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

[_] 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 : 0-23023

MMC NETWORKS, INC.
(Exact name of registrant as specified in its charter)

Delaware 77-0319809
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1134 E. ARQUES AVENUE
SUNNYVALE, CA 94086
(Address of principal offices)
(zip code)

(408) 731-1600
(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 __
-

The number of shares outstanding of the issuer's common stock as of July 28,
1998 was 29,671,837.

MMC NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Balance Sheets at June 30, 1998 and December 31, 1997.............................. 3

Condensed Statements of Operations for the three and six months
ended June 30, 1998 and 1997........................................................... 4

Condensed Statements of Cash Flows for the six months
months ended June 30, 1998 and 1997................................................... 5

Notes to the Condensed Financial Statements.................................................. 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 8

PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 14

Item 2. Changes in Securities...................................................................... 15

Item 3. Defaults Upon Senior Notes................................................................. 15

Item 4. Submission of Matters to a Vote of Security Holders........................................ 15

Item 5. Other Information.......................................................................... 15

Item 6. Exhibits and Reports on Form 8-K........................................................... 15

SIGNATURES.................................................................................................... 16

MMC NETWORKS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

JUNE 30, DECEMBER 31,
1998 1997
--------- -------------

ASSETS
Current assets:
Cash and cash equivalents.................................................. $18,698 $45,401
Short-term investments..................................................... 28,166 -
Accounts receivable, net of allowance of $172 and $181..................... 6,536 4,526
Finished goods inventories................................................. 704 570
Prepaid expenses and other current assets.................................. 870 382
------- -------
Total current assets..................................................... 54,974 50,879
Property and equipment, net.................................................. 4,074 3,631
Other assets................................................................. 208 213
------- -------
$59,256 $54,723
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 2,448 $ 2,626
Accrued expenses........................................................... 3,245 1,744
Current portion of capital lease obligations............................... 308 350
------- -------
Total current liabilities................................................ 6,001 4,720
------- -------
Capital lease obligations, net of current portion............................ 131 286
------- -------
Stockholders' equity:
Series A Convertible Preferred Stock: $0.001 par value; 0 and 9,378 shares
authorized; no shares issued or outstanding............................. - -
Series B Convertible Preferred Stock: $0.001 par value; 0 and 4,121 shares
authorized; no shares issued or outstanding............................. - -
Preferred Stock: $0.001 par value; 10,000 and 0 shares authorized; no
shares issued or outstanding............................................ - -
Common Stock: $0.001 par value; 100,000 shares authorized; 29,586
and 29,198 shares issued and outstanding................................ 26 25
Additional paid-in capital................................................. 51,571 50,778
Notes receivable from stockholders......................................... (116) (181)
Retained earnings (Accumulated deficit).................................... 1,643 (905)
------- -------
Total stockholders' equity............................................... 53,124 49,717
------- -------
$59,256 $54,723
======= =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.

MMC NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------

Revenues.......................................... $12,017 $ 4,780 $21,640 $ 8,201
Cost of revenues.................................. 3,490 1,417 6,426 2,535
------- ------- ------- -------
Gross profit............................. 8,527 3,363 15,214 5,666
------- ------- ------- -------

Operating expenses:
Research and development, net................. 3,654 1,655 6,798 2,751
Selling, general and administrative........... 2,255 1,497 4,352 2,559
Litigation settlement......................... 1,250 - 1,250 -
------- ------- ------- -------
Total operating expenses................. 7,159 3,152 12,400 5,310
------- ------- ------- -------
Operating income.................................. 1,368 211 2,814 356
------- ------- ------- -------

Other income (expense):
Interest income............................... 495 77 1,024 155
Interest expense.............................. (16) (35) (35) (68)
------- ------- ------- -------
Total other income....................... 479 42 989 87
------- ------- ------- -------
Income before income taxes........................ 1,847 253 3,803 443
Provision for income taxes........................ 555 5 1,255 9
------- ------- ------- -------
Net income........................................ $ 1,292 $ 248 $ 2,548 $ 434
======= ======= ======= =======

Basic income per share............................ $ 0.04 $ 0.02 $ 0.09 $ 0.04
======= ======= ======= =======
Shares used to compute basic income per share..... 29,553 11,423 29,414 11,352
======= ======= ======= =======

Diluted income per share.......................... $ 0.04 $ 0.01 $ 0.08 $ 0.02
======= ======= ======= =======
Shares used to compute diluted income per share... 33,794 28,160 33,756 27,618
======= ======= ======= =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.

MMC NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1997
------------- ------------

Cash flows from operating activities:
Net income.......................................................... $ 2,548 $ 434
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................................... 970 386
Issuance of Common Stock in exchange for services................ - 30
Changes in assets and liabilities:
Accounts receivable............................................ (2,010) (1,318)
Inventories.................................................... (134) 280
Prepaid expenses and other assets.............................. (483) (155)
Accounts payable............................................... (178) 450
Accrued expenses............................................... 1,501 252
-------- -------
Net cash provided by operating activities................... 2,214 359
-------- -------
Cash flows from investing activities:
Purchase of short-term investments.................................. (28,166) (1,100)
Acquisition of property and equipment............................... (1,413) (1,005)
-------- -------
Net cash used in investing activities....................... (29,579) (2,105)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and other................... 794 82
Proceeds from the repayment of notes receivable from stockholders... 65 -
Principal payments on capital lease obligations..................... (197) (192)
-------- -------
Net cash provided by (used in) financing activities......... 662 (110)
-------- -------
Net increase (decrease) in cash and cash equivalents.................. (26,703) (1,856)
Cash and cash equivalents at beginning of period...................... 45,401 4,809
-------- -------
Cash and cash equivalents at end of period............................ $ 18,698 $ 2,953
======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.............................................. $ 35 $ 68
Cash paid for income taxes.......................................... $ 1,333 $ 17

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.

MMC NETWORKS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited financial information
reflects all adjustments, including only normal recurring adjustments, necessary
for the fair presentation of the financial position, results of operations and
cash flows for MMC Networks, Inc. ("the Company") for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997. Results for the interim periods
are not necessarily indicative of results for the entire year.

NOTE 2 - EARNINGS PER SHARE

The following table reconciles the numerator and denominator of the basic and
diluted EPS computations for the three and six month periods ended June 30, 1998
and 1997:

THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income available to
common stockholders....................... $ 1,292 $ 248 $ 2,548 $ 434
======= ======= ======= =======

Shares used to compute basic income
per share................................. 29,553 11,423 29,414 11,352

Effect of dilutive securities:
Convertible Preferred Stock............... - 13,342 - 13,342
Warrants.................................. 31 130 31 121
Stock options............................. 4,210 3,265 4,311 2,803
------- ------- ------- -------

Shares used to compute diluted income
per share................................. 33,794 28,160 33,756 27,618
======= ======= ======= =======

Basic income per share......................... $ 0.04 $ 0.02 $ 0.09 $ 0.04
======= ======= ======= =======

Diluted income per share....................... $ 0.04 $ 0.01 $ 0.08 $ 0.02
======= ======= ======== =======

NOTE 3 - EQUITY

On January 13, 1998, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in the first quarter of 1998. SFAS
130 establishes standards for the reporting of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from non-owner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. For the three and six month periods
ended June 30, 1998 and 1997, comprehensive income approximated net income.

MMC NETWORKS, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") in the first quarter of 1998. This statement establishes standards for the
way companies report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of SFAS 131 has
not resulted in a change in the way the Company reports information and related
disclosures.

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities and be measured at fair
value. In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. The accounting prescribed by
SFAS 133 is effective beginning with the first quarter of 2000. The adoption of
SFAS 133 in 2000 is not expected to have a material impact on the Company's
financial position or results of operations.

NOTE 5 - FINANCING AGREEMENTS
The Company had two lines of credit, a $5.0 million revolving bank credit
facility under which borrowings accrued interest at the bank's prime rate and a
$3.0 million bank lease line under which borrowings accrued interest at the
bank's prime rate plus 0.5%. These lines of credit expired in April 1998.

During the first half of 1998, the Company entered into two credit facilities
with a bank, a loan agreement and a non-recourse receivables purchase agreement.
The loan agreement, which expires in May 1999, allows the Company to borrow up
to $8.0 million. Borrowings under the loan agreement bear interest at the bank's
prime rate. The agreement requires that the Company comply with certain
financial covenants. In the event of default, all outstanding borrowings will
accrue interest at a rate of five percentage points above the rate effective
immediately prior to any such default. The non-recourse receivables purchase
agreement, which expires in February 1999, allows the Company to sell up to $2.0
million of its accounts receivable to the bank at a discount rate equal to the
bank's prime rate plus 1.0% per annum, less an administrative fee equal to 0.20%
of the total purchased receivables balance. The receivables purchase agreement
also provides for the Company to grant to the bank a continuing lien on and
security interest in all purchased receivables and related property. To date,
the Company has not utilized either credit facility.

NOTE 6 - LITIGATION SETTLEMENT
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998. Excluding the litigation settlement
expenses, net income for the second quarter of 1998 would have been $2.2 million
or $0.06 per share.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information should be read in conjunction with the interim
condensed financial statements and the notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q and the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which reflect the Company's
current views with respect to future events which may impact the Company's
results of operations and financial condition. In this report, the words
"anticipates", "believes", "expects", "intends" and similar expressions identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties and other factors, including those set forth below under
the caption "Factors Affecting Future Results", which could cause the actual
future results to differ materially from historical results or those described
in the forward-looking statements. Readers are urged to carefully review the
disclosures made by the Company in this Report and in the section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Factors Affecting Future Results" of the Company's Annual Report on
Form 10-K previously filed with the Securities and Exchange Commission that
describe certain risks and factors that may affect the Company's business and
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.

BACKGROUND
The Company is a leading developer and supplier of network
processors--high-performance, open-architecture, software-programmable
integrated circuits optimized for network applications. The Company's network
processors form the core silicon "engines" of LAN and WAN switches and routers
and are designed to allow network equipment vendors to rapidly develop
high-performance, feature-rich, cost-effective products supporting a broad range
of networking functions. MMC Networks' customers employ the Company's network
processors to develop and market multi-gigabit, wire-speed switches and routers
with advanced features such as Layer 3 switching, internetworking of LANs and
WANs, security, class of service, quality of service and network management.

The Company's current products, the PS1000, ATMS2000 and AF5000 families of
network processors, provide the core functionality of high-performance Fast
Ethernet and Asynchronous Transfer Mode ("ATM") networking equipment. The
Company believes that network equipment vendors are able to reduce design and
development costs and accelerate product development cycles for high-performance
routers and switches by using the Company's products. All of the Company's
products are based on the Company's proprietary ViXTM architecture, which
enables network equipment vendors to easily and cost-effectively implement
high-performance, value-added features in their switch and router products.

The Company was incorporated in California in September 1992 and reincorporated
in Delaware in October 1997.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data expressed as
a percentage of the Company's revenue for the interim periods presented.

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ------------

STATEMENT OF OPERATIONS DATA:
Revenues............................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 29.0% 29.6% 29.7% 30.9%
----- ----- ----- -----
Gross profit....................... 71.0% 70.4% 70.3% 69.1%
----- ----- ----- -----
Operating expenses:
Research and development, net........ 30.4% 34.7% 31.4% 33.6%
Selling, general and administrative.. 18.8% 31.3% 20.1% 31.2%
Litigation settlement................ 10.4% 0.0% 5.8% 0.0%
----- ----- ----- -----
Total operating expenses........... 59.6% 66.0% 57.3% 64.8%
----- ----- ----- -----

Operating income....................... 11.4% 4.4% 13.0% 4.3%
Interest income, net................. 4.0% 0.9% 4.6% 1.1%
----- ----- ----- -----
Income before income taxes............. 15.4% 5.3% 17.6% 5.4%
Provision for income taxes............. 4.6% 0.1% 5.8% 0.1%
----- ----- ----- -----
Net income............................. 10.8% 5.2% 11.8% 5.3%
===== ===== ===== =====

Revenues

Revenues increased by 24.9% to $12.0 million in the second quarter of 1998 from
$9.6 million in the first quarter of 1998 and increased by 151.4% as compared to
$4.8 million for the same quarter of the previous year. The revenue growth from
the first quarter to the second quarter of 1998 was due to increased sales of
the Company's ATMS2000 and AnyFlow5000 product families to new and existing
customers partially offset by the decline of sales of the PS1000 product family
during the same period. Revenues for the six months ended June 30, 1998
increased by 163.9% to $21.6 million as compared to $8.2 million for the same
period in the previous year. This increase is a result of increased sales to new
and existing customers across all of the Company's products lines.

Cost of revenues; Gross profit

Cost of revenues increased to $3.5 million in the second quarter of 1998 from
$2.9 million in the first quarter of 1998 and from $1.4 million in the same
quarter of the previous year. The increase in cost of revenues primarily
reflects the increased volume of shipments from period to period and, as such,
gross profit as a percentage of total revenues stayed relatively constant;
71.0%, 69.5% and 70.4% for the three months ended June 30, 1998, March 31, 1998
and June 30, 1997, respectively. The cost of revenues and related gross profit
for the six months ended June 30, 1998 were $6.4 million and 70.3%,
respectively, as compared to $2.5 million and 69.1%, respectively, for the same
period in the previous year.

Research and development expenses, net

Research and development expenses, net, increased by 16.2% to $3.7 million in
the second quarter of 1998 from $3.1 million in the first quarter of 1998 and
increased by 120.8% as compared to $1.7 million for the same quarter of the
previous year. Research and development expenses as a percentage of total
revenues remained relatively constant; 30.4%, 32.7% and 34.7% for the three
months ended June 30 1998, March 31, 1998 and June 30, 1997, respectively.
Research and development expenses, net, include expenses incurred under a number
of contracts with customers whereby the Company receives partial or complete
reimbursement for expenses incurred. These reimbursements are recorded as an
offset against research and development expenses. During the second quarter of
1998, the Company established a wholly owned subsidiary in

Israel, MMC Networks Israel Ltd, ("MMCIL"), which will function as a design
center. The design center currently employs 4 engineers and is expected to grow
in headcount over the next eighteen months. Research and development expenses
for the six months ended June 30, 1998 were $6.8 million or 31.4% of revenues,
as compared to $2.8 million or 33.6% of revenues for the six months ended June
30, 1997. The increase in research and development expenses from period to
period was due to increased expenditures for the development of new products.
The Company expects quarterly research and development expenses, net, to
continue to increase in absolute dollars over the remainder of 1998.

Selling, general and administrative expenses
Selling, general and administrative expenses increased by 7.5% to $2.3 million
in the second quarter of 1998 from $2.1 million in the first quarter of 1998 and
increased by 50.6% as compared to $1.5 million for the same quarter of the
previous year. The increase in selling, general and administrative expenses
consisted of increased sales commissions resulting from higher revenues,
increased selling and marketing expenses associated with new products,
additional personnel and additional expenses related to being a public company.
Selling, general and administrative expenses decreased as a percentage of
revenues to 18.8% in the second quarter of 1998 compared to 21.8% in the first
quarter of 1998 and 31.3% in the same quarter of the previous year. Selling,
general and administrative expenses for the six months ended June 30, 1998 were
$4.4 million or 20.1% as compared to $2.6 million or 31.2% for the six months
ended June 30, 1997. Selling, general and administrative expenses have continued
to decrease as a percentage of revenue from period to period as revenue growth
outpaced the increase in selling, general and administrative expenses required
to support that growth. The Company expects quarterly selling, general and
administrative expenses to increase in absolute dollars over the remainder of
1998.

Litigation settlement
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998.

Interest income, net
The increase in net interest income is due to increased cash and investment
balances from period to period due primarily to the proceeds from the Company's
initial public offering in October 1997.

Provision for income taxes
The provision for income taxes decreased to $555,000 in the second quarter of
1998 from $700,000 in the first quarter of 1998 reflecting an effective tax rate
of 30.0% and 35.8%, respectively. This decrease in the effective tax rate from
period to period is due to the utilization of research and development tax
credits.

LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash, cash equivalents and short-term
investments totaled $46.9 million and the Company's working capital was
approximately $49.0 million. Net cash totaling $2.2 million was provided by
operating activities during the six months ended June 30, 1998. This increase
was primarily due to net income adjusted for depreciation and amortization of
$3.5 million and an increase in accrued expenses of $1.5 million offset by an
increase in accounts receivable of $2.0 million. Cash used in investing
activities of $29.6 million for the six months ended June 30, 1998 consisted of
the purchase of short-term investments of $28.2 million and the acquisition of
property and equipment of $1.4 million.

The Company had two lines of credit, a $5.0 million revolving bank credit
facility under which borrowings accrued interest at the bank's prime rate and a
$3.0 million bank lease line under which borrowings accrued interest at the
bank's prime rate plus 0.5%. These lines of credit expired in April 1998. The
Company has two additional credit facilities with a bank, a loan agreement which
allows the Company to borrow up to $8.0 million and a non-recourse receivables
purchase agreement which allows the Company

to sell up to $2.0 million of its accounts receivables. To date, the Company has
not utilized either credit facility. See Note 5 - Financing Agreements.

The Company believes that its existing cash balances together with the borrowing
capacity under its two credit facilities and cash flow expected from future
operations will be sufficient to meet the Company's capital requirements through
the next twelve months, although the Company could be required, or could elect,
to seek to raise additional capital before such time. This is a forward-looking
statement and the actual period of time for which the Company's resources will
be sufficient will depend on many factors, including the rate of revenue growth,
if any, the timing and extent of spending to support product development efforts
and the expansion of sales and marketing efforts, the timing and size of
business or technology acquisitions, the timing of introductions of new products
and enhancements to existing products and market acceptance of the Company's
products. There can be no assurance that additional equity or debt financing, if
required, will be available on acceptable terms or at all.

IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.

During the first quarter of 1998, initial contact with both the Company's
accounting system representatives and its significant outside suppliers
indicates Year 2000 compliance and, as such, the Company does not expect to be
required to modify or replace significant portions of its software to properly
utilize dates beyond December 31, 1999. The Company has adopted a Year 2000 Plan
which includes comprehensive testing of all critical systems for Year 2000
compliance by June 1999. In accordance with the Plan, the Company initiated a
survey, which is expected to be completed by January 1999, of all its
significant vendors and customers to ensure Year 2000 compliance. Also as part
of the Plan, the Company has completed a full assessment of its own products and
believes all its products are Year 2000 compliant.

Expenses related to the Company's Year 2000 Plan are expensed as incurred and
are not currently expected to have a material effect on the results of
operations of the Company. Although the Company is not aware of any material
operational issues or expenses associated with preparing its internal systems
for the Year 2000, there can be no assurance that the Company or that any third
party which the Company significantly relies on will not experience
unanticipated negative consequences or material expenses caused by undetected
errors or defects which could have a material adverse effect on the Company's
business, results of operations and financial condition.

FACTORS AFFECTING FUTURE RESULTS
As described by the following factors, past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods.

Fluctuations in Operating Results.
Fluctuations in the Company's operating results have occurred in the past and
are likely to occur in the future due to a variety of factors, any of which may
have a material adverse effect on the Company's operating results. In
particular, the Company's quarterly results of operations may vary significantly
due to general business conditions in the networking equipment and semiconductor
industries, changes in demand for the network equipment products of the
Company's customers, the timing and amount of orders from the Company's network
equipment vendor customers, cancellations or delays of customer product orders,
new product introductions by the Company or its competitors, cancellations,
changes or delays of deliveries of products to the Company by its suppliers,
increases in the costs of products from the Company's suppliers, fluctuations in
product life cycles, price erosion, competition, changes in the mix of products
sold by the Company, availability of semiconductor foundry capacity, variances
in the timing and amount of

nonrecurring engineering funding and operating expenses, seasonal fluctuations
in demand, intellectual property disputes and general economic conditions.

In addition, in the past the Company has recognized a substantial portion of its
revenues in the last month of a quarter. Since a large portion of the Company's
operating expenses, including rent, salaries and capital lease expenses, is
fixed and difficult to reduce or modify, if revenue does not meet the Company's
expectations, the material adverse effect of any revenue shortfall will be
magnified by the fixed nature of these operating expenses. All of the above
factors are difficult for the Company to forecast, and these and other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Customer Concentration.
The percentage of total revenues accounted for by the Company's significant
customers (significant customers are those customers accounting for more than
10% of the Company's total revenues) for the periods presented are as follows:
for the three months ended June 30, 1998 there was only one significant
customer, Cisco Systems, Inc. ("Cisco") accounting for 54% of total revenues;
for the three months ended June 30 1997, Cisco, Mitsui Comtek Corp., a non-
stocking sales representative for Japan ("Mitsui"), and the U.S. Computer
Division of Hitachi ("Hitachi") accounted for 23%, 24% and 14% of total
revenues, respectively; for the six months ended June 30, 1998, Cisco and Mitsui
accounted for 43% and 17% of total revenues, respectively; for the six months
ended June 30, 1997, Cisco, Mitsui and Hitachi accounted for 24%, 22% and 19% of
total revenues, respectively.

The Company's customer base is highly concentrated. A relatively small number of
customers has accounted for a significant portion of the Company's revenues to
date, and the Company expects that this trend will continue for the foreseeable
future. Each of the Company's network equipment vendor customers, including
Cisco, Mitsui and Hitachi, can cease incorporating the Company's products with
limited notice to the Company and with little or no penalty. The Company has no
minimum purchase agreements with its customers.

The Company's future operating results are currently substantially dependent on
Cisco's competitive position in the networking equipment market. The loss of one
or more of the Company's customers in general and Cisco in particular, the
possibility that the introduction of the customer's product may not be
successful, the possibility that design wins with customers do not result in
significant production levels or the inability of the Company to successfully
develop relationships with additional significant network equipment vendors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

New Product Development and Technological Change.
The data networking and semiconductor industries are characterized by rapidly
changing technology, frequent product introductions, rapid erosion of average
selling prices and evolving industry standards. Accordingly, the Company's
future performance depends on a number of factors, including the acceptance of
network processors as an alternative to Application-Specific Integrated Circuit
("ASIC") components and general purpose processors and the acceptance by the
Company's customers of third party sourcing for network processors as an
alternative to in-house development as well as the Company's ability to identify
emerging technological trends in its target markets, develop and maintain
competitive products, enhance its products by adding innovative features that
differentiate its products from those of competitors, bring products to market
on a timely basis at competitive prices, properly identify target markets and
respond effectively to new technological changes or new product announcements by
others. Products as complex as those offered by the Company frequently contain
errors, defects and bugs when first introduced or as new versions are released.
The Company has in the past experienced such errors, defects and bugs. Delivery
of products with production defects or reliability, quality or compatibility
problems could significantly delay

or hinder market acceptance of such products, which could damage the Company's
reputation and adversely affect the Company's ability to retain its existing
customers and to attract new customers. In addition, the Company must generally
incur substantial research and development costs before the technical
feasibility and commercial viability of a product line can be ascertained. There
can be no assurance that revenues from future products or product enhancements
will be sufficient to recover the development costs associated with such
products or enhancements, or that the Company will be able to secure the
financial resources necessary to fund future development. The inability of the
Company and its products to achieve market acceptance from network equipment
vendors and to adequately address any of the factors discussed above could have
a material adverse effect on the Company's business, financial condition and
results of operations.

Dependence on Independent Manufacturers.
Currently, the Company outsources all manufacturing, assembly and test of its
network processors. The Company's suppliers currently deliver fully assembled
and tested products on a turnkey basis. Only one of the Company's products is
currently manufactured by more than one supplier. The Company depends on its
suppliers to deliver sufficient quantities of finished product to the Company in
a timely manner. Since the Company places its orders on a purchase order basis
and does not have a long-term volume purchase agreement with any of its existing
suppliers, these suppliers may allocate, and in the past have allocated,
capacity to the production of other products while reducing deliveries to the
Company on short notice. Given that the Company must place orders approximately
10 to 12 weeks in advance of expected delivery, any sudden increase in customer
demand not anticipated by the Company in advance could result in the inability
to deliver product on a timely basis and, as such, may reduce the Company's
product revenues or increase the Company's cost of revenues and could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company places orders based on forecast
demand to ensure enough lead time to be able to meet anticipated customer
orders. Any sudden decrease in the anticipated customer demand could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Competition.
The data networking and semiconductor industries are intensely competitive and
are characterized by constant technological change, rapid rates of product
obsolescence and price erosion. The Company's PS1000, ATMS2000 and AF5000
product families compete with products from companies such as Texas Instruments
Incorporated, Lucent Technologies, Inc., PMC-Sierra Inc./Integrated Technology
Ltd., Galileo Technology Ltd. and I-Cube, Inc. In addition, the Company expects
significant competition in the future from major domestic and international
semiconductor suppliers. The Company also may face competition from suppliers of
products based on new or emerging technologies. Moreover, several established
electronics and semiconductor suppliers have recently entered or indicated an
intent to enter the switching and routing equipment market. In addition, many of
the Company's existing and potential customers internally develop ASICs, general
purpose processors, network processors and other devices which attempt to
perform all or a portion of the functions performed by the Company's products.
Many of the Company's current and prospective competitors offer broader product
lines and have significantly greater financial, technical, manufacturing and
marketing resources than the Company. Failure of the Company to compete
successfully could have a material adverse effect on its operating results.

Protection of Intellectual Property.
The Company relies primarily on a combination of nondisclosure agreements and
other contractual provisions as well as patent, trademark, trade secret and
copyright law to protect its proprietary rights. There can be no assurance that
any patents will issue pursuant to the Company's current or future patent
applications or that patents issued pursuant to such applications will not be
invalidated, circumvented, challenged or licensed to others. In addition, there
can be no assurance that the rights granted under any such patents will provide
competitive advantages to the Company or be adequate to safeguard and maintain
the Company's proprietary rights. From time to time, third parties, including
competitors of the Company, may assert patent, copyright and other intellectual
property rights to technologies that are important to the Company. There can be
no assurance that third parties will not assert infringement claims against the

Company in the future, that assertions by third parties will not result in
costly litigation or that the Company would prevail in any such litigation or be
able to license any valid and infringed patents from third parties on
commercially reasonable terms, if at all. Failure of the Company to enforce and
protect its intellectual property rights could have a material adverse effect on
the Company's business, financial condition and results of operations.

During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement, the Company agreed to a settlement fee and
entered into a patent cross-licensing agreement pursuant to which MMC Networks,
Inc. and FORE granted each other perpetual, with certain exceptions, and fully-
paid licenses to certain patents held by them. The settlement fee and related
legal expenses totaled approximately $1.3 million and was charged to operating
income in the quarter ended June 30, 1998.

Risks Associated with Expansion of International Business Activities.
The Company is subject to additional risks inherent in international operations.
All of the Company's international sales to date are U.S. dollar-denominated. As
a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in international
markets. In addition, the Company procures a portion of its manufacturing,
assembly and test services from suppliers located outside the United States.
International business activities may be limited or disrupted by the imposition
of governmental controls, export license requirements, restrictions on the
export of critical technology, currency exchange fluctuations, political
instability, trade restrictions and changes in tariffs. Demand for the Company's
products could also be adversely affected by seasonality of international sales
and economic conditions in the Company's primary overseas markets. These
international factors could have a material adverse effect on future sales of
the Company's products to international customers and, consequently, on the
Company's business, financial condition and results of operations. Sales to
Mitsui have declined in the last three quarters and may remain at this lower
level or decline further due to the economic downturn in Japan and Asia in
general, and could have an adverse effect on the Company's revenues in the
future.

Expected Volatility of Stock Price.
In recent years the stock market in general, and the market for shares of high
technology, data networking and semiconductor companies in particular, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. The trading price of the Company's
Common Stock is expected to be subject to extreme fluctuations in response to
both business-related issues, such as quarterly variations in operating results,
announcements of new products by the Company or its competitors or the gain or
loss of significant network equipment vendor customers, and stock market-related
influences, such as changes in analysts' estimates, the presence or absence of
short-selling of the Company's Common Stock or events affecting other companies
that the market deems to be comparable to the Company. In addition, technology
stocks have from time to time experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of these companies. Trading prices of many high technology, data networking and
semiconductor stocks, including the Common Stock of the Company, are at or near
their historical highs and reflect price/earnings ratios substantially above
historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near its current level.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the fourth quarter of 1997, FORE Systems, Inc. filed complaints alleging
patent infringement and trade secret misappropriation against MMC Networks, Inc.
The Company entered into a settlement agreement with FORE in June 1998. In
accordance with the settlement,

the Company agreed to a settlement fee and entered into a patent cross-licensing
agreement pursuant to which MMC Networks, Inc. and FORE granted each other
perpetual, with certain exceptions, and fully-paid licenses to certain patents
held by them. The settlement fee and related legal expenses totaled
approximately $1.3 million and was charged to operating income in the quarter
ended June 30, 1998.

ITEM 2. CHANGES IN SECURITIES
Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 28, 1998, the stockholders
voted to (1) elect two Class I directors to serve for three-year terms and (2)
ratify the appointment of Price Waterhouse, LLP (now known as
PricewaterhouseCoopers, LLP) as the independent accountants of the Company for
the fiscal year ending December 31, 1998.

The Class I directors were elected with the following vote:

Nominee For Withheld
- ------- --- --------
Prabhat K. Dubey 23,766,801 6,600
Geoffrey Yang 23,765,801 7,600

Other directors of the Company are as follows:
Class II Directors - Andrew S. Rappaport and Amos Wilnai currently serving for a
term that expires at the Annual Meeting of Stockholders in 1999
Class III Directors - John G. Adler and Irwin Federman currently serving for a
term that expires at the Annual Meeting of Stockholders in 2000.

The appointment of PricewaterhouseCoopers, LLP as the independent accountants
for the fiscal year ended December 31, 1998 was ratified with the following
vote:

Board Proposal For Against Abstentions
- -------------- --- ------- -----------
PricewaterhouseCoopers, LLP - 23,766,801 600 6,000
independent accountants for the
fiscal year ended December 31,
1998

ITEM 5. OTHER INFORMATION
Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No. Description of Exhibit
----------- ----------------------

10.1 Loan Agreement dated May 7, 1998 by and
between Silicon Valley Bank and the
Registrant.

27 Financial Data Schedule as of June 30, 1998
and for the 6 months then ended.

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the three months
ended June 30, 1998.

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.

Dated: August 5, 1998 MMC NETWORKS, INC.

/s/ Prabhat K. Dubey
By:-------------------------------------
Prabhat K. Dubey
President, Chief Executive
Officer and Director

/s/ Uday Bellary
By:-------------------------------------
Uday Bellary
Vice President, Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and
Accounting Officer)