The sources said the deal calls for Marlboro, Mass.-based Stratus to be split into four parts, with Ascend retaining the key portion of the business that makes computers used to run telephone switching systems. Other Stratus operations, which are used in securities trading and electronic commerce, would likely be sold by Ascend as part of the transaction.

The San Jose Mercury News was first to report news of the transaction on Friday. Sources later confirmed the talks to Reuters.

Shares of Alameda, Calif.-based Ascend tumbled sharply on Friday on concerns that the Stratus deal could jeopardise a potential purchase of Ascend by telephone equipment giant Lucent Technologies Inc.

Rumours of an Ascend-Lucent transaction have circulated for months and industry experts have speculated that a deal could be comingthis fall.

The deal will mark the latest in a wave of transactions in the telecommunications equipment sector. Companies are racing to outfit the worlds telecommunications networks so they can transmit both phone calls and data communications over the Internet.

Analysts said a transaction between Ascend and Stratus would be a strategic coup for Ascend. Furthermore, Stratus share price has fallen sharply in recent months due to weak sales, a development that makes the acquisition a better bargain for Ascend.

Other similar transactions include the planned acquisition of Summa Four Inc by Ascend competitor Cisco Systems Inc. In June, Canadas Northern Telecom Ltd agreed to buy Bay Networks Inc.