PAIRGAIN TECHNOLOGIES INC /CA/, DEF 14A, 1999-04-29

PAIRGAIN TECHNOLOGIES INC /CA/
DEF 14A, 1999-04-29
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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:

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

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] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-16(i)(4) and 0-11.

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

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

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

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

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

(1) Amount Previously Paid:

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

(3) Filing Party:

(4) Date Filed:

<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") on Wednesday, June 16, 1999, at
10:00 a.m. Pacific Daylight Time. The Annual Meeting will be held at our offices
at 14402 Franklin Avenue in Tustin, California.

At the meeting you will be asked to consider and vote on the following
proposals:

o the ratification of the appointment of one individual to serve on
our Board of Directors until 2001, and the re-election of three
individuals to serve on our Board of Directors until 2002;

o the approval of a series of amendments to the 1993 Stock
Option/Stock Issuance Plan (the "1993 Plan") which will:

o increase the number of shares of PairGain common stock available
for issuance under the 1993 Plan by an additional 2,000,000
shares;

o require all option grants and direct stock issuances to be made
at not less than 100% of the fair market value of the shares on
the grant or issue date;

o eliminate the option cancellation/regrant provisions; and

o eliminate the financing provisions of the 1993 Plan; and

o the approval of the selection of Deloitte & Touche LLP as our
independent auditor for the fiscal year ending December 31, 1999.

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 us 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/ MICHAEL PASCOE

MICHAEL PASCOE
Chief Executive Officer and President

Tustin, California
May 7, 1999

<PAGE> 3

PAIRGAIN TECHNOLOGIES, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 16, 1999

To the Stockholders of PairGain Technologies, Inc.

NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of PairGain Technologies, Inc. ("PairGain"), will be held at
our offices at 14402 Franklin Avenue in Tustin, California, on June 16, 1999, at
10:00 a.m. local time for the following purposes:

o the ratification of the appointment of one individual to serve on
our Board of Directors until 2001, and the re-election of three
individuals to serve on our Board of Directors until 2002;

o the approval of a series of amendments to the 1993 Stock
Option/Stock Issuance Plan (the "1993 Plan") which will:

o increase the number of shares of PairGain common stock available
for issuance under the 1993 Plan by an additional 2,000,000
shares;

o require all option grants and direct stock issuances to be made
at not less than 100% of the fair market value of the shares on
the grant or issue date;

o eliminate the option cancellation/regrant provisions; and

o eliminate the financing provisions of the 1993 Plan;

o the approval of the selection of Deloitte & Touche LLP as our
independent auditor for the fiscal year ending December 31, 1999;
and

o 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 26, 1999 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. The stock transfer books of PairGain will
remain open between the record date and the date of the Annual Meeting. A list
of stockholders entitled to vote at the Annual Meeting will be available for
inspection at the executive offices of PairGain.

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 US 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 7, 1999

<PAGE> 4

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

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 16, 1999

PROXY STATEMENT

GENERAL INFORMATION

This Proxy Statement is furnished to stockholders of PairGain
Technologies, Inc., a Delaware corporation ("PairGain"), 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 16, 1999, 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 PairGain's offices at 14402 Franklin Avenue in
Tustin, California.

These proxy solicitation materials are first being mailed on or about
May 7, 1999 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 PairGain (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 we 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 PairGain common stock. We
may conduct further solicitation personally or telephonically or by other means
through our officers, directors and regular employees, none of whom will receive
additional compensation for assisting with the solicitation. Except as provided
above, PairGain does not presently intend to solicit proxies other than by mail.

Only stockholders of record at the close of business on April 26, 1999
are entitled to notice of and to vote at the Annual Meeting. As of April 26,
1999, 70,852,201 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 26, 1999. PairGain'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 will 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. We believe 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. We
intend 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.

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<PAGE> 5

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:

o the ratification and election of the nominees listed below;

o the authorization of an additional 2,000,000 shares of common stock
for issuance under the 1993 Stock Option/Stock Issuance Plan (the
"1993 Plan") and the approval of the other indicated amendments to
the 1993 Plan; and

o the approval of the selection of Deloitte & Touche LLP as PairGain's
independent auditor for the fiscal year ending December 31, 1999.

As to any other business which may properly come before the meeting,
they will vote in accordance with their best judgment. We do not presently know
of any other such business.

PROPOSAL 1:

RATIFICATION AND ELECTION OF DIRECTORS

PairGain's Corporate Bylaws provide that the number of directors that
shall constitute the Board of Directors shall be not less than five nor more
than nine. In January 1999, PairGain's Board of Directors amended its Bylaws,
under Article III Section 1, to set the number of directors at eight. Prior to
the amendment, the number was set at seven. The Board appointed Michael Pascoe
as a member of the Board of Directors in conjunction with his election to serve
as the Chief Executive Officer and President of PairGain. Because the seat
filled by Mr. Pascoe was not voted on by the stockholders at the 1998 Annual
Meeting in the normal cycle of electing directors, the Board seeks ratification
from PairGain's stockholders of Mr. Pascoe's appointment to the Board. Assuming
ratification is given, Mr. Pascoe's term will extend to the 2001 Annual Meeting.
Information regarding Mr. Pascoe is set forth below:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Michael Pascoe 46 Chief Executive Officer and President 1999
PairGain Technologies, Inc.
</TABLE>

Mr. Pascoe joined PairGain as a part-time employee in December 1998 and
was appointed Chief Executive Officer, President and a member of the Board of
Directors on January 11, 1999. Mr. Pascoe was employed by Newbridge Networks
from 1986 to 1998, where his most recent position was President, Newbridge
Networks - US and Executive Vice President, North and South America. Mr. Pascoe
has also held senior sales, marketing and technical management positions at
Rockwell Telcom, MiTel and Nortel/Bell Northern Research.

PairGain's Amended and Restated Certificate of Incorporation provides
for its 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 1999, 2000 or 2001 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.

DIRECTORS STANDING FOR RE-ELECTION

The names of and certain information about the directors comprising
the class of directors whose term expires as of the 1999 Annual Meeting follows:

2
<PAGE> 6

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Charles S. Strauch 63 Chairman of the Board, 1991
PairGain Technologies, Inc.

Robert C. Hawk(1) 59 President 1992
Hawk Communications

Robert A. Hoff(2) 46 General Partner, 1989
Crosspoint Venture Partners
</TABLE>

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

Mr. Strauch became a PairGain director in October 1991 and has been
Chairman of our Board of Directors since November 1991. Mr. Strauch served as
our Chief Executive Officer from April 1992 until January 1999. Prior to his
employment with PairGain, 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 PairGain director in November 1992. Mr. Hawk is
President of Hawk Communications and 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 Covad Communications Group, Inc.
(Nasdaq), Xylan Corporation (Nasdaq), Concord Communications (Nasdaq), Radcom
(Nasdaq) and Com21 Incorporated (Nasdaq).

Mr. Hoff became a PairGain director 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 Efficient Networks, Sonoma Systems and Accredited Home Lenders
and publicly-held Onyx Acceptance Corporation (Nasdaq), Com21 Incorporated
(Nasdaq) and US Web Corporation (Nasdaq).

DIRECTORS CONTINUING TO SERVE UNTIL 2000

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

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Howard S. Flagg 44 Executive Vice President, 1991
Business Development,
PairGain Technologies, Inc.

Howard G. Bubb(1) 44 President and Chief Executive Officer, 1997
Dialogic Corporation
</TABLE>

(1) Member of the Audit Committee

Mr. Flagg, a PairGain founder, was named Executive Vice President,
Business Development in January 1999, and has been a PairGain director since
November 1991. He served as President from November 1991 to December 1998, 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
PairGain, Mr. Flagg founded and served as a principal of Advanced
Telecommunications, Inc., an aerospace telecommunications consulting firm.

3
<PAGE> 7

Mr. Bubb became a PairGain director in December 1997. 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 Telenova's Lexar subsidiary where he was senior vice president and general
manager. Mr. Bubb also held senior management positions at United Technologies,
Memorex and Telex corporations.

DIRECTORS CONTINUING TO SERVE UNTIL 2001

The name of and certain information about the directors comprising the
class of directors whose term expires in 2001 is set forth below:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Benedict A. Itri 46 Executive Vice President and 1991
Chief Technical Officer,
PairGain Technologies, Inc.

B. Allen Lay(1),(2) 64 General Partner, 1989
Southern California Ventures
</TABLE>

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

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

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

Mr. Lay became a PairGain director 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) and Kofax Imaging Corporation (Nasdaq).

There is no family relationship between any director and executive
officer of PairGain.

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, 1998,
PairGain's Board of Directors met six 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.

The Audit Committee, which held two meetings during fiscal 1998,
consisted of Howard G. Bubb, Robert C. Hawk and B. Allen Lay. The Audit
Committee recommends engagement of PairGain's independent auditor and is
primarily responsible for approving the services performed by our independent
auditor. In addition, the Audit Committee reviews and evaluates our accounting
principles and our system of internal accounting controls.

The Compensation Committee of the Board of Directors consists of Robert
A. Hoff and B. Allen Lay. The Compensation Committee held eight meetings during
fiscal 1998. The Compensation Committee is responsible for administering the
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.

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<PAGE> 8

Directors who are not PairGain officers 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 PairGain's 1996 Non-Employee Directors Stock
Option Plan (the "Director Plan"). Directors who are not members of the
Compensation Committee are also eligible to receive stock option grants pursuant
to the 1993 Plan.

Information regarding option activity during 1998 for non-employee
directors pursuant to the Director Plan and the 1993 Plan follows:

<TABLE>
<CAPTION>
DIRECTOR PLAN
--------------------------------------------------------------
OPTION OPTION NET VALUE OUTSTANDING
GRANTS EXERCISE OPTIONS ON EXERCISE AS OF
NAME RECEIVED PRICE(1) EXERCISED DATES APRIL 23, 1999
- ----------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Howard G. Bubb 40,000 $16.00 -- -- 40,000
Robert C. Hawk 20,000 $16.88 -- -- 40,000
Robert A. Hoff 20,000 $16.88 -- -- 80,000
B. Allen Lay 20,000 $16.88 -- -- 80,000
</TABLE>

<TABLE>
<CAPTION>
DIRECTOR PLAN
--------------------------------------------------------------
OPTION OPTION NET VALUE OUTSTANDING
GRANTS EXERCISE OPTIONS ON EXERCISE AS OF
NAME RECEIVED PRICE(1) EXERCISED DATES APRIL 23, 1999
- ----------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Howard G. Bubb 20,000 $16.88 -- -- 20,000
Robert C. Hawk -- -- -- -- 10,169
Robert A. Hoff N/A N/A N/A N/A N/A
B. Allen Lay N/A N/A N/A N/A N/A
</TABLE>

- -------------------
(1) All option grants have an exercise price equal to the fair market value of
the shares on the grant date.

The following table sets forth certain information regarding the options
to be granted under the Director Plan following the 1999 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.

<TABLE>
<CAPTION>
NUMBER OF
NAME OPTION SHARES
------------------------------------------------- --------------
<S> <C>
Howard G. Bubb, Director 20,000
Robert C. Hawk, Director 20,000
Robert A. Hoff, Director 20,000
B. Allen Lay, Director 20,000

All non-employee directors as a group (four persons) 80,000
</TABLE>

THE BOARD OF DIRECTORS RECOMMENDS THE RATIFICATION AND RE-ELECTION OF THE
NOMINEES LISTED ABOVE.

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<PAGE> 9

PROPOSAL 2:

APPROVAL OF AMENDMENTS TO 1993 STOCK OPTION/STOCK ISSUANCE PLAN

As PairGain stockholders, you are being asked to approve a series of
amendments to the 1993 Stock Option/Stock Issuance Plan (the "1993 Plan") that
will effect the following changes:

o increase the number of shares of common stock reserved under the
1993 Plan by an additional 2,000,000 shares;

o require all option grants and direct stock issuances to be made with
exercise or issue prices not less than one hundred percent (100%) of
the fair market value of the shares on the grant or issue date;

o eliminate the cancellation/regrant provisions which allow the
cancellation of outstanding options with exercise prices in excess
of the then current market price of common stock and the grant of
replacement options with an exercise price based on the market price
of common stock at the time of the new grant; and

o eliminate the financing provisions which authorize our Compensation
Committee (as plan administrator) to extend loans to optionees or
participants for purposes of exercising options or purchasing shares
under the 1993 Plan.

The 1993 Plan became effective in connection with PairGain's initial
public offering in September 1993. The amendments to the 1993 Plan which are the
subject of this Proposal were approved by the Board on January 14, 1999 and are
subject to your approval at the 1999 Annual Meeting. The share increase will
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 our
long-term growth and success. The remaining amendments will restrict the
Compensation Committee's discretionary authority under the 1993 Plan to ensure
that options granted or direct stock issuances made under the 1993 Plan will be
more closely aligned with your interests.

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

EQUITY PROGRAMS

The 1993 Plan contains two separate equity incentive programs: (i) the
Option Grant Program and (ii) the 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 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

As of April 26, 1999, a total of 24,046,400 shares of common stock has
been reserved for issuance over the ten year term of the 1993 Plan. Such share
reserve includes the 2,000,000 share increase that is subject to your approval
of this Proposal. 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 we repurchase on the open market with the cash
proceeds we received 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 automatic share
increase exceed 500,000 shares of common stock in any one calendar year. For the
1998 calendar year, such automatic increase added 21,400 shares of common stock
to the total share reserve and an automatic increase in April 1999 added an
additional 225,000 shares to the total share reserve.

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. Your approval of this
Proposal will also constitute re-approval of such share limitation for purposes
of Internal Revenue Code Section 162(m).

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<PAGE> 10

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 issuance
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 us pursuant to our 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 our receipt of consideration, then appropriate
adjustments will be made to:

o the maximum number and/or class of securities issuable under the
1993 Plan;

o the maximum number and/or class of securities by which the share
reserve under the Plan may automatically increase in any calendar
year in connection with our repurchase of outstanding shares on the
open market;

o 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

o 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.

ELIGIBILITY

Officers and other key employees of PairGain and its subsidiaries
(whether now existing or subsequently established), non-employee Board members,
and consultants and independent contractors hired by PairGain or its
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 26, 1999, approximately six executive officers, 706 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 26, 1999, the closing selling price per share
was $12.94.

OPTION GRANT PROGRAM

Options may be granted under the Option Grant Program at an exercise
price per share not less than one hundred percent (100%) of the fair market
value per share of common stock on the option grant date. 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 Compensation Committee 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 Compensation Committee 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 us equal
in amount to the excess of (a) the fair market value of the vested
shares of common stock subject to the surrendered option over (b) the
aggregate exercise price

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<PAGE> 11

payable for those shares. Such appreciation distribution may, at the
discretion of the Compensation Committee, be made in cash or in shares
of common stock.

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

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 Compensation Committee 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 one hundred percent (100%) of fair market value per share of
common stock. Shares may be purchased for cash or issued 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 Compensation Committee will have the
discretionary authority at any time to accelerate the vesting of any unvested
shares.

GENERAL PROVISIONS

ACCELERATION

In the event that PairGain 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 cash incentive program which
preserves the spread on the unvested option shares will automatically accelerate
in full, and all unvested shares under the Stock Issuance Program will
immediately vest, except to the extent PairGain's repurchase rights with respect
to those shares are to be assigned to the successor corporation. The
Compensation Committee will have the discretionary authority to structure one or
more option grants or unvested share issuances so that those options or shares,
to the extent they do not otherwise vest at the time of the acquisition, will
subsequently vest in full 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 PairGain (whether by
successful tender offer for more than 50% of our outstanding voting stock or by
proxy contest for the election of Board members), the Compensation Committee
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 PairGain 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 PairGain.

SPECIAL TAX ELECTION

The Compensation Committee may provide one or more holders of options or
unvested shares with the right to have us withhold a portion of the shares
otherwise issuable to such individuals in satisfaction of the withholding taxes
to which such individuals may become subject in connection with the exercise of
those options or the vesting of those

8
<PAGE> 12

shares. Alternatively, the Compensation Committee 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 your approval as required 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.

STOCK AWARDS

The table below shows, as to each of our executive officers named in the
Summary Compensation Table and the other indicated individuals and groups, the
number of shares of common stock subject to options granted under the 1993 Plan
between January 1, 1998 and April 23, 1999 together with the weighted average
exercise price payable per share. The number of shares and weighted average
exercise price includes the options that were originally granted during such
period and subsequently cancelled and regranted at a lower exercise price per
share on either August 5, 1998 or December 4, 1998. No direct stock issuances
have been made to date under the Stock Issuance Program of the 1993 Plan.

OPTION TRANSACTIONS

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
NAME AND TITLE OPTION SHARES(1) EXERCISE PRICE($)
------------------------------------------------ ------------------ ------------------------
<S> <C> <C>
Charles S. Strauch(2)
Chairman of the Board 40,000 $6.22

Howard S. Flagg(2)
Executive Vice President, Business
Development and Director 25,000 $6.22

Benedict A. Itri
Executive Vice President Chief
Technical Officer and Director 25,000 $6.22

Charles W. McBrayer(3)
Senior Vice President, Chief Financial
Officer and Secretary 130,334 $7.22

Dennis Young(4)
Senior Vice President, Operations and
Business Units 36,000 $7.85

All executive officers as a group (five 256,334 $6.96
persons)

Howard G. Bubb
Director 20,000 $16.88

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 20,000 $16.88
persons)

All employees, including officers who are not 10,159,396 $9.84
executive officers, as a group (500 persons)
</TABLE>

9
<PAGE> 13

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

(1) The number of option shares includes two option repricing programs that
occurred in August 1998 and December 1998. On August 5, 1998, options with
exercise prices in excess of $12.75 per share were cancelled in
consideration for new options each with an exercise price of $12.75 per
share. On December 4, 1998, options with exercise prices in excess of $7.03
per share (including options granted on August 5, 1998) were cancelled in
consideration for new options each with an exercise price of $7.03 per
share. Vesting of the higher priced options was forfeited by the
optionholders and the new options issued in replacement will vest monthly
over a 48 month period beginning on either the August 5, 1998 or December
4, 1998 grant date. The number of options granted on either August 5, 1998
or December 4, 1998 in cancellation of outstanding higher-priced options
originally granted during the period January 1, 1998 through April 23, 1999
was as follows for each of the indicated individuals and groups:

<TABLE>
<CAPTION>
NUMBER OF OPTION SHARES
-------------------------------------------------
NAME AUGUST 5, 1998 GRANT DECEMBER 4, 1998 GRANT
-------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Mr. Strauch -- --
Mr. Flagg -- --
Mr. Itri -- --
Mr. McBrayer -- 7,167
Mr. Young -- 8,000
All executive officers as a group -- 15,167
All non-employee directors as a group -- --
All employees, including officers
who are not executive officers, as a group 798,500 3,724,077
</TABLE>

(2) During 1998 and through January 11, 1999, Mr. Strauch had the additional
title of Chief Executive Officer and Mr. Flagg had the title of President.
On January 11, 1999, Michael Pascoe was appointed Chief Executive Officer
and President and Mr. Flagg became Executive Vice President, Business
Development. Mr. Strauch retained the position of Chairman of the Board.
Mr. Pascoe worked for PairGain on a part-time basis from December 1998
through January 10, 1999. In December 1998, we granted Mr. Pascoe a
non-qualified option to purchase 450,000 shares at a price of $7.00 per
share outside the Plan in connection with our hiring of him as Chief
Executive Officer and President. The terms of this grant are identical to
the terms of non-qualified grants issued under the 1993 Plan. The grant
will vest as to 25% of the options shares upon Mr. Pascoe's completion of
one year of employment and will vest as to the balance in a series of 36
successive equal monthly installments upon his completion of each of the
next 36 months of employment thereafter.

(3) 1998 grants to Mr. McBrayer include 20,000 option shares granted in 1998,
plus 110,334 option shares granted under repricing programs to replace
shares previously granted at higher exercise prices.

(4) 1998 grants to Mr. Young include 20,000 option shares granted in 1998, plus
16,000 option shares granted under repricing programs to replace shares
previously granted at higher exercise prices.

As of April 23, 1999, options for 9,167,841 shares of common stock were
outstanding under the 1993 Plan, 11,746,955 shares had been issued pursuant to
option exercises or direct stock issuances under the 1993 Plan, and 3,131,604
shares remained available for future issuance, including the 2,000,000 share
increase which is part of this proposal.

NEW PLAN BENEFITS

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

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)

10
<PAGE> 14

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 (i) the fair market value of those shares on the
exercise date over (ii) 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.

If the optionee makes a disqualifying disposition of the purchased
shares, then we 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 we 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 us 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 our 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 (i) the fair market value of the purchased shares on the exercise date
over (ii) 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.

We 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. In general, we will be allowed a deduction during the
taxable year 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. We 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

We anticipate that any compensation deemed paid by us 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). We anticipate that this
compensation will not have to be taken into account for purposes of the $1.0
million limitation per covered individual on the deductibility of the
compensation paid to certain of our executive officers. Accordingly, all
compensation deemed paid with respect to those options will remain deductible by
us without limitation under Code Section 162(m).

11
<PAGE> 15

ACCOUNTING TREATMENT

Under the current accounting principles in effect for equity incentive
programs such as the 1993 Plan, the option grants under the 1993 Plan will not
result in any direct charge to our reported earnings. However, the fair value of
those options is required to be disclosed in the notes to our financial
statements, and we must also disclose, in footnotes to our financial statements,
the proforma impact those options would have on our reported earnings were the
fair value of those options at the time of grant treated as a compensation
expense. In addition, the number of outstanding options may be a factor in
determining our earnings per share on a fully-diluted basis.

The Financial Accounting Standards Board recently issued an exposure
draft of a proposed interpretation of APB Opinion 25, "Accounting for Stock
Issued to Employees." Under the proposed interpretation, option grants made to
non-employee Board members or independent consultants after December 15, 1998
will result in a direct charge to our reported earnings based upon the fair
value of the option measured initially as of the grant date and then
subsequently on the vesting date of each installment of the option shares.
Accordingly, such charge will include the appreciation in the value of the
option shares over the period between the grant date of the option (or, if
later, the effective date of the final interpretation) and the vesting date of
each installment of the option shares.

Should one or more optionees be granted stock appreciation rights under
the 1993 Plan that have no conditions upon exercisability other than a service
or employment requirement, then such rights would result in a compensation
expense to be charged against our reported earnings. Accordingly, at the end of
each fiscal quarter, the amount (if any) by which the fair market value of the
shares of common stock subject to such outstanding stock appreciation rights has
increased from the prior quarter-end would be accrued as compensation expense,
to the extent such fair market value is in excess of the aggregate exercise
price in effect for those rights.

STOCKHOLDER APPROVAL

The affirmative vote of a majority of PairGain's outstanding voting
shares present or represented and entitled to vote at the 1999 Annual Meeting is
required for approval of the amendments to 1993 Plan. Should your approval not
be obtained, then the number of shares reserved under the 1993 Plan will not be
increased by the 2,000,000 shares presented in this Proposal. In addition,
options may be granted and direct stock issued at prices not less than
eighty-five percent (85%) of fair market value on the option grant or direct
issuance date, and the Compensation Committee will continue to have
discretionary authority to extend loans to individuals exercising non-statutory
options or purchasing shares under the 1993 Plan. Furthermore, 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 stockholders has
been issued pursuant to the exercise of options granted or direct stock
issuances made under the 1993 Plan.

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 PairGain's
independent auditor for the fiscal year ending December 31, 1999 and has further
directed that management submit the selection of independent auditor for
ratification by you at the Annual Meeting. Representatives of Deloitte & Touche
LLP are expected to be present at the Annual Meeting. They will have an
opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.

Your ratification of the selection of Deloitte & Touche LLP as our
independent auditor is not required by our Bylaws or otherwise. However, the
Board is submitting the selection of Deloitte & Touche LLP to you for
ratification as a matter of good corporate practice. If you 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
PairGain and our stockholders.

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

12
<PAGE> 16

STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth information concerning the beneficial
ownership of shares of PairGain's common stock by:

o each beneficial owner of more than 5% of the outstanding shares of
common stock;

o each PairGain director;

o the Chief Executive Officer and the four most highly compensated
other Executive Officers; and

o by all PairGain directors and executive officers as a group.

Except as otherwise noted, this information is presented as of April 23,
1999, and each beneficial owner listed has sole investment and voting power with
respect to the common stock indicated.

<TABLE>
<CAPTION>
NAME OF INDIVIDUAL SHARES OPTIONS
OR NUMBER OF BENEFICIALLY EXERCISABLE PERCENT
PERSONS IN GROUP POSITION WITH PAIRGAIN OWNED WITHIN 60 DAYS(1) OF SHARES
- ---------------------------- ----------------------------------- ------------ ----------------- ---------
<S> <C> <C> <C> <C>
Howard G. Bubb Director -- 40,000 *

Robert C. Hawk Director -- 50,169 *

Robert A. Hoff Director 19,980 80,000 *

B. Allen Lay Director 123,676 80,000 *

Charles S. Strauch(2) Chairman of the Board 908,493 654,090 2.2%

Howard S. Flagg(2) Executive Vice President, Business
Development and Director 439,768 592,931 1.4%

Benedict A. Itri Executive Vice President, Chief
Technical Officer and Director 566,444 554,657 1.6%

Charles W. McBrayer Senior Vice President, Chief
Financial Officer and Secretary 68,437 137,138 *

Dennis Young Senior Vice President,
Operations and Business Units 1,760 181,245 *

All directors and executive
officers as a group (nine persons) 2,128,558 2,370,230 6.1%
</TABLE>

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

* Less than 1%

(1) Number of shares subject to options that are exercisable as of April 23,
1999 or within 60 days after that date.

13
<PAGE> 17

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

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

Based solely on our review of copies of such reports we received, or
written representations of certain reporting persons, we believe that, during
1998, all filing requirements applicable to our executive officers, directors
and greater than ten percent stockholders were complied with, with the following
exceptions: Mr. McBrayer failed to timely file a Form 4 for the month of
November 1998 with respect to a sale of 1,226 shares of PairGain common stock.
Mr. McBrayer filed a Form 5 on February 14, 1999 reporting this sale.

PAIRGAIN'S DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning PairGain's
Executive Officers and Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ----------- --------------------------------------------------------------
<S> <C> <C>
Charles S. Strauch(1) 63 Chairman of the Board
Michael Pascoe(1) 46 Chief Executive Officer, President and Director
Howard S. Flagg(1) 44 Executive Vice President, Business Development and Director
Benedict A. Itri 46 Executive Vice President, Chief Technical Officer and Director
Charles W. McBrayer 50 Senior Vice President, Chief Financial Officer and Secretary
Dennis Young 56 Senior Vice President, Operations and Business Units
Howard G. Bubb(2) 44 Director
Robert C. Hawk(2) 59 Director
Robert A. Hoff(3) 46 Director
B. Allen Lay(2),(3) 64 Director
</TABLE>

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

(1) During 1998 and through January 11, 1999, Mr. Strauch had the additional
title of Chief Executive Officer and Mr. Flagg had the title of President.
On January 11, 1999, Michael Pascoe was appointed Chief Executive Officer
and President and Mr. Flagg became Executive Vice President, Business
Development. Mr. Strauch retained the position of Chairman of the Board.
Mr. Pascoe worked for PairGain on a part-time basis from December 1998
through January 10, 1999. In December 1998, we granted Mr. Pascoe a
non-qualified option to purchase 450,000 shares at a price of $7.00 per
share outside the Plan in connection with our hiring of him as Chief
Executive Officer and President. The terms of this grant are identical to
the terms of non-qualified grants issued under the 1993 Plan.

(2) Member of the Audit Committee

(3) Member of the Compensation Committee

Information regarding Messrs. Strauch, Pascoe, 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 PairGain 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 Business Units
in February 1998. Mr. Young joined PairGain 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.

14
<PAGE> 18

EXECUTIVE COMPENSATION AND OTHER INFORMATION

SUMMARY OF CASH AND OTHER COMPENSATION

The following table provides certain summary information concerning the
compensation earned by PairGain's Chief Executive Officer and each of our four
additional most highly compensated Executive Officers (the "Named Executive
Officers") 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 PairGain and our subsidiaries for the 1998, 1997 and 1996
fiscal years.

<TABLE>
<CAPTION>
TABLE I
SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------- --------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY($)(1)(2) BONUS($)(2) COMPENSATION($)(3) OPTIONS(#)
-------------------------- --------- --------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Charles S. Strauch(4) 1998 280,000 -- 75,631 40,000
Chairman of the Board 1997 280,000 33,697 500 --
1996 275,192 206,394 500 --

Howard S. Flagg(4) 1998 154,808 -- 51,833 25,000
Executive Vice President, 1997 144,231 17,357 11,610 --
Business Development 1996 125,000 93,750 500 --

Benedict A. Itri 1998 149,808 -- 53,459 25,000
Executive Vice President 1997 139,231 16,756 31,339 --
and Chief Technical Officer 1996 120,000 90,000 -- --

Charles W. McBrayer 1998 157,885 -- 16,019 130,334(5)
Senior Vice President and 1997 145,385 17,496 514 8,000
Chief Financial Officer 1996 133,077 99,080 500 100,000

Dennis Young 1998 146,346 -- 500 36,000(6)
Senior Vice President, 1997 125,385 15,089 -- 8,000
Operations and Business Units 1997 112,801 84,601 -- 40,000
</TABLE>

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

(1) Includes amounts deferred pursuant to PairGain's 401(k) Plan, where
applicable.

(2) Includes amounts deferred pursuant to PairGain's Management Deferred
Compensation Plan. Specific amounts earned but deferred for each Named
Executive Officer follow.

<TABLE>
<CAPTION>
1998($) 1997($) 1996($)
------------------ ------------------ -------------------
<S> <C> <C> <C>
Mr. Strauch 140,000 282,232 146,030
Mr. Flagg 92,885 86,538 75,000
Mr. Itri 144,818 151,026 186,393
Mr. McBrayer 47,366 48,864 31,773
Mr. Young -- -- --
</TABLE>

15
<PAGE> 19

(3) Other Annual Compensation has been revised to eliminate the value realized
from the exercise of stock options and the value received from the purchase
of shares of PairGain stock under the 1995 Employee Stock Purchase Plan,
but does include the excess earnings accrued for each fiscal year on the
account balances under the Management Deferred Compensation Plan. A
breakdown of Other Annual Compensation for the Named Executive Officers
follows.

<TABLE>
<CAPTION>
EXCESS EARNINGS
CASH IN LIEU ON DEFERRED
401(k) OF 401(k) COMPENSATION
NAME YEAR CONTRIBUTION($) CONTRIBUTION($) ACCOUNTS
------------------ ------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Mr. Strauch 1998 1,000 -- 74,631
1997 500 -- --
1996 500 -- --

Mr. Flagg 1998 1,000 -- 50,833
1997 500 -- 11,110
1996 500 -- --

Mr. Itri 1998 -- 500 52,959
1997 -- -- 31,339
1996 -- -- --

Mr. McBrayer 1998 1,000 -- 15,019
1997 500 -- 14
1996 500 -- --

Mr. Young 1998 -- 500 --
1997 -- -- --
1996 -- -- --
</TABLE>

401(k) Contribution is the amount of the matching contribution made by
PairGain the officer's 401(k) account.

Cash in lieu of 401(k) Contribution is a one-time bonus paid company-wide
to those not in the 401(k) Plan during 1998.

Excess Earnings on Deferred Compensation Accounts are the excess earnings
accrued for each fiscal year on the account balances under the Management
Deferred Compensation Plan in excess of 120% of the applicable federal rate
in effect at the start of each such fiscal year.

(4) During 1998 and through January 11, 1999, Mr. Strauch had the additional
title of Chief Executive Officer and Mr. Flagg had the title of President.
On January 11, 1999, Michael Pascoe was appointed Chief Executive Officer
and President and Mr. Flagg became Executive Vice President, Business
Development. Mr. Strauch retained the position of Chairman of the Board.
Mr. Pascoe worked for PairGain on a part-time basis from December 1998
through January 10, 1999. During 1998, Mr. Pascoe was paid $7,700. In
December 1998, we granted Mr. Pascoe a non-qualified option to purchase
450,000 shares at a price of $7.00 per share outside the Plan in connection
with our hiring of him as Chief Executive Officer and President. The terms
of this grant are identical to the terms of non-qualified grants issued
under the 1993 Plan.

(5) 1998 grants to Mr. McBrayer include 20,000 option shares granted in 1998,
plus 110,334 option shares granted under repricing programs to replace
shares previously granted at higher exercise prices.

(6) 1998 grants to Mr. Young include 20,000 option shares granted in 1998, plus
16,000 option shares granted under repricing programs to replace shares
previously granted at higher exercise prices.

16
<PAGE> 20

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. PairGain 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.
PairGain made no contributions or provisions for contributions to this Plan in
1998, 1997 or 1996.

Amounts owed as of December 31, 1998 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, Chairman of the Board 692,852
Howard S. Flagg, Executive Vice President, Business Development 347,992
Benedict A. Itri, Executive Vice President and Chief Technical Officer 631,600
Charles W. McBrayer, Senior Vice President and Chief Financial Officer 155,539
Dennis Young, Senior Vice President, Operations and Business Units --
All executive officers as a group (five persons) 1,827,983
</TABLE>

<PAGE> 21

OPTION GRANTS

The following table contains information concerning the grant of stock
options made under PairGain's 1993 Plan for the fiscal year ended December 31,
1998 to the Named Executive Officers.

TABLE II
OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS 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) 1998 ($/SHARE)(2) DATE 5%($) 10%($)
---------------------- ----------- --------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles S. Strauch(4) 40,000 0.4 6.219 10/09/08 156,439 396,447

Howard S. Flagg(4) 25,000 0.2 6.219 10/09/08 97,774 247,779

Benedict A. Itri 25,000 0.2 6.219 10/09/08 97,774 247,779

Charles W. McBrayer(5) 7,167 0.1 12.750 08/05/08 57,468 145,635
20,000 0.2 6.219 10/09/08 78,219 198,223
103,167 1.0 7.031 12/04/08 456,199 1,156,098

Dennis Young(6) 8,000 0.1 12.750 08/05/08 64,147 162,562
20,000 0.2 6.219 10/09/08 78,219 198,223
8,000 0.1 7.031 12/04/08 35,376 89,649
</TABLE>

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

(1) All of the options were granted under PairGain'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. The
options shares may be subject to accelerated vesting in connection with
certain changes in control or ownership of PairGain. Each option will have
a maximum term of ten years, subject to earlier termination following the
optionee's cessation of service with PairGain.

(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.

(3) There is no assurance provided to any executive officer or any other holder
of PairGain'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.

(4) On January 11, 1999, Michael Pascoe was appointed Chief Executive Officer
and President. Mr. Pascoe worked for PairGain on a part-time basis from
December 1998 through January 10, 1999. In December 1998, we granted Mr.
Pascoe a non-qualified option to purchase 450,000 shares at a price of
$7.00 per share outside the Plan in connection with our hiring of him as
Chief Executive Officer and President. The terms of this grant are
identical to the terms of non-qualified grants issued under the 1993 Plan.
The option shall become exercisable for 25% of the option shares upon the
completion of one year of service measured from the grant date. The balance
of the option shares shall become exercisable in a series of 36 equal and
successive monthly installments upon completion of each additional month of
service thereafter. The option has a maximum term of ten years, subject to
earlier termination if Mr. Pascoe were to cease working for PairGain.

18
<PAGE> 22

(6) 1998 grants to Mr. Young include 20,000 option shares granted in 1998, plus
16,000 option shares granted under repricing programs to replace shares
previously granted at higher exercise prices.

The following table sets forth information concerning option exercises
and option holdings for the fiscal year ended December 31, 1998 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, 1998.

TABLE III

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

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
OF SHARES DECEMBER 31, 1998 DECEMBER 31, 1998($)(2)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch(3) 181,000 2,783,454 1,094,545 55,003 7,206,801 57,344

Howard S. Flagg(3) 245,000 3,137,657 684,806 32,294 4,707,810 35,711

Benedict A. Itri 240,000 3,632,357 695,643 36,461 4,670,721 35,971

Charles W. McBrayer 82,000 1,223,563 146,328 132,752 619,580 140,122

Dennis Young 38,520 625,356 166,160 47,920 502,512 40,655
</TABLE>

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

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

(2) Based upon the closing selling price of $7.69 per share on the last day of
the 1998 fiscal year, less the option exercise price payable per share.

(3) On January 11, 1999, Michael Pascoe was appointed Chief Executive Officer
and President. Mr. Pascoe worked for PairGain on a part-time basis from
December 1998 through January 10, 1999. In December 1998, we granted Mr.
Pascoe a non-qualified option to purchase 450,000 shares at a price of
$7.00 per share outside the Plan in connection with our hiring of him as
Chief Executive Officer and President. The terms of this grant are
identical to the terms of non-qualified grants issued under the 1993 Plan.
All 450,000 shares were unexercisable at December 31, 1998.

19
<PAGE> 23

OPTION REPRICING PROGRAM

In 1998, the Board of Directors approved stock option repricing programs
pursuant to which optionholders having options with exercise prices in excess of
$12.75 per share at August 5, 1998 and $7.03 per share at December 4, 1998 could
elect to exchange their higher priced options for new stock options with
exercise prices of $12.75 and $7.03, the respective fair market values of the
common stock on those dates. The higher priced options were cancelled, and all
vesting in those options was forfeited by the optionholders. The new options
vest monthly over four years beginning on either the August 5, 1998 or December
4, 1998 grant date. The following table shows grants of options shares under the
repricing program.

<TABLE>
<CAPTION>
LENGTH IN
YEARS OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING
OPTIONS TIME OF TIME OF EXERCISE AT DATE OF
NAME AND TITLE DATE REPRICED(#) REPRICING($) REPRICING($) PRICE($) REPRICING
- ----------------------------- -------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles S. Strauch 08/05/98 -- -- -- -- --
Chairman of the Board 12/04/98 -- -- -- -- --

Howard S. Flagg 08/05/98 -- -- -- -- --
Executive Vice President, 12/04/98 -- -- -- -- --
Business Development

Benedict A. Itri 08/05/98 -- -- -- -- --
Executive Vice President 12/04/98 -- -- -- -- --
and Chief Technical Officer

Charles W. McBrayer 08/05/98 7,167 12.750 15.875 12.750 8.9
Senior Vice President and 12/04/98 96,000 7.031 10.313 7.031 7.1
Chief Financial Officer 12/04/98 7,167 7.031 12.750 7.031 9.7

Dennis Young 08/05/98 8,000 12.750 15.875 12.750 8.9
Senior Vice President, 12/04/98 8,000 7.031 12.750 7.031 9.7
Operations and Business Units

OTHER EXECUTIVE OFFICERS

Bruce Kimble 08/05/98 200,000 12.750 17.313 12.750 7.7
Vice President, T1/E1 Access 08/05/98 5,000 12.750 15.875 12.750 8.9
12/04/98 205,000 7.031 12.750 7.031 9.7

Thomas P. Reynolds(1) 08/05/98 200,000 12.750 27.250 12.750 8.0
Senior Vice President, 08/05/98 20,000 12.750 15.875 12.750 8.9
Sales, Service and Field Marketing 08/05/98 100,000 12.750 18.000 12.750 9.6
12/04/98 320,000 7.031 12.750 7.031 9.7
</TABLE>

- --------------
(1) Mr. Reynolds resigned from PairGain effective December 2, 1998.

20
<PAGE> 24

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of PairGain's Compensation Committee (the "Committee") are
Messrs. Hoff and Lay. Neither of these individuals was a PairGain officer or
employee at any time during the year ended December 31, 1998. No PairGain
executive officer served on the board of directors or compensation committee of
any entity which has one or more executive officers servings as members our
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 PairGain's various plans,
including the Key Management Incentive Compensation Plan and the 1993 Plan.

GENERAL COMPENSATION POLICY. The Committee's fundamental compensation
policy is to make a substantial portion of an executive's compensation
contingent on PairGain's financial performance. Accordingly, in addition to each
executive's base salary, we offer bonuses and stock option awards which are tied
to PairGain's and the 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 PairGain 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 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 21 participants in the fiscal 1998 Key Management Incentive
Compensation Plan. There are approximately 24 participants in the fiscal 1999
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. The principal factors considered in establishing the components
of each executive officer's compensation package for the 1999 fiscal year are
summarized below. 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 PairGain's principal competitors and our 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
our 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. PairGain'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 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

21
<PAGE> 25

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
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 PairGain 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. The corporate
performance goals for fiscal 1998 were based on achieving certain levels of
revenue, earnings per share and cash.

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 PairGain
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 PairGain,
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 our executive officers in an attempt to
target a fixed number of unvested option shares for each officer based upon his
or her position with us 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 us upon the participant's cessation of
service or if we do not attain 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. As of January 11, 1998, Mr. Michael Pascoe was
appointed Chief Executive Officer and President. The annual base salary for Mr.
Pascoe was set at $364,000. In connection with his hiring, Mr. Pascoe was
granted a non-qualified option to purchase 450,000 shares at a price of $7.00
per share outside of the 1993 Plan. The terms of this grant are identical to the
terms of non-qualified grants issued under the 1993 Plan. The grant will vest as
to 25% of the options shares upon Mr. Pascoe's completion of one year of
employment and will vest as to the balance in a series of 36 successive equal
monthly installments upon his completion of each of the next 36 months of
employment thereafter. Mr. Pascoe earned no bonus during 1998 but will be
eligible to participate in the 1999 Key Management Incentive Compensation Plan.

The annual base salary for Mr. Charles S. Strauch, PairGain's previous
Chief Executive Officer, 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
our competitors and at a level equivalent to the amounts paid by comparably
sized companies. Mr. Strauch earned no bonus during fiscal 1998. Mr. Strauch was
granted options to purchase 40,000 shares at a price of $6.22 per share in 1998.

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, PairGain 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 of our fiscal years 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
PairGain's executive officers for the 1999 fiscal year will exceed the $1
million limit per officer. Because it is very unlikely that the cash
compensation payable to any of PairGain'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 our executive officers. The Committee will reconsider
this decision should the individual compensation of any executive officer ever
approach the $1.0 million level.

REPRICING OF STOCK OPTIONS

During the 1998 fiscal year, the Compensation Committee felt that
circumstances had made it necessary for PairGain to implement an option
cancellation/regrant program for all PairGain employees, including the current
executive officers (whose repriced shares accounted for less than 2% of all
repriced shares). Pursuant to this program, optionholders having options with
exercise prices in excess of $12.75 per share at August 5, 1998 and $7.03 per
share at December 4, 1998 could elect to exchange their higher priced options
for new stock options with exercise prices of $12.75 and $7.03, the respective
fair market values of the common stock on those dates.. Each employee eligible
for a new option grant was given the choice of accepting that option with a new
vesting schedule in cancellation of his or her higher-priced option or rejecting
the new grant and retaining the higher-priced option with its original vesting
schedule.

The Compensation Committee determined that this program was necessary
because equity incentives are a significant component of the total compensation
package of each key employee and play a substantial role in PairGain's ability
to retain the services of individuals essential to our long-term financial
success. The Compensation Committee felt that PairGain's ability to retain key
employees would be significantly impaired, unless value were restored to their
options in the form of regranted options at the current market price of our
common stock. However, in order for the regranted options to serve their primary
purpose of assuring the continued service of each optionee, a new vesting
schedule was imposed with respect to the option shares. The new options vest
monthly over four years beginning on either the August 5, 1998 or December 4,
1998 grant date. Accordingly, each optionee will only have the opportunity to
acquire the option shares at the lower exercise price if he or she continues in
PairGain's employ.

As a result of the new vesting schedules imposed on the regranted
options, the Compensation Committee believes that the program strikes an
appropriate balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options potentially valuable once again to the executive officers and
key employees critical to PairGain's financial performance. However, those
individuals will enjoy the benefits of the regranted options only if they remain
employed by PairGain and contribute to our financial success.

We conclude our report with the acknowledgment that no member of the
Committee is a former or current officer or employee of PairGain 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 five-year comparison of cumulative total
returns for PairGain, 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"). 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]

The data points depicted on the graph are as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
INDEX DESCRIPTION 12/30/93 12/31/94 12/29/95 12/31/96 12/31/97 12/31/98
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PairGain Technologies, Inc. 100.00 103.64 398.18 885.45 563.64 223.64
S&P 500 100.00 98.00 131.43 158.06 207.07 262.30
CRSP Nasdaq Telecommunication Index 100.00 83.46 109.26 111.72 165.43 270.15
- -----------------------------------------------------------------------------------------
</TABLE>

Percentage annual returns for PairGain's stock and the Indexes listed above are
shown below:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
ANNUAL RETURN PERIOD
-----------------------------------------------------
12/30/93 12/31/94 12/29/95 12/31/96 12/31/97
INDEX DESCRIPTION TO TO TO TO TO
12/31/94 12/29/95 12/31/96 12/31/97 12/31/98
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PairGain Technologies, Inc. 3.64% 284.21% 122.37% -36.34% -60.32%
S&P 500 -2.00% 34.11% 20.26% 31.01% 26.67%
CRSP Nasdaq Telecommunication Index -16.54% 30.94% 2.25% 48.08% 63.30%
- -----------------------------------------------------------------------------------------
</TABLE>

(1) This section is not "soliciting material," is not deemed filed with the SEC
and is not to be incorporated by reference into any PairGain filing 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

We do not have employment contracts with any of our executive officers.
The employment of our executive officers may be terminated at any time at the
discretion of the Board of Directors. However, in November 1998, we issued
agreements to thirty-seven key employees which will provide severance payments
and certain other benefits in the event the employee is terminated without cause
following a change in control. In the event of involuntary termination without
cause within eighteen months after a change in control, the agreements specify a
salary continuation period of between nine and eighteen months (depending upon
position), acceleration of unvested stock options and continuation of life
insurance coverage during the salary continuation period. Participation in all
other benefit plans would cease upon termination. Each of the Named Executive
Officers have such an agreement.

The Compensation Committee has the discretionary authority as
administrator of PairGain'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, 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

PairGain has entered into an Indemnity Agreement with each of our
directors and officers (the "Indemnity Agreements") which provides that, with
certain exceptions, we will hold harmless and indemnify our directors and
officers to the fullest extent permitted under Delaware law. Under the Indemnity
Agreements, we are obligated to indemnify each of our 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 PairGain
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 PairGain or any other company or
enterprise to which the person provides services at our request. 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 PairGain, 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, our independent auditor for the
fiscal year ended December 31, 1998, 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, 1999. Neither the firm of Deloitte & Touche LLP
nor any of its members has any relationship with PairGain or any of its
affiliates except in the firm's capacity as our 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.

25
<PAGE> 29

STOCKHOLDER PROPOSALS

Proposals of PairGain stockholders which are intended to be presented by
stockholders at our 2000 Annual Meeting must be received by us no later than
January 7, 2000 to be included in the proxy statement and form of proxy relating
to the 2000 Annual Meeting. In addition, the proxy solicited by the Board of
Directors for the 2000 Annual Meeting will confer discretionary authority to
vote on any stockholder proposal presented at that Meeting, unless we are
provided with notice of such proposal no later than March 23, 2000.

OTHER MATTERS

We know 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.

Our Annual Report which includes Form 10-K as filed with the SEC for the
fiscal year ended December 31, 1998 is being sent with this Proxy Statement to
all stockholders of record as of April 26, 1999. The Annual Report to
Stockholders is not incorporated to this Proxy Statement and is not considered
proxy solicitation material.

By Order of the Board of Directors,

/s/ CHARLES W. MCBRAYER

CHARLES W. MCBRAYER
Secretary and Chief Financial Officer
Tustin, California
May 7, 1999

<PAGE> 30

PAIRGAIN TECHNOLOGIES, INC.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
(AMENDED AND RESTATED AS OF JANUARY 14, 1999)

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.

<PAGE> 31

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 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.

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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.

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.

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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:

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 one hundred percent
(100%) 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.

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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);

(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.

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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 24,046,400 shares(1), 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, (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, (v) the
21,400 shares added to the reserve pursuant to the automatic share increase
provisions of Section VI.B of this Article One during the 1998 fiscal year, (vi)
the 225,000 shares added to the reserve pursuant to the automatic share increase
provisions of Section VI.B of this Article One in April 1999 and (vii) the
additional increase of 2,000,000 shares authorized by the Board on January 14,
1999, subject to stockholder approval at the 1999 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.

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 shares1 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.

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

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<PAGE> 36

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, 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 cancelled in accordance with Section IV 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.

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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 exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

2. The option price shall become immediately due upon exercise of
the option and 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

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connection with such purchase 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.

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<PAGE> 39

- 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 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:

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<PAGE> 40

(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, 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.

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<PAGE> 41

(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
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.

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<PAGE> 42

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. 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
IV, 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 IV 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.

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<PAGE> 43

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 six
(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 IV.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 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 IV shall NOT be available
for subsequent issuance under the Plan.

<PAGE> 44

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:

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

(b) 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

2. The purchase price per Newly Issued Share shall be fixed by
the Plan Administrator, but shall not be less than one hundred percent (100%) of
the Fair Market Value per share of Common Stock on the issuance date.

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.

15
<PAGE> 45

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:

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

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

(d) 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.

16
<PAGE> 46

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 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

17
<PAGE> 47
REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) DATED
_________, 199__, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THE 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 cancelled, 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.

<PAGE> 48

ARTICLE FOUR
MISCELLANEOUS

I. 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.

II. 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 II 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 withholding taxes to which such holders may become subject in
connection with the exercise of their options or the vesting of their shares
(the "Withholding Taxes"). Such right may be provided to any such holder in
either or both of the following formats:

19
<PAGE> 49

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 Withholding 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 Withholding Taxes) with an aggregate Fair Market
Value equal to the percentage of the Withholding Taxes incurred in connection
with such option exercise or share vesting (not to exceed one hundred percent
(100%)) designated by the holder.

III. 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 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

20
<PAGE> 50

amendments to Rule 16b-3 of the 1934 Act. The 1998 Amendment became effective
immediately upon adoption by the Board was subsequently approved by the
Corporation's stockholders at the 1998 Annual Meeting held on June 24, 1998.

F. On January 14, 1999, the Board again amended the Plan to effect
the following changes (the "1999 Amendment"): (i) increase the number of shares
reserved for issuance under the Plan by 2,000,000 shares of Common Stock, (ii)
require all options and direct stock issuances under the Plan to have an
exercise or purchase price per share not less than one hundred percent (100%) of
the Fair Market Value per share of the Common Stock on the grant or issue date,
(iii) delete the cancellation/regrant provisions which allow the cancellation of
outstanding options with exercise prices in excess of the then current Fair
Market Value per share of Common Stock and the grant of replacement options with
an exercise price based on the Fair Market Value per share of Common Stock at
the time of the new grant, and (iv) remove the provision in the Plan which
authorize the Plan Administrator to extend a loan to Optionees or Participants
in connection with their exercise of options or their purchase of shares under
the Plan. No options shall be granted, and no shares shall be issued, on the
basis of the 2,000,000-share increase approved by the Board on January 14, 1999,
unless and until the 1999 Amendment is approved by the stockholders. Should such
stockholder approval not be obtained at the 1999 Annual Meeting, then such share
increase shall not be implemented. However, the provisions of the Plan as in
effect immediately prior to the 1999 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 1999
Amendment shall remain outstanding in accordance with the terms and conditions
of the respective instruments evidencing those options or issuances, and nothing
in the 1999 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.

G. 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.

H. 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.

21
<PAGE> 51

I. 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.

J. 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 cancelled 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.

IV. 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.

V. 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.

VI. 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.

22
<PAGE> 52

VII. 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.

<PAGE> 53

PROXY PAIRGAIN TECHNOLOGIES, INC.
Annual Meeting of Stockholders, June 16, 1999
14402 Franklin Avenue, Tustin, California 92780

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Charles S. Strauch, Michael Pascoe, 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
1999 Annual Meeting of Stockholders of PairGain Technologies, Inc. to be held at
14402 Franklin Avenue, Tustin, California 92780 on June 16, 1999 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 1999 Annual Meeting.

Whether or not the undersigned plans to attend the 1999 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 PairGain for 1999 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>
<CAPTION>
FOR WITHHOLD AUTHORITY TO VOTE
<S> <C> <C>
Michael Pascoe [ ] [ ]
and to elect the following directors to serve for the term of
three years:
Charles S. Strauch [ ] [ ]
Robert C. Hawk [ ] [ ]
Robert A. Hoff [ ] [ ]
</TABLE>

(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 54

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

[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. To approve the appointment of Deloitte & Touche LLP as independent auditor
of PairGain for 1999.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

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