FARALLON COMMUNICATIONS INC, DEF 14A, 1997-01-06

FARALLON COMMUNICATIONS INC
DEF 14A, 1997-01-06
COMPUTER INTEGRATED SYSTEMS DESIGN

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12

FARALLON COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

--Enter Company Name Here--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:

Notes:

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[LOGO OF FARALLON]

January 16, 1997

Farallon Communications, Inc.
2470 Mariner Square Loop
Alameda, CA 94501

NOTICE OF ANNUAL STOCKHOLDER MEETING

Notice is hereby given that the Annual Stockholder Meeting of Farallon
Communications, Inc. (the "Company") will be held on February 14, 1997, at 10:00
a.m. local time, at 2470 Mariner Square Loop, Alameda, California 94501 for the
following purposes:

1. To elect five directors, the names of whom are set forth in the
accompanying proxy statement, to serve until the 1998 Annual
Stockholder Meeting;

2. To approve amendments to the 1996 Stock Option Plan, including a
1,000,000 share increase to the number of shares available under the
1996 Stock Option Plan, as set forth in the accompanying proxy;

3. To approve an amendment to the Company's Employee Stock Purchase
Plan to increase the number of shares of the Company's Common Stock
available for issuance by 200,000 shares to a total of 500,000
shares;

4. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company; and

5. To transact such other business as may properly be brought before
the meeting.

The forgoing items of business are more fully described in the attached
Proxy Statement.

Stockholders of record at the close of business on December 31, 1996 are
the only stockholders entitled to notice of and to vote at the Annual
Stockholder Meeting and at any adjournment or postponements thereof. A list of
such stockholders will be available for inspection at the Company's headquarters
located at 2470 Mariner Square Loop, Alameda, CA 94501, during ordinary business
hours for the ten-day period prior to the Annual Stockholder Meeting.

The Board of Directors,

Alan B. Lefkof
President, Chief Executive Officer and Director

Alameda, California
January 16, 1997

IMPORTANT

WHETHER YOU EXPECT TO ATTEND THE MEETING OR NOT, PLEASE VOTE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY IN THE ATTACHED SELF-ADDRESSED ENVELOPE AS PROMPTLY AS
POSSIBLE. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON, EVEN
THOUGH YOU HAVE PREVIOUSLY SIGNED AND RETURNED YOUR PROXY.
<PAGE>

FARALLON COMMUNICATIONS, INC.
PROXY STATEMENT FOR ANNUAL STOCKHOLDER MEETING
TO BE HELD ON FEBRUARY 14, 1997

<TABLE>
<S> <C>
GENERAL INFORMATION..................................................... 3

ELECTION OF DIRECTORS................................................... 5
Executive Compensation................................................. 8
Employment and Change of Control....................................... 10
Compensation of Directors.............................................. 10
Compensation Committee Interlocks and Insider Participation............ 10
Compliance with Section 16(a) of the Securities Exchange Act of 1934... 11

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION........................................................... 11
Summary of Compensation Policies for Executive Officers................ 11

COMPARISION OF SHAREHOLDER RETURNS...................................... 13

APPROVAL OF AMENDMENT OF THE 1996 STOCK OPTION PLAN.................... 13
Summary of the Provisions of the 1996 Stock Option Plan................ 13

APPROVAL OF AMENDMENT OF THE EMPLOYEE STOCK PURCHASE PLAN............... 21
Summary of the Provisions of the Employee Stock Purchase Plan.......... 21

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS..................... 24

STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING............ 25

TRANSACTION OF OTHER BUSINESS........................................... 25

</TABLE>

2
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[LOGO OF FARALLON]

FARALLON COMMUNICATIONS, INC.
2470 MARINER SQUARE LOOP
ALAMEDA, CA 94501

____________________

PROXY STATEMENT
FOR THE ANNUAL STOCKHOLDER MEETING
TO BE HELD ON FEBRUARY 14, 1997

The accompanying proxy is solicited by the Board of Directors of Farallon
Communications, Inc. a Delaware corporation (the "Company" or "Farallon"), for
use at the Annual Stockholder Meeting to be held on Thursday, February 14, 1997,
at 10:00 a.m. local time or any adjournment thereof, for the purposes set forth
in the accompanying Notice of Annual Stockholder Meeting. The meeting will be
held at the Company's facility at 2470 Mariner Square Loop, Alameda, California.
The Company's telephone number is (510) 814-5100. The date of this Proxy
Statement is January 16, 1997, the approximate date on which this Proxy
Statement and the accompanying form of proxy were first sent or given to
stockholders.

GENERAL INFORMATION

ANNUAL REPORT. An annual report for the fiscal year ended September 30,
1996 is enclosed with this Proxy Statement.

VOTING SECURITIES. The Company's Common Stock is the only type of security
entitled to vote at the Annual Stockholder Meeting. On December 31, 1996, the
record date for the determination of stockholders entitled to vote at the Annual
Stockholder Meeting, there were 11,134,652 shares of the Company's Common Stock
issued and outstanding. Each stockholder of record on December 31, 1996 will be
entitled to one vote for each share of Common Stock held by such stockholder on
December 31, 1996 at the meeting and any adjournment thereof. Shares of Common
Stock may not be voted cumulatively. All votes will be tabulated by the
inspector of elections appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes.

Each holder of shares of the Company's Common Stock is entitled to one (1)
vote on the proposals presented in this Proxy Statement for each share of stock
held. Stockholders may vote in person or by proxy. The Company's By Laws
provide that a majority of all of the shares of the Common Stock entitled to
vote, whether present in person or represented by proxy, shall constitute a
quorum for the transaction of business at the Annual Stockholder Meeting.
Abstentions and broker non-votes will be counted as present for the purpose of
determining the presence of a quorum.

SOLICITATION OF PROXIES. The cost of soliciting proxies will be borne by
the Company. In addition to soliciting holders by mail through its regular
employees, the Company will request banks and brokers, and other custodians,
nominees and fiduciaries, to solicit their customers who have stock of the
Company registered in the names of such persons and will reimburse them for
their reasonable, out-of-pocket costs. The Company may use the services of its
officers, directors, and others to solicit proxies, personally or by telephone,
without additional compensation.

VOTING OF PROXIES. Whether or not you are able to attend the Annual
Stockholder Meeting, you are urged to complete and return the enclosed proxy,
which is solicited by the Company's Board of Directors and which will be voted
as you direct on your proxy when properly completed. In the event no directions
are specified, such proxies will be voted FOR the Nominees of the Board of
Directors (as set forth in Proposal No. 1), FOR Proposals No. 2, No. 3, No. 4
and in the discretion of the proxy holders, as to other matters that may
properly come before the

3
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Annual Stockholder Meeting. All valid proxies received prior to the meeting will
be voted. All shares represented by a proxy will be voted, and where a holder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. A
holder giving a proxy has the power to revoke his or her proxy, at any time
prior to the time it is voted, by delivery to the Secretary of the Company of a
written instrument revoking the proxy or a duly executed proxy with a later
date, or by attending the meeting and voting in person.

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of December 31, 1996,
with respect to the beneficial ownership of the Company's Common Stock by, (i)
the Chief Executive Officer and the four other most highly compensated executive
officers of the Company as of September 30, 1996, (ii) all executive officers
and directors of the Company as a group, and (iii) owners of more than 5% of the
Company's outstanding Common Stock. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. Under this rule, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within sixty (60) days of
the date as of which the information is provided; in computing the percentage
ownership of any person, the amount of shares is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
such acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in the following table does not necessarily reflect the
person's actual voting power at any particular date.
<TABLE>
<CAPTION>
Shares
Beneficially Owned (1)
-------------------------

Name of Beneficial Currently Percent
Owner Owned of Class
- -----------------------------------------------------------------
<S> <C> <C>
Alan B. Lefkof (2)...................... 264,888 2.2%

James A. Clark (3)...................... 27,875 *

Richard L. Maslana (4).................. 56,875 *

Didier Cop (5).......................... 20,988 *

Thomas A. Skoulis (6)................... 21,025 *

Reese M. Jones.......................... 2,551,155 21.4%

Bandel L. Carano (7)(11)................ 1,051,526 8.8%

David F. Marquardt (8)(12).............. 1,228,916 10.3%

James R. Swartz (9)(13)................. 1,051,525 8.8%

All Directors and Executive Officers as
a Group
(13 persons)(10)........................ 6,357,540 53.5%

</TABLE>

* Less than 1% of the outstanding shares of Common Stock.

1) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty (60)
days after December 31, 1996.

2) Includes options exercisable into 239,888 shares of Common Stock under the
Option Plan.

3) Includes options exercisable into 27,875 shares of Common Stock under the
Option Plan.

4
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4) Includes options exercisable into 48,375 shares of Common Stock under the
Option Plan.

5) Includes options exercisable into 5,288 shares of Common Stock under the
Option Plan.

6) Includes options exercisable into 21,025 shares of Common Stock under the
Option Plan.

7) Includes options exercisable into 25,000 shares of Common Stock under the
Option Plan.

8) Includes options exercisable into 25,000 shares of Common Stock under the
Option Plan.

9) Includes options exercisable into 25,000 shares of Common Stock under the
Option Plan.

10) Includes options exercisable into 509,218 shares of Common Stock under the
Option Plan.

11) Includes 1,004,030 shares held by Oak Investment Partners V, L.P. ("Oak
Investment"), a limited partnership, and 22,496 shares held by Oak V
Affiliates Fund, L.P., a limited partnership. Mr. Carano, a director of the
Company, is a general partner of Oak Investment and Oak V Affiliates Fund,
L.P. Mr. Carano disclaims beneficial ownership of the securities held by
these entities except to the extent of his pecuniary interest therein
arising from his partnership interest in Oak Investment and Oak V
Affiliates Fund, L.P.

12) Includes 1,201,414 shares held by entities affiliated with Technology
Venture Investors-IV, L.P., a limited partnership ("TVI-IV") and 2,502
share distributed by Hummer Winbald Venture Partners L. P. Mr. Marquardt is
a general partner of TVI Management-4, L.P., a limited partnership ("TVI
Management"), which is the general partner of TVI-IV. Mr. Marquardt
disclaims beneficial ownership of the shares held by TVI-IV and its
affiliated entities except to the extent of his pecuniary interest therein
arising from his general partnership in TVI Management.

13) Includes 882,812 shares held by Accel III L.P. ("Accel"), a limited
partnership; 61,592 shares held by Accel Investors '92 L.P., a limited
partnership; and 82,121 shares held by Accel Japan L.P., a limited
partnership. Mr. Swartz, a director of the Company, is a general partner or
a general partner of the respective general partner of Accel, Accel
Investors '92 L.P. and Accel Japan L.P. Mr. Swartz disclaims beneficial
ownership of the securities held by these entities except to the extent of
his pecuniary interest.

PROPOSAL NO. 1
ELECTION OF DIRECTORS

The directors who are being nominated for election to the Board of
Directors (the "Nominees"), their ages as of September 30, 1996, their positions
and offices held with the Company and certain biographical information are set
forth below. The proxy holders intend to vote all proxies received by them in
the accompanying form FOR the Nominees listed below unless otherwise instructed.
In the event any Nominee is unable or declines to serve as a director at the
time of the Annual Stockholder Meeting, the proxies will be voted for any
nominee who may be designated by the present Board of Directors to fill the
vacancy. As of the date of this Proxy Statement, the Board of Directors is not
aware of any Nominee who is unable or will decline to serve as a director. The
five Nominees receiving the highest number of affirmative votes of the shares
entitled to vote at the Annual Stockholder Meeting will be elected directors of
the Company to serve until the next Annual Stockholder Meeting or until their
successors have been duly elected and qualified.

5
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Name and Principal Occupation or Employment Age First Became a Director
- ------------------------------------------- --- -----------------------
<S> <C> <C>
Alan B. Lefkof, President, Chief
Executive Officer and Director of the
Company................................ 43 1991

Reese M. Jones, Chairman of the Board
of Directors of the Company............ 38 1987

Bandel L. Carano, General Partner of
Oak Investment Partners (1)............ 34 1992

David F. Marquardt, General Partner of
August Capital and various Technology
Venture Investor entities (1)(2)....... 47 1990

James R. Swartz, General Partner of
Accel Partners (2)..................... 53 1992

</TABLE>

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

Alan B. Lefkof joined the Company as President in August 1991 and has been
Chief Executive Officer since November 1994. Prior to joining the Company, Mr.
Lefkof spent over nine years at GRiD Systems, a manufacturer of laptop
computers, where he served as President from October 1989 to August 1991, Chief
Financial Officer from March 1987 to September 1989, and Vice President of
Marketing from August 1983 to February 1987. Before joining GRiD Systems, Mr.
Lefkof served as a Management Consultant at McKinsey and Company from July 1977
to January 1982. Mr. Lefkof received a B.S. in computer science from the
Massachusetts Institute of Technology in 1975 and an M.B.A. from Harvard
Business School in 1977.

Reese M. Jones, founder of the Company, has served as Chairman of the Board
of Directors of the Company since inception, and served as President of the
Company from inception to August 1991 when Mr. Lefkof was appointed President.
Mr. Jones served as Chief Executive Officer of the Company from the date of the
Company's incorporation until Mr. Lefkof was appointed Chief Executive Officer
in November 1994. Mr. Jones currently serves on the Board of Directors of a
number of privately held companies. Mr. Jones received a B.A. in biophysics
from the University of California at Berkeley in 1982.

Bandel L. Carano has been a director of the Company since 1992. Mr. Carano
joined Oak Investment Partners, a venture capital firm, in October 1985 as an
associate and was elected a General Partner of Oak Investment Partners III in
July 1987. Mr. Carano currently serves as a director of Digital Sound and
Polycom. Mr. Carano received a B.S. and an M.S. in electrical engineering from
Stanford University in 1983.

David F. Marquardt has been a director of the Company since 1990. Mr.
Marquardt is a founding general partner of August Capital, formed in 1995 and
has been a general partner of various Technology Venture Investors ("TVI")
entities since August 1980. August Capital and the TVI entities are all private
venture capital partnerships. Mr. Marquardt currently serves on the Board of
Directors of Auspex Systems, Microsoft Corporation, Visioneer and a number of
privately held companies. Mr. Marquardt received a B.S. in mechanical
engineering from Columbia University in 1973 and an M.B.A. from Stanford
University in 1979.

James R. Swartz has been a director of the Company since 1992. Mr. Swartz
currently serves as a General Partner of Accel Partners, a venture capital firm,
which he founded in September 1983. Mr. Swartz currently serves on the Board of
Directors of Remedy, PictureTel and Polycom. Mr. Swartz is a graduate of
Harvard University with a concentration in Engineering Sciences and Applied
Physics and received an M.S. in Industrial Administration from Carnegie Mellon
University.

During the fiscal year ended September 30, 1996, the Board held five
meetings. No director listed above who served on the Board in fiscal year 1996
attended fewer than 75% of the meetings of the Board and any committee on which
he served. The Board has an Audit Committee and a Compensation Committee. The
Board does not have a standing Nominating Committee.

6
<PAGE>

During the fiscal year ended September 30, 1996, the Company's Audit
Committee met five times. Its current members are Bandel L. Carano and David F.
Marquardt. The Audit Committee makes recommendations to the Board regarding
engagement of the Company's independent auditors, approves services rendered by
such auditors, reviews the activities, reviews and evaluates the Company's
accounting systems, financial controls and financial personnel.

During the fiscal year ended September 30, 1996, the Compensation Committee
met five times. Its current members are David F. Marquardt and James R. Swartz.
The Compensation Committee sets salaries and other compensation arrangements for
officers and other key employees of the Company, administers the Company's stock
option, stock purchase and stock bonus plans, and advises the Board on general
aspects of the Company's compensation and benefit policies. For additional
information concerning the Compensation Committee, see "Report of the
Compensation Committee on Executive Compensation," "Executive Compensation and
other Matters," and "Compensation Committee Interlocks and Insider
Participation."

During the fiscal year ended September 30, 1996, the Stock Option Committee
acted by written consent met twenty four times and acted by written consent each
time. Its current member is Alan B Lefkof.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

In accordance with the Company's current By Laws, the affirmative vote of a
majority of the shares present or represented by proxy and entitled to vote at
the Annual Stockholder Meeting, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present, either in person
or by proxy, is required for approval of this proposal. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum. Abstentions and broker non-votes will each have the same
effect as a negative vote.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE DIRECTORS AS
NAMED ABOVE.

7
<PAGE>

EXECUTIVE COMPENSATION AND OTHER MATTERS

The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated officers whose salary and bonus for fiscal 1996 were in excess of
$100,000 (collectively, the "Named Officers"), for services rendered in all
capacities to the Company and its subsidiary for that fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
----------------
ANNUAL COMPENSATION SECURITIES
------------------------ OTHER ANNUAL UNDERLYING ALL OTHER
SALARY (1) BONUS COMPENSATION (3) OPTIONS (#) COMPENSATION (2)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAME AND PRINCIPAL POSITION
- ---------------------------
Alan B. Lefkof................................1996 $235,000 $36,600 -- 25,000 $6,137
President and Chief Executive Officer 1995 235,945 38,155 -- 25,000 6,600

James A. Clark(4).............................1996 145,836 30,250 -- 5,000 6,000
Vice President and Chief Financial Officer 1995 125,295 21,719 60,000 6,078

Didier Cop (5)(6).............................1996 129,790 58,277 $40,306 -- 4,294
Vice President of International 1995 112,650 56,721 -- 27,000 3,571

Richard L. Maslana............................1996 168,750 35,000 -- -- 6,000
Vice President of Operations and General 1995 152,579 36,415 -- 45,000 6,000
Manager of LAN Products

Thomas A. Skoulis (7).........................1996 90,000 69,539 -- 2,500 6,000
Vice President of North American Sales 1995 90,000 46,054 -- 29,000 6,000

</TABLE>

(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) Represents car allowances.
(3) Represents amounts paid in connection with the relocation of Didier Cop to
the U.S on July 23, 1996.
(4) James Clark's employment with the Company began in November 1994, during
the first quarter of fiscal 1995.
(5) Mr. Cop's compensation was paid in French francs, until his transfer to the
U.S., and was converted into U.S. dollars based on an average exchange rate
per quarter.
(6) Bonus includes commissions earned of $44,011 and $48,518 during fiscal 1995
and 1996, respectively.
(7) Bonus includes commissions earned of $37,249 and $45,539 during fiscal 1995
and 1996, respectively.

8
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to each of the Named Officers in the fiscal year ended September 30, 1996.
No stock appreciation rights were granted to these individuals during such year.

POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES
NUMBER OF % OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
GRANTED 1996 (2) SHARE (3) DATE 5% 10%
-------------------- ----------------- ---------------- ------------ -------- ----------
NAME (#)(1)
- ---- --------------------
<S> <C> <C> <C> <C> <C> <C>
Alan B. Lefkof............... 25,000 4.82% $ 4.00 1/10/06 $62,889 $159,375
President and Chief Executive
Officer

James A. Clark............... 5,000 0.96% 4.00 1/10/06 12,578 31,874
Vice President and Chief
Financial Officer

Richard L. Maslana........... -- -- -- -- -- --
Vice President of Operations
and General Manager of LAN
Products

Didier Cop................... -- -- -- -- -- --
Vice President of International

Thomas A. Skoulis............ 2,500 0.48% 10.50 4/16/06 16,508 41,836
Vice President of North
American Sales

</TABLE>

(1) The options become exercisable in annual and quarterly installments over
five years beginning from the grant date. All outstanding options will
terminate following an acquisition of the Company by merger or asset sale
unless the acquiring company assumes the outstanding options.

(2) Based on options for an aggregate of 518,975 shares granted in the 1996
fiscal year.

(3) The exercise price may be paid in cash or in shares of the Company's Common
Stock valued at fair market value on the exercise date. The Company may
also finance the option exercise by loaning the optionee sufficient funds
to pay the exercise price for the purchased shares, together with any
federal and state income tax liability incurred by the optionee in
connection with such exercise.

(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Company's Common Stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.

9
<PAGE>

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the shares acquired
and the value realized upon the exercise of stock options during the 1996 fiscal
year and the year-end number and value of unexercised options with respect to
each of the Named Officers. No stock appreciation rights were exercised by the
Named Officers in the 1996 fiscal year or were outstanding at the end of that
fiscal year.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT SEPTEMBER 30, 1996 (#) AT SEPTEMBER 30, 1996 (2)
ACQUIRED ON VALUE -----------------------------------------------------------
NAME EXERCISE (#) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- --------------- ------------- ------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Alan B. Lefkof....... -- -- 231,063 43,937 $2,189,361 $331,739
James A. Clark....... -- -- 20,625 44,375 190,563 395,938
Richard L. Maslana... 10,750 $ 66,662 39,625 59,625 367,263 551,763
Didier Cop........... 15,700 $200,260 1,763 22,537 16,020 203,669
Thomas A. Skoulis.... -- -- 17,675 22,325 163,528 181,623
</TABLE>

(1) Market price at exercise less exercise price.

(2) Based on the fair market value of the Company's Common Stock at September
30, 1996 ($10.50 per share), as determined by the closing price on the
Nasdaq National Market System, less the exercise price payable for such
shares.

EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS

The Compensation Committee, as Plan Administrator of the 1996 Stock Option
Plan, has the authority to provide for accelerated vesting of the shares of
Company's Common Stock subject to outstanding options held by the Named Officers
and any other executive officer in connection with certain changes in control of
the Company or the subsequent termination of the officer's employment following
the change in control event.

None of the Named Officers have employment agreements with the Company, and
their employment may be terminated at any time. However, the Company has
entered into an agreement with Messrs. Lefkof, Clark, Maslana, Solomon (Vice
President of and General Manager of Software Products), Trupiano (Vice President
and General Manager of Netopia Systems)and Ms. Benesch (Vice President of LAN
Products) which provides for acceleration of vesting of option shares as if the
officer remained employed for 12 additional months in the event the officer's
employment is involuntarily terminated following certain acquisitions or changes
in control of the Company. In addition, Messrs. Clark and Maslana will receive
severance pay equal to 12 months salary and Messrs. Lefkof, Solomon, Trupiano
and Ms. Benesch will receive severance pay equal to six months salary upon any
such termination.

COMPENSATION OF DIRECTORS

Members of the Company's Board of Directors do not receive compensation for
their services as directors. The Company's 1996 Stock Option Plan provides that
options shall be granted to nonemployee directors of the Company. On June 12,
1996, each of Messrs. Carano, Marquardt, and Swartz was granted a nonstatutory
stock option to purchase 25,000 shares of the Company's Common Stock under the
Automatic Option Grant Program under the Company's 1996 Stock Option Plan at an
exercise price of $16 per share. The terms applicable to the foregoing option
grants are summarized below in the description of the Automatic Option Grant
Program. Mr. Jones received an option to purchase 25,000 shares at an exercise
price of $9.50 per share on September 16, 1996 under the 1996 Stock Option Plan.
See "1996 Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee"), as of September 30, 1996, consists of Messrs.
Marquardt and Swartz. Neither Mr. Marquardt nor Mr. Swartz was at any

10
<PAGE>

time during the fiscal year ended September 30, 1996, or at any other time, an
officer or employee of the Company. No member of the Compensation Committee
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons. Based solely on the Company's
review of such forms furnished to the Company and written representations from
certain reporting persons, the Company believes that all filing requirements
applicable to the Company's executive officers, directors and more than 10%
Stockholders were complied with during fiscal 1996, except that the following
individuals and entities filed a Form 5 late: Mr. Bandel L. Carano and Oak
Investment Partners V, L.P.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") has the authority to establish the level of base
salary payable to the Chief Executive Officer ("CEO") and to administer the
Company's 1996 Stock Option Plan, Stock Bonus Plan and Employee Stock Purchase
Plan. In addition, the Committee has the responsibility for approving the
individual bonus program to be in effect for the CEO. The CEO has the
authority to establish the level of base salary payable to all other employees
of the Company, including all executive officers, subject to the approval of
the Committee. In addition, the CEO has the responsibility for approving the
bonus programs to be in effect for all other executive officers and other key
employees each fiscal year, subject to the approval of the Committee.

For fiscal 1996, the process utilized by the CEO in determining executive
officer compensation levels took into account both qualitative and quantitative
factors. Among the factors considered by the CEO were informal surveys
conducted by Company personnel among local companies. The Committee reviewed
but made no changes to the CEO's compensation proposals for the officers.

GENERAL COMPENSATION POLICY. The CEO's fundamental policy is to offer the
Company's executive officers competitive compensation opportunities based upon
overall Company performance, their individual contribution to the financial
success of the Company and their personal performance. It is the CEO's
objective to have a substantial portion of each officer's compensation
contingent upon the Company's performance, as well as upon his or her own level
of performance. Accordingly, each executive officer's compensation package
consists of: (i) base salary, (ii) cash bonus awards and (iii) long-term stock-
based incentive awards.

In preparing the stock performance graph for this Proxy Statement, the
Company has selected the Standard & Poor's 500 Index, the Nasdaq Stock Market-US
index and the Hambrecht and Quist Technology Index. The companies included in
the Company's informal compensation survey are not necessarily those included in
the Indices, because the latter were determined not to be competitive with the
Company for executive talent or because compensation information was not
available to the Company.

BASE SALARY. The base salary for each executive officer is set on the
basis of personal performance and the salary level in effect for comparable
positions at companies that compete with the Company for executive talent on the
basis of informal surveys conducted by the Company.

ANNUAL CASH BONUSES. Each executive officer has an established bonus
target each fiscal year. The annual pool of bonuses for executive officers is
determined on the basis of the Company's achievement of the financial

11
<PAGE>

performance targets established at the start of the fiscal year including
operating profit, gross margin performance and revenue, and then a range is
established for each executive on the basis of his/her expected contribution to
the Company's performance targets. Actual bonuses paid reflect both achievement
of corporate objectives and an individual's accomplishment of functional
objectives, with greater weight being given to achievement of corporate rather
than functional objectives.

LONG-TERM INCENTIVE COMPENSATION. Generally, a significant grant is made
in the year that an officer commences employment and grants typically of lesser
amounts are made periodically. Generally, the size of each grant is set at a
level that the Committee deems appropriate, to create a meaningful opportunity
for stock ownership based upon the individual's position with the Company the
individual's potential for future responsibility and promotion, the individual's
performance in the recent period and the number of unvested options held by the
individual at the time of the new grant. The relative weight given to each of
these factors will vary from individual to individual at the Committee's
discretion based on the recommendation made by the CEO to the Committee.

Each grant allows the officer to acquire shares of the Company's Common
Stock at a fixed price per share (the market price on the grant date) over a
specified period of time. The option vests in periodic installments over a
four-year period, contingent upon the executive officer's continued employment
with the Company. Prior to June 12, 1996, granted options normally vested over
five years. Accordingly, the option will provide a return to the executive
officer only if he/she remains in the Company's employ, and then only if the
market price of the Company's Common Stock appreciates over the option term.

CEO COMPENSATION. The annual base salary for Mr. Lefkof, the Company's
President and CEO, was established by the Committee on October 10, 1994. Mr.
Lefkof received no increase in annual base salary in fiscal 1996. The remaining
components of the CEO's fiscal 1996 incentive compensation were entirely
dependent upon the Company's financial performance and provided no dollar
guarantees. Each fiscal year, the annual incentive plan is reevaluated with a
new achievement threshold and new targets for revenue and profit before
interest. The bonus paid to the CEO for fiscal 1996 was based on the same
incentive plan as for all other officers who receive bonuses and is subject to
review by the Compensation Committee. Specifically, a target incentive was
established at the beginning of the fiscal year using an agreed-upon formula
based on Company revenue and profit before interest. Additionally, the
Committee may grant additional stock options periodically to provide competitive
long term compensation opportunities based upon overall Company performance.
Mr. Lefkof was granted 25,000 stock options on January 10, 1996.

TAX LIMITATION. As a result of Federal tax legislation enacted in 1993, a
publicly held company such as the Company will not be allowed a Federal income
tax deduction for compensation paid to certain executive officers to the extent
that compensation exceeds $1 million per officer in any year. This limitation
will be in effect for all fiscal years of the Company ending after the Company's
initial public offering. The stockholders approved the Company's 1996 Stock
Option Plan, which includes a provision that limits the maximum number of shares
of Common Stock for which any one participant may be granted stock options over
a 3-year period. Accordingly, any compensation deemed paid to an executive
officer when he exercises an option under the 1996 Stock Option Plan with an
exercise price equal to the fair market value of the option shares on the grant
date will generally qualify as performance-based compensation that will not be
subject to the $1 million limitation. Since it is not expected that the cash
compensation to be paid to the Company's executive officers for the 1997 fiscal
year will exceed the $1 million limit per officer, the Committee will defer any
decision on whether to limit the dollar amount of the cash compensation payable
to the Company's executive officers to the $1 million cap.

Compensation Committee

David F. Marquardt

James R. Swartz

12
<PAGE>

COMPARISON OF STOCKHOLDER RETURN

Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the cumulative
total return of the Standard & Poor's 500 Index, the Nasdaq Stock Market-US
Index and the Hambrecht and Quist Technology Index for the period commencing on
June 13, 1996 and ending on October 31, 1996. The Company's fiscal year ended
September 30, 1996. This stock performance graph includes data as of the latest
practicable date.

RESEARCH Total Return - Data Summary

FRLN
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------------------------
6/13/96 6/96 7/96 8/96 9/96 10/96
<S> <C> <C> <C> <C> <C> <C>
Farallon Communications Inc. FRLN 100 92 75 70 66 80

S & P 500 1500 100 100 96 98 104 106

NASDAQ STOCK MARKET-US INAS 100 97 88 93 100 99

HAMBRECHT & QUIST TECHNOLOGY IHQT 100 96 87 92 102 100

</TABLE>

PROPOSAL NO. 2

AMENDMENT OF 1996 STOCK OPTION PLAN

The stockholders are being asked to vote on a proposal to approve an
amendment to the Farallon Communications, Inc. 1996 Stock Option Plan (the
"Option Plan") to (i) increase the number of shares of Company Common Stock
available for issuance under the Option Plan by 1,000,000 shares to a total of
3,166,995 shares of Common Stock, (ii) provide for automatic annual increases in
the share reserve in 1998 and 1999 calendar years, (iii) extend eligibility for
discretionary option grants to non-employee directors and (iv) to make certain
other changes to delete provisions made inapplicable by changes to SEC rules
governing option grants to officers and directors subject to the short-swing
profit rules of the Federal securities laws. The proxy holders intend to vote
all proxies received by

13
<PAGE>

them FOR the Amendment of the 1996 Stock Option Plan. The following is a
description of the Option Plan. The Company established the Option Plan as a
successor to the 1987 Restated Stock Option Plan ("1987 Plan") to provide a
means whereby employees, officers, directors, consultants, and independent
advisers of the Company or parent or subsidiary corporations may be given an
opportunity to purchase shares of Company's Common Stock. The Option Plan was
adopted by the Board on April 16, 1996. The Board believes that option grants
under the Option Plan play an important role in the Company's efforts to
attract, employ, and retain employees, directors, and consultants of outstanding
ability.

SUMMARY OF 1996 STOCK OPTION PLAN

The principal terms and provisions of the Option Plan are summarized below.
The summary, however, is not intended to be a complete description of all the
terms of the Option Plan. A copy of the Option Plan will be furnished by the
Company to any stockholder upon written request to the Chief Financial Officer
at the executive offices in Alameda, California.

STRUCTURE. The Option Plan contains two separate equity incentive
programs: (i) a Discretionary Option Grant Program under which eligible persons
may be granted stock options to purchase shares of the Company's Common Stock,
and (ii) an Automatic Option Grant Program under which option grants will be
made at specified intervals to the nonemployee Board members.

ADMINISTRATION. The Option Plan is currently administered by the
Compensation Committee of the Board of Directors. The Option Plan may also be
administered by the Board or a secondary committee comprised of one or more
Board members with respect to optionees who are not executive officers subject
to the short-swing profit rules of Federal securities laws. Committee members
serve for such period of time as the Board may determine. In addition, options
of the Company's Common Stock may be granted under the Option Plan to
individuals who are not officers or directors by a Stock Option Committee, which
currently has as its sole member Alan B. Lefkof, the Company's Chief Executive
Officer. The Committee (or Board or secondary committee to the extent acting as
plan administrator) has full authority (subject to the express provisions of the
Option Plan) to determine the eligible individuals who are to receive grants
under the Option Plan, the number of shares to be covered by each granted
option, the date or dates on which the option is to become exercisable, the
maximum term for which the option is to remain outstanding, whether the granted
option will be an incentive stock option ("Incentive Option") which satisfies
the requirements of section 422 of the Internal Revenue Code (the "Code") or a
nonstatutory option not intended to meet such requirements, and the remaining
provisions of the option grant.

Administration of the Automatic Option Grant Program is self-executing in
accordance with the terms of that program, however, the Plan Administrator may
exercise discretionary functions with respect to grants made thereunder.

ELIGIBILITY. Employees (including officers), consultants and independent
contractors who render services to the Company or its parent or subsidiary
corporations (whether now existing or subsequently established) are eligible to
receive option grants under the Discretionary Option Grant Program. A
nonemployee member of the board of directors of the Company or any parent or
subsidiary corporation is also eligible for option grants under the
Discretionary Option Grant Program. Prior to amendment of the Option Plan on
December 31, 1996, non-employee members of the Board were eligible solely for
automatic grants under the Automatic Option Grant Program of the Option Plan.

SECURITIES SUBJECT TO OPTION PLAN. The number of shares of Company's
Common Stock which may be issued over the term of the Option Plan shall not
exceed 3,166,975 shares, including an increase of 1,000,000 shares, which is the
subject of this Proposal No. 2. Such share reserve will be subject to further
adjustment in the event of subsequent changes to the capital structure of the
Company. The shares may be made available either from the Company's authorized
but unissued Common Stock or from Common Stock reacquired by the Company,
including shares purchased on the open market. Assuming approval of this
proposal No. 2, the share reserve shall increase automatically on January 1,
1998 and January 1, 1999 by the number of shares of Common Stock equal to 5% of
the number of shares of Common Stock outstanding on the last trading day of the
preceding calendar year, up to a maximum annual increase of 1,200,000 shares.

14
<PAGE>

In no event, however, may any one participant in the Option Plan acquire
shares of the Company's Common Stock under the Option Plan in excess of 500,000
shares over the period beginning on the effective date of the Option Plan and
ending on June 30, 1999.

Should an option expire or terminate for any reason prior to exercise in
full, including options incorporated from the 1987 Plan, the shares subject to
the portion of the option not so exercised will be available for subsequent
option grants under the Option Plan.

The holder of an option shall have no stockholder rights with respect to
the shares to the option until such person shall have exercised the option, paid
the exercise price and become the Stockholder of record of the purchased shares.

DISCRETIONARY OPTION GRANT PROGRAM

PRICE AND EXERCISABILTY. The option exercise price per share may not be
less than eighty-five percent (85%) of the fair market value of the Company's
Common Stock on the grant date. Options granted under the Discretionary Option
Grant Program become exercisable at such time or times, and during such period,
as the Committee may determine and set forth in the instrument evidencing the
option grant. In any event, options granted under the Option Plan may not have
a term in excess of 10 years.

The exercise price for options granted under the Option Plan may be paid in
cash or in outstanding shares of the Company's Common Stock. Options may also
be exercised on a cashless basis through the same-day sale of the purchased
shares. The Compensation Committee may also permit the optionee to pay the
exercise price through a promissory note payable in installments over a period
of years. The amount financed may include any Federal or state income and
employment taxes incurred by reason of the option exercise.

No optionee is to have any stockholder rights with respect to the option
shares until the optionee has exercised the option and paid the exercise price.
Options are not assignable or transferable other than by will or the laws of
descent and distribution, and during the optionee's lifetime, the option may be
exercised only by the optionee.

TERMINATION OF SERVICE. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated post-
service exercise period. Under no circumstances may any option be exercised
after the specified expiration date of the option term. Each such option will
normally, during such limited period, be exercisable only to the extent of the
number of shares of the Company's Common Stock in which the optionee is vested
at the time of cessation of service. The optionee will be deemed to continue in
service for so long as such individual performs services for the Company (or any
parent or subsidiary corporation), whether as an employee, independent
contractor, consultant or Board member.

The Committee has complete discretion to extend the period following the
optionee's cessation of service during which his or her outstanding options may
be exercised and/or to accelerate the exercisability of such options in whole or
in part. Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.

The shares of the Company's Common Stock acquired upon the exercise of one
or more options may be subject to repurchase by the Company at the original
exercise price paid per share upon the optionee's cessation of service prior to
vesting in such shares. The Committee has complete discretion in establishing
the vesting schedule to be in effect for any such unvested shares and may cancel
the Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.

INCENTIVE OPTIONS. Incentive Options may only be granted to individuals
who are employees of the Company or its parent or subsidiary corporation.
During any calendar year, the aggregate fair market value (determined as of the
grant date(s)) of the Company's Common Stock for which one or more options
granted to any employee under the Option Plan (or any other option plan of the
Company or its parent or subsidiary corporations) may for the first time become
exercisable as incentive stock options under section 422 of the Code shall not
exceed one hundred thousand dollars ($100,000).

15
<PAGE>

If an employee to whom an Incentive Option is granted is the owner of stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any of its parent or subsidiary corporations,
then the option price per share will be at least one hundred and ten percent
(110%) of the fair market value per share on the grant date, and the option term
will not exceed five (5) years, measured from the grant date.

TANDEM STOCK APPRECIATION RIGHTS. The Committee is authorized to issue
tandem stock appreciation rights in connection with option grants under the
Discretionary Option Grant Program. Tandem stock appreciation rights provide
the holders with the right, subject to the Committee's approval, to surrender
their options for a distribution from the Company equal in amount to the excess
of (a) the fair market value of the vested shares of Company's Common Stock
subject to the surrendered option over (b) the aggregate exercise price payable
for such shares. Such distribution may, at the discretion of the Committee, be
made in cash or in shares of Company's Common Stock or partly in shares of
Company's Common Stock and partly in cash.

AUTOMATIC OPTION GRANT PROGRAM

Under the Automatic Option Grant Program, nonemployee Board members will
receive option grants at designated dates during their period of Board service.
These special grants may be summarized as follows:

Each individual who was serving as a nonemployee Board member on June 12,
1996 was automatically granted on that date a nonstatutory stock option to
purchase 25,000 shares of Common Stock. Each individual who first becomes a
nonemployee Board member after the date of the initial public offering, whether
through election by the stockholders or appointment by the Board, will
automatically be granted, at the time of such initial election or appointment, a
nonstatutory stock option to purchase 25,000 shares of Common Stock, provided
such individual has not previously been in the employ of the Company.

Each option grant under the Automatic Option Grant Program will be subject
to the following terms and conditions:

1. The option price per share will be equal to 100% of the fair market
value per share of the Company's Common Stock on the automatic grant date and
each option is to have a maximum term of ten years measured from the grant date.

2. Each automatic option granted before December 31, 1996 will be
immediately exercisable for all of the option shares, but the shares purchasable
under the option will be subject to repurchase at the original exercise price in
the event the optionee's Board service should cease prior to full vesting. With
respect to each initial grant, the repurchase right will lapse and the optionee
vest in a series of five (5) successive annual installments, measured from the
grant date, provided such optionee continues service as a Board member. Each
option granted after December 31, 1996 will become exercisable in a series of
five (5) successive annual installments over the optionee's Board service
measured from the grant date.

3. The option will remain exercisable for a twelve (12)-month period
following the optionee's termination of service as a Board member for any
reason. Should the optionee die while serving as a Board member or during the
twelve (12)-month period following his or her cessation of Board service, then
such options may be exercised during the twelve (12)-month period following such
optionee's cessation of service by the personal representatives of the
optionee's estate or the person to whom the grant is transferred by the
optionee's will or the laws of inheritance. In no event, however, may the option
be exercised after the expiration date of the option term. During the applicable
exercise period, the option may not be exercised for more than the number of
vested shares (if any) for which it is exercisable at the time of the optionee's
cessation of Board service.

4. The option shares will become fully exercisable and fully vested in the
event of a Corporate Transaction (as defined below) or a Change in Control (as
defined below). The option shares will become fully exercisable and fully
vested in the event of the optionee's cessation of Board service by reason of
death or permanent disability.

5. Upon the occurrence of a hostile tender offer, each option granted
before December 31, 1996 which has been in effect for at least six (6) months
(whether or not the optionee is vested in such option) shall be automatically
canceled and the optionee will in return be entitled to a cash distribution from
the Company in an amount per

16
<PAGE>

canceled option share equal to the excess of (i) the highest reported price per
share of Company's Common Stock paid in the tender offer or, if greater, the
fair market value per share of the Company's Common Stock over (ii) the option
exercise price payable per share.

6. Option grants under the Automatic Option Grant Program will be made in
strict compliance with the express provisions of that program. The remaining
terms and conditions of the options will in general conform to the terms
described above for option grants under the Discretionary Option Grant Program
and will be incorporated into the option agreement evidencing the automatic
grant.

GENERAL PROVISIONS

ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon the
occurrence of either of the following transactions (a "Corporate Transaction"):

(i) the sale, transfer, or other disposition of all, or substantially all,
of the Company's assets in complete liquidation or dissolution of the Company,
or

(ii) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, each
outstanding option under the Option Plan will, immediately prior to the
effective date of the Corporate Transaction, become fully exercisable for all of
the shares at the time subject to such option. However, an outstanding option
shall not accelerate if and to the extent: (a) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent) or to be replaced with a comparable option to purchase
shares of the capital stock of the successor corporation (or parent), (b) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (c) the
acceleration of such option is subject to other limitations imposed by the
Committee at the time of the option grant. Immediately following the
consummation of the Corporate Transaction, all outstanding options will
terminate and cease to be exercisable, except to the extent assumed by the
successor corporation.

Also upon a Corporate Transaction, the Company's outstanding repurchase
rights will terminate automatically and the shares of the Company's Common Stock
subject to those terminated rights shall vest in full unless assigned to the
successor corporation or accelerated vesting is precluded by other limitations
imposed by the Committee at the time the repurchase right is issued.

Any options which are assumed or replaced in the Corporate Transaction and
do not otherwise accelerate at that time shall automatically accelerate (and any
of the Company's outstanding repurchase rights which do not otherwise terminate
at the time of the Corporate Transaction shall automatically terminate and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full) in the event the optionee's service should subsequently terminate by
reason of an involuntary or constructive termination within twelve (12) months
following the effective date on such Corporate Transaction. Any options so
accelerated shall remain exercisable for fully vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one (1)-
year period measured from the effective date of the employment termination.

Upon the occurrence of the following transactions ("Change in Control"):

(i) any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) acquires beneficial ownership of more than
fifty percent (50%) of the Company's outstanding voting stock without the
Board's recommendation, or

(ii) there is a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases by reason of a proxy contest(s) to be comprised of individuals
who (a) have been Board members continuously since the beginning of such period
or (b) have been elected or nominated for selection as Board members by a
majority of the Board in clause (a) who were still in office at the time such
election or nomination was approved by the Board, the Committee has the
discretion to accelerate outstanding options and terminate the Company's
outstanding repurchase rights. The Committee also has the discretion to

17
<PAGE>

accelerate outstanding options and terminate the Company's outstanding
repurchase rights upon the subsequent termination of the optionee's service
within a specified period following the Change in Control.

The acceleration of options in the event of a Corporate Transaction or
change in control may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt, or other efforts
to gain control of the Company.

VALUATION. For purposes of establishing the option price and for all other
valuation purposes under the Option Plan, the fair market value of a share of
Company's Common Stock on any relevant date will be the closing price per share
of Company's Common Stock on that date, as such price is reported on the Nasdaq
Stock Market. The fair market value on December 31, 1996 as reported on the
Nasdaq Stock Market was $6.375 per share.

CHANGE IN CAPITALIZATION. In the event any change is made to the Company's
Common Stock issuable under the Option Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change effecting
the outstanding Company's Common Stock as a class without the Company's receipt
of consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
options, and separately exercisable stock appreciation rights over the specified
term, (iii) the number and/or class of securities for which automatic option
grants are to be subsequently made per director under the Automatic Option Grant
Program and (iv) the number and/or class of securities and the exercise price
per share in effect under each outstanding option (including any option
incorporated from the 1987 Plan) in order to prevent the dilution or enlargement
of benefits thereunder.

Each outstanding option which is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities which would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the Option
Plan on both an aggregate and a per-participant basis.

OPTION PLAN AMENDMENTS. The Board may amend or modify the Option Plan in
any and all respects whatsoever. The Board may not, without the approval of the
Company's stockholders, (i) materially increase the maximum number of shares
issuable under the Option Plan (except in connection with certain changes in
capitalization), or (ii) materially modify the eligibility requirements for
option grants. Prior to the amendment of the Option Plan which is the subject
of this Proposal No. 2, the Automatic Option Grant Program could not be amended
more often than every six months and the Board could not, without stockholder
approval, amend the Option Plan to increase materially the benefits accruing to
participants under the Option Plan.

Unless sooner terminated by the Board, the Option Plan will in all events
terminate on April 15, 2006. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.

NEW PLAN BENEFITS. As of December 31, 1996 options covering 2,021,457
shares were outstanding under the Option Plan, 68,001 shares remained available
for future option grants, and 77,537 shares have been issued under the Option
Plan. The expiration dates for all such options range from April 2001 to
December 2006.

Except as set forth above under the caption "Automatic Option Grant
Program," grants to be made under the Option Plan in the future are at the
discretion of the Committee and are not determinable at this time. The following
table shows all option grants made under the Option Plan during the fiscal year
ending September 30, 1996 and through December 31, 1996, to the indicated
individuals, all current executive officers as a group, all current directors
who are not executive officers as a group, and all employees (including all
current officers who are not executive officers) as a group, respectively:

18
<PAGE>

Number of Option Shares
- ------------------------------------------------------------------
<S> <C>
Alan B. Lefkof.......................... 95,000
James A. Clark.......................... 50,000
Richard L. Maslana...................... 20,000
Didier Cop.............................. 38,500
Thomas A. Skoulis....................... 41,500
Reese M. Jones.......................... 25,000
Bandel L. Carano........................ 25,000
David F. Marquardt...................... 25,000
James R. Swartz......................... 25,000

All Executive Officers as a Group (10
persons)............................... 409,500
All Directors who were not employees (3
persons)............................... 75,000
All Employees (including officers who
are not executive officers)............ 997,850

</TABLE>

FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE OPTION PLAN

Options granted under the Option Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Internal Revenue Code or
nonstatutory options that are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:

INCENTIVE STOCK OPTIONS. No taxable income is recognized by the optionee
at the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. However, the excess of the fair market
value of the purchased shares on the exercise date over the exercise price paid
for the shares generally is includable in alternative minimum taxable income.
The optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made the subject of disposition.

For Federal tax purposes, dispositions are divided into two categories:
(i) qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.

Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of those
shares on the date the option was exercised over (ii) the exercise price paid
for the shares will be taxable as ordinary income. Any additional gain
recognized upon the disposition will be a capital gain.

If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the excess of (i) the fair market
value of such shares on the date the option was exercised over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
The Company anticipates that any compensation deemed paid by the Company upon
one or more disqualifying dispositions of incentive stock option shares by the
Company's executive officers will remain deductible by the Company and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.

19
<PAGE>

NONSTATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a nonstatutory option.

The optionee will in general recognize ordinary income in the year in which
the option is exercised equal to the excess of the fair market value of the
purchased shares on the exercise date over the exercise price paid for the
shares, and the optionee will be required to satisfy the tax withholding
requirements applicable to such income.

Special provisions of the Internal Revenue Code apply to the acquisition of
Company's Common Stock under a nonstatutory option if the purchased shares are
subject to repurchase by the Company. These special provisions may be
summarized as follows:

(i) If the shares acquired upon exercise of the nonstatutory option are
subject to repurchase by the Company at the original exercise price in the event
of the optionee's termination of service prior to vesting in such shares, the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when the Company's repurchase right
lapses, an amount equal to the excess of (a) the fair market value of the shares
on the date such repurchase right lapses with respect to such shares over (b)
the exercise price paid for the shares.

(ii) The optionee may, however, elect under Section 83(b) of the Internal
Revenue Code to include as ordinary income in the year of exercise of the
nonstatutory option an amount equal to the excess of (a) the fair market value
of the purchased shares on the exercise date (determined as if the shares were
not subject to the Company's repurchase right) over (b) the exercise price paid
for such shares. If the Section 83(b) election is made, the optionee will not
recognize any additional income as and when the repurchase right lapses.

The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised nonstatutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of nonstatutory options with exercise prices equal to
the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.

STOCK APPRECIATION RIGHTS. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT OF
THE 1996 STOCK OPTION PLAN.

20
<PAGE>

PROPOSAL NO. 3
AMENDMENT OF EMPLOYEE STOCK PURCHASE PLAN

The stockholders are being asked to vote on a proposal to approve an
amendment to the Farallon Communications, Inc. Employee Stock Purchase Plan (the
"Purchase Plan") to increase the number of shares of the Company's Common Stock
available for issuance under the Option Plan by 200,000 shares to a total of
500,000 shares of Company Common Stock. The Purchase Plan was adopted by the
Board on April 16, 1996 and approved by the stockholders on May 15, 1996. The
Purchase Plan was amended on December 31, 1996 to increase the number of shares
issuable thereunder by 200,000 shares. The Purchase Plan, and the right of
participants to make purchases thereunder, is intended to meet the requirements
of an "employee stock purchase plan" as defined in Section 423 of the Internal
Revenue Code (the "Code"). The proxy holders intend to vote all proxies
received by them FOR the Amendment of the Purchase Plan.

The principal terms and provisions of the Purchase Plan are summarized
below. The summary, however, is not intended to be a complete description of
all the terms of the Purchase Plan. A copy of the Purchase Plan will be
furnished by the Company to any stockholder upon written request to the Chief
Financial Officer at the executive offices in Alameda, California.

PURPOSE. The purpose of the Purchase Plan is to provide employees of the
Company and designated parent or subsidiary corporations (collectively,
"Participating Companies") an opportunity to participate in the ownership of the
Company by purchasing Common Stock of the Company through payroll deductions.
The Company is the only Participating Company in the Purchase Plan.

The Purchase Plan is intended to benefit the Company as well as its
stockholders and employees. The Purchase Plan gives employees an opportunity to
purchase shares of Company Common Stock at a favorable price. The Company
believes that the stockholders will correspondingly benefit from the increased
interest on the part of participating employees in the profitability of the
Company. Finally, the Company will benefit from the periodic investments of
equity capital provided by participants in the Purchase Plan.

ADMINISTRATION. The Purchase Plan is currently administered by the
Compensation Committee of the Board (the "Committee"). All costs and expenses
incurred in plan administration are paid by the Company without charge to
participants. All cash proceeds received by the Company from payroll deductions
under the Purchase Plan are credited to a non-interest bearing book account.

SHARES AND TERMS. The stock issuable under the Purchase Plan is the
Company's authorized but unissued or reacquired Common Stock. The maximum number
of shares of Company Common Stock that may be issued under the Purchase Plan is
500,000, assuming approval of this Proposal No. 3. Company Common Stock subject
to a terminated purchase right shall be available for purchase pursuant to
purchase rights subsequently granted.

ADJUSTMENTS. If any change in the Company Common Stock occurs (through
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration), appropriate adjustments shall
be made by the Company to the class and maximum number of shares subject to the
Purchase Plan, to the class and maximum number of shares purchasable by each
participant on any one purchase date, and the class and number of shares and
purchase price per share subject to outstanding purchase rights in order to
prevent the dilution or enlargement of benefits thereunder.

ELIGIBILITY. Generally, any individual who is customarily employed by a
Participating Company more than 20 hours per week and for more than five months
per calendar year is eligible to participate in the Purchase Plan.
Approximately 224 employees (including 10 officers) were eligible to participate
in the Purchase Plan as of December 31, 1996.

OFFERING PERIODS. The Purchase Plan is implemented by offering periods
which generally have a duration of twenty-four months. Each offering period is
comprised of a series of one or more successive purchase periods, each of which
generally have a duration of six (6) months. The first offering period began on
the date of the Company's initial public offering and will end on July 31, 1998;
the next offering period will commence on February

21
<PAGE>

3, 1997 and will end on the last business day in January 1999, unless terminated
earlier. The purchase periods during the initial offering period will end on
January 31, 1997, July 31, 1997, January 30, 1998, and July 31, 1998. The
Committee in its discretion may vary the beginning date and ending date of the
offering periods prior to their commencement, provided no offering period (other
than the initial offering period) shall exceed twenty-four (24) months in
length.

The participant will have a separate purchase right for each offering
period in which he or she participates. The purchase right will be granted on
the first day of the offering period and will be automatically exercised in
successive installments on the last day of each purchase period within the
offering period.

PURCHASE PRICE. The purchase price per share under the Purchase Plan will
be 85% of the lower of (i) the fair market value of a share of Company Common
Stock on the first day of the applicable offering period, or (ii) the fair
market value of a share of Company Common Stock on the purchase date.
Generally, the fair market value of the Company Common Stock on a given date is
the closing sale price of the Company Common Stock, as reported on the Nasdaq
National Market System. However, the fair market value for purposes of the
offering period that began on the date of the Company's initial public offering
was $16.00. The market value of the Company Common Stock as reported on the
Nasdaq Stock Market as of December 31, 1996, was $ 6.375 per share.

LIMITATIONS. The plan imposes certain limitations upon a participant's
rights to acquire Company Common Stock, including the following:

1. No purchase right shall be granted to any person who immediately thereafter
would own, directly or indirectly, stock or hold outstanding options or
rights to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or
any of its parent or subsidiary corporations.

2. In no event shall a participant be permitted to purchase more than 2,000
shares on any one purchase date.

3. The right to purchase Company Common Stock under the Purchase Plan (or any
other employee stock purchase plan that the Company or any of its
subsidiaries may establish) in an offering intended to qualify under
Section 423 of the Code may not accrue at a rate that exceeds $25,000 in
fair market value of such Company Common Stock (determined at the time such
purchase right is granted) for any calendar year in which such purchase
right is outstanding.

The purchase right shall be exercisable only by the Participant during the
Participant's lifetime and shall not be assignable or transferable by the
Participant.

PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS. Payment for shares by
participants shall be by accumulation of after-tax payroll deductions during the
purchase period. The deductions may not exceed 15% of a participant's cash
compensation paid during a purchase period. Compensation for this purpose will
include elective contributions that are not includable in income under Code
Sections 125 or 401(k) and all bonuses, overtime, commissions, and other amounts
to the extent paid in cash.

The participant will receive a purchase right for each offering period in
which he or she participates to purchase up to the number of shares of Company
Common Stock determined by dividing such participant's payroll deductions
accumulated prior to the purchase date by the applicable purchase price (subject
to the limitations described in the "Limitations" section). No fractional shares
shall be purchased. Any payroll deductions accumulated in a participant's
account that are not sufficient to purchase a full share will be retained in the
participant's account for the subsequent purchase period. No interest shall
accrue on the payroll deductions of a participant in the Purchase Plan.

TERMINATION AND CHANGE TO PAYROLL DEDUCTIONS. A purchase right shall
terminate at the end of the offering period or earlier if (i) the participant
terminates employment and then any payroll deductions which the participant may
have made with respect to a terminated purchase right will be refunded or (ii)
the participant elects to withdraw from the Purchase Plan. Any payroll
deductions which the participant may have made with respect to a terminated
purchase right under clause (ii) will be refunded unless the participant elects
to have the

22
<PAGE>

funds applied to the purchase of shares on the next purchase date. Unless a
participant has irrevocably elected otherwise, he or she may decrease his or her
deductions once during a purchase period.

AMENDMENT AND TERMINATION. The Purchase Plan shall continue in effect
until the earlier of (i) the last business day in July 2006, (ii) the date on
which all shares available for issuance under the Purchase Plan shall have been
issued or (iii) a Corporate Transaction, unless the Purchase Plan is earlier
terminated by the Board in its discretion.

The Board may at any time alter, amend, suspend or discontinue the Purchase
Plan, provided that, without the approval of the stockholders, no such action
may (i) alter the purchase price formula so as to reduce the purchase price
payable for shares under the Purchase Plan, (ii) materially increase the number
of shares issuable under the Purchase Plan or the maximum number of shares
purchasable per participant, or (iii) materially increase the benefits accruing
to participants under the Purchase Plan or materially modify the eligibility
requirements.

In addition, the Company has specifically reserved the right, exercisable
in the sole discretion of the Board, to terminate the Purchase Plan immediately
following any six-month purchase period. If such right is exercised by the
Board, then the Purchase Plan will terminate in its entirety and no further
purchase rights will be granted or exercised, and no further payroll deductions
shall thereafter be collected under the Purchase Plan.

CORPORATE TRANSACTION. In the event of (i) a merger or consolidation in
which securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from the persons holding those securities immediately prior
to such transaction or (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company (a "Corporate Transaction"), each purchase right
under the Purchase Plan will automatically be exercised immediately before
consummation of the Corporate Transaction as if such date were the last purchase
date of the offering period. The purchase price per share shall be equal to
eighty-five percent (85%) of the lower of the fair market value per share of
Company Common Stock on the start date of the offering period or the fair market
value per share of Company Common Stock immediately prior to the effective date
of such Corporate Transaction. Any payroll deductions not applied to such
purchase shall be promptly refunded to the participant.

The grant of purchase rights under the Purchase Plan will in no way affect
the right of the Company to adjust, reclassify, reorganize, or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.

PRORATION OF PURCHASE RIGHTS. If the total number of shares of Company
Common Stock for which purchase rights are to be granted on any date exceeds the
number of shares then remaining available under the Purchase Plan, the Committee
shall make a pro rata allocation of the shares remaining.

FEDERAL INCOME TAX CONSEQUENCES. The following is a general description of
certain federal income tax consequences of the Purchase Plan. This description
does not purport to be complete.

The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under a plan which so qualifies, no taxable
income will be reportable by a participant, and no deductions will be allowable
to the Company, by reason of the grant or exercise of the purchase rights issued
thereunder. A participant will, however, recognize taxable income in the year
in which the purchased shares are sold or otherwise made the subject of
disposition.

A sale or other disposition of the purchased shares will be a disqualifying
disposition if made before the later of two years after the start of the
offering period in which such shares were acquired or one year after the shares
are purchased. If the participant makes a disqualifying disposition of the
purchased shares, then the Company will be entitled to an income tax deduction,
for the taxable year in which such disposition occurs, equal to the amount by
which the fair market value of such shares on the date of purchase exceeded the
purchase price, and the participant will be required to satisfy the employment
and income tax withholding requirements applicable to such income. In no other
instance will the Company be allowed a deduction with respect to the
participant's disposition of the purchased shares.

23
<PAGE>

Any additional gain or loss recognized upon the disposition of the shares
will be a capital gain, which will be long-term if the shares have been held for
more than one (1) year following the date of purchase under the Purchase Plan.

The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the Purchase Plan. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which the participant may reside.

NEW PURCHASE PLAN BENEFITS. Since purchase rights are subject to
discretion, including an employee's decision not to participate in the Purchase
Plan, awards under the Purchase Plan for the current fiscal year are not
determinable. However, each of the Named Officers has the right to purchase a
maximum of 2,000 shares of Company Common Stock at a price that will not exceed
$13.60 per share on each of the January 31, 1997, July 31, 1997, January 30,
1998, and July 31, 1998 purchase dates for the initial offering period.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENT OF THE
COMPANY'S PURCHASE PLAN.

PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT
AUDITORS

The Board has selected KPMG Peat Marwick LLP as the independent auditors of
the Company for the fiscal year ending September 30, 1997. KPMG Peat Marwick
LLP has acted in such capacity since its appointment for fiscal year 1987. The
proxy holders intend to vote all proxies received by them for the ratification
of appointment of independent auditors. A representative of KPMG Peat Marwick
LLP will be present at the Annual Stockholder Meeting, will be given the
opportunity to make a statement, if he or she so desires, and will be available
to respond to appropriate questions.

In the event ratification by the holders of the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors is not obtained, the Board
will reconsider such appointment.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION

24
<PAGE>

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND A VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1997.

FORM 10-K

THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S FORM 10-K REPORT FOR FISCAL 1996, INCLUDING THE CONSOLIDATED FINANCIAL
STATEMENTS, SCHEDULE AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO FARALLON
COMMUNICATIONS, INC., 2470 MARINER SQUARE LOOP, ALAMEDA, CALIFORNIA 94501, ATTN:
INVESTOR RELATIONS.

STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL STOCKHOLDER MEETING

Proposals of Stockholders intended to be presented at the next Annual
Stockholder Meeting of the Company must be received by the Company at its
offices at 2470 Mariner Square Loop, Alameda, California 94501, not later than
October 20, 1997 and satisfy the conditions established by the Securities and
Exchange Commission for holder proposals to be included in the Company's proxy
statement for that meeting.

OTHER MATTERS

As of the date of this proxy statement, the Board of Directors is not
informed of any other matter, other than those stated above, that may be brought
before the meeting. The persons named in the enclosed form of proxy or their
substitutes will vote with respect to any such matters in accordance with their
best judgment.

By order of the Board of Directors,

Alan Lefkof
President, Chief Executive Officer and Director
Dated January 16, 1997

WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PROIR TO THE ANNUAL STOCKHOLDER
MEETING. IF YOU DECIDE TO ATTEND THE ANNUAL STOCKHOLDER MEETING AND WISH TO
CHANGE YOUR VOTE, YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE
MEETING.

THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE ANNUAL STOCKHOLDER MEETING.

25
<PAGE>

FARALLON COMMUNICATIONS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS

The undersigned hereby appoints Alan B. Lefkof and James A. Clark, and
either of them, to vote all shares of stock which the undersigned is entitled to
vote at the Annual Stockholder Meeting, to be held at 2470 Mariner Square Loop,
Alameda, California 94501 on Thursday, February 14, 1997 at 10:00 a.m., local
time, and at any continuation or adjournment thereof, with all the powers which
the undersigned might have if personally present at the meeting.

The undersigned hereby acknowledges receipt of the Notice of Annual
Stockholder Meeting and Proxy Statement, dated January 16, 1997, and a copy of
the Company's 1996 Annual Report to Stockholders. The undersigned hereby
expressly revokes any and all proxies heretofore given or executed by the
undersigned with respect to the shares of stock represented by this Proxy and,
by filing this Proxy with the Secretary of the Company, gives notice of such
revocation.

WHERE NO CONTRARY CHOICE IS INDICATED BY THE STOCKHOLDER, THIS PROXY, WHEN
RETURNED, WILL BE VOTED FOR SUCH PROPOSALS, FOR SUCH NOMINEES AND WITH
DISCRETIONARY AUTHORITY UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING. THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE TIME IT IS VOTED.

1. ELECTION OF DIRECTORS

For all nominees listed below [_] Withhold Authority to vote for nominees
listed below [_]

Reese M. Jones, Alan B. Lefkof, Bandel L. Carano, David F. Marquardt, and
James R. Swartz

2. PROPOSAL TO APPROVE AMENDMENTS TO THE 1996 STOCK OPTION PLAN, INCLUDING THE
1,000,000 SHARE INCREASE IN THE NUMBER OF SHARES AVAILABLE, AS SET FORTH IN
THE ACCOMPANYING PROXY.

For [_] Against [_] Abstain [_]

3. TO APPROVE AN AMENDMENT TO THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN TO
INCREASE THE NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK AVAILABLE FOR
ISSUANCE BY 200,000 SHARES TO A TOTAL OF 500,000 SHARES.

For [_] Against [_] Abstain [_]

4. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT
AUDITORS OF THE COMPANY.

For [_] Against [_] Abstain [_]
<PAGE>

5. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY BE BROUGHT BEFORE THE
MEETING.

This proxy when properly executed will be voted in the manner directed herein by
the undersigned Stockholder.

DATED: , 1997
------------------- -------------------------------
PLEASE VOTE, SIGN, DATE AND RETURN THE SIGNATURE
PROXY CARD USING THE ENCLOSED ENVELOPE

-------------------------------
SIGNATURE (IF HELD JOINTLY)

<PAGE>

FARALLON COMMUNICATIONS, INC.
1996 STOCK OPTION PLAN
----------------------
(Restated December 31, 1996)

ARTICLE ONE
GENERAL PROVISIONS
------------------

I. PURPOSE OF THE PLAN

This 1996 Stock Option Plan is intended to promote the interests of
Farallon Communications, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into two separate equity programs:

(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock, and

(ii) the Automatic Option Grant Program under which Eligible
Directors shall automatically receive option grants at periodic intervals
to purchase shares of Common Stock.

B. The provisions of Articles One and Four shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

III. ADMINISTRATION OF THE PLAN

A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant Program with respect to Section 16
Insiders.

B. Administration of the Discretionary Option Grant Program with respect
to all persons eligible to participate in that program may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to all such
persons. The members of the Secondary Committee may be Board members who are
Employees eligible to receive discretionary option grants under the Plan or any
stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).
<PAGE>

C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and shall be subject to
removal by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.

D. The Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority to establish such rules
and regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant Program and to make such determinations under, and
issue such interpretations of, the provisions of such program and any
outstanding options thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant Program under its jurisdiction or any option
thereunder.

E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants made under the Plan.

F. Administration of the Automatic Option Grant Program shall be self-
executing in accordance with the terms of that program, however, the Plan
Administrator (other than the Secondary Committee) may exercise any
discretionary functions with respect to option grants made thereunder.

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option Grant
Program are as follows:

(i) Employees,

(ii) non-employee members of the Board or of the board of
directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who
provide services to the Corporation (or any Subsidiary).

B. The Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the provisions of
the Plan) to determine, with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive option
grants, the time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or times at which
each option is to become exercisable and the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding.

2
<PAGE>

C. The individuals eligible to receive option grants under the Automatic
Option Grant Program shall be those individuals who are serving as non-employee
Board members on the Automatic Option Grant Program Effective Date or who are
first elected or appointed as non-employee Board members after such date,
whether through appointment by the Board or election by the Corporation's
stockholders. A non-employee Board member who has previously been in the employ
of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program on the
Automatic Option Grant Program Effective Date or at the time he or she first
becomes a non-employee Board member.

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall initially not exceed
3,166,995 shares. Such authorized share reserve includes an additional increase
of 1,000,000 shares authorized by the Board under the Plan, subject to
stockholder approval at the 1997 Annual Meeting.

B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of each of the two
calendar years beginning January 1, 1998, by an amount equal to five percent
(5%) of the shares of Common Stock outstanding on December 31 of the immediately
preceding calendar year; but in no event shall any such increase exceed
1,200,000 shares.

C. No one person participating in the Plan may receive options or
separately exercisable stock appreciation rights for more than 500,000 shares of
Common Stock over the period beginning on the Plan Effective Date and ending on
June 30, 1999.

D. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
(including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
canceled in accordance with the cancellation-regrant provisions of Article Two.
All shares issued under the Plan (including shares issued upon exercise of
options incorporated from the Predecessor Plan), whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan. In addition,
should the exercise price of an option under the Plan (including any option
incorporated from the Predecessor Plan) be paid with shares of Common Stock or
should shares of Common Stock otherwise issuable under the Plan be withheld by
the Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised, and not by the net number of
shares of Common Stock issued to the holder of such option.

3
<PAGE>

E. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted options and separately exercisable stock appreciation rights per
calendar year or over the term of the Plan, (iii) the number and/or class of
securities for which automatic option grants are to be subsequently made per
Eligible Director under the Automatic Option Grant Program and (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option (including any option incorporated from the Predecessor Plan)
in order to prevent the dilution or enlargement of benefits thereunder. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

4
<PAGE>

ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.
--------------

1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in one or more of the forms
specified below:

(i) cash or check made payable to the Corporation,

(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or

(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions to
(a) a Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

5
<PAGE>

C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------

1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.

(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.

(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Service.

(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.

(v) In the event of a Corporate Transaction, the
provisions of Section III of this Article Two shall govern the period for
which the outstanding options are to remain exercisable following the
Optionee's cessation of Service and shall supersede any provisions to the
contrary in this section.

2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
period otherwise in effect for that option to such greater period of time
as the Plan Administrator shall deem appropriate, but in no event beyond
the expiration of the option term, and/or

(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's

6
<PAGE>

cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested under the option had
the Optionee continued in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
-----------------
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option may
be assigned (i) to a member of the immediate family of the optionee or to a
trust established for the benefit of one or more members of the immediate family
of the optionee, provided that the assignment shall not be effective until
written notice of the assignment is received by the Plan Administrator, or (ii)
in accordance with terms approved in advance by the Plan Administrator. The
terms applicable to the assigned option (or portion thereof) shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
---

A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------

B. EXERCISE PRICE. The exercise price per share shall not be less than
--------------
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.

C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
-----------------
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the

7
<PAGE>

first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall NOT so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.

B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

C. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed or replaced (or those repurchase rights
are to be assigned) in the Corporate Transaction.

D. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).

8
<PAGE>

E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
Optionee basis following the consummation of such Corporate Transaction and (ii)
the exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same.

F. Any options which are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time, shall automatically accelerate
(and any of the Corporation's outstanding repurchase rights which do not
otherwise terminate at the time of the Corporate Transaction shall automatically
terminate and the shares of Common Stock subject to those terminated rights
shall immediately vest), in the event the Optionee's Service should subsequently
terminate by reason of an Involuntary Termination within twelve (12) months
following the effective date of such Corporate Transaction. Any options so
accelerated shall remain exercisable for fully vested shares until the earlier
-------
of (i) the expiration of the option term or (ii) the expiration of the one (1)-
year period measured from the effective date of the Involuntary Termination.

G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period following the effective date of such Change in
Control. Any options accelerated in connection with a Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.

H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.

I. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

9
<PAGE>

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new option grant date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (A) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (B) the aggregate exercise price payable for such
shares.

(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.

(iii) If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
-----
(A) five (5) business days after the receipt of the rejection notice or (B) the
last day on which the option is otherwise exercisable in accordance with the
terms of the documents evidencing such option, but in no event may such rights
be exercised more than ten (10) years after the option grant date.

10
<PAGE>

ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------

I. OPTION TERMS

A. GRANT DATES. Each Eligible Director who is a non-employee Board
-----------
member on the Automatic Option Grant Program Effective Date and each Eligible
Director who is first elected or appointed as a non-employee Board member after
such date shall automatically be granted, on the Automatic Option Grant Program
effective date or on the date of such initial election or appointment (as the
case may be), a Non-Statutory Option to purchase 25,000 shares of Common Stock.

B. EXERCISE PRICE.
--------------

1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

C. OPTION TERM. Each option shall have a term of ten (10) years measured
-----------
from the option grant date.

D. EXERCISE AND VESTING OF OPTIONS. Each option granted after December
-------------------------------
31, 1996 shall become exercisable in a series of five (5) annual installments
over the Optionee's period of continued service as a Board member, with the
first such installment to become exercisable upon the Optionee's completion of
one (1) year of Board service measured from the option grant date.

E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
--------------------------------------
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.

(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.

11
<PAGE>

(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest and become exercisable so that
such option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion of
such shares as fully-vested shares of Common Stock.

(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding to the extent it is not exercisable
for vested shares on the date of such cessation of Board service.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically become exercisable in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically become exercisable in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of such shares as fully-
vested shares of Common Stock. Each such option shall remain exercisable for
such fully-vested option shares until the expiration or sooner termination of
the option term or the surrender of the option in connection with a Hostile
Take-Over.

C. Upon the occurrence of a Hostile Take-Over, each automatic option
granted before December 31, 1996 and held by the Optionee for a period of at
least six (6) months shall be automatically canceled. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to the canceled option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within five
(5) days following the cancellation of the option by the Corporation. No
approval or consent of the Board shall be required in connection with such
option cancellation and cash distribution.

12
<PAGE>

D. The grant of options under the Automatic Option Grant Program shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

13
<PAGE>

ARTICLE FOUR
MISCELLANEOUS
-------------

I. FINANCING

A. The Plan Administrator may permit any Optionee to pay the option
exercise price under the Plan by delivering a promissory note payable in one or
more installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. Promissory notes may be authorized with or without
security or collateral. In all events, the maximum credit available to the
Optionee may not exceed the sum of (i) the aggregate option exercise price
payable for the purchased shares plus (ii) any Federal, state and local income
and employment tax liability incurred by the Optionee in connection with the
option exercise.

B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or stock appreciation rights under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options under the Plan (other than the options granted
under the Automatic Option Grant Program) with the right to use shares of Common
Stock in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options. Such right may be provided to any
such holder in either or both of the following formats:

(i) Stock Withholding: The election to have the
-----------------
Corporation withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

(ii) Stock Delivery: The election to deliver to the
--------------
Corporation, at the time the Non-Statutory Option is exercised, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise triggering the Taxes) with an aggregate
Fair Market Value equal to the percentage of the Taxes (not to exceed one
hundred percent (100%)) designated by the holder.

14
<PAGE>

III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Discretionary Option Grant Program shall become effective on the
Plan Effective Date and options may be granted under the Discretionary Option
Grant Program from and after the Plan Effective Date. The Automatic Option Grant
Program shall become effective on the Automatic Option Grant Program Effective
Date and the initial option grants under the Automatic Option Grant Program
shall be made to the Eligible Directors at that time. On December 31, 1996, the
Plan was amended to increase the number of shares issuable thereunder by
1,000,000 shares, to provide for automatic annual increases to the Plan share
reserve in 1998 and 1999, to extend eligibility to the non-employee directors
under the Discretionary Option Grant Program, and to make certain other
amendments and to delete provisions no longer required by Section 16 of the 1934
Act as a result of the SEC's revision of Rule 16b-3. However, no options granted
under the Plan on the basis of such share increase may be exercised until the
Plan amendment is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the date of
Board approval of the amendment, then all options previously granted under this
Plan on the basis of such increase shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan on the basis of such increase.

B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants shall be made under the Predecessor Plan after the Plan
Effective Date. All options outstanding under the Predecessor Plan as of such
date shall, immediately upon approval of the Plan by the Corporation's
stockholders, be incorporated into the Plan and treated as outstanding options
under the Plan. However, each outstanding option so incorporated shall continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with respect
to their acquisition of shares of Common Stock.

C. The option/vesting acceleration provisions of Article Two relating to
Corporate Transactions and Changes in Control may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise provide for such acceleration.

D. The Plan shall terminate upon the earliest of (i) April 15, 2006, (ii)
--------
the date on which all shares available for issuance under the Plan shall have
been issued pursuant to the exercise of the options under the Plan or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. Upon such Plan termination, all options outstanding on such date
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such options.

IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or stock appreciation rights at

15
<PAGE>

the time outstanding under the Plan unless the Optionee consents to such
amendment or modification. Notwithstanding the foregoing clause, the Plan
Administrator may amend an outstanding option to reduce the number of option
shares previously granted to an optionee provided the reduction applies solely
to unvested shares or shares which have not yet become exercisable as of the
date of the amendment. In addition, the Board shall not, without the approval of
the Corporation's stockholders, (i) materially increase the maximum number of
shares issuable under the Plan, the number of shares for which options may be
granted under the Automatic Option Grant Program or the maximum number of shares
for which any one person may be granted options or separately exercisable stock
appreciation rights in the aggregate over the term of the Plan, except for
permissible adjustments in the event of certain changes in the Corporation's
capitalization or (ii) materially modify the eligibility requirements for Plan
participation.

B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant Program that are in excess of the number of shares
then available for issuance under the Plan, provided any excess shares actually
issued under those programs are held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees the
exercise price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically canceled and cease to be outstanding.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any option or stock
appreciation right under the Plan and the issuance of any shares of Common Stock
upon the exercise of any option or stock appreciation right shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options and stock
appreciation rights granted under it and the shares of Common Stock issued
pursuant to it.

B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable

16
<PAGE>

listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.

17
<PAGE>

APPENDIX
--------

The following definitions shall be in effect under the Plan:

A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under the Plan.

B. AUTOMATIC OPTION GRANT PROGRAM EFFECTIVE DATE shall mean the Section
---------------------------------------------
12(g) Registration Date.

C. BOARD shall mean the Corporation's Board of Directors.
-----

D. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or

(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority
of the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election or
nomination.

E. CODE shall mean the Internal Revenue Code of 1986, as amended.
----

F. COMMON STOCK shall mean the Corporation's common stock.
------------

G. CORPORATE TRANSACTION shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction; or

A-1
<PAGE>

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.

H. CORPORATION shall mean Farallon Communications, Inc., a Delaware
-----------
corporation.

I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.

J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

K. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

L. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing price on the last preceding date for which such quotation
exists.

(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.

(iii) For purposes of option grants made on the date the
Underwriting Agreement is executed and the initial public offering price of
the Common Stock is established, the Fair Market Value shall be deemed to
be equal to the established initial offering price per share. For purposes
of option grants made prior to such date, the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors
as the Plan Administrator shall deem appropriate.

A-2
<PAGE>

N. HOSTILE TAKE-OVER shall mean a change in ownership of the Corporation
-----------------
effected through the following transaction:

(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, and
---

(ii) more than fifty percent (50%) of the securities so
acquired are accepted from persons other than Section 16 Insiders.

O. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.

P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive programs)
by more than fifteen percent (15%) or (C) a relocation of such individual's
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation without
the individual's consent.

Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee, any unauthorized use or disclosure by such person
of confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee or other person in the Service of the Corporation (or any Parent or
Subsidiary).

R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------

S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.

A-3
<PAGE>

T. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant or Automatic Option Grant Program.

U. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.

W. PLAN shall mean the Corporation's 1996 Stock Option Plan, as set
----
forth in this document.

X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant Program with respect to one or more
classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.

Y. PLAN EFFECTIVE DATE shall mean the Section 12(g) Registration Date.
-------------------

Z. PREDECESSOR PLAN shall mean the Corporation's existing 1987 Restated
----------------
Stock Option Plan.

AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.

BB. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
-------------------
members appointed by the Primary Committee to administer the Discretionary
Option Grant Program with respect to eligible persons other than Section 16
Insiders.

CC. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

DD. SECTION 12(g) REGISTRATION DATE shall mean the first date on which
-------------------------------
the Common Stock is registered under Section 12(g) of the 1934 Act.

EE. SERVICE shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.

A-4
<PAGE>

FF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.

GG. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

HH. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

II. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

JJ. TEN PERCENT STOCKHOLDER shall mean the owner of stock (as determined
-----------------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

KK. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

A-5

<PAGE>

FARALLON COMMUNICATIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
(Amended and Restated as of December 31, 1996)

I. PURPOSE
-------

This Farallon Communications, Inc. Employee Stock Purchase Plan
(the "Plan") is intended to provide eligible employees of the Corporation and
one or more of its Corporate Affiliates with the opportunity to acquire a
proprietary interest in the Corporation through participation in a plan designed
to qualify as an employee stock purchase plan under Section 423 of the Code.

II. DEFINITIONS
-----------

For purposes of administration of the Plan, the following terms
shall have the meanings indicated:

BOARD means the Board of Directors of the Corporation.
-----

CASH COMPENSATION means (i) the regular base salary paid to a
-----------------
Participant by one or more Participating Companies during such individual's
period of participation in the Plan; plus (ii) all of the following amounts to
the extent paid in cash: overtime payments, bonuses, commissions, profit-sharing
distributions and other incentive-type payments. However, Cash Compensation
shall not include any contributions (including Code Section 401(k) or Code
Section 125 contributions) made on the Participant's behalf by the Corporation
or any Corporate Affiliate to any deferred compensation plan or welfare benefit
program now or hereafter established.

CODE means the Internal Revenue Code of 1986, as amended.
----

COMMON STOCK means shares of the Corporation's common stock.
------------

CORPORATE AFFILIATE means any parent or subsidiary corporation
-------------------
of the Corporation (as determined in accordance with Code Section 424),
including any parent or subsidiary corporation which becomes such after the
Effective Time.

CORPORATION means Farallon Communications, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Farallon Communications, Inc. which shall by
appropriate action adopt the Plan.

EFFECTIVE TIME means the time at which the Underwriting
--------------
Agreement for the initial public offering of the Common Stock is executed and
finally priced. The initial Offering Period under the Plan shall start at the
time of such execution and pricing of the Underwriting Agreement. Any Corporate
Affiliate which becomes a Participating Corporation in the Plan after such
Effective Time shall designate a subsequent Effective Time with respect to its
employee-Participants.

ELIGIBLE EMPLOYEE means any person who is regularly engaged for
-----------------
a period of more than twenty (20) hours per week for more than five (5) months
per calendar year, in the rendition of personal services to the Corporation or
any other Participating Corporation as an employee for earnings considered wages
under Section 3121(a) of the Code.
<PAGE>

FAIR MARKET VALUE means, for the Effective Time at which the
-----------------
initial Offering Period under the Plan begins, the price per share at which the
Common Stock is to be sold in the initial public offering of the Common Stock
pursuant to the Underwriting Agreement. For any subsequent date under the Plan
on which the Common Stock is registered under Section 12(g) of the 1934 Act and
traded on the open market, Fair Market Value means the closing selling price per
share of the Common Stock on such date, as officially quoted on the principal
securities exchange on which the Common Stock is at the time traded or, if not
traded on any securities exchange, the closing selling price per share of the
common stock on such date, as reported on the Nasdaq National Market. If there
are no sales of the Common Stock on such day, then the closing selling price per
share on the last preceding day for which such closing selling price is quoted
shall be determinative of Fair Market Value.

1933 ACT means the Securities Act of 1933, as amended.
--------

1934 ACT means the Securities Exchange Act of 1934, as amended.
--------

OFFERING PERIOD means a period of approximately twenty-four (24)
---------------
months that commences on the first business day following each Semi-Annual
Purchase Date, during which a Participant may be granted a purchase right.

PARTICIPANT means any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.

PARTICIPATING CORPORATION means the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan, as of the Effective Time, are listed in
attached Schedule A.

PLAN ADMINISTRATOR shall have the meaning given such term in
------------------
Article III.

SEMI-ANNUAL PERIOD OF PARTICIPATION means each semi-annual
-----------------------------------
period for which the Participant actually participates in an Offering Period in
effect under the Plan. There shall be a maximum of four (4) semi-annual periods
of participation within each Offering Period. The first such semi-annual period
(which may actually be more or less than six (6) months for the Initial Offering
Period) shall extend from the Effective Time through the last business day in
January 1997. Subsequent semi-annual periods shall be measured from the first
business day of February to the last business day of July in the same calendar
year and from the first business day of August to the last business day of
January in the succeeding calendar year.

SEMI-ANNUAL PURCHASE DATE means the last business day of January
-------------------------
and July each calendar year on which shares of Common Stock are automatically
purchased for Participants under the Plan. The initial Semi-Annual Purchase
Date will be January 31, 1997.

III. ADMINISTRATION
--------------

The Plan Administrator shall have sole and exclusive authority to
administer the Plan and shall consist of a committee (the "Plan Administrator")
of two (2) or more non-employee Board members appointed by the Board. The Plan
Administrator shall have full authority to interpret and construe any provision
of the Plan and to adopt such rules and regulations for administering the Plan
as it may deem necessary in order to comply with the requirements of Code
Section 423. Decisions of the Plan Administrator shall be final and binding on
all parties who have an interest in the Plan.

2
<PAGE>

IV. OFFERING PERIODS
----------------

A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive or overlapping Offering Periods until
such time as (i) the maximum number of shares of Common Stock available for
issuance under the Plan shall have been purchased or (ii) the Plan shall have
been sooner terminated in accordance with Subsection I of Article VII,
Subsection A of Article IX or Subsection B of Article X.

B. Each Offering Period shall have a maximum duration of
twenty-four (24) months. The duration of each Offering Period shall be
designated by the Plan Administrator prior to the start date. However, the
initial Offering Period shall run from the Effective Time to the last business
day of July 1998. The next Offering Period shall commence on the first business
day of February 1997 and continue through the last business day of January 1999,
and subsequent Offering Periods shall commence as designated by the Plan
Administrator.

C. The Participant shall be granted a separate purchase right
for each Offering Period in which he or she participates, and each Participant
may participate in more than one (1) Offering Period at any one time.
Accordingly, a Participant may continue to participate in one Offering Period
and also enroll in subsequent Offering Periods. The purchase right shall be
granted on the date such individual first joins an Offering Period in effect
under the Plan and shall be automatically exercised in successive semi-annual
installments on the last business day of January and July of each year.
Accordingly, each purchase right may be exercised up to two (2) times each year
it remains outstanding.

D. No purchase rights granted under the Plan shall be
exercised, and no shares of Common Stock shall be issued hereunder, until such
time as (i) the Plan shall have been approved by the stockholders of the
Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any securities exchange on which the Common Stock is listed for trading and all
other applicable requirements established by law or regulation.

E. The Participant's acquisition of Common Stock under the Plan
on any Semi-Annual Purchase Date shall neither limit nor require the
Participant's acquisition of Common Stock on any subsequent Semi-Annual Purchase
Date, whether within the same or a different Offering Period.

V. ELIGIBILITY AND PARTICIPATION
-----------------------------

A. Each Eligible Employee of a Participating Corporation shall
be eligible to participate in the Plan in accordance with the following
provisions:

- An individual who is an Eligible Employee on the start date of
any Offering Period under the Plan shall be eligible to commence participation
in that Offering Period on such start date.

- An individual who first becomes an Eligible Employee after the
start date of any Offering Period under the Plan may enter any subsequent
Offering Period on which he/she remains an Eligible Employee.

3
<PAGE>

B. In order to participate in the Plan for a particular
Offering Period, the Eligible Employee must complete the enrollment forms
prescribed by the Plan Administrator (including a purchase agreement and a
payroll deduction authorization) and file such forms with the Plan Administrator
(or its designate) on or before the start date for such Offering Period.

C. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any multiple
of one percent (1%) of the Cash Compensation paid to the Participant during each
Semi-Annual Period of Participation within the Offering Period, up to a maximum
of fifteen percent (15%). However, if a Participant is participating in more
than one Offering Period at any one time, the maximum authorized payroll
deduction under the Plan remains fifteen percent (15%). The deduction rate so
authorized shall continue in effect for the remainder of the Offering Period,
except to the extent such rate is changed in accordance with the following
guidelines:

- The Participant may, at any time during a Semi-Annual Period of
Participation, reduce his/her rate of payroll deduction to become effective
as soon as possible after filing of the requisite reduction form with the
Plan Administrator. The Participant may not, however, effect more than one
(1) such reduction per Semi-Annual Period of Participation.

- The Participant may, prior to the commencement of any new Semi-
Annual Period of Participation within the Offering Period, increase the
rate of his/her payroll deduction by filing the appropriate form with the
Plan Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective as of the first day of the first
Semi-Annual Period of Participation following the filing of such form. If
the Participant is participating in more than one Offering Period and
Participant elects to increase his or her payroll deduction in any one
Offering Period, the payroll deduction applicable to any other Offering
Period shall be automatically reduced, such that the maximum payroll
deduction for all concurrent Offering Periods remains fifteen percent
(15%).

D. In no event may any Participant's payroll deductions for any
one Semi-Annual Period of Participation exceed Ten Thousand Dollars
($10,000.00).

E. Payroll deductions will automatically cease upon the
termination of the Participant's purchase right in accordance with the
applicable provisions of Section VII below.

VI. STOCK SUBJECT TO PLAN
---------------------

A. The Common Stock purchasable by Participants under the Plan
shall, solely in the discretion of the Plan Administrator, be made available
from either authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Corporation, including shares of Common Stock
purchased on the open market. The total number of shares which may be issued in
the aggregate under the Plan shall not exceed Five Hundred Thousand (500,000)
shares (subject to adjustment under Section VI.B below).

B. In the event any change is made to the Corporation's
outstanding Common Stock by reason of any stock dividend, stock split, exchange
or combination of shares, recapitalization or any other change affecting the
Common Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made by the Plan Administrator to (i) the class
and maximum number of securities issuable over the term of the

4
<PAGE>

Plan, (ii) the class and maximum number of securities purchasable per
Participant on any one (1) Semi-Annual Purchase Date and (iii) the class and
number of securities and the price per share in effect under each purchase right
at the time outstanding under the Plan. Such adjustments shall be designed to
preclude the dilution or enlargement of rights and benefits under the Plan.

VII. PURCHASE RIGHTS
---------------

Each Eligible Employee who participates in the Plan for a
particular Offering Period shall have the right to purchase shares of Common
Stock, in a series of successive semi-annual installments during such Offering
Period, upon the terms and conditions set forth below and shall execute a
purchase agreement embodying such terms and conditions and such other provisions
(not inconsistent with the Plan) as the Plan Administrator may deem advisable.

A. PURCHASE PRICE. Common Stock shall be purchasable on each
--------------
Semi-Annual Purchase Date within the Offering Period at a purchase price equal
to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share
of Common Stock on the Participant's commencement date into that Offering Period
or (ii) the Fair Market Value per share on that Semi-Annual Purchase Date.

B. NUMBER OF PURCHASABLE SHARES. The number of shares
----------------------------
purchasable per Participant on each Semi-Annual Purchase Date during the
Offering Period shall be the number of whole shares obtained by dividing the
amount collected from the Participant through payroll deductions during the
Semi-Annual Period of Participation ending with that Semi-Annual Purchase Date
(together with any carryover deductions from the preceding Semi-Annual Period of
Participation) by the purchase price in effect for the Semi-Annual Purchase Date
(as determined in accordance with Subsection A above). However, the maximum
number of shares of Common Stock purchasable per Participant on any Semi-Annual
Purchase Date shall not exceed Two Thousand (2,000) shares, subject to periodic
adjustment under Section VI.B.

Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any of its Corporate Affiliates.

C. PAYMENT. Payment for Common Stock purchased under the Plan
-------
shall be effected by means of the Participant's authorized payroll deductions.
Such deductions shall begin with the first pay day following the Participant's
Commencement into the Offering Period and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last day of the Offering Period. The amounts so collected shall be credited
to the Participant's book account under the Plan, but no interest shall be paid
on the outstanding balance credited to such account. The amounts collected from
a Participant will not be held in any segregated account or trust fund and may
be commingled with the general assets of the Corporation and used for general
corporate purposes.

D. TERMINATION OF PURCHASE RIGHT. The following provisions
-----------------------------
shall govern the termination of outstanding purchase rights:

- A Participant may, at any time prior to the last five (5)
business days of the next Semi-Annual Purchase Date, terminate his/her
outstanding purchase right(s) under the Plan by filing the prescribed
notification form with the Plan Administrator (or its designate). No further
payroll deductions shall be collected from the Participant with respect to the
terminated purchase

5
<PAGE>

right, and any payroll deductions collected for the Semi-Annual Period of
Participation in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares on the
Semi-Annual Purchase Date immediately following such termination. If no such
election is made at the time such purchase right is terminated, then the payroll
deductions collected with respect to the terminated right shall be refunded as
soon as possible.

- The termination of such purchase right shall be irrevocable, and
a Participant may not subsequently rejoin the Offering Period for which the
terminated purchase right was granted. In order to resume participation in any
subsequent Offering Period, such individual must re-enroll in the Plan (by
making a timely filing of a new stock purchase agreement and enrollment form) on
or before the date he or she is first eligible to join the new Offering Period.

- Should a Participant cease to remain an Eligible Employee for any
reason (including death, disability or change in status) while his/her purchase
right(s) remains outstanding, then such purchase right(s) shall immediately
terminate, and such individual (or the personal representative of the estate of
a deceased Participant) shall have the following election with respect to the
payroll deductions made to date in the Semi-Annual Period of Participation in
which such cessation of Eligible Employee status occurs:

1) to withdraw all of those deductions, or

2) to have such funds held for the purchase of shares at the end of
the Semi-Annual Period of Participation.

If no such election is made within the thirty (30)-day period
following such cessation of Eligible Employee status or (if earlier) prior to
the last day of the Semi-Annual Period of Participation, then the collected
payroll deductions shall be refunded as soon as possible. In no event, however,
may any payroll deductions be made on the Participant's behalf following his/her
cessation of Eligible Employee status. If a Participant's ceases Eligible
Employee status more than three (3) months prior to the last day of the Semi-
Annual Period of Participation and elects to have funds held for the purchase of
shares on such last date, then the Participant shall be required to satisfy all
income and employment tax withholding requirements applicable to such purchase.

E. STOCK PURCHASE. Shares of Common Stock shall automatically
--------------
be purchased on behalf of each Participant (other than Participants whose
payroll deductions have previously been refunded in accordance with the
Termination of Purchase Right provisions in Subsection D above) on each Semi-
Annual Purchase Date. The purchase shall be effected by applying each
Participant's payroll deductions for the Semi-Annual Period of Participation
ending on such Semi-Annual Purchase Date (together with any carryover deductions
from the preceding Semi-Annual Period of Participation) to the purchase of whole
shares of Common Stock (subject to the limitation on the maximum number of
purchasable shares imposed under Subsection B of this Article VII) at the
purchase price in effect for that Semi-Annual Purchase Date. Any payroll
deductions not applied to such purchase because they are not sufficient to
purchase a whole share shall be held for the purchase of Common Stock on the
next Semi-Annual Purchase Date. However, any payroll deductions not applied to
the purchase of Common Stock by reason of the limitation on the maximum number
of shares purchasable by the Participant on the Semi-Annual Purchase Date shall
be promptly refunded to the Participant.

F. PRORATION OF PURCHASE RIGHTS. Should the total number of
----------------------------
shares of Common Stock which are to be purchased pursuant to outstanding
purchase rights on any

6
<PAGE>

particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded to such Participant.

G. RIGHTS AS STOCKHOLDER. A Participant shall have no
---------------------
stockholder rights with respect to the shares subject to his/her outstanding
purchase right until the shares are actually purchased on the Participant's
behalf in accordance with the applicable provisions of the Plan. No adjustments
shall be made for dividends, distributions or other rights for which the record
date is prior to the date of such purchase.

A Participant shall be entitled to receive, as soon as
practicable after each Semi-Annual Purchase Date, a stock certificate for the
number of shares purchased on the Participant's behalf. Such certificate may,
upon the Participant's request, be issued in the names of the Participant and
his/her spouse as community property or as joint tenants with right of
survivorship. Alternatively, the Corporation may provide for the issuance of
such certificate in "street name" for immediate deposit in a Corporation-
designated brokerage account established by the Participant.

H. ASSIGNABILITY. No purchase right granted under the Plan
-------------
shall be assignable or transferable by the Participant other than by will or by
the laws of descent and distribution following the Participant's death, and
during the Participant's lifetime the purchase right shall be exercisable only
by the Participant.

I. CORPORATE TRANSACTION. Should any of the following
---------------------
transactions (a "Corporate Transaction") occur during the Offering Period:

(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation.

then each outstanding purchase right shall automatically be exercised,
immediately prior to the effective date of any Corporate Transaction, by
applying the payroll deductions of each Participant for the Semi-Annual Period
of Participation in which such Corporate Transaction occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
-----
Stock on the Participant's commencement date into the offering period in which
such Corporate Transaction occurs or (ii) the Fair Market Value per share of
Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable limitation on the number of shares of
Common Stock purchasable per Participant shall continue to apply to any such
purchase.

The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice, have
the right to terminate their outstanding purchase rights in accordance with the
applicable provisions of this Article VII.

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VIII. ACCRUAL LIMITATIONS
-------------------

A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right outstanding under this Plan and
(ii) similar rights accrued under other employee stock purchase plans (within
the meaning of Code Section 423) of the Corporation or its Corporate Affiliates,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value of such stock on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.

B. For purposes of applying such accrual limitations, the right
to acquire Common Stock pursuant to each purchase right outstanding under the
Plan shall accrue as follows:

- The right to acquire Common Stock under each such purchase
right shall accrue in a series of successive semi-annual installments as and
when the purchase right first becomes exercisable for each such installment on
the last business day of each Semi-Annual Period of Participation for which the
right remains outstanding.

- No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already accrued in
the same calendar year the right to acquire Common Stock under one (1) or more
other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000)
worth of Common Stock (determined on the basis of the Fair Market Value on the
date or dates of grant) for each calendar year during which one (1) or more of
those purchase rights were at any time outstanding.

- If by reason of such accrual limitations, any purchase right
of a Participant does not accrue for a particular Semi-Annual Period of
Participation, then the payroll deductions which the Participant made during
that Semi-Annual Period of Participation with respect to such purchase right
shall be promptly refunded.

C. In the event there is any conflict between the provisions of
this Article VIII and one (1) or more provisions of the Plan or any instrument
issued thereunder, the provisions of this Article VIII shall be controlling.

IX. AMENDMENT AND TERMINATION
-------------------------

A. The Board may alter, amend, suspend or discontinue the Plan
following the close of any Semi-Annual Period of Participation. However, the
Board may not, without the approval of the Corporation's stockholders:

- materially increase the number of shares issuable under the
Plan or the maximum number of shares purchasable per Participant on any one (1)
Semi-Annual Purchase Date, except that the Plan Administrator shall have the
authority, exercisable without such stockholder approval, to effect adjustments
to the extent necessary to reflect changes in the Corporation's capital
structure pursuant to Subsection B of Article VI; or

- alter the purchase price formula so as to reduce the
purchase price payable for the shares purchasable under the Plan; or

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- materially increase the benefits accruing to Participants
under the Plan or materially modify the requirements for eligibility to
participate in the Plan.

B. The Corporation shall have the right, exercisable in the
sole discretion of the Plan Administrator, to terminate all outstanding purchase
rights under the Plan immediately following the close of any Semi-Annual Period
of Participation. Should the Corporation elect to exercise such right, then the
Plan shall terminate in its entirety. No further purchase rights shall
thereafter be granted or exercised, and no further payroll deductions shall
thereafter be collected, under the Plan.

X. GENERAL PROVISIONS
------------------

A. The Plan was adopted by the Board on April 16, 1996 and
approved by the stockholders on May __, 1996. The Plan was subsequently amended
and restated on December 31, 1996 to increase the number of shares issuable
thereunder by 200,000 shares, subject to stockholder approval at the 1997 Annual
Meeting. No Purchase Rights shall be exercised and no shares of Common Stock
shall be issued hereunder on the basis of the 200,000 share-increase until the
Corporation shall have complied with all applicable requirements of the 1933 Act
(including the registration of the shares of Common Stock on a Form S-8
registration statement filed with the Securities and Exchange Commission), all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock is listed for trading and all
other applicable requirements established by law or regulation.

B. The Plan shall terminate upon the earlier of (i) the last
-------
business day in July 2006 or (ii) the date on which all shares available for
issuance under the Plan shall have been sold pursuant to purchase rights
exercised under the Plan.

C. All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation.

D. Neither the action of the Corporation in establishing the
Plan, nor any action taken under the Plan by the Board or the Plan
Administrator, nor any provision of the Plan itself shall be construed so as to
grant any person the right to remain in the employ of the Corporation or any of
its Corporate Affiliates for any period of specific duration, and such person's
employment may be terminated at any time, with or without cause.

E. The provisions of the Plan shall be governed by the laws of
the State of California without resort to that State's conflict-of-laws rules.

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SCHEDULE A
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CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------

Farallon Communications, Inc.