PAIRGAIN TECHNOLOGIES INC /CA/, DEF 14A, 1998-04-30

PAIRGAIN TECHNOLOGIES INC /CA/
DEF 14A, 1998-04-30
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<PAGE> 1

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:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to
sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>

PAIRGAIN TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

[X] Fee not 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:

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(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.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE> 2
[PAIRGAIN LOGO]
14402 Franklin Avenue, Tustin, CA 92780-7013 (714) 832-9922 FAX (714) 832-9924

TO THE STOCKHOLDERS OF PAIRGAIN TECHNOLOGIES, INC.

You are cordially invited to attend the Annual Meeting of Stockholders
of PairGain Technologies, Inc. ("PairGain" or the "Company") on Wednesday, June
24, 1998, at 10:00 a.m. Pacific Daylight Time. The Annual Meeting will be held
at the Company's offices at 14402 Franklin Avenue, Tustin, California 92780.

At the meeting you will be asked to consider and vote upon the
following proposals: (i) the ratification of the appointment of one individual
to serve on the Company's Board of Directors until 2000, and the election of two
individuals to serve on the Company's Board of Directors until 2001; (ii) the
approval of a series of amendments to the 1993 Stock Option/Stock Issuance Plan;
and (iii) the approval of the selection of Deloitte & Touche LLP as the
Company's independent auditor for the fiscal year ending December 31, 1998.

Whether or not you plan to attend the Annual Meeting, please mark,
sign, date and return the enclosed proxy card promptly in the accompanying
postage pre-paid envelope. By returning the proxy card, you can help the Company
avoid the expense of duplicate proxy solicitations and possibly having to
reschedule the Annual Meeting if a quorum of the outstanding shares are not
present or represented by proxy. If you decide to attend the Annual Meeting and
wish to change your proxy vote, you may do so simply by voting in person at the
Annual Meeting.

/S/ CHARLES S. STRAUCH

CHARLES S. STRAUCH
Chairman and Chief Executive Officer

Tustin, California
May 8, 1998

<PAGE> 3

PAIRGAIN TECHNOLOGIES, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 24, 1998

To the Stockholders of PairGain Technologies, Inc.:

NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders
(the "Annual Meeting") of PairGain Technologies, Inc. ("PairGain" or the
"Company"), will be held at the Company's offices at 14402 Franklin Avenue,
Tustin, California 92780, on June 24, 1998, at 10:00 a.m. local time for the
following purposes:

1. To ratify the appointment of one director to serve until the 2000
Annual Meeting, and to elect two directors to serve until the 2001
Annual Meeting;

2. To approve a series of amendments to the 1993 Stock Option/Stock
Issuance Plan;

3. To approve the selection of Deloitte & Touche LLP as the Company's
independent auditor for the fiscal year ending December 31, 1998;
and

4. To conduct such other business as may properly come before the
Annual Meeting and any adjournment or adjournments thereof.

The close of business on April 27, 1998 has been fixed as the record
date for the determination of stockholders entitled to notice of and to vote at
the Annual Meeting and any adjournment thereof. Only stockholders of record at
such time will be entitled to vote.

You are cordially invited to attend the Annual Meeting in person. Even
if you plan to attend the Annual Meeting, please promptly complete, sign, date
and return the enclosed proxy card in the enclosed self-addressed, postage
pre-paid envelope. It will assist us in keeping down the expenses of the Annual
Meeting if all stockholders, whether you own a few shares or many shares, return
your signed proxies promptly.

A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ENTITLED TO VOTE
AT THE ANNUAL MEETING MUST BE REPRESENTED AT THE ANNUAL MEETING, IN PERSON OR BY
PROXY, IN ORDER TO CONSTITUTE A QUORUM AT THE ANNUAL MEETING. PLEASE RETURN YOUR
PROXY CARD IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE
ADDITIONAL COSTS TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND
RESOLICITING PROXIES.

YOUR VOTE IS IMPORTANT

By Order of the Board of Directors,

/S/ CHARLES W. MCBRAYER

CHARLES W. MCBRAYER
Secretary and Chief Financial Officer

Tustin, California
May 8, 1998

<PAGE> 4

PAIRGAIN TECHNOLOGIES, INC.
14402 FRANKLIN AVENUE
TUSTIN, CALIFORNIA 92780

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 24, 1998

PROXY STATEMENT

GENERAL INFORMATION

This Proxy Statement is furnished to stockholders of PairGain
Technologies, Inc., a Delaware corporation ("PairGain" or the "Company"), in
connection with the solicitation of proxies by the Board of Directors for use at
the Annual Meeting of Stockholders to be held on Wednesday, June 24, 1998, at
10:00 a.m. local time, and at any and all adjournments or postponements thereof
for the purposes set forth in the Notice of Annual Meeting accompanying this
Proxy Statement. The Annual Meeting will be held at the Company's offices at
14402 Franklin Avenue, Tustin, California 92780.

These proxy solicitation materials are first being mailed on or about
May 8, 1998 to all stockholders entitled to vote at the Annual Meeting.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the Company (sent
to the attention of Mr. Charles W. McBrayer) a written notice of revocation or a
duly executed proxy bearing a later date, or by attending the Annual Meeting and
voting in person. Attendance at the meeting will not, by itself, revoke a proxy.

VOTING AND SOLICITATION

The solicitation of proxies will be conducted by mail and the Company
will bear all attendant costs. These costs will include reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation personally
or telephonically through its officers, directors and regular employees, none of
whom will receive additional compensation for assisting with the solicitation.

Only stockholders of record at the close of business on April 27, 1998
are entitled to notice of and to vote at the Annual Meeting. As of April 27,
1998, 69,997,093 shares of Common Stock were issued and outstanding. On each
matter to be considered at the Annual Meeting, stockholders will be entitled to
cast one vote for each share held of record on April 27, 1998. The Company's
Bylaws do not provide for cumulative voting by stockholders.

A majority of the shares of Common Stock entitled to vote will
constitute a quorum for the transaction of business at the Annual Meeting. Each
matter to be submitted to a vote of the stockholders, other than the election of
directors, must receive an affirmative vote of the majority of shares present,
in person or represented by proxy, and entitled to vote at the Annual Meeting.
Directors shall be elected by a plurality of the votes cast. Votes withheld from
any director are counted for purposes of determining the presence or absence of
a quorum for the transaction of business, but have no legal effect under
Delaware law. The Company believes that abstentions should be counted for
purposes of determining whether a quorum is present at the Annual Meeting for
the transaction of business, and, except for the election of directors, should
also be counted in tabulating votes cast on proposals presented to stockholders.
The Company intends to count broker non-votes as present or represented for
purposes of determining the presence or absence of a quorum for the transaction
of business. Broker non-votes will not be counted for purposes of determining
whether a proposal has been approved.

The shares represented by all valid proxies will be voted in accordance
with the specifications therein. Unless otherwise directed in the proxy, the
persons named therein will vote FOR: 1) the ratification and election of the

<PAGE> 5

nominees listed below; 2) the authorization of a series of amendments to the
1993 Stock Option/Stock Issuance Plan (the "1993 Plan"); and 3) the approval of
the selection of Deloitte & Touche LLP as the Company's independent auditor for
the fiscal year ending December 31, 1998. As to any other business which may
properly come before the meeting, they will vote in accordance with their best
judgment. The Company does not presently know of any other such business.

PROPOSAL 1:

RATIFICATION AND ELECTION OF DIRECTORS

The Company's Bylaws, which provide that the number of directors that
shall constitute the Board of Directors shall be not less than five nor more
than nine, currently set the number of directors at seven. From September 15,
1995 until January 1, 1998, the number of directors serving on the Board was six
due to the vacancy created by the resignation of Brian Kouri from the Board in
September 1995. The Board filled the vacancy created by Mr. Kouri's resignation
effective January 1, 1998 when it identified Howard G. Bubb as the best
candidate for the seat and appointed him as a director. Because the seat filled
by Mr. Bubb was not voted on by the stockholders at the 1997 Annual Meeting in
the normal cycle of electing directors, the Board seeks ratification from the
Company's stockholders of Mr. Bubb's appointment to the Board. Assuming
ratification is given, Mr. Bubb's term will extend to the 2000 Annual Meeting.
Information regarding Mr. Bubb is set forth below:
<TABLE>
<CAPTION>

NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- -------------------- --------------
<S> <C> <C> <C>
Howard G. Bubb(1) 43 President and Chief Executive Officer, 1998
Dialogic Corporation
</TABLE>

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

1 Member of the Audit Committee

Mr. Bubb became a director of the Company January 1, 1998. Mr. Bubb has
been President and CEO of Dialogic Corporation since June 1993. From July 1991
through June 1993, Mr. Bubb was an Executive Vice President of Dialogic. Mr.
Bubb has served as director for Dialogic since 1994. Mr. Bubb joined Dialogic
from Lexar's Telenova subsidiary where he was senior vice president and general
manager. Mr. Bubb also held senior management positions at United Technologies,
Memorex and Telex corporations.

The Amended and Restated Certificate of Incorporation of the Company
provides for the Company's Board of Directors to be divided into three classes,
as nearly equal in number as is reasonably possible, serving staggered terms so
that directors' current terms will expire either at the 1998, 1999, or 2000
Annual Meeting of Stockholders. The preceding notwithstanding, directors serve
until their successors have been duly elected and qualified or until they
resign, become disqualified or disabled, or are otherwise removed. Benedict A.
Itri and B. Allen Lay comprise the class of directors whose term expires as of
the Annual Meeting.

Certain information about Mr. Itri and Mr. Lay is set forth below:

NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- -------------------- --------------
<S> <C> <C> <C>
Benedict A. Itri 45 Executive Vice President and 1991
Chief Technical Officer,
PairGain Technologies, Inc.

B. Allen Lay (1,2) 63 General Partner, 1989
Southern California Ventures
</TABLE>

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

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

2
<PAGE> 6

Mr. Itri, a founder of the Company, was named Executive Vice President
and Chief Technical Officer in April 1996. Previously, Mr. Itri was Vice
President, Engineering of the Company since its inception in February 1988 and
has been a director of the Company since November 1991. Prior to founding the
Company, Mr. Itri founded and served as a principal of Advanced
Telecommunications, Inc.

Mr. Lay became a director of the Company in February 1989. Mr. Lay has
been a general partner of Southern California Ventures, a private venture
capital investment partnership, since May 1983. Mr. Lay serves as a director of
privately-held Physical Optics Corporation and Waveband, Inc. and of
publicly-held ViaSat, Inc. (Nasdaq), Kofax Imaging Corporation (Nasdaq) and
Helisys, Inc. (Nasdaq).

DIRECTORS CONTINUING TO SERVE UNTIL 1999

The names of and certain information about the directors comprising the
class of directors whose term expires in 1999 are set forth below:
<TABLE>
<CAPTION>

NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- -------------------- --------------
<S> <C> <C> <C>
Charles S. Strauch 62 Chief Executive Officer, 1991
PairGain Technologies, Inc.

Robert C. Hawk (1) 58 President (Retired), U S WEST 1992
Multimedia Communications, Inc.

Robert A. Hoff (2) 45 General Partner, 1989
Crosspoint Venture Partners
</TABLE>

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

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

Mr. Strauch became a director of the Company in October 1991, Chairman
of the Board of Directors of the Company in November 1991 and Chief Executive
Officer of the Company in April 1992. Prior to his employment with the Company,
Mr. Strauch held executive management positions and directorships with various
publicly traded companies including Chief Executive Officer of MSI Data
Corporation, a manufacturer of hand-held data collection devices (AMEX); Chief
Executive Officer of Magnuson Computer Systems, a manufacturer of main frame
computers (Nasdaq); and President/Chief Operating Officer of Memorex, a
manufacturer of computer peripherals (NYSE). Mr. Strauch has also held several
directorships including Symbol Technologies, EECO Inc. and BMC Industries.

Mr. Hawk became a director of the Company in November 1992. Mr. Hawk is
President of Hawk Communications and recently retired as President and CEO of U
S WEST Multimedia Communications, Inc. From 1988 until 1996, Mr. Hawk served as
President of the Carrier Division of U S WEST Communications, Inc. Prior to that
time, Mr. Hawk served as Vice President, Marketing and Strategic Planning for
CXC Corporation and as Director, Advanced Systems Development for AT&T/American
Bell. Mr. Hawk also serves as a director of Premisys Communications (Nasdaq),
Xylan Corporation (Nasdaq), Concord Communications (Nasdaq) and Radcom.

Mr. Hoff became a director of the Company in February 1989. Mr. Hoff
has been a general partner of Crosspoint Venture Partners, a private venture
capital investment company, since September 1983. Mr. Hoff also serves as a
director of privately-held Com21 Incorporated, Efficient Networks, Sonoma
Systems and Accredited Home Lenders and publicly-held Onyx Acceptance
Corporation (Nasdaq) and US Web Corporation (Nasdaq).

3
<PAGE> 7

DIRECTORS CONTINUING TO SERVE UNTIL 2000

The name of and certain information about the director comprising the
class of directors whose term expires in 2000 is set forth below:

NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- ------------------------------------- --- -------------------- --------------
<S> <C> <C> <C>
Howard S. Flagg 43 President, PairGain Technologies, Inc. 1991
</TABLE>

Mr. Flagg, a founder of the Company, has been President and a director
of the Company since November 1991. He served as Chief Executive Officer from
November 1991 to April 1992 and as Vice President, Research and Development from
February 1988 to November 1991. Prior to founding the Company, Mr. Flagg founded
and served as a principal of Advanced Telecommunications, Inc., an aerospace
telecommunications consulting firm.

There is no family relationship between any director or executive
officer of the Company.

THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors has two committees: the Audit Committee and the
Compensation Committee. During the fiscal year ended December 31, 1997,
PairGain's Board of Directors met four times. No incumbent Director attended
fewer than 75% of the aggregate meetings of the Board of Directors and meetings
of the committees of the Board on which he served, except Mr. Lay who attended
70% of the aggregate meetings of the Board of Directors and the committees on
which he served.

The Audit Committee, which held one meeting during fiscal 1997,
consisted of Robert C. Hawk, Robert A. Hoff and B. Allen Lay. The Audit
Committee recommends engagement of the Company's independent auditor and is
primarily responsible for approving the services performed by the Company's
independent auditor and for reviewing and evaluating the Company's accounting
principles and its system of internal accounting controls. As of April 14, 1998,
the Audit Committee consists of Howard G. Bubb, Robert C. Hawk and B. Allen Lay.

The Compensation Committee of the Board of Directors consists of Robert
A. Hoff and B. Allen Lay. The Compensation Committee held five meetings during
fiscal 1997. The Compensation Committee is responsible for administering the
Company's 1993 Plan, the 1995 Employee Stock Purchase Plan and the Key
Management Incentive Compensation Plan. The Compensation Committee determines
recipients of awards, sets the exercise price of options granted and determines
the terms, provisions and conditions of all rights granted. This Committee also
determines the recipients of and the amount of bonuses to be paid to key
management.

Directors who are not officers of the Company receive no compensation
for attending committee or regular or special Board meetings, but are reimbursed
for their out-of-pocket expenses for such meetings. Directors are eligible to
receive stock options pursuant to the Company's 1996 Non-Employee Directors
Stock Option Plan (the "1996 Plan"). Directors who are not members of the
Compensation Committee are also eligible to receive stock option grants pursuant
to the Company's 1993 Plan. In 1997, there were no grants to directors pursuant
to the Company's 1993 Plan.

In 1997, Messrs. Hawk, Hoff and Lay each received options grants
exercisable for 20,000 shares of the Company's Common Stock pursuant to the
Company's 1996 Plan. In January 1998, Mr. Bubb received options grants
exercisable for 40,000 shares of the Company's Common Stock pursuant to the
Company's 1996 Plan. As of April 24, 1998, Mr. Bubb, Mr. Hawk, Mr. Hoff and Mr.
Lay had outstanding stock options pursuant to the 1996 Plan of 40,000, 20,000,
60,000, and 60,000, respectively. In 1997, Mr. Hawk exercised options for 13,781
shares, under the 1993 Plan, having a net value of $333,270 on their exercise
dates. As of April 24, 1998, Mr. Hawk had 10,169 stock options outstanding,
pursuant to the Company's 1993 Plan. Neither Mr. Bubb, Mr. Hoff nor Mr. Lay have
been granted stock options pursuant to the Company's 1993 Plan.

The following table sets forth certain information regarding the
options to be granted under the 1996 Plan subsequent to the 1998 Annual Meeting
to continuing non-employee Board members. Each option will have an exercise
price per share equal to the closing selling price per share of Common Stock on
the Nasdaq Stock Market(SM) on the date of the grant.

4
<PAGE> 8
<TABLE>
<CAPTION>
Number of
Name Option Shares Exercise Price
--------------------------------------------------- ------------- ---------------
<S> <C> <C>
Howard G. Bubb, Director (1) N/A N/A

Robert C. Hawk, Director 20,000 (2)

Robert A. Hoff, Director 20,000 (2)

B. Allen Lay, Director 20,000 (2)

All non-employee directors as a group (four persons) 60,000 (2)
</TABLE>

-----------

(1) Mr. Bubb was elected by the Board to serve from January 1, 1998 until the
2000 Annual Meeting. Under the 1996 Plan, Board members must have served
for at least six months prior to the Annual Meeting to be eligible for the
additional options grants.

(2) Closing price on grant date

PROPOSAL 2:

APPROVAL OF AMENDMENTS TO 1993 STOCK OPTION/STOCK ISSUANCE PLAN

GENERAL

The Company's stockholders are being asked to approve a series of
amendments to the 1993 Plan that will effect the following changes: (i)
implement an automatic share increase feature pursuant to which the number of
shares of Common Stock available for issuance under the 1993 Plan will
automatically increase at periodic intervals by the number of shares of Common
Stock repurchased by the Company on the open market with the cash proceeds
received by the Company on or after the date of the Annual Meeting from the
exercise of outstanding options under the 1993 Plan or the direct issuance of
shares of Common Stock under the 1993 Plan, provided such share increase shall
not exceed 500,000 shares of Common Stock in any one calendar year and (ii)
effect a series of additional changes to the provisions of the 1993 Plan in
order to take advantage of the most recent amendments to Rule 16b-3 of the
Securities and Exchange Commission ("SEC") which exempts certain officer and
director transactions under the 1993 Plan from the short-swing liability
provisions of the federal securities laws. These latter changes include the
following revisions to the 1993 Plan:

Non-statutory options will now be transferable during the
optionee's lifetime to members of the optionee's immediate family or
to trusts established for such family members.

Stockholder approval of plan amendments will now be required only
to the extent required by applicable laws and regulations, including
the federal tax laws applicable to incentive stock option plans.
Previously, the 1993 Plan included a list of specific plan amendments
for which stockholder approval was required under Rule 16b-3 prior to
the recent amendments to that rule. Because of the number of
interpretive issues which arose under this particular Rule 16b-3
requirement, the SEC decided to eliminate this particular requirement
from the rule and allow other laws and regulations, such as the
federal tax laws and the state corporate laws, to establish the
applicable requirements for stockholder approval.

The 1993 Plan became effective in connection with the Company's initial
public offering in September 1993. The amendments to the 1993 Plan were approved
by the Board at meetings held on November 5, 1997 and April 14, 1998. All
changes to the 1993 Plan are subject to stockholder approval at the 1998 Annual
Meeting. The purpose of the proposed automatic share increase feature is to
assure that a sufficient reserve of Common Stock is available under the 1993
Plan to attract and retain the services of key individuals essential to the
Company's long-term growth and success with minimal dilution to existing
shareholders. The cash proceeds received by the Company from the exercise of
outstanding options under the 1993 Plan or the direct issuance of shares of
Common Stock under the 1993 Plan will be used to repurchase its shares in the
open market, and it is only those repurchased shares which will fund the share
increases to the 1993 Plan, thereby offsetting the dilution which would
otherwise result from options granted against those increases. The remaining
amendments will facilitate plan administration by eliminating a number of
restrictions previously incorporated into the 1993 Plan to comply with the
applicable requirements of SEC Rule 16b-3 prior to its most recent amendment.

The following is a summary of the principal features of the 1993 Plan.
The summary does not purport to be a complete description of all the provisions
of the 1993 Plan. Any stockholder of the Company who wishes to obtain a copy of
the actual plan document may do so upon written request to the Corporate
Secretary at the Company's principal executive offices in Tustin, California.

5
<PAGE> 9
EQUITY PROGRAMS

The 1993 Plan contains two separate equity incentive programs: (i) an
Option Grant Program; and (ii) a Stock Issuance Program. The principal features
of these programs are described below. The 1993 Plan will be administered by the
Compensation Committee of the Board. This committee (the "Plan Administrator")
will have complete discretion (subject to the provisions of the 1993 Plan) to
authorize option grants and direct stock issuances under the 1993 Plan.

SHARE RESERVE

A total of 21,800,000 shares of Common Stock has been reserved for
issuance over the ten year term of the 1993 Plan. If the stockholders approve
the automatic share increase feature which forms part of this Proposal, then the
number of shares of Common Stock available for issuance under the 1993 Plan will
automatically increase at periodic intervals by the number of shares of Common
Stock repurchased by the Company on the open market with the cash proceeds
received by the Company on or after the date of the Annual Meeting from the
following sources: (i) the exercise of outstanding options under the 1993 Plan;
and (ii) the direct issuance of shares of Common Stock under the 1993 Plan. In
no event, however, will such share increase exceed 500,000 shares of Common
Stock in any one calendar year.

In no event may any one participant in the 1993 Plan receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 4,000,000 shares in the aggregate over the term of the 1993 Plan. For
this purpose, option grants, stock appreciation rights and stock issuances prior
to January 1, 1995 will not be taken into account. Stockholder approval of this
Proposal will also constitute re-approval of such share limitation for purposes
of Internal Revenue Code Section 162(m).

To the extent an outstanding option under the 1993 Plan expires or
terminates for any reason prior to exercise in full, the shares subject to the
portion of the option not so exercised will be available for subsequent option
grants or stock issuances under the 1993 Plan. However, shares subject to any
option surrendered or canceled in accordance with the stock appreciation right
provisions of the 1993 Plan and all shares issued under the 1993, whether or not
those shares are subsequently repurchased by the Company pursuant to its
repurchase rights under the 1993 Plan will reduce on a share-for-share basis the
number of shares of Common Stock available for subsequent issuance.

Should any change be made to the Common Stock issuable under the 1993
Plan 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 Company's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the 1993 Plan, (ii) the maximum number and/or class of
securities by which the share reserve under the Plan may automatically increase
in any calendar year, (iii) the number and/or class of securities for which any
one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances over the remaining term of the 1993 Plan, and
(iv) the number and/or class of securities and price per share in effect under
each outstanding option. Such adjustments to the outstanding options will be
effected in a manner which will preclude the enlargement or dilution of rights
and benefits under those options.

Option activity under the 1993 Plan through April 27, 1998 follows:

Authorized Shares 21,800,000
Less: Granted (22,077,020)
Plus: Canceled 2,620,087
-----------
Available for future grants at April 27, 1998 2,343,067
===========

ELIGIBILITY

Officers and other key employees of the Company and its parent or
subsidiaries (whether now existing or subsequently established), non-employee
members of the Board, and consultants and independent contractors of the Company
and its parent and subsidiaries will be eligible to participate in the 1993
Plan. However, no member of the Compensation Committee while serving as such
will be eligible to receive a stock option grant or direct stock issuance under
the 1993 Plan.

As of April 27, 1998, approximately seven executive officers, 646 other
employees and two non-employee Board members were eligible to participate in the
1993 Plan.

VALUATION

The fair market value per share of Common Stock on any relevant date
under the 1993 Plan will be the closing selling price per share on that date on
the Nasdaq Stock Market. On April 27, 1998, the closing selling price per share
was $18.94.
6

<PAGE> 10

OPTION GRANT PROGRAM

Options may be granted under the Option Grant Program at an exercise
price per share not less than eighty five percent (85%) of the fair market value
per share of Common Stock on the option grant date. The Company has never issued
options below fair market value. No granted option will have a term in excess of
ten years.

Upon cessation of service, the optionee will have a limited period of
time in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have 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 or vesting 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 Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the Option Grant
Program:

Tandem stock appreciation rights provide the holders with the
right to surrender their options for an appreciation distribution from
the Company equal in amount to the excess of (i) the fair market value
of the vested shares of Common Stock subject to the surrendered option
over (ii) the aggregate exercise price payable for those shares. Such
appreciation distribution may, at the discretion of the Plan
Administrator, be made in cash or in shares of Common Stock.

Limited stock appreciation rights may be granted to officers
of the Company as part of their option grants. Any option with such a
limited stock appreciation right in effect for at least 6 months may be
surrendered to the Company upon the successful completion of a hostile
take-over of the Company. In return for the surrendered option, the
officer will be entitled to a cash distribution from the Company in an
amount per surrendered option share equal to the excess of (i) the
take-over price per share over (ii) the exercise price payable for such
share.

The Plan Administrator will have the authority to effect the
cancellation of outstanding options under the Option Grant Program which have
exercise prices in excess of the then current market price of Common Stock and
to issue replacement options with an exercise price based on the market price of
Common Stock at the time of the new grant.

STOCKHOLDER RIGHTS AND OPTION ASSIGNABILITY. No optionee is to have any
stockholder rights with respect to the option shares until such optionee has
exercised the option, paid the option price for the purchased shares and been
issued a stock certificate for such shares. Options are generally not assignable
or transferable other than by will or the laws of inheritance and, during the
optionee's lifetime, the option may be exercised only by such optionee. However,
the Plan Administrator may allow non-statutory options to be transferred or
assigned during the optionee's lifetime to one or more members of the optionee's
immediate family or to a trust established exclusively for one or more such
family members, to the extent such transfer or assignment is in furtherance of
the optionee's estate plan.

STOCK ISSUANCE PROGRAM

Shares may be sold under the Stock Issuance Program at a price per
share not less than eighty five percent (85%) of fair market value per share of
Common Stock, payable in cash or through a promissory note payable to the
Company. Shares may also be issued solely as a bonus for past services.

The issued shares may either be immediately vested upon issuance or
subject to a vesting schedule tied to the performance of service or the
attainment of performance goals. The Plan Administrator will, however, have the
discretionary authority at any time to accelerate the vesting of any unvested
shares.

<PAGE> 11

GENERAL PROVISIONS

ACCELERATION

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Option Grant Program which is not to be assumed by
the successor corporation or replaced with a comparable option to purchase
shares of the capital stock of the successor corporation will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
Plan Administrator will have the discretionary authority to provide for the
automatic acceleration of any options assumed or replaced in connection with
such acquisition, and to fully vest any unvested shares which do not vest at the
time of such acquisition, in the event the individual's service is subsequently
terminated within a designated period following the acquisition.

In connection with a change in control of the Company (whether by
successful tender offer for more than 50% of the outstanding voting stock or by
proxy contest for the election of Board members), the Plan Administrator will
have the discretionary authority to provide for automatic acceleration of
outstanding options under the Option Grant Program and the automatic vesting of
outstanding shares under the Stock Issuance Program either at the time of such
change in control or upon the subsequent termination of the individual's
service.

The acceleration of vesting in the event of a change in the ownership
or control of the Company 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.

FINANCIAL ASSISTANCE

The Plan Administrator may permit one or more participants to pay the
exercise of outstanding options or the purchase price of shares under the 1993
Plan by delivering a promissory note payable in installments. The Plan
Administrator will determine the terms of any such promissory note. However, the
maximum amount of financing provided any participant may not exceed the cash
consideration payable for the issued shares plus all applicable taxes incurred
in connection with the acquisition of the shares. Any such promissory note may
be subject to forgiveness in whole or in part, at the discretion of the Plan
Administrator, over the participant's period of service.

SPECIAL TAX ELECTION

The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.

AMENDMENT AND TERMINATION

The Board may amend or modify the 1993 Plan in any or all respects
whatsoever, subject to any required stockholder approval under applicable law or
regulation. The Board may terminate the 1993 Plan at any time, and the 1993 Plan
will in all events terminate on June 30, 2003.

8
<PAGE> 12

STOCK AWARDS

The table below shows, as to each of the Company's executive officers
named in the Summary Compensation Table and the various indicated individuals
and groups, the number of shares of Common Stock subject to options granted
under the 1993 Plan between January 1, 1997 and April 24, 1998 together with
the weighted average exercise price payable per share.

OPTION TRANSACTIONS
<TABLE>
<CAPTION>

NUMBER OF WEIGHTED AVERAGE
NAME AND TITLE OPTION SHARES EXERCISE PRICE ($)
- ----------------------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Charles S. Strauch
Chairman of the Board and Chief Executive Officer -- N/A

Howard S. Flagg
President and Director -- N/A

Benedict A. Itri
Executive Vice President, Chief Technical Officer and Director -- N/A

Charles W. McBrayer
Senior Vice President, Chief Financial Officer and Secretary 8,000 $15.88

Dennis Young
Senior Vice President, Operations and Product Line Management 8,000 $15.88

All executive officers as a group (seven persons) 141,000 $17.38

Howard G. Bubb
Director -- N/A

Robert C. Hawk
Director -- N/A

Robert A. Hoff
Director -- N/A

B. Allen Lay
Director -- N/A

All non-employee directors as a group (four persons) -- N/A

All employees, including current officers who are not executive
officers, as a group (646 persons) 2,020,000 $19.46
</TABLE>

FEDERAL INCOME TAX CONSEQUENCES

OPTION GRANTS

Options granted under the 1993 Plan may be either incentive stock
options which satisfy the requirements of Section 422 of the Internal Revenue
Code or non-statutory options which are not intended to meet such requirements.
The Federal income tax treatment for the two types of options differs as
follows:

Incentive 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. The optionee will, however, 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. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held the
shares for more than two (2) years after the option grant date and more than one
(1) year after the exercise date. If either of these two holding periods is not
satisfied, then a disqualifying disposition will result.

Upon a qualifying disposition, 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 the shares. If there is a disqualifying disposition of the
shares, then the excess of (a) the fair market value of those shares on the
exercise date over (b) the exercise price paid for the shares will be taxable as
ordinary income to the optionee. Any additional gain or loss recognized upon the
disposition will be recognized as a capital gain or loss by the optionee.

<PAGE> 13

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 option exercise date 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.

Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory 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.

If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then 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 (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. 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 option an amount equal
to the excess of (a) the fair market value of the purchased shares on the
exercise date 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 an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory 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.

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 an income tax deduction equal to
such distribution for the taxable year in which the ordinary income is
recognized by the optionee.

DIRECT STOCK ISSUANCE

The tax principles applicable to direct stock issuances under the 1993
Plan will be substantially the same as those summarized above for the exercise
of non-statutory option grants.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION

The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options granted with exercise prices equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) 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. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Code Section 162(m).

ACCOUNTING TREATMENT

Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a compensation expense to the Company's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date. Such expense will be accruable by the Company over the
period that the option shares or issued shares are to vest. Option grants or
stock issuances with an exercise or issue price equal to the fair market value
of the shares will not result in any charge to the Company's earnings. However,
the fair value of those options is required to be disclosed in the notes to the
Company's financial statements, and the Company must also disclose, in pro-forma
statements to the Company's financial statements, the impact those options would
have upon the Company's reported earnings were the value of those options

<PAGE> 14

at the time of grant treated as compensation expense. Whether or not granted at
a discount, the number of outstanding options may be a factor in determining the
Company's earnings per share on a fully-diluted basis.

Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings.

STOCKHOLDER APPROVAL

The affirmative vote of a majority of the outstanding voting shares of
the Company present or represented and entitled to vote at the 1998 Annual
Meeting is required for approval of the amendments to 1993 Plan. Should such
stockholder approval not be obtained, then the Company will not use proceeds
from option exercises to buy back shares in the market, the automatic share
increase feature will not be implemented and the maximum number of shares
available over the term of the 1993 Plan will remain fixed at 21,800,000 shares.
Option grants and direct stock issuances will continue to be made pursuant to
the provisions of the 1993 Plan in effect prior to the amendments summarized in
this Proposal, until the available reserve of Common Stock as last approved by
the stockholders has been issued pursuant to the exercise of options granted or
direct stock issuances made under the 1993 Plan.

NEW PLAN BENEFITS

No options, stock appreciation rights or direct stock issuances have
been made to date on the basis of the automatic share increase feature which
forms part of the Proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENTS TO THE 1993 PLAN.

PROPOSAL 3:

RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR

The Board of Directors has selected Deloitte & Touche LLP as the
Company's independent auditor for the fiscal year ending December 31, 1998 and
has further directed that management submit the selection of independent auditor
for ratification by stockholders at the Annual Meeting. Representatives of
Deloitte & Touche LLP are expected to be present at the Annual Meeting, will
have an opportunity to make a statement if they so desire and will be available
to respond to appropriate questions.

Stockholder ratification of the selection of Deloitte & Touche LLP as
the Company's independent auditor is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Deloitte & Touche
LLP to the stockholders for ratification as a matter of good corporate practice.
If the stockholders fail to ratify the selection, the Audit Committee and the
Board of Directors will reconsider whether to retain that firm. Even if the
selection is ratified, the Audit Committee and the Board of Directors in their
discretion may direct the appointment of a different independent accounting firm
at any time during the year if they determine that such a change would be in the
best interests of the Company and its stockholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR PROPOSAL 3.

<PAGE> 15

STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth information concerning the beneficial
ownership of shares of the Company's Common Stock by (i) each beneficial owner
of more than 5% of the outstanding shares of Common Stock; (ii) each Director of
the Company; (iii) the Chief Executive Officer and the four most highly
compensated other Executive Officers; and (iv) by all directors and executive
officers of the Company as a group. Except as otherwise noted, this information
is presented as of April 24, 1998, and each beneficial owner listed has sole
investment and voting power with respect to the Common Stock indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF INDIVIDUAL OF COMMON STOCK PERCENT
OR NUMBER OF PERSONS IN GROUP POSITION WITH COMPANY BENEFICIALLY OWNED OF CLASS
- ---------------------------------------- ----------------------------------- ------------------ ----------
<S> <C> <C> <C>
Amerindo Investment Advisors, Inc. (1) 5,431,600 7.8%
One Embarcadero Center, Suite 2300
San Francisco, CA 94111

Denver Investment Advisors LLC (2) 3,625,400 5.2%
1225 17th Street, 26th Floor
Denver, CO 80202

T. Rowe Price Associates, Inc. (3) 3,476,100 5.0%
100 E. Pratt Street
Baltimore, MD 21202

Howard G. Bubb (4) Director 40,000 *

Robert C. Hawk (5) Director 27,459 *

Robert A. Hoff (6) Director 79,980 *

B. Allen Lay (7) Director 198,676 *

Charles S. Strauch (8) Chairman and Chief Executive Officer 1,615,083 2.3%

Howard S. Flagg (9) President and Director 1,060,034 1.5%

Benedict A. Itri (10) Executive Vice President, Chief 1,129,436 1.6%
Technical Officer and Director

Charles W. McBrayer (11) Senior Vice President, Chief 237,561 *
Financial Officer and Secretary

Dennis Young (12) Senior Vice President, Operations 147,428 *
and Product Line Management

All directors and executive 5,019,588 6.8%
officers as a group (eleven
persons) (13)
</TABLE>

-----------

*Less than 1%

(1) Information obtained from Amendment No. 1 to Schedule 13G filed with the
SEC on February 13, 1998, stating shares beneficially held as of December
31, 1997. According to its Schedule 13G/A, Amerindo has shared voting
power and shared dispositive power of 5,431,600 shares in the aggregate
for all Reporting Persons and as to all of which beneficial ownership is
disclaimed.

12
<PAGE> 16

(2) Information obtained from Schedule 13G filed with the SEC on February 11,
1998 stating shares beneficially held as of December 31, 1997. According
to its Schedule 13G, Denver Investment Advisors has sole power to vote or
to direct the vote of 2,398,200 shares and sole power to dispose or to
direct the disposition of 3,625,400 shares.

(3) Information obtained from Schedule 13G filed with the SEC on February 12,
1998 stating shares beneficially held as of December 31, 1997. These
securities are owned by various individual and institutional investors
which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such securities.
According to its Schedule 13G/A, Price Associates has sole voting power
of 166,000 shares and sole dispositive power of 3,476,100 shares.

(4) Includes 40,000 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(5) Includes 27,459 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(6) Includes 60,000 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(7) Includes 60,000 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(8) Includes 1,170,546 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(9) Includes 841,266 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(10) Includes 784,604 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(11) Includes 168,411 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(12) Includes 122,661 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

(13) Includes 3,514,045 shares subject to options that are exercisable as of
April 24, 1998 or within 60 days of that date.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC and the Common Stock of the
Company are required by SEC Regulation to furnish the Company with copies of all
reports filed pursuant to Section 16(a).

Based solely on its review of copies of such reports received by it, or
written representations of certain reporting persons that no Form 5's were
required for such persons, the Company believes that, during 1997, all filing
requirements applicable to its executive officers, directors and greater than
ten percent stockholders were complied with, with the following exceptions:

Mr. Flagg failed to timely file a Form 4 for the month of May 1997 reporting
a change in beneficial ownership of 22,000 shares of the Company's Common
Stock. Mr. Flagg filed a Form 4 on June 19, 1997 reporting this change; the
Form was due on June 10, 1997.

13
<PAGE> 17

Mr. Itri failed to timely file a Form 4 for the month of August 1997
reporting a change in beneficial ownership of 30,000 shares of the Company's
Common Stock. Mr. Itri filed a Form 4 on September 18, 1997 reporting this
change; the Form was due on September 10, 1997.

Mr. Strauch amended his 1996 Form 5 on February 10, 1998 to report a change
in beneficial ownership of 20,000 shares on December 31, 1994.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information concerning the
Executive Officers and Directors of the Company.
<TABLE>
<CAPTION>

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

<S> <C> <C>
Charles S. Strauch 62 Chairman of the Board and Chief Executive Officer
Howard S. Flagg 43 President and Director
Benedict A. Itri 45 Executive Vice President, Chief Technical Officer and Director
Charles W. McBrayer 49 Senior Vice President, Chief Financial Officer and Secretary
Dennis Young 55 Senior Vice President, Operations and Product Line Management
Bruce Kimble 48 Vice President, T1 Access
Thomas Reynolds 46 Senior Vice President, Sales, Service and Field Marketing
Howard G. Bubb (1) 43 Director
Robert C. Hawk (1) 58 Director
Robert A. Hoff (2) 45 Director
B. Allen Lay (1,2) 63 Director
</TABLE>

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

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

Information regarding Messrs. Strauch, Flagg, Itri, Bubb, Hawk, Hoff
and Lay is included under the heading "Election of Directors."

Mr. McBrayer was named Senior Vice President and Chief Financial
Officer in February 1998. Mr. McBrayer joined the Company in March 1995 as Vice
President, Finance and Administration and Chief Financial Officer. Mr. McBrayer
served as Vice President, Finance and Chief Financial Officer for Triconex
Corporation, a publicly held corporation (Nasdaq), from 1986 to March 1995 and
was named to the Board of Directors of Triconex in January 1994.

Mr. Young was named Senior Vice President, Operations and Product Line
Management in February 1998. Mr. Young joined the Company in September 1993 as
Director, European Operations and assumed the position of Vice President,
Operations in December 1994. From 1985 to 1993, Mr. Young served as Managing
Director of Talley (UK) Ltd. and EECO (UK) Ltd. These companies designed,
manufactured and marketed both consumer and industrial products throughout the
United Kingdom, Europe and certain world markets.

Mr. Kimble was named Vice President, T1 Access in February 1998. Mr.
Kimble joined the Company in September 1993 as Project Manager and later assumed
the position of Director of Engineering. He was named Vice President,
Engineering in April 1996. From 1991 to 1993, Mr. Kimble was a Product Line
Manager at Cable and Computer Technology, Inc., a military computer systems
manufacturer. From 1985 to 1991, Mr. Kimble was President and owner of Semaphore
Corporation, a telemetry equipment and DSP consulting firm.

Mr. Reynolds joined the Company in October 1996 as Senior Vice
President, Sales, Customer Service and Field Marketing. Mr. Reynolds was
employed by Motorola Information Systems Group from 1990 to 1996 where he served
in various senior management positions in sales and marketing. From 1983 to
1990, Mr. Reynolds held field

14
<PAGE> 18

sales management positions at Hewlett-Packard and Harris Corporation,
manufacturers of workstation and data communications products.

The Company's Amended and Restated Certificate of Incorporation
provides for the Company's Board of Directors to be divided into three classes,
as nearly equal in number as is reasonably possible, serving staggered terms so
that directors' current terms will expire either at the 1998, 1999 or 2000
Annual Meeting of Stockholders. At each Annual Meeting of the Company's
stockholders, one class of directors is elected for a three-year term. The terms
of Messrs. Itri and Lay expire at the 1998 Annual Meeting, the terms of Messrs.
Strauch, Hoff and Hawk expire at the 1999 Annual Meeting and the terms of
Messrs. Flagg and Bubb expire at the 2000 Annual Meeting.

Officers serve at the discretion of the Board of Directors. The Board
of Directors has a Compensation Committee which administers the Company's 1993
Plan, the 1995 Employee Stock Purchase Plan and the Key Management Incentive
Compensation Plan, and an Audit Committee which reviews the results and scope of
the audit and other services provided by the Company's independent auditor.
There are no family relationships among any of the executive officers or
directors of the Company.

Directors who are not officers of the Company receive no compensation
for attending committee or regular or special Board meetings but are reimbursed
for their out-of pocket expenses. Directors are eligible to receive stock
options pursuant to the Company's 1996 Plan. Directors who are not members of
the Compensation Committee are also eligible to receive stock option grants
pursuant to the Company's 1993 Plan. In 1997, there were no grants to directors
pursuant to the Company's 1993 Plan.

15
<PAGE> 19

EXECUTIVE COMPENSATION AND OTHER INFORMATION

SUMMARY OF CASH AND OTHER COMPENSATION

The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and each of the
four additional most highly compensated Executive Officers (the "Named Executive
Officers") of the Company serving as such as of the end of the last fiscal year
whose compensation for such year was in excess of $100,000 for services rendered
in all capacities to the Company and its subsidiaries for the 1997, 1996 and
1995 fiscal years.

TABLE I
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------ ---------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY($)(1)(2) BONUS($)(2) COMPENSATION ($) OPTIONS(#)
----------------------------- ------------ -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Charles S. Strauch 1997 280,000 33,697(4) 6,173,579(9) --
Chief Executive Officer 1996 275,192 206,394(4) 4,756,059(9) --
1995 255,000 -- 212,375(10) 80,000

Howard S. Flagg 1997 144,231 17,357(5) 2,822,397(11) --
President 1996 125,000 93,750(5) 4,437,765(11) --
1995 119,615 -- 639,487(12) 40,000

Benedict A. Itri 1997 139,231 16,756(6) 2,878,334(13) --
Executive Vice President and 1996 120,000 90,000(6) 5,054,232(13) --
Chief Technical Officer 1995 114,615 -- 572,250(13) 60,000

Charles W. McBrayer 1997 145,385 17,496(7) 1,874,910(14) 8,000
Senior Vice President and 1996 133,077 99,080(7) 2,570,992(14) 100,000
Chief Financial Officer 1995 98,557(3) -- 10,234(15) 500,000

Dennis Young 1997 125,385 15,089(8) 1,058,689(16) 8,000
Senior Vice President, 1996 112,801 84,601(8) 2,590,349(16) 40,000
Operations and Product Line 1995 107,110 80,126(8) 209,046(17) 116,000
Management
</TABLE>

----------

(1) Includes amounts deferred pursuant to the Company's 401(K) Plan, where
applicable.

(2) Includes amounts deferred pursuant to the Company's Management Deferred
Compensation Plan. Specific amounts deferred in 1997 and 1996 for each
Named Executive Officer follow. For Mr. Strauch: $398,228, and $0; for Mr.
Flagg: $86,538, and $76,302; for Mr. Itri: $193,098, and $121,900; for Mr.
McBrayer: $63,577 and $7,985; and for Mr. Young: $0 and $0.

(3) Mr. McBrayer joined the Company in March, 1995. Had Mr. McBrayer been
employed by the Company for all of 1995, his salary would have been
$125,000.

(4) Bonus amounts shown in the table were earned in the years indicated. Bonus
amounts paid to Mr. Strauch were $137,596, $0 and $35,000 in 1997, 1996
and 1995, respectively.

(5) Bonus amounts shown in the table were earned in the years indicated. Bonus
amounts paid to Mr. Flagg were $64,577, $2,171 and $56,635 in 1997, 1996
and 1995, respectively.

(6) Bonus amounts shown in the table were earned in the years indicated. Bonus
amounts paid to Mr. Itri were $61,985, $2,075 and $54,135 in 1996, 1995
and 1994, respectively.

16
<PAGE> 20

(7) Bonus amounts shown in the table were earned in the years indicated. Bonus
amounts paid to Mr. McBrayer in 1997 were $66,538. No bonus amounts were
paid to Mr. McBrayer in 1996 or 1995.

(8) Bonus amounts shown in the table were earned in the years indicated. Bonus
amounts paid to Mr. Young were $66,639, $53,417 and $5,990 in 1997, 1996
and 1995, respectively.

(9) "Other Annual Compensation" for Mr. Strauch in the fiscal years ended
December 31, 1997 and 1996 includes $6,173,079 and $4,755,559 which is the
value received from the exercise of stock options, shown as the difference
between the exercise price and the closing price of the Company's Stock on
the dates of exercise, in 1997 and 1996, respectively, and a $500 Company
contribution to his 401(K) account in both 1997 and 1996.

(10) "Other Annual Compensation" for Mr. Strauch in the fiscal year ended
December 31, 1995 includes $212,375, which is the value received from the
exercise of stock options, shown as the difference between the exercise
price and the closing price of the Company's Stock on the dates of
exercise.

(11) "Other Annual Compensation" for Mr. Flagg in the fiscal years ended
December 31, 1997 and 1996 includes $2,821,897 and $4,437,265 which is the
value received from the exercise of stock options, shown as the difference
between the exercise price and the closing price of the Company's Stock on
the dates of exercise, in 1997 and 1996, respectively, and a $500 Company
contribution to his 401(K) account in both 1997 and 1996.

(12) "Other Annual Compensation" for Mr. Flagg in the fiscal year ended
December 31, 1995 includes $639,487 which is the value received from the
exercise of stock options, shown as the difference between the exercise
price and the closing price of the Company's Stock on the dates of
exercise.

(13) "Other Annual Compensation" for Mr. Itri in the fiscal years ended
December 31, 1997, 1996 and 1995 includes $2,878,334, $5,054,232, and
$572,250 which is the value received from the exercise of stock options,
shown as the difference between the exercise price and the closing price
of the Company's Stock on the dates of exercise, in 1997, 1996 and 1995,
respectively.

(14) "Other Annual Compensation" for Mr. McBrayer in the fiscal years ended
December 31, 1997 and 1996 includes $1,873,807 and $2,563,191 which is the
value received from the exercise of stock options, shown as the difference
between the exercise price and the closing price of the Company's Stock on
the dates of exercise, in 1997 and 1996, respectively; a $500 Company
contribution to his 401(K) account in both 1997 and 1996; and, $603 and
$7,301 which is the value received from the purchase of 187 and 548 shares
of Company stock under the 1995 Employee Stock Purchase Plan, shown as the
difference between the purchase price and the closing price of the
Company's Stock on the dates of purchase, in 1997 and 1996, respectively.

(15) "Other Annual Compensation" for Mr. McBrayer in the fiscal year ended
December 31, 1995 includes $10,234 which is the value received from the
purchase of 1,328 shares of Company stock under the 1995 Employee Stock
Purchase Plan, shown as the difference between the purchase price and the
closing price of the Company's Stock on the date of purchase.

(16) "Other Annual Compensation" for Mr. Young in the fiscal years ended
December 31, 1997 and 1996 includes $1,058,089 and $2,585,475, which is
the value received from the exercise of stock options, shown as the
difference between the exercise price and the closing price of the
Company's Stock on the dates of exercise, in 1997 and 1996, respectively,
and $600 and $4,874 which is the value received from the purchase of 186
and 366 shares of Company stock under the 1995 Employee Stock Purchase
Plan, shown as the difference between the purchase price and the closing
price of the Company's Stock on the dates of purchase, in 1997 and 1996,
respectively.

(17) "Other Annual Compensation" for Mr. Young in the fiscal year ended
December 31, 1995 includes $204,977 which is the value received from the
exercise of stock options, shown as the difference between the exercise
price and the closing price of the Company's Stock on the dates of
exercise and $4,069 which is the value received from the purchase of 528
shares of Company stock under the 1995 Employee Stock Purchase Plan, shown
as the difference between the purchase price and the closing price of the
Company's Stock on the date of purchase.

17
<PAGE> 21

MANAGEMENT DEFERRED COMPENSATION PLAN

The Management Deferred Compensation Plan was established January 1,
1996 to provide a tax deferred capital accumulation opportunity to senior
management and other key employees through deferrals of salary, commission and
incentive compensation awards. Any employee whose annual base salary is $100,000
or greater is eligible to participate. Up to 100% of annual base salary,
commission and/or annual incentive income may be deferred. The minimum election
amount is $5,000 which can be satisfied from salary, commission, and/or
incentive compensation. Deferral elections can be changed annually before the
beginning of the next plan year. Deferrals may be invested in one or more of
certain selected investment funds. Investment elections may be changed
quarterly. The Company may make discretionary contributions at any time, but all
contributions must be approved by the Compensation Committee of the Board of
Directors. All deferrals are 100% vested at the time of the contribution,
however, any Company contributions would be subject to a vesting schedule. The
Company made no contributions or provisions for contributions to this Plan in
1997 or 1996.

Amounts owed as of December 31, 1997 under the Management Deferred
Compensation Plan for the Named Executive Officers is as follows:
<TABLE>
<CAPTION>

NAME AND PRINCIPAL POSITION
- --------------------------------------------------------------------------
<S> <C>
Charles S. Strauch, Chief Executive Officer $ 410,815

Howard S. Flagg, President $ 186,776

Benedict A. Itri, Executive Vice President and Chief Technical Officer $ 371,446

Charles W. McBrayer, Senior Vice President and Chief Financial Officer $ 75,855

Dennis Young, Senior Vice President, Operations and Product Line Management $ 0

All executive officers as a group (seven persons) $ 1,044,892
</TABLE>

18
<PAGE> 22

OPTION GRANTS

The following table contains information concerning the grant of stock
options made under the Company's 1993 Plan for the fiscal year ended December
31, 1997 to the Named Executive Officers.

TABLE II
OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------- VALUE AT ASSUMED
NO. OF ANNUAL RATES OF
SECURITIES PERCENT OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM(S) (3)
GRANTED EMPLOYEES IN BASIC PRICE EXPIRATION --------------------------
NAME (#) (1) 1997 ($/SHARE) (2) DATE 5% ($) 10% ($)
------------------------ -------------- ------------------ --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch -- -- -- -- -- --
Howard S. Flagg -- -- -- -- -- --
Benedict A. Itri -- -- -- -- -- --
Charles W. McBrayer 8,000 0.5 15.875 07/07/07 79,870 202,405
Dennis Young 8,000 0.5 15.875 07/07/07 79,870 202,405
</TABLE>

-----------

(1) All of the options were granted under the Company's 1993 Plan. The option
shares will vest in 48 equal monthly installments upon the completion of
each month of service beginning one month after the date of grant. Each
option will have a maximum term of ten years, subject to earlier
termination following the optionee's cessation of service with the
Company.

(2) The exercise price per share of the options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted. The exercise price may be paid in cash
or in shares of 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.

(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price
appreciation over the ten-year option term will be at the assumed 5% and
10% levels or at any other defined level. Unless the market price of the
Common Stock does in fact appreciate over the option term, no value will
be realized from the option grants made to the executive officers.

19
<PAGE> 23

The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 1997 with respect to
the Named Executive Officers. No stock appreciation rights were exercised by any
such officer during such year and no stock appreciation rights were outstanding
on December 31, 1997.

TABLE III

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

NUMBER OF VALUE OF UNEXERCISED
NUMBER UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
OF SHARES VALUE DECEMBER 31, 1997 DECEMBER 31, 1997 ($)
ACQUIRED REALIZED ------------------------------ ------------------------------
NAME ON EXERCISE ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------- ------------- ------------ ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch 258,500 6,173,079 1,225,545 65,003 22,754,117 914,105
Howard S. Flagg 126,000 2,835,722 901,267 35,833 17,011,949 514,553
Benedict A. Itri 130,000 3,004,584 902,104 45,000 16,946,221 622,265
Charles W. McBrayer 88,010 1,873,807 146,410 194,670 2,031,501 2,655,322
Dennis Young 50,000 1,058,089 114,011 118,589 1,659,689 1,583,463
</TABLE>

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

(1) Based on the market price at the time of exercise less the exercise price.

20
<PAGE> 24

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Company's Compensation Committee (the "Committee")
are Messrs. Hoff and Lay. Neither of these individuals was an officer or
employee of the Company at any time during the year ended December 31, 1997. No
executive officer of the Company served on the board of directors or
compensation committee of any entity which has one or more executive officers
servings as members of the Company's Board of Directors or Compensation
Committee.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors is composed of two
independent outside directors, Messrs. Hoff and Lay. The Committee reviews the
salary levels of all officers and administers the Company's various plans,
including the Company's Key Management Incentive Compensation Plan and the
Company's 1993 Plan.

GENERAL COMPENSATION POLICY. The Committee's fundamental compensation
policy is to make a substantial portion of an executive's compensation
contingent upon the financial performance of the Company. Accordingly, in
addition to each executive's base salary, the Company offers bonuses and stock
option awards which are tied to the Company's and executive's performance goals.
Prior to January 1, 1994, executive compensation consisted of salary, benefits
and stock options. Effective January 1, 1994, the Board of Directors approved a
new compensation package for key management which added an incentive
compensation component. The Committee believes that providing incentives to the
executive officers through both a cash bonus and an equity interest in the
Company benefits stockholders by aligning the long-term interests of
stockholders and employees.

There are four components of key management's compensation package:

1. Salary;

2. Benefits, which include only medical, dental, and life insurance,
participation in a 401(K) plan, and participation in the
Management Deferred Compensation Plan;

3. Eligibility for equity purchase on more favorable terms than those
available to the outside common stockholder (through the 1993 Plan
and through the Company's 1995 Employee Stock Purchase Plan); and

4. Eligibility for annual incentive compensation.

The overriding principle of the Key Management Incentive Compensation
Plan is to motivate and reward key management to achieve above average results.
There were 16 participants in the fiscal 1997 Key Management Incentive
Compensation Plan. There are approximately 21 participants in the fiscal 1998
Key Management Incentive Compensation Plan. Participation is approved on a
year-by-year basis. A bonus plan is offered only to management because they can
influence corporate results more than the other employee group. The bonus
element of the participant's total compensation package is therefore, more
results-oriented than any other element.

FACTORS. Several of the more important factors which were considered in
establishing the components of each executive officer's compensation package for
the 1997 fiscal year are summarized below. Additional factors were also taken
into account, and the Committee may, in its discretion, apply entirely different
factors, particularly different measures of financial performance, in setting
executive compensation for future fiscal years. However, all compensation
decisions will be designed to further the general compensation policy indicated
above.

BASE SALARY. The base salary for each executive officer is set on the
basis of personal performance, the salary levels in effect for comparable
positions with the Company's principal competitors and the Company's financial
performance relative to such competitors. Factors relating to individual
performance that are assessed in setting base compensation are based on the
particular duties and areas of responsibility of the individual executive
officer. Factors relating to the Company's financial performance that may be
related to increasing or decreasing base salary include revenues and earnings.
The establishment of base compensation involves a subjective assessment and
weighing of the foregoing criteria and is not based on any specific formula.

ANNUAL INCENTIVE COMPENSATION. The Company's Key Management Incentive
Compensation Plan is intended to provide the opportunity for participants to
make long-term investments or special one-time purchases. The plan is
administered by the Committee. The Committee will, in general, rely on the CEO
to establish participant eligibility for the Key Management Incentive
Compensation Plan, set objectives, and establish awards, except that the
Committee will

<PAGE> 25

specifically approve the objectives for the CEO, approve the total amount
proposed for the final payments, interpret, change or establish new rules as
required and may alter any proposed objectives or awards. The full Board of
Directors must approve awards to the CEO. The Board of Directors, through the
Committee, may amend the Key Management Incentive Compensation Plan or
discontinue the Key Management Incentive Compensation Plan at any time.

Participants receive an annual cash award, most of which is based on
goals to achieve above average corporate results and some of which is based on
goals to achieve above average performance of the individual and their function
or business unit. Predetermined formulas are used whenever possible to assure
the participants' ability to manage toward their objectives. Final judgment as
to award amounts for all officers except the CEO is determined solely by the CEO
and the Committee regardless of predetermined formulas, in order to assure
fairness of awards relative to special circumstances. Extraordinary performance
can be rewarded above the maximum bonuses allowed, special circumstances may
warrant increasing a bonus above that determined by the plan formula or a bonus
can be reduced based on special circumstances.

Assessment of any adjustment to bonuses earned is determined by the
Committee. No bonuses are paid to participants if the Company does not achieve a
predetermined threshold level of planned earnings as approved by the Board. The
corporate goals and the threshold level differ from year to year, but are always
aligned with the objective of improving shareholder value.

STOCK OPTIONS. All stock options are granted under the 1993 Plan and
are intended to align the interests of each officer-optionee with those of the
stockholders and provide them with a significant incentive to manage the Company
from the perspective of an owner with an equity interest in the success of the
business. The size of the option grant made to each executive officer under the
1993 Plan is based upon that individual's current position with the Company,
internal comparability with option grants made to other Company executives and
the individual's potential for future responsibility and promotion over the
option term. The Compensation Committee has established certain general
guidelines in making option grants to the Company's executive officers in an
attempt to target a fixed number of unvested option shares for each officer
based upon his or her position with the Company and his or her existing holdings
of unvested option shares.

Options granted under the Discretionary Option Grant Program may be
immediately exercisable for all the option shares, on either a vested or
unvested basis, or may become exercisable for fully-vested shares in
installments over the participant's period of service. Any unvested shares are
subject to repurchase or cancellation by the Company upon the participant's
cessation of service or the Company's non-attainment of the applicable
performance goals. However, the Committee has full discretionary authority under
the 1993 Plan to accelerate the vesting and the exercisability of any
outstanding option, or to accelerate the vesting of any issued shares, in whole
or in part at any time.

CEO COMPENSATION. The annual base salary for the Company's Chief
Executive Officer, Mr. Charles S. Strauch, was established by the Committee on
March 4, 1996 at $280,000. The Committee's decision was based primarily on Mr.
Strauch's personal performance and the rate of base salary paid to the chief
executive officers of the Company's competitors and at a level equivalent to the
amounts paid by comparably sized companies. Under the Key Management Incentive
Compensation Plan, Mr. Strauch earned a bonus of $33,697 during fiscal 1997,
which was paid in February 1998. No stock options were granted to Mr. Strauch in
1997.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)

As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, 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 one year. This
limitation will be in effect for each fiscal year of the Company beginning after
December 31, 1993 and will apply to all compensation paid to the covered
executive officers which is not considered to be performance based. Compensation
which does qualify as performance-based compensation will not have to be taken
into account for purposes of this limitation.

22
<PAGE> 26

The Committee does not expect that the compensation to be paid to the
Company's executive officers for the 1998 fiscal year will exceed the $1 million
limit per officer. Because it is very unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1.0 million limit, the Committee has decided at this time not
to take any other action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Committee will
reconsider this decision should the individual compensation of any executive
officer ever approach the $1.0 million level.

We conclude our report with the acknowledgment that no member of the
Committee is a former or current officer or employee of the Company or any of
its subsidiaries.

COMPENSATION COMMITTEE

Robert A. Hoff

B. Allen Lay

23
<PAGE> 27

PERFORMANCE MEASUREMENT COMPARISON (1)

The following graph shows a comparison of cumulative total returns for
the Company, the Standard and Poor's 500 ("S&P 500") and the Center for Research
in Securities Prices Index for the Nasdaq Stock Market Telecommunication Stocks
(the "CRSP Nasdaq Telecommunication Index") for the period that commenced
September 15, 1993 (the date on which the Company's Common Stock was first
traded on the Nasdaq Stock Market) and ended on December 31, 1997. The
cumulative total return assumes that a stockholder invested $100 at the
beginning of the period in PairGain Common Stock, the S&P 500 and the CRSP
Nasdaq Telecommunications Index. It also assumes that all dividends have been
reinvested and is adjusted for any stock splits. Past financial performance
should not be considered to be a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in
future periods.

COMPARISON OF CUMULATIVE TOTAL RETURNS
(PAIRGAIN TECHNOLOGIES, INC., S&P 500, CRSP NASDAQ TELECOMMUNICATION INDEX)

[GRAPH OMITTED]

The data points depicted on the graph are as follows:
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------------------
INDEX DESCRIPTION 9/15/93 12/30/93 12/31/94 12/29/95 12/31/96 12/31/97
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PairGain Technologies, Inc. 100.00 98.21 101.79 391.07 869.64 553.57
S&P 500 100.00 101.53 99.50 133.43 160.47 210.23
CRSP Nasdaq Telecommunication Index 100.00 104.20 86.97 113.88 116.41 172.00
- ------------------------------------------------------------------------------------------------------
</TABLE>

Percentage annual returns for the Company's stock and the Indexes listed
above are shown below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ANNUAL RETURN PERIOD
-----------------------------------------------------------------
9/15/93 TO 12/30/93 TO 12/31/94 TO 12/29/95 TO 12/31/96 TO
INDEX DESCRIPTION 12/30/93(a) 12/31/94 12/29/95 12/31/96 12/31/97
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PairGain Technologies, Inc. -1.79% 3.64% 284.21% 122.37% -36.34%
S&P 500 1.53% -2.00% 34.11% 20.26% 31.01%
CRSP Nasdaq Telecommunication Index 4.20% -16.54% 30.94% 2.22% 47.76%
- ----------------------------------------------------------------------------------------------------------
</TABLE>

(a) Indicates the return for the 105 day period only

(1) This section is not "soliciting material," is not deemed filed with the
SEC and is not to be incorporated by reference into any filing of the
Company under the Securities Act or the Exchange Act whether made before
or after the date hereof and irrespective of any general incorporation
language in such filing.

24
<PAGE> 28

MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS

None of the Company's executive officers have employment agreements
with the Company, and their employment may be terminated at any time at the
discretion of the Board of Directors. The Compensation Committee has the
discretionary authority as administrator of the Company's 1993 Plan to provide
for the accelerated vesting of the shares of Common Stock subject to outstanding
options upon the happening of certain events, including, without limitation, a
change in control of the Company whether by successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or by a proxy contest
for the election of Board of Directors members or the subsequent termination of
the optionee's service within a designated time period following the change in
control.

CERTAIN TRANSACTIONS

INDEMNIFICATION AGREEMENTS

The Company has entered into an Indemnity Agreement with each of its
directors and officers (the "Indemnity Agreements") which provides that, with
certain exceptions, the Company will hold harmless and indemnify its directors
and officers to the fullest extent permitted under Delaware law. Under the
Indemnity Agreements, the Company is obligated to indemnify each of its
directors and officers against all expenses (including attorneys' fees), fines,
judgments and settlement amounts that such director or officer may incur in
connection with any action or proceeding (including actions brought by or on
behalf of the Company such as stockholder derivative actions) to which the
director or officer is or may be made a party to by reason of such director's or
officer's position as a director, officer, employee or agent of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. This additional indemnity goes beyond the rights
expressly provided under Delaware law primarily in the availability of
indemnification in connection with actions brought by or on behalf of the
Company, such as stockholder derivative actions, and in the provisions for
advancement of litigation expenses prior to settlement or judgment.

APPOINTMENT OF INDEPENDENT AUDITOR

The firm of Deloitte & Touche LLP, the Company's independent auditor
for the fiscal year ended December 31, 1997, was selected by the Board of
Directors, upon recommendation of the Audit Committee, to act in the same
capacity for the fiscal year ending December 31, 1998. Neither the firm of
Deloitte & Touche LLP nor any of its members has any relationship with the
Company or any of its affiliates except in the firm's capacity as the Company's
Auditor.

Representatives of Deloitte & Touche LLP are expected to be present at
the Annual Meeting and will have the opportunity to make statements if they so
desire and respond to appropriate questions from stockholders.

<PAGE> 29

STOCKHOLDER PROPOSALS

Proposals of stockholders of the Company which are intended to be
presented by stockholders at the Company's 1999 Annual Meeting must be received
by the Company no later than January 8, 1999 to be included in the proxy
statement and form of proxy relating to the 1999 Annual Meeting.

OTHER MATTERS

The Company knows of no other matters to be brought before the Annual
Meeting. If any other business should properly come before the Annual Meeting,
the persons named in the proxy intend to vote thereon in accordance with their
best judgment.

The Company's Annual Report which includes Form 10-K/A as filed with
the SEC for the fiscal year ended December 31, 1997 is being sent with this
Proxy Statement to all stockholders of record as of April 27, 1998.

By Order of the Board of Directors,

/S/ CHARLES W. MCBRAYER

CHARLES W. MCBRAYER
Secretary and Chief Financial Officer
Tustin, California
May 8, 1998

26
<PAGE> 30
PAIRGAIN TECHNOLOGIES, INC.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
(AMENDED AND RESTATED AS OF APRIL 14, 1998)

ARTICLE ONE
GENERAL

I. PURPOSE OF THE PLAN

A. This 1993 Stock Option/Stock Issuance Plan ("Plan") is
intended to promote the interests of PairGain Technologies, Inc., a Delaware
corporation (the "Corporation"), by providing (i) key employees (including
officers) of the Corporation (or its parent or subsidiary corporations) who are
responsible for the management, growth and financial success of the Corporation
(or its parent or subsidiary corporations), (ii) the non-employee members of the
Corporation's Board of Directors and (iii) consultants and other independent
contractors who provide valuable services to the Corporation (or its parent or
subsidiary corporations) 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 (or its parent or
subsidiary corporations).

B. This Plan shall serve as the successor to the Corporation's
existing 1990 Stock Option Plan (the "Predecessor Plan"), and no further option
grants or share issuances shall be made under the Predecessor Plan from and
after the Effective Date of this Plan. All outstanding stock options and
unvested share issuances under the Predecessor Plan on the Effective Date are
hereby incorporated into this Plan and shall accordingly be treated as
outstanding stock options and unvested share issuances under this Plan. However,
each outstanding option grant and unvested share issuance so incorporated shall
continue to be governed solely by the express terms and conditions of the
instrument evidencing such grant or issuance, and no provision of this 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 the Corporation's Common Stock thereunder. All unvested shares of Common
Stock outstanding under the Predecessor Plan on the Effective Date shall
continue to be governed solely by the express terms and conditions of the
instruments evidencing such issuances, and no provision of this Plan shall be
deemed to affect or modify the rights or obligations of the holders of such
unvested shares.

II. DEFINITIONS

A. For purposes of the Plan, the following definitions shall
be in effect:

BOARD: the Corporation's Board of Directors.

CODE: the Internal Revenue Code of 1986, as amended.

COMMITTEE: the committee of two (2) or more non-employee Board
members appointed by the Board to administer the Plan.

COMMON STOCK: shares of the Corporation's common stock.

CHANGE IN CONTROL: a change in ownership or control of the
Corporation effected through either of the following transactions:

a. any person or related group of persons (other than the
Corporation or a

<PAGE> 31

person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) directly or indirectly
acquires 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; or

b. 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 one or more proxy
contests for the election of Board members, 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 such election or nomination was approved by the Board.

CORPORATE TRANSACTION: any of the following
stockholder-approved transactions to which the Corporation is a party:

a. a merger or consolidation in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of
which is to change the State in which the Corporation is incorporated,

b. 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, or

c. any reverse merger in which the Corporation is the
surviving entity but 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 those who held such securities immediately prior to such merger.

EFFECTIVE DATE: the first date on which the shares of Common
Stock were registered under Section 12(g) of the 1934 Act.

EMPLOYEE: an individual who performs services while in the
employ of the Corporation or one or more parent or subsidiary corporations,
subject to the control and direction of the employer entity not only as to the
work to be performed but also as to the manner and method of performance.

FAIR MARKET VALUE: the fair market value per share of Common
Stock determined in accordance with the following provisions:

a. If the Common Stock is not at the time listed or admitted
to trading on any national stock exchange but is traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling
price per share 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 reported closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation
exists shall be determinative of Fair Market Value.

<PAGE> 32

b. If the Common Stock is at the time listed or admitted to
trading on any national stock exchange, then the Fair Market Value
shall be the closing selling price per share on the date in question on
the 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
reported sale of Common Stock on such exchange on the date in question,
then the Fair Market Value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.

HOSTILE TAKE-OVER: a change in ownership of the Corporation
pursuant to which 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) directly or indirectly
acquires 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.

INCENTIVE OPTION: an option which satisfies the requirements
of Code section 422.

1934 ACT: the Securities Exchange Act of 1934, as amended from
time to time.

NON-STATUTORY OPTION: an option not intended to satisfy the
requirements of Code section 422.

OPTIONEE: any person to whom an option is granted under the
Option Grant Program in effect under the Plan.

PARTICIPANT: any person who receives a direct issuance of
Common Stock under the Stock Issuance Program in effect under the Plan.

PLAN ADMINISTRATOR: the Committee in its capacity as the
administrator of the Plan.

PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability of
the Optionee or the Participant 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.

SERVICE: the performance of services on a periodic basis to
the Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option or stock issuance agreement.

TAKE-OVER PRICE: the greater of (a) 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 (b) 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 (a) price per share.

B. The following provisions shall be applicable in determining
the parent and subsidiary corporations of the Corporation:

<PAGE> 33

Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered
to be a PARENT of the Corporation, provided each such 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.

Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
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.

III. STRUCTURE OF THE PLAN

A. Stock Programs. The Plan shall be divided into two separate
components: the Option Grant Program specified in Article Two and the Stock
Issuance Program specified in Article Three. Under the Option Grant Program,
eligible individuals may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock in accordance with the
provisions of Article Two. Under the Stock Issuance Program, eligible
individuals may be issued shares of Common Stock directly, either through the
immediate purchase of such shares at a price not less than eighty-five percent
(85%) of the Fair Market Value of the shares at the time of issuance or as a
bonus tied to the performance of services or the Corporation's attainment of
financial objectives, without any cash payment required of the recipient.

B. General Provisions. Unless the context clearly indicates
otherwise, the provisions of Articles One and Four shall apply to the Option
Grant Program and the Stock Issuance Program and shall accordingly govern the
interests of all individuals under the Plan.

IV. ADMINISTRATION OF THE PLAN

A. The Plan shall be administered by the Committee. Members of
the 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.

B. The Committee as Plan Administrator shall have full power
and authority (subject to the express provisions of the Plan) to establish rules
and regulations for the proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the provisions of the
Plan and any outstanding option grants or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan or any outstanding
option or share issuance thereunder.

V. OPTION GRANTS AND STOCK ISSUANCES

A. The persons eligible to participate in the Plan shall be
limited to the following:

(i) officers and other key employees of the
Corporation (or its parent or subsidiary corporations) who render
services which contribute to the management, growth and financial
success of the Corporation (or its parent or subsidiary corporations);

4
<PAGE> 34

(ii) non-employee Board members; and

(iii) those consultants or other independent
contractors who provide valuable services to the Corporation (or its
parent or subsidiary corporations).

B. Non-employee Board members who serve as Plan Administrator
shall not, during their period of service as such, be eligible to participate in
the Option Grant and Stock Issuance Programs or in any other stock option, stock
purchase, stock bonus or other stock plan of the Corporation (or its parent or
subsidiary corporations).

C. The Plan Administrator shall have full authority to
determine, (i) with respect to the option grants made under the Option Grant
Program, which eligible individuals are to receive option grants, the time or
times when the options are to be granted, 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 when each granted option is to
become exercisable and the maximum term for which the option may remain
outstanding and (ii) with respect to stock issuances under the Stock Issuance
Program, the number of shares to be issued to each Participant, the vesting
schedule (if any) to be applicable to the issued shares and the consideration to
be paid by the individual for such shares.

VI. STOCK SUBJECT TO THE PLAN

A. Shares of the Corporation's Common Stock shall be available
for issuance under the Plan and shall be drawn from either the Corporation's
authorized but unissued shares of Common Stock or from reacquired shares of
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 not exceed 21,800,000 shares1/, subject to adjustment
from time to time in accordance with the provisions of this Section VI. Such
authorized share reserve is comprised of (i) the number of shares which remained
available in the aggregate for issuance, as of the Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to the outstanding options incorporated into this Plan and
any other shares which would have been available for future option grant or
direct share issuance under the Predecessor Plan, (ii) the increase of 1,599,834
shares authorized by the Board under this Plan and approved by the stockholders
prior to the Effective Date, (iii) the additional increase of 1,000,000 shares
authorized by the Board on January 27, 1995, and approved by the stockholders at
the 1995 Annual Stockholders Meeting, and (iv) the additional increase of
3,000,000 shares authorized by the Board on January 21, 1997, and approved by
the stockholders at the 1997 Annual Stockholders Meeting. To the extent one or
more outstanding options under the Predecessor Plan which have been incorporated
into this Plan are subsequently exercised, the number of shares issued with
respect to each such option shall reduce, on a share-for-share basis, the number
of shares available for issuance under this Plan.

B. The maximum number of shares of Common Stock authorized for
issuance over the term of the Plan shall automatically increase at periodic
intervals each year by the number of shares of Common Stock repurchased by the
Corporation on the open market with the cash proceeds received by the
Corporation on or after the date of the 1998 Annual Stockholders Meeting from
the following sources: (i) the exercise of outstanding options under the Plan or
(ii) the direct issuance of shares of Common Stock under the Plan. In no event,
however shall such automatic share increase exceed 500,000 shares of Common
Stock in any one calendar year.

- --------
1/ Adjusted to reflect one or more splits of the Common Stock.

5
<PAGE> 35

C. No one person participating in the Plan may receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 4,000,000 shares2/ of Common Stock over the term of the
Plan. For purposes of this limitation, option grants, stock appreciation rights
and direct stock issuances made prior to January 1, 1995 shall not be taken into
account.

D. Should one or more outstanding options under this Plan
(including outstanding options under the Predecessor Plan incorporated into this
Plan) expire or terminate for any reason prior to exercise in full (including
any option canceled in accordance with the cancellation-regrant provisions of
Section IV of Article Two), then the shares subject to the portion of each
option not so exercised shall be available for subsequent issuance under the
Plan. Shares subject to any option or portion thereof surrendered or canceled in
accordance with Section V of Article Two and all share issuances under the Plan
(including unvested share issuances under the Predecessor Plan which have been
incorporated into this Plan), whether or not the 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 option
price of an outstanding 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 outstanding option under the Plan or the vesting of a direct
share issuance made 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 or which vest under the share issuance
and not by the net number of shares of Common Stock actually issued to the
holder of such option or share issuance.

E. Should any change be made to the Common Stock issuable
under the Plan 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, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, (ii) the maximum
number and/or class of securities by which the share reserve under the Plan may
automatically increase in any calendar year, (iii) the number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances over the
remaining term of the Plan, (iv) the number and/or class of securities and price
per share in effect under each option outstanding under the Option Grant Program
and (v) the number and/or class of securities and price per share in effect
under each outstanding option incorporated into this Plan from the Predecessor
Plan. Such adjustments to the outstanding options are to be effected in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.

- ----------
2/ Adjusted to reflect one or more splits of the Common Stock.

6
<PAGE> 36

ARTICLE TWO

OPTION GRANT PROGRAM

I. TERMS AND CONDITIONS OF OPTIONS

Options granted pursuant to the Option Grant Program shall be
authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted Non-Statutory Options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.

A. Option Price.

(1) The option price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:

(i) The option price per share of the Common Stock
subject to an Incentive Option shall in no event be less than one
hundred percent (100%) of the Fair Market Value of such Common Stock on
the grant date.

(ii) The option price per share of the Common Stock
subject to a Non-Statutory Option shall in no event be less than
eighty-five percent (85%) of the Fair Market Value of such Common Stock
on the grant date.

(2) The option price shall become immediately due upon
exercise of the option and, subject to the provisions of Section I of Article
Four and the instrument evidencing the grant, shall be payable in one of the
following alternative forms specified below:

full payment in cash or check drawn to the
Corporation's order;

full payment in 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 (as such term is defined below);

full payment in a combination of 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 and cash or check drawn to the
Corporation's order; or

full payment through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (I) shall provide
irrevocable instructions to 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 option price payable for the
purchased shares plus all applicable Federal and State income and
employment taxes required to be withheld by the Corporation in
connection with such purchase

7
<PAGE> 37

and (II) shall provide directives to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale transaction.

For purposes of this subparagraph (2), the Exercise Date shall
be the date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure is utilized
in connection with the exercise of the option, payment of the option price for
the purchased shares must accompany such notice.

B. Term and Exercise of Options. Each option granted under
this Option Grant Program shall be exercisable at such time or times and during
such period as is determined by the Plan Administrator and set forth in the
instrument evidencing the grant. No such option, however, shall have a maximum
term in excess of ten (10) years from the grant date.

C. Limited Transferability of Options. During the lifetime of
the Optionee, Incentive Options 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. Non-Statutory Options
may, to the extent permitted by the Plan Administrator, be assigned in whole or
in part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The terms applicable to the assigned portion 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.

D. Termination of Service.

(1) The following provisions shall govern the exercise
period applicable to any outstanding options held by the Optionee at the time of
cessation of Service or death.

Should an Optionee cease Service for any reason
(including death or Permanent Disability) while holding one or more
outstanding options under this Article Two, then none of those options
shall (except to the extent otherwise provided pursuant to subparagraph
C.(3) below) remain exercisable for more than a thirty-six (36)-month
period (or such shorter period determined by the Plan Administrator and
set forth in the instrument evidencing the grant) measured from the
date of such cessation of Service.

Any option held by the Optionee under this Article
Two and exercisable in whole or in part on the date of his or her 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. Such exercise, however, must occur
prior to the earlier of (i) the third anniversary of the date of the
Optionee's death (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the grant) or
(ii) the specified expiration date of the option term. Upon the
occurrence of the earlier event, the option shall terminate.

Under no circumstances shall any such option be
exercisable after the specified expiration date of the option term.

During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the
number of shares (if any) in

<PAGE> 38

which the Optionee is vested at the time of his or her cessation of
Service. Upon the expiration of the limited post-Service exercise
period or (if earlier) upon the specified expiration date of the option
term, each such option shall terminate and cease to be outstanding with
respect to any vested shares for which the option has not otherwise
been exercised. However, each outstanding option shall immediately
terminate and cease to be outstanding, at the time of the Optionee's
cessation of Service, with respect to any shares for which the option
is not otherwise at that time exercisable or in which the Optionee is
not otherwise at that time vested.

Should (i) the Optionee's Service be terminated for
misconduct (including, but not limited to, any act of dishonesty,
willful misconduct, fraud or embezzlement) or (ii) the Optionee make
any unauthorized use or disclosure of confidential information or trade
secrets of the Corporation or its parent or subsidiary corporations,
then in any such event all outstanding options held by the Optionee
under this Article Two shall terminate immediately and cease to be
outstanding.

(2) The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to permit one or more options held by the Optionee
under this Article Two to be exercised, during the limited post-Service exercise
period applicable under subparagraph (1) above, not only with respect to the
number of vested shares of Common Stock for which each such option is
exercisable at the time of the Optionee's cessation of Service but also with
respect to one or more subsequent installments for which the option would
otherwise have become exercisable had such cessation of Service not occurred.

(3) The Plan Administrator shall also have full power and
authority to extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service or death from the
limited period in effect under subparagraph (1) above to such greater period of
time as the Plan Administrator shall deem appropriate. In no event, however,
shall such option be exercisable after the specified expiration date of the
option term.

E. Stockholder Rights. An Optionee shall have no stockholder
rights with respect to any shares covered by the option until such individual
shall have exercised the option and paid the option price for the purchased
shares.

F. Repurchase Rights. The shares of Common Stock acquired upon
the exercise of any Article Two option grant may be subject to repurchase by the
Corporation in accordance with the following provisions:

(a) The Plan Administrator shall have the discretion to
authorize the issuance of unvested shares of Common Stock under this
Article Two. Should the Optionee cease Service while holding such
unvested shares, the Corporation shall have the right to repurchase any
or all of those unvested shares at the option price paid per share. The
terms and conditions 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 instrument
evidencing such repurchase right.

(b) All of the Corporation's outstanding repurchase rights
under this Article Two shall automatically terminate, and all shares
subject to such terminated rights shall immediately vest in full, upon
the occurrence of a Corporate Transaction,

9
<PAGE> 39

except to the extent: (i) any such repurchase right is expressly
assigned to the successor corporation (or parent thereof) in connection
with the 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 discretionary
authority, exercisable either before or after the Optionee's cessation
of Service, to cancel the Corporation's outstanding repurchase rights
with respect to one or more shares purchased or purchasable by the
Optionee under this Option Grant Program and thereby accelerate the
vesting of such shares in whole or in part at any time.

II. INCENTIVE OPTIONS

The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Incentive Options may
only be granted to individuals who are Employees of the Corporation. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to such terms and conditions.

A. Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more options granted to any Employee under this Plan (or any other
option plan of the Corporation or its parent or subsidiary corporations) may for
the first time become exercisable as incentive stock options under the Federal
tax laws during any one 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 first time in the same calendar
year, the foregoing limitation on the exercisability of such options as
incentive stock options under the Federal tax laws shall be applied on the basis
of the order in which such options are granted. Should the number of shares of
Common Stock for which any Incentive Option first becomes exercisable in any
calendar year exceed the applicable One Hundred Thousand Dollar ($100,000)
limitation, then that option may nevertheless be exercised in that calendar year
for the excess number of shares as a Non-Statutory Option under the Federal tax
laws.

B. 10% Stockholder. If any individual to whom an Incentive
Option is granted is the owner of stock (as determined under Section 424(d) of
the Code) possessing ten percent (10%) or more of the total combined voting
power of all classes of stock of the Corporation or any one of its parent or
subsidiary corporations, then the option price per share shall not be less than
one hundred and ten percent (110%) of the Fair Market Value per share of Common
Stock on the grant date, and the option term shall not exceed five (5) years,
measured from the grant date.

Except as modified by the preceding provisions of this Section
II, the provisions of Articles One, Two and Four of the Plan shall apply to all
Incentive Options granted hereunder.

III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL

A. In the event of any Corporate Transaction, each option
which is at the time outstanding under this Article Two shall automatically
accelerate so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of such shares. However,
an outstanding option under this Article Two 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

<PAGE> 40

corporation or parent thereof, (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the option spread
existing 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. Upon the consummation of the Corporate Transaction, all
outstanding options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company.

C. Each outstanding option under this Article Two which is
assumed in connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issued to the option holder, in consummation of such Corporate
Transaction, had such person exercised the option immediately prior to such
Corporate Transaction. Appropriate adjustments shall also be made to the option
price payable per share, provided the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.

D. 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 (upon such terms as it may deem
appropriate) for the automatic acceleration of one or more outstanding options
granted under the Plan which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time, in the event the
Optionee's Service should subsequently terminate within a designated period
following the effective date of such Corporate Transaction.

E. The grant of options under this Article Two 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.

F. The Plan Administrator shall have the discretionary
authority, 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 under this Article Two (and the termination
of one or more of the Corporation's outstanding repurchase rights under this
Article Two) upon the occurrence of a Change in Control. The Plan Administrator
shall also have full power and authority to condition any such option
acceleration (and the termination of any outstanding repurchase rights) upon the
subsequent termination of the Optionee's Service within a specified period
following the Change in Control.

G. Any options accelerated in connection with the Change in
Control shall remain fully exercisable until the expiration or sooner
termination of the option term.

H. Any Incentive Options accelerated under this Section III in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as incentive stock options under the Federal tax laws only to the
extent the applicable dollar limitation of Section II of this Article Two is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
option shall be exercisable as a Non-Statutory Option under the Federal tax
laws.

IV. CANCELLATION AND REGRANT OF OPTIONS

11
<PAGE> 41

The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under this Article Two (including
outstanding options under the Predecessor Plan incorporated into this Plan) and
to grant in substitution new options under the Plan covering the same or
different numbers of shares of Common Stock but with an option price per share
not less than (i) eighty five percent (85%) of the Fair Market Value of the
Common Stock on the new grant date or (ii) one hundred percent (100%) of such
Fair Market Value in the case of an Incentive Option.

V. STOCK APPRECIATION RIGHTS

A. Provided and only if the Plan Administrator determines in
its discretion to implement the stock appreciation right provisions of this
Section V, one or more Optionees may be granted the right, exercisable upon such
terms and conditions as the Plan Administrator may establish, to surrender all
or part of an unexercised option under this Article Two in exchange for a
distribution from the Corporation in an amount equal to the excess of (i) 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 (ii) the aggregate option price payable for
such vested shares.

B. No surrender of an option shall be effective hereunder
unless it is approved by the Plan Administrator. If the surrender is so
approved, then the distribution to which the Optionee shall accordingly become
entitled under this Section V 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.

C. 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
(i) five (5) business days after the receipt of the rejection notice or (ii) the
last day on which the option is otherwise exercisable in accordance with the
terms of the instrument evidencing such option, but in no event may such rights
be exercised more than ten (10) years after the date of the option grant.

D. One or more officers of the Corporation subject to the
short-swing profit restrictions of the Federal securities laws may, in the Plan
Administrator's sole discretion, be granted limited stock appreciation rights in
tandem with their outstanding options under the Plan. Upon the occurrence of a
Hostile Take-Over effected at any time when the Corporation's outstanding Common
Stock is registered under Section 12(g) of the 1934 Act, the officer shall have
a thirty (30)-day period in which he or she may surrender any outstanding
options with such a limited stock appreciation right in effect for at least
6 months to the Corporation, to the extent such options are at the time
exercisable for fully-vested shares of Common Stock. The officer 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 vested shares of Common Stock at
the time subject to each surrendered option (or surrendered portion of such
option) over (ii) the aggregate option price payable for such shares. The cash
distribution payable upon such option surrender shall be made within five (5)
days following the consummation of the Hostile Take-Over. The Plan Administrator
shall pre-approve, at the time the limited right is granted, the subsequent
exercise of that right in accordance with the terms of the grant and the
provisions of this Section V.D. No additional approval of the Plan Administrator
or the Board shall be required at the time of the actual option surrender and
cash distribution. Any unsurrendered portion of the option shall continue to
remain outstanding and

<PAGE> 42

become exercisable in accordance with the terms of the instrument evidencing
such grant.

E. The shares of Common Stock subject to any option
surrendered for an appreciation distribution pursuant to this Section V shall
NOT be available for subsequent issuance under the Plan.

13
<PAGE> 43

ARTICLE THREE

STOCK ISSUANCE PROGRAM

I. TERMS AND CONDITIONS OF STOCK ISSUANCES

Shares may be issued under the Stock Issuance Program through
direct and immediate purchases without any intervening stock option grants. The
issued shares shall be evidenced by a Stock Issuance Agreement ("Issuance
Agreement") that complies with the terms and conditions of this Article Three.

A. Consideration.

(1) Shares of Common Stock drawn from the Corporation's
authorized but unissued shares of
Common Stock ("Newly Issued Shares") shall be issued under the Stock Issuance
Program for one or more of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:

(i) cash or cash equivalents (such as a personal
check or bank draft) paid to the Corporation;

(ii) a promissory note payable to the Corporation's
order in one or more installments, which may be subject to cancellation
in whole or in part upon the terms and conditions established by the
Plan Administrator; or

(iii) past services rendered to the Corporation or
any parent or subsidiary corporation.

(2) Newly Issued Shares may, in the absolute discretion of
the Plan Administrator, be issued for consideration with a value less than
one-hundred percent (100%) of the Fair Market Value of such shares at the time
of issuance, but in no event less than eighty-five percent (85%) of such Fair
Market Value.

(3) Shares of Common Stock reacquired by the Corporation
and held as treasury shares ("Treasury Shares") may be issued under the Stock
Issuance Program for such consideration (including one or more of the items of
consideration specified in subparagraph 1. above) as the Plan Administrator may
deem appropriate, whether such consideration is in an amount less than, equal
to, or greater than the Fair Market Value of the Treasury Shares at the time of
issuance. Treasury Shares may, in lieu of any cash consideration, be issued
subject to such vesting requirements tied to the Participant's period of future
Service or the Corporation's attainment of specified performance objectives as
the Plan Administrator may establish at the time of issuance.

B. Vesting Provisions.

(1) Shares of Common Stock issued under the Stock Issuance
Program may, in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service. The elements of the vesting schedule
applicable to any unvested shares of Common Stock issued under the Stock
Issuance Program, namely:

14
<PAGE> 44

(i) the Service period to be completed by the
Participant or the performance objectives to be achieved by the
Corporation,

(ii) the number of installments in which the shares
are to vest,

(iii) the interval or intervals (if any) which are to
lapse between installments, and

(iv) the effect which death, Permanent Disability or
other event designated by the Plan Administrator is to have upon the
vesting schedule,

shall be determined by the Plan Administrator and incorporated into the Issuance
Agreement executed by the Corporation and the Participant at the time such
unvested shares are issued.

(2) The Participant shall have full stockholder rights
with respect to any shares of Common Stock issued to him or her under the Plan,
whether or not his or her interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares. Any new, additional or different shares of
stock or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
his or her unvested shares by reason of any stock dividend, stock split,
reclassification of Common Stock or other similar change in the Corporation's
capital structure or by reason of any Corporate Transaction shall be issued,
subject to (i) the same vesting requirements applicable to his or her unvested
shares and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.

(3) Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock under the Plan, then
those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further stockholder rights with
respect to those shares. To the extent the surrendered shares were previously
issued to the Participant for consideration paid in cash or cash equivalent
(including the Participant's purchase-money promissory note), the Corporation
shall repay to the Participant the cash consideration paid for the surrendered
shares and shall cancel the unpaid principal balance of any outstanding
purchase-money note of the Participant attributable to such surrendered shares.
The surrendered shares may, at the Plan Administrator's discretion, be retained
by the Corporation as Treasury Shares or may be retired to authorized but
unissued share status.

(4) The Plan Administrator may in its discretion elect to
waive the surrender and cancellation of one or more unvested shares of Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

II. CORPORATE TRANSACTIONS/CHANGE IN CONTROL

A. Upon the occurrence of any Corporate Transaction, all
unvested shares of Common Stock at the time outstanding under the Stock Issuance
Program shall immediately vest in full, except to the extent the Plan
Administrator imposes limitations in the Issuance Agreement which preclude such
accelerated vesting in whole or in part.

B. The Plan Administrator shall have the discretionary
authority, exercisable either

<PAGE> 45

at the time the unvested shares are issued under the Stock Issuance Program or
at any time while those shares remain outstanding, to provide for the immediate
and automatic vesting of those unvested shares at the time of a Change in
Control. The Plan Administrator shall also have full power and authority to
condition any such accelerated vesting upon the subsequent termination of the
Participant's Service within a specified period following the Change in Control.

III. TRANSFER RESTRICTIONS/SHARE ESCROW

A. Unvested shares may, in the Plan Administrator's
discretion, be held in escrow by the Corporation until the Participant's
interest in such shares vests or may be issued directly to the Participant with
restrictive legends on the certificates evidencing such unvested shares. To the
extent an escrow arrangement is utilized, the unvested shares and any securities
or other assets issued with respect to such shares (other than regular cash
dividends) shall be delivered in escrow to the Corporation to be held until the
Participant's interest in such shares (or other securities or assets) vests.
Alternatively, if the unvested shares are issued directly to the Participant,
the restrictive legend on the certificates for such shares shall read
substantially as follows:

"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND
ARE ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER RESTRICTIONS
AND (II) CANCELLATION OR REPURCHASE IN THE EVENT THE
REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) CEASES
TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER
RESTRICTIONS AND THE TERMS AND CONDITIONS OF SUCH CANCELLATION
OR REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER
PREDECESSOR IN INTEREST) DATED_______________, 199__, A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OFTHE
CORPORATION."

B. The Participant shall have no right to transfer any
unvested shares of Common Stock issued to him or her under the Stock Issuance
Program. For purposes of this restriction, the term "transfer" shall include
(without limitation) any sale, pledge, assignment, encumbrance, gift or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be canceled, and
neither the Participant nor the proposed transferee shall have any rights with
respect to those shares. However, the Participant shall have the right to make a
gift of unvested shares acquired under the Stock Issuance Program to his or her
spouse or issue, including adopted children, or to a trust established for such
spouse or issue, provided the donee of such shares delivers to the Corporation a
written agreement to be bound by all the provisions of the Stock Issuance
Program and the Issuance Agreement applicable to the gifted shares.

16
<PAGE> 46

ARTICLE FOUR

MISCELLANEOUS

I. LOANS OR INSTALLMENT PAYMENTS

A. The Plan Administrator may, in its discretion, assist any
Optionee or Participant (including an Optionee or Participant who is an officer
of the Corporation) in the exercise of one or more options granted to such
Optionee under the Option Grant Program or the purchase of one or more shares
issued to such Participant under the Stock Issuance Program, including the
satisfaction of any Federal and State income and employment tax obligations
arising therefrom, by (i) authorizing the extension of a loan from the
Corporation to such Optionee or Participant or (ii) permitting the Optionee or
Participant to pay the option price or purchase price for the purchased Common
Stock in installments over a period of years. The terms of any loan or
installment method of payment (including the interest rate and terms of
repayment) shall be upon such terms as the Plan Administrator specifies in the
applicable option or issuance agreement or otherwise deems appropriate under the
circumstances. Loans or installment payments may be authorized with or without
security or collateral. However, the maximum credit available to the Optionee or
Participant may not exceed the option or purchase price of the acquired shares
(less the par value of such shares) plus any Federal and State income and
employment tax liability incurred by the Optionee or Participant in connection
with the acquisition of such shares.

B. The Plan Administrator may, in its absolute discretion,
determine that one or more loans extended under this financial assistance
program shall be subject to forgiveness by the Corporation in whole or in part
upon such terms and conditions as the Plan Administrator may deem appropriate.

II. AMENDMENT OF THE PLAN AND AWARDS

A. The Board has complete and exclusive power and authority to
amend or modify the Plan (or any component thereof) in any or all respects
whatsoever. However, no such amendment or modification shall adversely affect
rights and obligations with respect to options at the time outstanding under the
Plan, nor the rights of any Participant with respect to Common Stock issued
under the Stock Issuance Program prior to such action, unless the Optionee or
Participant consents to such amendment. In addition, certain amendments may
require stockholder approval pursuant to applicable laws or regulations.

B. (i) Options to purchase shares of Common Stock may be
granted under the Option Grant Program and (ii) shares of Common Stock may be
issued under the Stock Issuance Program, which are in both instances in excess
of the number of shares then available for issuance under the Plan, provided any
excess shares actually issued under the Option Grant Program or the Stock
Issuance Program are held in escrow until stockholder approval is obtained for a
sufficient increase in the number of shares available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess option grants or excess share issuances are
made, then (I) any unexercised excess options shall terminate and cease to be
exercisable and (II) the Corporation shall promptly refund the purchase price
paid for any excess shares actually 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.

17
<PAGE> 47

<PAGE> 48

III. TAX WITHHOLDING

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

The Plan Administrator may, in its discretion and in
accordance with the provisions of this Section III of Article Four and such
supplemental rules as the Plan Administrator may from time to time adopt
(including the applicable safe-harbor provisions of Securities and Exchange
Commission Rule 16b-3), provide any or all holders of Non-Statutory Options or
unvested shares under the Plan with the right to use shares of the Corporation's
Common Stock in satisfaction of all or part of the Federal, State and local
income and employment tax liabilities incurred by such holders in connection
with the exercise of their options or the vesting of their shares (the "Taxes").
Such right may be provided to any such holder in either or both of the following
formats:

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

B. Stock Delivery. The Plan Administrator may, in its
discretion, provide the holder of the Non-Statutory Option or the unvested
shares with the election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in connection
with the option exercise or share vesting triggering the Taxes) with an
aggregate Fair Market Value equal to the percentage of the Taxes incurred in
connection with such option exercise or share vesting (not to exceed one hundred
percent (100%)) designated by the holder.

IV. EFFECTIVE DATE AND TERM OF PLAN

A. The Plan became effective on the Effective Date for the
Plan.

B. On January 27, 1995, the Board amended the Plan to increase
the number of shares available for issuance pursuant to the Plan by 1,000,000
shares, and the stockholders approved such increase at the 1995 Annual
Stockholders Meeting.

C. On April 28, 1995, the Board amended the Plan to impose a
limitation on the maximum number of shares of Common Stock for which any one
participant in the Plan may be granted stock options and separately exercisable
stock appreciation rights after December 31, 1994. The amendment was approved by
the stockholders at the 1995 Annual Stockholders Meeting.

D. On January 21, 1997, the Board amended the Plan to increase
the number of shares available for issuance pursuant to the Plan by an
additional 3,000,000 shares, and the stockholders approved such increase at the
1997 Annual Stockholders Meeting.

E. On April 14, 1998 the Board again amended the Plan to
effect the following changes (the "1998 Amendment"): (i) implement an automatic
share increase feature pursuant to which the maximum number of shares of Common
Stock authorized for issuance under the Plan will automatically increase at
periodic intervals by the number of shares of Common Stock

<PAGE> 49

repurchased by the Corporation on the open market with the cash proceeds
received by the Corporation on or after the date of the 1998 Annual Stockholders
Meeting from the following sources: the exercise of outstanding options under
the Plan or the direct issuance of shares of Common Stock under the Plan,
provided such automatic share increase shall not exceed 500,000 shares of Common
Stock in any one calendar year and (ii) effect a series of technical changes to
the provisions of the Plan (including the stockholder approval requirements and
the transferability of Non-Statutory Options) in order to take advantage of the
most recent amendments to Rule 16b-3 of the 1934 Act. The 1998 Amendment became
effective immediately upon adoption by the Board and is subject to approval by
the Corporation's stockholders at the 1998 Annual Meeting. No options shall be
granted, and no shares shall be issued, on the basis of the automatic share
increase feature of Paragraph VI.B of Article One, unless and until the 1998
Amendment is approved by the stockholders. Should such stockholder approval not
be obtained at the 1998 Annual Meeting, then such automatic increase feature
shall not be implemented. However, the provisions of the Plan as in effect
immediately prior to the 1998 Amendment shall automatically be reinstated, and
option grants may thereafter continue to be made pursuant to the reinstated
provisions of the Plan. All option grants made prior to the 1998 Amendment shall
remain outstanding in accordance with the terms and conditions of the respective
instruments evidencing those options or issuances, and nothing in the 1998
Amendment shall be deemed to modify or in any way affect those outstanding
options or issuances. Subject to the foregoing limitations, the Plan
Administrator may make option grants under the Plan at any time before the date
fixed herein for the termination of the Plan.

F. Each stock option grant outstanding under the Predecessor
Plan immediately prior to the Effective Date shall be incorporated into this
Plan and treated as an outstanding option under this Plan, but each such option
shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant, and nothing in this Plan shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to their acquisition of shares of Common Stock thereunder.
Each unvested share of Common Stock outstanding under the Predecessor Plan on
the Effective Date shall continue to be governed solely by the terms and
conditions of the instrument evidencing such share issuance, and nothing in this
Plan shall be deemed to affect or otherwise modify the rights or obligations of
the holder of such unvested shares.

G. The option/vesting acceleration provisions of Section III
of Article Two and Section II of Article Three relating to Corporate
Transactions and Changes in Control may, in the Plan Administrator's discretion,
be extended to one or more stock options or unvested share issuances which are
outstanding under the Predecessor Plan on the Effective Date but which do not
otherwise provide for such acceleration.

H. The sale and remittance procedure authorized for the
exercise of outstanding options under this Plan shall be available for all
options granted under this Plan on or after the Effective Date and for all
Non-Statutory Options outstanding under the Predecessor Plan and incorporated
into this Plan. The Plan Administrator may also allow such procedure to be
utilized in connection with one or more disqualifying dispositions of Incentive
Option shares effected after the Effective Date, whether such Incentive Options
were granted under this Plan or the Predecessor Plan.

I. The Plan shall terminate upon the earlier of (i) June 30,
2003 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued or canceled pursuant to the exercise, surrender or
cash-out of the options granted under the Plan or the issuance of shares
(whether vested or unvested) under the Stock Issuance Program. Upon such plan
termination, all outstanding option grants and unvested share issuances shall
continue to have force and effect in accordance with the provisions of the
instruments evidencing such grants or issuances.

19
<PAGE> 50

V. REGULATORY APPROVALS

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

B. No shares of Common Stock or other assets shall be issued
or delivered under this 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 listing
requirements of any securities exchange on which stock of the same class is then
listed.

VI. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants or share issuances under the Plan shall be used
for general corporate purposes.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Neither the action of the Corporation in establishing the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the Plan shall be construed so as to grant any individual the right
to remain in the employ or service of the Corporation (or any parent or
subsidiary corporation) for any period of specific duration, and the Corporation
(or any parent or subsidiary corporation retaining the services of such
individual) may terminate such individual's employment or service at any time
and for any reason, with or without cause.

VIII. MISCELLANEOUS PROVISIONS

A. The right to acquire Common Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any Optionee or
Participant.

B. The provisions of the Plan relating to the exercise of
options and the vesting of shares shall be governed by the laws of the State of
California, as such laws are applied to contracts entered into and performed in
such State.

C. The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Participants and Optionees, the
legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.

20
<PAGE> 51

PROXY PAIRGAIN TECHNOLOGIES, INC.
ANNUAL MEETING OF STOCKHOLDERS, JUNE 24, 1998
14402 FRANKLIN AVENUE
TUSTIN, CALIFORNIA 92780

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Charles S. Strauch, Howard S. Flagg, Benedict
A. Itri, Howard G. Bubb, Robert C. Hawk, Robert A. Hoff, B. Allen Lay, or any of
them, each with full power of substitution, to represent the undersigned and to
vote all shares of stock of PairGain Technologies, Inc. which the undersigned
would be entitled to vote if personally present at the 1998 Annual Meeting of
Stockholders of PairGain Technologies, Inc. to be held at 14402 Franklin Avenue,
Tustin, California 92780 on June 24, 1998 at 10:00 a.m. local time, and at any
and all adjournments or postponements thereof, as follows on the reverse side.

The undersigned acknowledges receipt of the Notice of Annual Meeting and
Proxy Statement for the 1998 Annual Meeting.

Whether or not the undersigned plans to attend the 1998 Annual Meeting, the
undersigned is urged to execute and return this Proxy, which may be revoked at
any time prior to the voting hereof.

All other proxies heretofore given by the undersigned to vote shares of stock
of PairGain Technologies, Inc. which the undersigned would be entitled to vote
if personally present at said Annual Meeting or any other adjournment thereof
are hereby expressly revoked.

The shares represented by this Proxy will be voted as directed, but when no
direction is given, they will be voted FOR the nominees named below and FOR
approval of the proposals named below. The nomination of three members of the
Board of Directors, the proposal of the amendments to the 1993 Stock
Option/Stock Issuance Plan and the proposal to approve the appointment of
Deloitte & Touche LLP as independent auditor of the Company for 1998 have been
made by PairGain Technologies, Inc. Your vote on each matter is neither
conditioned on nor related to your vote on any other matter.

1. To ratify the appointment of the following director to serve for the term of
two years:

<TABLE>
<S> <C> <C>
FOR WITHHOLD AUTHORITY TO VOTE
Howard G. Bubb [ ] [ ]
</TABLE>

and to elect the following directors to serve for the term of three years:

<TABLE>
<S> <C> <C>
FOR WITHHOLD AUTHORITY TO VOTE
Benedict A. [ ] [ ]
Itri
FOR WITHHOLD AUTHORITY TO VOTE
B. Allen Lay [ ] [ ]
</TABLE>

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 52

2. To approve the amendments to the 1993 Stock Option/Stock Issuance Plan:

<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>

3. To approve the appointment of Deloitte & Touche LLP as independent auditor of
the Company for 1998:

<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>

In addition, the proxies are authorized, in their discretion, to vote upon
such other matters as may properly come before the Annual Meeting or any
adjournment thereof. The Board of Directors recommends a vote FOR the nominees
listed above and FOR Proposal 2 and Proposal 3. This Proxy, when properly
executed, will be voted as specified above. THIS PROXY WILL BE VOTED FOR THE
NOMINEES LISTED ABOVE AND FOR PROPOSAL 2 AND PROPOSAL 3 IF NO SPECIFICATION IS
MADE.

Date:

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

----------------------------
Signature

Please sign your name
exactly as it appears on
your stock certificate, date
and return this Proxy as
promptly as possible in the
reply envelope provided.
When signing as attorney,
executor, trustee, or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by a
duly authorized officer. If
a partnership, please sign
in partnership name by
authorized person. Joint
owners must each sign
personally.
PLEASE BE CERTAIN YOU HAVE DATED AND SIGNED THIS PROXY