Filed pursuant to Rule 424(b)(4)

Registration No.333-34005

PROSPECTUS

3,500,000 Shares

[LOGO OF MMC APPEARS HERE]

COMMON STOCK

----------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. SEE "UNDERWRITERS" FOR A DISCUSSION OF
THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE. THE SHARES OF COMMON STOCK OFFERED HEREBY HAVE BEEN
APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "MMCN."

----------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

----------------

PRICE $11 A SHARE

----------------

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------

Per Share.............. $11.00 $.77 $10.23
Total(3)............... $38,500,000 $2,695,000 $35,805,000

- --------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended. See "Underwriters."
(2) Before deducting expenses estimated at $1,000,000 payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within
30 days from the date hereof, to purchase up to an aggregate of 525,000
additional Shares at the price to public less underwriting discounts
and commissions for the purpose of covering over-allotments, if any. If
the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions and proceeds to Company
will be $44,275,000, $3,099,250 and $41,175,750, respectively. See
"Underwriters."

----------------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Gray Cary Ware & Freidenrich, A Professional Corporation, counsel for the
Underwriters. It is expected that delivery of the Shares will be made on or
about November 3, 1997, at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.

----------------

MORGAN STANLEY DEAN WITTER

DEUTSCHE MORGAN GRENFELL

WESSELS, ARNOLD & HENDERSON

October 28, 1997

NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

----------------

UNTIL NOVEMBER 22, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

----------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary................ 3
The Company....................... 4
Risk Factors...................... 5
Use of Proceeds................... 15
Dividend Policy................... 15
Capitalization.................... 16
Dilution.......................... 17
Selected Financial Data........... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 19

PAGE
----

Business.............................................................. 25
Management............................................................ 37
Certain Transactions.................................................. 45
Principal Stockholders................................................ 47
Description of Capital Stock.......................................... 49
Shares Eligible for Future Sale....................................... 52
Underwriters.......................................................... 53
Legal Matters......................................................... 55
Experts............................................................... 55
Additional Information................................................ 55
Index to Financial Statements......................................... F-1

----------------

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first
three quarters of each year.

----------------

AnyFlow, ATMS2000, Direct Replication Engine, MMC Networks, NCI, Per-Flow
Queuing (PFQ), PS1000, Programmable BitStream Processor, ViX and the MMC
Networks logo are trademarks of the Company. This Prospectus also includes
product names and other trade names and trademarks of the Company and of other
organizations.

----------------

Except as otherwise noted herein, information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) the conversion of
all outstanding shares of Preferred Stock of the Company into shares of Common
Stock of the Company which will occur in connection with this offering and
(iii) the authorization of 10,000,000 shares of undesignated Preferred Stock
upon the closing of this offering.

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITERS."

BACKGROUND GRAPHIC:

TIME-LAPSE NIGHT TIME PHOTOGRAPH OF BUSY COMPLEX FREEWAY INTERCHANGE AS A
METAPHOR FOR NETWORK TRAFFIC.

TEXT:

MMC NETWORKS

NETWORK PROCESSORS FOR WIRE-SPEED NETWORKING EQUIPMENT

PROVIDING NETWORKING EQUIPMENT VENDORS

.HIGH PERFORMANCE
.ADVANCED FEATURES
.RAPID TIME-TO-MARKET
.SOFTWARE PROGRAMMABILITY
.LOW SYSTEM COST

TEXT BOX:

MMC NETWORKS IS A LEADING DEVELOPER AND SUPPLIER OF NETWORK PROCESSORS--HIGH-
PERFORMANCE, OPEN-ARCHITECTURE, SOFTWARE-PROGRAMMABLE PROCESSORS OPTIMIZED FOR
NETWORKING OPERATIONS. THESE NETWORK PROCESSORS ENABLE A NEW GENERATION OF
HIGH-PERFORMANCE LAN AND WAN NETWORKING EQUIPMENT.

MMC NETWORKS' PRODUCT FAMILIES ...

PS1000 Fast Ethernet
ATMS2000 ATM
AnyFlow 5000

PROVIDE ADVANCED FEATURES AT WIRE SPEED ...

Layer 3 Switching and Routing
Internetworking of LANs and WANs
Security
Class of Service
Quality of Service
Network Management

FOR NETWORKING EQUIPMENT TARGETED AT
ENTERPRISE NETWORKS ...

Wiring Closet Remote Access
Power Workgroup WAN Backbone
Campus Backbone

AND SERVICE PROVIDER SERVICES ...

Internet Voice
Frame Relay Cable
ATM Dial
xDSL

AND MMC NETWORKS HAS ACHIEVED OVER 35 DESIGN WINS WITH 27
COMPANIES, INCLUDING:

Cisco NEC
Fujitsu Olicom
Hitachi SNT
Ipsilon Toshiba

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by more detailed
information and the Financial Statements and notes thereto appearing elsewhere
in this Prospectus.

THE COMPANY

MMC Networks, Inc. (the "Company" or "MMC Networks") is a leading developer
and supplier of network processors--high-performance, open-architecture,
software-programmable processors optimized for networking 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 and ATMS2000 families of network processors, provide the core
functionality of high-performance Fast Ethernet and Asynchronous Transfer Mode
("ATM") networking equipment, respectively. 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 ViX architecture, which enables network equipment vendors
to easily and cost-effectively implement high-performance, value-added features
in their switch and router products.

To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC,
Olicom, SNT and Toshiba) are shipping networking products that incorporate the
Company's network processors. MMC Networks outsources all of its semiconductor
manufacturing, allowing the Company to focus its resources on designing,
developing and marketing its network processor products.

THE OFFERING

Total Common Stock outstanding prior
to this offering.................... 25,101,708 shares(1)
Common Stock offered................. 3,500,000 shares
Common Stock to be outstanding after
the offering........................ 28,601,708 shares(1)
Use of proceeds...................... For general corporate purposes including
working capital and capital expenditures.
See "Use of Proceeds."
Nasdaq National Market symbol........ MMCN

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------
1994 1995 1996 1996 1997
------- -------- -------- ----------- --------
(UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 165 $ 577 $ 10,515 $ 7,026 $ 14,296
Total costs and expenses....... 453 3,257 10,113 6,799 13,832
Operating income (loss)........ (288) (2,680) 402 227 464
Net income (loss).............. (226) (2,576) 702 465 557
Net income per share(2)........ .02 .02 .02
Shares used to compute net
income per share(2)........... 29,181 29,110 29,395

AT SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)

BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 5,416 $40,221
Total assets............................................. 13,802 48,607
Long-term obligations.................................... 344 344
Total stockholders' equity............................... 8,931 43,736

- ------
(1) Based on the number of shares outstanding as of September 30, 1997.
Excludes (i) 5,310,668 shares of Common Stock then issuable upon the
exercise of options outstanding under the Company's 1993 Stock Option Plan
(the "1993 Plan") with a weighted average exercise price of $2.34 per
share, (ii) 1,500,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Plan (the "1997 Plan"), (iii) 300,000 shares
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan
(the "1997 Purchase Plan"), (iv) 150,000 shares of Common Stock reserved
for issuance under the Company's 1997 Director Option Plan (the "Director
Plan") and (v) 156,963 shares of Common Stock issuable upon the exercise of
outstanding warrants with a weighted average exercise price of $.64 per
share. See "Management--Benefit Plans," "Description of Capital Stock" and
Notes 6 and 9 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share calculations. Net
income (loss) per share prior to 1996 has not been presented since such
amounts are not meaningful.
(3) As adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
by the Company hereby, after deducting underwriting discounts and
commissions and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."

THE COMPANY

The dramatic increase in network traffic, the growing size and complexity of
private and public networks and the proliferation of diverse networking
technologies and protocols have fueled demand for network switching and
routing equipment which delivers superior price/performance, multiprotocol
connectivity and support for a variety of advanced networking features. While
attempting to meet customers' demands for switches and routers with increased
performance and advanced features, heightened competition in the networking
equipment market is forcing vendors to accelerate time-to-market for new
products, reduce costs, differentiate their products and address the needs of
an increasingly segmented customer base. The Company works closely with major
network equipment vendors to develop network processors which enable vendors
to more rapidly design and bring to market a broad variety of advanced,
differentiated, high-performance networking solutions.

The Company's current products, the PS1000 and ATMS2000 families of network
processors, provide the core functionality of high-performance Fast Ethernet
and ATM networking equipment, respectively. The Company's forthcoming AnyFlow
5000 network processor family will employ a modular design which is expected
to enable a wide range of networking equipment with wire-speed Layer 3
switching and routing, quality of service and packet/cell internetworking. All
of the Company's products are based on the Company's proprietary ViX
architecture, which employs a centralized shared-memory structure and point-
to-point connections to provide wire-speed routing performance, scalable port
densities and cost-effective feature support without significant performance
degradation. The Company's core technologies are designed to support multiple
tiers of user-defined quality of service, frame/cell conversion without
external segmentation and reassembly ("SAR") chips and rapid data multicasting
and broadcasting capabilities. The Company's network processors employ an open
architecture which allows network equipment vendors to more easily implement
advanced features and differentiate their product offerings.

To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco Systems, Inc., Fujitsu Denso, Ltd.,
Hitachi Computer Products (America), Inc., Ipsilon Networks, Inc., NEC
Corporation, Olicom, Inc., Switched Network Technologies, Inc. ("SNT") and
Toshiba Corporation) are shipping networking products that incorporate the
Company's network processors. A design win with a network equipment vendor
will not necessarily lead to shipment of networking products employing the
Company's network processors and therefore may not result in significant
revenues for the Company. The Company markets its products primarily through a
direct sales and marketing organization and provides field support and
assistance in product design and development to its network equipment vendor
customers through its staff of factory systems engineers and product designers
and architects. MMC Networks outsources all of its semiconductor
manufacturing, allowing the Company to focus its resources on designing,
developing and marketing its network processor products.

The Company was incorporated in California in September 1992 and
reincorporated in Delaware in October 1997. The Company's principal executive
offices are located at 1134 East Arques Avenue, Sunnyvale, California 94086,
and its telephone number is (408) 731-1600.

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby. This Prospectus contains forward- looking
statements that involve risks and uncertainties. Actual events or results
could differ materially from those discussed in the forward-looking statements
as a result of various factors, including, without limitation, the risk
factors set forth below and elsewhere in the Prospectus.

Limited Operating History; No Assurance of Future Profitability. The Company
was incorporated in 1992 and did not begin shipping products in volume until
the fourth quarter of 1995. Accordingly, the Company has a limited operating
history upon which investors may evaluate the Company and its prospects. The
Company had an accumulated deficit of $1.5 million as of September 30, 1997.
Although the Company has experienced significant revenue growth in recent
periods and first achieved profitability in the first quarter of 1996, these
results should not be considered indicative of future revenue growth, if any,
nor is there any assurance that the Company will be profitable in any future
period. The Company intends to increase its operating expenses significantly
during the balance of 1997 and in 1998, particularly in research and
development and sales and marketing. Due to the anticipated increases in the
Company's operating expenses, the Company's operating results will be
adversely affected if the Company's revenues do not increase significantly
over the same period. The sales cycle for the Company's products can range
from three to six months or more, with an additional nine to 18 months or more
before a network equipment vendor customer commences volume production of
equipment which incorporates the Company's products. As a result, there may be
a significant delay between the Company increasing its research and
development and sales and marketing expenses and its generation of higher
revenues, if any, from such expenditures. The Company's prospects must be
considered in light of the risks, challenges and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in rapidly evolving markets such as the data networking and
semiconductor industries. To address these risks, the Company must, among
other things, successfully increase the scope of its operations, respond to
competitive developments, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating innovative
technologies. There can be no assurance that the Company will be successful in
addressing these risks and challenges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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. The
Company has at times 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. In addition, the Company's lengthy sales
cycle limits its visibility regarding future financial performance. As a
result of all of the foregoing, there can be no assurance that the Company
will be able to sustain profitability on a quarterly or an annual basis.
Moreover, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
operating

results. The Company's operating results in a future quarter or quarters are
likely to fall below the expectations of public market analysts or investors.
In such event, the price of the Company's Common Stock will likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Dependence Upon Development of the Market for Network Processors. The
Company's future prospects are dependent upon the acceptance of network
processors as an alternative to the Application-Specific Integrated Circuit
("ASIC") components and general purpose processors traditionally utilized by
network equipment vendors. The Company's future prospects are also dependent
upon acceptance by the Company's customers of third party sourcing for network
processors as an alternative to in-house development. Many of the Company's
current and potential customers have substantial technological capabilities
and financial resources and currently develop internally the ASIC components
and program the general purpose processors utilized in their products. These
customers may in the future continue to utilize internally-developed ASIC
components and general purpose processors or may determine to develop or
acquire components, technologies or network processors that are similar to, or
that may be substituted for, the Company's products. The Company must
anticipate market trends and the price, performance and functionality
requirements of such network equipment vendors and must successfully develop
and manufacture products that meet these requirements. In addition, the
Company must make products available to such customers on a timely basis and
at competitive prices. If the Company's network equipment vendor customers
fail to accept network processors as an alternative, if they develop or
acquire the technology to develop such components internally rather than
purchase the Company's products, or if the Company is otherwise unable to
develop strong relationships with network equipment vendors, the Company's
business, financial condition and results of operations would be materially
and adversely affected. See "Business--MMC Networks' Strategy" and "--
Competition."

Customer Concentration. 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. The Company currently has only eight
customers which are using the Company's network processors in volume
production. In particular, sales to Cisco accounted for approximately 51.0%
and 30.4% of sales in 1996 and the first nine months of 1997, respectively. In
addition, to date, only Hitachi has commenced production of a product
incorporating the Company's PS1000 products. Sales to Hitachi accounted for
approximately 10.3% and 16.6% of the Company's sales for the year ended
December 31, 1996 and for the first nine months of 1997, respectively. In
addition, sales to Mitsui Comtek Corp., a distributor which serves Japan,
accounted for 20.0% and 14.7% of the Company's total revenues for the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively. Each of the Company's network equipment vendor customers,
including Cisco and Hitachi, can cease incorporating the Company's products
with limited notice to the Company and with little or no penalty. The
Company's agreements with network equipment vendor customers do not require
minimum purchases. In addition, certain of the Company's network equipment
vendor customers offer or may offer network equipment utilizing ASICs, general
purpose processors, network processors and other devices (designed by
themselves or third parties) that compete with those offered by the Company,
or have pre-existing relationships with current or potential competitors of
the Company. Pursuant to the Company's agreements with Cisco and certain of
its other customers, under certain circumstances, such customers have the
right to manufacture the Company's network processors for resale as part of
their products or to otherwise use proprietary technology of the Company in
their products. The circumstances in which customers have such rights include
certain defaults by the Company, a change of control of the Company and
certain other events relating to the Company's inability, or potential
inability, to supply products to such customers. In any such event, the
Company will not necessarily be entitled to royalty payments or fees for use
of its technology. The obligation of customers to pay royalties, if any, may
be dependent upon the customer's ability to obtain products at a price lower
than that previously charged by the Company to the customer.

The Company's longstanding relationship with Cisco may inhibit other leading
network equipment vendors from adopting the Company's network processors.
Cisco faces intense competition from vendors such as Bay

Networks, Inc., 3Com Corporation and FORE Systems, Inc. ("FORE"), none of
which currently uses the Company's network processors. Accordingly, the
Company's future operating results may be substantially dependent on Cisco's
competitive position in the networking equipment market. Any reduction or
delay in sales of the Company's products to its network equipment vendor
customers could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will retain its current network equipment vendor customers or that it
will be able to recruit additional customers. The loss of one or more of the
Company's customers 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Sales, Marketing and
Technical Support," and "--Customers."

Erosion of Average Selling Prices. The data networking and semiconductor
industries have experienced rapid erosion of average selling prices ("ASPs")
due to a number of factors, including rapid technological change,
price/performance enhancements and product obsolescence. The Company may
experience substantial period-to-period fluctuations in future operating
results due to ASP erosion. The Company anticipates that ASPs will decrease in
the future in response to product introductions by competitors or the Company
or other factors, including price pressures from significant customers. In
particular, the market for Ethernet switching and routing components has
experienced and is expected to continue to experience significant ASP erosion.
Therefore, the Company must continue to develop and introduce on a timely
basis new products which incorporate features that can be sold at higher ASPs.
Failure to achieve any or all of the foregoing could cause the Company's
revenues and gross margins to decline, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Lengthy Sales Cycle. The Company sells its products to network equipment
vendors. The Company's sales cycle involves test and evaluation of its
products by the potential customer, design of the customer's equipment to
incorporate the Company's products and the customer's own sales cycle. The
sales cycle for the test and evaluation of the Company's products can range
from three to six months or more with an additional nine to 18 months or more
before a customer commences volume production of equipment which incorporates
the Company's products. Because of such lengthy sales cycle, the Company may
experience a delay between increasing expenses for research and development
and sales and marketing efforts and the generation of higher revenues, if any,
from such expenditures. In addition, the delays inherent in such lengthy sales
cycle raise additional risks of customer decisions to cancel or change product
plans, which could result in the loss of anticipated sales by the Company.
Achieving a "design win" with a network equipment vendor provides no assurance
that such network equipment vendor will ultimately ship products incorporating
the Company's network processors. The Company's business, operating results
and financial condition could be materially adversely affected if customers
curtail, reduce or delay orders during the Company's sales cycle or choose not
to release products employing the Company's network processors. See
"Business--Sales, Marketing and Technical Support."

New Product Development and Technological Change. The data networking and
semiconductor industries are characterized by rapidly changing technology,
frequent product introductions and evolving industry standards. Accordingly,
the Company's future performance depends on a number of factors, including 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. No assurance can be given that
the Company's design and introduction schedules for any additions and
enhancements to its existing and future products will be met, that these
products will achieve market acceptance, or that the Company will be able to
sell these products at ASPs that are favorable to the Company. In evaluating
new product decisions, the Company must anticipate well in advance future
demand for product features and performance characteristics, as well as
available supporting technologies, manufacturing capacity, industry standards
and

competitive product offerings. The Company must also continue to make
significant investments in research and development in order to continually
enhance the performance and functionality of its products to keep pace with
competitive products and customer demands for improved performance, features
and functionality. The technical innovations required for the Company to
remain competitive are inherently complex and require long development cycles.
Such innovations must be completed before developments in networking
technologies or standards render them obsolete and must be sufficiently
compelling to induce network equipment vendors to favor them over alternative
technologies. Moreover, 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. In particular, no assurance can be given that the
Company's AnyFlow product line will become commercially available on a timely
basis, will provide the functional and performance advantages expected by
customers, or will find market acceptance. The failure to successfully develop
new products on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Research and Development."

Dependence on Independent Manufacturers. 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. The semiconductor industry is highly cyclical and, in the past, foundry
capacity has been very limited at times and may become limited in the future.
Currently, only one of the Company's products is 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. The Company has recently experienced delays in obtaining an adequate
supply of certain of its products from one supplier, as well as certain
problems regarding the quality of the products delivered by that supplier, and
as a result has begun obtaining such products from an alternative supplier.
There can be no assurance that the Company will not have similar or more
protracted problems in the future with existing or new suppliers. In the event
of a loss of, or a decision by the Company to change, a key supplier or
foundry, qualifying a new supplier or foundry and commencing volume production
could involve delay and expense, resulting in lost revenues, reduced operating
margins and possible detriment to customer relationships.

The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to
react to fluctuations in demand for its products, which could cause the
Company to have an excess or a shortage of inventory of a particular product.
Moreover, any failure of global semiconductor manufacturing capacity to
increase in line with demand could cause foundries to allocate available
capacity to larger customers or customers with long-term supply contracts. The
inability of the Company to obtain adequate foundry capacity at acceptable
prices, or any delay or interruption in supply, could 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.

The Company continuously evaluates the benefits, on a product-by-product
basis, of migrating to a smaller semiconductor geometry process in order to
reduce costs, and has commenced migration of certain products to smaller
geometries. The Company believes that transitioning its products to
increasingly smaller geometries will be important for the Company to remain
competitive. No assurance can be given that future process migration will be
achieved or achieved without difficulty.

In the future, the Company expects to change its supply arrangements to
assume more of the product manufacturing responsibilities. Such changes will
include contracting for wafer manufacturing and subcontracting for assembly
and test rather than purchasing finished product. The Company has begun
investing in design tools, libraries and personnel with the expectation of
assuming greater manufacturing responsibilities by mid-1998. The assumption of
greater manufacturing responsibilities involves additional risks including not

only the risks discussed above, but also risks associated with variances in
production yields, obtaining adequate test and assembly capacity at reasonable
cost and other general risks associated with the manufacture of
semiconductors. In addition, the Company also expects that it may enter into
volume purchase agreements pursuant to which the Company must commit to
minimum levels of purchases and which may require up-front investments. The
inability of the Company to effectively assume greater manufacturing
responsibilities or manage volume purchase arrangements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."

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 and
ATMS2000 product families compete with products from companies such as Texas
Instruments Incorporated, Lucent Technologies, Inc., PMC-Sierra Inc., Galileo
Technology Ltd., Integrated Telecom Technology, Inc. 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. In particular,
companies such as Texas Instruments and Lucent Technologies have proprietary
semiconductor manufacturing ability, preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, greater
financial resources than the Company and other significant advantages over the
Company. In addition, current and potential competitors may determine, for
strategic reasons, to consolidate, lower the prices of their products or
bundle their products with other products. Current and potential competitors
have established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other third
parties. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. The
Company believes that important competitive factors in its market are
performance, price, length of development cycle, design wins with major
network equipment vendors, support for new data networking standards, features
and functionality, adaptability of products to specific applications, support
of product differentiation, reliability, technical service and support and
protection of products by effective utilization of intellectual property laws.
Failure of the Company to compete successfully as to any of these or other
factors could have a material adverse effect on its operating results. The
failure of the Company to successfully develop and market products that
compete successfully with those of other suppliers in the market would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company must compete for the services
of qualified distributors and sales representatives. To the extent that the
Company's competitors offer such distributors or sales representatives more
favorable terms or a higher volume of business, such distributors or sales
representatives may decline to carry, or discontinue carrying, the Company's
products. The Company's business, financial condition and results of
operations could be adversely affected by any failure to maintain and expand
its distribution network. See "Business--Competition."

Product Complexity. 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. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or
bugs will not be found in new products after commencement of commercial

production, resulting in additional development costs, loss of, or delays in,
market acceptance, diversion of technical and other resources from the
Company's other development efforts, claims by the Company's customers or
others against the Company, or the loss of credibility with the Company's
current and prospective customers. Any such event would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Dependence on Growth in Demand for Networking Equipment. The Company's
future success is in large measure dependent on continued growth in the market
for networking equipment, in particular the market for mid- to high-end
switches and routers which are manufactured and sold by the Company's
customers. The market for these products has in the past and may in the future
fluctuate significantly based upon numerous factors, including the lack of
industry standards, adoption of alternative technologies, capital spending
levels and general economic conditions. There can be no assurance with respect
to the rate or extent to which the networking equipment market will grow, if
at all, nor can there be any assurance that the Company will not experience a
decline in demand for its products. Any decrease in the growth of the
networking equipment market or decline in demand for the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--MMC Networks'
Strategy."

Order and Shipment Uncertainties. The Company's sales are generally made
pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or
deferral of product orders could result in the Company holding excess
inventory, which could have a material adverse effect on the Company's profit
margins and restrict its ability to fund its operations. The Company
recognizes revenue upon shipment of products to the customer. Refusal of
customers to accept shipped products or delays or difficulties in collecting
receivable accounts could result in significant charges against income, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Protection of Intellectual Property. Since its inception, the Company has
devoted significant resources to research and development. 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. The Company has been granted one patent in the
United States, the claims of which cover certain aspects of its ViX
architecture, and has received notice that one additional patent will issue.
In addition, the Company has filed 20 other patent applications, ten in the
United States and ten outside the United States, relating to other aspects of
systems employing the ViX architecture. None of the Company's patent
applications relates to specific products of the Company, such as the ATMS2000
and PS1000 lines of network processors, as the Company believes that it may be
more effective to seek patent protection with respect to its key underlying
technologies, including aspects of its ViX architecture. 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. 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. There can be no assurance that such intellectual
property rights can be successfully asserted in the future or will not be
invalidated, circumvented or challenged. 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.
Litigation, regardless of the outcome, is likely to result in substantial cost
and diversion of resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business, financial condition and results of operations.

In addition, there can be no assurance that competitors of the Company, many
of which have substantially greater resources than the Company and have made
substantial investments in competing technologies, do not have, or will not
seek to apply for and obtain, patents that will prevent, limit or interfere
with the Company's ability to make, use or sell its products either in the
United States or in international markets. On October 27, 1997, FORE filed a
complaint in the United States District Court for the Western District of
Pennsylvania alleging that the Company willfully infringed two of FORE's
patents. The complaint seeks both a preliminary and a permanent injunction
against the Company, as well as recovery of damages. The Company has received
a legal opinion from Dergosits & Noah, LLP, its patent counsel, to the effect
that certain claims made in the FORE patents are invalid, and that, as to the
other claims, the Company's products do not infringe. However, the results of
litigation are inherently uncertain, and there can be no assurance that the
Company will prevail in any litigation with FORE. Furthermore, there can be no
assurance that the Company will not in the future become subject to other
patent infringement claims and litigation or interference proceedings to
determine the priority of inventions. The defense and prosecution of
intellectual property suits, interference proceedings and related legal and
administrative proceedings are both costly and time consuming. Any such suit
or proceeding involving the Company could have a material adverse effect on
the Company's business, financial condition and results of operations.

Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management and other personnel, many of whom would be
difficult to replace. The Company does not have employment contracts with any
of its key personnel and only maintains limited key man life insurance on two
of its officers. In addition, the Company believes that its success depends to
a significant extent on the ability of its management to operate effectively,
both individually and as a group. Several members of the Company's management
team have joined the Company in the last 12 months. In particular, a new Chief
Financial Officer joined the Company in September 1997. The Company may
experience difficulty in integrating members of its management team, and there
can be no assurance that the new executives will succeed in their roles in a
timely and efficient manner. The Company must also attract and retain highly
skilled managerial and other personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of any of
the key personnel, the inability to attract or retain qualified personnel in
the future or delays in hiring required personnel, particularly engineers,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, companies in the networking
industry whose employees accept positions with competitive companies
frequently claim that their competitors have engaged in unfair hiring
practices. There can be no assurance that the Company will not receive such
claims in the future as it seeks to hire qualified personnel or that such
claims will not result in material litigation involving the Company. The
Company could incur substantial costs in defending itself against any such
claims, regardless of their merits. See "Business--Employees" and
"Management--Executive Officers and Directors."

Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
effort. There can be no assurance that such efforts can be accomplished
successfully. In addition, this growth as well as the Company's product
development activities have necessitated an increase in the number of the
Company's employees, resulting in increased responsibilities for the Company's
management. If the Company sustains its growth in the future, the Company will
need to continue to implement and improve its operational, financial and
management information systems and to hire, train, motivate and manage its
expanding employee base. There can be no assurance that the Company's systems,
procedures and controls will be adequate to support the Company's operations.
Any failure to improve the Company's operational, financial and management
information systems, or to hire, train, motivate or manage its employees could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Risks Associated with Expansion of International Business
Activities. Substantially all of the Company's sales to date have been to
customers located in the United States, including sales to U.S.-based
affiliates of non-U.S. network equipment vendors. If the Company's
international sales increase, the Company will be 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. See "Business--Sales, Marketing
and Technical Support" and "--Manufacturing."

Need for Additional Capital. The Company may require substantial additional
working capital to fund its business, particularly to finance inventories and
accounts receivable and for product development. The Company believes that the
net proceeds of this offering, together with its existing cash balances and
available line of credit and cash flow expected to be generated 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. The
Company's future capital requirements 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. Any such additional financing may result in
significant dilution to the Company's then existing investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities, or that may otherwise offer growth
opportunities. While the Company has no current agreements or negotiations
underway with respect to any such acquisitions, the Company may make
acquisitions of businesses, products or technologies in the future. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's operating results and/or
the price of the Company's Common Stock. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds."

Cyclicality of Semiconductor Industry. The semiconductor industry has
historically been characterized by significant downturns and wide fluctuations
in supply and demand. From time to time, the industry has also experienced
significant fluctuations in anticipation of changes in general economic
conditions. This cyclicality has been characterized by significant variances
in product demand, production capacity and accelerated erosion of unit ASPs.
Industry-wide fluctuations in the future could have a material adverse effect
on the Company's business, financial condition and results of operations.

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, 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 and 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.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock. Moreover, the trading prices of many high technology,
data networking and semiconductor stocks 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
not decline below its initial offering price to the public. See
"Underwriters."

Discretionary Use of Proceeds of this Offering. The Company currently has no
specific plans for the use of the net proceeds of this offering. The Company's
management will retain broad discretion in the allocation of the net proceeds
of this offering. There can be no assurance that the proceeds will be utilized
in a manner that the stockholders deem optimal or that the proceeds can or
will be invested to yield a significant return upon the completion of this
offering. Upon completion of this offering, the Company will receive net
proceeds of approximately $34.8 million (assuming no exercise of the
Underwriters' over-allotment option and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company),
substantially all of which will be invested in investment-grade, interest-
bearing securities for an indefinite period. See "Use of Proceeds."

Effect of Antitakeover Provisions. Certain provisions of the Company's
Certificate of Incorporation and Bylaws and of Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a
price above the then current market value of the Common Stock. Such provisions
may also inhibit increases in the market price of the Common Stock that could
result from takeover attempts. The Certificate of Incorporation authorizes
10,000,000 shares of undesignated Preferred Stock. The Board of Directors of
the Company, without further stockholder approval, may issue this Preferred
Stock with such terms as the Board of Directors may determine, which could
have the effect of delaying or preventing a change in control of the Company.
The issuance of Preferred Stock could also adversely affect the voting power
of the holders of Common Stock, including the loss of voting control to
others. Such Preferred Stock could be utilized to implement, without
stockholder approval, a stockholders' right plan that could be triggered by
certain change in control transactions, which could delay or prevent a change
in control of the Company or could impede a merger, consolidation, takeover or
other business combination involving the Company, or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of the Company. The Company's Bylaws and indemnity agreements provide that the
Company will indemnify officers and directors against losses that they may
incur in legal proceedings resulting from their service to the Company. In
addition, the Company's charter documents provide for a classified Board of
Directors and eliminate the right of stockholders to call special meetings of
stockholders and to take action by written consent. Moreover, Section 203 of
the Delaware General Corporation Law restricts certain business combinations
with "interested stockholders" as defined by that statute. The provisions of
the Certificate of Incorporation and of Delaware law are intended to encourage
potential acquirors to negotiate with the Company and allow the Board the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also have the effect of
discouraging acquisition proposals or delaying or preventing a change in
control of the Company, which in turn may have an adverse effect on the market
price of the Company's Common Stock. In addition to the foregoing, certain of
the Company's customers would have the right to manufacture the Company's
network processors for resale as part of their products, or otherwise use the
Company's proprietary technology in their products, in the event of a change
of control of the Company. Such contract provisions may have the effect of
discouraging acquisition proposals. See "Description of Capital Stock."

Control by Principal Stockholders. A substantial majority of the Company's
capital stock is held by a limited number of stockholders. After completion of
this offering, the Company's officers and directors and parties affiliated or
related to such persons will own approximately 57.3% of the shares of Common
Stock outstanding or issuable upon conversion of convertible securities.
Accordingly, such stockholders are likely, for the foreseeable future, to
continue to be able to control major decisions of corporate policy and
determine the outcome of any major transaction or other matter submitted to
the Company's stockholders or Board of Directors, including potential mergers
or acquisitions involving the Company, amendments to the Company's Certificate
of Incorporation and the like. Stockholders other than such principal
stockholders are therefore likely to have little or no influence on decisions
regarding such matters. See "Principal Stockholders."

Dilution. Investors participating in this offering will incur immediate and
substantial dilution in the net tangible book value of their shares of Common
Stock in the amount of approximately $9.47 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company. Additional dilution will occur upon the exercise of
outstanding stock options. See "Dilution."

Shares Eligible for Future Sale. Sales of the Company's Common Stock in the
public market after this offering could adversely affect the market price of
the Company's Common Stock. Upon completion of this offering, the Company will
have approximately 28,601,708 shares of Common Stock outstanding, of which
3,500,000 shares (4,025,000 if the Underwriters' over-allotment option is
exercised in full) will be freely transferable without restriction or
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless such shares are held by affiliates of the Company, as that term
is defined in Rule 144 under the Securities Act. The officers and directors
and all existing stockholders of the Company have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the
date of this offering. However, Morgan Stanley & Co. Incorporated may, in its
sole discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Holders of approximately 21,118,743
shares of Common Stock will have certain rights with respect to registration
of such shares of Common Stock for sale to the public. Sales of Common Stock
by existing stockholders in the public market, or the availability of such
shares for sale, could adversely affect the market price of the Common Stock.
In addition, approximately 5,210,987 shares are issuable upon exercise of
outstanding options granted under the Company's stock option plans as of the
date of this Prospectus. The Company intends to file a registration statement
immediately after the closing of this offering to allow resale of such option
shares. See "Management--Benefit Plans," "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby are estimated to be $34.8 million
($40.2 million if the underwriters' overallotment option is exercised in
full), after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. The principal purposes of this
offering are to obtain additional capital, to create a public market for the
Company's Common Stock, to enhance the Company's ability to use its Common
Stock as consideration for acquisitions and as a means of attracting and
retaining key employees and to facilitate future access by the Company to
public capital markets. As of the date of this Prospectus, the Company has no
specific plans as to the use of the net proceeds of this offering. The Company
ultimately expects to use the net proceeds from this offering for general
corporate purposes, including working capital and capital expenditures. A
portion of the proceeds may also be used to make strategic acquisitions of
complementary businesses, technologies or products. Although the Company
evaluates such potential acquisitions from time to time, the Company currently
has no understanding, commitment or agreement with respect to any such
acquisitions. Pending such uses, the Company intends to invest the net
proceeds of this offering in U.S. investment grade, interest-bearing
securities.

DIVIDEND POLICY

Since January 1, 1995, the Company has not declared or paid any cash
dividends on its Common Stock. The Company presently intends to retain future
earnings, if any, for use in the operation and expansion of its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's bank line of credit agreement prohibits the payment of
dividends without prior consent of the bank.

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1997 (i) on an actual basis and (ii) as adjusted to give effect
to the sale of 3,500,000 shares of Common Stock offered by the Company hereby,
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, and the conversion of all outstanding shares
of Preferred Stock into 13,341,780 shares of Common Stock. This table should
be read in conjunction with the Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.

SEPTEMBER 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)

Long-term obligations..................................... $ 344 $ 344
------- -------
Stockholders' equity:
Preferred Stock: $.001 par value, 13,498,737 shares
authorized, 13,341,780 issued and outstanding, actual;
10,000,000 shares authorized, no shares issued and
outstanding, as adjusted............................... 10,247 --
Common Stock: $.001 par value, 100,000,000 shares
authorized, 11,759,928 shares issued and outstanding,
actual; 28,601,708 shares issued and outstanding, as
adjusted(1)............................................ 8 25
Additional paid-in capital.............................. 515 45,550
Notes receivable from stockholders...................... (295) (295)
Accumulated deficit..................................... (1,544) (1,544)
------- -------
Total stockholders' equity.............................. 8,931 43,736
------- -------
Total capitalization.................................. $ 9,275 $44,080
======= =======

- --------
(1) Based on the number of shares outstanding as of September 30, 1997.
Excludes (i) 5,310,668 shares of Common Stock then issuable upon the
exercise of options outstanding under the Company's 1993 Plan with a
weighted average exercise price of $2.34 per share, (ii) 1,500,000 shares
of Common Stock reserved for issuance under the Company's 1997 Plan, (iii)
300,000 shares reserved for issuance under the Company's 1997 Purchase
Plan, (iv) 150,000 shares of Common Stock reserved for issuance under the
Company's 1997 Director Plan and (v) 156,963 shares of Common Stock
issuable upon the exercise of outstanding warrants with a weighted average
exercise price of $.64 per share. See "Management--Benefit Plans,"
"Description of Capital Stock" and Notes 6 and 9 of Notes to Financial
Statements.

DILUTION

The net tangible book value of the Company as of September 30, 1997, was
approximately $8,931,000, or $.36 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. Without taking into account any other
changes in such net tangible book value after September 30, 1997, other than
to give effect to the sale by the Company of the 3,500,000 shares of Common
Stock offered hereby, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of September 30, 1997, would have been
$43,736,000, or $1.53 per share. This amount represents an immediate increase
in such net tangible book value of $1.17 per share to existing stockholders
and an immediate dilution of $9.47 per share to new investors. The following
table illustrates this per share dilution:

Assumed initial public offering price per share..................... $11.00
Net tangible book value per share as of September 30, 1997......... $ .36
Increase per share attributable to new investors................... 1.17
-----
Pro forma net tangible book value per share after the offering...... 1.53
------
Dilution per share to new investors................................. $ 9.47
======

The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share, based upon the initial public offering price of $11.00 per
share (before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) with respect to the 3,500,000 shares
offered by the Company hereby:

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------

Existing stockholders.......... 25,101,708 87.8% $10,519,161 21.5% $ .42
New investors.................. 3,500,000 12.2 38,500,000 78.5 11.00
---------- ----- ----------- -----
Total........................ 28,601,708 100.0% $49,019,161 100.0%
========== ===== =========== =====

The above computations assume that (i) the Underwriters' over-allotment
option is not exercised and (ii) no options or warrants have been or are
exercised after September 30, 1997. As of September 30, 1997, there were
outstanding options to purchase an aggregate of 5,310,668 shares of Common
Stock at a weighted average exercise price of $2.34 per share and warrants
exercisable for 156,963 shares of Common Stock, with a weighted average
exercise price of $.64 per share. If all such options had been exercised at
September 30, 1997, the net tangible book value of the Company at such date
would have been $21,370,000 or $.70 per share, the increase in net tangible
book value attributable to new investors would have been $.96 per share and
the dilution in net tangible book value to new investors would have been $9.34
per share. See "Management--Benefit Plans," "Description of Capital Stock" and
Notes 6 and 9 of Notes to Financial Statements.

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and notes thereto included
elsewhere in this Prospectus. The balance sheet data as of December 31, 1995
and 1996 and September 30, 1997 and the statement of operations data for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997 are derived from the audited financial statements included
elsewhere in this Prospectus. The balance sheet data as of December 31, 1992,
1993 and 1994 and the statement of operations data for period from inception
to December 31, 1992 and the year ended December 31, 1993 are derived from
audited financial statements of the Company not included herein. The statement
of operations data for the nine-month period ended September 30, 1996 are
derived from unaudited financial statements included elsewhere in this
Prospectus. In the opinion of management, such unaudited financial statements
have been prepared on the same basis as the audited financial statements
referred to above and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
results of operations for the indicated periods. Operating results for the
nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the full year.

NINE MONTHS
PERIOD FROM ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
------------ --------- --------- ---------- ---------- ------- -------
(IN THOUSANDS, EXECEPT PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ -- $ 165 $ 577 $ 10,515 $ 7,026 $14,296
Cost of revenues........ -- -- 23 304 3,576 2,440 4,281
----- -------- -------- ---------- ---------- ------- -------
Gross profit............ -- -- 142 273 6,939 4,586 10,015
----- -------- -------- ---------- ---------- ------- -------
Operating expenses:
Research and
development, net...... (87) (186) 132 1,802 3,312 2,167 5,410
Selling, general and
administrative........ 21 184 298 1,151 3,225 2,192 4,141
----- -------- -------- ---------- ---------- ------- -------
Total operating
expenses.............. (66) (2) 430 2,953 6,537 4,359 9,551
----- -------- -------- ---------- ---------- ------- -------
Operating income (loss). 66 2 (288) (2,680) 402 227 464
----- -------- -------- ---------- ---------- ------- -------
Other income (expense):
Interest income........ -- 5 64 146 427 330 212
Interest expense....... -- -- (2) (42) (110) (81) (101)
----- -------- -------- ---------- ---------- ------- -------
Total other income..... -- 5 62 104 317 249 111
----- -------- -------- ---------- ---------- ------- -------
Income (loss) before
income taxes........... 66 7 (226) (2,576) 719 476 575
Provision for income
taxes.................. -- -- -- -- 17 11 18
----- -------- -------- ---------- ---------- ------- -------
Net income (loss)...... $ 66 $ 7 $ (226) $ (2,576) $ 702 $ 465 $ 557
===== ======== ======== ========== ========== ======= =======
Net income per share(1). $ .02 $ .02 $ .02
========== ======= =======
Shares used to compute
net income per
share(1)............... 29,181 29,110 29,395
========== ======= =======

DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1992 1993 1994 1995 1996 1997
---- ---- ------ ------ ------- -------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments................ $ 27 $ 23 $2,920 $8,102 $ 6,318 $ 5,416
Working capital.................. 68 19 2,777 7,177 7,113 5,831
Total assets..................... 75 33 3,322 9,527 10,676 13,802
Long-term obligations............ -- -- 100 301 636 344
Total stockholders' equity....... 68 19 2,830 7,446 8,177 8,931

- --------
(1) For an explanation of the number of shares used to compute net income per
share, see Note 2 of Notes to Financial Statements. Net income (loss) per
share prior to 1996 has not been presented since such amounts are not
meaningful.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

OVERVIEW

MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking applications. From its inception in September 1992
through late 1995, the Company was engaged principally in research and
development, and a substantial portion of the Company's operating expenses
during such period was related to such research and development activities.
The Company commenced volume shipments of its ATMS2000 products in late 1995
and of its PS1000 products in 1996. The Company's operating results to date in
1997 reflect increased market acceptance and sales of the Company's products.
The Company recognizes revenue at the time of product shipment to its
customers. Product returns and sales allowances, which have not been
significant through September 30, 1997, are estimated and provided for at the
time of sale.

Substantially all of the Company's revenues have been derived from sales of
its ATMS2000 and PS1000 product families to a small number of customers. Sales
to the Company's three largest customers in 1996 and for the nine months ended
September 30, 1997 accounted for 76.0% and 67.0% of total revenues,
respectively. The largest of these customers is Cisco, which accounted for
approximately 51.0% and 30.4% of total revenues in 1996 and the first nine
months of 1997, respectively. The decrease in the percentage of revenues
attributable to Cisco is primarily the result of the significant increase in
revenues from other customers. The level of sales to any customer can vary
substantially from period to period based on the customer's product
development cycle. The Company expects that significant customer concentration
will continue for the foreseeable future. As a result, the Company's business,
financial condition and operating results may be materially adversely affected
by any cancellation, delay or deferral of orders by any of its significant
customers. See "Risk Factors--Customer Concentration" and "Business--Products"
and "--Customers."

The Company markets and sells its products primarily through a direct sales
and marketing organization. Substantially all of the Company's sales to date
have been to customers located in the United States, including sales to U.S.-
based affiliates of non-U.S. network equipment vendors. The Company has sales
representatives in the United States, Canada, Israel, Japan, Taiwan and the
United Kingdom.

The Company has been profitable for the last seven quarters. As of September
30, 1997, the Company had an accumulated deficit of $1.5 million. Although the
Company has experienced revenue growth in recent periods and first achieved
profitability in the first quarter of 1996, these results should not be
considered indicative of future revenue growth, if any, nor is there any
assurance that the Company will be profitable in any future period. While the
Company has experienced increased revenues during the past seven quarters, net
income has not increased proportionately primarily as a result of the
continued growth in the Company's investment in research and development. Due
to the lengthy sales cycle of the Company's products, there is often a
significant delay between the time the Company incurs expenses and the time it
receives the related revenue. See "Risk Factors--Lengthy Sales Cycle." The
Company has increased its operating expenses significantly in the past seven
quarters due to increased research and development and sales and marketing
personnel as well as administration. In addition, the Company moved to larger
facilities with higher rent in 1996. To the extent that future revenues do not
increase significantly in the same periods in which operating expenses
increase, the Company's operating results would be adversely affected. See
"Risk Factors--Limited Operating History; No Assurance of Future
Profitability" and "--Fluctuations in Operating Results."

As described above, in the period from 1992 to late 1995, the Company was
primarily engaged in initial research and development. In late 1995, the
Company began commercial sales of its products and focused on adding features
and functionality to such products. Because of the Company's significantly
different levels of operations during 1994, 1995 and 1996, year-to-year
comparisons may be less meaningful than comparisons of recent quarterly
results. The following discussion summarizes the Company's quarterly results
of operations in 1996 and in the first nine months of 1997.

RESULTS OF OPERATIONS

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain statement of operations data for each
quarter of 1996 and for the first three quarters of 1997, as well as such data
expressed as a percentage of the Company's revenues for each quarter. This
information has been presented on the same basis as the audited Financial
Statements appearing elsewhere in this Prospectus and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary to present fairly the
unaudited quarterly results. This information should be read in conjunction
with the Company's audited Financial Statements and notes thereto appearing
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period. See "Risk Factors--
Fluctuations in Operating Results."

QUARTER ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)

Revenues................ $2,162 $2,528 $2,336 $3,489 $3,421 $4,780 $6,095
Cost of revenues........ 903 692 845 1,136 1,118 1,417 1,746
------ ------ ------ ------ ------ ------ ------
Gross profit............ 1,259 1,836 1,491 2,353 2,303 3,363 4,349
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development, net...... 600 990 577 1,145 1,096 1,655 2,659
Selling, general and
administrative........ 605 754 833 1,033 1,062 1,497 1,582
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 1,205 1,744 1,410 2,178 2,158 3,152 4,241
------ ------ ------ ------ ------ ------ ------
Operating income........ 54 92 81 175 145 211 108
Interest income, net.... 113 75 61 68 45 42 24
------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 167 167 142 243 190 253 132
Provision for income
taxes.................. 4 4 3 6 4 5 9
------ ------ ------ ------ ------ ------ ------
Net income.............. $ 163 $ 163 $ 139 $ 237 $ 186 $ 248 $ 123
====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF REVE-
NUES:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 41.8 27.4 36.2 32.6 32.7 29.6 28.6
------ ------ ------ ------ ------ ------ ------
Gross profit............ 58.2 72.6 63.8 67.4 67.3 70.4 71.4
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development, net...... 27.7 39.2 24.6 32.8 32.1 34.7 43.6
Selling, general and
administrative........ 28.0 29.8 35.7 29.6 31.0 31.3 26.0
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 55.7 69.0 60.3 62.4 63.1 66.0 69.6
------ ------ ------ ------ ------ ------ ------
Operating income........ 2.5 3.6 3.5 5.0 4.2 4.4 1.8
Interest income, net.... 5.2 3.0 2.6 2.0 1.4 .9 .4
------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 7.7 6.6 6.1 7.0 5.6 5.3 2.2
Provision for income
taxes.................. .2 .2 .1 .2 .1 .1 .2
------ ------ ------ ------ ------ ------ ------
Net income.............. 7.5% 6.4% 6.0% 6.8% 5.4% 5.2% 2.0%
====== ====== ====== ====== ====== ====== ======

Revenues. Substantially all product revenues to date have been derived from
sales of the Company's ATMS2000 and PS1000 product families to network
equipment vendors. During 1996, several of the Company's customers began
shipping production volumes of networking systems which incorporate the
Company's ATMS- 2000 products. Starting in the second quarter of 1996, the
Company introduced and began shipping its PS1000 products. During the second
quarter of 1996, revenues increased to $2.5 million from $2.2 million for the
first quarter of 1996 due primarily to a substantial increase in shipments of
the Company's ATMS2000 product family and to higher sales of reference design
kits. The decline in revenue in the third quarter of 1996 to $2.3 million
reflected reduced shipments of ATMS2000 products. The growth in revenues in
the fourth quarter of 1996 and the second and third quarters of 1997 reflected
increased sales of both the ATMS2000 and PS1000 product families to new and
existing customers.

Cost of Revenues; Gross Profit. Cost of revenues consists principally of the
cost of purchased packaged semiconductor products from outside manufacturers
and warranty costs. Gross margin in the first quarter of 1996 was 58.2%,
primarily as a result of significant start-up production costs. Gross margin
improved to 72.6% in the second quarter of 1996, due in part to a substantial
increase in shipments of ATMS2000 products and increased shipments of
reference design kits, which typically have a higher gross margin than
finished products. The decline in gross margin to 63.8% in the third quarter
of 1996 reflected a shift in product mix. The increases in gross margin in the
fourth quarter of 1996 and the second and third quarters of 1997 to 67.4%,
70.4% and 71.4%, reflected lower per unit prices paid to the Company's
contract manufacturers and increased sales of higher margin products.

Research and Development Expenses, Net. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities as well as related subcontracting
costs. These costs are reduced by non-recurring engineering ("NRE") funding
provided by the Company's customers to facilitate acceleration of certain
product development projects. Research and development expenditures prior to
applying NRE funding have increased in absolute dollars in each quarter,
reflecting the addition of research and development personnel and associated
costs. Net research and development expenses have varied from quarter to
quarter depending in part on the amount of NRE funding earned by the Company
in a particular quarter. Research and development expenses increased as a
percentage of revenues in the second quarter of 1996 and the third quarter of
1997 due to unusually high contract engineering and pre-production charges
associated with the launch of PS1000 products and the AnyFlow 5000 products,
respectively. During the third quarter of 1996, the Company earned higher than
typical NRE funding, which commensurately reduced research and development
expenses in that quarter. The Company anticipates that research and
development expenses will continue to increase in absolute dollars as the
Company continues to increase the number of research and development personnel
and incurs pre-production charges associated with new products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist mainly of employee-related expenses,
commissions to sales representatives and trade exhibition and facilities
expenses. During the first three quarters of 1996, selling, general and
administrative expenses increased in absolute dollars and as a percentage of
revenues due primarily to increased commissions on higher sales, increased
product marketing costs associated with the introduction of new products, the
establishment of a sales office in Boston and additional personnel. In the
third quarter of 1996, selling, general and administrative expenses increased
to 35.7% of revenues, due in part to the Company's move to new facilities with
higher rent. In the second quarter of 1997, selling, general and
administrative expenses increased to $1.5 million from $1.1 million in the
first quarter of 1997, due primarily to the hiring of additional sales and
marketing personnel. The Company anticipates that selling, general and
administrative expenses will continue to increase in absolute dollars due to
increased sales activity as well as costs associated with being a publicly
held company.

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 networking

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. The
Company has at times 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. In addition, the Company's lengthy sales
cycle limits its visibility regarding future financial performance. As a
result of all of the foregoing, there can be no assurance that the Company
will be able to sustain profitability on a quarterly or an annual basis.
Moreover, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
operating results. The Company's operating results in a future quarter or
quarters are likely to fall below the expectations of public market analysts
or investors. In such event, the price of the Company's Common Stock will
likely be materially adversely affected.

NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997

Revenues. Revenues increased from $7.0 million for the nine months ended
September 30, 1996 to $14.3 million for the nine months ended September 30,
1997. This increase in revenues reflects the increased acceptance of the
Company's ATMS2000 and PS1000 families of network processors by new and
existing customers.

Cost of Revenues; Gross Profit. Cost of revenues increased from $2.4 million
for the nine months ended September 30, 1996 to $4.3 million for the nine
months ended September 30, 1997 reflecting increased sales of the Company's
network processors to new and existing customers, including volume shipments
of the Company's PS1000 product family. Gross margin increased from 65.3% for
the nine months ended September 30, 1996 to 70.1% for the nine months ended
September 30, 1997. Gross margin was lower in the first nine months of 1996 as
a result of higher costs associated with the commencement of volume production
during this period.

Research and Development Expenses, Net. Net research and development
expenses increased from $2.2 million for the nine months ended September 30,
1996 to $5.4 million for the nine months ended September 30, 1997 due to the
addition of research and development personnel and associated costs. As a
percentage of total revenues, research and development expenses were 30.8% and
37.8% for the nine months ended September 30, 1996 and 1997, respectively,
reflecting a substantial increase in the Company's investment in research and
new product development in the second and third quarters of 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2.2 million for the nine months ended
September 30, 1996 to $4.1 million for the nine months ended September 30,
1997 due primarily to increased sales commissions on higher sales, increased
product marketing costs associated with new products, additional personnel,
higher costs associated with the Company's new facility and the establishment
of a sales office in Boston.

Interest Income. Interest income reflects interest earned on average cash,
cash equivalents and short-term investment balances. Interest income was
$330,000 and $212,000 for the nine months ended September 30, 1996 and 1997,
respectively, reflecting a decrease in cash balances and investments from
period to period.

Interest Expense. Interest expense reflects interest on borrowings against
lease lines to finance the acquisition of capital equipment. Interest expense
was $81,000 and $101,000 for the nine months ended September 30, 1996 and
1997, respectively.

Provision for Income Taxes. Due to the utilization of net operating loss
carryforwards, the provision for income taxes in the first nine months of 1996
and 1997 consisted solely of federal and state alternative minimum taxes.

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

Revenues. Revenues for 1994, 1995 and 1996 were $165,000, $577,000 and $10.5
million, respectively. The Company commenced sales of its network processors
in late 1995 and substantially increased shipments to its customers in 1996.

Cost of Revenues; Gross Profit. Cost of revenues was $23,000, $304,000 and
$3.6 million in 1994, 1995 and 1996, respectively, reflecting increased sales
in these periods. Gross margin was 86.1%, 47.3% and 66.0% for 1994, 1995 and
1996, respectively. In 1994, revenues were primarily attributable to sales of
reference design kits. In 1995, the Company commenced shipments of its first
ATMS2000 products, and cost of revenues reflected start-up manufacturing
costs. In 1996, increased gross margin reflected increased production volumes
resulting in lower unit prices paid to the Company's contract manufacturers.

Research and Development Expenses, Net. Net research and development
expenses were $132,000, $1.8 million and $3.3 million in 1994, 1995 and 1996,
respectively. Research and development expenses as a percentage of revenues
were 80.0%, 312.3% and 31.5% in 1994, 1995 and 1996, respectively. The
increases in research and development expenses in absolute dollars primarily
reflected the addition of personnel and related costs during these periods.
The decrease in research and development expenses as a percentage of revenues
in 1996 reflected the substantial increase in product shipments in 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $298,000, $1.2 million and $3.2 million in 1994,
1995 and 1996, respectively. These increases in absolute dollars were
primarily due to increased commissions on higher sales, increased product
marketing costs associated with new products, additional personnel, costs
associated with the Company's new facility commencing in September 1996 and
the establishment of a sales office in Boston. Selling, general and
administrative expenses as a percentage of total revenues were 180.6%, 199.5%
and 30.7% in 1994, 1995 and 1996, respectively. The decrease in selling,
general and administrative expenses as a percentage of revenues in 1996
reflected the substantial increase in product shipments in 1996.

Interest Income. Interest income totaled $64,000, $146,000 and $427,000 in
1994, 1995 and 1996, respectively. The increases reflect interest earned on
higher balances of cash, cash equivalents and short-term investments resulting
from sales of Preferred Stock in July 1994 and November 1995.

Interest Expense. Interest expense totaled $2,000, $42,000 and $110,000 in
1994, 1995 and 1996, respectively. The increase in interest expense resulted
from increased borrowing against established lease lines to finance the
acquisition of additional capital equipment.

Provision for Income Taxes. The provision for income taxes of $17,000 in
1996 represents federal and state alternative minimum taxes. No current
provisions for income taxes were recorded in 1994 or 1995 as the Company
incurred net operating losses for income tax purposes from July 12, 1994, the
date on which the Company elected to be taxed as a Subchapter C corporation,
through December 31, 1995. In addition, no deferred benefit for income taxes
was recorded in 1994 or 1995 as the Company was in a net deferred tax asset
position for which a full valuation allowance was provided.

At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $2.0 million and $700,000, respectively. The
federal net operating loss carryforwards expire in 2010. The state net
operating loss carryforwards expire in 2000. As of December 31, 1996, the
Company also had research and development credit carryforwards for federal and
state tax purposes of approximately $169,000 and $145,000, respectively. The
federal research and development credit carryforwards expire beginning in 2009
through 2011. The state research and development credit carryforwards expire
beginning in 1999 through 2001.

LIQUIDITY AND CAPITAL RESOURCES

From inception, the Company has financed its operations and capital
requirements primarily through sales of Preferred Stock. Net cash used in
operations for the years ended December 31, 1994, 1995 and 1996 was $130,000,
$1.8 million and $859,000, respectively. To the extent that the Company is
unable to fund its working capital needs in the future through cash generated
from operations, it may seek additional funds through public or private
financing or from other sources. At September 30, 1997, the Company had $5.4
million in cash, cash equivalents and short-term investments, a decrease of
$902,000 from December 31, 1996. This decrease was primarily attributable to
an increase in accounts receivable resulting from increased sales and an
increase in the purchase of capital assets. The Company expects that accounts
receivable will continue to increase to the extent that the Company's revenues
continue to rise and that the Company will continue to increase its investment
in capital assets to support expansion of its operations. Any such increase
can be expected to reduce cash, cash equivalents and short-term investments.
As of September 30, 1997, the Company had an accumulated deficit of $1.5
million.

In April 1997 the Company entered into a $5.0 million revolving bank credit
facility, which bears interest at the bank's prime rate, and a $3.0 million
bank lease line, which bears interest at the bank's prime rate plus .5%. Both
facilities expire in April 1998. At September 30, 1997, the Company had not
made any borrowings under either facility. As of such date, however, the
Company had $709,000 in borrowings under two prior lease facilities. See Notes
4 and 9 of Notes to Financial Statements.

Through September 30, 1997, the Company had acquired approximately $4.6
million in capital assets. The Company intends to purchase approximately $1.5
million of additional capital assets during the remainder of 1997, but
currently has no other significant commitments to acquire capital assets. A
portion of the Company's future capital expenditures will be devoted to
enhancing and expanding the Company's operational, financial and management
information systems. The Company expects such expenditures to be funded in
part out of working capital, and in part through existing and future credit
and lease facilities.

The Company uses a number of independent suppliers to manufacture
substantially all of its products. As a result, the Company relies on these
suppliers to allocate to the Company a sufficient portion of foundry capacity
to meet the Company's needs and deliver sufficient quantities of the Company's
products on a timely basis. See "Risk Factors--Dependence on Independent
Manufacturers." These arrangements allow the Company to avoid utilizing its
capital resources for manufacturing facilities and work-in-process inventory
and focus substantially all of its resources on the design, development and
marketing of its products. The Company expects to assume more responsibility
for managing product manufacturing in the future, which may entail additional
expenditures. The Company anticipates that any such expenditures will be
funded by working capital.

Net cash provided by (used in) financing activities was $3.0 million, $7.1
million, ($252,000) and ($148,000) in 1994, 1995, 1996 and the first nine
months of 1997, respectively, resulting primarily from the issuance of $3.1
million of Preferred Stock in 1994 and $7.2 million of Preferred Stock in
1995, and the repayment of principal on capital lease obligations in 1996 and
the first nine months of 1997, respectively.

The Company requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory, and for investments
in property and equipment. The Company's need to raise capital in the future
will depend on many factors, including the rate of sales growth, market
acceptance of the Company's existing and new products, the amount and timing
of research and development expenditures, the timing and size of acquisitions
of businesses or technologies, the timing of the introduction of new products
and the expansion of sales and marketing efforts. There can be no assurance
that additional equity or debt financing, if required, will be available on
terms satisfactory to the Company, if at all. See "Risk Factors--Need for
Additional Capital." The Company believes the net proceeds of this offering
combined with its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's needs for at
least the next 12 months, although the Company could seek to raise additional
capital during that period.

BUSINESS

MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking 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 and ATMS2000 families
of network processors, provide the core functionality of high-performance Fast
Ethernet and ATM network switches, respectively. 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 ViX architecture, which enables network
equipment vendors to easily and cost-effectively implement high-performance
value-added features in their switch and router products.

INDUSTRY BACKGROUND

The proliferation of high-performance personal computers, workstations and
servers along with the growing reliance on increasingly data-intensive
networked applications has resulted in dramatic growth in traffic over data
networks. In addition, as organizations and individuals increasingly rely on
intranets and the Internet, networks have been extended to connect branch
offices, home offices, mobile users and, more recently, customers and
suppliers. The rise in data traffic has been accompanied by substantial growth
in the number of protocols employed in LAN and WAN networking, including
Ethernet, Token Ring, Fiber-Distributed Data Interface ("FDDI"), WAN serial
lines, X.25, Frame Relay and dial-up access. More recently, Fast Ethernet,
Gigabit Ethernet, higher-speed Frame Relay and ATM networks are beginning to
be deployed. These trends continue to drive demand for high-performance
networking equipment that supports internetworking a variety of types of LANs
and WANs.

As the size and performance requirements of networks have grown, network
equipment vendors have increasingly focused on advanced switching and routing
devices to enable large-scale, high-performance networks. Known as Layer 3
switches, IP switches, high-speed routers or switching routers, these devices
are designed to enable a network hierarchy that facilitates the implementation
of such networks. In addition to improved performance and multiprotocol
connectivity, enterprises and network service providers are increasingly
demanding networking equipment that supports a broad variety of advanced
features, without compromising performance. For example, as the reach of
enterprise data networks has spread to WANs and the Internet, network
administrators need security at multiple points in the network. As businesses
become more dependent on intranets and the Internet, they are increasingly
focused on differentiated classes or priorities of service for certain of
their applications and users to make more efficient use of networking
resources. Similarly, new applications such as video conferencing, multimedia
training and Internet telephony require end-to-end quality of service
guaranteed across entire networks. Finally, in order to implement advanced
features and functionality across complex, high speed networks, network
administrators also need better network management capabilities to help them
analyze the traffic flowing through the network, to anticipate traffic growth
and to quickly isolate and solve network problems.

While attempting to respond to customer demands for more performance, new
capabilities, greater security and better management, network equipment
vendors face growing competition, evolving networking standards

and increasing market segmentation. Rapid growth in the data networking
industry has attracted a multitude of new entrants who are competing with or,
in many instances, are being acquired by major network equipment vendors. To
compete effectively, network equipment vendors must improve their time-to-
market and lower their costs while continuing to increase performance and add
advanced features and differentiated functionality. At the same time, network
equipment vendors must support multiple evolving industry standards and
protocols and must address the diverse needs of customers in an increasingly
segmented networking market. For example, a small office may require a simple
network built with one Ethernet LAN switch, a large corporation may require
multiple Fast Ethernet high-speed routers connected to an ATM campus backbone
switch, and an Internet service provider may require a dedicated OC-3 or SDH-1
backbone switch with downlinks that support dedicated and dial-up
connectivity.

In order to address the needs of their increasingly diverse customer base
and provide support for a broad array of networking protocols and
functionalities without substantially degrading performance, network equipment
vendors have employed increasingly capable semiconductor devices in their
networking equipment, the most important being those used as the switching or
routing "engines." Network equipment vendors have traditionally relied on two
general approaches for these semiconductor engines: general purpose processors
which are software-programmable or custom-developed ASICs. Each of these
approaches has advantages but involves significant trade-offs with respect to
performance, feature implementation, time-to-market and cost. Switches and
routers utilizing general purpose processors can be brought to market
relatively rapidly, can be easily adapted to changes in industry protocols and
standards and can be programmed in software to add additional features, but
these benefits are usually not achievable without significant performance
degradation or unacceptably high unit production cost. Alternatively, switches
and routers based on ASICs can be designed to achieve high performance and
produced at relatively low unit cost, but the ASIC development cycle is
usually too time consuming to permit the development of high-performance ASICs
with advanced feature sets while meeting network equipment vendors' time-to-
market constraints. In addition, ASICs involve the risk of additional delays
associated with multiple iterations that may be required in the ASIC
development cycle, provide little flexibility to conform to rapidly evolving
standards and protocols and lack the full feature support that would allow
them to address multiple segments of the networking market. Consequently,
neither approach achieves network equipment vendors' requirements for high
performance and advanced features without imposing an unacceptable time-to-
market and/or cost burden.

MARKET OPPORTUNITY FOR NETWORK PROCESSORS

The Company believes that these market trends have created a significant
opportunity for network processors--high-performance, open-architecture,
software-programmable processors optimized for networking applications. These
network processors enable the design and development of switching and routing
solutions that incorporate advanced features, operate without significant
performance degradation, address evolving standards and multiple market
segments through software programmability, and can be produced in a cost-
efficient manner and within the time-to-market constraints of the competitive
networking equipment market. The Company believes that network processors
offer network equipment vendors the ability to reduce the time and expense
involved in developing customized chip sets for individual network switching
products, while allowing vendors to focus on developing networking systems
which are powerful, cost-effective, differentiated and feature-rich to satisfy
the needs of their increasingly diverse customer bases.

MMC NETWORKS' SOLUTION

MMC Networks is a leading developer and supplier of network processors
enabling a new generation of high-performance networking equipment. These
network processors are designed to allow network equipment vendors to rapidly
develop high-performance, feature-rich, cost-effective, scalable LAN and WAN
switches and routers targeting the specific needs of distinct customer
segments. The Company believes that, by designing-in the Company's network
processors, network equipment vendors can simultaneously reduce development
costs, accelerate time-to-market and focus on enhancing system differentiation
with advanced features and functionality. Using the Company's network
processors as building blocks, MMC Networks' customers are

offering or designing multi-gigabit, wire-speed switches and routers with
enhanced features including internetworking among multiple types of LANs and
WANs, security, class of service, quality of service and network management
without significant performance degradation.

The Company currently offers the PS1000 Fast Ethernet and ATMS2000 ATM
families of network processors. All of the Company's products are based on the
Company's ViX architecture, which is designed to enable network equipment
vendors to construct cost-effective, high-bandwidth, high-port-count, feature-
rich, modular and stand-alone switches and routers. The Company's proprietary
Per Flow Queuing ("PFQ") technology extends the ViX architecture to support
class of service and quality of service for network switches. To date, the
Company has achieved more than 35 design wins with 27 network equipment
vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT
and Toshiba) are shipping networking products that incorporate the Company's
network processors.

MMC NETWORKS' STRATEGY

MMC Networks' strategy is to enable network equipment vendors to rapidly
develop and introduce differentiated products by leveraging the high-
performance, feature-rich, software-programmable and cost-effective network
processors offered by the Company. Key elements of the Company's strategy
include the following:

Target High-Growth Markets. MMC Networks' network processors target the
rapidly growing enterprise and service provider markets. These markets require
high-performance, feature-rich, mid- to high-end LAN and WAN networking
equipment solutions. The Company believes that as these markets continue to
grow, they will become increasingly specialized. Consequently, network
equipment vendors will need to deliver a broader mix of products in order to
satisfy increasingly sophisticated and diverse customer performance and
feature requirements. The Company focuses on the design and development of
network processors that enable network equipment vendors to rapidly design and
bring to market a broad variety of differentiated networking solutions meeting
the performance and feature requirements of this evolving market.

Facilitate Customer Success. Increasing competition and evolving networking
standards have exerted and will continue to exert pressure on network
equipment vendors to introduce new products rapidly and cost-effectively. MMC
Networks' network processors are designed to improve network equipment
vendors' time-to- market and lower their development costs by providing them
with software programmable processing functionality to enable them to address
evolving standards and multiple market segments. The Company works closely
with its customers to design network processors that enable performance and
functionality compatible with such customers' current and future needs and
that complement network equipment vendors' product development efforts.

Extend Technology Leadership. MMC Networks has made substantial investments
in the technologies that underlie its network processors, with the goal of
setting new price/performance benchmarks and enabling the widespread use of
sophisticated networking functionality. For example, the Company's ViX
architecture, which forms the basis of all of its products, is designed to
enable network equipment vendors to implement value-added features without
significant performance degradation. MMC Networks is continually developing
new technologies for its network processors, such as the Company's next
generation network processors, which are designed to integrate the processing
of data from different protocols.

Leverage Fabless Semiconductor Model. MMC Networks seeks to leverage the
flexibility of its fabless semiconductor business model to lower technology
and production risks, increase profitability and reduce time-to-market. The
Company's fabless model allows it to focus on its core network processor
design competencies, while minimizing the capital and operating infrastructure
requirements. In addition, the Company's reliance on mainstream semiconductor
design and manufacturing technologies rather than newer, more expensive
manufacturing processes reduces the risks inherent in newer, less proven
process technologies.

TECHNOLOGY

MMC Networks' network processors are high-performance, multi-gigabit, open-
architecture, software-programmable processors with instruction sets that have
been optimized for processing and switching data, voice and video packets and
cells. The Company believes that the key underlying technologies employed in
its network processors give it a substantial competitive advantage. The core
technologies employed in current products or to be implemented in future
products include the Company's ViX architecture, Per-Flow Queuing technology,
Direct Replication Engine technology, Virtual SAR technology and Programmable
BitStream Processor technology.

ViX Architecture. The ViX architecture is a switch fabric architecture that
uses a patented point-to-point connection matrix that permits the use of a
wide, centralized, shared-memory structure, while separating control
information from user data. The ViX architecture's use of "point-to-point
connections" is designed to enable network equipment vendors to easily scale
the number of ports in their switches and routers, unlike shared-bus
architectures that run into clock frequency, bus capacitance and pin count
limitations. The use of a "wide, centralized shared-memory structure" enables
network equipment vendors to scale the bandwidth and amount of buffer memory,
unlike crossbar architectures which become increasingly expensive as bandwidth
and buffer requirements increase. The "separation of control information from
user data" enables network equipment vendors to more easily implement high-
performance processing, queuing, replication and switching functions for
networking applications, unlike shared-bus and crossbar architectures, which
may require complex processors to coordinate multiple functions across
multiple ports and the replication of user data within their buffers. In
addition, the ViX architecture is designed as an open architecture, providing
external access to the appropriate timing and control signals, which enables
network equipment vendors to more easily implement differentiated features and
functionality.

Per-Flow Queuing Technology. All networking switches and routers must buffer
data when networks become congested. Networks that use conventional switches
and routers usually buffer data on a linear, first-in-first-out ("FIFO")
basis. As data accumulates in the buffer, new data sits "behind" all of the
information that previously arrived at the switch/router. High-priority
information sent to that switch or router is not distinguished from other data
and is therefore "stuck" in the back of the buffer until such other data is
sent. MMC Networks' PFQ technology is designed to alleviate the limitations of
FIFO queuing by assigning each piece of data to its own unique queue and then
scheduling the sending of the data according to software-programmable
algorithms developed by the network equipment vendor, thus allowing the switch
or router to implement class of service or quality of service functionality.
Switches and routers incorporating PFQ technology can be designed to support
up to 500,000 queues, providing enough queues for large-scale networks.

Direct Replication Engine Technology. When data must be broadcast to all
ports on a switch or router or "multicast" to select ports, routers and
switches must replicate data packets for each port connection. This process
may significantly degrade performance. MMC Networks' Direct Replication Engine
technology is designed to provide wire-speed multicast and broadcast
capability by leveraging the separation of control information from user data
enabled by the ViX architecture. This capability allows the switch or router
to store a single copy of the data to be transmitted and replicate it to
multiple ports in a single instruction cycle.

Virtual SAR Technology. Conventional switches and routers use expensive
segmentation and reassembly ("SAR") chips to convert frames to cells and vice
versa, thus enabling the internetworking of ATM with Ethernet, frame relay and
other packet-based protocols. The Company's Virtual SAR technology, which will
be implemented in its next generation of network processors, is expected to
provide the ability to convert frames to cells and vice versa, thus
eliminating the need for expensive external SAR chips.

Programmable BitStream Processor Technology. MMC Networks' Programmable
BitStream Processor technology, which will be incorporated in its next
generation of network processors, is expected to perform control information
processing functionality including real-time parsing, matching and table look-
up, as well as bit stream manipulations such as adding, deleting,
substituting, appending and pre-pending. This functionality is expected to
enable network equipment vendors to build high-performance switches and
routers with additional services that address network security, class of
service and quality of service and improve management throughout the network.

TARGET MARKETS AND PRODUCTS

MMC Networks' products serve two primary markets: the enterprise network
market and the service provider market. The Company's Fast Ethernet and ATM
products are being designed into networking equipment intended for both of
these markets. The following table summarizes selected product and service
applications within each of these markets:

ENTERPRISE NETWORK SERVICE PROVIDER SERVICES
Wiring Closet Remote Access Internet Voice
Power Workgroup WAN Backbone Frame Relay Cable
Campus Backbone ATM Dial
xDSL

The Company's PS1000 and ATMS2000 product families provide the core
functionality for Fast Ethernet and ATM switches and routers developed by
network equipment vendors targeting both the enterprise network and service
provider markets. The Company also offers reference design kits, which assist
customers in their technical evaluation of the Company's products. See "--
Technology."

The PS1000 Family. The PS1000 network processor family implements the core
functionality of a high- performance Fast Ethernet switch, provides extensions
for layer 3 routing and is optimized for power workgroup, wiring closet and LAN
backbone applications. The PS1000 network processor family enables network
equipment vendors to build low-cost, highly-integrated solutions supporting
scalable port densities from eight to 128 10-Mbps Ethernet ports, and up to 16
100-Mbps Fast Ethernet ports with the option of one or two ATM uplinks. The
flexible PS1000 ViX-based architecture allows a high degree of customer product
differentiation in terms of bandwidth segmentation, port type implementations,
support for external frame forwarding, prioritization and uplinks.

The following table sets forth MMC Networks' PS1000 product family:

DATE OF
PRODUCT DESCRIPTION INTRODUCTION

PS1001 PSP Packet switch processor which provides the Second quarter
central core of the switching operation 1996
PS1002 FEIU Fast Ethernet interface unit comprised of Second quarter
four 10/100-Mbps full-duplex Fast Ethernet 1996
MAC ports
PS1003 EIU Ethernet interface unit comprised of six Fourth quarter
10-Mbps MAC ports and two 10/100-Mbps MAC 1996
ports
PS1004 AIU ATM interface unit that provides an ATM Third quarter 1997
uplink for Ethernet switches
PS1005 ARL Address resolution logic device that Third quarter 1996
provides full frame forwarding and
filtering logic
PS1007 NCB Network component interconnect ("NCI") bus Third quarter 1996
to CPU bridge
PS1008 NPB NCI bus to PCI bus bridge Second quarter
1997

A 16-port full-duplex Fast Ethernet switch can be constructed using a set of
four PS1001s, four PS1002s, four PS1005s, and either a PS1007 or PS1008. This
chip set is priced at approximately $1,125 per set in quantities of 1,000 per
year. PS1004 processors may be used to add optional ATM uplinks to the switch.

The ATMS2000 Family. The ATMS2000 network processor family provides the core
functionality of a high-performance ATM switch and the capabilities for layer 3
routing. The ATMS2000 network processor family is optimized for feature-rich
building or campus backbones, power workgroups and WAN access. The ATMS2000
network processor family provides a cost-effective solution for 2.5- or 5-Gbps
switches and routers with port densities of up to 32 OC-3 ports or eight OC-12
ports. The flexible ViX-based architecture enables the centralized
implementation of value-added features such as PFQ, as well as customer-defined
features, without the need to change any of the linecards in the network.

The following table sets forth MMC Networks' ATMS2000 product family:

DATE OF
PRODUCT DESCRIPTION INTRODUCTION

ATMS2001 Memory access buffer which acts as an Second quarter
MBUF interface between the ATMS2002 PIF and a 1995
common memory bank
ATMS2002 PIF Port interface which interfaces the Second quarter
ATMS2000 switch core with ATM Physical 1995
Layer Devices
ATMS2003 Switch controller which manages data queues Second quarter
SWC1 and provides an interface to the CPU 1995
ATMS2004 Switch controller which manages the reading Second quarter
SWC2 and writing of data to various external 1995
data structures and performs pipeline
control
ATMS2101 Optional feature chip set that monitors and First quarter 1997
XChecker polices cell traffic, providing statistics,
usage parameter control and/or packet
discard
ATMS2110 Optional feature chip set that offloads First quarter 1997
XPort cell reception and transmission from the
CPU
ATMS2200 Co-processor that implements PFQ Second quarter
XStream 1997

A 32-port OC-3 5-Gbps switch or router utilizing the Company's ATMS2000
network processor requires six ATMS2001s, eight ATMS2002s and one each of the
ATMS2003 and ATMS2004. This chip set is priced at approximately $2,000 per set
in quantities of 1,000 per year. The ATMS2101, ATMS2110 and ATMS2200 may be
used to add additional features to the network processor.

The AnyFlow 5000 Family. MMC Networks' forthcoming AnyFlow 5000 network
processor family is designed to implement the Company's new Virtual SAR and
Programmable BitStream Processor technologies. The AnyFlow 5000 family will
employ a modular design which is expected to enable a wide range of networking
equipment, including both Ethernet and ATM switches and routers. The AnyFlow
5000 network processors are designed to provide Layer 3 switching and routing
with quality of service and packet/cell internetworking at a bandwidth of 20
Gbps and with throughput of up to 20 million packets-per-second. AnyFlow
network processors are expected to scale up to 128 Fast Ethernet or ATM OC-3
ports, 16 Gigabit Ethernet ports or 32 ATM OC-12 ports. The Company
anticipates that the samples of the first AnyFlow 5000 products will be
available in the fourth quarter of 1997, and that the products will be
commercially available in 1998. Samples of the Programmable BitStream
Processor are expected to be available in the first quarter of 1998. No
assurance can be given that the AnyFlow product line will become commercially
available on a timely basis, will provide the functional and performance
advantages expected by customers, or will find market acceptance.

Reference Design Kits. To facilitate the adoption by network equipment
vendors and speed the design cycle for its network processors, MMC Networks
designs and makes available system-level reference design kits. The Company's
reference design kits include a reference machine, schematics, layout details,
documentation and firmware, including device drivers and diagnostic software.
Source code for the reference machines can be licensed from the Company, as
can the bus models for those companies who design their own interfaces to the
network processors.

Products Under Development. The Company expects to continue to enhance and
refine its network processors, while adding additional operational features
designed to make the Company's products more attractive to a wide range of
network equipment vendors.

CUSTOMERS

MMC Networks sells its products to a variety of network equipment vendors.
To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC,
Olicom, SNT and Toshiba) are shipping networking products that incorporate the
Company's network processors. To qualify as a design win, a network equipment
vendor must have (i) purchased network processor prototypes, a reference
design kit or software drivers from the Company and (ii) commenced development
of a product incorporating the Company's network processors. During the
design-in process, the Company works closely with each customer to assist in
resolving technical questions and to help the customer achieve volume
production of its products. Achieving a design win with a network equipment
vendor provides no assurance that such network equipment vendor will
ultimately ship products incorporating the Company's network processors.

For the nine months ended September 30, 1997, sales to Cisco and Hitachi
accounted for 30.4% and 16.6% of the Company's total revenues, respectively.
For the year ended December 31, 1996, sales to Cisco and Hitachi accounted for
51.0% and 10.3% of total revenues, respectively. In addition, sales to Mitsui
Comtek Corp., a distributor which serves Japan, accounted for 20.0% and 14.7%
of the Company's total revenues for the nine months ended September 30, 1997
and the year ended December 31, 1996, respectively. The Company currently has
purchase agreements with Cisco, Olicom and Optical Data Systems, Inc. None of
the Company's customer purchase agreements contains a minimum purchase
requirement. Customers typically purchase the Company's products pursuant to
short-term purchase orders that may be canceled without charge if notice is
given within an agreed-upon period. The Company's future success depends in
significant part upon the decision of the Company's current and prospective
customers to continue to purchase products from the Company. There can be no
assurance that the Company will retain its current network equipment vendor
customers or that it will be able to recruit additional customers. The loss of
one or more of the Company's customers 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. See "Risk Factors--
Customer Concentration."

SALES, MARKETING AND TECHNICAL SUPPORT

The Company targets customers based on industry leadership, technology
leadership and target applications. The Company maintains close working
relationships with its customers in order to design and develop solutions
which specifically address their needs. The Company markets its products
through a direct sales and marketing organization, headquartered in Sunnyvale,
California, with a sales office in Boston, and through sales representatives
in the United States, Canada, Israel, Japan, Taiwan and the United Kingdom.
Sales representatives are selected for their understanding of the networking
marketplace and their ability to provide effective field sales support for MMC
Networks' products. The Company's relationships with many of its
representatives have been established within the last year, and the Company is
unable to predict the extent to which some of these representatives will be
successful in marketing and selling the Company's products.

Sales to U.S. customers account for the substantial majority of MMC
Networks' revenues. Although the Company has a number of international
customers, substantially all of these customers currently order through, and
receive shipments at, their U.S. operations.

The Company has a number of marketing programs designed to inform network
equipment vendors about the capabilities and benefits of the Company's
products. The Company's marketing efforts include participation in industry
trade shows, technical conferences and technology seminars, preparation of
competitive analyses, sales training, publication of technical and educational
articles in industry journals, maintenance of MMC Networks' World Wide Web
site, advertising and direct mail distribution of Company literature.

Technical support to customers is provided through factory system engineers
and, if necessary, product designers and architects. Local field support is
provided in person or by telephone. The Company plans to hire additional
support staff for remote offices, as the need arises. The Company believes
that providing network

equipment vendors with comprehensive product service and support is critical
to maintaining a competitive position in the networking market and is critical
to shortening customers' design-in cycles. The Company works closely with its
customers to monitor the performance of its product designs and to provide
support at each stage of customer product development.

RESEARCH AND DEVELOPMENT

The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. MMC Networks has made and plans to continue to make
substantial investments in research and development and to participate in the
development of industry standards.

The Company focuses its development efforts on network processor product
development. Before a new product is developed, the Company's research and
development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and
commercially released, Company engineers continue to work with customers on
early design-in efforts to understand requirements for future generations and
upgrades. Most of the Company's engineers are involved in algorithm and chip
design and verification. In addition, the Company also has a group of software
engineers and reference machine designers.

The Company's research and development expenditures, net of nonrecurring
engineering funding, totaled $5.4 million in the first nine months of 1997 and
$3.3 million in the year ended December 31, 1996, representing 37.8% and 31.5%
of revenues for such periods, respectively. Research and development expenses
primarily consist of salaries and related costs of employees engaged in
ongoing research, design and development activities and subcontracting costs.
These expenses are reduced by non-recurring engineering fees paid by the
Company's customers to facilitate product development projects. Currently,
there are 43 employees and full-time contractors engaged in research and
development. The Company performs its research and product development
activities at its headquarters in Sunnyvale, California. The Company is
seeking to hire additional skilled development engineers, who are currently in
short supply. The Company's business, operating results and financial
condition could be adversely affected if it encounters delays in hiring
additional engineers. See "Risk Factors--Dependence on Key Personnel and
Hiring of Additional Personnel."

The Company's future performance depends on a number of factors, including
its 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. No assurance can be given that the
Company's design and introduction schedules for any additions and enhancements
to its existing and future products will be met, that these products will
achieve market acceptance, or that these products will be able to be sold at
ASPs that are favorable to the Company. In evaluating new product decisions,
the Company must anticipate well in advance the future demand for product
features and performance characteristics, as well as available supporting
technologies, manufacturing capacity, industry standards and competitive
product offerings. The Company must also continue to make significant
investments in research and development in order to continually enhance the
performance and functionality of its products to keep pace with competitive
products and customer demands for improved performance, features and
functionality. The technical innovations required for the Company to remain
competitive are inherently complex and require long development cycles. Such
innovations must be completed before developments in networking technologies
or standards render them obsolete and must be sufficiently compelling to
induce network equipment vendors to favor them over alternative technologies.
Moreover, 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 failure to successfully develop new products
on a timely basis could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--
New Product Development and Technological Change."

MANUFACTURING

Currently, the Company outsources all of its semiconductor manufacturing,
assembly and test. The Company's suppliers currently deliver fully assembled
and tested products on a turnkey basis. This "fabless" semiconductor
manufacturing model allows the Company to focus substantially all of its
resources on the design, development and marketing of products and
significantly reduces the capital requirements of the Company.

In 1995 and 1996, MMC Networks subcontracted its semiconductor manufacturing
to Oki Semiconductor and NEC in Japan and Motorola, Inc. in the United States.
In 1997, the Company added TSMC in Taiwan. In 1998, it is expected that a
growing percentage of the Company's production will be contracted to TSMC and
potentially other new suppliers as new products reach volume production. The
Company chose these four manufacturers in large part due to their conformance
with international standards of technology, their capacity, their quality and
their support for the state-of-the-art design tools used by MMC Networks. Only
one of the Company's products is currently manufactured by more than one
supplier.

MMC Networks uses mainstream CMOS processes for the manufacturing of its
products instead of depending on leading edge processes in order to help
reduce technical risks and production capacity constraints. The Company's main
products currently are fabricated in .5 and .8 micron CMOS. The Company
continuously evaluates the benefits, on a product-by-product basis, of
migrating to a smaller geometry process in order to reduce costs, and has
commenced migration of certain products to smaller geometries. The Company
believes that transitioning its products to increasingly smaller geometries
will be important for the Company to remain competitive. No assurance can be
given that future process migration will be achieved without difficulty.

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,
any of 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. The Company has recently experienced delays in obtaining an
adequate supply of certain of its products from one supplier, as well as
certain problems regarding the quality of the products delivered by that
supplier, and as a result has begun obtaining such products from an
alternative supplier. There can be no assurance that the Company will not have
similar or more protracted problems in the future with existing or new
suppliers. In the event of a loss of, or a decision by the Company to change,
a key supplier or foundry, qualifying a new supplier or foundry and commencing
volume production could involve delay and expense, resulting in lost revenues,
reduced operating margins and possible detriment to customer relationships.

In the future, the Company expects to change its supply arrangements to
assume more of the product manufacturing responsibilities. Such changes will
include contracting for wafer manufacturing and subcontracting for assembly
and test rather than purchasing finished product. The Company has begun
investing in design tools, libraries and personnel with the expectation of
assuming greater manufacturing responsibilities by mid 1998. The assumption of
greater manufacturing responsibilities involves additional risks including not
only the risks discussed above, but also risks associated with variances in
production yields, obtaining adequate

test and assembly capacity at reasonable cost, and other general risks
associated with the manufacture of semiconductors. In addition, the Company
also expects that it may enter into volume purchase agreements pursuant to
which the Company must commit to minimum levels of purchases and which may
require up front investments. The inability of the Company to effectively
assume greater manufacturing responsibilities or manage volume purchase
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on Independent Manufacturers."

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 and ATMS2000 product
families compete with products from companies such as Texas Instruments,
Lucent Technologies, PMC-Sierra, Galileo Technology, Integrated Telecom and I-
Cube. 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. In particular,
companies such as Texas Instruments and Lucent Technologies have proprietary
semiconductor manufacturing ability, preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, greater
financial resources than the Company and other significant advantages over the
Company. In addition, current and potential competitors may determine, for
strategic reasons, to consolidate, lower the prices of their products
substantially or to bundle their products with other products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. The Company believes that important competitive
factors in its market are performance, price, length of development cycle,
design wins with major network equipment vendors, support for new data
networking standards, features and functionality, adaptability of products to
specific applications, support of product differentiation, reliability,
technical service and support and protection of products by effective
utilization of intellectual property laws. Failure of the Company to compete
successfully as to any of these or other factors could have a material adverse
effect on its operating results. The failure of the Company to successfully
develop and market products that compete successfully with those of other
suppliers in the market would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company must compete for the services of qualified distributors and sales
representatives. To the extent that the Company's competitors offer such
distributors or sales representatives more favorable terms or a higher volume
of business, such distributors or sales representatives may decline to carry,
or discontinue carrying, the Company's products. The Company's business,
financial condition and results of operations could be adversely affected by
any failure to maintain and expand its distribution network. See "Risk
Factors--Competition."

INTELLECTUAL PROPERTY

The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company has been granted one patent in
the United States, the claims of which cover certain aspects of its ViX
architecture, and has received notice that one additional patent will issue.
In addition, the Company has filed 20 other patent applications, ten in the
United States and ten outside the United States, relating to other aspects of
systems employing the ViX architecture. None of the Company's patent
applications relate to specific products of the Company, such as the ATMS2000
and PS1000 lines of network processors, as the Company believes that it may be
more effective to seek patent protection with respect to its key underlying

technologies, such as aspects of its ViX Architecture. 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.

In addition, the Company claims copyright protection for certain proprietary
software and documentation. The Company also attempts to protect its trade
secrets and other proprietary information through agreements with its
customers, suppliers, employees and consultants, and through other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
manufactured or sold, including Japan and Taiwan, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.

While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the networking industry, its technical
expertise and ability to introduce new products on a timely basis will be more
important in maintaining its competitive position than protection of its
intellectual property and that patent, trade secret and copyright protection
are important but must be supported by expanding the knowledge, ability and
experience of the Company's personnel and introducing and enhancing products.
Although the Company continues to implement protective measures and intends to
defend vigorously its intellectual property rights, there can be no assurance
that these measures will be successful.

Many participants in the semiconductor and networking industries have a
significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. 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. Litigation, regardless of the
outcome, is likely to result in substantial cost and diversion of resources of
the Company. Any infringement claim or other litigation against or by the
Company could materially adversely affect the Company's business, financial
condition and results of operations.

LEGAL PROCEEDINGS

On October 27, 1997, FORE filed a complaint in the United States District
Court for the Western District of Pennsylvania alleging that the Company
willfully infringed two of FORE's patents. The complaint seeks both a
preliminary and a permanent injunction against the Company, as well as
recovery of damages. The Company has received a legal opinion from Dergosits &
Noah, LLP, its patent counsel, to the effect that certain claims made in the
FORE patents are invalid, and that, as to the other claims, the Company's
products do not infringe. However, the results of litigation are inherently
uncertain, and there can be no assurance that the Company will prevail in any
litigation with FORE. Any such suit or proceeding involving the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Protection of Intellectual
Property."

EMPLOYEES

As of September 30, 1997, the Company had a total of 84 full-time employees
and three full-time contractors. Of the total number of employees, 43 were in
research and development, 19 in marketing and technical support, seven in
sales and 18 in operations and administration. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.

The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related networking and integrated circuit design expertise and
for technical support personnel with networking engineering expertise.

FACILITIES

The Company's main executive, administrative and technical offices occupy
approximately 35,000 square feet in Sunnyvale, California, under a lease that
expires in March 1999. Of the 35,000 square feet, approximately 8,000 square
feet is occupied by another company under a sublease that expires in January
1998. The Company believes that its existing facilities are adequate to meet
its requirements through 1998. The Company leases its Boston area office on a
month-to-month basis.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of September 30, 1997.

NAME AGE POSITION
- ---- --- --------

Prabhat K. Dubey................ 46 President, Chief Executive Officer and
Director
Amos Wilnai..................... 58 Chairman of the Board, Executive Vice
President, Business Development
Sena C. Reddy................... 49 Executive Vice President, Operations
Uday Bellary.................... 42 Vice President, Chief Financial Officer and
Assistant Secretary
Alexander Joffe................. 40 Vice President, Engineering
Brent R. Bilger................. 40 Vice President, Marketing
John A. Teegen.................. 39 Vice President, Sales
John G. Adler (1)............... 60 Director
Irwin Federman (2).............. 62 Director
Andrew S. Rappaport (2)......... 40 Director
Geoffrey Y. Yang (1)............ 38 Director

- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

PRABHAT K. DUBEY has served as the Company's President and Chief Executive
Officer, and as a director, since he joined the Company in October 1994. From
March 1994 to August 1994, Mr. Dubey was the Chief Operating Officer of
Wireless Access, Inc., a supplier of communications devices and chip sets.
From August 1989 to March 1994, he served as Vice President and General
Manager of the Wireless & Messaging DSP IC Group at Lucent Technologies, a
communications products company and former subsidiary of AT&T Corporation. Mr.
Dubey holds a Ph.D. in Physics from the Indian Institute of Technology and an
M.B.A. from the University of Western Ontario.

AMOS WILNAI has served as the Chairman of the Board of Directors since he
founded the Company in September 1992. Since September 1994, Mr. Wilnai has
also served as the Company's Executive Vice President of Business Development.
From September 1992 to October 1994, he was the President of the Company. Mr.
Wilnai has a B.S.E.E. degree from the Technion Institute of Technology in
Israel and an M.S.E.E. degree from the Polytechnic Institute in Brooklyn.

SENA C. REDDY has served as the Company's Executive Vice President of
Operations since he joined the Company in January 1997. Prior to joining the
Company, Mr. Reddy spent more than 11 years at Cirrus Logic Inc., a
semiconductor company, where he served as the Senior Vice President of
Operations from April 1994 to January 1997, Vice President of Manufacturing
from July 1991 to April 1994 and the Director of Wafer Fabrication and
Technology from September 1985 to June 1991. Mr. Reddy holds an M.S.E.E.
degree from Oklahoma State University.

UDAY BELLARY joined the Company as its Vice President and Chief Financial
Officer in September 1997. From February 1997 until joining the Company, Mr.
Bellary served as Vice President, Finance & Administration and Chief Financial
Officer of DTM Corporation, a manufacturer of computer-driven laser systems
for industrial prototyping. From May 1990 to December 1996, Mr. Bellary served
in various positions at Cirrus Logic Inc., a semiconductor company, most
recently as Director of Finance. Mr. Bellary holds a B.S. degree from Karnatak
University and a DMA from the University of Bombay. He is also a chartered
accountant and a certified public accountant.

ALEXANDER JOFFE has served as the Company's Vice President of Engineering
since July 1994. From March 1993 to July 1994, Mr. Joffe was the Company's
Director of Engineering. Prior to joining the Company,

Mr. Joffe spent more than eight years with Motorola Semiconductor Products, a
semiconductor manufacturing subsidiary of Motorola, Inc., where he served most
recently as an engineering manager. Mr. Joffe holds a B.S.E.E. degree from the
Technion Institute of Technology in Israel.

BRENT R. BILGER has served as the Company's Vice President of Marketing
since joining the Company in April 1997. Prior to joining the Company, Mr.
Bilger spent more than seven years with Cisco, a network equipment vendor,
where he served most recently as the Director of Marketing for service
providers. Mr. Bilger also served as the Director of Marketing of high-end
routers and ATM products during part of his tenure at Cisco. Mr. Bilger
received a B.A. degree from Dartmouth College, a B.E. degree from Thayer
School, Dartmouth College, and an M.S.E.E. degree from Cornell University.

JOHN A. TEEGEN has served as the Company's Vice President of Sales since
joining the Company in January 1997. From August 1994 to January 1997, Mr.
Teegen was the Vice President of Worldwide Sales for Intellon Corporation, a
semiconductor company. From August 1987 to August 1994, Mr. Teegen was
employed by VLSI Technology, Inc., also a semiconductor company, where he
served in a variety of sales management positions, most recently as the Vice
President of Consumer and Industrial Sales. Mr. Teegen holds a B.S.E.E. degree
from the University of Florida.

JOHN G. ADLER has served as a director of the Company since March 1997. Mr.
Adler served as the Chairman of the Board of Directors of Adaptec, Inc., an
electronic equipment manufacturing company, from May 1990 through August 1997.
Mr. Adler also served as the President of Adaptec, Inc. from May 1985 to
August 1992 and as its Chief Executive Officer from December 1986 to July
1995. Mr. Adler holds a B.S.E.E. degree from University of Mississippi and was
a Sloan Executive Fellow at Stanford University in 1971. He also serves on the
advisory council of the College of Engineering at San Jose State University
and is on the Dean's Advisory Board of the Leavey School of Business and
Administration at Santa Clara University.

IRWIN FEDERMAN has served as a director of the Company since July 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture
capital firm, since April 1990. From 1988 to 1990 he was a Managing Director
of Dillon Read & Co., an investment banking firm, and a general partner in its
venture capital affiliate, Concord Partners. Mr. Federman also serves on the
boards of directors of TelCom Semiconductor, Inc., a semiconductor company,
SanDisk Corporation, a memory systems company, Western Digital Corporation, a
disk drive manufacturer, Komag Incorporated, a thin film media manufacturer,
NeoMagic Corporation, a developer of multimedia accelerators, Checkpoint
Software Technology, Ltd., a network security software company and several
privately-held companies. Mr. Federman received a B.S. degree in Economics
from Brooklyn College and was awarded an honorary Doctorate of Engineering
Science from Santa Clara University.

ANDREW S. RAPPAPORT has served as a director of the Company since July 1994.
Mr. Rappaport has been a partner of August Capital, LLC, a venture capital
firm, since July 1996. Prior to that time, Mr. Rappaport was the President of
The Technology Research Group, Inc. a Boston-based strategic management
consulting firm which he founded in August 1984. He is also a director of
Storm Technology, Inc., a photoelectronics manufacturing company. Mr.
Rappaport attended Princeton University.

GEOFFREY Y. YANG has served as a director of the Company since July 1994.
Mr. Yang has been a general partner of Institutional Venture Partners, a
venture capital firm, since June 1989. He also serves on the Board of
Directors of Excite, Inc., an Internet search engine company. Mr. Yang holds a
B.A. in Economics from Princeton University, a B.S.E. in Engineering and
Management Systems from Princeton University, as well as an M.B.A. from
Stanford University.

There are no family relationships among any of the Company's directors or
executive officers.

The Company's Board of Directors is divided into three classes: Classes I,
II and III. The initial term of the Class I directors expires at the Company's
annual meeting of stockholders in 1998; the initial term of the Class II
directors expires at the Company's annual meeting of stockholders in 1999; and
the initial term of the Class III directors expires at the Company's annual
meeting of stockholders in 2000. Thereafter, the term of each class of
directors will be three years. All directors hold office until the annual
meeting of stockholders at which their respective class is subject to
reelection and until their successors are duly elected and qualified, or until
their earlier resignation or removal.

BOARD COMMITTEES

Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external
audits of the Company, including among other things, the Company's internal
audit and control functions, the results and scope of the annual audit and
other services provided by the Company's independent accountants, and the
Company's compliance with legal matters with a significant impact on the
Company's financial reports. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent accountants. The Audit Committee
also monitors transactions between the Company and its officers, directors and
employees for any potential conflicts of interest. The current members of the
Audit Committee are Irwin Federman and Andrew S. Rappaport.

Compensation Committee. The Compensation Committee of the Board of Directors
reviews and makes recommendations to the Board regarding the Company's
compensation policy and all forms of compensation to be provided to executive
officers and directors of the Company, including among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of
the foregoing, the Compensation Committee also administers the Company's 1997
Stock Plan and 1997 Employee Stock Purchase Plan. The current members of the
Compensation Committee are John G. Adler and Geoffrey Y. Yang.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the Company's fiscal year ended December 31, 1996, the members of the
Compensation Committee were Geoffrey Y. Yang and Irwin Federman. No
interlocking relationship exists between any member of the Company's Board of
Directors or the Compensation Committee and any member of the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past. See "Certain Transactions."

DIRECTOR COMPENSATION

The Company's directors do not receive cash compensation for their services
as members of the Board of Directors. Under the Company's 1997 Director Option
Plan, however, each of the Company's directors who is not also an employee of
the Company is automatically granted an option to purchase (i) 40,000 shares
of the Company's Common Stock at a purchase price equal to the fair market
value of such shares on the date of grant, upon becoming a director and (ii)
an additional 10,000 shares of the Company's Common Stock at a purchase price
equal to the fair market value of such shares on the date of grant, following
the announcement of the Company's earnings for the prior fiscal year, provided
that such director has served on the Board of Directors for the preceding six
months. Such directors do not receive any other compensation for their
services as members of the Board of Directors. See "--Benefit Plans--1997
Director Option Plan."

EXECUTIVE COMPENSATION

The following table sets forth for the fiscal year ended December 31, 1996
(the "Last Fiscal Year") certain information with respect to the compensation
of the Company's Chief Executive Officer and each of the two other executive
officers of the Company who were serving as executive officers of the Company
at the end of the Last Fiscal Year and whose total annual salary and bonus
during such fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
---------------- --------------
SECURITIES
UNDERLYING
NAME AND POSITION SALARY BONUS OPTIONS(#)
----------------- -------- ------- ----------

Prabhat K. Dubey.............................. $165,000 -- --
President and Chief Executive Officer
Amos Wilnai................................... 150,000 -- --
Executive Vice President, Business
Development
Alexander Joffe............................... 140,000 $50,000 300,000
Vice President, Engineering

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information with respect to the Named
Executive Officers regarding grants of options to purchase Common Stock of the
Company made during the Last Fiscal Year.

INDIVIDUAL GRANTS
------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(1)
GRANTED EMPLOYEES PRICE EXPIRATION ---------------------
NAME (# OF SHARES) IN 1996 ($/SHARE) DATE 5% 10%
---- ------------- ------------- --------- ---------- ---------- ----------

Prabhat K. Dubey (2).... -- -- -- -- -- --
Amos Wilnai............. -- -- -- -- -- --
Alexander Joffe (3)..... 300,000(4) 9.2% $.67 5/9/06 $ 125,785 $ 318,764

- --------
(1) Amounts represent hypothetical gains that could be achieved if the option
was exercised at the end of the option term to purchase all of the
underlying stock subject to such option, assuming such stock had
appreciated during the term of the option at the assumed annualized rates
of 5% and 10%, respectively. The assumed 5% and 10% rates of stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future price of its Common Stock. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Company,
overall conditions and the option holder's continued employment with the
Company throughout the entire vesting period and option term. This table
does not take into account any appreciation in the fair market value of
the Company's Common Stock from the date of grant to the date of this
offering, other than the columns reflecting assumed rates of appreciation
of 5% and 10%, respectively.
(2) On April 25, 1997, the Board of Directors granted an option to Mr. Dubey
to purchase 225,000 shares of the Company's Common Stock for a purchase
price of approximately $3.33 per share. Such option will vest with respect
to 56,250 shares on April 25, 1998, and with respect to an additional
4,688 shares each full month of continuous employment with the Company
thereafter. The exercise price equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.

(3) On April 25, 1997, the Board of Directors granted an option to Mr. Joffe
to purchase 150,000 shares of the Company's Common Stock for a purchase
price of approximately $3.33 per share. Such option will vest with respect
to 37,500 shares on April 25, 1998, and with respect to an additional
3,125 shares each full month of continuous employment with the Company
thereafter. The exercise price equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(4) Represents an option to purchase 300,000 shares of the Company's Common
Stock granted on May 9, 1996 under the Company's 1993 Plan. Such option
vested with respect to 75,000 shares on the first anniversary of the date
of grant, and has vested and will continue to vest with respect to an
additional 6,250 shares each full month of continuous employment with the
Company thereafter. The exercise price equaled the fair market value of
the Common Stock on the date of grant, as determined by the Board of
Directors.

FISCAL YEAR END OPTION VALUES

The following table sets forth certain information with respect to the
number and value of the stock options held by each of the Named Executive
Officers at the end of the Last Fiscal Year. No options were exercised by the
Named Executive Officers during the Last Fiscal Year.

NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Prabhat K. Dubey............ -- -- -- --
Amos Wilnai................. -- -- -- --
Alexander Joffe............. -- 300,000 -- $399,990

- --------
(1) Represents the difference between the fair market value of the shares
underlying such option at fiscal year-end ($2.00 per share, as determined
by the Board of Directors) and the exercise price of such option
(approximately $.67 per share).

BENEFIT PLANS

1993 Stock Plan. The Company's 1993 Stock Plan (the "1993 Plan") provides
for the grant of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") to employees of the
Company, and the grant of nonstatutory stock options and stock purchase rights
("SPRs") to employees and consultants of the Company. As of September 30,
1997, options to purchase an aggregate of 5,310,668 shares of Common Stock of
the Company were outstanding under the 1993 Plan. The Board of Directors has
determined that no further options will be granted under the 1993 Plan after
the completion of this offering.

1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was
approved by the Board of Directors in August 1997 and was approved by the
stockholders in September 1997. The 1997 Plan provides for the grant of
incentive stock options to employees (including officers and employee
directors) and for the grant of nonstatutory stock options and SPRs to
employees, directors and consultants. The following shares have been reserved
for issuance under the 1997 Plan: (a) 1,500,000 shares of Common Stock, which
includes shares which have been reserved but unissued under the 1993 Plan; (b)
any shares returned to the 1993 Plan as a result of termination of options
under the 1993 Plan; and (c) shares added to the 1997 Plan pursuant to
automatic annual increases equal to the lesser of (i) 1,000,000 shares, (ii)
5% of all then outstanding shares of Common Stock of the Company, or (iii) a
lesser amount determined by the Board of Directors. Unless terminated sooner,
the 1997 Plan will terminate automatically in August 2007.

The 1997 Plan may be administered by the Board of Directors or a committee
thereof (as applicable, the "Administrator"). The Administrator has the power
to determine the terms of the options or SPRs granted,

including the exercise price of the option or SPR, the number of shares
subject to each option or SPR, the exercisability thereof and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1997 Plan.

Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of an optionee's
status as an employee, director or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's 10 year term. Unless the
Administrator determines otherwise, the agreements governing the terms of the
SPRs (each an "SPR Agreement") will grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or disability).
The purchase price for the shares of Common Stock repurchased pursuant to an
SPR Agreement will be the original price paid by the purchaser and may be paid
by cancellation of any indebtedness of the purchaser to the Company. The
repurchase option will lapse at a rate determined by the Administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the Common Stock on the date of
grant. The exercise price of nonstatutory stock options and SPRs granted under
the 1997 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1997 Plan may not exceed ten years.

The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option is to be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the Administrator will provide
for the optionee to have the right to exercise such options or SPRs as to all
of the optioned stock, including shares as to which such options or SPRs would
not otherwise be exercisable. If the Administrator makes an option or SPR
exercisable in full in the event of a merger or sale of assets, the
Administrator will notify the optionee that the option or SPR will be fully
exercisable for a period of 15 days from the date of such notice, and the
option or SPR will terminate upon the expiration of such period.

1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors
in August 1997 and was approved by the stockholders in September 1997. A total
of 300,000 shares of Common Stock has been reserved for issuance under the
1997 Purchase Plan, plus shares added to the plan pursuant to automatic annual
increases equal to the lesser of (i) 400,000 shares, (ii) .8% of all then
outstanding shares of Common Stock of the Company, or (iii) a lesser amount
determined by the Board of Directors.

The 1997 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, 24-month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the date of this Prospectus and ends on the last
trading day on or before October 31, 1999.

Employees are eligible to participate in the 1997 Purchase Plan if they are
customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, any employee who (i) immediately after grant owns stock possessing 5%
or more of the total combined voting power or value of all classes of the
capital stock of the Company, or (ii) whose rights

to purchase stock under all employee stock purchase plans of the Company
accrues at a rate which exceeds $25,000 worth of stock for each calendar year
may not purchase stock under the 1997 Purchase Plan. The 1997 Purchase Plan
permits participants to purchase Common Stock through payroll deductions of up
to 10% of the participant's "compensation." Compensation is defined as the
participant's base gross earnings and commissions excluding payments for
overtime, shift premiums, incentive compensation, incentive payments, bonuses
and other compensation. The maximum number of shares a participant may
purchase during a single purchase period is 5,000 shares.

Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning of the offering period or at the
end of the purchase period. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with the
Company.

Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option granted thereunder may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute such outstanding options, the offering period then in progress will
be shortened and a new exercise date will be set. The 1997 Purchase Plan will
terminate in August 2007. The Board of Directors has the authority to amend or
terminate the 1997 Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock granted under the 1997
Purchase Plan.

1997 Director Option Plan. The 1997 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors in August 1997 and was approved
by the stockholders in September 1997. The Director Plan provides for the
grant of nonstatutory stock options to non-employee directors. The Director
Plan has a term of ten years, unless terminated sooner by the Board of
Directors. A total of 150,000 shares of Common Stock have been reserved for
issuance under the Director Plan, plus annual increases equal to (i) the
number of shares of stock underlying options granted under the Director Plan
in the immediately preceding year, or (ii) a lesser amount determined by the
Board of Directors.

The Director Plan provides that each non-employee director will
automatically be granted an option to purchase 40,000 shares of Common Stock
(the "First Option") on the date which such person first becomes a non-
employee director, unless immediately prior to becoming a non-employee
director, such person was an employee director of the Company. In addition to
the First Option, each non-employee director will automatically be granted an
option to purchase 10,000 shares (a "Subsequent Option") on the date two days
after the announcement of the Company's fiscal year-end earnings of each year,
if on such date he or she will have served on the Board of Directors for at
least the preceding six months. Each First Option and each Subsequent Option
will have a term of 10 years. Each First Option will vest as to 25% of the
optioned stock one year from the date of grant, and as to an additional 1/48
of the optioned stock each full month thereafter, provided the person
continues to serve as a Director on such dates. Each Subsequent Option will
vest as to 1/12 of the optioned stock each full month after the date of grant.
The exercise price of each First Option and each Subsequent Option is 100% of
the fair market value per share of the Common Stock, generally determined with
reference to the closing price of the Common Stock as reported on the Nasdaq
National Market on the last trading day prior to the date of grant.

In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each outstanding option may be assumed or an
equivalent option substituted for by the successor corporation. If an option
is assumed or substituted for by the successor corporation, it will continue
to vest as provided in the Director Plan. However, if a non-employee
director's status as a director of the Company or the successor corporation,
as applicable, is terminated other than upon a voluntary resignation by the
non-employee director, each option granted to such non-employee director will
become fully vested and exercisable. If the successor corporation does not
agree to assume or substitute for such options, they will become fully vested
and exercisable for a period of 15 days from the date the Board of Directors
notifies the optionee of the option's full exercisability, after which period
such options will terminate. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a
director of the Company, or within 12 months after such director's termination
by death or disability, but in no event later than the expiration of the
option's 10 year term. No option granted under the Director Plan is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchase or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. The Company's Bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws would permit indemnification.

The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the
Company. At the present time, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company believes that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.

CERTAIN TRANSACTIONS

Since January 1, 1994, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the
amount involved exceeded or exceeds $60,000 and in which any director,
executive officer, holder of more than 5% of any class of the Company's voting
securities, or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest, other than
the transactions described below.

Series A Preferred Stock Financing. On July 12, 1994, the Company issued and
sold an aggregate of 9,255,000 shares of Series A Preferred Stock for an
aggregate purchase price of $3,085,000, or approximately $.33 per share. The
investors in such shares included, among others, venture capital funds
affiliated with Institutional Venture Partners ("IVP") and U.S. Venture
Partners ("USVP"), each of which holds more than 5% of the Company's voting
securities as of the date of this Prospectus. The number of shares purchased
and the aggregate purchase price paid by affiliates of IVP and USVP in
connection with such transaction are as follows:

NUMBER OF SHARES AGGREGATE
NAME OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------- ---------------- --------------

Institutional Venture Partners VI, L.P.......... 4,410,000 $1,470,000
Institutional Venture Management VI, L.P. ...... 90,000 30,000
U.S. Venture Partners IV, L.P................... 3,892,500 1,297,500
Second Ventures Limited Partnership II.......... 472,500 157,500
U.S.V.P. Entrepreneur Partners II, L.P. ........ 135,000 45,000

Upon the closing of this offering, each share of Series A Preferred Stock
will automatically convert into one share of Common Stock of the Company.

Series B Preferred Stock Financing. On November 16, 1995, the Company issued
and sold an aggregate of 4,086,780 shares of Series B Preferred Stock for an
aggregate purchase price of $7,219,967, or approximately $1.77 per share. The
investors in such shares included, among others, venture capital funds
affiliated with Kleiner Perkins Caufield & Byers ("KPCB"), IVP and USVP, each
of which holds more than 5% of the Company's voting securities as of the date
of this Prospectus. The number of shares purchased and the aggregate purchase
price paid by affiliates of KPCB, IVP and USVP in connection with such
transaction are as follows:

NUMBER OF SHARES AGGREGATE
NAME OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------- ---------------- --------------

Kleiner Perkins Caufield & Byers VII............ 1,194,672 $2,110,587
KPCB VII Founders Fund.......................... 129,856 229,410
KPCB Information Sciences Zaibatsu Fund II...... 33,964 60,001
Institutional Venture Partners VI, L.P.......... 851,322 1,504,002
IVP Founders Fund I, L.P. ...................... 36,226 63,998
Institutional Venture Management VI, L.P........ 18,114 32,001
U.S. Venture Partners IV, L.P................... 783,396 1,384,000
Second Ventures Limited Partnership II.......... 95,094 167,999
U.S.V.P. Entrepreneur Partners II, L.P.......... 27,172 48,002

Upon the closing of this offering, each share of Series B Preferred Stock
will automatically convert into one share of Common Stock of the Company.

Shareholder Rights Agreements. In connection with the Series A Preferred
Stock financing described above, the Company entered into a shareholder rights
agreement with, among others, Amos Wilnai, Alexander Joffe and holders of the
Company's Series A Preferred Stock, pursuant to which the Company granted,
among other things, certain stock registration rights to such parties. In
connection with the Series B Preferred Stock financing described above, the
Company amended such agreement to, among other things, add the holders of
Series B Preferred Stock as parties thereto. Under the agreement, as amended,
Mr. Wilnai and Mr. Joffe have certain registration rights with respect to an
aggregate of 7,875,000 of the shares of Common Stock held by them or issuable
upon the exercise of stock options granted to them. In addition, the holders
of Common Stock of the Company issued upon the conversion of the Company's
Series A Preferred Stock and Series B Preferred Stock have certain
registration rights with respect to such shares. See "Description of Capital
Stock--Registration Rights."

Indemnification Agreements. The Company has entered into indemnification
agreements with each of its directors and executive officers. See
"Management--Limitation on Liability and Indemnification Matters."

Loans to Officers. From time to time the Company has made interest free
loans to certain executive officers of the Company to fund the exercise price
of stock options held by such officers. These loans are evidenced by full
recourse promissory notes which mature on the earlier to occur of (i) the
fifth anniversary of the issuance date, (ii) a date which is 30 days after the
termination of the respective officer's employment with the Company for any
reason other than death or disability and (iii) a date which is one year after
the date of termination of the respective officer's employment with the
Company due to death or disability. Such promissory notes are also secured by
the shares of Common Stock purchased with the proceeds of such loans. The
following table sets forth the name and position of such officers, certain
information with respect to the promissory notes issued to evidence such loans
and the number of shares of the Company's Common Stock purchased with the
proceeds of such loans.

PRINCIPAL SHARES ISSUANCE MATURITY
NAME AND POSITION AMOUNT PURCHASED DATE DATE
----------------- --------- --------- -------- --------

Prabhat K. Dubey.......................... $60,000 1,800,000 10/31/95 10/31/00
President and Chief Executive Officer
Alexander Joffe........................... 47,400 1,800,000 11/3/95 11/3/00
Vice President, Engineering

The entire principal amount on each of the loans described in the table set
forth above remains outstanding as of the date of this offering.

On March 7, 1997, the Company made a loan to Mr. Dubey in the aggregate
principal amount of $100,000 and bearing interest at the rate of 6.07% per
annum. The loan is evidenced by a full recourse promissory note, dated
October 31, 1996, which matures on the earlier to occur of (i) October 31,
1999, or (ii) a date which is six months after the date of any termination of
Mr. Dubey's employment with the Company. The promissory note is secured by a
pledge of 1,800,000 shares of the Company's Common Stock owned by Mr. Dubey
and currently held in escrow. The entire principal amount and accrued interest
on the loan to Mr. Dubey remains outstanding as of the date of this
Prospectus.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of September 30, 1997,
and as adjusted to reflect the sale of the securities offered by the Company
in this offering held by (i) each person (or group of affiliated persons) who
is known by the Company to beneficially own more than 5% of the Company's
Common Stock, (ii) each of the Company's directors and Named Executive
Officers, and (iii) all directors and executive officers of the Company as a
group.

PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(2)
SHARES -------------------------
NAMES AND ADDRESSES OF BENEFICIAL BENEFICIALLY BEFORE THE AFTER THE
OWNERS(1) OWNED(2) OFFERING OFFERING
--------------------------------- ------------ ----------- ----------

Institutional Venture Partners(3).... 5,405,662 21.5% 18.9%
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
U.S. Venture Partners(4)............. 5,405,662 21.5 18.9
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Kleiner Perkins Caufield & Byers(5).. 1,358,492 5.4 4.7
2750 Sand Hill Road
Menlo Park, CA 94025
Alexander Joffe(6)................... 1,885,500 7.4 6.6
Prabhat K. Dubey(7).................. 1,800,000 7.2 6.3
Amos Wilnai(8)....................... 1,737,226 6.9 6.1
Nitzan Wilnai........................ 1,313,206 5.2 4.6
Sigal Wilnai......................... 1,313,206 5.2 4.6
Yael Wilnai.......................... 1,313,206 5.2 4.6
John G. Adler........................ -- * *
Irwin Federman(9).................... -- * *
Andrew S. Rappaport.................. 225,000 * *
Geoffrey Y. Yang(10)................. -- * *
All directors and executive officers
as a group (11 persons)
(6)(7)(8)(11)....................... 16,459,050 65.3 57.3

- --------
* Less than 1%.
(1) Except as otherwise noted below, the address of each person listed in the
table is c/o MMC Networks, Inc., 1134 East Arques Avenue, Sunnyvale,
California 94086.
(2) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 25,101,708 shares outstanding as of
September 30, 1997, and (ii) 28,601,708 shares outstanding after this
offering. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and includes voting and
investment power with respect to such shares. All shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
after September 30, 1997 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the number of shares beneficially owned and the percentage
ownership of such person, but are not deemed to be outstanding and to be
beneficially owned for the purpose of computing the percentage ownership
of any other person. Except as indicated in the footnotes to the table
and subject to applicable community property laws, based on information
provided by the persons named in the table, such persons have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Includes 5,261,322 shares held by Institutional Venture Partners VI,
L.P., 108,114 shares held by Institutional Venture Management VI, L.P.
and 36,226 shares held by IVP Founders Fund I, L.P. Geoffrey Y. Yang, a
director of the Company, is a General Partner of Institutional Venture
Management VI, L.P., which is the General Partner of each of such limited
partnerships.
(4) Includes 4,675,896 shares held by U.S. Venture Partners IV, L.P., 567,594
shares held by Second Ventures Limited Partnership II and 162,172 shares
held by U.S.V.P. Entrepreneur Partners II, L.P. Irwin

Federman, a director of the Company, is a General Partner of Presidio
Management Group IV, L.P., which is the General Partner of each of such
limited partnerships.
(5) Includes 1,324,528 shares held by Kleiner Perkins Caufield & Byers VII
and 33,964 shares held by KPCB Information Sciences Zaibatsu Fund II.
(6) Includes 112,500 shares issuable pursuant to options currently
exercisable or exercisable within 60 days of September 30, 1997. Also
includes 9,000 shares held by Mr. Joffe's minor children, as to which Mr.
Joffe disclaims beneficial ownership.
(7) Includes 502,590 shares held by Dr. Ranjana Sharma as custodian for Mr.
Dubey's minor children. Mr. Dubey disclaims beneficial ownership of all
such shares.
(8) Represents shares held by Amos Wilnai and Ruth Wilnai, Trustees of the
Wilnai Family Trust U/D/T dated June 10, 1997. Does not include 1,313,206
shares held by each of Nitzan Wilnai, Sigal Wilnai and Yael Wilnai,
Mr. Wilnai's adult children. Also does not include 113,205 shares held by
Miriam Wilnai, Mr. Wilnai's mother. Mr. Wilnai disclaims beneficial
ownership of all such shares.
(9) Does not include 4,675,896 shares held by U.S. Venture Partners IV, L.P.,
567,594 shares held by Second Ventures Limited Partnership II and 162,172
shares held by U.S.V.P. Entrepreneur Partners II, L.P. As the General
Partner of Presidio Management Group IV, L.P., which is the General
Partner of each of such limited partnerships, Mr. Federman may be deemed
to share voting and investment power with respect to such shares.
However, Mr. Federman disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(10) Does not include 5,261,322 shares beneficially owned by Institutional
Venture Partners VI, L.P., 108,114 shares held by Institutional Venture
Management VI, L.P., and 36,226 shares held by IVP Founders Fund I, L.P.
As a General Partner of Institutional Venture Management VI, L.P., which
is the General Partner each of such limited partnerships, Mr. Yang may be
deemed to share voting and investment power with respect to such shares.
However, Mr. Yang disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(11) Includes shares held by Institutional Venture Partners VI, L.P.,
Institutional Venture Management VI, L.P., IVP Founders Fund I, L.P. U.S.
Venture Partners IV, L.P., Second Ventures Limited Partnership II and
U.S.V.P. Entrepreneur Partners II, L.P.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of this offering, the Company will be authorized to
issue 100,000,000 shares of Common Stock, $.001 par value, and 10,000,000
shares of undesignated Preferred Stock, $.001 par value. Immediately after the
completion of this offering, the Company estimates there will be an aggregate
of 28,601,708 shares of Common Stock issued and outstanding and approximately
5,210,987 shares of Common Stock issuable upon exercise of outstanding
options. Upon completion of this offering, there will be no shares of
Preferred Stock issued and outstanding.

The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Certificate of Incorporation and Bylaws and by the provisions of applicable
Delaware law.

The Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring, or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights under the Company's Bylaws or Certificate of
Incorporation, and therefore, holders of a majority of the shares voting for
the election of directors can elect all of the directors. In such event, the
holders of the remaining shares will not be able to elect any directors. The
shares of Common Stock offered pursuant to this offering, when issued, will be
fully paid and nonassessable and will not be subject to any redemption or
sinking fund provisions. Holders of Common Stock do not have any preemptive,
subscription or conversion rights.

Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the rights of preferred stockholders and the
terms of any existing or future agreements between the Company and its
debtholders. Since January 1, 1995, the Company has not declared or paid any
cash dividends on its Common Stock. The Company presently intends to retain
future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's bank line of credit agreement prohibits the
payment of dividends without prior consent of the bank. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding.

PREFERRED STOCK

Effective upon the closing of this offering, the Company will be authorized
to issue 10,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price,
and the voting and other rights, of the holders of Common Stock. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.

TRANSFER AGENT AND REGISTRAR

The Company's transfer agent and registrar is BankBoston, N.A. Its telephone
number is (800) 730-6001.

WARRANTS

In October 1994, in conjunction with the execution and delivery of a Master
Lease Agreement by and between the Company and Dominion Ventures, Inc.
("Dominion"), the Company issued a warrant (the "Dominion Warrant") to
Dominion to purchase 123,000 shares of the Company's Series A Preferred Stock
at a purchase price of approximately $.33 per share. Upon completion of this
offering, such warrant will convert into the right to purchase an equivalent
number of shares of the Company's Common Stock at the same exercise price per
share. The Dominion Warrant may be exercised at any time before October 31,
2003. The Dominion Warrant contains provisions relating to adjustment of the
exercise price and the number of shares of stock issuable upon exercise
thereof under certain circumstances, including stock splits, reverse stock
splits, combinations and reclassifications of the Company's Preferred Stock.
The Dominion Warrant also provides that the warrant holder may exercise the
warrant without payment of cash by surrendering the warrant and receiving
shares of Common Stock equal in value to the value of the warrant so
surrendered.

In February 1996, in conjunction with the execution and delivery of a Master
Equipment Lease Agreement by and between the Company and Lighthouse Capital
Partners, L.P. ("Lighthouse"), the Company issued another warrant (the
"Lighthouse Warrant") to Lighthouse to purchase 33,963 shares of the Company's
capital stock at a purchase price of approximately $1.77 per share. Upon
completion of this offering, such warrant will convert into the right to
purchase an equivalent number of shares of the Company's Common Stock at the
same exercise price per share. The Lighthouse Warrant may be exercised at any
time before January 31, 2003. The Lighthouse Warrant contains provisions
relating to adjustment of the exercise price and the number of shares of stock
issuable upon exercise thereof under certain circumstances, including stock
splits, reverse stock splits, combinations and reclassifications of the
Company's Preferred Stock. The Lighthouse Warrant also provides that the
warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal in value
to the value of the warrant so surrendered.

LISTING

The Common Stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "MMCN."

REGISTRATION RIGHTS

Following the closing of this offering, the holders of approximately
21,118,743 shares of Common Stock (the "Registrable Securities"), will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. In the event that the Company proposes to register
any of its securities under the Securities Act, either for its own account or
the account of other security holders, the holders of Registrable Securities
are entitled to notice of such registration and are entitled to include their
Registrable Securities in such registration, subject to certain marketing and
other limitations. Beginning six months after the closing of this offering,
certain holders of Registrable Securities have the right to require the
Company, on not more than two occasions, to file a registration statement
under the Securities Act in order to register all or any part of their
Registrable Securities. The Company may in certain circumstances defer such
registrations and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, holders of Registrable Securities may require the Company to register
all or a portion of their shares with registration rights on Form S-3, when
such form becomes available to the Company, subject to certain conditions and
limitations.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of
the Common Stock that could result from takeover attempts. The Company is also
afforded the protections of Section 203 of the Delaware General Corporation
Law, which could delay or prevent a change in control of the Company or could
impede a merger, consolidation, takeover or other business combination
involving the Company or discourage a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company. In addition,
the Board of Directors has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further
vote or action by the stockholders. The rights of the holders of the Company's
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock, and as a result, the issuance of such Preferred Stock could have a
material adverse effect on the market value of the Common Stock. The Company
has no present plan to issue shares of Preferred Stock. The Company's
Certificate of Incorporation provides that, so long as the Board of Directors
consists of more than two directors, the Board of Directors will be divided
into three classes of directors serving staggered three-year terms. As a
result, only one of the three classes of the Company's Board of Directors will
be elected each year. The classified board structure may have the effect of
delaying or inhibiting any attempt to acquire control of the Company. The
Company's Certificate of Incorporation also provides that, upon the completion
of the offering, stockholders can take action only at a duly called annual or
special meeting of stockholders. Accordingly, stockholders of the Company will
not be able to take action by written consent in lieu of a meeting. In
addition, the Company's Bylaws permit only a majority of the Board of
Directors (or a committee thereof) to call a special meeting of stockholders,
and require prior notice of matters to be brought before stockholder meetings.
These provisions may have the effect of delaying hostile takeovers or delaying
changes in control or management of the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon completion of this offering the Company will have outstanding an
aggregate of approximately 28,601,708 shares of Common Stock (based upon
shares outstanding at September 30, 1997), assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (the
"Affiliates"). The remaining shares of Common Stock held by existing
stockholders will continue to be "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144,
144(k) and 701, all Restricted Shares will be available for sale in the public
market upon expiration of the lock-up arrangements at least 180 days after the
date of this Prospectus.

The officers and directors and all existing stockholders of the Company have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of this offering. However, Morgan Stanley & Co.
Incorporated may, in its sole discretion, at any time without notice, release
all or any portion of the shares subject to lock-up agreements.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately 286,000 shares immediately after this
offering), or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions and notice requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this offering. In general, under Rule 701 of the
Securities Act as currently in effect, any employee, consultant or advisor of
the Company who purchases shares from the Company in connection with a
compensatory stock or option plan or other written agreement is eligible to
resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.

Upon completion of this offering, the holders of 21,118,743 shares of Common
Stock issuable upon conversion of Preferred Stock, or their transferees, will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights." Registration of such shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act (except for shares purchases by Affiliates) immediately upon the
effectiveness of such registration.

The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the 1993 Plan,
the 1997 Plan, the Director Plan and the 1997 Purchase Plan. See "Management--
Benefit Plans." Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to the Affiliates, be available for
sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. As of
September 30, 1997, options to purchase 5,310,668 shares of Common Stock were
issued and outstanding under the 1993 Plan, and no options to purchase shares
had been granted under the 1997 Plan, the Director Plan or the 1997 Purchase
Plan. See "Management--Director Compensation" and "--Benefit Plans."

UNDERWRITERS

Under the terms and subject to the conditions in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters") for whom Morgan Stanley & Co. Incorporated, Deutsche Morgan
Grenfell Inc. and Wessels, Arnold & Henderson, L.L.C. are acting as
representatives (the "Representatives") have severally agreed to purchase, and
the Company has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters
below:

NUMBER OF
NAME SHARES
---- ---------

Morgan Stanley & Co. Incorporated.................................. 783,334
Deutsche Morgan Grenfell Inc....................................... 783,333
Wessels, Arnold & Henderson, L.L.C................................. 783,333
BancAmerica Robertson Stephens..................................... 100,000
Bear, Stearns & Co. Inc. .......................................... 100,000
BT Alex. Brown Incorporated........................................ 100,000
Cowen & Company.................................................... 50,000
A.G. Edwards & Sons, Inc. ......................................... 100,000
Fahnestock & Co., Inc. ............................................ 50,000
Goldman, Sachs & Co. .............................................. 100,000
Hambrecht & Quist LLC.............................................. 100,000
Edward D. Jones & Co., L.P. ....................................... 50,000
J.P. Morgan Securities Inc. ....................................... 100,000
NationsBanc Montgomery Securities, Inc. ........................... 100,000
Needham & Company, Inc. ........................................... 50,000
Oppenheimer & Co., Inc. ........................................... 100,000
SoundView Financial Group, Inc..................................... 50,000
---------
Total............................................................ 3,500,000
=========

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the Underwriters' over-allotment option described below) if
any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.46 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.

Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 525,000 shares of Common Stock
at the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock set forth next to the names of all
Underwriters in the preceding table.

The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Common Stock offered by them.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of
this Prospectus without the prior consent of Morgan Stanley & Co.
Incorporated. The Company has agreed in the Underwriting Agreement that it
will not, directly or indirectly, without the prior written consent of Morgan
Stanley & Co. Incorporated, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of this Prospectus, except
under certain circumstances.

At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to five percent of the shares of the
Common Stock offered hereby (not including shares subject to the Underwriters'
over-allotment option) for certain parties who have expressed an interest in
purchasing such shares in the offering. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the
same basis as other shares offered hereby.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
by negotiations among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the future
prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of the Company.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain matters will be passed upon for the Underwriters by
Gray Cary Ware & Freidenrich, A Professional Corporation, Palo Alto,
California. As of the date of this Prospectus, WS Investment Company 94A and
WS Investment Company 95B, investment partnerships composed of certain current
and former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 87,876
shares of Common Stock of the Company, and a member of Wilson Sonsini Goodrich
& Rosati, Professional Corporation owns 25,542 shares of Common Stock of the
Company.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997 and for each of the three years in the period ended
December 31, 1996, and the nine month period ended September 30, 1997 included
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.

Certain statements in this Prospectus set forth under the captions "Risk
Factors--Protection of Intellectual Property," "Business--Intellectual
Property" and "--Legal Proceedings," insofar as they relate to patent
infringement claims asserted by FORE, have been passed upon by Dergosits &
Noah, LLP, San Francisco, California, patent counsel to the Company, as
experts on such matters.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1, including amendments thereto, under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect
to the Company and the Common Stock offered hereby, reference is hereby made
to such Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of
any contract or other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such office upon the payment of the
prescribed fees. Such materials may also be obtained from the Commission's web
site at http://www.sec.gov.

MMC NETWORKS, INC.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of
MMC Networks, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of MMC Networks, Inc. at December
31, 1995 and 1996, and September 30, 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996 and for the nine-month period ended September 30, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
San Jose, California
October 12, 1997, except for
the reincorporation in
Delaware described in Note 1
which is as of October 15,
1997

F-2

MMC NETWORKS, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------

ASSETS
Current assets:
Cash and cash equivalents.................... $ 250 $ 4,809 $ 3,241
Short-term investments....................... 7,852 1,509 2,175
Accounts receivable, net of allowances of
$45, $133 and $181.......................... 637 2,025 4,027
Inventories.................................. 154 511 369
Prepaid expenses and other current assets.... 64 122 546
------- ------- -------
Total current assets....................... 8,957 8,976 10,358
Property and equipment, net.................... 542 1,616 3,242
Other assets................................... 28 84 202
------- ------- -------
$ 9,527 $10,676 $13,802
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 617 $ 586 $ 2,755
Accrued expenses............................. 195 789 1,407
Deferred revenue and customer deposits....... 850 100 --
Current portion of capital lease obligations. 118 388 365
------- ------- -------
Total current liabilities.................. 1,780 1,863 4,527
------- ------- -------
Capital lease obligations, net of current
portion....................................... 301 636 344
------- ------- -------
Commitments and contingencies (Note 9)
Stockholders' equity:
Series A Convertible Preferred Stock: $.001
par value; 9,378 shares authorized; 9,255
shares issued and outstanding .............. 3,055 3,055 3,055
Series B Convertible Preferred Stock: $.001
par value; 4,087, 4,121 and 4,121 shares
authorized; 4,087 shares issued and
outstanding ................................ 7,192 7,192 7,192
Common Stock: $0.001 par value; 60,000,
60,000 and 100,000 shares authorized;
10,365, 11,121 and 11,760 shares issued and
outstanding ................................ 6 7 8
Additional paid-in capital................... 121 249 515
Notes receivable from stockholders........... (125) (225) (295)
Accumulated deficit.......................... (2,803) (2,101) (1,544)
------- ------- -------
Total stockholders' equity................. 7,446 8,177 8,931
------- ------- -------
$ 9,527 $10,676 $13,802
======= ======= =======

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

F-3

MMC NETWORKS, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
----------------------- -------------------
1994 1995 1996 1996 1997
----- ------- ------- ----------- -------
(UNAUDITED)

Revenues........................ $ 165 $ 577 $10,515 $ 7,026 $14,296
Cost of revenues................ 23 304 3,576 2,440 4,281
----- ------- ------- ------- -------
Gross profit................ 142 273 6,939 4,586 10,015
----- ------- ------- ------- -------
Operating expenses:
Research and development, net. 132 1,802 3,312 2,167 5,410
Selling, general and
administrative............... 298 1,151 3,225 2,192 4,141
----- ------- ------- ------- -------
Total operating expenses.... 430 2,953 6,537 4,359 9,551
----- ------- ------- ------- -------
Operating income (loss)......... (288) (2,680) 402 227 464
----- ------- ------- ------- -------
Other income (expense):
Interest income............... 64 146 427 330 212
Interest expense.............. (2) (42) (110) (81) (101)
----- ------- ------- ------- -------
Total other income ......... 62 104 317 249 111
----- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (226) (2,576) 719 476 575
Provision for income taxes...... -- -- 17 11 18
----- ------- ------- ------- -------
Net income (loss)............... $(226) $(2,576) $ 702 $ 465 $ 557
===== ======= ======= ======= =======
Net income per share (Note 2)... $ 0.02 $ 0.02 $ 0.02
======= ======= =======
Shares used to compute net
income per share (Note 2) 29,181 29,110 29,395
======= ======= =======

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

F-4

MMC NETWORKS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

CONVERTIBLE NOTES RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS
---------------- ------------- PAID-IN FROM (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT) TOTAL
------- -------- ------ ------ ---------- ------------ ------------ -------

Balance at December 31,
1993................... -- $ -- 6,075 $ 2 $ -- $ -- $ 17 $ 19
Issuance of Series A
Convertible Preferred
Stock, net of issuance
costs of $30........... 9,255 3,055 -- -- -- -- -- 3,055
Issuance of Common Stock
in exchange for
services............... -- -- 22 -- -- -- -- --
Distribution to
stockholder............ -- -- -- -- -- -- (18) (18)
Net loss................ -- -- -- -- -- -- (226) (226)
------- -------- ------ ---- ----- ----- ------- -------
Balance at December 31,
1994................... 9,255 3,055 6,097 2 -- -- (227) 2,830
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs of $28........... 4,087 7,192 -- -- -- -- -- 7,192
Exercise of stock
options................ -- -- 4,268 4 121 -- -- 125
Advances to employees
for exercise of stock
options................ -- -- -- -- -- (125) -- (125)
Net loss................ -- -- -- -- -- -- (2,576) (2,576)
------- -------- ------ ---- ----- ----- ------- -------
Balance at December 31,
1995................... 13,342 10,247 10,365 6 121 (125) (2,803) 7,446
Exercise of stock
options................ -- -- 741 1 122 -- -- 123
Advances to employees
for exercise of stock
options................ -- -- -- -- -- (100) -- (100)
Issuance of Common Stock
in exchange for
services............... -- -- 15 -- 6 -- -- 6
Net income.............. -- -- -- -- -- -- 702 702
------- -------- ------ ---- ----- ----- ------- -------
Balance at December 31,
1996................... 13,342 10,247 11,121 7 249 (225) (2,101) 8,177
Exercise of stock
options and other...... -- -- 624 1 236 -- -- 237
Advances to employees
for exercise of stock
options................ -- -- -- -- -- (70) -- (70)
Issuance of Common Stock
in exchange for
services............... -- -- 15 -- 30 -- -- 30
Net income.............. -- -- -- -- -- -- 557 557
------- -------- ------ ---- ----- ----- ------- -------
Balance at September 30,
1997................... 13,342 $ 10,247 11,760 $ 8 $ 515 $(295) $(1,544) $ 8,931
======= ======== ====== ==== ===== ===== ======= =======

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

F-5

MMC NETWORKS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)

Cash flows from operating
activities:
Net income (loss).............. $ (226) $(2,576) $ 702 $ 465 $ 557
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization. 15 97 479 312 695
Issuance of Common Stock in
exchange for services........ -- -- 6 -- 30
Changes in assets and
liabilities:
Accounts receivable.......... (209) (427) (1,388) (783) (2,002)
Inventories.................. -- (154) (357) (357) 142
Prepaid expenses and other
assets...................... (56) (26) (114) (191) (542)
Accounts payable............. 19 598 (31) 642 2,169
Accrued expenses............. 52 128 594 120 618
Deferred revenue and customer
deposits.................... 275 575 (750) (497) (100)
------- ------- ------- ------ -------
Net cash provided by (used
in) operating activities... (130) (1,785) (859) (289) 1,567
------- ------- ------- ------ -------
Cash flows from investing
activities:
Sale (purchase) of short-term
investments................... (2,332) (5,520) 6,343 5,825 (666)
Acquisition of property and
equipment..................... -- (162) (673) (360) (2,321)
------- ------- ------- ------ -------
Net cash provided by (used
in) investing activities.... (2,332) (5,682) 5,670 5,465 (2,987)
------- ------- ------- ------ -------
Cash flows from financing
activities:
Proceeds from issuance of
Convertible Preferred Stock,
net........................... 3,055 7,192 -- -- --
Proceeds from exercise of stock
options....................... -- -- 23 17 167
Principal payments on capital
lease obligations............. (10) (63) (275) (128) (315)
Distribution to stockholder.... (18) -- -- -- --
------- ------- ------- ------ -------
Net cash provided by (used
in) financing activities.... 3,027 7,129 (252) (111) (148)
------- ------- ------- ------ -------
Net increase (decrease) in cash
and cash equivalents........... 565 (338) 4,559 5,065 (1,568)
Cash and cash equivalents at
beginning of period............ 23 588 250 250 4,809
------- ------- ------- ------ -------
Cash and cash equivalents at end
of period...................... $ 588 $ 250 $ 4,809 $5,315 $ 3,241
======= ======= ======= ====== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest......... $ 2 $ 42 $ 110 $ 81 $ 101
Cash paid for income taxes..... $ -- $ -- $ -- $ -- $ 2
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and
equipment through capital
leases........................ $ 140 $ 352 $ 880 $ 880 $ --

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

F-6

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE COMPANY:

MMC Networks, Inc. (the "Company") was incorporated in California on
September 25, 1992 as a Subchapter S corporation and became a Subchapter C
corporation effective July 12, 1994. The Company is a leading developer and
supplier of network processors--high-performance, open-architecture, software-
programmable processors optimized for networking applications. The Company
sells its products primarily in the United States.

Certain equity transactions

In August 1997, the Company's Board of Directors authorized, and in
September 1997, the stockholders approved, the reincorporation of the Company
in Delaware and the associated exchange of one share of each class and series
of stock of the predecessor Company for one share of each corresponding class
and series of stock of the Delaware successor. Such reincorporation was
effective as of October 15, 1997. As a result of the reincorporation, the
Company is authorized to issue 100,000,000 shares of Common Stock. Following
the completion of the offering contemplated by this Prospectus (the
"Offering"), the Company intends to amend its Certificate of Incorporation to
authorize 10,000,000 shares of undesignated Preferred Stock, and the Board of
Directors will have the authority to issue the undesignated Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash, cash equivalents and short-term investments

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments
consist primarily of commercial paper and U.S. Treasury securities with
maturities of more than three months when purchased. The Company has
categorized its short-term investments as available-for-sale. At December 31,
1995 and 1996 and September 30, 1997, the fair market value of the Company's
short-term investments approximated cost.

Inventories

Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.

Long-lived assets

The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("FAS 121"). FAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. No such
impairments have been identified to date.

F-7

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Revenue recognition; customer concentration

Revenues are recognized upon shipment of product to customers. Funds
received in advance of product shipment are deferred and recognized upon
shipment of the product. The Company's policy is to not accept returns except
for defective products. Anticipated costs related to product warranties are
charged to operations as revenues are recognized. The Company has not
experienced significant warranty claims to date.

The following table summarizes 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) during
1994, 1995, 1996 and the nine months ended September 30, 1997:

NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------

A.............................. -- 48% 51% 30%
B.............................. -- -- 15 20
C.............................. -- -- 10 17
D.............................. -- 12 -- --
E.............................. -- 11 -- --
F.............................. -- 11 -- --
G.............................. 91% -- -- --

Research and development

Research and development costs are charged to operations as incurred. The
Company on occasion receives nonrecurring engineering funding for development
projects to apply or enhance the Company's technology to a particular
customer's needs. Such funding is recognized over the term of the respective
contract using the percentage of completion method. At the time of
recognition, amounts received under research and development contracts are
offset against research and development expenses. (See Note 8.)

Software development costs

Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86 ("FAS
86") requires the capitalization of certain software development costs once
technological feasibility is established, which the Company defines as the
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current sales to total projected product sales, whichever is greater. To date,
the period between achieving technological feasibility and the general
availability of such software has been short, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the
Company has not capitalized any software development costs.

Income taxes

From inception through July 11, 1994, the Company elected to be taxed as a
Subchapter S corporation for federal income tax and California franchise tax
purposes. As a result, the Company's sole stockholder paid tax on the taxable
income of the Company, and no federal income taxes were payable at the
corporate level.

F-8

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Beginning July 12, 1994, the Company became taxable as a Subchapter C
corporation and since that date has accounted for income taxes using an asset
and liability approach. The asset and liability approach requires the
recognition of taxes payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets are based on
the provisions of the enacted tax law; the effects of future changes in tax
laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.

Stock-based compensation

The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." (See Note 6.)

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts,
commercial paper and U.S. Treasury bills. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company provides an allowance for doubtful
accounts receivable based upon the expected collectibility of such
receivables.

Stock splits

In December 1996, the Company effected a 2-for-1 stock split of its Common
Stock and Convertible Preferred Stock. The accompanying financial statements
have been retroactively adjusted to reflect this split.

In July 1997, the Company effected a 3-for-2 stock split of its Common Stock
and Convertible Preferred Stock. The accompanying financial statements have
been retroactively adjusted to reflect this split.

Net income (loss) per share

Net income (loss) per share is presently computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of Convertible Preferred Stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive, except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, Convertible Preferred Stock
(using the if converted method) and common equivalent shares (using the
treasury stock method and the initial public offering price) issued subsequent
to July 31, 1996 have been included in the computation as if they were
outstanding for all periods presented. Net income (loss) per share prior to
1996 has not been presented since such amounts are not meaningful. See "recent
accounting pronouncements" for a discussion of prospective change in computing
net income (loss) per share.

Dependence on independent manufacturers

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. The semiconductor industry is

F-9

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

highly cyclical and, in the past, foundry capacity has been very limited at
times and may become limited in the future. Currently, only one of the
Company's products is 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. The Company has recently
experienced delays in obtaining an adequate supply of certain of its products
from one supplier, as well as certain problems regarding the quality of the
products delivered by that supplier, and as a result has begun obtaining such
products from an alternative supplier. There can be no assurance that the
Company will not have similar or more protracted problems in the future with
existing or new suppliers. In the event of a loss of, or a decision by the
Company to change, a key supplier or foundry, qualifying a new supplier or
foundry and commencing volume production could involve delay and expense,
resulting in lost revenues, reduced operating margins and possible detriment
to customer relationships.

Recent accounting pronouncements

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). This statement is effective for the Company's quarter ending
December 31, 1997 and requires restatement of all prior periods. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic
earnings per share and fully diluted earnings per share is replaced by diluted
earnings per share. The following table sets forth unaudited pro forma basic
and diluted net income per share, computed in accordance with the requirements
of FAS 128, giving effect for the treatment of all common equivalent shares
issued subsequent to July 31, 1996 as outstanding for all periods presented
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, for the year ended December 31, 1996 and the nine month periods ended
September 30, 1996 and 1997.

NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ ----------- -----
(UNAUDITED)

Basic income per share.......................... $0.05 $0.04 $0.04
Diluted income per share........................ 0.02 0.02 0.02

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 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 nonowner 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. The disclosures prescribed by FAS
130 are effective beginning with the first quarter of calendar 1998.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("FAS 131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 are effective for calendar 1998.

F-10

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Proposed public offering of Common Stock (unaudited)

If the Offering is consummated, all of the Convertible Preferred Stock
outstanding as of the closing date will automatically be converted into an
aggregate of 13,341,780 shares of Common Stock based on the shares of
Convertible Preferred Stock outstanding as of September 30, 1997. Unaudited
pro forma stockholders' equity at September 30, 1997, adjusted for the
conversion of Preferred Stock, and giving effect for the authorization of
10,000,000 shares of Preferred Stock described in Note 1, is as follows (in
thousands, except share and per share data):

Preferred Stock: $0.001 par value; 10,000,000 shares authorized; no
shares issued or outstanding...................................... $ --
Common Stock: $0.001 par value; 100,000,000 shares authorized;
25,101,708 shares issued and outstanding ......................... 21
Additional paid-in capital......................................... 10,749
Notes receivable from stockholders................................. (295)
Accumulated deficit................................................ (1,544)
-------
$ 8,931
=======

Interim results (unaudited)

The accompanying statements of operations and of cash flows for the nine
months ended September 30, 1996 are unaudited. In the opinion of management,
the statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair statement of the results of the interim
periods. The data disclosed in these notes to financial statements for such
period are also unaudited.

NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):

DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
----- ------ -------------

Inventories:
Raw materials.............................. $ 24 $ 99 $ --
Finished goods............................. 130 412 369
----- ------ ------
$ 154 $ 511 $ 369
===== ====== ======
Property and equipment:
Computers and equipment.................... $ 282 $1,397 $1,705
Purchased software......................... 328 751 2,485
Furniture and fixtures..................... 44 59 400
----- ------ ------
654 2,207 4,590
Less accumulated depreciation and
amortization................................ (112) (591) (1,348)
----- ------ ------
$ 542 $1,616 $3,242
===== ====== ======
Accrued liabilities:
Accrued compensation and benefits.......... $ 108 $ 293 $ 408
Accrued contract engineering fees.......... -- -- 349
Other accrued liabilities.................. 87 496 650
----- ------ ------
$ 195 $ 789 $1,407
===== ====== ======

F-11

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--BANK LINES OF CREDIT

In April 1997, the Company entered into a revolving credit facility
agreement and lease line agreement with a bank. The revolving line of credit
provides for working capital advances of up to $5.0 million and borrowings
bear interest at the bank's prime rate. The lease line allows for advances of
up to $3.0 million and borrowings bear interest at the bank's prime rate plus
0.5%. The lines expire in April 1998. Borrowings under the lines are secured
by the assets of the Company. Among other provisions, the Company is required
to maintain certain financial covenants. In addition, payment of dividends is
prohibited without the bank's prior consent. At September 30, 1997, there were
no amounts outstanding under either facility.

NOTE 5--INCOME TAXES:

The provision for income taxes of $17,000 and $18,000 for the year ended
December 31, 1996 and the nine months ended September 30, 1997, represents
current federal and state income taxes payable.

No current provision for income taxes was recorded in 1994 or 1995 as the
Company incurred net operating losses for income tax purposes from July 12,
1994, the date on which the Company became a Subchapter C corporation, through
December 31, 1995.

The effective tax rate for the nine months ended September 30, 1997
reconciles to the statutory tax rates as follows:

Federal statutory rate 34 %
State taxes, net of federal benefit 1
Permanent differences 2
Utilization of net operating loss carryforwards (34)
---
Effective tax rate 3 %
===

Deferred tax assets consist of the following:

DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)

Net operating loss carryforwards................ $ 994 $ 737 $ --
Research and development credit carryforwards... 111 314 550
Inventory reserves and basis differences........ 4 129 236
Accrued expenses................................ 64 187 306
Deferred revenue and customer deposits.......... 341 -- --
Other........................................... 71 126 169
------- ------- -------
Total deferred tax assets..................... 1,585 1,493 1,261
Valuation allowance............................. (1,585) (1,493) (1,261)
------- ------- -------
Net deferred tax assets....................... $ -- $ -- $ --
======= ======= =======

Because the Company emerged from the development stage in 1996 and,
consequently, does not have an extensive history of profitability, management
believes that the available objective evidence creates sufficient uncertainty
regarding the realizability of deferred tax assets such that a full valuation
allowance is required at December 31, 1995 and 1996 and September 30, 1997.

F-12

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

At September 30, 1997, the Company had research and development tax credit
carryforwards for federal and state income tax purposes of $400,000 and
$150,000, respectively. The federal research and development credit
carryforwards expire from 2009 through 2012. The state research and
development credit carryforwards expire from 1999 through 2002.

Under the tax reform act of 1986, the amount of net operating losses that
can be utilized may be limited in certain circumstances including, but not
limited to, a cumulative stock ownership change of more than 50% over a three-
year period, as defined. Stock ownership changes of greater than 50% occurred
in July 1994 and November 1995; however, due to the value of the Company at
such dates, no significant limitation was imposed on the net operating losses.

NOTE 6--CAPITAL STOCK:

Convertible Preferred Stock

The Company has authorized 13,498,737 shares of Convertible Preferred Stock,
of which 9,378,000 shares have been designated Series A Convertible Preferred
Stock ("Series A") and 4,120,737 shares have been designated Series B
Convertible Preferred Stock ("Series B"). The Convertible Preferred Stock has
certain rights, preferences and privileges with respect to dividends,
conversion, liquidation and voting as described below.

In July 1994, the Company issued 9,255,000 shares of Series A at $0.33 per
share. In November 1995, the Company issued 4,086,780 shares of Series B at
$1.77 per share. At December 31, 1996, the Company had reserved 13,341,780
shares of Common Stock for issuance upon conversion of outstanding shares of
Convertible Preferred Stock.

Each share of Convertible Preferred Stock is convertible into one share of
Common Stock, subject to adjustment for anti-dilution, and will be converted
into Common Stock in the event of the closing of a public offering of the
Company's Common Stock for which aggregate gross proceeds equal at least
$7,500,000. Shares of Convertible Preferred Stock have voting rights equal to
Common Stock on an as-if converted basis.

In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of Series A and Series B are entitled
to receive $0.33 and $1.77 per share, respectively, plus any declared but
unpaid dividends, prior to any distribution to the holders of Common Stock.

1993 Stock Plan

In April 1993, the Company's Board of Directors (the "Board") adopted the
1993 Stock Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for the
granting of stock options and stock purchase rights to employees, directors
and consultants for the purchase of up to 16,725,000 shares of Common Stock.
Options granted under the 1993 Plan are for periods not to exceed ten years,
and may be either incentive stock options ("ISOs") or nonstatutory stock
options ("NSOs"). ISOs are granted at exercise prices which are not less than
100% of the estimated fair value of the Common Stock, as determined by the
Board, on the date of the grant. NSOs are granted at prices not less than 85%
of the estimated fair value of the Common Stock, as determined by the Board,
on the date of the grant. To date all options granted under the 1993 Plan have
been granted at the estimated fair market value as of a the date of grant, as
determined by the Board. Options granted under the 1993 Plan generally vest at
a rate of 25% on the first anniversary of the date of grant and as to 1/48 of
the underlying shares per month thereafter. Options may be exercised in
exchange for cash or promissory notes payable to the Company.

F-13

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Stock purchase rights may be granted either alone, in addition to, or in
tandem with other awards granted under the 1993 Plan. Stock purchase rights
are granted at prices not less than 85% of the estimated fair value of the
shares on the date of grant, as determined by the Board, and must be exercised
within thirty days from the date of grant. Shares purchased through the
exercise of stock purchase rights are subject to repurchase by the Company at
the original purchase price paid by the purchaser in the event the purchaser's
employment with the Company is terminated for any reason. Such repurchase
option lapses at a rate determined at the date of grant, in no event less than
20% per year. No stock purchase rights have been granted under the 1993 Plan
to date.

The following table summarizes stock option activity under the 1993 Plan:

WEIGHTED-
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ---------

Balance at December 31, 1993................. 7,121,250 303,750 $0.03
Granted...................................... (4,769,439) 4,769,439 0.03
---------- ----------
Balance at December 31, 1994................. 2,351,811 5,073,189 0.03
Granted...................................... (846,000) 846,000 0.03
Exercised.................................... -- (4,268,250) 0.03
Canceled..................................... 171,000 (171,000) 0.03
---------- ----------
Balance at December 31, 1995................. 1,676,811 1,479,939 0.03
Authorized................................... 3,300,000 -- --
Granted...................................... (3,265,500) 3,265,500 0.79
Exercised.................................... -- (741,534) 0.17
Canceled..................................... 810,000 (810,000) 0.29
---------- ----------
Balance at December 31, 1996................. 2,521,311 3,193,905 0.71
Authorized .................................. 6,000,000 -- --
Granted ..................................... (3,172,000) 3,172,000 3.01
Exercised ................................... -- (623,549) 0.33
Canceled .................................... 431,688 (431,688) 0.97
---------- ----------
Balance at September 30, 1997................ 5,780,999 5,310,668 $2.34
========== ==========

1997 Stock Plan

In August 1997, the Company's Board of Directors adopted, and in September
1997, the stockholders approved, the 1997 Stock Plan (the "1997 Plan"). The
1997 Plan is intended to serve as the successor equity incentive program to
the Company's 1993 Plan. The 1997 Plan provides for the grant of incentive
stock options ("ISOs") to employees, officers and employee directors and
nonstatutory stock options ("NSOs") and stock purchase rights ("SPRs") to
employees, directors and consultants. ISOs granted to participants owning
stock possessing more than 10% of the voting power of all classes of stock
must have an exercise price at least equal to 110% of the fair market value on
the date of grant and are for periods not to exceed five years. All other
options granted under the plan must have an exercise price at least equal to
the fair market value on the date of grant and are for periods not to exceed
ten years. Options granted under the 1997 Plan generally shall vest at a rate
of 25% on the first anniversary of the date of grant and as to 1/48 of the
underlying shares per month thereafter.

Stock purchase rights are for periods and prices determined by the Board.
Shares purchased through the exercise of SPRs are subject to repurchase by the
Company at the original price paid by the purchaser in the event that the
purchaser's employment with the Company terminates. The repurchase right
lapses at a rate determined by the Board.

F-14

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following shares have been reserved for issuance under the 1997 plan:
(a) 1,500,000 shares of Common Stock, which includes shares which have been
reserved but unissued under the 1993 Plan; (b) any shares returned to the 1993
Plan as a result of termination of options under the 1993 Plan; and (c) shares
added to the 1997 Plan pursuant to automatic annual increases equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of all then outstanding shares of
Common Stock of the Company, or (iii) a lesser amount determined by the Board.
Unless terminated sooner, the 1997 Plan will terminate automatically in August
2007.

1997 Director Option Plan

In August 1997, the Company's Board of Directors adopted, and in September
1997, the stockholders approved, the 1997 Director Option Plan (the "Director
Plan"). The Director Plan provides for the grant of nonstatutory stock options
to non-employee directors. Options granted under the Director Plan are for
periods not to exceed ten years and are granted at exercise prices not less
than 100% of the fair market value on the date of grant. The Director Plan
provides that each non-employee director will automatically be granted a
nonstatutory option to purchase 40,000 shares of Common Stock (the "First
Option") on the date which such person first becomes a non-employee director,
unless immediately prior to becoming a non-employee director, such person was
an employee director of the Company. In addition to the First Option, each
non-employee director will automatically be granted an option to purchase
10,000 shares (a "Subsequent Option") on the date two days after the
announcement of the Company's fiscal year-end earnings of each year, if on
such date he or she will have served on the Board of Directors for at least
the preceding six months. Each First Option and each Subsequent Option will
have a term of 10 years. Each First Option will vest as to 25% of the optioned
stock one year from the date of grant, and as to an additional 1/48 of the
optioned stock each full month thereafter, provided the person continues to
serve as a Director on such dates. Each Subsequent Option will vest as to 1/12
of the optioned stock each full month after the date of grant. A total of
150,000 shares of Common Stock have been reserved for issuance under the
Director Plan, plus annual increases equal to (i) the number of shares of
stock underlying options granted under the Director Plan in the immediately
preceding year, or (ii) a lesser amount determined by the Board.

1997 Employee Stock Purchase Plan

In August 1997, the Company's Board of Directors adopted, and in September
1997, the stockholders approved, the 1997 Employee Stock Purchase Plan (the
"1997 Purchase Plan"). The 1997 Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code and contains 24-month offering
periods, with four six-month purchase periods included in each offering
period. The 1997 Purchase Plan permits employees to purchase Common Stock of
the Company through payroll deductions of up to 10% of the participant's
compensation. The price of stock purchased under the 1997 Purchase Plan shall
be 85% of the lower of the fair market value of the Common Stock at the
beginning of the offering period or at the end of the purchase period. A total
of 300,000 shares of Common Stock has been reserved for issuance under the
1997 Purchase Plan, plus shares added to the plan pursuant to automatic annual
increases equal to the lesser of (i) 400,000 shares, (ii) 0.8% of all then
outstanding shares of Common Stock of the Company or (iii) a lesser amount
determined by the Board.

F-15

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information concerning outstanding and
exercisable options as of September 30, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------

$ 0.03 478,510 7.51 $0.03 155,100 $0.03
0.18 to
0.42 379,219 8.43 0.24 49,030 0.24
0.67 to
1.10 791,939 8.68 0.76 176,249 0.72
2.00 1,291,500 9.23 2.00 -- --
2.17 to
2.67 1,012,500 9.40 2.20 -- --
3.33 to
5.33 946,500 9.67 4.28 -- --
6.67 to
7.00 410,500 9.95 7.00 -- --
--------- -------
$ 0.03
to 7.00 5,310,668 9.03 $2.34 380,379 $0.38
========= =======

The weighted-average estimated grant-date fair values of options granted
under the 1993 Plan during the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, determined using either the minimum
value model or the Black-Scholes model as prescribed by SFAS No. 123, were
$0.01, $0.20, and $1.07 respectively.

For options granted during the years ended December 31, 1995 and 1996 and
for the period from January 1, 1997 to August 19, 1997 (the day prior to the
filing of the Company's initial registration statement), the Company
calculated the fair value of its stock options using the minimum value model
and the following assumptions: annual dividend yield of 0.0%; risk-free
interest rates of 5.63% to 7.31% in 1995, 5.28% to 6.55% in 1996 and 5.86% to
6.66% for the period from January 1, 1997 to August 19, 1997; and an expected
option term of 4 years. For options granted during the period from August 20,
1997 to September 30, 1997, the Company calculated the fair value of its stock
options using the Black-Scholes model and the following assumptions: annual
dividend yield of 0.0%; expected stock price volatility of 70% over the option
term; risk-free interest rates of 5.94% to 6.16%; and an expected option term
of 4 years.

Had the Company recorded compensation based on the estimated grant-date fair
value, using either the minimum value model or the Black-Scholes model as
discussed above and as prescribed by SFAS 123, for options granted under the
1993 Plan, the Company's net income (loss) and net income per share would have
been reduced to the pro forma amounts below for the years ended December 31,
1995 and 1996 and for the nine months ended September 30, 1997:

YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
-------------- SEPTEMBER 30,
1995 1996 1997
------- ----- ----------------- ---
(IN THOUSANDS)

Net income (loss) as reported......... $(2,576) $ 702 $ 557
Pro forma net income (loss)......... (2,576) 661 263
Net income per share as reported.... -- $0.02 $0.02
Pro forma net income per share...... -- 0.02 0.01

Because the determination of the fair value of all options granted after the
Company filed its intial registration statement includes a volatility factor
and because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995, the pro forma effect on net income
(loss) for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997 shown above is not representative of the pro forma
effect on net income (loss) in future years.

F-16

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7--NOTES RECEIVABLE FROM STOCKHOLDERS:

In October and November 1995, the Company made full recourse loans with
principal amounts totaling $125,000 to certain employees pursuant to the
Company's 1993 Plan. The loans are secured by 4,268,250 shares of the
Company's Common Stock. The loans are non-interest bearing and are due in
October and November 2000 or earlier in the event of the borrower's
termination of employment with the Company.

In December 1996, the Company accepted a full recourse promissory note with
a principal amount of $100,000 from a former officer upon the exercise of
certain stock options pursuant to the Company's 1993 Plan. The note bears
interest at 5.75% per annum and is due upon the earlier of three years from
the date of the note or six months following termination of employment with
the Company.

In January 1997, the Company accepted a full recourse promissory note with a
principal amount of $70,000 from a former officer upon the exercise of certain
stock options pursuant to the Company's 1993 Plan. The note bears interst at
5.75% per annum and is due upon the earlier of three years from the date of
the note or six months following termination of employment with the Company.

In March 1997, the Company accepted a full recourse promissory note with a
principal amount of $100,000 from one of its officers. The note bears interest
at 6.07% per annum, is secured by 1,800,000 shares of the Company's Common
Stock and is due upon the earlier of October 31, 1999 or six months following
termination of employment with the Company.

NOTE 8--RESEARCH AND DEVELOPMENT CONTRACTS:

During the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997, the Company performed research and development which
was funded under a number of contracts and recognized $549,000, $280,000,
$863,000 and $716,000, respectively as offsets against research and
development expenses. These contracts, which vary in term and are with parties
unrelated to the Company, provide for non-refundable funding (irrespective of
the results) of research and development of certain technologies owned by the
Company which will enhance the Company's products to meet specific customers'
needs. To date, funding received under any of the research and development
contracts has not been individually significant.

NOTE 9--COMMITMENTS AND CONTINGENCIES:

The Company leases its facility under a noncancelable lease agreement which
expires in March 1999. Rent expense under noncancelable operating leases was
$48,000, $112,000, $245,000 and $465,000 during the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1997,
respectively.

In 1994, the Company entered into a master lease agreement with a leasing
company for the acquisition of property and equipment. The leasing company's
commitment to fund purchases of capital equipment under this agreement expired
on January 15, 1996. During 1995 and 1996, the Company leased $352,000 and
$54,000, respectively, of property and equipment under this agreement which
have been classified as capital leases. These capital leases terminate at
various dates through 1999. In connection with the master lease agreement the
Company issued a warrant to purchase 123,000 shares of Series A at $0.33 per
share. The estimated fair value of the warrant was not material on the date of
issuance. The warrant expires on the earlier of October 2003 or upon the
fourth anniversary of an initial public offering of the Company's Common
Stock. A total of 123,000 shares of Series A have been reserved for issuance
upon exercise of the warrant. The warrant had not been exercised at
September 30, 1997.

F-17

MMC NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)

In February 1996, the Company entered into a new master lease agreement with
a leasing company for the acquisition of property and equipment. The agreement
provides for up to $750,000 for equipment purchases made through June 30,
1997, all of which had been utilized as of December 31, 1996. Capital leases
under this agreement terminate at various dates through 1999. In connection
with the master lease agreement the Company issued a warrant to purchase
33,963 shares of Series B at $1.77 per share. The estimated fair value of the
warrant was not material on the date of issuance. The warrant expires in
January 2003. A total of 33,963 shares of Series B have been reserved for
issuance upon exercise of the warrant. The warrant had not been exercised at
September 30, 1997.

As of December 31, 1995 and 1996 and September 30, 1997, property and
equipment recorded under capital leases, consisting primarily of computer
equipment and purchased software, totaled $492,000, $1,372,000 and $1,372,000,
respectively, with related accumulated amortization of $112,000, $517,000 and
$733,000, respectively.

Future minimum lease payments under all noncancelable operating and capital
leases are as follows:

OPERATING CAPITAL
LEASES LEASES
--------- --------

October 1, 1997 through December 31, 1997................ $144,000 $ 94,000
January 1, 1998 through December 31, 1998................ 579,000 401,000
January 1, 1999 through December 31, 1999................ 145,000 301,000
-------- --------
Total minimum payments............................... $868,000 796,000
========
Less amount representing interest........................ 87,000
--------
Present value of lease obligations................... 709,000
Less current portion..................................... 365,000
--------
Lease obligations, net of current portion............ $344,000
========

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. Management does not believe
that any such matters that are currently pending will have a material adverse
impact on the Company's financial position and results of operations.

F-18

[LOGO OF MCC NETWORKS APPEARS HERE]