NETWORK APPLIANCE INC, DEF 14A, 1996-10-01

NETWORK APPLIANCE INC
DEF 14A, 1996-10-01
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:

<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
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
</TABLE>

Network Appliance, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

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

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

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

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

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

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

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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

/ / Fee paid previously with preliminary materials.

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

(1) Amount Previously Paid:

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

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

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

(3) Filing Party:

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

(4) Date Filed:

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<PAGE> 2

NETWORK APPLIANCE, INC.
319 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043

Dear Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Network Appliance, Inc. (the "Company") which will be held
on October 23, 1996, at 1:00 p.m., at the Garden Court Hotel, 520 Cowper Street,
Courtyard 4, Palo Alto, California 94301.

At the Annual Meeting, you will be asked to consider and vote upon the
following proposals: (i) to elect six directors of the Company; and (ii) to
ratify the appointment of Deloitte and Touche LLP as independent accountants of
the Company for the fiscal year ending April 30, 1997.

The enclosed Proxy Statement more fully describes the details of the
business to be conducted at the Annual Meeting. After careful consideration, the
Company's Board of Directors has unanimously approved the proposals and
recommends that you vote FOR each such proposal.

After reading the Proxy Statement, please mark, date, sign and return the
enclosed proxy card in the accompanying reply envelope by no later than October
9, 1996. If you decide to attend the Annual Meeting and would prefer to vote in
person, please notify the Secretary of the Company that you wish to vote in
person and your proxy will not be voted. YOUR SHARES CANNOT BE VOTED UNLESS YOU
SIGN, DATE AND RETURN THE ENCLOSED PROXY OR ATTEND THE ANNUAL MEETING IN PERSON.

A copy of the Company's 1996 Annual Report has been mailed concurrently
herewith to all shareholders entitled to notice of and to vote at the Annual
Meeting.

We look forward to seeing you at the Annual Meeting.

Sincerely yours,

Daniel J. Warmenhoven
President and Chief Executive Officer

Mountain View, California
September 30, 1996

IMPORTANT

PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID RETURN ENVELOPE SO THAT IF YOU ARE
UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.
<PAGE> 3

NETWORK APPLIANCE, INC.
319 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 23, 1996

TO OUR SHAREHOLDERS:

You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Network Appliance, Inc., a California corporation (the
"Company"), to be held on October 23, 1996 at 1:00 p.m., local time, at the
Garden Court Hotel, 520 Cowper Street, Courtyard 4, Palo Alto, California 94301,
for the following purposes:

1. To elect directors to serve for the ensuing year or until their
respective successors are duly elected and qualified. The nominees are
Daniel J. Warmenhoven, Donald T. Valentine, Carol A. Bartz, Michael R.
Hallman, Kurt R. Jaggers and Robert T. Wall.

2. To ratify the appointment of Deloitte and Touche LLP as independent
accountants of the Company for the fiscal year ending April 30, 1997.

3. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy
Statement that accompanies this Notice.

Only shareholders of record at the close of business on September 16, 1996
are entitled to notice of and to vote at the Annual Meeting and at any
continuation or adjournment thereof.

All shareholders are cordially invited and encouraged to attend the Annual
Meeting. In any event, to assure your representation at the meeting, please
carefully read the accompanying Proxy Statement which describes the matters to
be voted on at the Annual Meeting and sign, date and return the enclosed proxy
card in the reply envelope provided. Should you receive more than one proxy
because your shares are registered in different names and addresses, each proxy
should be returned to assure that all your shares will be voted. If you attend
the Annual Meeting and vote by ballot, your proxy will be revoked automatically
and only your vote at the Annual Meeting will be counted. The prompt return of
your proxy card will assist us in preparing for the Annual Meeting.

We look forward to seeing you at the Annual Meeting.

BY ORDER OF THE BOARD OF DIRECTORS

DANIEL J. WARMENHOVEN
President and Chief Executive Officer
Mountain View, California
September 30, 1996

ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN
PERSON. IN ANY EVENT, TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU
ARE URGED TO VOTE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN
THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE.
<PAGE> 4

PROXY STATEMENT

FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
NETWORK APPLIANCE, INC.
TO BE HELD OCTOBER 23, 1996

GENERAL

This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Network Appliance, Inc., a California corporation (the
"Company" or "Network Appliance"), of proxies to be voted at the Annual Meeting
of Shareholders (the "Annual Meeting") to be held on October 23, 1996, or at any
adjournment or postponement thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders. Shareholders of record on
September 16, 1996 will be entitled to vote at the Annual Meeting. The Annual
Meeting will be held at 1:00 p.m. at the Garden Court Hotel, 520 Cowper Street,
Courtyard 4, Palo Alto, California 94301.

It is anticipated that this Proxy Statement and the enclosed proxy card
will be first mailed to shareholders on or about September 30, 1996.

VOTING RIGHTS

The close of business on September 16, 1996 was the record date for
shareholders entitled to notice of and to vote at the Annual Meeting and any
adjournments thereof. At the record date, the Company had approximately
16,195,923 shares of its Common Stock outstanding and entitled to vote at the
Annual Meeting, held by approximately 260 shareholders. Holders of Common Stock
are entitled to one vote for each share of Common Stock so held. A majority of
the shares of Common Stock entitled to vote will constitute a quorum for the
transaction of business at the Annual Meeting. Abstentions and broker non-votes
are counted as present for the purpose of determining the presence of a quorum.

If any shareholder is unable to attend the Annual Meeting, such shareholder
may vote by proxy. The enclosed proxy is solicited by the Company's Board of
Directors, (the "Board of Directors" or the "Board") and, when the proxy card is
returned properly completed, it will be voted as directed by the shareholder on
the proxy card. Shareholders are urged to specify their choices on the enclosed
proxy card. If a proxy card is signed and returned without choices specified, in
the absence of contrary instructions, the shares of Common Stock represented by
such proxy will be voted FOR Proposals 1 and 2 and will be voted in the proxy
holders' discretion as to other matters that may properly come before the Annual
Meeting.

The six director nominees receiving the highest number of affirmative votes
will be elected. Votes against a nominee, abstentions and broker non-votes shall
have no effect. Approval of Proposal 2 requires (i) the affirmative vote of a
majority of those shares present and voting, and (ii) the affirmative vote of
the majority of the required quorum. Thus, abstentions and broker non-votes can
have the effect of preventing approval of a proposal where the number of
affirmative votes, through a majority of the votes cast, does not constitute a
majority of the required quorum. All votes will be tabulated by the inspector of
the election appointed for the meeting, who will separately tabulate affirmative
and negative votes, abstentions and broker non-votes.

REVOCABILITY OF PROXIES

Any person giving a proxy has the power to revoke it at any time before its
exercise. A proxy may be revoked by filing with the Secretary of the Company an
instrument of revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person.
<PAGE> 5

SOLICITATION OF PROXIES

The Company will bear the cost of soliciting proxies. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
to forward to such beneficial owners. The Company may reimburse such persons for
their costs of forwarding the solicitation material to such beneficial owners.
The original solicitation of proxies by mail may be supplemented by solicitation
by telephone, telegram, or other means by directors, officers, employees or
agents of the Company. No additional compensation will be paid to these
individuals for any such services. Except as described above, the Company does
not intend to solicit proxies other than by mail.

THE ANNUAL REPORT OF THE COMPANY FOR THE FISCAL YEAR ENDED APRIL 26, 1996,
HAS BEEN MAILED CONCURRENTLY WITH THE MAILING OF THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT TO ALL SHAREHOLDERS ENTITLED TO NOTICE OF AND TO VOTE AT THE
ANNUAL MEETING. THE ANNUAL REPORT IS NOT INCORPORATED INTO THIS PROXY STATEMENT
AND IS NOT CONSIDERED PROXY SOLICITING MATERIAL.

PROPOSAL NO. 1:

ELECTION OF DIRECTORS

At the Annual Meeting, six directors (constituting the entire board) are to
be elected to serve until the next Annual Meeting of Shareholders and until a
successor for such director is elected and qualified, or until the death,
resignation, or removal of such director. It is intended that the proxies will
be voted for the six nominees named below for election to the Company's Board of
Directors unless authority to vote for any such nominee is withheld. There are
six nominees, each of whom is currently a director of the Company. All of the
current directors were elected to the Board by the shareholders at the last
annual meeting. Each person nominated for election has agreed to serve if
elected, and the Board of Directors has no reason to believe that any nominee
will be unavailable or will decline to serve. In the event, however, that any
nominee is unable or declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee who is designated by the
current Board of Directors to fill the vacancy. Unless otherwise instructed, the
proxyholders will vote the proxies received by them for the nominees named
below. The six candidates receiving the highest number of the affirmative votes
of the shares entitled to vote at the Annual Meeting will be elected directors
of the Company. The proxies solicited by this Proxy Statement may not be voted
for more than six nominees.

NOMINEES

The directors of the Company, and their ages as of April 26, 1996, are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ---- ----------------------------------------------------
<S> <C> <C>
Daniel J. Warmenhoven...... 45 President, Chief Executive Officer and Director
Donald T. Valentine........ 63 Chairman of the Board and Director
Carol A. Bartz(1).......... 47 Director
Michael R. Hallman(2)...... 50 Director
Kurt R. Jaggers(2)......... 37 Director
Robert T. Wall(1).......... 50 Director
</TABLE>

- ---------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

BUSINESS EXPERIENCE OF NOMINEES FOR ELECTION AS DIRECTORS

Daniel J. Warmenhoven joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company, Mr. Warmenhoven served in various
capacities, including President, Chief Executive Officer and Chairman of

2
<PAGE> 6

the Board of Directors of Network Equipment Technologies, Inc., a
telecommunications company, from November 1989 to January 1994. Mr. Warmenhoven
presently serves on the Board of Directors of Brooktree Corporation, a
semiconductor company. Mr. Warmenhoven holds a B.S. degree in electrical
engineering from Princeton University.

Donald T. Valentine has been a director of the Company and Chairman of the
Board of Directors since September 1994. Mr. Valentine has been a general
partner of Sequoia Capital, a venture capital firm, since 1972. He is also
Chairman of the Board of C-Cube Microsystems Inc., a semiconductor video
compression company, and Elantec Semiconductor, Inc., an analog integrated
circuit company, Vice Chairman of Cisco Systems, Inc., an internetworking
communications company, and a director of Sierra Semiconductor, Inc., a
communications semiconductor company.

Carol A. Bartz has been a member of the Board of Directors since September
1995. Since April 1992, Ms. Bartz has been Chairman of the Board, President and
Chief Executive Officer of Autodesk, Inc., a PC software company and supplier of
design software. Prior to that, Ms. Bartz was with Sun Microsystems from
September 1983 to April 1992, most recently as Vice President of Worldwide Field
Operations. Ms. Bartz also currently serves on the Board of Directors of
Airtouch Communications, Cadence Design Systems, Inc. and BEA Systems, Inc. Ms.
Bartz received a B.A. degree in computer science from the University of
Wisconsin.

Michael R. Hallman has been a member of the Board of Directors since August
1994. Mr. Hallman is the President of The Hallman Group, a management consulting
firm, which he founded in June 1992. Prior to that, he served as President and
Chief Operating Officer of Microsoft Corporation, a microcomputer software
company, from March 1990 to March 1992. He presently serves on the Board of
Directors of Amdahl Corporation, a manufacturer of mainframe computers and
peripherals, InFocus Systems, a computer peripherals company, Intuit, a
microcomputer software company, Keytronics Corporation, an input device company,
and Timeline, a developer of financial reporting software. Mr. Hallman holds
B.B.A. and M.B.A. degrees from the University of Michigan.

Kurt R. Jaggers has been a member of the Board of Directors since August
1993. Mr. Jaggers has been at TA Associates, an equity investment firm, since
August 1990 and has been a Principal there since January 1993. Mr. Jaggers
presently serves on the Board of Directors of JDA Software Group, Inc. Mr.
Jaggers received B.S. and M.S. degrees in electrical engineering and an M.B.A.
degree from Stanford University.

Robert T. Wall has been a member of the Board of Directors since January
1993. Mr. Wall has been the Chairman of the Board, President and Chief Executive
Officer of Theatrix Interactive, Inc., a consumer educational software
publisher, since April 1994. From June 1989 to December 1990, Mr. Wall served as
Co-Head of Investment and Merchant Banking at Cowen & Company, an investment
banking firm. In August 1984, he founded On Point Developments Inc., a venture
management and investment banking company, where he has served as President
since its formation. He received an A.B. degree in economics from De Pauw
University and an M.B.A. degree from Harvard Business School.

BOARD MEETINGS AND COMMITTEES

The Board of Directors held five (5) meetings during fiscal 1996. All
members of the Board of Directors during fiscal 1996 attended more than
seventy-five percent (75%) of the aggregate of the total number of meetings of
the Board of Directors held during the period in fiscal 1996 for which he or she
was a director. All directors attended more than 75% of the aggregate of the
total number of meetings held by all committees of the Board on which such
director served. There are no family relationships among executive officers or
directors of the Company. The Board of Directors has an Audit Committee and a
Compensation Committee.

The Audit Committee of the Board of Directors held three (3) meeting during
fiscal 1996. The Audit Committee, which is currently comprised of Directors
Hallman and Jaggers, reviews, acts on and reports to the Board of Directors with
respect to various auditing and accounting matters, including the selection of
the Company's auditors, the scope of the annual audits, fees to be paid to the
auditors, the performance of the Company's auditors and the accounting practices
of the Company.

3
<PAGE> 7

The Compensation Committee of the Board of Directors held three (3) meeting
during fiscal 1996. The Compensation Committee, which is comprised of Directors
Bartz and Wall, establishes salaries, incentives and other forms of compensation
for officers and other employees of the Company and administers the incentive
compensation and benefit plans of the Company.

DIRECTOR COMPENSATION

Directors of the Company do not receive compensation for services provided
as a director. The Company also does not pay compensation for committee
participation or special assignments of the Board of Directors. However, the
directors are eligible to receive grants of stock options under the Automatic
Option Grant Program in effect under the Company's 1995 Stock Incentive Plan
(the "1995 Plan"), under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
option shares on the grant date.

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member on or after the effective date of this offering will
receive an option grant for 24,000 shares of Common Stock on the date he or she
joins the Board, provided such individual has not otherwise been in the prior
employ of the Company. In addition, at each Annual Shareholders Meeting,
beginning with the 1996 Annual Meeting, each individual who is to continue to
serve as a non-employee Board member will receive an option grant to purchase
6,000 shares of Common Stock, provided such individual has served on the Board
for at least six (6) months.

Each automatic option will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable for all the option shares; however, any
shares purchased upon exercise of the option will be subject to repurchase by
the Company, at the option exercise price paid per share, should the optionee
cease service on the Board prior to vesting in those shares. The initial
24,000-share grant will vest in a series of four (4) successive equal annual
installments over the optionee's period of Board service measured from the grant
date. Each annual 6,000-share grant will vest upon the optionee's completion of
one year of Board service measured from the grant date. However, each
outstanding option will immediately vest upon (i) certain changes in the
ownership or control of the Company or (ii) the death or disability of the
optionee while serving as a Board member.

The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on August 31, 2005, unless sooner terminated by the Board.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR ELECTION OF
ALL OF THE ABOVE NOMINEES FOR ELECTION AS DIRECTORS.

4
<PAGE> 8

PROPOSAL NO. 2:

RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS

The Company is asking the shareholders to ratify the selection of Deloitte
and Touche LLP as the Company's independent public accountants for the fiscal
year ending April 30, 1997. The affirmative vote of the holders of a majority of
the shares represented and voting at the Annual Meeting will be required to
ratify the selection of Deloitte and Touche LLP.

In the event the shareholders fail to ratify the appointment, the Audit
Committee of the Board of Directors will consider it as a direction to select
other auditors for the subsequent year. Even if the selection is ratified, the
Board in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board determines that such a
change would be in the best interest of the Company and its shareholders.

A representative of Deloitte and Touche LLP is expected to be present at
the Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.

In January 1995, the Company's Board of Directors retained Deloitte &
Touche LLP as its independent auditors and dismissed the Company's former
auditors, Coopers & Lybrand LLP. The decision to change independent auditors was
approved by resolution of the Board of Directors. The former independent
auditors' report on the Company's financial statements for the years ended March
31, 1993 and 1994 did not contain an adverse opinion, a disclaimer of opinion or
any qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. In addition, the former
independent auditors' report does not cover any of the consolidated financial
statements of the Company incorporated by reference in this Annual Report on
Form 10-K. Coopers & Lybrand LLP was not engaged to audit the Company's
financial statements for any other period. There were no disagreements with the
former auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's consolidated financial statements up through the time of dismissal
which, if not resolved to the former auditors' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. Prior to retaining Deloitte & Touche LLP, the Company had not
consulted with Deloitte & Touche LLP regarding accounting principles.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL
TO RATIFY THE SELECTION OF DELOITTE AND TOUCHE LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING APRIL 30, 1997.

5
<PAGE> 9

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1996 by (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors and Named Officers
and (iii) all current executive officers and directors as a group.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)
5% SHAREHOLDERS, NAMED OFFICERS, DIRECTORS AND ---------------------
EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP NUMBER PERCENT
- ------------------------------------------------------------------------- --------- -------
<S> <C> <C>
TA Associates Group(2)................................................... 2,135,263 13.2%
435 Tasso St., Suite 200
Palo Alto, CA 94301
Entities Affiliated with Sequoia Capital(3).............................. 1,768,353 11.0%
3000 Sand Hill Road
Bldg. 4, Suite 280
Menlo Park, CA 94025
Michael A. Malcolm....................................................... 884,868 5.5%
48 South Avalon Drive
Los Altos, CA 94022
David Hitz............................................................... 827,500 5.1%
319 North Bernardo Avenue
Mountain View, CA 94043
Daniel J. Warmenhoven(4)................................................. 457,000 2.8%
Michael J. McCloskey..................................................... 200,500 1.2%
Thomas F. Mendoza(5)..................................................... 200,000 1.2%
Michael E. Paul.......................................................... 126,000 *
M. Helen Bradley(6)...................................................... 100,000 *
Donald T. Valentine(3)................................................... 1,768,353 10.9%
Robert T. Wall(7)........................................................ 197,857 1.2%
Michael R. Hallman(8).................................................... 133,478 *
Carol A. Bartz(9)........................................................ 81,423 *
Kurt R. Jaggers(10)...................................................... 55,737 *
All directors and executive officers as a group
(10 persons)(11)....................................................... 7,142,242 43.5%
</TABLE>

- ---------------
* Less than 1%

(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.

(2) Includes 1,835,226 shares held by Advent VII L.P., 378,818 shares held by
Advent Atlantic and Pacific II Limited Partnership, 183,456 shares held by
Advent New York L.P., 136,540 shares held by Advent Industrial II L.P. and
27,518 shares held by TA Venture Investors, L.P. Advent VII L.P., Advent
Atlantic and Pacific II Limited Partnership, Advent Industrial II Limited
Partnership, Advent New York L.P., and TA Venture Investors, L.P. are part
of an affiliated group of investment partnerships referred to,
collectively, as the TA Associates Group. The general partner of Advent VII
L.P. is TA Associates VII L.P. The general partner of each of Advent New
York L.P. and Advent Industrial II L.P. is TA Associates VI, L.P. The
general partner of Advent Atlantic and Pacific II Limited Partnership is TA
Associates AAP II Partners, L.P. The general partner of each of TA
Associates VII, L.P., TA Associates VI, L.P. and TA Associates AAP II
Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates, Inc.
exercises sole voting and investment power with respect to all of the
shares held of record by the named investment partnerships, with the
exception of those shares held by TA Venture Investors, L.P.; individually
no stockholder, director or officer of TA Associates, Inc. is deemed to
have or share such voting or investment power. Principals and employees of
TA Associates, Inc.

6
<PAGE> 10

(including Mr. Jaggers, a director of the Company) comprise the general
partners of TA Venture Investors, L.P. In such capacity, Mr. Jaggers may be
deemed to share voting and investment power with respect to the 27,518
shares held of record by TA Venture Investors, L.P. Mr. Jaggers disclaims
beneficial ownership of such shares, except to the extent of the 5,860
shares as to which he holds a pecuniary interest.

(3) Includes 999,566 shares held by Sequoia Capital Growth Fund, 641,539 shares
held by Sequoia Capital VI, 63,801 shares held by Sequoia Technology
Partners III, 35,248 shares held by Sequoia Technology Partners VI and
28,199 shares held by Sequoia XXIV. Mr. Valentine, the Chairman of the
Company's Board of Directors, is an affiliate of the foregoing entities and
may be deemed to share voting and investment power with respect to such
shares. Mr. Valentine disclaims beneficial ownership of such shares, except
to the extent of his pecuniary interest in such shares arising from his
interests in the entities referred to above.

(4) Includes 457,000 shares held by Daniel J. Warmenhoven & Charmaine A.
Warmenhoven, trustees to The Warmenhoven 1987 Revocable Trust UTA dated
12/16/87, as amended, of which Mr. Warmenhoven is a trustee and shares
voting and investment powers. Excludes 8,500 shares held by Charmaine A.
Warmenhoven, Mr. Warmenhoven's spouse, as separate property. Also excludes
200,000 shares held by Richard A. Andre, trustee to The Warmenhoven 1995
Children's Trust, under trust agreement dated 5/1/95, and 9,000 shares held
by Richard A. Andre, trustee to the Daniel J. Warmenhoven 1991 Children's
Trust, as Mr. Warmenhoven disclaims beneficial ownership over the shares
held by such trusts.

(5) Does not include 16,000 shares held by Mr. Mendoza's spouse.

(6) Includes 100,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan.

(7) Includes 40,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. Some of these
shares are subject to a repurchase right of the Company. In addition,
includes 17,857 shares held by Wampum Partners II. Mr. Wall, a director of
the Company, is the Managing Joint Venturer of Wampum Partners II, an
investment joint venture. In such capacity, Mr. Wall exercises sole voting
and investment power with respect to all of the shares held of record by
Wampum Partners II. Mr. Wall disclaims beneficial ownership of such shares
held by Wampum Partners II, except to the extent of his pecuniary interest
in 3,657 of such shares. Also includes 1,000 shares held by Mr. Wall as
custodian for each of his two adult children and 1,000 shares held by Mr.
Wall as trustee of a trust for the benefit of his children. Mr. Wall
disclaims beneficial ownership of these 3,000 shares.

(8) Includes 80,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan.

(9) Includes 30,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. In addition,
includes 51,423 shares held by the Carol Ann Bartz Trust UAD 10/14/87.

(10) Includes 30,000 shares of Common Stock issuable upon exercise of a
currently exercisable option granted under the 1993 Plan. In addition,
includes 27,518 shares held by TA Venture Investors, L.P., all of which
shares are included in the 2,041,933 shares described in footnote (2)
above. Mr. Jaggers disclaims beneficial ownership to such shares, except to
the extent of the 5,860 shares as to which he holds a pecuniary interest.
Does not include any shares beneficially owned by Advent VII L.P., Advent
Atlantic and Pacific II Limited Partnership, Advent Industrial II L.P. or
Advent New York L.P., of which Mr. Jaggers disclaims beneficial ownership.

(11) Includes a total of 280,000 shares of Common Stock issuable upon the
exercise of options exercisable within 60 days of May 31, 1996. Also,
includes all shares held by TA Associates Group and entities affiliated
with Sequoia Capital. Mr. Jaggers disclaims beneficial ownership of the
shares held by TA Associates Group except to the extent of his pecuniary
interest in TA Venture Investors, L.P., and Mr. Valentine disclaims
beneficial ownership of the shares held by entities affiliated by Sequoia
Capital except to the extent of his pecuniary interest in such entities.

7
<PAGE> 11

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

Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten percent (10%) shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 1996 fiscal year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 1996 fiscal year, the Company believes that
all executive officers and Board members complied with all their reporting
requirements under Section 16(a) for such fiscal year.

EXECUTIVE COMPENSATION AND RELATED INFORMATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers for the 1996 fiscal year for services rendered in
all capacities to the Company and its subsidiaries for the 1996 and 1995 fiscal
years. The listed individuals shall be hereinafter referred to as the "Named
Officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEARS SALARY($) BONUS OPTIONS(#)(1) COMPENSATION(2)
- -------------------------------- ----- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Daniel J. Warmenhoven........... 1996 $ 190,615 $147,000 100,000 $ 1,306
President and Chief 1995 96,230 -- 700,000 --
Executive Officer
Michael J. McCloskey(3)......... 1996 148,269 85,000 200,000 391
Vice President, Finance 1995 -- -- -- --
and Operations, Chief
Financial Officer, and
Secretary
Thomas F. Mendoza............... 1996 120,000 186,539 -- 835
Vice President, 1995 117,694 60,077 200,000 --
North American Sales
Michael E. Paul................. 1996 120,000 43,179 -- 1,383
Vice President, 1995 90,923 26,191 125,000 --
International Sales
M. Helen Bradley(4)............. 1996 86,538(5) 55,000(6) 100,000 353
Vice President, Engineering 1995 -- -- -- --
</TABLE>

- ---------------
(1) The options listed in the table were granted under the Company's 1993 Stock
Option/Stock Issuance Plan. The options were incorporated into the Company's
1995 Stock Incentive Plan at the time of the Company's initial public
offering, but will continue to be governed by their existing terms.

(2) Represents the cost of term life insurance.

(3) Mr. McCloskey joined the Company in May of 1995.

(4) Ms. Bradley joined the Company in September of 1995.

(5) Ms. Bradley's salary on an annual basis is $150,000.

(6) Includes a $10,000 signing bonus.

8
<PAGE> 12

STOCK OPTIONS

The following table contains information concerning the stock option grants
made to each of the Named Officers for the 1996 fiscal year. No stock
appreciation rights were granted to those individuals during such year.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
---------------------------------------- ANNUAL
PERCENT OF RATES OF STOCK
NUMBER OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR ($/SHARE)(3) DATE 5% 10%
- ----------------------------- ---------- ------------ ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Warmenhoven........ 100,000 5.9% $ 8.10 10/30/05 $509,404 $1,290,930
Michael J. McCloskey......... 200,000 11.8% .28 05/24/05 35,218 89,250
Thomas F. Mendoza............ -- -- -- -- -- --
Michael E. Paul.............. -- -- -- -- -- --
M. Helen Bradley............. 100,000 5.9% 7.20 09/25/05 452,804 1,147,495
</TABLE>

- ---------------
(1) There is no assurance provided to the option holder or any other holder of
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the 5% and 10% assumed annual rates of
compounded stock price appreciation.

(2) The options were granted under the Company's 1993 Stock Option/Stock
Issuance Plan on the following dates: Mr. Warmenhoven, November 1, 1995; Mr.
McCloskey, May 25, 1995, and Ms. Bradley, September 26, 1995. Each option
has a maximum term of 10 years measured from the grant date, subject to
earlier termination upon the optionee's cessation of service with the
Company. Mr. Warmenhoven's option is immediately exercisable for 87,655
shares and exercisable for the remaining 12,345 shares on January 3, 1996.
Each of the other granted options is immediately exercisable for all the
option shares. However, any shares purchased under the options are subject
to repurchase by the Company at the option exercise price paid per share,
should the optionee leave the Company prior to vesting in the shares. With
respect to the option granted to Mr. Warmenhoven, the option will vest as to
ten percent (10%) of the shares on the first anniversary of the date of
grant; another twenty percent (20%) of the shares in equal monthly
installments over the twenty-four (24) month period starting from the first
anniversary of the grant date; another thirty percent (30%) of the shares in
equal monthly installments over the twelve-month period starting from the
third anniversary of the grant date; and the remaining forty percent (40%)
of the shares in equal monthly installments over the twelve-month period
starting from the fourth anniversary of the grant date. With respect to the
options granted to Mr. McCloskey and Ms. Bradley, the options will vest as
to twenty-five percent (25%) of the shares upon the optionee's completion of
one year of service measured from May 25, 1995 and September 8, 1995,
respectively, and with respect to the balance of the shares in a series of
equal monthly installments over the thirty-six (36) months of service
thereafter. Full and immediate vesting of Messrs. Warmenhoven's and
McCloskey's options will occur in the event the Company is acquired by
merger or asset sale.

(3) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the Federal and state
income and employment tax liability incurred by the optionee in connection
with such exercise.

9
<PAGE> 13

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

The following table sets forth information concerning option exercises and
option holdings for the 1996 fiscal year by each of the Named Officers. No stock
appreciation rights were exercised during such year or were outstanding at the
end of the year.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END AT FY-END(2)
ACQUIRED ON VALUE ----------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel E. Warmenhoven.... -- $ -- 100,000(3) -- $ 2,615,000 --
Michael J. McCloskey..... 200,000 -- -- -- -- --
Thomas F. Mendoza........ 200,000 30,000 -- -- -- --
Michael E. Paul.......... 125,000 18,750 -- -- -- --
M. Helen Bradley......... -- -- 100,000(3) -- 2,705,000 --
</TABLE>

- ---------------
(1) Based on the fair market value (as determined by the Board of Directors) of
the purchased option shares at the time of exercise less the option exercise
price paid for those shares.

(2) Based on the fair market value of the shares at the end of the 1996 fiscal
year ($34.25 per share) less the option exercise price payable for those
shares.

(3) The options are fully exercisable as of the fiscal year end, but any shares
purchased thereunder will be subject to repurchase by the Company at the
original option exercise price paid per share should the optionee leave the
Company prior to vesting in the shares. As of April 26, 1996, Mr.
Warmenhoven and Ms. Bradley had not vested in any shares.

1995 STOCK INCENTIVE PLAN

The Company's 1995 Stock Incentive Plan (the "1995 Plan") was adopted by
the Board of Directors on September 26, 1995 and approved by the shareholders on
October 24, 1995, and became effective on November 20, 1995 in connection with
the initial public offering of the Company's Common Stock. The 1995 Plan serves
as the successor to the Company's 1993 Stock Option/Stock Issuance Plan (the
"1993 Plan"), and all outstanding options under the 1993 Plan have been
incorporated into the 1995 Plan. Under the 1995 Plan, 3,406,262 shares of Common
Stock (including the share reserve transferred from the 1993 Plan) have been
authorized for issuance upon the exercise of options granted under the 1995 Plan
and the outstanding options under the 1993 Plan which have been incorporated
into the 1995 Plan. A summary of the principle features of the 1995 Plan,
together with applicable tax and accounting implications, is set forth in
Appendix A hereto. This information is provided in accordance with the
applicable requirements of the federal securities laws in order to assure that
the 1995 Plan will qualify under Rule 16b-3 of the Securities and Exchange
Commission and thereby provide the Company's executive officers and Board
members with certain exemptions from the short-swing liability provisions of the
federal securities laws for their transactions under the 1995 Plan.

EMPLOYEE STOCK PURCHASE PLAN

The Employee Stock Purchase Plan (the "Purchase Plan") was approved by the
Board of Directors on September 26, 1995, and the Company's shareholders
approved the Purchase Plan on October 24, 1995. The Purchase Plan became
effective on November 20, 1995, in connection with the initial public offering
of the Company's Common Stock. Under the Purchase Plan, 350,000 shares of Common
Stock are authorized for issuance at periodic intervals as the accumulated
payroll deductions under the Purchase Plan are applied to the purchase of
shares. A summary of the principle features of the Purchase Plan, together with
applicable tax and accounting implications, is set forth in Appendix B hereto.
This information is provided in accordance with the applicable requirements of
the federal securities laws in order to assure that the Purchase Plan will
qualify under Rule 16b-3 of the Securities and Exchange Commission and thereby
provide the Company's

10
<PAGE> 14

executive officers and Board members with certain exemptions from the
short-swing liability provisions of the federal securities laws for their
transactions under the Purchase Plan.

REPORT OF THE COMPENSATION COMMITTEE AND THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors (the "Committee") is
currently comprised of two non-employee directors, Carol A. Bartz and Robert T.
Wall, and was formed in November of 1995, in anticipation of the initial public
offering of the Company's Common Stock.

For the 1996 fiscal year, all compensation decisions with respect to base
salaries and bonuses for the Company's executive officers were made by the Board
of Directors. The Board made its decisions primarily on the basis of the Board's
understanding of the compensation practices of similarly-sized companies in the
industry and fixed the compensation package of each executive officer at level
which was competitive with those practices.

Beginning with the second half of the 1996 fiscal year, the Committee
administers the Company's compensation policies and programs and has primary
responsibility for executive compensation matters, including the establishment
of the base salaries of the Company's executive officers, the approval of
individual bonuses and bonus programs for executive officers and the
administration of certain employee benefit programs. In addition, the Committee
has exclusive responsibility for administering the Company's 1995 Plan, under
which stock option grants and direct stock issuances may be made to executive
officers and other employees. The following is a summary of policies which the
Committee applies in setting the compensation levels for the Company's executive
officers.

GENERAL COMPENSATION POLICY. The overall policy of the Committee is to
offer the Company's executive officers competitive compensation opportunities
based upon their personal performance, the financial performance of the Company
and their contribution to that performance. One of the primary objectives is to
have a substantial portion of each executive officer's compensation contingent
upon the Company's financial success as well as upon such executive officer's
own level of performance. Each executive officer's compensation package is
comprised of three elements: (i) base salary, which will be determined on the
basis of the individual's position and responsibilities with the Company, the
level of his or her performance, and the financial performance of the Company,
(ii) incentive performance awards payable in cash and based upon a formula which
takes into account Company and individual performance, and (iii) long-term
stock-based incentive awards designed to strengthen the mutuality of interests
between the executive officers and the Company's shareholders. Generally, as an
executive officer's level of responsibility increases, a greater portion of that
individual's total compensation will be dependent upon the Company's performance
and stock price appreciation rather than base salary.

FACTORS. The primary factors which will be taken into consideration in
establishing the components of each executive officer's compensation package for
the 1997 fiscal year are summarized below. However, the Committee may, in its
discretion, apply entirely different factors, such as different measures of
financial performance, for future fiscal years.

BASE SALARY. In setting the base salary for each executive officer, the
Committee reviews published compensation survey data for its industry. The base
salary for each officer will reflect the salary levels for comparable positions
in the published surveys as well as the individual's personal performance and
internal alignment considerations. The relative weight given to each factor will
vary with each individual in the sole discretion of the Committee. For the 1996
fiscal year, the base salary of the Company's executive officers ranged from the
fiftieth percentile to the seventy-fifth percentile of the base salary levels in
effect for comparable positions in the surveyed compensation data.

INCENTIVE COMPENSATION. For the 1996 fiscal year, an incentive
compensation program was established pursuant to which each executive officer
earned a bonus on the basis of the Company's achievement of certain operating
income objectives and his or her individual performance. The bonus amount was
tied to a percentage of each executive officer's base salary on the basis of the
Company's actual financial performance in

11
<PAGE> 15

comparison to the Company's business plan as measured in terms of operating
income, with additional consideration given to the attainment of individual
goals. No bonus would have been paid if the Company's actual operating income
had not exceeded the plan. The Company's financial performance exceeded the plan
and, accordingly, the executive officers were awarded the bonuses indicated for
them in the Summary Compensation Table which appears earlier in this Proxy
Statement. A similar program will be established by the Committee for the 1997
fiscal year.

LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. From time to time, the
Committee will make option grants to the Company's executive officers under the
1995 Plan. The grants will be designed to align the interests of each executive
officer with those of the shareholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant will allow the officer to
acquire shares of the Company's Common Stock at a fixed price per share (the
market price on the grant date) over a specified period of time (up to ten (10)
years), thus providing a return to the executive officer only if the market
price of the shares appreciates over the option term and the officer continues
in the Company's employ. The size of the option grant to each executive officer
will be designed to create a meaningful opportunity for stock ownership and will
be based upon the executive officer's current position with the Company,
internal comparability with option grants made to other Company executives, the
executive officer's current level of performance and the executive officer's
potential for future responsibility and promotion over the option term. The
Committee will also take into account the number of vested and unvested options
held by the executive officer in order to maintain an appropriate level of
equity incentive for that individual. However, the Committee does not intend to
adhere to any specific guidelines as to the relative option holdings of the
Company's executive officers.

CEO COMPENSATION. The compensation payable to Mr. Warmenhoven, the
Company's Chief Executive Officer during fiscal year 1996, was determined by the
Board of Directors. His base salary was set at a level which the Board felt
would be competitive with the base salary levels in effect for chief executive
officers at similarly-sized companies within the industry. Based upon the Board
evaluation of the Company's achievement of certain performance goals tied to
operating income and Mr. Warmenhoven's individual performance, the Board awarded
Mr. Warmenhoven a bonus of $147,000 for the 1996 fiscal year. In addition, Mr.
Warmenhoven was also granted an option to purchase 100,000 shares of the
Company's common stock under the 1995 Plan. The option has an exercise price of
$8.10 per share, the fair market value per share on the grant date, and is
intended to maintain Mr. Warmenhoven's option holdings in the Company at a
competitive level with the holdings of other chief executive officers at
similarly-sized companies within the industry. For the 1997 fiscal year, Mr.
Warmenhoven's compensation package was set by the Committee on the basis of the
compensation policy summarized in this report.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). Section 162(m) of
the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to publicly-held companies for compensation paid to certain executive officers,
to the extent that compensation exceeds $1 million per officer in any year. The
compensation paid to the Company's executive officers for the 1996 fiscal year
did not exceed the $1 million limit per officer, and it is not expected the
compensation to be paid to the Company's executive officers for the 1997 fiscal
year will exceed that limit. In addition, the Company's 1995 Stock Incentive
Plan is structured so that any compensation deemed paid to an executive officer
in connection with the exercise of his or her outstanding options under the 1995
Plan will qualify as performance-based compensation which will not be subject to
the $1 million limitation. Because it is very unlikely that the cash
compensation payable to any of the Company's executive officers in the
foreseeable future will approach the $1 million limit, the Committee has decided
at this time not to take any other action to limit or restructure the elements
of cash compensation payable to the Company's executive officers. The Committee
will reconsider this decision should the individual compensation of any
executive officer ever approach the $1 million level.

12
<PAGE> 16

Submitted by both the Board of Directors and the Compensation Committee of
the Company's Board of Directors:

Carol A. Bartz, Board and Compensation Committee Member

Robert T. Wall, Board and Compensation Committee Member

Daniel J. Warmenhoven, Board Member

Donald T. Valentine, Board Member

Michael R. Hallman, Board Member

Kurt R. Jaggers, Board Member

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board of Directors is comprised
of Ms. Bartz and Mr. Wall. Neither of these individuals was at any time during
the 1996 fiscal year, or at any other time, an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL AGREEMENTS

The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the other executive officers named in the
Summary Compensation Table.

In connection with an acquisition of the Company by merger or asset sale,
the options granted in the last fiscal year to Mr. Warmenhoven and Mr. McCloskey
under the Predecessor Plan shall immediately vest in full. In addition, each
additional outstanding option held by the Chief Executive Officer and the other
executive officers under the 1995 Plan will automatically accelerate in full and
all unvested shares of Common Stock held by such individuals under either the
Predecessor Plan or the 1995 Plan will immediately vest in full, except to the
extent such options are to be assumed by, and the Company's repurchase rights
with respect to these shares are to be assigned to, the successor corporation.
In addition, the Compensation Committee as Plan Administrator of the 1995 Plan
will have the authority to provide for the accelerated vesting of the shares of
Common Stock subject to outstanding options held by the Chief Executive Officer
or any other executive officer or the shares of Common Stock subject to direct
issuances held by such individual, in connection with the termination of the
officer's employment following a merger or asset sale in which: (i) these
options are assumed, (ii) the Company's repurchase rights with respect to
unvested shares are assigned, or (iii) certain hostile changes in control of the
Company occur.

In June 1995, the Company and Mr. Michael Malcolm, a greater than five
percent shareholder and former director and executive officer of the Company,
entered into a Settlement Agreement and General Release (the "Settlement
Agreement") relating to Mr. Malcolm's termination of services with the Company.
Under the material terms of the Settlement Agreement, Mr. Malcolm and the
Company release each other of any claims, damages, and causes of action that
they might have against each other arising out of Mr. Malcolm's employment with
the Company. The Company also agreed to pay Mr. Malcolm the lump sum of $220,000
and a monthly consulting fee, which terminated in November 1995, of $15,000. In
addition, the Company agreed to indemnify and defend Mr. Malcolm under certain
circumstances in connection with the Whipsaw Litigation.

PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return on the
Common Stock of the Company with that of the Nasdaq Stock Market-US Index, a
broad market index published by the National Association of Securities Dealers,
Inc., and the Hambrecht & Quist Technology Index compiled by Hambrecht & Quist
LLC. The comparison for each of the periods assumes that $100 was invested on

13
<PAGE> 17

November 21, 1995 (the date of the Company's initial public offering) in the
Company's Common Stock, the stocks included in the Nasdaq Stock Market-US Index
and the stocks included in the Hambrecht & Quist Technology Index. These
indices, which reflect formulas for dividend reinvestment and weighing of
individual stocks, do not necessarily reflect returns that could be achieved by
individual investors.

COMPARISON OF CUMULATIVE TOTAL RETURN SINCE NOVEMBER 21, 1995
AMONG NETWORK APPLIANCE, THE NASDAQ STOCK MARKET-US INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX

<TABLE>
<S> <C> <C> <C> <C>
NETWORK HAMBRECHT &
APPLIANCE, NASDAQ STOCK QUIST
11/21/95 INC. MARKET- US TECHNOLOGY
11/95 100 100 100
12/95 224 102 99
1/96 297 102 96
2/96 228 102 99
3/96 235 106 102
4/96 235 107 98
5/96 237 115 109
</TABLE>

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Proxy Statement, in
whole or in part, the preceding Compensation Committee Report on Executive
Compensation and the preceding performance graph shall not be incorporated by
reference into any such filings; nor shall such Report or graph be incorporated
by reference into any future filings.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has also granted options to certain of its directors and
executive officers.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.

14
<PAGE> 18

OTHER BUSINESS

The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If other matters are properly brought
before the Annual Meeting, however, it is the intention of the persons named in
the accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.

SHAREHOLDER PROPOSALS

Proposals of shareholders that are intended to be presented at the
Company's annual meeting of shareholders to be held in 1997 must be received by
June 2, 1997 in order to be included in the proxy statement and proxy relating
to that meeting.

BY ORDER OF THE BOARD OF DIRECTORS

DANIEL J. WARMENHOVEN
President and Chief Executive Officer

September 30, 1996

15
<PAGE> 19

APPENDIX A

SUMMARY OF THE 1995 STOCK INCENTIVE PLAN

The 1995 Stock Incentive Plan (the "1995 Plan"), was adopted by the Board
of Directors (the "Board") on September 26, 1995 and approved by the Company's
shareholders on October 24, 1995. The 1995 Plan became effective on November 20,
1995 in connection with the initial public offering of the Company's Common
Stock and serves as the successor to the Company's 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan"). All outstanding options under the 1993 Plan
have been incorporated into the 1995 Plan, and no further shares of Common Stock
will be issued under the 1993 Plan.

The 1995 Plan is designed to provide key employees (including officers),
consultants and non-employee Board members with an opportunity to acquire an
equity interest in the Company as an incentive for them to remain in the
Company's service. Such equity incentives are a significant factor in the
Company's ability to attract and retain key employees, consultants and
non-employee Board members who are critical to the Company's long-term success.

The following is a summary of the principal features of the 1995 Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the 1995 Plan. Any shareholder who wishes to obtain a copy of the
actual plan document may do so by written request to the Corporate Secretary at
the Company's executive offices in Mountain View, California.

EQUITY INCENTIVE PROGRAMS

The 1995 Plan contains four separate equity incentive programs: (i) a
Discretionary Option Grant Program, (ii) a Salary Investment Option Grant
Program, (iii) a Stock Issuance Program, and (iv) an Automatic Option Grant
Program. The principal features of these programs are described below. The 1995
Plan (other than the Automatic Option Grant Program) is administered with
respect to all officers and directors of the Company subject to the short-swing
profit liabilities of Section 16 of the Securities Act of 1934 (Section 16
Insiders) by the Compensation Committee of the Board. With respect to all other
participants, the 1995 Plan may be administered by either the Compensation
Committee or a secondary committee of Board members appointed by the Board. The
Compensation Committee or any secondary committee of the Board acting within the
scope of its administrative jurisdiction under the 1995 Plan will be referred to
in this summary as the Plan Administrator, and each Plan Administrator will have
complete discretion (subject to the provisions of the 1995 Plan) to authorize
option grants and direct stock issuances under the 1995 Plan within the scope of
its administrative jurisdiction. However, all grants under the Automatic Option
Grant Program are to be made in strict compliance with the provisions of that
program, and no administrative discretion will be exercised by any Plan
Administrator with respect to the grants made under such program.

SHARE RESERVE

3,406,262 shares of Common Stock has been reserved for issuance over the
ten-year term of the 1995 Plan. Such authorized share reserve is comprised of
(i) the number of shares of Common Stock which remained available for issuance
under the 1993 Plan at time of the initial public offering of the Company's
Common Stock, including the shares subject to outstanding options incorporated
into the 1995 Plan, plus (ii) an additional increase of 1,750,000 shares. The
shares of Common Stock issuable under the 1995 Plan may be made available from
authorized but unissued shares of the Company's Common Stock or from shares of
Common Stock repurchased by the Company, including shares repurchased on the
open market.

In no event may any one participant in the 1995 Plan receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate in any one calendar
year, beginning with the 1995 calendar year.

In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in

A-1
<PAGE> 20

corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to (i) the maximum number and class of
securities issuable under the 1995 Plan, (ii) the maximum number and class of
securities for which a participant may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances in any one
calendar year, (iii) the number and class of securities for which option grants
will subsequently be made under the Automatic Option Grant Program to each
newly-elected or continuing non-employee Board member and (iv) the number and
class of securities and the exercise price per share in effect under each
outstanding option.

Should an option expire or terminate 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 1995 Plan. Shares subject to any
option surrendered in accordance with the stock appreciation right provisions of
the 1995 Plan, as well as shares repurchased by the Company pursuant to its
repurchase rights will not be available for subsequent issuance.

ELIGIBILITY

Officers and other employees of the Company and its subsidiaries (whether
now existing or subsequently established), non-employee Board members (other
than the members of the Compensation Committee), and independent consultants and
advisors to the Company and its subsidiaries will be eligible to participate in
the Discretionary Option Grant and Stock Issuance Programs. Non-employee Board
members, including the members of the Compensation Committee, will also be
eligible to participate in the Automatic Option Grant Program. The Company's
officers and other highly-compensated employees will also be eligible to
participate in the Salary Investment Option Grant Program.

As of May 31, 1996, 5 executive officers, 2 non-employee board members, and
approximately 155 other employees were eligible to participate in the
Discretionary Option Grant and Stock Issuance Programs, 4 non-employee Board
members were eligible to participate in the Automatic Option Grant Program. The
Compensation Committee has not yet chosen to implement the Salary Investment
Option Grant Program.

VALUATION

The fair market value per share of Common Stock on any relevant date under
the 1995 Plan will be the closing selling price per share on that date on the
Nasdaq National Market. On May 31, 1996, the closing selling price per share was
$34.25.

DISCRETIONARY OPTION GRANT PROGRAM

Options may be granted under the Discretionary 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. The options will generally
become exercisable in one or more installments over the optionee's period of
service with the Company.

Upon cessation of service, the optionee will have a limited period of time
in which to exercise his or her outstanding options for any shares in which the
optionee is vested at that time. The Plan Administrator has complete discretion
to extend the period following the optionee's cessation of service during which
his or her outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such discretion
may be exercised at any time while the options remain outstanding, whether
before or after the optionee's actual cessation of service.

The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:

Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from the Company
equal in amount to the excess of (a) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (b) the
aggregate exercise

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<PAGE> 21

price payable for such shares. Such appreciation distribution may, at the
discretion of the Plan Administrator, be made in cash or in shares of
Common Stock.

Limited stock appreciation rights may be provided to one or more
officers of the Company as part of their option grants. Any option with
such a limited stock appreciation right in effect for at least six (6)
months may be surrendered to the Company upon the successful completion of
a hostile tender offer for more than fifty percent (50%) of the Company's
outstanding voting stock. In return for the surrendered option, the officer
will be entitled to a cash distribution from the Company in an amount per
surrendered option share equal to the excess of (a) the greater of (i) the
fair market value of common stock on the date the option is surrendered or
(ii) the highest price per share of Common Stock paid in connection with
the tender offer over (b) the exercise price payable for such share.

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

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

SALARY INVESTMENT OPTION GRANT PROGRAM

The Compensation Committee has complete discretion to decide whether the
Salary Investment Option Grant Program will be in effect for a given year, and
what individuals are selected to participate. Selected individuals must be
officers or other highly compensated employees. As a condition of participation,
each selected individual who elects to participate must, prior to the start of
the calendar year of participation, file with the Primary Committee an
irrevocable authorization directing the Company to reduce his or her salary for
the upcoming calendar year. The minimum salary reduction permitted is $15,000
and the maximum is $75,000. Each selected individual who files the proper
authorization shall automatically be granted an option under the Salary
Investment Option Grant Program.

Each option will be subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Option Grant Program,
except for the following differences:

- The exercise price per share will be equal to one-third of the fair
market value per share of Common Stock on the grant date.

- The number of option shares will be determined by dividing the total
dollar amount of the approved reduction in the participant's base salary
by two-thirds of the fair market value per share of Common Stock on the
grant date. As a result, the total spread on the option (the fair market
value of the option shares on the grant date less the aggregate exercise
price payable for those shares) will equal the dollar amount of the
reduction to the optionee's base salary to be in effect for the calendar
year for which the grant is made.

- The option shall become exercisable in a series of twelve (12) equal
monthly installments upon the optionee's completion of each calendar
month of service in the calendar year in which the salary reduction is in
effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of the Company.

- Should the optionee cease Service for any reason while holding one or
more options under this program, then each such option will remain
exercisable until the expiration of the ten (10) year option term for
that number of option shares for which the option is exercisable at the
time the optionee ceases Service. Should the optionee die while in
service, then each such option may be exercised by the

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<PAGE> 22

personal representative of the optionee's estate or by the optionee's
heir(s). However, the option shall, immediately upon the optionee's
cessation of service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.

- Each option will have a maximum term of ten years measured from the grant
date, whether or not the individual continues in Service.

As of May 31, 1996, the Compensation Committee has not chosen to implement
this Program.

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, payable in cash
or through a promissory note payable to the Company. Shares may also be 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 a minimum period of service with the Company or
the attainment of specified performance goals. The Plan Administrator will,
however, have the discretionary authority at any time to accelerate the vesting
of any and all unvested shares outstanding under the 1995 Plan.

AUTOMATIC OPTION GRANT PROGRAM

Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member on or after the November 20, 1995 effective date of
the 1995 Plan, whether through election by the shareholders or appointment by
the Board, will automatically be granted, at the time of such initial election
or appointment, a non-statutory option to purchase 24,000 shares of Common
Stock, provided such individual has not previously been in the Company's employ.
Each non-employee Board member who is to continue to serve on the Board will be
granted a 6,000-share automatic option grant on the date of each Annual
Shareholders Meeting, provided such individual has served as a non-employee
Board member for at least six (6) months. There will be no limit on the number
of such 6,000-share option grants which any one non-employee Board member may
receive over his or her period of Board service.

Each 24,000-share or 6,000-share option granted under the Automatic Option
Grant Program will have an exercise price per share equal to 100% of the fair
market value per share of Common Stock on the grant date and a maximum term of
ten years measured from the grant date, subject to earlier termination at the
end of the twelve (12)-month period measured from the date of the optionee's
cessation of Board service. Each option will be immediately exercisable for any
or all of the option shares. However, any shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
upon the optionee's cessation of Board service prior to vesting in those shares.
The shares subject to each initial 24,000-share option grant will vest in four
(4) successive equal annual installments upon the optionee's completion of each
year of Board service over the four (4)-year period measured from the grant
date. The shares subject to each annual 6,000-share option grant will vest in
full upon the optionee's completion of one year of Board service measured from
the grant date.

The shares subject to each automatic option grant will immediately vest
upon (i) the optionee's death or permanent disability while a Board member, (ii)
an acquisition of the Company by merger or asset sale or (iii) the successful
completion of a hostile tender offer for more than fifty percent (50%) of the
Company's outstanding voting stock or a change in the majority of the Board
effected through one or more proxy contests for Board membership. In addition,
upon the successful completion of a hostile tender offer for more than fifty
percent (50%) of the Company's outstanding voting stock, each automatic option
grant which has been outstanding for at least six months may be surrendered to
the Company for a cash distribution per surrendered option share in an amount
equal to the excess of (a) the greater of (i) the fair market value of common
stock on the date the option is surrendered or (ii) the highest price per share
of Common Stock paid in connection with the tender offer over (b) the exercise
price payable for such share.

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<PAGE> 23

GENERAL PROVISIONS

ACCELERATION

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. Any options assumed in connection with such acquisition may, in the
Plan Administrator's discretion, be subject to immediate acceleration, and any
unvested shares which do not vest at the time of such acquisition may be subject
to full and immediate vesting, in the event the individual's service with the
successor entity is subsequently terminated within a specified period (not to
exceed twelve (12) months) after the acquisition. In connection with a hostile
change in control of the Company (whether by successful tender offer for more
than 50% of the outstanding voting stock or by proxy contest for the election of
Board members), the Plan Administrator will have the discretionary authority to
provide for the full and immediate vesting of all outstanding stock options and
unvested shares under the Discretionary Option Grant and Stock Issuance
Programs, with such vesting to occur either at the time of such change in
control or upon the subsequent termination of the individual's service within a
specified period (not to exceed twelve (12) months) after the change in control.

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

FINANCIAL ASSISTANCE

The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options or the purchase of
shares under the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs. The Plan Administrator will have complete discretion to
determine the terms of any such financial assistance. However, the maximum
amount of financing provided any individual may not exceed the cash
consideration payable for the issued shares plus all applicable taxes. Any such
financing may be subject to forgiveness in whole or in part, at the discretion
of the Plan Administrator.

SPECIAL TAX ELECTION

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

OUTSTANDING OPTIONS UNDER 1993 PLAN

All options which were outstanding under the 1993 Plan on November 20, 1995
have been incorporated into the 1995 Plan and are now treated as outstanding
options under the 1995 Plan. However, each option so incorporated will continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the 1995 Plan will affect or otherwise modify the rights or
obligations of the holders of those incorporated options with respect to their
acquisition of shares of Common Stock. However, the Plan Administrator has
complete discretion to extend one or more provisions of the 1995 Plan, including
(without limitation) the vesting acceleration provisions of the 1995 Plan
applicable to an acquisition of the Company by merger or asset sale or to a
change in control of the Company, to one or more of the incorporated options
which do not otherwise contain such provisions.

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<PAGE> 24

STOCK AWARDS

The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated individuals and
groups, the number of shares of Common Stock subject to options granted under
the 1995 Plan or the predecessor 1993 Plan during the period beginning May 1,
1995 and ending May 31, 1996, together with the weighted average exercise price
payable per share.

OPTION TRANSACTIONS

<TABLE>
<CAPTION>
OPTIONS GRANTED WEIGHTED AVERAGE
NAME (NUMBER OF SHARES) EXERCISE PRICE
- ----------------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Daniel J. Warmenhoven...................................... 100,000 $ 8.10
Chairman of the Board,
President and Chief Executive Officer
Michael J. McCloskey....................................... 200,000 $ 0.28
Vice President, Finance and Operations,
Chief Financial Officer and Secretary
Thomas F. Mendoza.......................................... -- --
Vice President, Domestic Sales
M. Helen Bradley........................................... 100,000 $ 7.20
Vice President, Engineering
All executive officers as a group.......................... 400,000 $ 3.97
All non-employee directors as a group...................... -- --
All employees, including current officers who are not
executive officers as a group............................ 1,298,190 $ 9.76
</TABLE>

As of May 31, 1996, options covering 1,596,624 shares of Common Stock were
outstanding under the 1995 Plan (including shares subject to options
incorporated from the 1993 Plan), 1,772,459 shares remained available for future
option grant and 2,288,177 shares have been issued under the 1995 Plan.

AMENDMENT AND TERMINATION

The Board may amend or modify the provisions of the 1995 Plan at any time,
but amendments to the Automatic Option Grant Program may not be made at
intervals more frequently than once every six (6) months, unless otherwise
required to comply with applicable federal tax laws. Shareholder approval will
be required for any amendment to the 1995 Plan which would (i) materially
increase the maximum number of shares issuable under the 1995 Plan, the number
of shares for which options may be granted under the Automatic Option Grant
Program to newly-elected or continuing non-employee Board members, or the
maximum number of shares for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances per
calendar year, except for permissible adjustments in the event of certain
changes in the Company's capitalization, (ii) materially modify the eligibility
requirements for plan participation or (iii) materially increase the benefits
accruing to participants. The Board may terminate the 1995 Plan at any time, and
the 1995 Plan will in all events terminate on August 31, 2005.

FEDERAL INCOME TAX CONSEQUENCES

OPTION GRANTS

Options granted under the 1995 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 a taxable disposition. For Federal tax
purposes, dispositions are divided into two categories:

A-6
<PAGE> 25

(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 years after the option grant date and more than
one year after the exercise date. If either of these two holding periods is
not satisfied, then a disqualifying disposition will result.

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

Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a nonstatutory option. The optionee will in general
recognize ordinary income, in the year in which the option is exercised,
equal to the excess of the fair market value of the purchased shares on the
exercise date over the exercise price paid for the shares, and the optionee
will be required to satisfy the tax withholding requirements applicable to
such income.

If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then
the optionee will not recognize any taxable income at the time of exercise
but will have to report as ordinary income, as and when those shares vest,
an amount equal to the excess of (i) the fair market value of the shares at
time of vesting over (ii) the exercise price paid for those 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 shares subsequently vest.

The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed
for the taxable year of the Company in which such ordinary income is
recognized by the optionee. Any compensation deemed paid by the Company
upon the exercise of non-statutory options with an exercise price equal to
the fair market value of the option shares on the grant date will not have
to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.

STOCK APPRECIATION RIGHTS

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

SALARY INVESTMENT OPTIONS

The tax principles applicable to options issued under the Salary Investment
Option Grant Program will be substantially the same as those summarized above
for the exercise of non-statutory option grants.

DIRECT STOCK ISSUANCE

The tax principles applicable to direct stock issuances under the 1995 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.

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<PAGE> 26

ACCOUNTING TREATMENT

Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
compensation expense to the Company's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the grant
or issue date. Such expense will be accruable by the Company over the period
that the option shares or issued shares are to vest. Option grants or stock
issuances at 100% of fair market value will not result in any charge to the
Company's earnings, but the Company must disclose, in footnotes to the Company's
financial statements, the impact those options would have upon the Company's
reported earnings were the value of those options treated as compensation
expense. Whether or not granted at a discount, the number of outstanding options
may be a factor in determining the Company's earnings per share on a
fully-diluted basis.

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

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<PAGE> 27

APPENDIX B

SUMMARY OF THE EMPLOYEE STOCK PURCHASE PLAN

The Employee Stock Purchase Plan (the "Purchase Plan"), was adopted by the
Board of Directors (the "Board") on September 26, 1995 and approved by the
shareholders on October 24, 1995. The Purchase Plan became effective on November
20, 1995 in connection with the initial public offering of the Company's Common
Stock. The purpose of the Purchase Plan is to provide eligible employees of the
Company and its participating affiliates with the opportunity to acquire a
proprietary interest in the Company through participation in a payroll-deduction
based employee stock purchase plan under Section 423 of the Internal Revenue
Code.

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

ADMINISTRATION

The Purchase Plan is administered by the Compensation Committee of the
Board. Such committee, as Plan Administrator, has full authority to adopt
administrative rules and procedures and to interpret the provisions of the
Purchase Plan. All costs and expenses incurred in plan administration are paid
by the Company without charge to participants.

SECURITIES SUBJECT TO THE PURCHASE PLAN

350,000 shares of Common Stock have been reserved for issuance over the
term of the Purchase Plan. The shares may be made available from authorized but
unissued shares of the Company's Common Stock or from shares of Common Stock
repurchased by the Company, including shares repurchased on the open market.

In the event that any change is made to the Company's outstanding Common
Stock (whether by reason of any recapitalization, stock dividend, stock split,
exchange or combination of shares or other change in corporate structure
effected without the Company's receipt of consideration), appropriate
adjustments will be made to (i) the class and maximum number of securities
issuable over the term of the Purchase Plan, (ii) the class and maximum number
of securities purchasable per participant on any one semi-annual purchase date
and (iii) the class and number of securities and the price per share in effect
under each outstanding purchase right.

PURCHASE PERIODS AND PURCHASE RIGHTS

Shares of Common Stock will be offered under the Purchase Plan through a
series of successive offering periods, each with a maximum duration of
twenty-four (24) months. The initial offering period began on November 20, 1995
and will end on the last business day in November, 1997. The next offering
period will start on the first business day in December, 1997, and any
subsequent offering periods will begin as designated by the Plan Administrator.

ELIGIBILITY AND PARTICIPATION

Any individual who is employed on a basis under which he or she is expected
to work more than twenty (20) hours per week for more than five (5) months per
calendar year in the employ of the Company or any participating parent or
subsidiary corporation (including any corporation which subsequently becomes
such at any time during the term of the Purchase Plan) is eligible to
participate in the Purchase Plan. As of May 31, 1996, the Company estimated that
approximately 160 employees, including 5 executive officers, were eligible to
participate in the Purchase Plan.

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<PAGE> 28

An individual who is an eligible employee at the start of any offering
period may join that offering period at that time or on any subsequent
semi-annual entry date (the first business day in June or December each year)
within that offering period. An individual who first becomes an eligible
employee after such start date may join the offering period on any semi-annual
entry date within that offering period on which he or she is an eligible
employee.

At the time the participant joins the offering period, he or she will be
granted a purchase right to acquire shares of Common Stock at semi-annual
intervals over the remainder of that offering period. The purchase dates will
occur on the last business day in May and November each year, and all payroll
deductions collected from the participant for the period ending with each such
semi-annual purchase date will automatically be applied to the purchase of
Common Stock. Payroll deductions may not exceed 10% of base salary for each
semi-annual period of participation, and no participant may purchase more than
750 shares per semi-annual purchase date. The first purchase date under the
Purchase Plan occurred on May 31, 1996.

PURCHASE PRICE

The purchase price of the Common Stock acquired on each semi-annual
purchase date will be equal to 85% of the lower of (i) the fair market value per
share of Common Stock on the participant's entry date into the offering period
or (ii) the fair market value on the semi-annual purchase date. However, the
clause (i) amount for any participant whose entry date is other than the start
date of the offering period will not be less than the fair market value per
share of Common Stock on that start date.

The fair market value per share of Common Stock on the November 20, 1995
effective date of the Purchase plan was deemed to be equal to the $13.50 per
share price at which the Common Stock was sold in the initial public offering on
that date. The fair market value of the Common Stock on any other relevant date
under the Purchase Plan will be deemed to be equal to the closing selling price
per share on such date on the Nasdaq National Market. On May 31, 1996, the fair
market value per share of Common Stock was $34.25 per share, the closing selling
price per share on such date on the Nasdaq National Market.

PAYROLL DEDUCTIONS AND STOCK PURCHASES

Each participant may authorize periodic payroll deductions in any multiple
of 1% (up to a maximum of 10%) of his or her base salary each offering period to
be applied to the acquisition of Common Stock on the semi-annual purchase dates.
On each semi-annual purchase date (the last business day in May and November
each year), the payroll deductions of each participant will automatically be
applied to the purchase of whole shares of Common Stock at the purchase price in
effect for the participant for that purchase date.

SPECIAL LIMITATIONS

The Purchase Plan imposes certain limitations upon a participant's rights
to acquire Common Stock, including the following limitations:

- Purchase rights may not be granted to any individual who, immediately
after the grant of such right, would own (or otherwise hold options or
other rights to purchase) stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or
any of its affiliates.

- Purchase rights granted to a participant may not permit such individual
to purchase more than $25,000 worth of Common Stock (valued at the time
each purchase right is granted) for each calendar year those purchase
rights are outstanding at any time.

- No participant may purchase more than 750 shares of Common Stock on any
semi-annual purchase date.

- The maximum number of shares of Common Stock which all participants in
the aggregate may purchase on any one semi-annual purchase date is
100,000 shares.

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<PAGE> 29

TERMINATION OF PURCHASE RIGHTS

The participant may withdraw from the Purchase Plan at any time, and his or
her accumulated payroll deductions will, at the participant's election, either
be refunded immediately or applied to the purchase of Common Stock on the next
purchase date.

The participant's purchase right will immediately terminate upon his or her
cessation of employment or loss of eligible employee status. Any payroll
deductions which the participant may have made for the semi-annual period in
which such cessation of employment or loss of eligibility occurs will be
refunded and will not be applied to the purchase of Common Stock.

SHAREHOLDER RIGHTS

No participant will have any shareholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.

ASSIGNABILITY

No purchase rights will be assignable or transferable by the participant,
and the purchase rights will be exercisable only by the participant.

CHANGE IN CONTROL

In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to such acquisition, but in no event will the clause (i) fair market value be
less than the fair market value per share of Common Stock on the start date of
the offering period in which such acquisition occurs.

SHARE PRO-RATION

Should the total number of shares of Common Stock to be purchased pursuant
to outstanding purchase rights on any particular date exceed the number of
shares then available for issuance under the Purchase Plan, then the Plan
Administrator will make a pro-rata allocation of the available shares on a
uniform and nondiscriminatory basis, and the payroll deductions of each
participant, to the extent in excess of the aggregate purchase price payable for
the Common Stock pro-rated to such individual, will be refunded.

AMENDMENT AND TERMINATION

The Purchase Plan will terminate upon the earliest of (i) the last business
day in November, 2005, (ii) the date on which all shares available for issuance
thereunder are sold pursuant to exercised purchase rights or (iii) the date on
which all purchase rights are exercised in connection with an acquisition of the
Company.

The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, the Board may not, without shareholder approval, (i) increase the
number of shares issuable under the Purchase Plan or the maximum number of
shares purchasable per participant on any one semi-annual purchase date, except
in connection with certain changes in the Company's capital structure, (ii)
alter the purchase price formula so as to reduce the purchase price, (iii)
materially increase the benefits accruing to participants or (iv) materially
modify the requirements for eligibility to participate in the Purchase Plan.

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<PAGE> 30

FEDERAL TAX CONSEQUENCES

The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to the Company, upon either the grant or the
exercise of the purchase rights. Taxable income will not be recognized until
there is a sale or other disposition of the shares acquired under the Purchase
Plan or in the event the participant should die while still owning the purchased
shares.

If the participant sells or otherwise disposes of the purchased shares
within two years after his or her entry date into the offering period in which
such shares were acquired or within one year after the semi-annual purchase date
on which those shares were actually acquired, then the participant will
recognize ordinary income in the year of sale or disposition equal to the amount
by which the fair market value of the shares on the purchase date exceeded the
purchase price paid for those shares, and the Company will be entitled to an
income tax deduction, for the taxable year in which such disposition occurs,
equal in amount to such excess. Any additional gain will be capital gain, which
will be long term if the shares are held for more than one year.

If the participant sells or disposes of the purchased shares more than two
years after his or her entry date into the offering period in which the shares
were acquired and more than one year after the semi-annual purchase date of
those shares, then the participant will recognize ordinary income in the year of
sale or disposition equal to the lesser of (i) the amount by which the fair
market value of the shares on the sale or disposition date exceeded the purchase
price paid for those shares or (ii) 15% of the fair market value of the shares
on the participant's entry date into that offering period; and any additional
gain upon the disposition will be taxed as a long-term capital gain. The Company
will not be entitled to an income tax deduction with respect to such
disposition.

If the participant still owns the purchased shares at the time of death,
the lesser of (i) the amount by which the fair market value of the shares on the
date of death exceeds the purchase price or (ii) 15% of the fair market value of
the shares on his or her entry date into the offering period in which those
shares were acquired will constitute ordinary income in the year of death.

ACCOUNTING TREATMENT

Under current accounting rules, the issuance of Common Stock under the
Purchase Plan will not result in a compensation expense chargeable against the
Company's reported earnings. However, the Company must disclose, in footnotes to
the Company's financial statements, the impact the purchase rights granted under
the Purchase Plan would have upon the Company's reported earnings were the value
of those purchase rights treated as compensation expense.

STOCK ISSUANCES

The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated groups, the number
of shares of Common Stock purchased under the Purchase Plan on May 31, 1996
together with the purchase price paid per share.

B-4
<PAGE> 31

PURCHASE PLAN TRANSACTIONS

<TABLE>
<CAPTION>
NUMBER OF
NAME PURCHASED SHARES PURCHASE PRICE
- --------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Daniel J. Warmenhoven.......................................... 750 $ 11.475
Chairman of the Board,
President and Chief Executive Officer
Michael J. McCloskey........................................... 653 $ 11.475
Vice President, Finance and Operations,
Chief Financial Officer and Secretary
Thomas F. Mendoza.............................................. 750 $ 11.475
Vice President, Domestic Sales
Michael E. Paul................................................ 750 $ 11.475
Vice President, International Sales
M. Helen Bradley............................................... 653 $ 11.475
Vice President, Engineering
All executive officers as a group.............................. 3,556 $ 11.475
All employees, including current officers who are not executive
officers as a group.......................................... 36,020 $ 11.475
</TABLE>

B-5
<PAGE> 32
PROXY PROXY

NETWORK APPLIANCE, INC.

This Proxy is Solicited on Behalf of the Board of Directors.

Daniel J. Warmenhoven and Michael J. Sheridan or either of them, are
hereby appointed as the lawful agents and proxies of the undersigned (with all
powers the undersigned would possess if personally present, including full
power of substitution) to represent and to vote all shares of capital stock of
Network Appliance, Inc. (the "Company") which the undersigned is entitled to
vote at the Company's Annual Meeting of Shareholders on October 23, 1996, and
at any adjournments or postponements thereof as follows:

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.

(Continued and to be signed on reverse side.)

3045--Network Appliance, Inc.
<PAGE> 33
NETWORK APPLIANCE, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/

[ ]

1. Election of Directors: Nominees: Daniel J. Warmenhoven, Donald T. Valentine,
Carol A. Bartz, Michael R. Hallman, Kurt R. Jaggers and Robert T. Wall

(INSTRUCTION: to withhold authority to vote for any individual nominee,
write such name or names in the space provided below.)

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

FOR ALL / / WITHHOLD ALL / / FOR ALL EXCEPT / /

2. Proposal to ratify the appointment of Deloitte and Touche LLP as independent
accountants of the Company for the fiscal year ending April 30, 1997:

FOR / / AGAINST / / ABSTAIN / /

3. Transaction of any other business which may properly come before the meeting
and any adjournment or postponement thereof.

The Board of Directors recommends a vote FOR each of the above proposals. This
Proxy will be voted as directed, or, if no direction is indicated, will be voted
FOR each of the above proposals and, at the discretion of the persons named as
proxies, upon such other matters as may properly come before the meeting. This
proxy may be revoked at any time before it is voted.

Dated: ____________________, 1996

Signature ________________________________

Signature if held jointly ________________________________

(Please sign exactly as shown on your stock certificate and on this proxy form.
When signing as partner, corporate officer, attorney, executor, administrator,
trustee, guardian or in any other representative capacity, give full title as
such and sign your own name as well. If stock is held jointly owner should
sign.)

3045--Network Appliance, Inc.