitalized software
         development costs ...........................           16,765            12,276
      Deferred income taxes ..........................          (20,435)            5,699
      Gain from sales of stock received from
         1996 litigation settlement ..................               --           (35,494)
  Decrease in current and long-term receivables ......           47,975            13,861
  Increase in inventories ............................           (8,407)          (28,547)
  Increase (decrease) in income taxes payable ........          (28,277)           19,956
  Other, including changes in other
    assets, current payables and other liabilities ...          (29,406)          (29,936)
                                                              ---------         ---------

          NET CASH PROVIDED BY (USED FOR)
          OPERATING ACTIVITIES .......................           (3,583)           64,601
                                                              ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment ................          (67,731)          (77,850)
  Purchases of marketable securities .................         (521,730)         (122,244)
  Proceeds from sales and maturities of marketable
    securities .......................................          535,961           152,447
  Proceeds from sales of stock received from
    1996 litigation settlement .......................               --            35,494
  Additions to capitalized software
    development costs ................................          (26,916)          (22,507)
  Other ..............................................           (8,862)          (11,535)
                                                              ---------         ---------

          NET CASH USED FOR
          INVESTING ACTIVITIES .......................          (89,278)          (46,195)
                                                              ---------         ---------
</TABLE>


                                   (Continued)


                                  Page 4 of 17


<PAGE>   5



                 DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
           Condensed Consolidated Statements of Cash Flows (Continued)
                                 (In thousands)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                   Six Months Ended
                                                                        June 30,
                                                            -------------------------------
                                                                 1998              1997
                                                            ------------     -------------

<S>                                                           <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Payments on long-term borrowings .................          (30,312)          (29,443)
  Proceeds from the sale of common stock
     under stock plans .............................            4,499             1,041
  Other ............................................              547             4,018
                                                            ---------         ---------

          NET CASH USED FOR
          FINANCING ACTIVITIES .....................          (25,266)          (24,384)
                                                            ---------         ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH
          AND CASH EQUIVALENTS .....................             (133)             (767)
NET DECREASE IN CASH AND CASH
          EQUIVALENTS ..............................         (118,260)           (6,745)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...          277,200           155,101
                                                            ---------         ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD .........        $ 158,940         $ 148,356
                                                            =========         =========



SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid ....................................        $  22,954         $   9,618
                                                            =========         =========

  Income taxes paid ................................        $  33,658         $  10,934
                                                            =========         =========
</TABLE>




See the accompanying Notes to Condensed Consolidated Financial Statements.


                                  Page 5 of 17


<PAGE>   6








                DSC COMMUNICATIONS CORPORATION AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements
                  June 30, 1998 and 1997 and December 31, 1997
                                  (Unaudited)

BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements reflect,
in the opinion of management, all adjustments necessary to present fairly the
Company's financial position, results of operations and cash flows. Such
adjustments are of a recurring nature unless otherwise disclosed herein. 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 rules and regulations promulgated by the
Securities and Exchange Commission. However, the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. Quarterly consolidated financial results may not be indicative of
annual consolidated financial results.

The Company has not paid or declared a cash dividend on its common stock since
its organization.

Certain prior year's financial statement information has been reclassified to
conform with the current year financial statement presentation.

These unaudited financial statements should be read in conjunction with the
audited financial statements and accompanying notes included in the Company's
1997 Annual Report to Shareholders for the year ended December 31, 1997.

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in the first quarter of 1998. This standard
requires disclosure of comprehensive income, defined as net income plus nonowner
changes in shareholders' equity, such as accumulated translation adjustments and
unrealized gains (losses) on certain marketable securities. For the three months
ended June 30, 1998 and 1997, total comprehensive income (loss) amounted to
($4.7) million and $28.8 million, respectively. Total comprehensive income
(loss) amounted to ($36.5) million and $51.8 million for the six months ended
June 30, 1998 and 1997, respectively. The primary difference between
comprehensive income and net income for the three months ended June 30, 1997 is
related to a decrease in unrealized appreciation due to the sale of an
investment in common stock received from a litigation settlement.

PENDING MERGER

On June 3, 1998, Alcatel Alsthom ("Alcatel") and the Company signed a definitive
agreement under which Alcatel will acquire the Company in a stock-for-stock
transaction. Under the terms of the agreement all outstanding shares of the
Company's stock will be exchanged at a ratio of 0.815 of an Alcatel ADS for each
outstanding DSC share. Based on the closing price of Alcatel's ADS on June 3,
1998, the total value of the acquisition is approximately $4.4 billion. The
transaction will be accounted for under the purchase method of accounting.

The transaction is expected to close in the third quarter of 1998 subject to
various terms and conditions including the approval of Company shareholders and
regulatory agencies. The Company's shareholders have been asked to vote on the
proposed merger at a Special Meeting to be held on August 27, 1998.



                                  Page 6 of 17
<PAGE>   7
INVENTORIES

Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>

                                                                              June 30,             December 31,
                                                                                1998                  1997
                                                                            ------------           ------------
<S>                                                                         <C>                    <C>
       Raw Materials.................................................       $   92,246             $   88,796
       Work in Process...............................................           20,677                 17,840
       Finished Goods................................................          277,415                267,611
                                                                            ------------            ----------- 
                                                                            $  390,338             $  374,247
                                                                            ============           ============ 

</TABLE>

CREDIT AGREEMENTS AND LONG-TERM DEBT

The Company has an unsecured $160.0 million revolving credit facility with
several banks which expires in May 2001. This facility provides for borrowings
and issuances of letters of credit in various currencies. The maximum borrowings
available under the facility are reduced by the value of outstanding letters of
credit issued by the banks on behalf of the Company. The letters of credit
issued by the banks under this agreement at June 30, 1998 totaled $2.2 million.
This facility contains various financial covenants and there have been no
borrowings under this agreement. Two of the Company's foreign subsidiaries also
have credit agreements providing for borrowings of up to $18.3 million with
local banks.

The Company's senior debt agreements contain various financial covenants,
including among other things, minimum net worth, maintenance of certain fixed
charge ratios and maximum allowable indebtedness to net worth. In 1998, the
Company and its senior lenders agreed to amendments to the senior loan
agreements modifying certain of these financial covenants. As a result, the
Company is in compliance with all of the provisions of its senior loan
agreements. In addition, the variable interest rate on certain senior borrowings
(approximately $79.7 million outstanding at June 30, 1998) was increased from a
maximum of 0.69% above Danish index rates to 0.80% above the index rate and
maturities of $31.0 million of these borrowings were reduced from 2011 to 2001.
The Company also agreed to increase the interest rate on other senior borrowings
(approximately $140.6 million outstanding at June 30, 1998) from 9.0% to 9.6%.
Should the Company's credit rating be downgraded, the Company has also agreed to
pay the lenders (i) $2.5 million in cash if the merger (see "Pending Merger") is
consummated, or (ii) warrants to purchase the Company's common stock with an
equivalent value of $2.5 million should the merger not be consummated. The
warrants, if issued, would be exercisable by the lenders for up to ten years at
the fair market value of the Company's common stock at the date of issuance.

OTHER INCOME (EXPENSE), NET

Included in Other income (expense), net for the second quarter of 1998 was a
pre-tax gain of $10.0 million from the sale of the Company's remaining
investment in Airspan Communications Corporation ("Airspan"). Other income
(expense), net in the first and second quarters of 1997 included pre-tax gains
of approximately $4.0 million and $31.5 million, respectively, from sales of
common stock received from a settlement of litigation in 1996.

INCOME TAXES

The Company provided an income tax benefit of $20.4 million for the first half
of 1998 at the estimated annual effective income tax rate of 37%. The income tax
benefit and related increase in the deferred tax asset were recorded based on
the Company's operating history as well as a current assessment that the Company
will generate taxable earnings in the future.


                                  Page 7 of 17


<PAGE>   8





The Company's income taxes include federal, foreign and state (including Puerto
Rico) income taxes. The effective income tax rate is based upon estimates for
the full year for a number of variables including, among other things,
forecasted income in the United States and foreign jurisdictions. The effective
tax rate could change as estimates of these and other variables are finalized at
the end of the year.

INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                   Three Months Ended               Six Months Ended
                                                        June 30,                        June 30,
                                              ------------------------------  -----------------------------
                                                  1998            1997            1998            1997
                                              --------------  --------------  -------------   -------------
<S>                                          <C>               <C>              <C>               <C>
Numerator:
   Net income (loss) ................        $  (4,691)        $  41,817        $ (34,795)        $  58,177

Denominator for basic income 
   (loss) per share:
   Weighted average shares 
     outstanding ....................          118,350           117,124          118,276           117,072
Effect of dilutive securities:
   Stock options and awards .........               --             2,177               --             2,116
                                             ---------         ---------        ---------         ---------
Denominator for diluted income
   (loss) per share .................          118,350           119,301          118,276           119,188

Basic income (loss) per share .......        $   (0.04)        $    0.36        $   (0.29)        $    0.50
                                             =========         =========        =========         =========
Diluted income (loss) per share .....        $   (0.04)        $    0.35        $   (0.29)        $    0.49
                                             =========         =========        =========         =========
</TABLE>

For both the three and six months ended June 30, 1998, the number of stock
options and awards excluded from the computation of income (loss) per share
because of their antidilutive effect was 12.2 million shares, compared to 4.3
million shares for the same periods in 1997. In addition, approximately 8.0
million shares of common stock issuable upon conversion of the 7% convertible
notes were excluded from the calculation of income (loss) per share for the
three and six months ended June 30, 1998 due to their antidilutive effect.


COMMITMENTS AND CONTINGENCIES

Contingent Liabilities

The Company has guarantees of $69.1 million outstanding at June 30, 1998
supporting bid and performance bonds to customers and others, of which $2.2
million were collateralized by letters of credit issued under the Company's
credit facility. Additionally, in the past, the Company has sold customer
receivables and leases under agreements which contain recourse provisions. The
Company could be obligated to repurchase a portion of the sales-type and
operating lease receivables which were previously sold on a partial recourse
basis, the terms of which allow the Company to limit its risk of loss to
approximately $7.5 million at June 30, 1998. The Company believes it has
adequate reserves for any ultimate losses associated with these contingencies.

At June 30, 1998, the Company had forward foreign exchange contracts of $54.1
million outstanding.


                                  Page 8 of 17



<PAGE>   9


Litigation

In August, 1996, the Company filed suit against Samsung Information Systems
America, Inc., Samsung Electronics Co., Ltd. and James L. Bunch and later added
additional defendants Leo Putchinski, Kevin Gallagher, Jim Olivier, Nancy
Korman, Martin Wu, David Fox, Bhushan Gupta and Michael Bray (collectively the
"Defendants"). The suit arises out of research and development that the Company
was and is doing on a next-generation switching system. Many of the Defendants
to this suit were long-term employees of the Company and were involved in the
research and development of the Company's next-generation switching system. In
the summer and early fall of 1996, Samsung hired each of these individuals and
placed them into similar positions researching and developing Samsung's
next-generation switching system.

The Company alleges claims for breach of contract, theft of trade secrets,
unfair competition and tortious interference with contract and prospective
contractual relations. Based on these claims, the Company is seeking damages in
an amount that is not yet specified. The Company is also seeking an injunction
against the Defendants to prevent them from using the Company's trade secrets.
The Company obtained a temporary restraining order against Defendant Bunch on
August 14, 1996.

On December 31, 1996, the Defendants filed a counterclaim against the Company,
alleging a variety of causes of action, including a claim for declaratory
judgment, wrongful injunction, tortious interference with actual and prospective
contractual relations, misappropriation of trade secrets, unfair competition,
exclusion from telephony switch market, civil conspiracy, fraud and negligent
misrepresentation, breach of fiduciary or confidential relationship, defamation
and intentional infliction of emotional distress. These allegations arise
primarily out of the filing and prosecution of the Company's suit against the
Defendants.

The Company believes that it has valid and substantial claims against the
Defendants and valid defenses to the Defendants' counterclaims.

On October 8, 1996, the Company filed suit against Pulse Communications, Inc.
("Pulsecom") alleging contributory copyright infringement and misappropriation
of trade secrets relating to the manufacture and sale of a POTS line card
advertised as compatible with the Company's Litespan-2000 system. The Company
sought damages and an injunction barring further infringement of the Company's
intellectual property rights by Pulsecom and its agents. Pulsecom filed a
counterclaim alleging that the Universal Voice Grade line card manufactured by
the Company for the Litespan-2000 system infringes U. S. Patent No. 5,263,081
assigned to Pulsecom. The Company's claims against Pulsecom were dismissed by
the trial court on June 10, 1997. Pulsecom's claims against the Company were
dismissed August 29, 1997. Both parties have filed appeals. Based on the facts
known at this time, the Company believes it has a valid defense to Pulsecom's
claim and that the ultimate outcome of the dispute will not have a material
adverse effect on the Company's consolidated financial position.

On May 25, 1994, the Company filed suit against DGI Technologies, Inc. ("DGI"),
a Texas corporation, in the United States District Court for the Northern
District of Texas, Dallas Division. The Company alleged that DGI misappropriated
the Company's trade secrets regarding digital trunk interface cards and
microprocessor cards. The Company sought damages for DGI's prior actions and
permanent injunctive relief. DGI brought counterclaims for alleged violations of
federal antitrust statutes, tortious interference, industrial espionage,
misappropriation of trade secrets, trespass, conversion and unfair competition.
DGI's antitrust counterclaims were based upon allegations that the Company's
claims constituted "sham" litigation, that the Company's statements to customers
about the impact of their use of DGI products on the Company's warranties were
unlawful attempts to exclude competition, and that

                                  Page 9 of 17

<PAGE>   10


the Company unlawfully tied the sale of its microprocessors to the sale of other
products. The balance of DGI's counterclaim was based upon certain investigative
procedures employed by the Company in connection with this controversy. DGI
asked the court to award unspecified actual damages, treble damages under
antitrust statutes, punitive damages, injunctive relief and attorneys' fees, and
sought declaratory relief that DGI's sales of microprocessors did not violate
any proprietary rights of the Company or any applicable law.

The case was tried in January 1997 and the jury returned a verdict. The Court
entered a final judgment on November 18, 1997. The judgment enjoined DGI from
selling its microprocessor cards and included a net monetary judgment of $0.3
million in the Company's favor. Both parties have filed appeals to the Fifth
Circuit Court of Appeals.

On December 22, 1997, Catherine Millet, the Company's former Vice President of
advanced planning in the Access Products Division and her new employer, Advanced
Fibre Communications, Inc. ("AFC"), sued the Company in Roseville, California
State Court for declaratory judgment against the Company. Millet is attempting
to keep the Company from enforcing rights in its trade secrets and intellectual
property which Millet will inevitably be required to use in her new position
with AFC. Ms. Millet is performing the identical job function in advanced
product planning that she performed for the Company in regard to the same line
of products. The Company had previously sued AFC for theft of trade secrets in
U. S. District Court. That case was resolved at trial.

On January 22, 1998, the Company filed patent infringement action against AFC,
in federal court, Texarkana, Texas. On May 28, 1998, AFC filed a counterclaim
against the Company alleging Sherman Act violation, unfair competition,
interference with business advantage, breach of contract, fraud, and negligent
misrepresentation. While no specific amount of damages is stated by AFC, treble
and punitive damages are also requested.

On July 2, 1998, Charles Grimes, a shareholder of the Company, filed a complaint
in Delaware State Court against the Company and all of its current directors.
Styled as a class action, it alleges corporate waste. The complaint does not
seek to enjoin or interfere with the merger. The Company believes that the
allegation is wholly without merit, and it intends to pursue several valid
defenses.

The Company is also party to other routine legal proceedings incidental to its
business.

The Company does not believe the ultimate resolution of these matters will have
a material adverse effect on its consolidated financial position.



                                 Page 10 of 17



<PAGE>   11


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

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 Except for the historical information contained herein, the matters
discussed or incorporated by reference in this Quarterly Report on Form 10-Q
herein, including the matters relating to future performance, are
forward-looking statements that are dependent upon a number of risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. These risks and uncertainties include, but are
not limited to, those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other risks indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.

Pending Merger

On June 3, 1998, Alcatel and the Company signed a definitive agreement under
which Alcatel will acquire the Company in a stock-for-stock transaction. Under
the terms of the agreement all outstanding shares of the Company's stock will be
exchanged at a ratio of 0.815 of an Alcatel ADS for each outstanding DSC share.
Based on the closing price of Alcatel's ADS on June 3, 1998, the total value of
the acquisition is approximately $4.4 billion. The transaction will be accounted
for under the purchase method of accounting.

The transaction is expected to close in the third quarter of 1998 subject to
various terms and conditions including the approval of Company shareholders and
regulatory agencies. The Company's shareholders have been asked to vote on the
proposed merger at a Special Meeting to be held on August 27, 1998.

Results of Operations

For the three months ended June 30, 1998, the Company reported revenue of $388.4
million and a net loss of $4.7 million, or $0.04 per diluted share, compared to
revenue of $382.9 million and net income of $41.8 million, or $0.35 per diluted
share, for the three months ended June 30, 1997. Net income for the second
quarter of 1998 included a pre-tax gain of $10.0 million (after-tax gain of $6.3
million or $0.05 per diluted share) from the sale of Company's remaining
investment in Airspan Communications Corporation. Second quarter 1997 net income
included a pre-tax gain of approximately $31.5 million (after-tax gain of $19.5
million or $0.16 per diluted share) from the sale of stock received from a 1996
litigation settlement. Excluding the effects of these special gains, the net
loss for the three months ended June 30, 1998 was $11.0 million, or $0.09 per
diluted share, compared to net income of $22.3 million, or $0.19 per diluted
share, for the same period in 1997. For the six months ended June 30, 1998, the
Company reported revenue of $703.3 million and a net loss of $34.8 million, or
$0.29 per diluted share compared to revenue of $729.1 million and net income of
$58.2 million, or $0.49 per diluted share for the same period in 1997. Excluding
the effects of special gains, the net loss for the first half of 1998 was $41.1
million, or $0.35 per diluted share, compared to net income of $36.2 million, or
$0.31 per diluted share, for the six months ended June 30, 1997.

Although revenue levels for the 1998 and 1997 second quarters remained
comparable, revenue of access and transmission products increased, while switch
product deliveries declined. The lower level of switch product revenue was due
to a number of factors, including the reduction in deliveries of wireless switch
platforms, delayed purchasing decisions by certain long-distance customers
involved in merger and restructuring activities, and delayed customer orders
from a key Japanese customer.



                                 Page 11 of 17


<PAGE>   12



Gross profit as a percentage of revenue was 31% and 30% for the three and six
months ended June 30, 1998, respectively, compared to 41% for the same periods
in 1997. The gross profit percentage for the second quarter of 1998 was
negatively impacted by a higher volume of access and transmission products which
have traditionally produced lower margins than switching products. The Company's
gross profit percentage and operating performance could vary significantly from
period to period in the future due to changes in the relative mix of product
deliveries, as was experienced in the first half of 1998, software content and
the impact of sales price changes.

The Company's European transmission business and newly acquired cellular
infrastructure business continued to incur operating losses in the first half of
1998. The ultimate profitability of these businesses is dependent upon
successful market acceptance and deployment of these products.

Research and product development expenses were $66.6 million, or 17% of revenue,
in the second quarter of 1998, compared to $59.5 million, or 16% of revenue, for
the same period in 1997. For the first half of 1998, research and development
expenses were $135.9 million, or 19% of revenue, compared to $114.3 million, or
16% of revenue for the same period in 1997. The Company continues to make a
substantial investment in research and development to maintain the Company's
ongoing development of new products and enhancements to existing products across
all strategic product areas, including the cellular infrastructure business
acquired in December 1997.

Selling, general and administrative expenses totaled $62.7 million and $122.1
million for the three and six months ended June 30, 1998, respectively, compared
to $57.3 million and $115.4 million, respectively, for the same periods in 1997.
As a percentage of revenue, selling, general and administrative expense was 16%
and 17% for the three and six months ended June 30, 1998, compared to 15% and
16% for the same periods in 1997. The Company's active pursuit of claims related
to its intellectual property rights have resulted in increased legal expenses
which may continue at a high level as this litigation progresses. See
"Litigation" under "Commitments and Contingencies" in Notes to Condensed
Consolidated Financial Statements for further discussion.

Interest income and interest expense were at higher levels in the first half of
1998 compared to the 1997 first half primarily as a result of the convertible
debt offering in August 1997. Included in Other income (expense), net for the
second quarter of 1998 was a pre-tax gain of $10.0 million related to the sale
of the Company's remaining investment in Airspan. For the first and second
quarters of 1997, Other income (expense), net included pre-tax gains of $4.0
million and $31.5 million, respectively, resulting from the sales of stock
received as part of a litigation settlement in 1996. See "Other Income
(Expense), Net" in Notes to Condensed Consolidated Financial Statements for
further discussion.

See "Income Taxes" in Notes to Condensed Consolidated Financial Statements for
information on the Company's income taxes during 1998.

Financial Condition and Liquidity

The Company's cash and cash equivalents at June 30, 1998 were $158.9 million
compared to $277.2 million at December 31, 1997, and marketable securities were
$328.1 million at June 30, 1998 compared to $340.6 million at December 31, 1997.

Cash of $3.6 million was used in operating activities. Cash usage resulted
primarily from the Company's net loss and a significant U.S. income tax payment,
substantially offset by a reduction in receivables. In order to reduce the risk
of collection associated with the Company's receivables, among other things, the
Company has historically sold both current and long-term

                                 Page 12 of 17



<PAGE>   13




receivables primarily without recourse. The net proceeds collected from the
receivable sales in the first six months of 1998 were $96.7 million. The Company
may from time to time continue to sell receivables in the future.

Investing activities during the six months ended June 30, 1998 included
additions to property and equipment of $67.7 million. The Company anticipates
that capital expenditures for 1998 could be in the range of $140 million to $160
million. This amount includes capital additions related to a new customer
service facility on the Plano campus, which is expected to be completed in the
third quarter of 1998. However, the timing and extent of any future capital
expenditures is dependent upon future business growth.

The Company received proceeds of approximately $35.5 million in the first half
of 1997 from the sales of common stock received as part of a litigation
settlement in 1996.

In April 1998, the Company made a scheduled annual principal payment of $28.1
million on the $225.0 million loan entered into during 1995.

As discussed in "Credit Agreements and Long-Term Debt" in Notes to Condensed
Consolidated Financial Statements, the Company has an unsecured $160.0 million
revolving credit agreement. There have been no borrowings under this credit
facility. Outstanding letters of credit, which totaled $2.2 million at June 30,
1998, reduce the amount of available borrowings. Two of the Company's foreign
subsidiaries also have credit agreements providing for borrowings of up to $18.3
million with local banks.

As discussed in "Credit Agreements and Long-Term Debt" in Notes to Condensed
Consolidated Financial Statements, in 1998, certain financial covenants in the
Company's senior loan agreements were modified and, as a result, the Company
continues to be in compliance with the provisions of its senior loan agreements.
The Company believes it will remain in compliance with the provisions of its
loan agreements for the foreseeable future. However, should the Company's
operating results continue to deteriorate in the future, additional amendments
or waivers to these agreements could become necessary.

Additionally, the Company agreed to repay a senior lender $31.0 million of
senior notes previously due in 2011 in 2001. As a result, total long-term debt
maturities in 2001 have increased from $53.2 million to $84.2 million. See
"Credit Agreements and Long-Term Debt" in Notes to Condensed Consolidated
Financial Statements for further discussion.

The Company is party to certain litigation, as disclosed in "Litigation" under
"Commitments and Contingencies" in Notes to Condensed Consolidated Financial
Statements, the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial position.

The Company believes that its existing cash and short-term investments and
available credit facilities will be adequate to support the Company's financial
resource needs, including working capital requirements, capital expenditures,
operating lease obligations and debt payments. In order to remain competitive in
the future, the Company believes that it will become increasingly necessary to
offer financing alternatives to both domestic and international customers. To
the extent such financing becomes significant or other business requirements
arise, additional financing could become necessary.

Risks and Uncertainties

The Company has taken action to understand the nature and extent of the work
required to make its products, systems and infrastructure Year 2000 compliant. A
Year 2000 project team has been appointed to bring its products, systems and
infrastructure into compliance. The Company is currently evaluating responses


                                 Page 13 of 17

<PAGE>   14



from and addressing issues with significant vendors to determine the extent to
which the Company's systems and infrastructure are vulnerable to those third
parties which fail to remedy their own Year 2000 issues. The Company anticipates
its systems and infrastructure will be compliant by the end of 1998 or early
1999. The Company will develop contingency plans for those critical suppliers
the Company deems to be at risk of not being compliant. Relative to the
Company's products, Year 2000 compliant releases are generally available for the
majority of the Company's products, and for the remainder of the products, a
Year 2000 compliant release will be available by the end of 1998. While the
Company does not believe the Year 2000 issue will pose significant operational
problems, if the Year 2000 compliance modifications are not made, or completed
timely, the Year 2000 issue could have a material adverse impact on the
Company's business. The Year 2000 compliance activities will be performed as a
part of the Company's normal sustaining activity and will not result in
significant incremental costs to the Company. It is estimated that the total
Year 2000 costs, including costs previously incurred and future costs, will be
in the range of $15 million to $20 million. The estimated cost and date on which
the Company believes it will be Year 2000 compliant are based on management's
best estimates, yet there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.

The Company's future operating results may be affected by a number of factors,
including, but not limited to, the introduction and market acceptance of new
products on a timely basis; mix of products sold; the impact of sales price
changes; the timing and ultimate receipt of orders from certain customers which
continue to constitute a large portion of the Company's revenue; the successful
enhancement of existing products; manufacturing lead times; significant
fluctuations in foreign currency exchange rates; the successful integration of
strategic acquisitions; effects of consolidation among the Company's customer
base; the success of underlying technologies in which the Company has chosen to
target certain of its products; the successful completion of certain multi-year
projects which include requirements to develop new technologies including
hardware, software and installation of infrastructure systems; effects of
customer purchasing budgets, which have historically resulted in weaker demand
for the Company's products in the first half of the year; and changes in general
worldwide economic conditions, any of which could have an adverse impact on
operating results. The industry in which the Company operates requires
substantial investment in product development, capital and, at times, inventory
prior to customer acceptance of new products or enhancements to existing
products. One of the keys to the Company's overall success has been anticipating
the appropriate timing of such activities. Delays in product completion and/or
slower than expected market acceptance of certain newer products have in the
past negatively impacted the Company's operating performance and also, in
certain cases, resulted in adjustments to carrying values of assets. Future
operating performance could be impacted should timing of further product
development and/or market acceptance be delayed.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal years beginning after June 15, 1999. Earlier application of SFAS 133
is encouraged but should not be applied retroactively to financial statements of
prior periods. The Company is currently evaluating the requirements and impact
of SFAS 133.


                                 Page 14 of 17


<PAGE>   15





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

 A.      Exhibits.

         10.1     Agreement and Plan of Merger among the Company, Alcatel, and
                  Net Acquisition, Inc., dated June 3, 1998 (filed as an exhibit
                  to the Company's Current Report on 8-K, dated June 5, 1998,
                  and incorporated herein by reference).

         27.1     Financial Data Schedule - June 30, 1998 (for EDGAR filing
                  purposes only).

         27.2     Restated Financial Data Schedule - June 30, 1997 (for
                  EDGAR filing purposes only).


B.       Reports on Form 8-K.

         Form 8-K, dated June 5, 1998

                  Item 5.   Other Events - Joint press release of Alcatel
                            Alsthom and DSC Communications Corporation
                            announcing merger

                  Item 7.   Financial Statements and Exhibits - Press Release
                            and Agreement and Plan of Merger between DSC
                            Communications Corporation, Alcatel Alsthom and Net
                            Acquisition, Inc.


                                 Page 15 of 17


<PAGE>   16





                                   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.


                                  DSC COMMUNICATIONS CORPORATION



Dated: August 14, 1998            By: /s/ KENNETH R. VINES
                                     ----------------------------------------
                                          Kenneth R. Vines
                                          Vice President, Finance,
                                          duly authorized officer
                                          and principal accounting officer


                                 Page 16 of 17


<PAGE>   17




                                  EXHIBIT INDEX


EXHIBIT                DESCRIPTION
--------               ------------
  10.1                 Agreement and Plan of Merger (Incorporated by Reference)

  27.1                 Financial Data Schedule

  27.2                 Restated Financial Data Schedule



                                 Page 17 of 17