
<PAGE>   1

                               CISCO SYSTEMS, INC.
                            1996 STOCK INCENTIVE PLAN

              AS AMENDED AND RESTATED EFFECTIVE SEPTEMBER 15, 1998



                                  ARTICLE ONE

                               GENERAL PROVISIONS

     I.   PURPOSE OF THE PLAN

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

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

     II.  STRUCTURE OF THE PLAN

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

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

               (ii) the Automatic Option Grant Program under which eligible
     non-employee Board members shall automatically receive option grants at
     periodic intervals to purchase shares of Common Stock.

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

     III. ADMINISTRATION OF THE PLAN

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




<PAGE>   2

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

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

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

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

          F.   Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants made under that program.

     IV.  ELIGIBILITY

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

               (i)  Employees,

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

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

                                       2.
<PAGE>   3

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

          C.   The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Plan Effective Date, (ii) those individuals
who first become non-employee Board members on or after the Plan Effective Date,
whether through appointment by the Board or election by the Corporation's
shareholders, and (iii) those individuals who continue to serve as non-employee
Board members at one or more Annual Shareholders Meetings held after the Plan
Effective Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.

     V.   STOCK SUBJECT TO THE PLAN

          A.   The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
reserved for issuance over the term of the Plan shall not exceed 372,556,782(1)
shares, subject to the automatic share increases described in Paragraph V.B.
below. Such share reserve consists of the number of shares of Common Stock
transferred from the Predecessor Plan, as of the Plan Effective Date
(154,881,225 shares), plus the number of shares added to the reserve in the
automatic share increases that occurred in December 1996 and December 1997
(142,523,023 shares) and December 1998 (75,152,534 shares). These share numbers
reflect both (i) the three (3)-for-two (2) split of Common Stock effected on
December 16, 1997 and (ii) the three (3)-for-two (2) split of Common Stock
effected on September 15, 1998.

          B.   The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of fiscal
December each calendar year, beginning with fiscal December in calendar year
1996 and continuing through fiscal December in calendar year 2001, by a number
of shares equal to four and three-quarters percent (4.75%) of the total number
of shares of Common Stock outstanding on the last trading day in the immediately
preceding fiscal November, but in no event shall any such annual increase exceed

----------
(1)  On June 21, 1999 the maximum number of shares of Common Stock reserved for
     issuance over the term of the Plan will be adjusted to 745,113,564 shares
     to reflect the two for one stock split effected on that date.

                                       3.
<PAGE>   4

120,000,000(2) shares (as adjusted for both (i) the three (3)-for-two (2) split
of Common Stock effected on December 16, 1997 and (ii) the three (3)-for-two (2)
split of Common Stock effected on September 15, 1998).

          C.   No one person participating in the Plan may receive stock options
or separately exercisable stock appreciation rights for more than 4,500,000(3)
shares of Common Stock in the aggregate per calendar year.






----------
(2)  On June 21, 1999 the maximum number of shares of Common Stock which
     may be added to the Plan pursuant to such annual increase will be adjusted
     to 240,000,000 shares to reflect the two for one stock split effected on
     that date.

(3)  On June 21, 1999 the maximum number of shares of Common Stock which any one
     person may receive pursuant to stock options or stock appreciation rights
     under the Plan will be adjusted to 9,000,000 shares to reflect the two for
     one stock split effected on that date.

                                       4.
<PAGE>   5

          D.   Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, should the exercise price of an option under the
Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Corporation in satisfaction
of the withholding taxes incurred in connection with the exercise of an option
or the vesting of a stock issuance 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 stock
issuance, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance. Shares of Common Stock underlying one
or more stock appreciation rights exercised under Section IV of Article Two of
the Plan shall NOT be available for subsequent issuance under the Plan.

          E.   If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options or separately exercisable stock appreciation rights in the
aggregate under the Plan per calendar year, (iii) the number and/or class of
securities for which grants are subsequently to be made under the Automatic
Option Grant Program to new and continuing non-employee Board members, unless
the Plan Administrator determines otherwise, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan 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.

                                       5.
<PAGE>   6

                                  ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM

     I.   OPTION TERMS

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

          A.   EXERCISE PRICE.

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

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

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

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

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

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

                                       6.
<PAGE>   7

          B.   EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of nine (9) years
measured from the option grant date.

          C.   EFFECT OF TERMINATION OF SERVICE.

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

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

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

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

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

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

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

                                       7.
<PAGE>   8

                    (ii) permit the option to be exercised, during the
     applicable post-Service exercise period, not only with respect to the
     number of vested shares of Common Stock for which such option is
     exercisable at the time of the Optionee's cessation of Service but also
     with respect to one or more additional installments in which the Optionee
     would have vested had the Optionee continued in Service.

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

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

          G.   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. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, 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 assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. 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.

     II.  INCENTIVE OPTIONS

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

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

                                       8.
<PAGE>   9

          B.   DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one 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 Options shall be applied on the
basis of the order in which such options are granted.

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

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

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

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

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

                                       9.
<PAGE>   10

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options or
separately exercisable stock appreciation rights under the Plan per calendar
year.

          E.   The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do not
otherwise accelerate. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights with
respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.

          F.   The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.

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

                                      10.
<PAGE>   11

          H.   The outstanding options 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.

     IV.  STOCK APPRECIATION RIGHTS

          A.   The Plan Administrator shall have full power and authority,
exercisable in its sole discretion, to grant to selected Optionees or other
individuals eligible to receive option grants under the Discretionary Option
Grant Program stock appreciation rights.

          B.   Three types of stock appreciation rights shall be authorized for
issuance under the Plan: (i) tandem stock appreciation rights ("Tandem Rights"),
(ii) stand-alone stock appreciation rights ("Stand-alone Rights") and (iii)
limited stock appreciation rights ("Limited Rights").

          C.   The following terms and conditions shall govern the grant and
exercise of Tandem Rights under this Article Two.

               1.   One or more Optionees may be granted a Tandem Right,
exercisable upon such terms and conditions as the Plan Administrator may
establish, to elect between the exercise of the underlying Article Two stock
option for shares of Common Stock or the surrender of that option 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 exercise price payable for
such vested shares.

               2.   No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall accordingly become entitled under this
Section V may be made in shares of Common Stock valued at Fair Market Value on
the option surrender date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.

               3.   If the surrender of an option is not approved 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 nine (9) years after the date of the option grant.

          D.   The following terms and conditions shall govern the grant and
exercise of Stand-alone Rights under this Article Two:

                                      11.
<PAGE>   12

               1.   One or more individuals eligible to participate in the
Discretionary Option Grant Program may be granted a Stand-alone Right not tied
to any underlying option under this Discretionary Option Grant Program. The
Stand-alone Right shall cover a specified number of underlying shares of Common
Stock and shall be exercisable upon such terms and conditions as the Plan
Administrator may establish. Upon exercise of the Stand-alone Right, the holder
shall be entitled to receive a distribution from the Corporation in an amount
equal to the excess of (i) the aggregate Fair Market Value (on the exercise
date) of the shares of Common Stock underlying the exercised right over (ii) the
aggregate base price in effect for those shares.

               2.   The number of shares of Common Stock underlying each
Stand-alone Right and the base price in effect for those shares shall be
determined by the Plan Administrator in its sole discretion at the time the
Stand-alone Right is granted. In no event, however, may the base price per share
be less than the Fair Market Value per underlying share of Common Stock on the
grant date.

               3.   The distribution with respect to an exercised Stand-alone
Right may be made in shares of Common Stock valued at Fair Market Value on the
exercise date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.

          E.   The following terms and conditions shall govern the grant and
exercise of Limited Rights under this Article Two:

               1.   One or more Section 16 Insiders may, in the Plan

Administrator's sole discretion, be granted Limited Rights with respect to their
outstanding options under this Article Two.

               2.   Upon the occurrence of a Hostile Take-Over, the Section 16
Insider shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each option with such a
Limited Right to the Corporation, to the extent the option is at the time
exercisable for fully vested shares of Common Stock. The Section 16 Insider
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 exercise price payable for such
vested shares. Such cash distribution shall be made within five (5) days
following the option surrender date.

               3.   The Plan Administrator shall pre-approve, at the time such
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. 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.

          F.   The shares of Common Stock underlying any stock appreciation
rights exercised under this Section IV shall NOT be available for subsequent
issuance under the Plan.

                                      12.
<PAGE>   13

                                 ARTICLE THREE

                         AUTOMATIC OPTION GRANT PROGRAM

     I.   OPTION TERMS

          A.   GRANT DATES. Option grants shall be made pursuant to this
September 15, 1998 restatement on the dates specified below:

               1.   Each individual who is first elected or appointed as a
non-employee Board member on or after the date of the 1998 Annual Shareholders
Meeting shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase 20,000(4) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary.

               2.   On the date of each Annual Shareholders Meeting, beginning
with the 1998 Annual Shareholders Meeting, each individual who is re-elected to
serve as an Eligible Director shall automatically be granted a Non-Statutory
Option to purchase 10,000(5) shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 10,000-share option grants any one
Eligible Director may receive over his or her period of Board service, and
non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive one or
more such annual option grants over their period of continued Board service.

          B.   EXERCISE PRICE.

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

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

          C.   OPTION TERM. Each option shall have a maximum term equal to the
lesser of (i) nine (9) years measured from the option grant date or (ii) twelve
(12) months following termination of Board service.


----------
(4)  On June 21, 1999 the size of the initial option grant to non-employee Board
     members will be adjusted to 40,000 shares to reflect the two for one stock
     split effected on that date.

(5)  On June 21, 1999 the size of the annual option grant to non-employee Board
     members will be adjusted to 20,000 shares to reflect the two for one stock
     split effected on that date.

                                      13.
<PAGE>   14

          D.   EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 20,000-share grant shall vest,
and the Corporation's repurchase right shall lapse in four (4) successive equal
annual installments over the Optionee's period of Board service, with the first
such installment to vest upon the completion of one (1) year of Board service
measured from the automatic grant date. Each annual 10,000-share grant shall
vest, and the Corporation's repurchase right shall lapse, in two (2) successive
equal annual installments over the optionee's period of Board service measured
from the automatic grant date.

          E.   TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee upon his or her
cessation of Board service:

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

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

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

               (iv) In no event shall the option remain exercisable after the
     expiration of the option term. Upon the expiration of the twelve (12)-month
     exercise period or (if earlier) upon the expiration of the option term, the
     option shall terminate and cease to be outstanding for any vested shares
     for which the option has not been exercised. However, the option shall,
     immediately upon the Optionee's cessation of Board service for any reason
     other than death or Permanent Disability, terminate and cease to be
     outstanding to the extent the option is not otherwise at that time
     exercisable for vested shares.

                                      14.
<PAGE>   15

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

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

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

          C.   Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. This provision of the
Automatic Option Grant Program shall constitute advance approval by the Board of
any subsequent surrender of the option in accordance with the provisions of this
Section II.C, and no additional approval of the Board or any Plan Administrator
shall accordingly be required at the time of the actual option surrender and
cash distribution.

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

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

                                      15.
<PAGE>   16

     III. REMAINING TERMS

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

                                      16.
<PAGE>   17

                                  ARTICLE FOUR

                                  MISCELLANEOUS


     I.   FINANCING

          The Plan Administrator may permit any Optionee to pay the option
exercise price under the Discretionary Option Grant Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee exceed the sum of (i) the aggregate option exercise price payable for
the purchased shares plus (ii) any Federal, state and local income and
employment tax liability incurred by the Optionee in connection with the option
exercise or share purchase.

     II.  TAX WITHHOLDING

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

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

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

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

                                      17.
<PAGE>   18

     III. EFFECTIVE DATE AND TERM OF THE PLAN

          A.   The Plan and each of the equity incentive programs thereunder
shall become effective immediately upon the approval of the Corporation's
shareholders at the 1996 Annual Meeting. Options may be granted under the Plan
at any time on or after the date of such shareholder approval. If such
shareholder approval is not obtained, then this Plan shall not become effective,
and no options shall be granted and no shares shall be issued under the Plan.

          B.   The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants shall be made under the Predecessor Plan after this
Plan is approved by the shareholders at the 1996 Annual Meeting. All options
outstanding under the Predecessor Plan at the time of such shareholder approval
shall be incorporated into the Plan at that time and shall be treated as
outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.

          C.   One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

          D.   The Plan shall terminate upon the earliest of (i) December 31,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such plan
termination, all outstanding option grants shall thereafter continue to have
force and effect in accordance with the provisions of the documents evidencing
such grants.

     IV.  AMENDMENT OF THE PLAN

          A.   The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options at the time outstanding under the Plan unless the Optionee
consents to such amendment or modification. In addition, certain amendments may
require shareholder approval in accordance with applicable laws and regulations.

          B.   The Plan was amended by the Board on July 29, 1998 in order to
extend the automatic share increase provisions of the Plan for an additional
three (3)-year through fiscal December in calendar year 2001. Such amendment,
however, is subject to shareholder approval at the 1998 Annual Meeting and will
not be implemented unless such shareholder approval is obtained.

                                      18.
<PAGE>   19

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

     V.   USE OF PROCEEDS

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

     VI.  REGULATORY APPROVALS

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

          B.   No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

     VII. NO EMPLOYMENT/SERVICE RIGHTS

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

                                      19.
<PAGE>   20

                                    APPENDIX

          The following definitions shall be in effect under the Plan:

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

          B.   BOARD shall mean the Corporation's Board of Directors.

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

               (i)  the acquisition, directly or indirectly by any person or
     related group of persons (other than the Corporation or a person that
     directly or indirectly controls, is controlled by, or is under common
     control with, the Corporation), of beneficial ownership (within the meaning
     of Rule 13d-3 of the 1934 Act) of securities possessing more than
     thirty-five percent (35%) 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 shareholders which the Board does not
     recommend such shareholders to accept, or

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

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

          E.   COMMON STOCK shall mean the Corporation's common stock.

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

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

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

                                      A-1.
<PAGE>   21

          G.   CORPORATION shall mean Cisco Systems, Inc., a California
corporation, and its successors.

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

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

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

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

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

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

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

          M.   HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than thirty-five percent (35%) 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 shareholders which the Board does not recommend
such shareholders to accept.

                                      A-2.
<PAGE>   22

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

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

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

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

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

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

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

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

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

                                      A-3.
<PAGE>   23

          U.   PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
However, solely for purposes of the Automatic Option Grant Program, Permanent
Disability or Permanently Disabled shall mean the inability of the non-employee
Board member to perform his or her usual duties as a Board member 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.

          V.   PLAN shall mean the Corporation's 1996 Stock Incentive Plan, as
set forth in this document.

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

          X.   PREDECESSOR PLAN shall mean the Corporation's pre-existing 1987
Stock Option Plan in effect immediately prior to the Plan Effective Date
hereunder.

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

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

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

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

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

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

                                      A-4.
<PAGE>   24

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

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

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

                                      A-5.
