NETWORK ENGINES INC
S-1/A, 2000-05-19
PREPACKAGED SOFTWARE
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<PAGE>


   As filed with the Securities and Exchange Commission on May 19, 2000

                                                 Registration No. 333-34286
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  -----------

                              AMENDMENT No. 1

                                    TO

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

                                  -----------

                             NETWORK ENGINES, INC.
             (Exact name of registrant as specified in its charter)
        Delaware                     3572                     04-3064173
    (State or other           (Primary Standard            (I.R.S. Employer
    jurisdiction of               Industrial
    incorporation or         Classification Code        Identification Number)
     organization)                 Number)

               25 Dan Road, Canton, Massachusetts 02021-2817

                              (781) 828-6767
   (Address Including Zip Code, and Telephone Number Including Area Code, of
                   Registrant's Principal Executive Offices)

                                  -----------

                              Lawrence A. Genovesi
                             Network Engines, Inc.
 Chairman of the Board, President, Chief Executive Officer and Chief Technology
                                    Officer

               25 Dan Road, Canton, Massachusetts 02021-2817

                              (781) 828-6767

 (Name, Address Including Zip Code and Telephone Number Including Area Code, of
                               Agent for Service)

                                  -----------

                                   Copies to:
        Philip P. Rossetti, Esq.                 Michael A. Conza, Esq.
           Hale and Dorr LLP                Testa, Hurwitz & Thibeault, LLP
 60 State Street, Boston, Massachusetts  125 High Street, Boston, Massachusetts
                 02109                                   02110
       Telephone: (617) 526-6000               Telephone: (617) 248-7000
        Telecopy: (617) 526-5000                Telecopy: (617) 248-7100

                                  -----------

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
   If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                        CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                          Proposed
                                                          Maximum     Proposed Maximum   Amount of
         Title of Each Class of           Amount to be Offering Price     Aggregate     Registration
      Securities to be Registered          Registered   Per Share(1)  Offering Price(1)    Fee(2)
- ----------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>            <C>               <C>
Common Stock, $.01 par value per share..   7,187,500       $13.00        $93,437,500     $24,668(3)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1)  Estimated solely for the purpose of calculating the amount of the
     registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
     as amended.
(2)  Calculated pursuant to Rule 457(a) based on an estimate of the proposed
     maximum aggregate offering price including the amount attributable to the
     underwriters' overallotment option.

(3)  $22,770 of the registration fee was previously paid at the time of the
     initial filing of this Registration Statement.

                                  -----------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we    +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until  +
+the documentation filed with the SEC relating to these securities has been    +
+declared effective by the SEC. This prospectus is not an offer to sell these  +
+securities or our solicitation of your offer to buy these securities in any   +
+jurisdiction where that would not be permitted or legal.                      +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                    SUBJECT TO COMPLETION--May 19, 2000

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

Prospectus
      , 2000

                           [LOGO OF NETWORK ENGINES]

                     6,250,000 Shares of Common Stock

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

<TABLE>
<S>  <C>
    Network Engines,       The Offering:
    Inc.:
                           . We are offering to
    . We develop, market     the public
      and provide            6,250,000 shares
      integrated and         of our common
      powerful server        stock.
      appliances that
      enable               . The underwriters
      organizations to       have an option to
      provide                purchase up to
      information and        937,500 additional
      applications over      shares from us to
      the Internet.          cover over-
                             allotments.
    Proposed Symbol &
    Market:                . This is our
                             initial public
    . We have applied        offering and we
      for quotation on       anticipate that
      the Nasdaq             the initial public
      National Market        offering price
      under the symbol       will be between
      "NENG."                $11.00 and $13.00
                             per share.

                           . Closing:        ,
                             2000.

</TABLE>
    --------------------------------------------
<TABLE>
<CAPTION>
                                    Per
                                   Share  Total
    -------------------------------------------
     <S>                           <C>   <C>
     Public offering price:        $     $
     Underwriting fees:
     Proceeds to Network Engines:
    -------------------------------------------
</TABLE>

     This investment involves risk. See "Risk Factors" beginning on page 5.

- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------

Donaldson, Lufkin & Jenrette

              Dain Rauscher Wessels

                            Robertson Stephens

                                                                  DLJdirect Inc.
<PAGE>


   [The inside front cover includes a depiction of groupings of varying numbers
of our WebEngine Roadster server appliances which are connected by gold colored
lines to a gold circle. In turn, inside the gold circle is a depiction of an
Internet browser which can be used to manage the groupings of server appliances
through the Internet. In the upper right-hand corner of the graphic, the
following text appears:

   Integrated Remote Management

   .  Lights Out Control

   .  Single-location, Browser-based Interface

   .  Rules-based Notification Levels

   .  Limits Need for On-site Technicians

Beneath the graphic is the following text:

   Internet Server Appliances

   .  Powerful Web Content Servers

   .  Choices of Appliances to Meet Specific Customer Needs

   .  Clustered to Deliver High Performance

   .  Can be Placed in Multiple Locations to Reduce Network Delay

Above the graphic is our logo.]
<PAGE>

   You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                    Page
<S>                                 <C>
Prospectus Summary.................   1
Risk Factors.......................   5
Forward-Looking Statements and
 Industry Data.....................  19
Use of Proceeds....................  20
Dividend Policy....................  20
Capitalization.....................  21
Dilution...........................  22
Selected Financial Data............  23
Management's Discussion and
 Analysis of Results of Operations
 and Financial Conditions..........  26
</TABLE>
<TABLE>
<CAPTION>
                                   Page
<S>                                <C>
Business.........................   37
Management.......................   51
Related Party Transactions.......   60
Principal Stockholders...........   64
Description of Capital Stock.....   66
Shares Eligible For Future Sale..   70
Underwriting.....................   73
Legal Matters....................   75
Experts..........................   76
Where You Can Find Additional
 Information.....................   76
Index To Financial Statements....  F-1
</TABLE>

   We have applied for a trademark registration for "Network Engines," and our
trademarks, among others, include "WebEngine Roadster NT," "WebEngine Roadster
LX," "WebEngine Viper NT," "WebEngine Viper LX," "AdminEngine" and
"CommerceEngine." This prospectus also contains other trademarks, servicemarks
and tradenames that are the property of other parties.

                                       i
<PAGE>

                               PROSPECTUS SUMMARY

   You should read the following summary together with the more detailed
information regarding our company and the common stock we are offering and the
financial statements and related notes to those statements that appear
elsewhere in this prospectus.







                             Network Engines, Inc.

   We develop, market and provide integrated and powerful server appliances
that enable organizations to provide information and applications over the
Internet. Server appliances are a new category of computer network
infrastructure devices that deliver specific functionality through a
combination of pre-packaged hardware and software. Unlike general-purpose
servers, our server appliances are high-powered, compact products that use
either Windows or Linux operating systems and support a range of applications
and are available with varying amounts of computing power. Our server
appliances are scalable, which means that our server appliances can be used as
standalone devices or can be easily and quickly connected in groups, or
clusters, of up to 256 units to meet different management and performance
requirements. Our server appliances are designed to meet the complex needs and
requirements of e-commerce and Internet-based organizations, including "dot
com" companies, web hosting providers, application service providers and
Internet service providers.

   We offer a broad range of server appliance products that enable our
customers to create Internet content delivery systems with a wide range of
power at a reduced total cost of ownership. Our server appliances are easy to
install and configure and are designed to meet our customers' needs by
combining specific application functionality within small physical packaging.
In addition, our server appliance products contain integrated hardware and
software features that allow multiple units or groups of units to be managed
from a single location with "lights out" management. Lights out management is
the management of the appliance remotely without the assistance of any on-site
technicians.

   The openness and accessibility of the Internet enable large and small
organizations to enter this competitive environment by creating Internet sites
and establishing their own network infrastructures. New and emerging
organizations hoping to grow, and well-financed organizations hoping to
increase market share, typically seek to reduce "time-to-revenue," the length
of time between developing their online ideas and the availability of their web
sites to their potential customers. The increase in Internet traffic and demand
for greater bandwidth has resulted in more utilization of remote server
facilities, including co-location facilities, to house servers for Internet-
related businesses.

   Traditionally, organizations have built their Internet solutions with
general-purpose servers, requiring extensive time and technical resources. To
extend the power and features of a general-purpose server, organizations must
integrate numerous discrete hardware and software elements, including operating
systems, applications, security systems, load balancers and management tools.
This approach is not well-suited for use in remote server facilities because it
typically creates large, complex systems that require substantial facility
space. In addition, few vendors, if any, provide the ability to manage these
systems remotely without any on-site technicians. When organizations use
general-purpose servers to handle Internet traffic, they typically face a
higher total cost of ownership because equipment costs, facility costs and
operating expenses for general-purpose servers are high and time-to-revenue is
increased.


                                       1
<PAGE>


   Server appliances were developed to address the shortcomings of general-
purpose servers. International Data Corporation estimates that the worldwide
market for server appliances will grow to $8.0 billion in 2003 from
approximately $214.6 million in 1999, a compounded annual growth rate of 147%.
As market acceptance of server appliances grows, we expect that users will
increasingly demand products that meet specific functional requirements and
reduce total cost of ownership factors, including time-to-revenue, packaging
density, installation and management functionality.

   We have assembled a research and development team of highly-skilled
engineers with significant experience in high-density packaging, server design,
embedded management, networking and software. We believe that this team will
allow us to build upon our current technology platforms and expand the features
and functionality of our suite of server appliances. In addition, we have
formed strategic relationships with technology vendors that will enhance our
total product offerings. We sell our products through a direct sales
organization and through a network of channels that includes systems
integrators, distributors and licensed manufacturers. In fiscal 1999, we had
net revenues of $6.0 million and a net loss of $5.8 million. For the six months
ended March 31, 2000, we had net revenues of $10.5 million and a net loss of
$5.8 million.

   Our objective is to become the leading global provider of Internet server
appliances. We intend to increase market acceptance of server appliances for
Internet-based applications by providing and expanding our range of specific-
purpose server appliances that can be easily grouped to increase application
power and can be easily integrated into managed clusters.

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

   Our principal executive offices are located at 25 Dan Road, Canton,
Massachusetts 02021-2817 and our telephone number is (781) 828-6767. Our World
Wide Web site address is www.networkengines.com. The information on our web
site is not incorporated by reference into this prospectus.

                                       2
<PAGE>

                                  The Offering

<TABLE>
 <C>                                                  <S>
 Common stock offered................................ 6,250,000 shares
 Common stock to be outstanding after this offering.. 32,673,629 shares
 Use of proceeds..................................... For research and
                                                      development, sales and
                                                      marketing including
                                                      international expansion,
                                                      potential acquisitions of
                                                      businesses, technologies
                                                      or products and general
                                                      corporate purposes. See
                                                      "Use of Proceeds."
 Proposed Nasdaq National Market symbol.............. NENG
</TABLE>

   The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of April 30, 2000 and excludes:

  .  3,721,615 shares of common stock issuable upon exercise of stock options
     outstanding as of April 30, 2000, with a weighted average exercise price
     of $1.54 per share, of which options to purchase 56,505 shares were then
     exercisable;

  .  1,882,851 shares of common stock reserved for issuance upon exercise of
     warrants outstanding as of April 30, 2000, with a weighted average
     exercise price of $0.35 per share; and

  .  4,506,035 shares of common stock reserved for future grant under our
     stock plans.

   See "Capitalization," "Management--Benefit Plans" and "Description of
Capital Stock."

                 Assumptions That Apply To This Prospectus

   Unless we indicate otherwise, all information in this prospectus is based on
the following:

  .  conversion of all outstanding shares of preferred stock into shares of
     common stock effective upon the closing of this offering;

  .  no exercise by the underwriters of their over-allotment option; and

  .  a 2.5-for-1 stock split which will be effected prior to this offering.

                                       3
<PAGE>

                             Summary Financial Data
                     (in thousands, except per share data)

   The following summary financial data should be read in conjunction with our
financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data. The statement of operations data for the years ended September 30, 1998
and 1999 is derived from audited financial statements included elsewhere in
this prospectus. The statement of operations data for the three months ended
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000 and the balance sheet data as of March 31, 2000 are
derived from our unaudited financial statements.

   Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of our series A,
series B, series C and series D preferred stock into shares of common stock, as
if the shares had converted immediately upon issuance.

<TABLE>
<CAPTION>
                            Year Ended                               Three Months Ended
                           September 30,    ---------------------------------------------------------------------
                          ----------------  December 31, March 31, June 30,  September 30, December 31, March 31,
                           1998     1999        1998       1999      1999        1999          1999       2000
<S>                       <C>      <C>      <C>          <C>       <C>       <C>           <C>          <C>
Statement of Operations
 Data:
Net revenues............  $ 1,102  $ 6,031    $   223     $   893  $   908      $ 4,007      $ 4,415     $ 6,051
Gross profit (loss).....     (489)   1,298       (162)         10      (96)       1,546        1,802       1,859
Loss from operations....   (3,625)  (5,247)    (1,240)     (1,325)  (1,757)        (925)      (1,616)     (4,501)
Net loss................   (4,199)  (5,830)    (2,170)     (1,000)  (1,753)        (907)      (1,586)     (4,221)
Net loss attributable to
 common stockholders....   (4,199)  (6,053)    (2,170)     (1,009)  (1,763)      (1,111)      (2,396)     (7,670)
Pro forma net loss per
 common share--basic and
 diluted................           $ (0.63)                                                              $ (0.20)
                                   =======                                                               =======
Shares used in computing
 pro forma basic and
 diluted net loss per
 common share...........             9,242                                                                20,597
</TABLE>

   The pro forma balance sheet data reflects the conversion of all outstanding
shares of redeemable convertible preferred stock into common stock upon
completion of this offering. The pro forma as adjusted balance sheet data
further adjusts the pro forma data to give effect to the sale of 6,250,000
shares of common stock offered hereby at the assumed initial public offering
price of $12.00 per share, less underwriting discounts and commissions and
estimated offering expenses.

<TABLE>
<CAPTION>
                                                       As of March 31, 2000
                                                    ----------------------------
                                                               Pro    Pro Forma
                                                    Actual    Forma  As Adjusted
<S>                                                 <C>      <C>     <C>
Balance Sheet Data:
Cash, cash equivalents and restricted cash......... $17,172  $17,172   $85,922
Working capital....................................  20,497   20,497    89,247
Total assets.......................................  29,979   29,979    98,729
Long-term debt, less current portion...............     109      109       109
Redeemable convertible preferred stock.............  41,976      --        --
Total stockholders' equity (deficit)............... (18,898)  23,078    91,828
</TABLE>

                                       4
<PAGE>

                                  RISK FACTORS

   An investment in our common stock involves a high degree of risk. You should
consider the following risks and the other information in this prospectus
before deciding to invest in our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose part or all of your investment.

                     Risks Related to Our Financial Results

You may have difficulty evaluating our business and operating results because
we began selling our current products in June 1999, February 2000 and the third
quarter of fiscal 2000.

   We are an early-stage company in the new and rapidly evolving market for
server appliances. Because of our limited operating history in the server
appliance market, it is difficult to discern trends that may emerge and affect
our business. We did not begin shipping our current products until quite
recently. We began shipping our WebEngine Blazer and AdminEngine in June 1999
and February 2000, respectively. We began shipping our WebEngine Roadster and
WebEngine Viper products in the third quarter of fiscal 2000. Our limited
historical financial performance may make it difficult for you to evaluate the
success of our business to date and to assess its future viability.

We have a history of losses and may experience losses in the future, which
could result in the market price of our common stock declining.

   Since our inception, we have incurred significant net losses, including net
losses of $4.2 million in 1998, $5.8 million in 1999 and $5.8 million for the
six months ended March 31, 2000 and we expect to have net losses in the future.
In addition, we had an accumulated deficit of $17.2 million as of March 31,
2000. We believe that our future growth depends upon the success of our new
product development and sales and marketing efforts, which will require us to
incur significant product development, sales and marketing and administrative
expenses. As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain that we will achieve profitability in the
future or, if we achieve profitability, that we will be able to sustain it. If
we do not achieve and maintain profitability, the market price for our common
stock may decline, perhaps substantially.

   We anticipate that our expenses will increase substantially in the next 12
months as we:

  .  increase our direct sales and marketing activities;

  .  develop our technology, expand our existing product lines and create and
     market additional server appliance products;

  .  make additional investments to develop our brand;

  .  develop strategic alliances with third-party technology vendors;

  .  expand our distribution and reseller channels; and

  .  implement additional internal systems, develop additional infrastructure
     and hire additional management to keep pace with our growth.

                                       5
<PAGE>

   Any failure to significantly increase our revenues and control costs as we
implement our product and distribution strategies would also harm our ability
to achieve and maintain profitability and could negatively impact the market
price of our common stock.

We may not be able to sustain our current revenue growth rates, which could
cause our stock price to decline.

   Although our revenues grew in 1998, grew rapidly in 1999 and have grown
rapidly to date in 2000, we do not believe that we will maintain this rate of
revenue growth. This is because we started from a small base of revenue and it
is difficult to achieve high percentage increases over a larger revenue base.
In addition, growing competition, the incremental manner in which customers
implement server appliances and our inexperience in selling our products could
also affect our revenue growth. Any significant decrease in our rate of revenue
growth after this offering could result in a decrease in our stock price.

We derive a substantial portion of our revenues from a small number of
customers, and our revenues may decline significantly if any major customer
cancels or delays a purchase of our products.

   A relatively small number of customers accounted for a significant portion
of our net revenues. In the fiscal year ended September 30, 1999, sales to
InterVu, International Business Machines, or IBM, and Microsoft (WebTV)
accounted for 46%, 28% and 14% of net revenues, respectively. In the six months
ended March 31, 2000, sales to IBM, Microsoft (WebTV) and Tellme Networks,
accounted for 26%, 18% and 14% of net revenues, respectively. None of our
customers, including our licensed manufacturers and OEMs, is obligated to
purchase any quantity of our products in the future. If any of our large
customers stop purchasing from us or delay future purchases, our revenues and
profitability may be adversely affected, our reputation in the industry may
suffer and our ability to predict cash flow accurately may decrease. Revenues
from a relatively small number of our licensed manufacturer, OEM and direct
sales customers may account for a significant portion of our net revenues.
Accordingly, unless and until we diversify and expand our customer base, our
future success will depend upon the timing and size of future purchase orders,
if any, from our largest customers and, in particular:

  .  the success of our licensed manufacturer and OEM customers in marketing
     our products;

  .  the product requirements of our direct sales customers; and

  .  the financial and operational success of our licensed manufacturer, OEM
     and direct sales customers.

   In addition, because we have a small number of customers, some of which are
significantly larger than we are, these customers may have increased bargaining
power to seek lower prices and better terms.

Our quarterly revenues and operating results may fluctuate; any resulting
failure to meet market expectations may cause the price of our common stock to
decline.

   Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter because our current
products are relatively new and the future growth of the market for our
products is uncertain. Four of our current server appliance products

                                       6
<PAGE>


were released in the last year, with two released in the current fiscal
quarter. If our quarterly revenues or operating results fall below the
expectations of investors or public market research analysts, the price of our
common stock could decline substantially. Factors that are likely to cause
quarterly fluctuations in our operating results include:

  .  shifts in the timing of product releases;

  .  delays or cancellations of orders by a few customers from our currently
     limited customer base;

  .  the timing of large orders;

  .  temporary shortages in supply from vendors;

  .  fluctuations in production or demand;

  .  changes in our pricing policies or those of our competitors;

  .  our ability to expand our operations and the amount and timing of
     expansion-related and infrastructure expenditures;

  .  political instability, or natural disasters, in the countries in which
     we operate or in which we seek to expand;

  .  technical difficulties and information system outages; and

  .  global economic conditions.

   A large proportion of our expenses, including those related to research and
development, sales and marketing, general and administrative functions and
amortization of deferred compensation, are essentially fixed in the short term.
As a result, if our net sales are less than forecasted, our quarterly operating
results are likely to be adversely affected.

If sales of our new or enhanced products are lower than expected, our revenues
and operating results will be adversely affected.

   If our customers do not continue to purchase our new and enhanced products,
our revenues and operating results will be adversely affected. Factors that may
affect the market acceptance of our products, some of which are beyond our
control, include the following:

  .  the growth and changing requirements of the server appliance market;

  .  the performance, quality, price and total cost of ownership of our
     products;

  .  the availability, price, quality and performance of competing products
     and technologies; and

  .  the successful development of our relationships with licensed
     manufacturers, OEMs and existing and potential channel partners.

We may not succeed in developing and marketing new types of server appliance
products, or do so in a timely manner, and our operating results may decline as
a result.

   We have recently released our AdminEngine product and are developing
additional types of server appliance products. Developing new products that
meet the needs of the server appliance market requires significant additional
expense and development resources. If we fail to successfully develop and
market new products, our operating results will suffer.

                                       7
<PAGE>


If the commodification of products and competition in the server appliance
market increases, then the average unit price of our products may decrease and
our operating results may suffer.

   Products in the server appliance market may be subject to potential
commodification as the industry matures and other businesses introduce
competing products. The average unit price of our products may also decrease in
response to changes in product mix, competitive pricing pressures, or new
product introductions by us or our competitors. If we are unable to offset a
decrease in our average selling prices by increasing our sales volumes, our
revenues will decline. Changes in the mix of sales of our products, including
the mix of higher margin sales of products sold in smaller quantities and
somewhat lower margin sales of products sold in larger quantities, could
adversely affect our operating results for future quarters. To maintain our
gross margins, we also must continue to reduce the manufacturing cost of our
products. Our efforts to produce higher margin products, continue to improve
our products and produce new products may make it difficult to reduce our
manufacturing cost per product. Further, our current reliance on our single
manufacturer, SCI Systems, may not allow us to reduce our cost per product.

    Risks Related to Growth of the Internet and the Server Appliance Market

If server appliances are not increasingly adopted as a means to deliver
information and conduct commerce over the Internet, the market for our products
will not grow and the market price for our common stock could decline as a
result of lower revenues or reduced investor expectations.

   We expect that substantially all of our revenues will continue to come from
sales of our current and future server appliance products. As a result, we
depend on the growing use of server appliances as a means to deliver
information and conduct commerce over the Internet. The market for server
appliance products, particularly those using the Internet to deliver
information and process commercial transactions, has only recently begun to
develop and is evolving rapidly. Because this market is new, we cannot predict
its potential size or future growth rate. Our revenues may not continue to grow
and the market price for our common stock could decline if the server appliance
market does not grow rapidly.

   We believe that our expectations for the growth of the server appliance
market may not be fulfilled if customers continue to use general-purpose
servers. The role of our server appliances could, for example, be limited if
general-purpose servers become better at performing functions currently being
performed by our specific-purpose server appliances or are offered at a lower
cost. This could force us to lower the prices of our products or result in
fewer sales of our products.

If the market for server appliance products does not grow because medium to
large Internet service providers and application service providers in our
target market are not receptive to them, our revenues may not grow.

   Large Internet service providers and application service providers that
offer hosting services may not be as receptive to our products as other
organizations because they currently rely on, and their buying programs are
more likely to be based on, established, proprietary operating systems and
general-purpose servers. In addition, we expect that Internet service providers
that specialize in providing Internet access and non-hosting services to
consumers will not be substantial purchasers of

                                       8
<PAGE>


our products. Consolidation has recently begun to occur in the Internet service
provider and application service provider market, with many large Internet
service providers and application service providers acquiring smaller and
regional companies. Continued consolidation in this market could result in some
of our customers being absorbed into larger organizations. This consolidation
may increase the number of larger corporations that may not be as receptive to
our products and, as a result, our revenues would not grow and may even
decrease.

Potential increases or changes in governmental regulation of Internet
communication and commerce could discourage the growth of the Internet, which
could decrease the demand for our products.

   Due to concerns arising from the increasing use of the Internet, a number of
laws and regulations have been, and may be, adopted covering issues including
user privacy, taxation, pricing, acceptable content and quality of products and
services. Legislative changes could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. Further, due to the global nature of the Internet, it is
possible that multiple federal, state or foreign jurisdictions might attempt to
regulate Internet transmissions or levy sales or other taxes relating to
Internet-based activities. Moreover, the applicability to the Internet of
existing laws, including laws governing property ownership, libel and personal
privacy, is uncertain. We cannot assess the possible negative impact of any
future regulation of the Internet on our business.

                   Risks Related to Our Product Manufacturing

Our dependence on sole source and limited source suppliers for key components
makes us susceptible to supply shortages that could prevent us from shipping
customer orders on time, if at all, and could result in lost sales or
customers.

   We depend upon single source and limited source suppliers for our industry-
standard processors and power supplies and our custom-printed circuit boards,
chassis and sheet metal parts. We also depend on limited sources to supply
several other industry-standard components. We have in the past experienced,
and may in the future experience, shortages of, or difficulties in acquiring,
components needed to produce our products. In particular, there have also been
recent industry-wide shortages and delays in the production of commodities,
including high-performance processor boards, memory chips and disk drives.
Shortages have been of limited duration and have not yet caused delays in
production of our products. However, shortages in supply of these key
components for an extended time would cause delays in the production of our
products, prevent us from satisfying our contractual obligations and meeting
customer expectations, and result in lost sales or customers. If we are unable
to buy components we need or if we are unable to buy components at acceptable
prices, we will not be able to manufacture and deliver our products on a timely
or cost-effective basis to our customers.

We rely on a single contract manufacturer to produce our products and, if our
manufacturer fails to meet our requirements, we will be unable to meet customer
requirements and our customer relationships would suffer.

   We do not have a written agreement with SCI Systems that guarantees
production levels or manufacturing prices and we may not be able to enter into
a written agreement with SCI Systems in

                                       9
<PAGE>


the future. SCI Systems may not have additional facilities available when we
need them. Commencing volume production or expanding production to another
facility owned by SCI Systems may be expensive and time-consuming. In addition,
commencement of the manufacturing of our products at a second SCI Systems
manufacturing site or any additional sites we may need in the future may cause
transitional problems, including delays and quality control issues, that could
cause us to lose sales and impair our ability to achieve profitability. We may
need to find new outside manufacturers to manufacture our products in higher
volume and at lower costs to meet increased demand and competition. If we are
required or choose to change outside manufacturers, we may lose sales and
customer relationships may suffer.

If we do not accurately forecast our component requirements, our manufacturing
may be interrupted and delivery of products may be delayed.

   We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors including specific supplier
requirements, contract terms and current market demand for those components. In
addition, a variety of factors, including the timing of product releases,
potential delays or cancellations of orders and the timing of large orders,
make it difficult to predict product orders. As a result, our component
requirement forecasts may not be accurate. If we overestimate our component
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component requirements, we may have inadequate inventory,
which could interrupt our manufacturing and delay delivery of our products to
our customers. Any of these occurrences would negatively impact our business
and operating results.

                                       10
<PAGE>

                Risks Related to Our Marketing and Sales Efforts

We need to expand our direct sales channel and build our indirect sales channel
of system integrators and resellers to distribute our products and, if we fail
to do so, our growth could be limited.

   In order to increase market awareness and sales of our products, we will
need to substantially expand our direct sales programs and build our network of
system integrators and resellers, both domestically and internationally. If we
fail in this endeavor, our growth will be limited. To date, we have relied
primarily on our direct sales force to generate demand for our products. We
have recently expanded our direct sales force and plan to hire additional sales
personnel. Competition for qualified sales people is intense, and we might not
be able to hire the quality and number of sales people we require. We have
limited experience working with systems integrators and resellers. We expect we
will need to expend significant resources to enlist systems integrators and
resellers and educate them regarding our products.

We may incur significant costs to promote our brand that may not result in the
desired brand recognition by customers or increased sales.

   In the fast growing market for server appliances, we believe we need to
establish a strong brand to compete successfully. In order to attract and
retain customers, we believe that our brand must be recognized and viewed
favorably by our customers and end users. Although we intend to advertise and
promote our brand, these strategies may fail. If we are unable to design and
implement effective marketing campaigns or otherwise fail to promote and
maintain our brand, our sales could decline. Our business may also suffer if we
incur excessive expenses promoting and maintaining our brand but fail to
achieve the expected or desired increase in revenues.

If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers and attract new customers.

   We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
our existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of server appliance products.
If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers and attract new customers. In
addition, we may be required to pay higher compensation and benefits to hire
these people than we expect. In this event, the cost of expanding our customer
service and support organization may have a negative impact on margins and
operating results.

                Risks Related to Competition Within Our Industry

If we are not able to effectively compete against providers of general-purpose
servers or specific-purpose servers, our revenues will not increase and may
decrease.

   In the market for server appliances, we face significant competition from
larger companies who market general-purpose or specific-purpose servers and
have greater financial resources and name recognition than we do. Many of these
companies have larger and more established service organizations to support
these products. These and other large competitors may be able to leverage

                                       11
<PAGE>


their existing resources, including their service organizations, and provide a
wider offering of products and higher levels of support on a more cost-
effective basis than we can. In addition, competing companies may be able to
undertake more extensive promotional activities, adopt more aggressive pricing
policies and offer more attractive terms to their customers than we can. If
these large competitors provide lower cost server appliances with greater
functionality or support than our products, or if some of their products are
comparable to ours and are offered as part of a range of products that is
broader than ours, our products could become undesirable. Even if the
functionality of competing products is equivalent to ours, we face a
substantial risk that a significant number of customers would elect to pay a
premium for similar functionality rather than purchase products from a less-
established vendor. Increased competition may negatively affect our business
and future operating results by leading to price reductions, higher selling
expenses or a reduction in our market share.

Our revenues could be reduced if general-purpose server manufacturers make
acquisitions in order to join their extensive distribution capabilities with
our smaller competitors' products.

   Compaq, Dell, Hewlett-Packard, IBM, Sun Microsystems and other server
manufacturers may not only develop their own server appliance solutions, but
they may also acquire or establish cooperative relationships with our other
current competitors, including smaller private companies. Because general-
purpose server manufacturers have significant financial and organizational
resources available, they may be able to quickly penetrate the server appliance
market by leveraging the technology and expertise of smaller companies and
utilizing their own extensive distribution channels. For example, Whistle, a
server appliance company, was recently acquired by IBM. We expect that the
server appliance industry will experience consolidation. It is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share through consolidation.

We may sell fewer products if other vendors' products are no longer compatible
with ours or other vendors bundle their products with those of our competitors
and sell them at lower prices.

   Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. Developers of
these products may change their products so that they will no longer be
compatible with our products. These other vendors may also decide to bundle
their products with other server appliances for promotional purposes and
discount the sales price of the bundle. If that were to happen, our business
and future operating results could suffer if we were no longer able to offer
commercially viable products.

Server appliance products are subject to rapid technological change due to
changing operating system software and network hardware and software
configurations, and our sales will suffer if our products are rendered obsolete
by new technologies.

   The server appliance market is characterized by rapid technological change,
frequent new product introductions and enhancements, potentially short product
life cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge.


                                       12
<PAGE>

   New products and product enhancements can require long development and
testing periods, which requires us to hire and retain increasingly scarce,
technically competent personnel. Significant delays in new product releases or
significant problems in installing or implementing new products could seriously
damage our business. We have on occasion experienced delays in the scheduled
introduction of new and enhanced products and cannot be certain that we will
avoid similar delays in the future.

   Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.

       Risks Related to Our Products' Dependence on Intellectual Property
                            and Our Use of Our Brand

Our reliance upon contractual provisions and domestic trademark laws to protect
our proprietary rights may not be sufficient to protect our intellectual
property from others who may sell similar products.

   Our products are differentiated from those of our competitors by our
internally developed software and hardware and the manner in which they are
integrated into our products. If we fail to protect our intellectual property,
other vendors could sell products with features similar to ours, and this could
reduce demand for our products. We believe that the steps we have taken to
safeguard our intellectual property afford only limited protection. Others may
develop technologies that are similar or superior to our technology or design
around the copyrights and trade secrets we own. Despite the precautions we have
taken, laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies.




   In addition, the laws of the countries in which we decide to market our
services and solutions may offer little or no effective protection of our
proprietary technology. Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technology could enable third-parties to
benefit from our technology without paying us for it, which would significantly
harm our business.

We have invested substantial resources in developing our products and our
brand, and our operating results would suffer if we were subject to a
protracted infringement claim or one with a significant damages award.

   Substantial litigation regarding intellectual property rights and brand
names exists in our industry. We expect that server appliance products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. We are not aware that our products employ
technology that infringes any proprietary rights of third parties. However,
third parties may claim that we infringe their intellectual property rights.
Any claims, with or without merit, could:

  .  be time-consuming to defend;

  .  result in costly litigation;

                                       13
<PAGE>

  .  divert our management's attention and resources;

  .  cause product shipment delays; or

  .  require us to enter into royalty or licensing agreements.

   Royalty or licensing agreements may not be available on terms acceptable to
us, if at all. A successful claim of product infringement against us or our
failure or inability to license the infringed or similar technology could
adversely affect our business because we would not be able to sell the impacted
product without redeveloping it or incurring significant additional expenses.

                      Other Risks Related to Our Business

Failure to manage our growth successfully could lead to inefficiencies in
conducting our business, increased expenses and slower growth.

   In the past year, our operations have expanded greatly. Our growth has
placed, and will continue to place, a significant strain on our management and
operating and financial systems, as well as sales and marketing and
administrative resources. As of April 30, 2000, we had a total of
141 employees, an increase from a total of 33 employees as of December 31,
1998. Additional growth will further strain these resources. If we cannot
manage our expanding operations, we may not be able to continue to grow or we
may grow at a slower rate. To manage any future growth effectively, we must
continue to improve our financial and accounting systems, inventory and
production controls, reporting and procedures, integrate new personnel and
manage expanded operations. If we fail to do so, the quality of our products
and our ability to respond to our customers' needs and retain key personnel
would cause our business to suffer. Also, we may fail to add capacity in a
cost-effective manner or allow our operating costs to escalate faster than
planned.

If we fail to recruit and retain a significant number of qualified technical
personnel and sales and marketing personnel, we may not be able to develop and
introduce our products on a timely basis.

   We require the services of a substantial number of qualified technical
personnel. The market for this personnel is characterized by intense
competition, as well as a high level of employee mobility, which makes it
particularly difficult to attract and retain the qualified technical personnel
we require. We have experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly-skilled employees with appropriate
technical qualifications. If we are unable to recruit and retain a sufficient
number of technical personnel, we may not be able to complete development of,
or upgrade or enhance, our products in a timely manner.

   The expansion of our sales and marketing department will also require the
hiring and retention of personnel for whom there is also a high demand. If we
are unable to recruit and retain a sufficient number of sales and marketing
personnel, we may not be able to increase market awareness of our products and
generate sales of our products as quickly as we would like. Moreover, we may
only be able to expand our staff of technical personnel and sales and marketing
personnel by providing individuals with compensation packages that are higher
than expected.

                                       14
<PAGE>


If we cannot manage and expand our international operations profitably, our
revenues may not increase and our business and results of operations would be
adversely affected.

   We currently conduct limited business activity outside of North America.
However, we expect international revenue to account for a more significant
percentage of our total revenue in the future. We believe that we must continue
to expand our international sales and fulfillment activities in order to be
successful. There are certain risks inherent in conducting international
operations, including:

  .  added fulfillment complexities in operations, including multiple
     languages, multiple currencies, multiple bills of materials and multiple
     stock-keeping units;

  .  exposure to currency fluctuations;

  .  longer payment cycles;

  .  greater difficulties in accounts receivable collections;

  .  the complexity of ensuring compliance with multiple U.S. and foreign
     regulatory requirements, particularly differing laws on intellectual
     property rights and export control; and

  .  labor practices, difficulties in staffing and managing foreign
     operations, political instability and potentially adverse tax
     consequences.

   As we attempt to expand our international sales, any of these factors may
have an adverse effect on our international operations and, consequently, on
our business and results of operations.

If we are unable to find suitable acquisition candidates, our growth could be
impeded.

   A component of our business strategy is the acquisition of, or investment
in, complementary businesses, technologies or products. Our ability to identify
and invest in suitable acquisition and investment candidates on acceptable
terms is crucial to this strategy. We may not be able to identify, acquire or
make investments in promising acquisition candidates on acceptable terms.
Moreover, in pursuing acquisition and investment opportunities, we may be in
competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment. An inability to find suitable acquisition or investment candidates
at reasonable prices could slow our growth rate.

Our acquisition strategy could have an adverse effect on our existing business,
customer satisfaction and operating results.

   Acquisitions involve a number of risks, including:

  .  adverse effects on our reported operating results due to accounting
     charges associated with the acquisitions;

  .  difficulties in management and integration of the acquired business;

  .  increased expenses, including compensation expense resulting from newly-
     hired employees;

  .  diversion of management resources and attention; and

  .  potential disputes with sellers of acquired businesses, technologies,
     services or products.

                                       15
<PAGE>


Our future success is dependent on the services of our founder and other key
personnel, and those persons' knowledge of our business and technical expertise
would be difficult to replace.

   Our products and technologies are complex and we are substantially dependent
upon the continued service of our existing engineering personnel, and
especially Lawrence A. Genovesi, our President, Chief Executive Officer and
Chief Technology Officer. We do not have employment agreements with any of our
officers. The loss of any of our key employees could adversely affect our
business and slow our product development processes or sales and marketing
efforts. Although we maintain a key person life insurance policy on Mr.
Genovesi, the amount of this insurance may be inadequate to compensate us for
his loss.

If our products fail to perform properly and conform to our specifications, our
customers may demand refunds or assert claims for damages and our reputation
and operating results may suffer.

   Because our server appliance products are complex, they could contain errors
or bugs that can be detected at any point in a product's life cycle. In the
past we have discovered errors in some of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors or we have had to replace defective products that were already
shipped. These delays and replacements have principally related to new product
releases. Errors in our products may be found in the future and any of these
errors could be significant. Detection of any significant errors may result in:

  .  the loss of or delay in market acceptance and sales of our products;

  .  diversion of development resources;

  .  injury to our reputation; or

  .  increased maintenance and warranty costs.

   These problems could harm our business and future operating results. Product
errors or delays could be material, including any product errors or delays
associated with the introduction of new products or the versions of our
products that support Windows or Linux operating systems. If our products fail
to conform to warranted specifications, customers could demand a refund for the
purchase price or assert claims for damages.

   Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability
claims. However, these limitations may not preclude all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Any claims for damages, whether or
not successful, could seriously damage our reputation and our business.


We may need additional capital that may not be available to us and, if raised,
may dilute your ownership interest in us.

   We may need to raise additional funds to develop or enhance our services and
solutions, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or

                                       16
<PAGE>

technologies. Additional financing may not be available on terms that are
acceptable to us. If we raise additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders
would be reduced and these securities might have rights, preferences and
privileges senior to those of our current stockholders. If adequate funds are
not available on acceptable terms, our ability to fund our expansion, take
advantage of unanticipated opportunities, develop or enhance products or
services, or otherwise respond to competitive pressures would be significantly
limited.

                         Risks Related to this Offering

Our directors, executive officers and existing stockholders will continue to
control us after this offering and could delay or prevent a change in control.

   After this offering, our directors, executive officers and existing
stockholders and their affiliates will together control approximately 80.9% of
our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring approval of a majority
of our stockholders, including the election and removal of directors and any
merger, sale of assets and other significant corporate transactions. This
control could:

  .  delay or prevent a change in control of Network Engines;

  .  deprive our stockholders of an opportunity to receive a premium for
     their common stock as part of a sale of Network Engines or its assets;
     and

  .  affect the market price of our common stock.

We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.

   After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock and, without any further vote or
action on the part of the stockholders, will have the authority to determine
the price, rights, preferences, privileges and restrictions of the preferred
stock. This preferred stock, if issued, might have preference over the rights
of the holders of common stock and could adversely affect the price of our
common stock. The issuance of this preferred stock may make it more difficult
for a third party to acquire us or to acquire a majority of our outstanding
voting stock. We currently have no plans to issue preferred stock.

   In addition, provisions of our second amended and restated certificate of
incorporation, second amended and restated by-laws and equity compensation
plans may deter an unsolicited offer to purchase Network Engines. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
Network Engines. For example, our board of directors will be divided into three
classes, only one of which will be elected at each annual meeting. These
factors may further delay or prevent a change of control of our business. See
"Description of Capital Stock--Delaware Law and Certain Charter and By-Law
Provisions; Anti-Takeover Effects."

The potential volatility of our stock price could result in substantial losses
for investors.

   The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme

                                       17
<PAGE>


volatility. This volatility has often been unrelated to the operating
performance of particular companies. An active public market for our common
stock may not develop or continue after this offering. Investors may not be
able to sell their common stock at or above our initial public offering price.
Prices for the common stock will be determined in the marketplace and may be
influenced by many factors, including variations in our financial results,
changes in earnings estimates by industry research analysts, investors'
perceptions of us and general economic, industry and market conditions.

Future sales by existing stockholders could depress the market price of our
common stock.

   Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. See "Shares Eligible for Future Sale."



                                       18
<PAGE>

                  FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

   This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words including "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of
operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have an adverse effect on our
business, results of operations and financial position.

   This prospectus contains industry data related to our business and the
server appliance industry, which we believe is reasonable under the
circumstances. This industry data includes projections that are based on a
number of assumptions. If these assumptions turn out to be incorrect, actual
results may differ from the projections based on these assumptions. The failure
of the server appliance market to grow at these projected rates may have a
material adverse effect on our business, results of operations and financial
condition, and the market price of our common stock.

                                       19
<PAGE>

                                USE OF PROCEEDS

   We expect the net proceeds from our sale of 6,250,000 shares of common
stock will be approximately $68.8 million, at an assumed initial public
offering price of $12.00 per share less underwriting discounts and commissions
and estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, we estimate that our net proceeds will be approximately
$79.2 million.

   The principal purposes of this offering are to establish a public market
for our common stock, increase visibility in the marketplace, facilitate our
future access to public capital markets, provide liquidity to existing
stockholders and obtain additional working capital.

   We have no current specific plan for the proceeds of this offering, but
expect to use the proceeds for research and development, sales and marketing
including international expansion, potential acquisitions of businesses,
technologies or products and general corporate purposes. No specific
acquisitions are currently planned and no portion of the net proceeds has been
allocated for any acquisition. Pending our use of the net proceeds, we intend
to invest the net proceeds in investment grade, interest-bearing securities.

                                DIVIDEND POLICY

   We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all of our future earnings,
if any, for use in the operation and expansion of our business.

   Under the terms of our existing credit agreement, we are prohibited from
paying any cash dividends without the prior written consent of our lender.

                                      20
<PAGE>

                                CAPITALIZATION

   The following table sets forth our cash position and total capitalization
as of March 31, 2000

  .  on an actual basis;

  .  on a pro forma basis to give effect to the conversion of all outstanding
     shares of our preferred stock into shares of common stock upon the
     closing of this offering; and

  .  on a pro forma as adjusted basis to reflect the sale in this offering of
     6,250,000 shares of common stock at an assumed initial public offering
     price of $12.00 per share, less underwriting discounts and commissions
     and estimated offering expenses payable by us.

   This table should be read in conjunction with our financial statements and
notes thereto, which can be found at the end of this prospectus.
<TABLE>
<CAPTION>
                                                     As of March 31, 2000
                                                  -----------------------------
                                                             Pro     Pro Forma
                                                  Actual    Forma   As Adjusted
                                                        (in thousands)
<S>                                               <C>      <C>      <C>
Cash, cash equivalents and restricted cash....... $17,172  $17,172    $85,922
                                                  =======  =======    =======
Current portion of long-term debt................ $    66  $    66    $    66
                                                  =======  =======    =======
Long-term debt, less current portion............. $   109  $   109    $   109
Redeemable convertible preferred stock:
  Series D Convertible Preferred Stock, $.01 par
   value; 3,581,554 shares, no shares and no
   shares authorized, issued and outstanding,
   actual, pro forma and pro forma as adjusted,
   respectively..................................  28,152      --         --
  Series C Convertible Preferred Stock, $.01 par
   value; 1,123,549 shares, no shares and no
   shares authorized, issued and outstanding,
   actual, pro forma and pro forma as adjusted,
   respectively..................................   9,949      --         --
  Series B Convertible Preferred Stock, $.01 par
   value; 357,142 shares, no shares and no shares
   authorized, issued and outstanding, actual,
   pro forma and pro forma as adjusted,
   respectively..................................   2,750      --         --
  Series A Convertible Preferred Stock, $.01 par
   value; 185,250 shares, no shares and no shares
   authorized, issued and outstanding, actual,
   pro forma and pro forma as adjusted,
   respectively..................................   1,125      --         --
                                                  -------  -------    -------
    Total redeemable convertible preferred
     stock.......................................  41,976      --         --
Stockholders' equity (deficit):
  Common stock, $.01 par value; 60,000,000 shares
   authorized and 4,902,035 shares issued and
   outstanding, actual; 60,000,000 shares
   authorized and 26,350,477 shares issued and
   outstanding, pro forma; 100,000,000 shares
   authorized and 32,600,477 shares issued and
   outstanding pro forma as adjusted.............      49      264        326
  Additional paid-in capital.....................  10,191   51,952    120,640
  Accumulated deficit............................ (17,241) (17,241)   (17,241)
  Note receivable from stockholder...............     (92)     (92)       (92)
  Deferred stock compensation.................... (11,805) (11,805)   (11,805)
                                                  -------  -------    -------
    Total stockholders' equity (deficit)......... (18,898)  23,078     91,828
                                                  -------  -------    -------
      Total capitalization....................... $23,187  $23,187    $91,937
                                                  =======  =======    =======
</TABLE>

   This information excludes 3,501,017 shares of common stock issuable upon
exercise of options outstanding as of March 31, 2000 at a weighted average
exercise price of $0.99 per share, 1,882,851 shares of common stock issuable
upon exercise of warrants outstanding as of March 31, 2000 at a weighted
average exercise price of $0.35 per share, 3,549,785 shares of common stock
reserved for future grant under our 1999 stock incentive plan, 750,000 shares
of common stock reserved for issuance under our 2000 employee stock purchase
plan and 500,000 shares of common stock reserved for issuance under our 2000
director stock option plan.

                                      21
<PAGE>

                                    DILUTION

   Our pro forma net tangible book value as of March 31, 2000, was $23.1
million, or approximately $0.88 per share. Pro forma net tangible book value
per share represents the pro forma stockholders' equity divided by the pro
forma number of shares of common stock outstanding, giving effect to the
conversion of all outstanding shares of preferred stock. After giving effect to
the sale of the 6,250,000 shares of common stock being offered at an assumed
initial public offering price of $12.00 per share less underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma
net tangible book value at March 31, 2000, would have been $91.8 million, or
approximately $2.82 per share. This represents an immediate increase in pro
forma net tangible book value of $1.94 per share to existing stockholders and
an immediate dilution in net tangible book value of $9.18 per share to new
investors in common stock in this offering. The following table illustrates
this dilution on a per share basis:

<TABLE>
<S>                                                                <C>   <C>
Assumed initial public offering price per share...................       $12.00
  Pro forma net tangible book value per shares as of March 31,
   2000........................................................... $0.88
  Increase attributable to new investors..........................  1.94
Pro forma net tangible book value per share after offering........         2.82
                                                                         ------
Dilution per share to new investors...............................       $ 9.18
                                                                         ======
</TABLE>

   The following table sets forth, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses payable by us, at the assumed initial public offering price
of $12.00 per share.

<TABLE>
<CAPTION>
                                Shares Purchased  Total Consideration   Average
                               ------------------ -------------------- Price Per
                                 Number   Percent    Amount    Percent   Share
<S>                            <C>        <C>     <C>          <C>     <C>
Existing stockholders......... 26,350,477    81%  $ 38,380,000    34%    $1.46
New public investors..........  6,250,000    19     75,000,000    66     12.00
                               ----------   ---   ------------   ---
  Total....................... 32,600,477   100%  $113,380,000   100%
                               ==========   ===   ============   ===
</TABLE>

   The foregoing discussion excludes any shares to be issued in connection with
the over-allotment option and excludes any shares of common stock issuable upon
the exercise of options or warrants. As of March 31, 2000, there were 3,501,017
shares of common stock issuable upon exercise of options outstanding at a
weighted average exercise price of $0.99 per share, 1,882,851 shares of common
stock issuable upon exercise of warrants outstanding at a weighted average
exercise price of $0.35 per share, 3,549,785 shares of common stock reserved
for future grant under our 1999 stock incentive plan, 750,000 shares of common
stock reserved for issuance under our 2000 employee stock purchase plan and
500,000 shares of common stock reserved for issuance under our 2000 director
stock option plan. To the extent that any shares are issued upon exercise of
options or warrants that were outstanding at March 31, 2000 or granted after
that date, or reserved for future issuance under our stock plans, there may be
further dilution to new investors.

                                       22
<PAGE>

                            SELECTED FINANCIAL DATA

   The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere
in this prospectus. The statement of operations data for the fiscal years ended
September 30, 1997, 1998 and 1999 and the balance sheet data as of September
30, 1998 and 1999 are derived from our financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere in this
prospectus. The statement of operations data for the years ended September 30,
1995 and 1996 and the balance sheet data as of September 30, 1995, 1996 and
1997 are derived from our audited financial statements not included elsewhere
in this prospectus. The statement of operations data for the three months ended
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000, the statement of operations data for the six
months ended March 31, 1999 and 2000 and the balance sheet data as of March 31,
2000 are derived from our unaudited financial statements. The unaudited
financial statements have been prepared on the same basis as our audited
financial statements and, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, which we consider necessary for a fair
presentation of our results of operations and financial position for these
periods. These historical results are not necessarily indicative of results to
be expected for any future period.

   Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance. Accordingly, accretion of preferred stock to redemption value has not
been included in the calculation of unaudited pro forma basic and diluted net
loss per share.

                                       23
<PAGE>

                            Selected Financial Data
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                             Fiscal Year Ended September 30,            March 31,
                          -----------------------------------------  -----------------
                           1995    1996    1997     1998     1999     1999      2000
<S>                       <C>     <C>     <C>      <C>      <C>      <C>      <C>
Statement of Operations
 Data:
Net revenues............  $  661  $1,515  $   609  $ 1,102  $ 6,031  $ 1,116  $ 10,466
Cost of revenues........     335     718      465    1,591    4,733    1,268     6,805
                          ------  ------  -------  -------  -------  -------  --------
 Gross profit (loss)....     326     797      144     (489)   1,298     (152)    3,661
Operating expenses:
 Research and
  development...........      92     169      395      923    2,564      867     3,084
 Sales and marketing....      98     233      477    1,593    2,920    1,147     4,627
 General and
  administrative........     257     268      396      620      934      389     1,191
 Stock compensation.....      --      --       --       --      127       10       876
                          ------  ------  -------  -------  -------  -------  --------
   Total operating
    expenses............     447     670    1,268    3,136    6,545    2,413     9,778
Income (loss) from
 operations.............    (121)    127   (1,124)  (3,625)  (5,247)  (2,565)   (6,117)
Interest income
 (expense), net.........     (27)    (69)     (33)    (574)    (897)    (919)      310
                          ------  ------  -------  -------  -------  -------  --------
Income (loss) before
 extraordinary item.....    (148)     58   (1,157)  (4,199)  (6,144)  (3,484)   (5,807)
Extraordinary gain on
 extinguishment of
 debt...................      --      --       --       --      314      314        --
                          ------  ------  -------  -------  -------  -------  --------
Net income (loss).......    (148)     58   (1,157)  (4,199)  (5,830)  (3,170)   (5,807)
Accretion of redeemable
 convertible preferred
 stock..................      --      --       --       --     (223)      --    (4,259)
                          ------  ------  -------  -------  -------  -------  --------
Net income (loss)
 attributable to common
 stockholders...........  $ (148) $   58  $(1,157) $(4,199) $(6,053) $(3,170) $(10,066)
                          ======  ======  =======  =======  =======  =======  ========
Income (loss) per common
 share before
 extraordinary item--
 basic and diluted......  $(0.06) $ 0.02  $ (0.36) $ (1.31) $ (1.92) $ (0.96) $  (2.86)
Extraordinary item per
 common share--basic and
 diluted................      --      --       --       --     0.09       --        --
                          ------  ------  -------  -------  -------  -------  --------
Net income (loss) per
 common share--basic and
 diluted................  $(0.06) $ 0.02  $ (0.36) $ (1.31) $ (1.83) $ (0.96) $  (2.86)
                          ======  ======  =======  =======  =======  =======  ========
Shares used in computing
 basic and diluted net
 income (loss) per
 common share...........   2,675   3,025    3,177    3,200    3,312    3,285     3,525
Pro forma net loss per
 common share--basic and
 diluted (unaudited)....                                    $ (0.63)          $  (0.37)
                                                            =======           ========
Shares used in computing
 basic and diluted pro
 forma net loss per
 common share
 (unaudited)............                                      9,242             15,887
</TABLE>

<TABLE>
<CAPTION>
                                      As of September 30,              As of
                                -----------------------------------  March 31,
                                1995  1996  1997    1998     1999      2000
<S>                             <C>   <C>  <C>     <C>      <C>      <C>
Balance Sheet Data:
Cash, cash equivalents and
 restricted cash............... $ 11  $ 32 $   16  $   113  $ 1,535  $ 17,172
Working capital (deficit)......   (8)  205    (97)  (3,937)   1,897    20,497
Total assets...................  313   804    699    1,730    5,864    29,979
Long-term debt, less current
 portion.......................   61    82     58       69      158       109
Redeemable convertible
 preferred stock...............   --    --  1,000    1,000   12,467    41,976
Total stockholders' equity
 (deficit).....................  (45)  227   (953)  (4,554)  (9,897)  (18,898)
</TABLE>


                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                  Three Months Ended
                         -----------------------------------------------------------------------
                         December 31, March 31,  June 30,   September 30, December 31, March 31,
                             1998       1999       1999         1999          1999       2000
                                                    (in thousands)
<S>                      <C>          <C>        <C>        <C>           <C>          <C>
Net revenues............   $   223     $   893   $   908       $4,007       $ 4,415     $ 6,051
Cost of revenues........       385         883     1,004        2,461         2,613       4,192
                           -------     -------   -------       ------       -------     -------
 Gross profit (loss)....      (162)         10       (96)       1,546         1,802       1,859
Operating expenses:
 Research and
  development...........       317         550       640        1,057         1,174       1,910
 Sales and marketing....       558         589       778          995         1,615       3,012
 General and
  administrative........       203         186       206          339           432         759
 Stock compensation.....        --          10        37           80           197         679
                           -------     -------   -------       ------       -------     -------
   Total operating
    expenses............     1,078       1,335     1,661        2,471         3,418       6,360
Loss from operations....    (1,240)     (1,325)   (1,757)        (925)       (1,616)     (4,501)
Interest income
 (expense), net.........      (930)         11         4           18            30         280
                           -------     -------   -------       ------       -------     -------
Loss before
 extraordinary item.....    (2,170)     (1,314)   (1,753)        (907)       (1,586)     (4,221)
Extraordinary gain on
 extinguishment of
 debt...................        --         314        --           --            --          --
                           -------     -------   -------       ------       -------     -------
Net loss................   $(2,170)    $(1,000)  $(1,753)      $ (907)      $(1,586)    $(4,221)
                           =======     =======   =======       ======       =======     =======
As a Percentage of Net
 Revenues:
Net revenues............     100.0%      100.0%    100.0%       100.0%        100.0%      100.0%
Cost of revenues........     172.6        98.9     110.6         61.4          59.2        69.3
                           -------     -------   -------       ------       -------     -------
 Gross profit (loss)....     (72.6)        1.1     (10.6)        38.6          40.8        30.7
Operating expenses:
 Research and
  development...........     142.2        61.6      70.5         26.4          26.6        31.6
 Sales and marketing....     250.2        66.0      85.7         24.8          36.6        49.8
 General and
  administrative........      91.0        20.8      22.7          8.5           9.8        12.5
 Stock compensation.....        --         1.1       4.0          2.0           4.4        11.2
                           -------     -------   -------       ------       -------     -------
   Total operating
    expenses............     483.4       149.5     182.9         61.7          77.4       105.1
                           -------     -------   -------       ------       -------     -------
Loss from operations....    (556.0)     (148.4)   (193.5)       (23.1)        (36.6)      (74.4)
Interest income
 (expense), net.........    (417.1)        1.2       0.4          0.5           0.7         4.6
                           -------     -------   -------       ------       -------     -------
Loss before
 extraordinary item.....    (973.1)     (147.2)   (193.1)       (22.6)        (35.9)      (69.8)
Extraordinary gain on
 extinguishment of
 debt...................        --        35.2        --           --            --          --
                           -------     -------   -------       ------       -------     -------
Net loss................    (973.1)%    (112.0)%  (193.1)%      (22.6)%       (35.9)%     (69.8)%
                           =======     =======   =======       ======       =======     =======
</TABLE>

                                       25
<PAGE>

  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                                   CONDITIONS

   You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial
statements and related notes included elsewhere in this prospectus.

Overview

   We develop, market and provide integrated and powerful server appliances
that enable organizations to provide information and applications over the
Internet. We were incorporated in 1989 as PowerStation Technologies, Inc. to
provide systems integration and consulting services. In fiscal 1994, we
transitioned our business by becoming a developer of fault-tolerant high-
density general-purpose computers, our P6000 product line. In September 1997,
we changed our name to Network Engines, Inc. and began expending substantial
research and development efforts to leverage our legacy general-purpose
computer technology into server appliance products. Research and development
expenses increased significantly from $395,000 to $923,000 to $2.6 million in
fiscal 1997, 1998 and 1999, respectively.

   In June 1999, we introduced our WebEngine Blazer product, which is our first
generation of server appliances. Since July 1999, substantially all of our
revenue has been attributable to the WebEngine Blazer product as we
discontinued development and sales of the P6000 product line upon the
introduction of our server appliances. Additionally, we introduced our
AdminEngine server appliance in February 2000 and our WebEngine Roadster and
WebEngine Viper server appliances in the third quarter of fiscal 2000 and
expect to introduce our CommerceEngine server appliance in the fourth quarter
of fiscal 2000.

   Since we began focusing on server appliances in 1998, we have incurred
substantial costs to develop our technology and products, to recruit and train
personnel for our engineering, sales and marketing and technical support
departments, and to establish an administrative organization. As a result, we
had an accumulated deficit of $17.2 million as of March 31, 2000. We anticipate
that our operating expenses will increase substantially in the future as we
increase our sales and marketing operations, develop new channels, fund greater
levels of research and development, expand our technical support and improve
our operational and financial systems. Accordingly, we will need to generate
significant revenues to achieve profitability. In addition, our limited
operating history in the server appliance market makes it difficult for us to
predict future operating results, and, accordingly, there can be no assurances
that we will sustain revenue growth or achieve profitability in future
quarters.

   We derive revenues from the sale of our products to customers and from
license fees. License fees are generated by granting customers a right to
manufacture specific configurations of our product and to distribute that
product under their name. For direct sales and sales to resellers, we recognize
revenues upon delivery, provided evidence of an arrangement has been received,
no obligations remain outstanding and collectibility is reasonably assured. For
the license agreements, we recognize license revenues upon sell through to the
licensee's customers.

                                       26
<PAGE>


   We have strategic relationships with IBM and Micronpc.com that allow them to
manufacture our WebEngine Blazer hardware design. Until these partners were
able to manufacture the licensed product for themselves, we were manufacturing
the product for them and charging them a higher unit sales price for this
service than we would have received in license fees had they manufactured the
product. As of March 31, 2000, we expect that substantially all future revenue
from IBM and Micronpc.com will be license revenues. Accordingly, the revenue
per unit for these customers will decrease. However, since these licensees will
be manufacturing the units, we will not incur any substantial cost of revenues
and our gross profit as a percentage of revenue will be high for license
revenues. There are no minimum license fee commitments under either of these
agreements.

   We sell our products through a direct sales force, through systems
integrators acting as resellers, and to OEMs and licensed manufacturers.
Substantially all of our sales to date have been to customers in the United
States. We intend to expand our reseller channel in the United States and to
establish an international indirect channel.

   Gross profit represents net revenues recognized less the cost of revenues.
Cost of revenues includes cost of materials, manufacturing costs, manufacturing
personnel expenses, obsolescence charges, packaging, license fees and shipping
and warranty costs. Our gross profit will be affected primarily by the mix of
product revenues versus license revenues, the timing and size of customer
orders, and new product introductions by us and our competitors.

   Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development, fees paid to
consultants and outside service providers, material costs for prototype and
test units and other expenses related to the design, development, testing and
enhancements of our products. We expense all of our research and development
costs as they are incurred. We believe that a significant level of investment
in product research and development is required to remain competitive.
Accordingly, we expect to continue to devote substantial resources to product
research and development. As a result, we expect research and development
expenses will increase in absolute dollars but will continue to fluctuate as a
percentage of net revenues.

   Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in sales, marketing and customer support
functions, as well as costs associated with trade shows, public relations and
marketing materials. We intend to expand our sales and marketing operations and
efforts substantially, both domestically and internationally, in order to
increase market awareness and to generate sales of our products. Accordingly,
we expect our sales and marketing expenses to increase in absolute dollars but
continue to fluctuate as a percentage of net revenues.

   General and administrative expenses consist primarily of salaries and other
related costs for executive, finance, accounting, information technology,
facilities and human resources personnel, as well as accounting, legal, other
professional fees and allowance for doubtful accounts. We expect these expenses
to increase in absolute dollars but continue to fluctuate as a percentage of
net revenues as we add administrative personnel and incur additional costs
related to the growth of our business, expansion of our information
infrastructure and our operation as a public company.

                                       27
<PAGE>


   As of March 31, 2000, we recorded deferred stock compensation on our balance
sheet of $12.9 million in connection with stock option and restricted stock
grants to our employees and directors that were granted between February 1,
1999 and March 31, 2000. This amount represents the difference between the
exercise price and the deemed fair value of our common stock for financial
reporting purposes at the date of grant. We will amortize this stock
compensation over the vesting period of the related options. During the six
months ended March 31, 2000, we amortized $876,000 of stock compensation.
During the remainder of fiscal 2000 and 2001, we expect to amortize stock
compensation of:

<TABLE>
<CAPTION>
                                                        Expected Amortization of
Fiscal Quarter Ending                                      Stock Compensation
- ---------------------                                   ------------------------
                                                             (in thousands)
<S>                                                     <C>
June 30, 2000..........................................           $906
September 30, 2000.....................................            921
December 31, 2000......................................            921
March 31, 2001.........................................            911
June 30, 2001..........................................            861
September 30, 2001.....................................            861
</TABLE>

   We then expect aggregate per quarter stock compensation amortization of
approximately $840,000 during fiscal 2002, between $759,000 and $838,000 in
fiscal 2003 and between $34,000 and $669,000 during fiscal 2004. The amount of
stock compensation expense to be recorded in future periods could decrease if
options for accrued but unvested compensation are forfeited.

   As of March 31, 2000, we had net operating loss carryforwards for both
federal and state income tax purposes of approximately $8.9 million available
to offset future taxable income. These net operating loss carryforwards expire
beginning in 2019 and 2004, respectively. We have not recognized any benefit
from the future use of loss carryforwards for these periods because of the
uncertainty surrounding their realization.

   Our net loss attributable to common stockholders includes accretion charges
to increase the carrying amount of our redeemable convertible preferred stock
to the amount we would be required to pay if the preferred stock were to be
redeemed. All preferred stock will automatically convert to common stock as a
result of this offering. As a result, there will not be any accretion charges
in the future related to our currently outstanding redeemable convertible
preferred stock.

   We had 141 employees as of April 30, 2000, a substantial increase from 48 as
of September 30, 1999 and 33 as of December 31, 1998. This rapid growth has
placed significant demands on our management and operational resources. In
order to manage our growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis. If our total
revenues do not increase relative to our operating expenses, our management
systems do not expand to meet increasing demands, we fail to attract,
assimilate and retain qualified personnel or our management otherwise fails to
manage our expansion effectively, we could experience a decline in our revenues
and operating results.

                                       28
<PAGE>

Results of Operations

   In light of the significant change in our business related to the
introduction of our server appliance products, we have presented a comparison
of results for (1) the three months ended March 31, 2000 versus the three
months ended December 31, 1999; (2) the three months ended December 31, 1999
versus the three months ended September 30, 1999 and (3) the three months ended
September 30, 1999 versus the three months ended June 30, 1999. We have also
presented a comparison of results for each of the fiscal years ended September
30, 1997, 1998 and 1999.

Three Months Ended March 31, 2000 and Three Months Ended December 31, 1999

 Net Revenues

   Net revenues increased to $6.1 million for the three months ended March 31,
2000 from $4.4 million for the three months ended December 31, 1999. This
increase was due primarily to increased sales volumes of our WebEngine Blazer
product and, to a lesser extent, to an increased average sales price of the
WebEngine Blazer attributable to the sale of configurations with faster
processing power and more memory.

 Gross Profit

   Gross profit increased to $1.9 million for the three months ended March 31,
2000 from $1.8 million for the three months ended December 31, 1999. Gross
profit as a percentage of net revenues decreased to 30.7% for the three months
ended March 31, 2000 from 40.8% for the three months ended December 31, 1999.
The decrease in gross profit was primarily due to a decrease in product sales
to IBM that was only partially offset by license revenue from IBM. For the
three months ended December 31, 1999, product sales to IBM accounted for 53% of
net revenues versus license revenue from IBM accounting for less than 10% of
net revenues for the three months ended March 31, 2000.

 Operating Expenses

   Research and Development. Research and development expenses increased to
$1.9 million for the three months ended March 31, 2000 from $1.2 million for
the three months ended December 31, 1999. This increase in research and
development expenses was due primarily to an increase in compensation costs as
research and development personnel increased during the period from 35
employees to 42 employees and, to a lesser extent, to higher expenses related
to prototype and test units and consultant expenses.

   Sales and Marketing. Sales and marketing expenses increased to $3.0 million
for the three months ended March 31, 2000 from $1.6 million for the three
months ended December 31, 1999. This increase in sales and marketing expenses
was due primarily to an increase in compensation costs as sales, marketing and
customer support personnel during the period increased from 33 employees to 48
employees, increased commission expense attributable to higher net revenues
and, to a lesser extent, due to increased spending on marketing programs,
increased travel expenses associated with increased sales personnel and higher
costs attributable to evaluation units.

                                       29
<PAGE>


   General and Administrative. General and administrative expense increased to
$759,000 for the three months ended March 31, 2000 from $432,000 for the three
months ended December 31, 1999. This increase in general and administrative
expenses was due primarily to an increase in compensation costs as general and
administrative personnel during the period increased from ten employees to 17
employees, increased legal fees and higher corporate recruiting costs.

   Stock Compensation. For the three months ended March 31, 2000, we recorded
deferred stock compensation of $8.1 million relating to stock options and
restricted stock granted to employees and directors versus $3.2 million
recorded for the three months ended December 31, 1999. These amounts are being
amortized over the vesting periods of the granted options. Stock-based
compensation increased to $679,000 for the three months ended March 31, 2000
from $197,000 for the three months ended December 31, 1999.

Three Months Ended December 31, 1999 and Three Months Ended September 30, 1999

 Net Revenues

   Net revenues increased to $4.4 million for the three months ended December
31, 1999 from $4.0 million for the three months ended September 30, 1999. The
increase was primarily due to increased sales volumes of our WebEngine Blazer
product.

 Gross Profit

   Gross profit increased to $1.8 million for the three months ended December
31, 1999 from $1.5 million for the three months ended September 30, 1999. Gross
profit as a percentage of net revenues increased to 40.8% for the three months
ended December 31, 1999 from 38.6% for the three months ended September 30,
1999. The increase in gross profit was primarily due to increased sales volume
of our WebEngine Blazer product.

 Operating Expenses

   Research and Development. Research and development expenses increased to
$1.2 million for the three months ended December 31, 1999 from $1.1 million for
the three months ended September 30, 1999. The increase in research and
development expenses was primarily due to an increase in compensation and
recruiting costs as research and development personnel during the period
increased from 16 employees to 35 employees. This increase was partially offset
by a decrease in consultant expenses and a decrease in costs related to
prototype and test units.

   Sales and Marketing. Sales and marketing expenses increased to $1.6 million
for the three months ended December 31, 1999 from $1.0 million for the three
months ended September 30, 1999. The increase in sales and marketing expenses
was primarily due to an increase in compensation and recruiting costs related
to an increase in sales, marketing and customer support personnel during the
period from 18 employees to 33 employees.

   General and Administrative. General and administrative expense increased to
$432,000 for the three months ended December 31, 1999 from $339,000 for the
three months ended September 30,

                                       30
<PAGE>

1999. The increase in general and administrative expenses was primarily due to
an increase in compensation and recruiting costs related to an increase in
general and administrative personnel during the period from seven employees to
ten employees.

   Stock Compensation. For the three months ended December 31, 1999, we
recorded deferred stock compensation of $3.2 million relating to stock options
and restricted stock granted to employees and directors versus $708,000
recorded for the three months ended September 30, 1999. These amounts are being
amortized over the vesting periods of the granted options. Stock-based
compensation increased to $197,000 for the three months ended December 31, 1999
from $80,000 for the three months ended September 30, 1999.

Three Months Ended September 30, 1999 and Three Months Ended June 30, 1999

 Net Revenues

   Net revenues increased to $4.0 million for the three months ended September
30, 1999 from $908,000 for the three months ended June 30, 1999. The increase
in net revenues was primarily due to the June introduction of our WebEngine
Blazer product that accounted for substantially all of the net revenues for the
three months ended September 30, 1999.

 Gross Profit (Loss)

   Gross profit (loss) increased to $1.5 million for the three months ended
September 30, 1999 from ($96,000) for the three months ended June 30, 1999.
Gross profit (loss) as a percentage of net revenues increased to 38.6% for the
three months ended September 30, 1999 from (10.6%) for the three months ended
June 30, 1999. The increase in gross profit was primarily due to increased
sales related to the introduction of our WebEngine Blazer product.

 Operating Expenses

   Research and Development. Research and development expenses increased to
$1.1 million for the three months ended September 30, 1999 from $640,000 for
the three months ended June 30, 1999. This increase in research and development
expenses was due to an increase in compensation and recruiting expenses related
to an increase in research and development personnel during the period from
nine employees to 15 employees, increased prototype and test unit costs and an
increase in consultant expenses.

   Sales and Marketing. Sales and marketing expenses increased to $1.0 million
for the three months ended September 30, 1999 from $778,000 for the three
months ended June 30, 1999. This increase in sales and marketing expenses was
due to an increase in sales commissions associated with our increased net
revenues and increased compensation costs attributable to an increase in sales,
marketing and customer support personnel during the period from 14 employees to
18 employees.

   General and Administrative. General and administrative expense increased to
$339,000 for the three months ended September 30, 1999 from $206,000 for the
three months ended June 30, 1999.

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<PAGE>


This increase in general and administrative expenses was due primarily to
increased legal and accounting fees and, to a lesser extent, due to increased
facilities costs and increased costs related to the expansion of our
information systems infrastructure.


   Stock Compensation. For the three months ended September 30, 1999, we
recorded deferred stock compensation of $708,000 relating to stock options
granted to employees versus $368,000 recorded for the three months ended June
30, 1999. These amounts are being amortized over the vesting periods of the
granted options. Stock-based compensation increased to $80,000 for the three
months ended September 30, 1999 from $37,000 for the three months ended June
30, 1999.

Fiscal 1997, 1998 and 1999

  Net Revenues

   Net revenues increased from $609,000 in fiscal 1997 to $1.1 million in
fiscal 1998 and to $6.0 million in fiscal 1999. The increase in net revenues
from fiscal 1997 to 1998 was primarily due to both increased unit sales of our
P6000 product and an increase in the average unit sales price attributable to
units shipping with a greater number of processors in fiscal 1998. The increase
in net revenues from fiscal 1998 to 1999 was primarily due to the June 1999
introduction of our WebEngine Blazer server appliance that accounted for $4.1
million of fiscal 1999 net revenues.

  Gross Profit (Loss)

   Gross profit (loss) decreased from a $144,000 gross profit in fiscal 1997 to
($489,000) in fiscal 1998 and then increased to a $1.3 million gross profit in
fiscal 1999. Gross profit (loss) as a percentage of net revenues decreased from
23.6% in fiscal 1997 to (44.4%) in fiscal 1998 and then increased to 21.5% in
fiscal 1999. The decrease in gross profit from fiscal 1997 to 1998 was
primarily due to higher discounting on P6000 sales, increased obsolescence
charges related to the P6000 product line and increased manufacturing
compensation costs. The increase in gross profit from fiscal 1998 to 1999 was
primarily due to increased sales volume related to the June 1999 introduction
of our WebEngine Blazer that was partially offset by increased obsolescence
charges related to the P6000 product line and increased manufacturing
compensation costs.

  Operating Expenses

   Research and Development. Research and development expenses were $395,000,
$923,000 and $2.6 million in fiscal 1997, 1998 and 1999, respectively,
representing 64.9%, 83.8% and 42.5% of net revenues in the respective periods.
The dollar increases for each of the periods were primarily due to increases in
personnel, consultants and material costs for prototype and test units and were
attributable to development efforts related to our server appliances.

   Sales and Marketing. Sales and marketing expenses were $477,000, $1.6
million and $2.9 million in fiscal 1997, 1998 and 1999, respectively,
representing 78.3%, 144.6% and 48.4% of net revenues in the respective periods.
The dollar increases for each of the periods were primarily due to increased
personnel in our direct sales and marketing organization, higher sales
commissions associated with increased net revenues and increased marketing
activities.

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<PAGE>


   General and Administrative. General and administrative expenses were
$396,000, $620,000 and $934,000 in fiscal 1997, 1998 and 1999, respectively,
representing 65.0%, 56.3% and 15.5% of net revenues in the respective periods.
The dollar increases for each of the periods were primarily due to increases in
personnel, professional fees and increases in our allowance for doubtful
accounts associated with increased revenues.

   Stock Compensation. During fiscal 1999 we recorded deferred stock-based
compensation of $1.6 million related to stock options granted to employees and
directors. We had no deferred stock-based compensation relating to stock option
grants in fiscal 1997 and 1998. We recorded $127,000 of stock-based
compensation expense in operating expenses in fiscal 1999. There was no stock-
based compensation expense recorded in operating expenses during fiscal 1997
and 1998.

  Extraordinary Gain

   The extraordinary gain on extinguishment of debt realized in fiscal 1999 was
due to the forgiveness of all interest expense on the notes payable upon the
conversion of that debt into series B and series C redeemable convertible
preferred stock.

   As a result of our limited history with our server appliance products, we
cannot forecast operating expenses based on historical results. Accordingly, we
may incur expenses, in part, based on future revenue projections. Most of our
expenses are fixed in nature, and we may not be able to quickly reduce spending
if revenues are lower than we have projected. Our ability to forecast our
quarterly sales accurately is limited, which makes it difficult to predict the
quarterly revenues that we will recognize. We expect that our business,
operating results and financial condition would be harmed if revenues did not
meet projections. Investors should not rely on the results of one quarter as an
indication of future performance.

   We expect that our revenues and operating results may vary significantly
from quarter to quarter, and we anticipate that our expenses will increase
substantially for at least the next two fiscal years as we:

  .  increase our sales and marketing activities, including expanding our
     North American direct sales force, establish an international presence
     and commence our initial advertising campaign;

  .  expand our indirect channels, both domestically and internationally;

  .  develop our technology, expand our product lines and create and market
     new products; and

  .  pursue strategic relationships and acquisitions.

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<PAGE>


Liquidity and Capital Resources

   Since our fiscal 1997, we have financed our operations primarily through the
sale of equity securities, borrowings and the sale of our products. As of March
31, 2000, we have raised approximately $37.3 million, net of offering costs,
from the issuance of preferred stock. As of March 31, 2000, we had $16.8
million in cash and cash equivalents.

   In April 2000, we amended an equipment line of credit agreement to provide
for an additional $2.0 million of equipment financing and a $4.0 million
working capital revolving line of credit. The additional equipment financing is
separated into two consecutive six-month borrowing periods of $1.0 million
beginning on the date of the amendment. Interest at the rate of prime plus
1.25% is payable monthly. Any outstanding balances at the end of each of the
two borrowing periods will be repaid in 36 equal monthly installments. The
revolving line of credit matures in April 2001 and bears interest at prime plus
1%.

   Cash used in operating activities was $768,000, $3.4 million, $5.1 million
and $7.6 million in fiscal 1997, 1998, 1999 and for the six months ended March
31, 2000, respectively. Cash used in fiscal 1997 was primarily due to a net
loss of $1.2 million and an increase in inventories, offset in part by decrease
in accounts receivable and increases in accrued expenses and depreciation,
inventory reserves and provision for doubtful accounts expenses. Cash used in
fiscal 1998 was primarily due to a net loss of $4.2 million and increases in
accounts receivable and inventories, offset in part by increases in accounts
payable and accrued expenses and charges for depreciation, inventory reserves
and amortization of discount on notes payable. Cash used in fiscal 1999 was
primarily due to a net loss of $5.8 million and increases in accounts
receivable and inventories, offset in part by increases in accounts payable and
accrued expenses and charges for depreciation, inventory reserves and
amortization of discount on notes payable. Cash used for the six months ended
March 31, 2000 was primarily due to a net loss of $5.8 million and increases in
accounts receivable, inventories and prepaid expenses, offset in part by an
increases in accounts payable, accrued expenses and deferred revenue and
charges for depreciation, inventory reserves and stock-based compensation.

   Cash used in investing activities was $185,000, $343,000, $723,000 and $2.4
million in fiscal 1997, 1998, 1999 and for the six months ended March 31, 2000,
respectively. Cash used in investing activities was primarily for purchases of
property and equipment and, for the six months ended March 31, 2000, providing
a $279,000 letter of credit as a security deposit on our new leased facilities
in Canton, Massachusetts and the use of $276,000 as we commenced leasehold
improvements in the new Canton facility. As of this date, we expect to spend
approximately $1.3 million on additional leasehold improvements and
approximately $1.0 million on furniture and equipment related to our new Canton
facility.

   Cash provided by financing activities was $937,000, $3.8 million, $7.2
million and $25.4 million in fiscal 1997, 1998, 1999 and for the six months
ended March 31, 2000, respectively. Cash provided by financing activities
consisted primarily of proceeds from private sales of preferred stock and
bridge loans from stockholders and, for the six months ended March 31, 2000,
the exercise of stock options and warrants. These bridge loans were subsequent
to our sale of series A preferred stock in fiscal 1997 and eventually converted
into a combination of series B and series C preferred stock in fiscal 1999.

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<PAGE>

   We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including:

  .  the costs and timing of expansion of sales and marketing activities;

  .  the costs and timing of expansion of product development efforts and the
     success of these development efforts;

  .  the extent to which our existing and new products gain market
     acceptance;

  .  the level and timing of license revenues;

  .  the costs involved in maintaining and enforcing intellectual property
     rights;

  .  market developments;

  .  the costs and timing of expanding and improving our facilities;

  .  available borrowings under line of credit arrangements; and

  .  other factors.

   We believe that the net proceeds from this offering, together with cash on
hand, cash equivalents and borrowings, will be sufficient to meet our debt
service, operating and capital requirements for at least the next 12 months.
After that, we may need to raise additional funds. We may seek to raise
additional funds through additional borrowings, public or private equity
financings or from other sources. There can be no assurance that additional
financing will be available at all or, if available, will be on terms
acceptable to us.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. SFAS 133 will be effective for our fiscal year
ended September 30, 2001. We believe the adoption of this statement will not
have a significant impact on our financial position, results of operations or
cash flows.

   In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin summarizes certain views of the staff of the
Securities and Exchange Commission on applying generally accepted accounting
principles to revenue recognition in financial statements. The staff of the
Securities and Exchange Commission believes that revenue is realized or
realizable and earned when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or services have been
rendered; the seller's price to the buyer is fixed or determinable; and
collectibility is reasonably assured. We do not expect the application of SAB
101 to have a material impact on our financial position or results of
operations.

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<PAGE>


   In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. We do
not expect the application of FIN 44 to have a material impact on our financial
position or results of operations.

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<PAGE>

                                   BUSINESS

Overview

   We develop, market and provide integrated and powerful server appliances
that allow organizations to provide information and applications over the
Internet. Server appliances are a new category of computer network
infrastructure devices that deliver specific functionality through a
combination of pre-packaged hardware and software. Unlike general-purpose
servers, our server appliances are high-powered, compact products that can be
used with either Windows or Linux operating systems and a range of
applications and computing power. Our customers may select the number and type
of each server that they need, utilize them separately or combine them into
groups, or clusters, and locate them geographically as needed. Our servers can
be managed from a single location without the support of on-site technicians.
Our server appliances are designed to meet the complex needs and requirements
of e-commerce and Internet-based organizations, including dot com companies,
web hosting providers, application service providers and Internet service
providers. Our server appliances are easy to install and configure and are
designed to meet our customers' needs by combining specific application
functionality within small physical packaging.



Industry Background

   The emergence of the Internet as a global communications medium for e-
commerce and information delivery is now well-accepted. The openness and
accessibility of the Internet enable large and small organizations, either new
or established, to enter this competitive environment by creating Internet
sites and establishing their own network infrastructures. New and emerging
organizations hoping to grow, and well-financed organizations hoping to
increase market share, typically seek to reduce time-to-revenue.

   Organizations seek to appeal to a wide range of users and to generate large
volumes of activity at their web sites, resulting in significant Internet
traffic. The growth and complexity in Internet use and functionality,
including streaming media, dynamic content and e-commerce transactions, have
led to increased demand for greater bandwidth and processing power. The
increase in Internet traffic and demand for greater bandwidth has resulted in
more utilization of remote server facilities, including co-location
facilities, to house servers for Internet-related businesses. Co-location
facilities, which provide strategically located secure data center space with
high-speed network connections to the Internet, can improve network
performance to end users by reducing the distance between end users and
Internet servers.

   Traditionally, organizations have built their Internet solutions with
general-purpose servers. This method requires extensive time and technical
resources and capabilities which increases overall cost of ownership,
including time and cost of implementation. To extend the power and features of
a general-purpose server, organizations must integrate numerous discrete
hardware and software elements, including operating systems, applications,
security systems, load balancers and management tools, which increases overall
costs and time-to-revenue. This approach is not well-suited for use in remote
server facilities because it typically creates large, complex systems that
require substantial facility space. In addition, most vendors' offerings
include limited management and few vendors, if any, provide remote lights out
management capabilities, which increases the need

                                      37
<PAGE>

for dedicated attention of on-site information technology professionals. When
organizations use general-purpose servers to handle Internet traffic, they
typically face a higher total cost of ownership since equipment, facility costs
and operating expenses are high and time-to-revenue is increased.

   To address the shortcomings of general-purpose servers, many organizations
are seeking well-designed solutions for Internet applications that meet a
common set of requirements. These organizations include e-commerce and
Internet-based businesses, including dot com companies, web hosting providers,
application service providers and Internet service providers. Their
requirements include:

  .  pre-packaged functionality to reduce or eliminate the need for custom
     integration by the end user;

  .  high-density physical packaging that provides high-performance server
     hardware in small, rack-mounted devices to minimize the costs of co-
     location space rental;

  .  an integrated management system that enables administrators to
     extensively control their server appliances remotely, even in the case
     of system failure; and

  .  built-in clustering capability that enables users to easily scale the
     power and functionality of their solution as user demand grows and
     evolves.

   The server appliance, which is a combination of computing hardware and
software that is designed to deliver a single application function, was
developed to address the shortcomings of general-purpose servers. International
Data Corporation estimates that the worldwide market for server appliances will
grow to $8.0 billion in 2003 from approximately $214.6 million in 1999, a
compounded annual growth rate of 147%. As market acceptance of server
appliances grows, we expect that users will increasingly demand products that
meet specific functional requirements and reduce total cost of ownership,
including time-to-revenue, packaging density, installation and management
functionality. In addition, specific customer preferences for operating
systems, applications and computing power play important roles in customer
selection of server appliances. Therefore, server appliance vendors who offer a
choice in these areas will have a broader market opportunity.

The Network Engines Solution

   We develop, market and provide a selection of server appliances that enable
organizations to provide information and applications over the Internet to meet
the requirements of e-commerce and Internet-based organizations. Our server
appliances are high-powered, compact products with a choice of operating
systems, applications and computing power. Key elements of our solution
include:

   High Performance in a Small Package. Our products integrate high performance
components in a small package enabling our customers to minimize hosting or co-
location costs for servers. All of our products today are 1.75 inches in
height, also known as one rack unit, which is typically one-half to one-third
the height of the leading, currently available general-purpose servers with the
same processing power. This is important because our customers typically use
multiple server appliances

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<PAGE>

and must pay for the amount of rack space the servers require. Our server
appliances minimize the space requirements for our customers without loss of
computing power, thereby reducing the rental costs for rack space at co-
location facilities.

   Ease of Installation and Use. Each of our server appliances is pre-
configured and is capable of performing its assigned application when it is
unpacked and connected. The typical installation consists of the user entering
one or sometimes a few configuration parameters, including the network address,
either through the front-panel liquid crystal display or an Internet browser.
Customers do not need to integrate other hardware, operating systems,
applications or management software. Each appliance has built-in management for
installation, configuration and error reporting, as well as application
management capabilities specific to the appliance type. With these features, we
believe our servers enable our customers to decrease time-to-revenue and lower
cost of ownership.

   Integrated Remote Management. Our server appliances contain integrated
hardware and software components that allow lights out management capable of
monitoring and operating our server appliances even if a server's operating
system is not functioning. Each of our server appliances is designed with a
dedicated embedded processor and extensive, embedded software for system
management and communications. Customers can monitor and control our appliances
in dispersed, remote locations using an Internet connection and an Internet
browser. In addition, our management system enables customers to develop rules-
based decision-making, whereby errors or performance conditions in a remote
cluster can trigger actions ranging from simple notification to a complex
series of automatic responses. This remote management capability enables
customers to customize and centralize system administration and scale their
Internet solutions without hiring a proportionate number of technicians.

   Dynamic Scalability. Our solution is scalable because our customers can
increase the power and capacity of their server clusters simply by adding more
servers. Our server appliances can be easily connected to form a group, or
cluster, or to augment an existing cluster, to meet both varied and rapidly
changing management and performance requirements, thereby reducing costs. The
scalability of our solution is dynamic because the performance of individual
networking applications operating on our servers can be increased rapidly and
without interruption by increasing the number of server appliances in a cluster
of our servers devoted to that application. Our proprietary connection
technology automatically recognizes new Network Engines' appliances and assigns
addresses without interruption, instantly establishing communication with, and
control of, any of our server appliances that are added to a working cluster.

   Selection of Operating Systems, Applications and Computing Power. We offer
customers appliances with a choice of operating systems, a range of
applications and varying degrees of computing power and functionality. Our
customers have differing requirements for operating systems, either Windows or
Linux, applications and computing power. By offering these choices, our
products appeal to a broad range of customers.

The Network Engines Strategy

   Our objective is to become a leading global provider of Internet server
appliances for medium- to large-sized organizations that use Internet-based
applications. The key elements of our strategy include:


                                       39
<PAGE>

   Broaden Our Server Appliance Product Line. We believe that each medium- to
large-scale Internet server appliance customer has specific application and
appliance requirements that result in the need for a variety of server
appliances. To increase our appeal to the server appliance market, we are
seeking to broaden our product line beyond our current web content and e-
commerce appliances to include products designed specifically for streaming
content, storage, database management, system security and other purposes. In
addition, we intend to continue to meet the evolving needs of our customers by
offering a product line with varying levels of performance and a choice of
operating systems.

   Continue Hardware and Software Innovation. With our technology expertise, we
seek to continue to develop hardware and software innovations for the server
appliance market. Utilizing our software expertise, we intend to ensure that
our products have intuitive user interfaces and that they may be easily
installed, configured and remotely managed. We also intend to continue to
enhance the performance of our hardware platforms and their remote
manageability, while maintaining our leadership in compact packaging. In
addition, we intend to continue to enhance the combinations of hardware and
software in our server appliances to address the evolving needs of the
Internet.

   Expand Research and Development. We will continue our research and
development efforts, including the hiring of qualified technical personnel, in
an effort to enhance existing products and develop new products. In order to
offer our customers the best possible products and to accommodate their future
software and hardware choices and their legacy technology equipment, we will
also seek to continue to develop relationships with key technology vendors that
enhance our total product offerings. With our expanded research and development
capabilities, we intend either to integrate new technologies into our products
or to enhance the management and interoperability of our products within our
customers' installations.

   Build Multi-tier Distribution Capability. We sell our products through a
direct sales force, through systems integrators acting as resellers, and to
OEMs and licensed manufacturers. We intend to expand and utilize a direct sales
organization to build our relationships with large end-user customers and to
maintain a good understanding of their changing and expanding market
requirements. In addition, we intend to continue building relationships with
network systems integrators to provide our products more effectively to this
and other market segments. We are expanding our distribution network to include
several international equipment distributors and an Internet-based channel
fulfillment program. A key element of our distribution strategy is to continue
to license our technology and sell our products to significant licensed
manufacturers and OEMs and to seek additional licensed manufacturer and OEM
relationships. For example, we have licensing relationships with IBM and
Micronpc.com and an OEM relationship with VA Linux. We believe these
relationships will assist us in establishing market presence and increasing our
product sales.

   Establish Strong Brand Identity. We seek to establish company name
recognition and identification in our targeted market to enhance our sales
efforts. We intend to employ an aggressive public relations campaign and
creative marketing strategies to build market awareness of our products. We
intend to continue to incorporate innovative hardware designs with easy-to-use,
stylish web management interfaces to reinforce our brand name and establish a
strong competitive advantage.


                                       40
<PAGE>

   Invest in Businesses, Products and Technologies. We intend to pursue
strategic acquisitions of, or investments in, businesses, products and
technologies that will provide us with additional industry expertise, enhance
our range of product offerings, expand our development and production capacity,
broaden our client base and expand our geographical presence.

Products

   Network Engines' Internet Appliance Architecture is our approach to building
high-performance, high-density appliances for use by e-commerce and Internet-
based organizations, including dot com companies, web hosting providers,
application service providers and Internet service providers. This architecture
enables us to combine the hardware and software needed to install, manage,
optimize and expand our customers' Internet-based applications.

   Inherent in our architecture is the concept that simple, comprehensive
management of customer installations is as important as ease of set up. All of
our products can be managed from any location using a standard web browser or
industry-standard network protocol-compliant application, enabling network
managers to operate more efficiently without sacrificing site performance and
availability. All of our products are designed within this Internet Appliance
Architecture framework. Each of our server appliances has the following common
characteristics:

  .  it is a complete, integrated, standalone specific-purpose server
     appliance;

  .  it can be easily installed, requiring simple configuration information
     to be entered through the front-panel liquid crystal display or an
     Internet browser;

  .  it can be grouped in a load-balanced cluster with additional appliances
     of its own type to increase the power of the solution;

  .  it includes hardware and software that enable centralized management and
     allow the addition of the appliance to a cluster; and

  .  its management functionality can be extended by the addition of our
     management appliance, AdminEngine, to its cluster.

   We currently offer WebEngine, CommerceEngine and AdminEngine server
appliances.

 WebEngine Product Offerings

   The WebEngine family of products includes the WebEngine Roadster NT,
WebEngine Roadster LX, WebEngine Viper NT, WebEngine Viper LX and WebEngine
Blazer. Each WebEngine server appliance may be easily and rapidly deployed to
handle Internet-based information. Each member of the WebEngine family has
distinct features developed to provide a customized solution for the range of
organizations that provide information over the Internet, from entry-level
home-based businesses to large-scale, rapid-growth Internet businesses.

   We have committed significant research and development resources to offer
our WebEngine products with either Windows or Linux operating systems in the NT
and LX versions of the Roadster and Viper. This choice accommodates customer
preferences for operating systems and applications. The software in each of the
NT and LX products is as follows:

  .  the NT products incorporate Microsoft Windows NT Server version 4.0,
     Microsoft Internet Information Server, our customized management
     software, Microsoft Index Server and Microsoft Management Console; and

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<PAGE>

  .  the LX products incorporate Linux software, including Red Hat version
     6.1, the Apache web server version 1.3.9, our customized management
     software, and software for file transfer protocol access, a domain name
     server and a variety of e-mail servers.

   WebEngine Roadster and WebEngine Viper. The WebEngine Roadster and Viper
products incorporate Intel processing components in a rack mountable device
that is one rack unit in height. The Roadster and Viper products can be used as
standalone servers, if a customer needs to dedicate an affordable server
appliance to individual web sites or end users. These products can also be
grouped into a cluster of servers containing up to 256 of our appliances. Setup
is easy and management of the Roadsters and Vipers can be handled through the
front-panel liquid crystal display or an Internet browser.

   The WebEngine Roadster NT and LX products are our entry-priced server
appliances. The WebEngine Viper NT and LX products have either one or two Intel
Pentium III processors, allowing for higher performance and speed. We commenced
commercial shipment of the WebEngine Roadster and WebEngine Viper in the third
quarter of fiscal 2000. We charge between $2,000 and $5,000 per unit for our
WebEngine Roadster appliances and between $4,000 and $15,000 per unit for our
WebEngine Viper appliances, depending upon specific product configurations.

   WebEngine Blazer. The WebEngine Blazer uses the same hardware platform as
the Viper products. Blazers are available without an operating system to allow
for complete customer configuration or they may be ordered with Windows or
Linux operating systems already installed. Like our other products, the Blazer
includes a backup management network connection and an industry-standard
network connection to give our customers a powerful hardware platform with our
standard management features that can be easily expanded. We commenced
commercial shipment of the WebEngine Blazer in June 1999. We charge between
$4,000 and $15,000 per unit for our WebEngine Blazer appliances, depending upon
specific product configurations.

 AdminEngine

   The AdminEngine enables the management of up to 256 Network Engines
appliances that are grouped in a cluster, from any location, through any
standard web browser or standards-based network management application.
AdminEngine enables a customer to quickly and easily solve a variety of
problems that otherwise would require a technician to travel to the customer's
server room, which is often located in a remote facility. Using an Internet
browser, customers can restart any Network Engines server from a network drive,
reset it for a local restart, and power it up or down. AdminEngine also allows
our customers to closely monitor performance of their appliances and to
establish rules that will enable our servers to notify the customer of unusual
events. We commenced commercial shipment of the AdminEngine in February 2000.
We charge approximately $5,000 per unit for our AdminEngine, depending upon
specific product configurations.

 CommerceEngine

   We expect to commence commercial shipment of the CommerceEngine in the
fourth quarter of fiscal 2000. The CommerceEngine is our server appliance that
customers can use to increase their ability to process secure Internet
commercial transactions. The CommerceEngine incorporates a

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<PAGE>


hardware-based secure transaction processor in a rack-mountable device that is
one rack unit in height and includes specialized secure transaction processing
software. CommerceEngine is based on industry standards and is compatible with
a wide variety of encryption tools, as well as communications and security
protocols. CommerceEngine gives our customers the performance benefits of
hardware-based secure transaction processing, without complicated installation
and configuration and it can be scaled by adding additional CommerceEngines and
WebEngine appliances. The manageability of the CommerceEngine can be increased
by grouping multiple units in a cluster with our AdminEngine. We expect to
charge between $4,000 and $18,000 per unit for our CommerceEngine, depending
upon specific product configurations.

Technology

   A key benefit of our server appliances is the integration of hardware and
software technologies to provide a complete solution for our users. Our server
appliance hardware and software technology is integrated with many industry-
standard technologies to create server appliance solutions.

 Hardware Platforms

   We have made significant investments in the development of hardware
platforms that combine very high-density packaging of industry-standard
components with management features for clustered server appliances.

   High-density packaging. We believe that we have been a leader in the
development of server hardware utilizing standard Intel Pentium III processors
in a rack mountable device that is one rack unit in height. We have developed
significant expertise in cooling and monitoring temperatures to maintain
operating conditions within specifications for the included components.

   Management. The processing board of each of our server appliances contains
hardware and software dedicated to the management of that particular appliance
and contributes to our ability to achieve lights out management. This
management section of the processing board is connected to our management
appliance by a network connection, as well as a backup management connection,
known as a cluster management bus. Although our management appliance normally
uses the principal network connection to communicate with each of our
appliances, it is able to switch to the cluster management bus when
communications through the network connection are not available.

 Software

   We have made significant investments in the development of our software
applications that are integrated with our hardware platforms to provide:

  .  substantial management capability of our server appliances in each
     appliance independently or using our AdminEngine to manage a cluster of
     appliances;

  .  support for both Windows and Linux operating systems; and

  .  an intuitive user interface for ease of installation, configuration and
     management.

   Our software is incorporated at three levels: standard appliance management
software in all of our WebEngine and CommerceEngine products; specific
appliance management software in each of our WebEngine and CommerceEngine
products; and AdminEngine software in our AdminEngine management server
appliance.

                                       43
<PAGE>


   Standard Appliance Management. Each of our WebEngine and CommerceEngine
products includes software that allows the appliance to be managed as a
standalone device. In addition, each of these server appliances includes
software to enable enhanced management communications using our AdminEngine if
that appliance is added to a cluster of our appliances that are managed
together. This built-in software reports on hardware conditions, including
temperatures, voltage measurements, fan rotation and similar operating
conditions. It also provides performance statistics, including numbers of
transactions, processor utilization, disk and memory utilization and related
measurements. This software reports on the presence and working condition of
application and system software components. Each server appliance incorporates
software that can execute management instructions. For example, the software
can restart the operating system or reset the power supply.

   Specific Appliance Management. Management software is also included in each
appliance for normal application management functions, depending on the level
of management provided by the application builder. For example, Roadster NT and
Viper NT provide a simple interface to the management features of Microsoft's
Internet Information Server. Roadster LX and Viper LX include proprietary
software for the creation and management of web site partitions--functionality
that is not included with the Apache application.

   AdminEngine Application. Our AdminEngine appliance application incorporates
several key items of technology:

  .  Internet Browser interface. AdminEngine utilizes any standard browser
     software for presentation of its Java-based user interface. The
     AdminEngine interface was designed for easy navigation from screen to
     screen and the ability to present an easy-to-understand top-level
     interface that can also present detailed technical information to the
     more experienced administrator.

  .  Rules-based decision-making. AdminEngine enables users to develop a set
     of rules for management actions based on the information reported to
     AdminEngine from other appliances in the cluster. Rules may be based on
     error or performance conditions, and actions can range from simple
     notification to a complex series of management responses.

  .  Cluster management bus control. AdminEngine manages the connections
     between appliances grouped in a cluster using a cluster management bus,
     which does not rely on a normal network connection. This device
     automatically recognizes new appliances when they are first connected
     and assigns addresses for future reference. It subsequently uses the
     cluster management bus software and associated application logic to
     communicate with appliances if they are no longer responding on the
     network.

  .  External appliance interface. The AdminEngine provides a standard point
     of control for products developed by our third-party technology
     providers to be managed as part of a cluster of our appliances.

Customers

   Our customers include companies with e-commerce web sites and high-traffic
Internet web sites, as well as web hosting providers, including application
service providers and Internet service providers. These customers include
providers of streaming video service, web content services, television-based
web services, e-commerce, web portals and emerging web technologies. Customers
also include OEMs and parties that are licensed to build products based on our
product designs. In

                                       44
<PAGE>


the fiscal year ended September 30, 1999, sales to InterVu, IBM and Microsoft
(WebTV) accounted for 46%, 28% and 14% of net revenues, respectively. For the
six months ended March 31, 2000, sales to each of IBM, Microsoft (WebTV) and
Tellme Networks accounted for 26%, 18% and 14% of our net revenues,
respectively.

   Our customers include:

<TABLE>
<S>                  <C>                            <C>
Akamba               Infobank Computer              NetScaler
Arlan & Associates   InfoLibria                     Network Storage Solutions
Audiotalk Networks   Information Technology         NovaWiz
BeVocal              Systems                        Rearden Steel
Bluedog.com          Intertainer                    Register.com
Comet Systems        Intervu                        Responsys.com
CyberIQ Systems      iVillage.com                   Revit Technology
Data Transit         IVion Network                  Screaming Media
International        Lucent Technologies            Tellme Networks
Digital Impact       Mi8                            Ticketmaster Online-City
e-Media              Microsoft (WebTV)              Search
Enosus Systems       Mission Critical               TssiMicrosage
FastForward Networks Motorola                       Visualize Video
iBEAM Broadcasting   Natex Communications           VocaLoca
IBM                  NetCreations

</TABLE>
Sales

   We sell our products through a direct sales organization and through a
network of channels that includes systems integrators, distributors and
licensed manufacturers. We are continuing to expand our relationships with
channel partners and establish an Internet channel. As of April 30, 2000, we
employed 38 people in sales.

 Direct Sales

   Our direct sales organization sells to large users of Internet-based
applications and dot com companies and focuses on organizations who require
multiple numbers of our server appliances to meet the demands of their
applications. We have regional sales managers and technical sales engineers
that are located in and serve strategic metropolitan areas, including Atlanta,
Boston, Dallas, Los Angeles, New York, Philadelphia, San Francisco and
Washington D.C. Our sales managers and sales engineers work in teams to analyze
our prospective customers' requirements and propose solutions that meet their
needs. Our sales teams maintain close relationships with our customers after
our products have been installed to ensure our customers remain satisfied. Our
sales managers are compensated with a base salary and commissions which are
based on their attainment of sales quotas. In addition to a base salary, our
sales engineers receive bonus payments based on the sales revenues generated by
their assigned customers.

 Channel Sales

   Our indirect sales efforts in the United States are primarily focused on
enhancing our network of domestic systems integrators and resellers with
significant experience with networking applications. We are also focusing on
developing additional indirect sales channels as we initiate sales activities
outside the United States, primarily in Europe and Asia.

                                       45
<PAGE>


 Licensing and OEM Relationships

   We have established strategic OEM and licensed manufacturer relationships
under which our products, manufactured either by us or another company, are
branded and sold under another company's label, including relationships with
IBM, Micronpc.com and VA Linux. We will continue to seek additional licensing
relationships to broaden our sales capacity.



Marketing

   Our marketing objectives include building market awareness and acceptance
of Network Engines and our products, as well as generating qualified customer
leads. We attend trade shows, send out direct mail, and provide information
about our company and our products on our web site. We also conduct public
relations activities utilizing the services of Beaupre & Co., a division of
Brodeur Worldwide. Our executives speak at industry events and provide
briefings to industry analysts and trade press. We have begun advertising in
local and trade publications to promote our products to our target markets.
Our marketing goals include the following:

  .  to plan and build an integrated program addressing both internal and
     external audiences, including prospects, customers, business and trade
     press, industry analysts and investors;

  .  to position us as a leader in providing a wide range of server
     appliances for the Internet;

  .  to design and implement media and tactical programs that communicate
     effectively with our target audiences; and

  .  to clearly and consistently communicate our positioning in our marketing
     programs.

   As of April 30, 2000, we employed 11 people in marketing.

Support Services

   We believe that our ability to consistently provide high-quality customer
service and support will be a key factor in attracting and retaining
customers. We provide support for our products through technical sales
engineers who are located in our sales offices and through our customer
support staff based in our Canton, Massachusetts facility. Our support
activities include direct support to our customers through our web site, which
offers technical information designed to assist in answering frequently asked
questions and in problem diagnosis and resolution. We also provide telephone
support via a help desk, e-mail support, and remote control support that
provides direct access from our support personnel to our customers' systems
for diagnosis and problem resolution. We have also recently engaged the
services of IBM as a subcontractor to provide on-site support in U.S.
locations where we do not have our own service personnel. Our service
arrangement with IBM, which provides next-day, on-site customer support visits
and after-hours phone-in help desk support, is expected to be operational by
the second half of fiscal 2000.

   We provide a warranty program for all of our products, which is typically
one year in duration for all parts replacement. Our standard terms and
conditions provide that a customer may return a defective product for repair
or replacement during the warranty period. In addition, during the warranty
period, it has been our practice to send our customers a replacement unit in
advance of their returning a unit experiencing problems. The customer then
swaps units, returning the damaged unit to our depot repair facility in
Canton, Massachusetts. We plan to add additional repair facilities as we

                                      46
<PAGE>


build our distribution capability to be able to provide this level of service
on a worldwide basis. As of April 30, 2000, we employed five people in support
services.

Manufacturing

   We use contract manufacturers to produce most of our products. We also have
our own manufacturing employees and manufacturing facilities to build
prototypes and initial units of our new server appliance hardware products. Our
in-house capability is also currently used to perform final assembly, testing
and quality assurance processes, although many of these activities will be
transferred to our manufacturer, SCI Systems. SCI Systems currently utilizes
two of their facilities to build our server appliances--one in Hookset, New
Hampshire and the other in Augusta, Maine.

   Some of our sub-assemblies, including chassis, central processing unit
motherboards, and power supplies, are manufactured to our specifications while
other sub-assemblies, for example disk drives, are commodity items. This
approach allows us to maintain design control in areas where we add significant
value and to benefit from market economies with respect to commodity items.

   Our contract manufacturing strategy allows us to:

  .  reduce our capital expenditures;

  .  conserve the working capital that would be required to fund inventory;

  .  adjust manufacturing volumes more quickly to meet changes in demand; and

  .  operate with reduced space dedicated to manufacturing operations.

Research & Development

   We believe that our future success depends on our ability to build upon our
current technology platforms, expand the features and functionality of our
suite of server appliances, and develop additional products that maintain our
technological advantages. We have assembled a team of highly skilled engineers
with significant industry experience in high-density packaging, server design,
embedded management, networking, software, quality assurance and technical
documentation. As of April 30, 2000, we employed 46 people in this group.

   We will continue to integrate our own hardware and software designs with
industry-standard components, including operating systems and processor
technologies. We also intend to combine technology from other industry sources
into our server appliances where appropriate in order to meet functionality and
time-to-market objectives. We currently have new server appliances and new
hardware platforms under development that are intended to increase the choices
of server appliances we offer to our customers. Included in this development
activity are server appliances for network attached storage, for Internet
caching, for load balancing and for streaming video. These research and
development activities for our server appliances range from feasibility studies
to active development efforts. It is possible that we may choose to abandon any
or all of these activities without bringing them to market.

   Our product development expenses for fiscal 1998, 1999 and the six months
ended March 31, 2000, were $923,000, $2.6 million and $3.1 million,
respectively. We expect our product development expenses to increase as we hire
additional research and development personnel to develop new products and
enhance our existing products.

                                       47
<PAGE>

Strategic Relationships

   We have developed, and will continue to seek to develop, relationships with
key technology vendors that enhance our product offerings. We believe the use
of industry standard technologies, wherever possible, can reduce the cost of
our development activities and the cost of our products to our customers. We
also believe that the integration of non-standard technologies from these key
vendors can allow us to bring products to market more quickly and to reduce the
costs that would result from developing the capability ourselves. In addition,
we believe that extending the management capabilities of our products to
provide management of some of these key vendors products will assist us in
meeting the needs of our customers to manage their Internet systems that
include products from other vendors.

Competition

   Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. We face competition
primarily from server vendors that provide solutions for network computing
systems.

   Our principal competitors are general-purpose server manufacturers,
including Compaq, Dell, Hewlett-Packard, IBM and Sun Microsystems. These
competitors have begun manufacturing special versions of their general-purpose
server products for sale as server appliances. We also compete with server
appliance vendors such as Cobalt, Network Appliance and CacheFlow. These other
competitors are expanding their product lines to include several types of
server appliances. In addition, we compete with computer companies that
specialize in building very compact rack-mounted server products, but who do
not typically include software in their offerings. Examples of these
competitors are TruSolutions, Penguin Computing and Qsol.com.

   We believe that we compete favorably on factors that are important to our
target market, including packaging density, ease of installation and
configuration, clustering capability to build large configurations of our
server appliances, management capabilities for co-located servers and a wide
range of appliance choices.

   We expect competition in the server appliance market to increase
significantly as more companies enter the market and current competitors expand
their product lines. Many of these potential competitors may have significant
competitive advantages, including greater name recognition, more resources to
apply to the development, marketing and sales of their products, and more
established sales channels.

Intellectual Property

   We have invested significantly in the development of proprietary technology
for our products and our operations frequently incorporate proprietary and
confidential information. We rely upon a combination of copyright and trademark
laws and non-disclosure and other intellectual property contractual
arrangements to protect our proprietary rights. We protect our software,
documentation and other written materials under trade secret and copyright
laws, which only provide limited protection. We do not hold any patents and
currently have no patent applications pending. We also enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and control access to and distribution of our software,
documentation and other proprietary information.

                                       48
<PAGE>


   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. In addition, our
competitors might independently develop similar technology or duplicate our
product or circumvent any patents or our other intellectual property rights.
Due to rapid technological change in our market, we believe the various legal
protections available for our intellectual property are of limited value.
Instead, we seek to establish and maintain a technology leadership position by
leveraging technological and creative skills of our personnel, new product
developments and enhancements to existing products.

Employees

   Our success in recruiting, hiring and training large numbers of full-time
and skilled employees and, if the need arises, obtaining large numbers of
temporary employees during periods of increased product demand, is critical to
our ability to produce high quality products on a timely basis. As of April 30,
2000, we had 141 employees. In addition, we may hire temporary employees during
the year depending on market acceptance of our products. We believe that the
demographics surrounding our headquarters, and our reputation and compensation
package, should allow us to continue to attract and retain qualified employees.

   We are committed to training our employees and we believe that we maintain
good employee relations.

Facilities

   We recently moved our corporate headquarters to a facility in Canton,
Massachusetts, consisting of approximately 52,000 square feet of manufacturing
and office space. In August 2000, we plan to expand our corporate headquarters
into an additional 23,000 square feet located at the Canton facility. We
believe that the Canton facility and additional or alternative available spaces
will be adequate to meet our requirements for the foreseeable future. In
addition, we have regional sales office facilities in the following strategic
metropolitan areas: Los Angeles, New York, San Francisco and Washington, D.C.


                                       49
<PAGE>

Legal Proceedings

   On December 29, 1999, a former employee, George Flate, commenced a lawsuit
against us, a current officer and director and a former officer and director in
Suffolk Superior Court, a Massachusetts state court. Mr. Flate alleges that he
was unlawfully terminated as Vice President of OEM Sales in an effort to
deprive him of commission payments. He is seeking undisclosed damages based on
two contractual claims relating to his employment, although we anticipate he
will claim damages in the multi-million dollar range. Specifically, he is
alleging a breach of the implied covenant of good faith and fair dealing
against Network Engines and a claim of intentional interference with
contractual relations against the current and former officers of the company
named in the lawsuit. Both of these claims are based on Mr. Flate's allegations
that he is entitled to commissions from several transactions that were
negotiated after Mr. Flate was no longer with the company. Mr. Flate was
employed by Network Engines for approximately one year. Currently, the matter
is in the early stages of discovery. Although we believe these claims are
without merit and we intend to vigorously defend against each claim asserted in
the complaint, an adverse resolution of either of these claims could require
the payment of substantial monetary damages. Moreover, our defense against
these claims might result in the expenditure of significant financial and
managerial resources.

   We are, from time to time, a party to other litigation arising in the normal
course of our business. Management believes that none of these other actions,
individually or in the aggregate, will have a material adverse effect on our
financial position or results of operations.

                                       50
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors, and their ages and positions as of
April 30, 2000, are as follows:

<TABLE>
<CAPTION>
 Name                        Age Position
 <C>                         <C> <S>
 Lawrence A. Genovesi....... 42  Chairman of the Board of Directors, President,
                                 Chief Executive Officer and Chief Technology
                                 Officer
 Douglas G. Bryant.......... 43  Vice President of Administration, Chief
                                 Financial Officer, Treasurer and Secretary
 Timothy J. Dalton.......... 48  Vice President of Manufacturing
 William B. Elliott......... 55  Vice President of Marketing
 Rene E. Thibault........... 49  Vice President of Sales
 Robert F. Wambach.......... 39  Vice President of Engineering
 John A. Blaeser(2)......... 58  Director
 Lawrence Kernan(1)(2)...... 46  Director
 Dennis A. Kirshy(1)........ 57  Director
 Frank M. Polestra.......... 74  Director
 Michael H. Shanahan(1)(2).. 43  Director
 Robert M. Wadsworth(1)(2).. 40  Director
</TABLE>
- ---------------------
(1)  Member of the compensation committee

(2)  Member of the audit committee

   Set forth below is certain information regarding the professional experience
for each of the above-named persons.

   Lawrence A. Genovesi is our founder and has served as our Chairman of the
Board, President, Chief Executive Officer and Chief Technology Officer since
October 1989. Mr. Genovesi also founded and served as Chief Executive Officer
of New England Interconnection Devices, Inc., a contract manufacturer, from May
1985 to July 1988. From October 1982 to January 1983, Mr. Genovesi served as
Vice President of Engineering for Microsystems International, Inc., a computer
manufacturer. From June 1981 to December 1982, Mr. Genovesi served as Director
of Engineering for CPU Systems Corp., a computer manufacturer and reseller.

   Douglas G. Bryant has served as our Secretary and Vice President of
Administration since March 2000, our Treasurer since January 1998 and our Chief
Financial Officer since September 1997. Prior to joining Network Engines, Mr.
Bryant served as Chief Financial Officer of CrossComm Corporation, a
manufacturer of internetworking products including routers and switches, from
July 1996 to June 1997, and as Corporate Controller from September 1989 to June
1996.


                                       51
<PAGE>

   Timothy J. Dalton has served as Vice President of Manufacturing since
November 1997. From November 1996 to November 1997, Mr. Dalton served as
Operations Manager of Axil Computer Corporation, a privately-held designer and
manufacturer of eight-way SMP servers. From January 1994 to July 1996, Mr.
Dalton served as Director of Manufacturing Engineering of Concurrent Computer
Corporation, a designer and manufacturer of Real Time Fault Tolerant servers
for the financial and telecommunications industries.

   William B. Elliott has served as Vice President of Marketing since December
1997. Previously, Mr. Elliott served as Vice President of Operations for
Dynaflo, Inc. from May 1997 to December 1997. From October 1996 to May 1997,
Mr. Elliott served as Vice President of Sales and Marketing for Anysoft, Inc.,
a producer of utility software that enhances the interchange of information
between legacy and modern Windows-based applications. Mr. Elliott served as
Vice President of Telecommunications at Stratus Computer from November 1993 to
April 1996, and as Vice President of International Sales for Stratus'
telecommunications division from October 1990 to November 1993.

   Rene E. Thibault has been Vice President of Sales since July 1999. Prior to
joining Network Engines, Mr. Thibault served as Vice President of Sales and
Marketing for Voice Request Corporation, a developer of speech-enabled call
routing systems, from January 1997 to June 1999. From October 1995 to December
1996, Mr. Thibault served as Vice President of Sales for Centigram
Communications Corporation, a manufacturer of multimedia messaging and personal
assistant servers. Mr. Thibault also served as Director of Sales for Centigram
from September 1990 to September 1995.

   Robert F. Wambach has served as Vice President of Engineering since May
1999. Prior to joining Network Engines, Mr. Wambach served as Senior Director
of VPN Programs at Shiva Corporation, a manufacturer of hardware and software
to enable the connectivity of enterprise networks, which was ultimately
acquired by a subsidiary of Intel and renamed Intel Network Systems, from
February 1999 to May 1999, Senior Director of Platform Engineering from June
1998 to February 1999, and Director of Hardware Engineering from June 1997 to
June 1998. Mr. Wambach held various engineering management positions with
Fujitsu-Nexion (formerly Nexion) from May 1993 to June 1997.

   John A. Blaeser has been a director of Network Engines since October 1999.
Since January 1996, Mr. Blaeser has served as President, Chief Executive
Officer and Chairman of the Board of Concord Communications Inc., a maker of e-
business management solutions. Mr. Blaeser served as Managing General Partner
of EG&G Venture Partners from January 1990 to December 1995.

   Lawrence Kernan has served as a Director of Network Engines since October
1999. Mr. Kernan has been a Principal of MDT Advisers, Inc., an investment and
venture capital firm, since December 1991. Mr. Kernan has also served as a
director of Keurig, Inc., a manufacturer of coffee brewing equipment, as
Chairman of the Board of Directors, since April 1995. Mr. Kernan has previously
served as a director at First American Financial Corporation, ADS Technologies,
Inc., Cobotyx, Inc. and Visage, Inc.


                                       52
<PAGE>

   Dennis A. Kirshy has served as a Director of Network Engines since July
1997. Mr. Kirshy is a private investor and has advised and invested in small
technology companies in the networking, internetworking and computer industries
since February 1993. Mr. Kirshy is also a director of several privately-held
companies in the networking and computer peripherals arena.

   Frank M. Polestra has served as a Director of Network Engines since May
1997. Mr. Polestra has been Managing Director of Ascent Venture Management,
Inc., a manager of venture funds and investor in early-stage companies in the
Northeastern United States, since March 1999. Mr. Polestra is a Managing Member
or General Partner of each of the general partners of Ascent Venture Partners,
L.P., Ascent Venture Partners II, L.P. and Ascent Venture Partners III, L.P.
Mr. Polestra is also a partner of Le Serre. Prior to his position with Ascent
Venture Management, Mr. Polestra was President, Director and General Partner of
Pioneer Capital Corporation, a venture capital management firm, from 1981 to
1999. Mr. Polestra is also a director of several privately-held companies.

   Michael H. Shanahan has served as a Director of Network Engines since
January 1999. Mr. Shanahan has served as General Partner of Egan-Managed
Capital, L.P., a venture capital firm managing a portfolio of investments in
technology companies, since co-founding that firm in February 1997. From April
1982 to February 1997, Mr. Shanahan was a Partner with Eastech Management
Company, a manager of venture capital funds with investments in technology
companies. Mr. Shanahan is also a director of several privately-held companies.

   Robert M. Wadsworth has served as a Director of Network Engines since
December 1999. He has been a Managing Director of HarbourVest Partners, LLC, a
global private equity firm investing in Internet and information technology
companies on a worldwide basis, since January 1997. Mr. Wadsworth has also been
a General Partner of Hancock Venture Partners, the predecessor organization to
HarbourVest, since December 1988. Mr. Wadsworth is also a member of the board
of directors of the following companies: Banyan Systems, Inc., Blue Sky
Software Corporation, Cardiff Software, Inc., Communication Systems Technology,
Inc., Concord Communications, Inc., Nuera Communications, Inc., Oasis
Technology Ltd., Outsourcing Services Group, Polaris Service, Inc.,
Switchboard.com, Inc., Tally Systems Corporation and Trintech Group Limited.

Election of Directors

   Upon the closing of this offering, the board of directors will be divided
into three classes, each of whose members will serve for a staggered three-year
term. Dennis A. Kirshy and Michael H. Shanahan will serve in the class whose
term expires in 2001; Lawrence Kernan and Frank M. Polestra will serve in the
class whose term expires in 2002; and Lawrence A. Genovesi, John A. Blaeser and
Robert M. Wadsworth will serve in the class whose term expires in 2003. Upon
the expiration of the term of a class of directors, directors for that class
will be elected for three-year terms at the annual meeting of stockholders.

   Each officer serves at the discretion of the board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. A voting agreement among us and several of our
stockholders provides for the nomination and election of directors by certain
of our 5% stockholders. Messrs. Genovesi, Blaeser, Kernan, Kirshy, Polestra,

                                       53
<PAGE>

Shanahan and Wadsworth were elected to the board of directors pursuant to the
voting agreement. The voting agreement terminates upon the closing of this
offering.

Compensation of Directors

   We intend to grant stock options on an annual basis under our director plan
and may grant other equity awards from time-to-time to our non-employee
directors pursuant to our 1999 plan or director plan.

Board Committees

   The board of directors has established a compensation committee and an audit
committee. The compensation committee, which consists of Messrs. Kernan,
Kirshy, Shanahan and Wadsworth, reviews executive salaries, administers any
bonus, incentive compensation and stock option plans, and approves the salaries
and other benefits of our executive officers. In addition, the compensation
committee consults with our management regarding pension and other benefit
plans and our compensation policies and practices. The audit committee, which
consists of Messrs. Blaeser, Kernan, Shanahan and Wadsworth, reviews the
professional services provided by our independent accountants, the independence
of our accountants from our management, our annual financial statements and our
system of internal accounting controls. The audit committee also reviews other
matters related to our accounting, auditing and financial reporting practices
and procedures that the committee find appropriate or may be brought to its
attention.

Compensation Committee Interlocks and Insider Participation

   Prior to the formation of a compensation committee, the board of directors
as a whole made decisions concerning the compensation of executive officers.
Mr. Genovesi, an executive officer, was a member of our board of directors when
it performed the functions generally performed by a compensation committee,
including determining the compensation of executive officers. However, Mr.
Genovesi did not participate in any discussions regarding his compensation. For
a description of transactions between us and certain of our directors, Messrs.
Genovesi, Kernan, Kirshy, Polestra, Shanahan and Wadsworth, and entities
affiliated with our directors, see "Related Party Transactions" below.

Executive Compensation

   The following table sets forth, for the fiscal year ended September 30,
1999, the cash compensation paid and shares underlying options granted to our:

  .  Chief Executive Officer; and

  .  five other most highly compensated executive officers who received, or
     would have received, annual compensation in excess of $100,000, referred
     to collectively as the named executive officers.


                                       54
<PAGE>

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                     Long-term
                                                                    Compensation
                                                                       Awards
                                                                    ------------
                                                     Annual
                                                Compensation (1)       Shares
                                                ----------------     Underlying
Name and Principal Position                      Salary   Bonus     Options (2)
<S>                                             <C>      <C>        <C>
Lawrence A. Genovesi........................... $146,154     --           --
 Chief Executive Officer
Douglas G. Bryant..............................  111,538     --       149,850
 Chief Financial Officer
William B. Elliott.............................  111,538     --       127,500
 Vice President of Marketing
Timothy J. Dalton..............................  111,538     --       121,500
 Vice President of Manufacturing
Rene E. Thibault...............................   34,039 $18,750(4)   348,000
 Vice President of Sales (3)
Robert F. Wambach..............................   43,269     --       261,000
 Vice President of Engineering (5)
</TABLE>
- ---------------------
(1)  In accordance with the rules of the Securities and Exchange Commission,
     the compensation set forth in the table does not include medical, group
     life or other benefits which are available to all of our salaried
     employees, and certain perquisites and other benefits, securities or
     property which do not exceed the lesser of $50,000 or 10% of the person's
     salary and bonus shown in the table.

(2)  We did not award any stock appreciation rights or make any long-term
     incentive payments during fiscal 1999 to the named executive officers.
     Options granted to the named executive officers were granted at fair
     market value as determined by the board of directors based on all factors
     available to the board of directors on the grant date.

(3)  Mr. Thibault joined us in July 1999. On an annualized basis, Mr. Thibault
     would have earned a salary of $150,000 and an incentive-based compensation
     target of $75,000.

(4)  Comprised of commissions paid based on revenue generated.

(5)  Mr. Wambach joined us in April 1999. On an annualized basis, Mr. Wambach
     would have earned a salary of $125,000.

   In the table above, columns required by the regulations of the Securities
and Exchange Commission have been omitted where no information was required to
be disclosed under those columns.

Option Grants in the Last Fiscal Year

   The following table sets forth grants of stock options made under our 1999
stock incentive plan for the year ended September 30, 1999 to each individual
named in the Summary Compensation Table. We have never granted any stock
appreciation rights.

                                       55
<PAGE>


   The amounts shown as potential realizable value represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. These amounts represent certain assumed rates of appreciation
in the value of our common stock. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by rules by the Securities and
Exchange Commission. These estimates do not represent our estimate or
projection of the future price of our common stock and may not necessarily be
achieved. The potential realizable value is calculated based on the ten year
term of the option at its time of grant on the assumption that the share value
appreciates from the assumed initial public offering price of $12.00 at the
indicated compounded annual rate and that the option is exercised and sold on
the last day of its term for the appreciated stock price. Actual gains, if any,
on stock option exercises depend on the future performance of our common stock.


   The percentage of total options granted to our employees in the last fiscal
year is based on options to purchase an aggregate of 1,593,975 shares of common
stock granted during fiscal 1999.
<TABLE>
<CAPTION>
                                      Individual Grants
                         -------------------------------------------
                                                                      Potential Realizable
                                                                        Value at Assumed
                                                                        Annual Rates of
                         Number of   % of Total                           Stock Price
                         Securities   Options    Exercise               Appreciation for
                         Underlying  Granted To  of Base                  Option Term
                          Options   Employees in  Price   Expiration ----------------------
Name                      Granted   Fiscal Year   ($/Sh)     Date        5%         10%
<S>                      <C>        <C>          <C>      <C>        <C>        <C>
Lawrence A. Genovesi....      --         -- %     $  --        --    $      --  $       --
Douglas G. Bryant.......  149,850        9.4       0.133   2/24/09    2,909,103   4,644,093
William B. Elliott......  127,500        8.0       0.133   2/24/09    2,475,213   3,951,430
Timothy J. Dalton.......  121,500        7.6       0.133   2/24/09    2,358,729   3,765,477
Rene E. Thibault........  348,000       21.8       0.133   7/22/09    6,755,865  10,785,070
Robert F. Wambach.......  261,000       16.4       0.133   5/26/09    5,066,899   8,088,810
</TABLE>

Fiscal Year-End Option Values

   The following table sets forth information for each of the named executive
officers with respect to the value of options outstanding as of September 30,
1999. There was no public trading market for our common stock as of September
30, 1999. Accordingly, these values have been calculated based on the assumed
initial public offering price of $12.00, less the aggregate exercise price.

<TABLE>
<CAPTION>
                                           Number of Securities
                                                Underlying       Value of Unexercised
                          Shares            Unexercised Options  In-The-Money Options
                         Acquired          at September 30, 1999 at September 30, 1999
                            on     Value   --------------------- ---------------------
Name                     Exercise Realized  Vested    Unvested    Vested   Unvested
<S>                      <C>      <C>      <C>       <C>         <C>       <C>
Lawrence A. Genovesi....   --       --           --         --   $     --  $       --
Douglas G. Bryant.......   --       --        48,627    212,372    579,964   2,523,905
William B. Elliott......   --       --        39,375    178,125    469,613   2,116,788
Timothy J. Dalton.......   --       --        22,967    151,032    273,926   1,794,024
Rene E. Thibault........   --       --           --     348,000        --    4,129,600
Robert F. Wambach.......   --       --           --     261,000        --    3,097,200
</TABLE>


                                       56
<PAGE>

Benefit Plans

   1999 Stock Incentive Plan. Our 1999 stock incentive plan, as amended, was
originally adopted by our board of directors in October 1999 and approved by
our stockholders in November 1999. Up to 8,047,902 shares of our common stock
currently may be issued pursuant to options or awards granted under the 1999
plan. The number of shares that may be issued pursuant to the 1999 plan will be
increased annually beginning on October 1, 2000 by the lesser of:

  .  4,000,000 shares;

  .  5% of the outstanding shares on the date of the increase; or

  .  a lesser amount determined by the board of directors.

Share increases may not exceed an aggregate of 12,000,000 shares during the
term of the 1999 plan.

   The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards. Our officers,
employees, directors, consultants and advisors are eligible to receive awards
under the 1999 plan. The granting of awards under the 1999 plan is
discretionary. Under present law, however, incentive stock options may be
granted only to employees. Under the 1999 plan, no participant may receive any
award for more than 1,250,000 shares in any calendar year.

   We may grant options at an exercise price less than, equal to or greater
than the fair market value of our common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value of
the common stock on the date of grant or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of Network Engines. The 1999 plan permits our
board of directors to determine how optionees may pay the exercise price of
their options, including by cash, check or, in connection with a "cashless
exercise," through a broker, by surrender to us of shares of common stock, by
delivery to us of a promissory note, or by any combination of the permitted
forms of payments.

   Our board of directors administers the 1999 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the 1999 plan to one or more committees of the board
of directors and, subject to certain limitations, to one or more of our
executive officers. Subject to any applicable limitations contained in the 1999
plan, our board of directors or a committee of the board of directors or
executive officer to whom our board of directors delegates authority, as the
case may be, selects the recipients of awards and determines:

  .  the number of shares of common stock covered by options and the dates
     when the options become exercisable;

  .  the exercise price of options;

  .  the duration of options; and


                                       57
<PAGE>


  .  the number of shares of common stock subject to any restricted stock or
     other stock-based awards and the terms and conditions of the awards,
     including the conditions for repurchase, issue price and repurchase
     price.

   Typically, for each option granted, 25% of the shares become exercisable on
the first anniversary of the option grant and the remainder become exercisable
in 12 equal installments at the rate of 6.25% of the shares each three-month
period following the first anniversary of the option grant.

   The plan provides that in the event of a merger, liquidation or other
acquisition event, each outstanding option or restricted stock award shall be
assumed or an equivalent option or award substituted by the successor
corporation, as determined by our board of directors, unless the successor
corporation refuses to assume or substitute for the option or award, in which
case those options or awards shall become fully vested and free of restrictions
prior to the consummation of the acquisition event.

   No award may be granted under the 1999 plan after October 21, 2009, but the
vesting and effectiveness of options and awards previously granted may extend
beyond that date. As of April 30, 2000, we granted awards of and options
exercisable for 4,915,875 shares of common stock, excluding awards and options
that have been cancelled. Our board of directors may at any time amend, suspend
or terminate the 1999 plan, except that no award granted after an amendment of
the 1999 plan and designated as subject to Section 162(m) of the Internal
Revenue Code by our board of directors shall become exercisable, realizable or
vested, to the extent the amendment was required to grant the award, unless and
until the amendment is approved by our stockholders.

   2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in March 2000 and will be approved by the
stockholders in May 2000. The employee stock purchase plan authorizes the
issuance of up to a total of 750,000 shares of common stock to participating
employees.

   All of our employees, including our employee-directors, who are customarily
employed by us for more than 20 hours a week and who are customarily employed
by us for at least five months in a calendar year are eligible to participate
in the employee stock purchase plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of our stock
or any subsidiary are not eligible to participate.

   The employee stock purchase plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subject to certain limitations. On the first day of a
designated payroll deduction period, referred to as the offering period, we
will grant to each eligible employee who has elected to participate in the
employee stock purchase plan an option to purchase shares of common stock. On
the last day of the offering period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the employee stock purchase plan, the option
price is an amount equal to 85% of the fair market value per share of the
common stock on either the first day or the last day of the offering period,
whichever is lower. The first offering period under the employee stock purchase
plan will commence on the first date that we have filed

                                       58
<PAGE>

with the Securities and Exchange Commission an effective registration statement
on Form S-8 for purposes of registering under the Securities Act of 1933, or
the Securities Act, all shares of our common stock issuable under the employee
stock purchase plan, and shall end on December 31, 2000. The compensation
committee may, in its discretion, choose an offering period of 12 months or
less for each of the offerings and choose a different offering period for each
offering.

   If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the employee stock purchase plan terminate upon voluntary
withdrawal from the employee stock purchase plan at any time, or when the
employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has a right to the
accumulated payroll deductions in the participant's account.

   2000 Director Stock Option Plan. Our 2000 director stock option plan was
adopted by our board of directors in March 2000 and will be approved by our
stockholders in May 2000. Under the director plan, our directors who are not
employees of Network Engines or a subsidiary of Network Engines receive non-
statutory options to purchase shares of common stock. A total of 500,000 shares
of common stock may be issued upon the exercise of options granted under the
director plan.

   Pursuant to the director plan, each non-employee director who first becomes
a non-employee director after the closing of this offering will be granted an
option to purchase 50,000 shares of common stock on the date of his or her
initial election to our board of directors, which will vest ratably over four
years on each anniversary of the date of grant. In addition, each non-employee
director will receive an option to purchase 15,000 shares of common stock on
the date of each annual meeting of stockholders commencing with the 2001 annual
meeting of stockholders (other than a director who was initially elected to the
board of directors at any annual meeting or, if previously, at any time after
the prior year's annual meeting). The options granted annually vest upon the
earlier of one year from the date of grant or the date immediately preceding
the next annual meeting of stockholders, so long as the optionee remains our
director. The exercise price per share of all options granted to directors
under the director plan will be the fair market value of a share of common
stock on the date of grant.

   Employee Savings and Retirement Plan. We have an employment savings and
retirement plan. The plan covers all of our full-time employees. Under the
plan, participants may elect to defer a portion of their eligible compensation,
subject to certain limitations. We do not match employee contributions to the
plan.

   Management Incentive Plan. The compensation committee adopted a management
incentive plan in February 2000. Under this plan, commencing with the quarterly
period ending June 30, 2000, we will pay on a quarterly basis to each of our
vice presidents and our president a percentage of their respective annual base
salaries if we achieve our net revenue targets for that quarter. For the
quarters ending June 30, 2000 and September 30, 2000, the compensation
committee determined that the executives will receive 12.5% of their respective
annual base salaries if targets for those periods are met.


                                       59
<PAGE>

                           RELATED PARTY TRANSACTIONS

Transfer of P6000 Product Line

   In April 2000, we sold all of our inventory and test equipment related to
the P6000 product line to Copernicus Systems, Inc., which is wholly-owned by
Cheryl H. Smith. Ms. Smith, the wife of Mr. Genovesi, is a co-founder,
stockholder and former director and officer of Network Engines. Our production
and development of the P6000 product line has been discontinued and we have
fully reserved for these assets on our balance sheet. In exchange for these
assets, Copernicus Systems, Inc. agreed to pay to us royalties on future sales
of the inventory and agreed to support P6000 units for which we have
obligations under warranty or service contracts.

Loan and Guarantee from Lawrence A. Genovesi and Cheryl H. Smith

   In April 1993, Mr. Genovesi and Ms. Smith loaned us $26,175 in exchange for
a promissory note bearing interest at 10% annually made in their favor. In
January 1996, Ms. Smith also loaned us $4,300 in exchange for a promissory note
bearing interest at 12% annually in her favor. The interest rate on each note
was reduced by one-half in January 1999. These notes were paid in full and
canceled in August 1999.

   In order to receive a Small Business Administration guarantee of 90% of a
$100,000 note obtained in May 1994, Mr. Genovesi and Ms. Smith granted a second
mortgage on their personal residence to the Small Business Administration. We
repaid the loan in fiscal 1999.

Severance Arrangements with Cheryl H. Smith

   In January 1998, we and Ms. Smith executed a Severance Agreement and
Release, pursuant to which we paid Ms. Smith approximately $72,000 and engaged
Copernicus & Co., which is wholly-owned by Ms. Smith, as a consultant for one
month at a fee of $300 per day. We and Ms. Smith released each other from most
claims related to her employment by us.

Issuances of Preferred Stock to Directors and 5% Holders

   We have issued four series of preferred stock. Each series A, series B and
series C preferred share is convertible upon the completion of this offering
into 7.5 shares of our common stock. Each series D preferred share is
convertible upon the completion of this offering into 2.5 shares of our common
stock. We issued the following number of shares of each series of preferred
stock on the following dates:

  .  On April 9, 1997, we issued an aggregate of 185,250 shares of series A
     preferred stock at $5.40 per share, or 1,389,375 shares of common stock
     at $0.72 per share on an as-converted basis;

  .  On January 13, 1999, we issued an aggregate of 357,142 shares of series
     B preferred stock at $7.70 per share, or 2,678,565 shares of common
     stock at $1.03 per share on an as-converted basis;

                                       60
<PAGE>


  .  On January 13 and June 30, 1999, we issued an aggregate of 1,123,549
     shares of series C preferred stock at $7.70 per share, or 8,426,617
     shares of common stock at $1.03 per share on an as-converted basis; and

  .  On December 20, 1999, we issued an aggregate of 3,581,554 shares of
     series D preferred stock at $7.05 per share, or 8,953,885 shares of
     common stock at $2.82 per share on an as-converted basis.

   The following directors and 5% holders of our common stock and entities
controlled by them were issued the following number of shares of each series of
preferred stock in exchange for cash or the cancellation of bridge notes:

<TABLE>
<CAPTION>
                                         Series A  Series B  Series C  Series D
                                         Preferred Preferred Preferred Preferred
                                           Stock     Stock     Stock     Stock
<S>                                      <C>       <C>       <C>       <C>
5% Holders
  Ascent Venture Partners II, L.P.(1)...  148,200   285,714   111,298        --
  MD Co.................................      --        --    388,941    141,894
  Egan-Managed Capital, L.P.............      --        --    291,698    106,383
  HarbourVest VI-Direct Fund, L.P.......      --        --        --   1,985,816
  Canaan Equity Partners II, LLC........      --        --        --     709,220
Directors
  Dennis A. Kirshy......................      --        --      6,493      2,056
  Lawrence Kernan(2)....................      --        --      1,298        --
  Frank M. Polestra(3)..................      --        --      9,740        --
</TABLE>
- ---------------------

(1)  Ascent Venture Partners II, L.P. acquired all of its series A preferred
     stock and series B preferred stock and 77,922 shares of its series C
     preferred stock from Pioneer Ventures Limited Partnership II.

(2)  Mr. Kernan may be deemed to beneficially own shares purchased by MD Co.,
     which purchased 388,941 shares of series C preferred stock and 141,844
     shares of series D preferred stock.

(3)  Mr. Polestra may be deemed to beneficially own shares held by each of
     Ascent Venture Partners, L.P., which purchased 37,050, 71,428, and 27,824
     shares of series A preferred stock, series B preferred stock and series C
     preferred stock, respectively, Ascent Venture Partners II, L.P., which
     purchased 148,200, 285,714 and 111,298 shares of series A preferred stock,
     series B preferred stock and series C preferred stock, respectively,
     Ascent Venture Partners III, L.P., which purchased 283,688 shares of
     series D preferred stock, and Le Serre, which purchased 4,544 shares of
     series C preferred stock.

Issuances of Common Stock and Options to Purchase Common Stock to Directors and
5% Holders of our Common Stock

   On March 16, 2000, our board of directors approved the sale of 12,500 shares
of common stock to Mr. Shanahan at $6.00 per share. Pursuant to a stock
restriction agreement these shares vest on the earlier of one year after the
date of grant or on the day prior to our next annual stockholders' meeting
after the end of fiscal 2000.

                                       61
<PAGE>


   On March 16, 2000, we granted options to purchase 12,500 shares of our
common stock at $6.00 per share to each of Messrs. Kernan, Polestra and
Wadsworth.

   On November 18, 1999, we sold 375,000 shares of common stock to Mr. Genovesi
for $0.24 per share in exchange for a $90,000 full recourse promissory note.
The note from Mr. Genovesi is due on demand or on November 18, 2004 and accrues
interest at 6.08% compounded annually. Pursuant to a stock restriction
agreement, these 375,000 shares vest on a quarterly basis beginning on December
31, 1999 and ending on September 30, 2002. Each quarter, the amount that vests
is determined based on the attainment of net revenue and net profit objectives
set by the board of directors. Mr. Genovesi must forfeit any shares that have
not vested by November 18, 2006.

   We sold 225,000 shares of common stock to Mr. Kirshy for $0.07 per share on
January 7, 1998. Pursuant to a stock restriction agreement, these 225,000
shares vest over three years, one-third on June 30, 1998 and 8.375% of the
remainder each quarter until June 30, 2000. We sold 75,000 shares of common
stock to Mr. Kirshy for $0.24 per share on November 18, 1999. Pursuant to a
stock restriction agreement, one-half of these 75,000 shares vest one year
after the sale and 12.5% of the remainder vest each quarter thereafter.

   We sold 187,500 shares of common stock to Mr. Blaeser for $0.24 per share on
November 18, 1999. Pursuant to a stock restriction agreement, these 187,500
shares vest over four years, 25% upon the expiration of one year and 6.25% at
the end of each quarter thereafter.

Issuance of Promissory Notes

   We have issued the following subordinated promissory notes, bearing interest
at 10% per annum, to 5% holders of our common stock and entities controlled by
them, all of which were cancelled in exchange for series B or series C
preferred stock:

<TABLE>
<CAPTION>
     Name                                 Dates of Issuance   Aggregate Amount
     <S>                                 <C>                  <C>
     Ascent Venture Partners II,
      L.P.(1)........................... 10/16/1997-11/2/1998    $2,720,000
     MD Co..............................      12/8/1998             428,571(2)
     Egan-Managed Capital, L.P..........      12/8/1998             321,429(2)
     Frank Polestra(3)..................      8/12/1998              75,000(4)
</TABLE>
- ---------------------
(1)  The notes held by Ascent Venture Partners, L.P. and Ascent Venture
     Partners II, L.P. were originally acquired by Pioneer Ventures Limited
     Partnership and Pioneer Ventures Limited Partnership II, respectively.

(2)  Bore interest at a rate of 15% per annum.

(3)  Mr. Polestra is a Managing Member or General Partner of each of the
     general partners which control Ascent Venture Partners, L.P., Ascent
     Venture Partners II, L.P. and Ascent Venture Partners III, L.P.

(4)  Mr. Polestra could have been deemed to beneficially own $680,000 in
     promissory notes issued to Ascent Venture Partners, L.P., $2,720,000 in
     promissory notes issued to Ascent Venture Partners II, L.P., and a $25,000
     promissory note issued to Le Serre, but those notes have not been included
     as held by Mr. Polestra in the table.

                                       62
<PAGE>

Issuance of Warrants to Purchase Common Stock

   Between October 16, 1997 and January 13, 1999, in connection with the sale
of promissory notes or series C preferred stock, we issued warrants to purchase
an aggregate of 1,705,500 shares of our common stock at an exercise price of
$0.36667 per share with a ten year term to the following holders of 5% or more
of our common stock on a fully converted basis and a director.

<TABLE>
<CAPTION>
                           Original       Revised
                          Number of      Number of
                          Shares of      Shares of
                         Common Stock   Common Stock
                          Underlying     Underlying
Name (1)                   Warrants     Warrants (2)      Dates of Issuance
<S>                      <C>            <C>            <C>
Ascent Venture Partners
 II, L.P.(3)............    377,812        721,500      10/16/1997-11/2/1998

MD Co...................    546,427             NA     12/8/1998 and 1/13/1999

Egan-Managed Capital,
 L.P....................    409,822             NA     12/8/1998 and 1/13/1999

Frank Polestra..........     10,410(4)      20,812(5)         11/2/1998
                          ---------      ---------
 Total..................  1,344,471      1,698,561
                          =========      =========
</TABLE>
- ---------------------
(1) See Notes to Table of Beneficial Ownership in "Principal Stockholders" for
    information relating to the beneficial ownership of the referenced shares.
(2) Reflects modification of the number of shares underlying bridge warrants
    issued on October 16, 1997, January 30, 1998, May 21, 1998, June 4, 1998,
    August 12, 1998, by agreements dated December 8, 1998 by and among Network
    Engines, Pioneer Ventures Limited Partnership, Pioneer Ventures Limited
    Partnership II, Mr. Polestra, Le Serre and other investors who received
    warrants on those dates.
(3) The warrants held by each of Ascent Venture Partners, L.P. and Ascent
    Venture Partners II, L.P. were originally issued to Pioneer Ventures
    Limited Partnership and Pioneer Ventures Limited Partnership II,
    respectively.

(4) Mr. Polestra may be deemed to beneficially own warrants to purchase 94,455
    shares of common stock issued to Ascent Venture Partners, L.P., warrants to
    purchase 377,812 shares of common stock issued to Ascent Venture Partners,
    II, L.P., and a warrant to purchase 3,465 shares of common stock issued to
    Le Serre.

(5) Mr. Polestra may be deemed to beneficially own warrants to purchase 180,375
    shares of common stock issued to Ascent Venture Partners, L.P., warrants to
    purchase 721,500 shares of common stock issued to Ascent Venture Partners
    II, L.P. and a warrant to purchase 6,937 shares of common stock issued to
    Le Serre.

Issuance of Options to Purchase Common Stock

   We have granted options to executive officers, and we intend to grant
additional options to our directors and executive officers in the future. See
"Management--Option Grants in Last Fiscal Year," "--Benefit Plans" and "--
Director Compensation."

                                       63
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 30, 2000 and as adjusted to reflect
the sale of the shares in this offering by:

  .  each person who is known by us to own beneficially more than 5% of the
     outstanding shares of common stock;

  .  each of our directors and named executive officers; and

  .  all our directors and executive officers as a group.

<TABLE>
<CAPTION>
                                   Number of Shares
                                     Beneficially
                                    Owned Prior to
                                      and After
                                   the Offering (1)  Percentage of Shares(1)
                                   ------------------------------------------
Name and Address of Beneficial                         Before       After
Owner                                               the Offering the Offering
<S>                                <C>         <C>  <C>          <C>
HarbourVest Partners VI--Direct
 Fund, L.P........................   4,964,540          18.8%        15.2%
  c/o HarbourVest Partners, LLC
  One Financial Center, 44th Floor
  Boston, Massachusetts 02111
Ascent Venture Partners II,
 L.P. ............................   4,810,590          18.2         14.7
  255 State Street
  Boston, Massachusetts 02109
MD Co.............................   3,818,095          14.4         11.7
  125 Cambridge Park Drive
  Cambridge, Massachusetts 02140-
   2314
Egan-Managed Capital, L.P.........   2,863,515          10.8          8.8
  Thirty Federal Street
  Boston, Massachusetts 02110
Canaan Equity Partners II,
 LLC(2)...........................   1,773,050           6.7          5.4
  105 Rowayton Avenue
  Rowayton, Connecticut 06853-1436
Directors and Executive Officers
Lawrence A. Genovesi(3)...........   2,625,000           9.9          8.0
Douglas G. Bryant(4)..............     116,295             *            *
Timothy J. Dalton(5)..............      70,780             *            *
William B. Elliott(6).............      96,092             *            *
Rene E. Thibault..................      65,250             *            *
Robert F. Wambach(7)..............      65,250             *            *
John A. Blaeser...................     187,500             *            *
Lawrence Kernan(8)................   3,827,830          14.5         11.7
Dennis A. Kirshy(9)...............     338,837           1.3          1.0
Frank M. Polestra(10).............   6,857,330          26.0         21.0
Michael H. Shanahan(11)...........   2,876,015          10.9          8.8
Robert M. Wadsworth(12)...........   4,964,540          18.8         15.2
All directors and executive
 officers as a group
 (12 persons)(13).................  22,090,719          83.3%        67.4%
</TABLE>
- ---------------------
* Less than 1% of the outstanding common stock.


                                       64
<PAGE>

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

(1)  The number of shares of common stock deemed outstanding prior to this
     offering includes: (i) 26,423,629 shares of common stock outstanding as of
     April 30, 2000; and (ii) any shares issuable pursuant to options and
     warrants held by the respective person which may be exercised within 60
     days after April 30, 2000 as set forth in the additional footnotes below.
     The number of shares of common stock deemed outstanding after this
     offering includes the 6,250,000 shares that we are offering for sale in
     this offering. Beneficial ownership is determined in accordance with the
     rules of the Securities and Exchange Commission, and includes voting and
     investment power with respect to shares. Unless otherwise indicated below,
     to our knowledge, all persons named in the table have sole voting and
     investment power with respect to their shares of common stock, except to
     the extent authority is shared by spouses under applicable law. The fact
     that we have included these "beneficially owned" shares, however, does not
     constitute an admission that the named stockholder is a direct or indirect
     beneficial owner of the shares. Unless otherwise indicated, the address of
     each person listed is c/o Network Engines, Inc., 25 Dan Road, Canton,
     Massachusetts 02021.

(2)  Includes 1,161,350 shares owned by Caanan Equity II L.P., 92,197 shares
     owned by Caanan Equity II Entrepeneurs LLC, and 519,502 shares owned by
     Caanan Equity II L.P. (QP).

(3)  Includes 750,000 shares of common stock owned by Cheryl H. Smith, the wife
     of Mr. Genovesi. Mr. Genovesi disclaims beneficial ownership of all shares
     owned by Ms. Smith.

(4)  Includes 16,312 shares subject to options exercisable within 60 days
     following April 30, 2000.

(5)  Includes 10,875 shares subject to options exercisable within 60 days
     following April 30, 2000.

(6)  Includes 13,592 shares subject to options exercisable within 60 days
     following April 30, 2000.

(7)  Consists of 65,250 shares subject to options exercisable within 60 days
     following April 30, 2000.

(8)  Includes 3,818,095 shares owned by MD Co. Mr. Kernan may be deemed to have
     or share voting or investment power with respect to these shares. He is a
     Principal of MDT Advisers, Inc., which controls MD Co. Mr. Kernan
     disclaims beneficial ownership of these shares except to the extent of his
     pecuniary interest in the shares.

(9)  Includes 7,500 shares of common stock held by Mr. Kirshy's son, Wade G.
     Kirshy. Mr. Kirshy disclaims beneficial ownership of the 7,500 shares held
     by Wade G. Kirshy.

(10)  Includes 41,017 shares owned by Le Serre, 1,202,640 shares owned by
      Ascent Venture Partners, L.P., 4,810,590 shares owned by Ascent Venture
      Partners II, L.P. and 709,220 shares owned by Ascent Venture Partners
      III, L.P.  Mr. Polestra may be deemed to have or share voting or
      investment power with respect to these shares. Mr. Polestra is a Managing
      Member or General Partner of each of the general partners which control
      Ascent Venture Partners, L.P., Ascent Venture Partners II, L.P. and
      Ascent Venture Partners III, L.P. Mr. Polestra disclaims beneficial
      ownership of these shares except to the extent of his pecuniary interest
      in the shares.

(11)  Includes 2,863,515 shares owned by Egan-Managed Capital, L.P. Mr.
      Shanahan may be deemed to have or share voting or investment power with
      respect to these shares. He is a General Partner of Egan-Managed Capital,
      L.P. Mr. Shanahan disclaims beneficial ownership of these shares except
      to the extent of his pecuniary interest in the shares.

(12)  Consists of 4,964,540 shares owned by HarbourVest Partners VI--Direct
      Fund, L.P. Mr. Wadsworth may be deemed to have or share voting or
      investment with respect to these shares. He is a Managing Director of
      HarbourVest Partners, LLC, which controls HarbourVest Partners VI-Direct
      Fund, L.P. Mr. Wadsworth disclaims beneficial ownership of these shares
      except to the extent of his pecuniary interest in the shares.

(13)  Includes 106,030 shares subject to options exercisable within 60 days
      following April 30, 2000.

                                       65
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   The following is a description of all of the material terms of our capital
stock contained in our second amended and restated certificate of
incorporation. Because this is a summary description, we refer you to the
provisions of Delaware corporate law and of our second amended and restated
certificate of incorporation and our second amended and restated by-laws, which
you can access using the EDGAR database at www.sec.gov/edgarhp.htm.

   Effective upon the closing of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $.01 par value per share.

   As of April 30, 2000, we had outstanding:

  .  4,975,187 shares of common stock held by 52 stockholders of record;

  .  5,247,495 shares of preferred stock held by 43 stockholders of record;

  .  options to purchase 3,721,615 shares of common stock; and

  .  warrants to purchase 1,882,851 shares of common stock.

   Upon the closing of this offering, all outstanding shares of preferred stock
will automatically convert into 21,448,442 shares of common stock. The options
and warrants will remain outstanding.

Common Stock

   Based upon the number of shares outstanding as of April 30, 2000, giving
effect to the conversion of all shares of preferred stock into 21,448,442
shares of common stock upon the closing of this offering, and giving effect to
the issuance of the shares of common stock offered by us in this offering,
there will be 32,673,629 shares of common stock outstanding upon the closing of
this offering. In addition, as of April 30, 2000, there were outstanding
options for the purchase of a total of 3,721,615 shares of common stock and
warrants for the purchase of 1,882,851 shares of common stock.

   Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders at the annual meeting of
stockholders and do not have cumulative voting rights. Directors are elected by
a plurality of the votes of the shares present in person or by proxy at the
meeting and entitled to vote in elections of directors. Holders of common stock
are entitled to receive ratably any dividends that are declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding preferred stock. Upon the liquidation,
dissolution or winding up of Network Engines, the holders of common stock are
entitled to receive ratably our net assets available after the payment of all
our debts and other liabilities, subject to the prior rights of any outstanding
preferred stock. Holders of our common stock have no preemptive, subscription,
redemption or conversion rights, nor are they entitled to the benefit of any
sinking fund. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock that our board of
directors may designate and issue in the future.

                                       66
<PAGE>

Preferred Stock

   Our board of directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more
series. Each series of preferred stock that may be authorized shall have the
number of shares, designations, preferences, voting powers, qualifications and
special or relative rights or privileges as shall be determined by our board of
directors, which may include, among others, dividend rights, voting rights,
redemption provisions, liquidation preferences, conversion rights and
preemptive rights.

   Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
rights of the holders of common stock will be subject to the rights of holders
of any preferred stock issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of our outstanding voting stock.

Registration Rights

   According to the terms of an investor rights agreement, beginning six months
following the date of the closing of this offering, the holders of 21,886,014
shares of common stock and 1,852,851 shares of common stock issuable upon
conversion of warrants, including Ascent Venture Partners II, L.P., HarborVest
VI-Direct Fund, L.P., MD Co., Egan-Managed Capital, L.P. and Canaan Equity
Partners II LLC, may require us to file a registration statement under the
Securities Act. To demand registration, stockholders holding an aggregate of
8,308,603 of those shares must request that we file a registration statement to
register the resale of their shares. Those stockholders must also request
registration of enough shares so that the offering would have an anticipated
aggregate offering price of $5.0 million. We are only required to effect up to
two of these demand registrations.

   Additionally, these holders of 23,738,865 shares of common stock and shares
of common stock issuable upon exercise of warrants will have incidental
registration rights with respect to the future registration of our shares of
common stock under the Securities Act; these holders are entitled to notice of
any future registration and to include their shares in any future registration.

   At any time we become eligible to file a registration statement on Form S-3
under the Securities Act, upon the request of holders of not less than 474,778
shares of common stock, we must effect a registration on Form S-3. However, the
registration must have a minimum anticipated aggregate offering price of $1.0
million.

   These registration rights are subject to conditions and limitations,
including, in the case of an underwritten public offering, the right of the
managing underwriter to limit the number of shares of common stock to be
included in the registration. We are generally required to bear all the
expenses of registrations under the investor rights agreement, except
underwriting discounts and commissions. The investor rights agreement also
contains our commitment to indemnify the holders of registration

                                       67
<PAGE>

rights for certain losses they might incur in connection with registrations
under the agreement. Registration of any of the shares of common stock held by
stockholders with registration rights would result in those shares becoming
freely tradeable without restriction under the Securities Act.

Warrants

   As of April 30, 2000, the following warrants to purchase a total of
1,882,851 shares of our common stock were outstanding:

<TABLE>
<CAPTION>
         Number of
         Shares of
        Common Stock              Exercise Price                        Expiration Date
        <S>                       <C>                                  <C>
           52,500                    $0.5333                               July 31, 2002
          136,987                     0.0733                             August 31, 2002
           30,000                     0.3667                           February 23, 2003
          277,500                     0.3667                            October 15, 2007
          208,125                     0.3667                            January 29, 2008
           55,500                     0.3667                                May 20, 2008
          222,000                     0.3667                                June 3, 2008
          291,375                     0.3667                             August 12, 2008
           13,875                     0.3667                           September 8, 2008
           48,562                     0.3667                            November 2, 2008
          428,572                     0.3667                            December 8, 2008
          117,855                     0.3667                            January 13, 2009
</TABLE>

Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects

   We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.

   Our second amended and restated certificate of incorporation and second
amended and restated by-laws provide for the division of the board of directors
into three classes, as nearly equal in size as possible, with staggered three-
year terms. See "Management--Election of Directors." Under our second amended
and restated certificate of incorporation and second amended and restated by-
laws any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by vote
of a majority of the directors then in office. The classification of the board
of directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of Network
Engines.

                                       68
<PAGE>


   Our second amended and restated certificate of incorporation and second
amended and restated by-laws also provide that, after the closing of this
offering, any action required or permitted to be taken by our stockholders at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before a meeting of stockholders and may not be taken by
written action in lieu of a meeting. Our second amended and restated
certificate of incorporation and second amended and restated by-laws further
provide that special meetings of the stockholders may only be called by the
Chairman of the board of directors, the Chief Executive Officer, the President,
or by the board of directors. Under the second amended and restated by-laws, in
order for any matter to be considered "properly brought" before a meeting, a
stockholder must comply with certain requirements regarding advance notice to
us. The foregoing provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer for our common
stock, because a person or an entity, even if that person or entity acquired a
majority of our outstanding voting securities, would be able to take action as
a stockholder (e.g., to elect new directors or approve a merger) only at a duly
called stockholders meeting, and not by written consent.

   The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our second amended and restated by-laws may
be amended or repealed by a majority vote of the board of directors or the
holders of a majority of the shares of our capital stock issued and outstanding
and entitled to vote, subject to any limitations set forth in the restated by-
laws. The stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any series of
preferred stock that might be outstanding at the time any amendments are
submitted to stockholders for approval.

Limitation of Liability and Indemnification

   Our second amended and restated certificate of incorporation provides that
our directors and officers shall be indemnified by us to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in connection with the
service for or on our behalf. In addition, our second amended and restated
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to us or our
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is EquiServe Trust
Company.

Nasdaq National Market Listing

   We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "NENG."

                                       69
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Upon completion of this offering (assuming no exercise of the underwriters'
over-allotment option), we will have outstanding an aggregate of 32,673,629
shares of common stock, assuming no exercise of outstanding options or
warrants. Of the total outstanding shares, the 6,250,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares held by our affiliates, as
that term is defined under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 as described below.

Sales of Restricted Shares

   The remaining 26,423,629 shares of common stock held by existing
stockholders are "restricted shares," which means they were issued and sold by
us in reliance on, and are subject to, exemptions from the registration
requirements of the Securities Act, including Rule 144, Rule 144(k) and Rule
701. These restricted shares are also subject to "lock-up" agreements with the
underwriters and will become eligible for sale in the public market during or
after the period covered by the lock-up agreements.



   Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of

  .  1% of the number of shares of common stock then outstanding, which will
     equal approximately 326,736 shares immediately after the offering, or

  .  the average weekly trading volume of the common stock on the Nasdaq
     National Market during the four calendar weeks preceding the filing of a
     notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to specific manner-of-sale provisions,
notice requirements and the availability of current public information about
us.

   Rule 144(k). Under Rule 144(k), a person who is not one of our affiliates at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144(k)" shares may be sold immediately upon completion of this
offering.

   Lock-up Agreements. All of the restricted shares are subject to lock-up
agreements providing that the stockholders will not offer, sell or otherwise
dispose of any shares owned by them for a period of 180 days after the date of
this offering. However, holders of restricted shares who have not been
executive officers or directors of our company on or since the date of this
prospectus may offer, sell or otherwise dispose of 25% of those shares on the
later of 90 days after the date of this offering or on the second trading day
after the first public release of our quarterly results, if the last recorded
sale price on the Nasdaq National Market for 20 of the 30 trading days ending
on the 90th day is at least twice the price per share in the initial public
offering. These stockholders may also offer, sell or

                                       70
<PAGE>

otherwise dispose of an additional 25% of those shares 135 days after the date
of this offering if the price per share of common stock has achieved the same
target level for the 30 trading day period ending on the 135th day. However,
Donaldson, Lufkin & Jenrette Securities Corporation, may in its sole
discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Upon expiration of the lock-up
agreements,     additional shares will become eligible for sale pursuant to
Rule 144(k),     additional shares will become eligible for sale under the
other provisions of Rule 144 and      additional shares will become eligible
for sale under Rule 701.

      Eligibility of Restricted Shares for Sale in the Public Market

                          Under Rules 144 and 701

            (Listed by date upon which shares become saleable)

<TABLE>
<CAPTION>
                                                                        Number
                                                                          of
                                 Date                                   Shares
                                 ----                                  --------
<S>                                                                    <C>
 Later of 90 days after the effective date or second trading day
  following first public release of quarterly earnings(1).............
 135 days after the effective date(1).................................
 180 days after the effective date (expiration of lockup).............
</TABLE>
- ------------

(1)The number of shares listed may be offered, sold or traded provided that the
   last recorded sale price per share for 20 of the 30 trading days ending on
   the applicable date is at least twice the initial public offering price per
   share.


Options and Employee Compensation Shares

   Rule 701 provides that currently outstanding shares of common stock acquired
under our employee compensation plans may be resold beginning 90 days after the
date of this prospectus by:

  .  persons, other than our affiliates, subject only to the manner of sale
     provisions of Rule 144; and

  .  our affiliates under Rule 144 without compliance with its one-year
     minimum holding period, subject to certain limitations.

   At April 30, 2000, approximately 56,505 shares of common stock were issuable
pursuant to vested options under our 1999 plan, all of which are subject to
lock-up agreements with the underwriters and will be eligible for sale in the
public market in accordance with Rule 701 under the Securities Act beginning 90
days after the date of this prospectus.

   We intend to file one or more registration statements on Form S-8 under the
Securities Act following the date of this prospectus, to register up to
8,227,650 shares of common stock underlying outstanding stock options or other
rights granted or to be granted pursuant to our 1999 plan, employee stock
purchase plan and director plan, including the 56,505 shares of common stock
subject to options vested as of April 30, 2000, and 4,506,035 shares of common
stock reserved for options or awards to be granted under our 1999 plan,
employee stock purchase plan and director plan. The registration statements for
the plans are expected to become effective upon filing.

                                       71
<PAGE>

Registration Rights

   Six months after this offering, the holders of 23,738,865 shares of common
stock and     shares of common stock issuable upon conversion of warrants will
be entitled to certain rights with respect to the registration of their shares
under the Securities Act. After any required registration of shares, the
registered shares will be freely tradeable without restriction under the
Securities Act. These sales could cause the market price of our common stock to
decline. See "Description of Capital Stock--Registration Rights."

Pricing of the Offering

   Prior to this offering, there has been no public market for our common
stock, and no predictions can be made as to the effect, if any, that market
sales of shares of common stock from time to time, or the availability of
shares for future sale, may have on the market price for the common stock.
Sales of substantial amounts of common stock, or the perception that
substantial sales could occur, could adversely affect prevailing market prices
for the common stock and could impair our future ability to obtain capital
through an offering of equity securities.

                                       72
<PAGE>

                                  UNDERWRITING

   Subject to the terms and conditions contained in an underwriting agreement
dated               , 2000, the underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, Dain Rauscher
Incorporated, FleetBoston Robertson Stephens Inc., and DLJdirect Inc., have
severally agreed to purchase from us the number of shares of common stock set
forth opposite their names below:

<TABLE>
<CAPTION>
                                                                        Number
  Underwriters                                                         of Shares
<S>                                                                    <C>
  Donaldson, Lufkin & Jenrette Securities Corporation.................
  Dain Rauscher Incorporated..........................................
  FleetBoston Robertson Stephens Inc..................................
  DLJdirect Inc.......................................................
                                                                         ----
    Total.............................................................
                                                                         ====
</TABLE>

   The underwriting agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares of common stock offered by this
prospectus are subject to approval by their counsel of legal matters concerning
the offering and to conditions that must be satisfied by us. The underwriters
are obligated to purchase and accept delivery of all of the shares of common
stock offered by this prospectus, other than those shares covered by the over-
allotment option described below, if any are purchased.

   The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at the initial public offering price less a concession not in
excess of $          per share. The underwriters may allow, and dealers may re-
allow, to other dealers a concession not in excess of $          per share.
After the initial offering of the common stock, the public offering price and
other selling terms may be changed by the representatives at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.

   An electronic prospectus will be available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation.

   We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to an aggregate of             additional shares of common stock at
the initial public offering price less underwriting discounts and commissions.
The underwriters may exercise the option solely to cover over-allotments, if
any, made in connection with the offering. To the extent that the underwriters
exercise the option, each

                                       73
<PAGE>


underwriter will become obligated, subject to conditions contained in the
underwriting agreement, to purchase its pro rata portion of the additional
shares based on the underwriter's percentage underwriting commitment.

   We have agreed to indemnify the underwriters against liabilities which may
arise in connection with the offering, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make.

   Each of Network Engines, our executive officers, directors and stockholders
have agreed to lock-up agreements which provide, subject to certain exceptions,
that Network Engines, our officers, directors and stockholders will not (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with
the ownership of any common stock (regardless of whether any of the
transactions described in clause (i) or (ii) is to be settled by the delivery
of common stock, other securities, in cash or otherwise) for a period of 180
days after the date of this prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. However, up to 50% of the
shares of common stock held by our stockholders subject to the restrictions
described above (other than shares owned by directors and executive officers)
will be released from these restrictions under the conditions described under
the caption "Shares Eligible for Future Sale--Sales of Restricted Shares."

   In addition, during the 180-day period after the date of this prospectus, we
have also agreed not to file any registration statement with respect to the
registration of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. However, we are
permitted to file a registration statement on Form S-8 with respect to shares
of common stock issuable under our existing benefit plans, all of which shares
are subject to the lock-up agreements with Donaldson, Lufkin & Jenrette
Securities Corporation. Furthermore, none of our stockholders have registration
rights, which have not been waived, that may be exercised during the 180-day
period.

   Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered by this prospectus will be determined by negotiation among us and the
underwriters. The factors to be considered in determining the initial public
offering price include:

  .  the history of and the prospects for the industry in which we compete;

  .  our past and present operations;

  .  the historical results of operations;

  .  our prospects for future earnings;

  .  the recent market prices of securities of generally comparable
     companies; and

  .  the general condition of the securities markets at the time of the
     offering.

                                       74
<PAGE>

   The underwriters have reserved up to     shares of the common stock to be
sold in this offering for sale to some of our employees and associates of our
employees and directors, and to other individuals or companies who have
commercial arrangements or personal relationships with us. Through this
directed share program, we intend to ensure that those individuals and
companies that have supported us, or who are in a position to support us in the
future, have the opportunity to purchase our common stock at the same price
that we are offering our shares to the general public. Prospective participants
will not receive any investment materials other than a copy of this prospectus,
and will be permitted to participate in this offering at the initial public
price presented on the cover page of this prospectus. No commitment to purchase
shares by any participant in the directed share program will be accepted until
after the registration statement, of which this prospectus is a part, is
effective and an initial public offering price has been established. The number
of shares available for sale to the general public will be reduced by the
number of shares sold through the directed share program. Any shares reserved
for the directed share program which are not so purchased will be offered by
the underwriters to the general public on the same basis as the other shares
offered hereby.

   Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering materials or
advertisements in connection with the offer and sale of any shares of common
stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of the applicable jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and observe any
restrictions relating to the offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered in any jurisdiction in which
the offer or a solicitation of shares made by this prospectus is unlawful.

   In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.

                                 LEGAL MATTERS

   The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts and for the
underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.


                                       75
<PAGE>

                                    EXPERTS

   Our financial statements as of September 30, 1999 and 1998 and for each of
the three years in the period ended September 30, 1999 included in this
prospectus have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in auditing and accounting.

                   WHERE YOU CAN FIND ADDITIONAL INFORMATION

   We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 to register with the Commission the shares of our common
stock described in this prospectus. This prospectus is part of that
registration statement, and provides you with a general description of the
common stock being registered and offered, but does not include all of the
information you can find in the registration statement or the exhibits to the
registration statement. You should refer to the registration statement and its
exhibits for more information about our business and the shares of common stock
being registered.

   You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the Commission at the
Commission's public reference room at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. Copies of the registration statement or
any reports, statements or other information we file with the Commission can
also be obtained at prescribed rates by mail from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

                                       76
<PAGE>

                             NETWORK ENGINES, INC.

                         Index to Financial Statements

<TABLE>
<CAPTION>
                                                                           Page
<S>                                                                        <C>
Report of Independent Accountants........................................  F-2
Balance Sheets as of September 30, 1998 and 1999 and as of March 31, 2000
 (unaudited).............................................................  F-3
Statement of Operations for the years ended September 30, 1997, 1998 and
 1999 and the six months ended March 31, 1999 and 2000 (unaudited).......  F-4
Statement of Stockholders' Equity (Deficit) for the years ended September
 30, 1997, 1998 and 1999 and the six months ended March 31, 2000
 (unaudited).............................................................  F-5
Statement of Cash Flows for the years ended September 30, 1997, 1998 and
 1999 and the six months ended March 31, 1999 and 2000 (unaudited).......  F-6
Notes to Financial Statements............................................  F-7
</TABLE>

                                      F-1
<PAGE>


   This is the form of report that we expect to issue upon the approval of
stockholders of a 2.5-for-one stock split and the increase in authorized shares
to 60,000,000 as discussed in Note 7 to the Financial Statements.

PricewaterhouseCoopers LLP

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
 of Network Engines, Inc.:

   In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Network Engines,
Inc. at September 30, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1999
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Boston, Massachusetts
November 22, 1999, except as to

 Note 13 for which the date is May 15, 2000

                                      F-2
<PAGE>

                             NETWORK ENGINES, INC.
                                 BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                               As of              As of
                                           September 30,     March 31, 2000
                                          ----------------  -------------------
                                           1998     1999     Actual   Pro Forma
                                                               (unaudited)
                                                                       (Note 2)
                 Assets
<S>                                       <C>      <C>      <C>       <C>
Current assets:
 Cash and cash equivalents..............  $   113  $ 1,435  $ 16,793  $ 16,793
 Restricted cash........................      --       100       379       379
 Accounts receivable, less allowance for
  doubtful accounts of $107, $227 and
  $287 at September 30, 1998, 1999 and
  March 31, 2000 (unaudited),
  respectively..........................      492    2,025     5,211     5,211
 Inventories............................      587    1,251     3,949     3,949
 Prepaid expenses and other current
  assets................................       86      222       957       957
                                          -------  -------  --------  --------
 Total current assets...................    1,278    5,033    27,289    27,289
Property and equipment, net.............      452      831     2,056     2,056
Other assets............................      --       --        634       634
                                          -------  -------  --------  --------
  Total assets..........................  $ 1,730  $ 5,864  $ 29,979  $ 29,979
                                          =======  =======  ========  ========
<CAPTION>
 Liabilities, Redeemable Preferred Stock
   and Stockholders' Equity (Deficit)
<S>                                       <C>      <C>      <C>       <C>
Current liabilities:
 Bridge loans...........................  $ 3,717  $   --   $    --   $    --
 Accounts payable.......................      752    2,354     5,047     5,047
 Accrued interest.......................      247      --        --        --
 Accrued expenses.......................      363      614     1,059     1,059
 Deferred revenue.......................       29      105       620       620
 Current portion of capital lease
  obligations...........................       21       48        66        66
 Notes payable..........................       86       15       --        --
                                          -------  -------  --------  --------
 Total current liabilities..............    5,215    3,136     6,792     6,792
Capital lease obligations, net of
 current portion........................       69      132       109       109
Notes payable...........................      --        26       --        --
                                          -------  -------  --------  --------
 Total liabilities......................    5,284    3,294     6,901     6,901
Commitments and contingencies (Note 10)
Redeemable convertible preferred stock:
 Series D redeemable convertible
  preferred stock, $.01 par value,
  3,581,554 shares authorized; 3,581,554
  and no shares issued and outstanding
  at March 31, 2000 (unaudited) and pro
  forma March 31, 2000 (unaudited)
  (liquidation preference of $25,250 at
  March 31, 2000 (unaudited))...........      --       --     28,152       --
 Series C redeemable convertible
  preferred stock, $.01 par value,
  1,123,549 shares authorized;
  1,123,549, 1,123,549 and no shares
  issued and outstanding at September
  30, 1999, March 31, 2000 (unaudited)
  and pro forma March 31, 2000
  (unaudited) (liquidation preference of
  $8,651 at March 31, 2000
  (unaudited))..........................      --     8,705     9,949       --
 Series B redeemable convertible
  preferred stock, $.01 par value,
  360,000 shares authorized; 357,142,
  357,142 and no shares issued and
  outstanding at September 30, 1999,
  March 31, 2000 (unaudited) and pro
  forma March 31, 2000 (unaudited)
  (stated at liquidation preference)....      --     2,750     2,750       --
 Series A redeemable convertible
  preferred stock, $.01 par value,
  185,250 shares authorized; 185,250,
  185,250, 185,250 and no shares issued
  and outstanding at September 30, 1998,
  1999, March 31, 2000 (unaudited) and
  pro forma March 31, 2000 (unaudited)
  (liquidation preference of $1,000 at
  March 31, 2000 (unaudited))...........    1,000    1,012     1,125       --
                                          -------  -------  --------  --------
 Total redeemable convertible preferred
  stock.................................    1,000   12,467    41,976       --
Stockholders' equity (deficit):
 Common stock, $.01 par value,
  60,000,000 shares authorized;
  3,407,250, 3,429,862, 4,902,035 and
  26,350,477 shares issued and
  outstanding at September 30, 1998,
  1999, March 31, 2000 (unaudited) and
  pro forma March 31, 2000 (unaudited)..       34       34        49       264
 Additional paid-in capital.............    1,016    2,942    10,191    51,952
 Accumulated deficit....................   (5,604) (11,434)  (17,241)  (17,241)
 Note receivable from stockholder.......      --       --        (92)      (92)
 Deferred stock compensation............      --    (1,439)  (11,805)  (11,805)
                                          -------  -------  --------  --------
 Total stockholders' equity (deficit)...   (4,554)  (9,897)  (18,898)   23,078
                                          -------  -------  --------  --------
  Total liabilities, redeemable
   convertible preferred stock and
   stockholders' equity (deficit).......  $ 1,730  $ 5,864  $ 29,979  $ 29,979
                                          =======  =======  ========  ========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-3
<PAGE>

                             NETWORK ENGINES, INC.
                            STATEMENT OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                         Year Ended           Six Months Ended
                                        September 30,            March 31,
                                   -------------------------  -----------------
                                    1997     1998     1999     1999      2000
<S>                                <C>      <C>      <C>      <C>      <C>
Net revenues.....................  $   609  $ 1,102  $ 6,031  $ 1,116  $ 10,466
Cost of revenues (excluding stock
 compensation of $16 and $62 for
 the year ended September 30,
 1999 and the six months ended
 March 31, 2000 (unaudited),
 respectively)...................      465    1,591    4,733    1,268     6,805
                                   -------  -------  -------  -------  --------
 Gross profit (loss).............      144     (489)   1,298     (152)    3,661
Operating expenses:
 Research and development
  (excluding stock compensation
  of $37 and $202 for the year
  ended September 30, 1999 and
  the six months ended March 31,
  2000 (unaudited),
  respectively)..................      395      923    2,564      867     3,084
 Selling and marketing (excluding
  stock compensation of $53 and
  $311 for the year ended
  September 30, 1999 and the six
  months ended March 31, 2000
  (unaudited), respectively).....      477    1,593    2,920    1,147     4,627
 General and administrative
  (excluding stock compensation
  of $21, $10 and $301 for the
  year ended September 30, 1999
  and the six months ended March
  31, 1999 and 2000 (unaudited),
  respectively)..................      396      620      934      389     1,191
 Stock compensation..............      --       --       127       10       876
                                   -------  -------  -------  -------  --------
 Total operating expenses........    1,268    3,136    6,545    2,413     9,778
                                   -------  -------  -------  -------  --------
Loss from operations.............   (1,124)  (3,625)  (5,247)  (2,565)   (6,117)
Interest income..................       12       18       52       19       340
Interest expense.................      (45)    (592)    (949)    (938)      (30)
                                   -------  -------  -------  -------  --------
Loss before extraordinary item...   (1,157)  (4,199)  (6,144)  (3,484)   (5,807)
Extraordinary gain on
 extinguishment of debt..........      --       --       314      314       --
                                   -------  -------  -------  -------  --------
Net loss.........................   (1,157)  (4,199)  (5,830)  (3,170)   (5,807)
Accretion of redeemable
 convertible preferred stock.....      --       --      (223)     --     (4,259)
                                   -------  -------  -------  -------  --------
Net loss attributable to common
 stockholders....................  $(1,157) $(4,199) $(6,053) $(3,170) $(10,066)
                                   =======  =======  =======  =======  ========
Loss per common share before
 extraordinary item--basic and
 diluted.........................  $ (0.36) $ (1.31) $ (1.92) $ (0.96) $  (2.86)
Extraordinary item per common
 share--basic and diluted........      --       --      0.09      --        --
                                   -------  -------  -------  -------  --------
Net loss per common share--basic
 and diluted.....................  $ (0.36) $ (1.31) $ (1.83) $ (0.96) $  (2.86)
                                   =======  =======  =======  =======  ========
Shares used in computing basic
 and diluted net loss per common
 share...........................    3,177    3,200    3,312    3,285     3,525
Pro forma net loss per common
 share--basic and diluted
 (unaudited).....................                    $ (0.63)          $  (0.37)
                                                     =======           ========
Shares used in computing basic
 and diluted pro forma net loss
 per common share (unaudited)....                      9,242             15,887
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-4
<PAGE>

                             NETWORK ENGINES, INC.
                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                     Note                      Total
                            Common Stock   Additional             Receivable    Deferred   Stockholders'
                          ----------------  Paid-in   Accumulated    from        Stock        Equity
                           Shares   Amount  Capital     Deficit   Stockholder Compensation   (Deficit)
<S>                       <C>       <C>    <C>        <C>         <C>         <C>          <C>
Balance, September 30,
 1996...................  3,144,750  $31    $   444    $   (248)     $--        $    --      $    227
Issuance of common
 stock..................     37,500    1         24         --        --             --            25
Issuance costs
 associated with Series
 A redeemable
 convertible preferred
 stock..................        --   --         (48)        --        --             --           (48)
Net loss................        --   --         --       (1,157)      --             --        (1,157)
                          ---------  ---    -------    --------      ----       --------     --------
Balance, September 30,
 1997...................  3,182,250   32        420      (1,405)      --             --          (953)
Issuance of restricted
 common stock...........    225,000    2         15         --        --             --            17
Issuance of common stock
 warrants in connection
 with bridge loans......        --   --         581         --        --             --           581
Net loss................        --   --         --       (4,199)      --             --        (4,199)
                          ---------  ---    -------    --------      ----       --------     --------
Balance, September 30,
 1998...................  3,407,250   34      1,016      (5,604)      --             --        (4,554)
Issuance costs
 associated with Series
 C redeemable
 convertible preferred
 stock..................        --   --        (188)        --        --             --          (188)
Issuance of common stock
 upon stock option
 exercise...............     22,612  --           2         --        --             --             2
Issuance of common stock
 warrants in connection
 with bridge loans......        --   --         608         --        --             --           608
Issuance of common stock
 warrants in connection
 with Series C
 redeemable convertible
 preferred stock........        --   --         157         --        --             --           157
Issuance of common stock
 options to consultants
 and compensation
 expense for stock
 option modifications...        --   --           4         --        --             --             4
Deferred stock
 compensation related to
 grants of stock
 options................        --   --       1,566         --        --          (1,566)         --
Amortization of deferred
 stock compensation to
 expense................        --   --         --          --        --             127          127
Accretion of redeemable
 convertible preferred
 stock to redemption
 value..................        --   --        (223)        --        --             --          (223)
Net loss................        --   --         --       (5,830)      --             --        (5,830)
                          ---------  ---    -------    --------      ----       --------     --------
Balance, September 30,
 1999...................  3,429,862   34      2,942     (11,434)      --          (1,439)      (9,897)
Issuance of common stock
 upon stock option and
 warrant exercises
 (unaudited)............    834,673    8        202         --        --             --           210
Issuance of restricted
 common stock
 (unaudited)............    637,500    7        146         --        (90)           --            63
Issuance costs
 associated with Series
 D redeemable
 convertible preferred
 stock (unaudited)......        --   --         (82)        --        --             --           (82)
Interest on note
 receivable from
 stockholder
 (unaudited)............        --   --         --          --         (2)           --            (2)
Deferred stock
 compensation related to
 grants of stock options
 (unaudited)............        --   --      11,299         --        --         (11,299)         --
Amortization of deferred
 stock compensation to
 expense (unaudited)....        --   --         --          --        --             876          876
Deferred compensation
 related to cancellation
 of stock options for
 terminated employees
 (unaudited)............        --   --         (57)        --        --              57          --
Accretion of redeemable
 convertible preferred
 stock to redemption
 value (unaudited)......        --   --      (4,259)        --        --             --        (4,259)
Net loss (unaudited)....        --   --         --       (5,807)      --             --        (5,807)
                          ---------  ---    -------    --------      ----       --------     --------
Balance, March 31, 2000
 (unaudited)............  4,902,035  $49    $10,191    $(17,241)     $(92)      $(11,805)    $(18,898)
                          =========  ===    =======    ========      ====       ========     ========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-5
<PAGE>

                             NETWORK ENGINES, INC.
                            STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                Six Months
                                    Year Ended September           Ended
                                             30,                 March 31,
                                   -------------------------  ----------------
                                    1997     1998     1999     1999     2000
                                                                (unaudited)
<S>                                <C>      <C>      <C>      <C>      <C>
Cash flows from operating
 activities:
 Net loss......................... $(1,157) $(4,199) $(5,830) $(3,170) $(5,807)
 Adjustments to reconcile net loss
  to net cash used in operating
  activities:
 Depreciation and amortization....      88      194      361      135      289
 Provision for inventory
  reserves........................      35      350      663      166      214
 Amortization of discount on note
  payable.........................     --       348      841      841      --
 Provision for doubtful
  accounts........................      37       50      120       60       60
 Gain on extinguishment of debt
  ................................     --       --      (314)     --       --
 Compensation expense related to
  common stock options............     --       --       131      --       876
 Interest on note receivable from
  stockholder.....................     --       --       --       --        (2)
 Changes in operating assets and
  liabilities:
  Accounts receivable.............     435     (427)  (1,653)     274   (3,246)
  Inventories.....................    (307)    (587)  (1,327)    (197)  (2,912)
  Prepaid expenses and other
   current assets.................     (14)     (71)    (136)     (97)    (735)
  Accounts payable................     (11)     447    1,602     (232)   2,693
  Accrued interest and expenses...     126      458      325     (303)     445
  Deferred revenue................     --        29       76      (11)     515
                                   -------  -------  -------  -------  -------
   Net cash used in operating
    activities....................    (768)  (3,408)  (5,141)  (2,534)  (7,610)
Cash flows used in investing
 activities:
 Purchase of property and
  equipment.......................    (185)    (343)    (623)    (151)  (1,514)
 Deposit of restricted cash.......     --       --      (100)     --      (279)
 Increase in other assets.........     --       --       --       (22)    (634)
                                   -------  -------  -------  -------  -------
   Net cash used in investing
    activities....................    (185)    (343)    (723)    (173)  (2,427)
Cash flows from financing
 activities:
 Proceeds from bridge loans.......     --     3,950    1,100    1,100      --
 Proceeds from notes payable......     --         4       56       56    2,205
 Payments on notes payable........     (40)    (112)    (101)     (73)  (2,246)
 Payments on capital lease
  obligations.....................     --       (11)     (27)     --        (5)
 Proceeds from issuance of common
  stock...........................      25       17        2      --       273
 Proceeds from issuance of
  redeemable convertible preferred
  stock, net......................     952      --     6,156    3,070   25,168
                                   -------  -------  -------  -------  -------
   Net cash provided by financing
    activities....................     937    3,848    7,186    4,153   25,395
                                   -------  -------  -------  -------  -------
Net increase (decrease) in cash
 and cash equivalents.............     (16)      97    1,322    1,446   15,358
Cash and cash equivalents,
 beginning of period..............      32       16      113      113    1,435
                                   -------  -------  -------  -------  -------
Cash and cash equivalents, end of
 period........................... $    16  $   113  $ 1,435  $ 1,559  $16,793
                                   =======  =======  =======  =======  =======
Supplemental cash flow
 information:
 Interest paid.................... $    29  $    29  $    36  $    32  $    29
Non-cash transactions:
 Acquisition of property and
  equipment under capital leases.. $   --   $   101  $   117  $   --   $   --
 Bridge loans and accrued interest
  converted to Series B and C
  redeemable convertible preferred
  stock........................... $   --   $   --   $ 5,057  $ 5,057  $   --
 Restricted common stock issued in
  exchange for note receivable
  from stockholder................ $   --   $   --   $   --   $   --   $    90
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                      F-6
<PAGE>

                             NETWORK ENGINES, INC.
                         NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS

 Business

   Network Engines, Inc. (the "Company") develops, markets and provides
integrated and scalable server appliances that enable organizations to provide
information and applications over the Internet. The Company markets its
products principally in North America through a direct sales organization, as
well as through indirect channels consisting of original equipment
manufacturers, resellers and systems integrators. The Company reports results
in one operating segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Revenue Recognition

   The Company recognizes product revenue upon delivery, provided evidence of
an arrangement has been received, no obligations remain outstanding and
collectibility is reasonably assured. The Company recognizes license revenue
upon sell through to the licensees' end users. License revenue was immaterial
for all periods presented in these financial statements. The Company accrues
for anticipated returns and warranty costs upon product delivery. Revenue from
support contracts is recognized ratably over the term of the agreement.

 Unaudited Interim Financial Data

   The interim financial data as of March 31, 2000 and for the six months
ended March 31, 1999 and 2000 have been derived from unaudited financial
statements of the Company. Management believes these unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the six months ended March
31, 1999 and 2000 have not been audited and are not necessarily indicative of
results to be expected for the full fiscal year.

 Concentrations of Risk

   Credit. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
restricted cash and trade receivables. The Company invests primarily in money
market funds of major financial institutions. The Company provides credit to
customers in the normal course of business and does not require collateral
from its customers but routinely assesses their financial strength. The
Company maintains reserves for potential credit losses and such losses have
been within management's expectations.

   Customers. Revenue of approximately $207,000 (34%), $140,000 (23%) and
$128,000 (21%) was attributable to three customers during the year ended
September 30, 1997. Revenue of approximately $562,000 (51%) and $132,000 (12%)
was attributable to two customers during the year ended September 30, 1998.
Revenue of approximately $2,774,000 (46%), $1,689,000 (28%) and $844,000 (14%)
was attributable to three customers during the year ended September 30, 1999.

                                      F-7
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

Revenue of approximately $408,000 (37%) and $126,000 (11%) was attributable to
two customers during the six months ended March 31, 1999 (unaudited) and
revenue of approximately $2,774,000 (26%), $1,832,000 (18%) and $1,486,000
(14%) was attributable to three customers during the six months ended March 31,
2000 (unaudited).

   One customer accounted for approximately $491,000 (82%) of accounts
receivable at September 30, 1998, three customers accounted for approximately
$1,809,000 (80%) of accounts receivable as of September 30, 1999 and three
customers accounted for approximately $3,444,000 (63%) of accounts receivable
at March 31, 2000 (unaudited).

   Suppliers. Although the Company generally uses standard parts and components
for its products, certain processor board components are currently available
only from a single source. Other components and subassemblies are available
only from limited sources. Although the Company believes that these components
and subassemblies are sufficiently available from alternate sources in a
reasonable amount of time, the reduction or interruption of supply, a
significant price increase or engineering changes required by the use of
alternate components and subassemblies could adversely affect the Company's
operating results.

 Fair Value of Financial Instruments

   Financial instruments, including cash, cash equivalents, restricted cash,
accounts receivable, accounts payable and redeemable convertible preferred
stock, are carried in the financial statements at amortized cost which
approximated fair value as of September 30, 1997, 1998 and 1999 and March 31,
2000 (unaudited).

 Cash, Cash Equivalents and Restricted Cash

   The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. At September 30,
1999, the Company's cash equivalents of $1,372,000 consisted of investments in
money market funds. These investments are stated at cost, which approximated
fair value. At September 30, 1998, the Company had no cash equivalents. At
September 30, 1999, $100,000 of cash was restricted and pledged as collateral
to the Company's primary contract manufacturer. At March 31, 2000, $379,000 of
cash was restricted and pledged as collateral to the Company's primary contract
manufacturer and its facility landlord (unaudited).

 Inventories

   Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out method.

 Property and Equipment

   Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Property and equipment
held under capital leases are stated at the present

                                      F-8
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

value of the minimum lease payments at the inception of the lease and are
amortized using the straight-line method over the lesser of the life of the
related asset or the term of the lease. Upon retirement or sale, the cost of
the assets disposed of and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the determination of
net income or loss. Repairs and maintenance are charged to expense as incurred.

 Research and Development

   Research and development costs, except for certain software development
costs, are expensed as incurred. Software development costs incurred after
technological feasibility has been achieved and until the products are
available for general release are capitalized and amortized as the greater of
the ratio of current revenues to total expected revenues from the product or
straight-line method over the remaining estimated economic life of the product.
Costs of internally developed software which qualify for capitalization have
not been material to date.

 Accounting for Stock-Based Compensation

   Stock options and restricted stock issued to employees and members of the
Company's Board of Directors are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations ("APB 25"); accordingly, compensation expense is
recorded for options and restricted stock awarded to employees and directors to
the extent that the exercise or purchase prices are less than the common
stock's fair market value on the date of grant, where the number of shares and
exercise or purchase price are fixed. The difference between the fair value of
the Company's common stock and the exercise or purchase price of the stock
option or restricted stock award is recorded as deferred stock compensation.
Deferred stock compensation is amortized to compensation expense over the
vesting period of the underlying stock option or restricted stock. The Company
follows the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") (see
Note 8). Stock-based awards to non-employees are accounted for under provisions
of SFAS 123.

 Income Taxes

   Deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation reserve against deferred tax assets is
recorded, if based upon weighted available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.

                                      F-9
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Comprehensive Income (Loss)

  Comprehensive income (loss) is comprised of two components, net income (loss)
and other comprehensive income (loss). Comprehensive loss is equal to net loss
for the years ended September 30, 1997, 1998 and 1999 and the six month periods
ended March 31, 1999 and 2000 (unaudited).

 Net Loss Per Common Share--Historical

   Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Restricted common shares that are vested at the end of each
reporting period have been included as common shares outstanding for the basic
net loss per share calculation during that period; unvested restricted shares
have not been included in the basic net loss per common share calculation.
There is no difference between basic and diluted net loss per share since
potential common shares from the conversion of redeemable convertible preferred
stock and the exercises of options and warrants are dilutive for all periods
presented. The calculations of diluted net loss per common share for the years
ended September 30, 1997, 1998 and 1999 and the six months ended March 31, 1999
and 2000 do not include 1,638,862, 3,892,995, 16,782,135, 16,103,107
(unaudited) and 26,832,312 (unaudited) potential shares of common stock
equivalents, including common stock options and warrants and redeemable
convertible preferred stock, respectively.

 Net Loss Per Common Share--Pro Forma

   The unaudited pro forma net loss per common share for the year ended
September 30, 1999 and the six months ended March 31, 2000 is calculated
assuming the automatic conversion of all preferred stock outstanding had
occurred as of the beginning of the period or as of the date of issuance of the
preferred stock, if later. Therefore, accretion of the redeemable convertible
preferred stock is excluded from the calculation of pro forma net loss per
common share. The redeemable convertible preferred stock automatically converts
into 21,448,442 shares of common stock upon the completion of the Company's
initial public offering. The calculations of pro forma diluted net loss per
common share for the year ended September 30, 1999 and the six months ended
March 31, 2000 do not include 4,287,577 and 5,383,870 (unaudited) potential
shares of common stock equivalents as their inclusion would be dilutive,
respectively.

 Unaudited Pro Forma Balance Sheet

   Under the terms of the Company's redeemable convertible preferred stock, all
shares of such preferred stock will automatically convert into common stock
upon completion of the Company's initial public offering of common stock. The
unaudited pro forma balance sheet reflects the conversion of the outstanding
shares of redeemable convertible preferred stock into 21,448,442 shares of
common stock, as if the conversions had occurred on March 31, 2000.


                                      F-10
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates and would impact future
results of operations and cash flows.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. Because the Company does not currently hold any
derivative instruments and does not currently engage in hedging activities, the
adoption of SFAS 133 is not expected to have a material impact on its financial
position or operating results.

   In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin summarizes certain views of the staff of the
Securities and Exchange Commission (the "Staff") on applying generally accepted
accounting principals to revenue recognition in financial statements. The Staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
Company does not expect the application of SAB 101 to have a material impact on
the Company's financial position or results of operations.

   In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 will
become effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.

                                      F-11
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


3. INVENTORIES

   Inventories consisted of the following at September 30, 1998, 1999 and March
31, 2000 (unaudited) (in thousands):

<TABLE>
<CAPTION>
                                                         September 30,
                                                         ------------- March 31,
                                                         1998   1999     2000
<S>                                                      <C>   <C>     <C>
Raw materials........................................... $ 293 $   845  $2,924
Work in process.........................................   121     120      66
Finished goods..........................................   173     286     959
                                                         ----- -------  ------
                                                         $ 587 $ 1,251  $3,949
                                                         ===== =======  ======
</TABLE>

4. PROPERTY AND EQUIPMENT

   Property and equipment consisted of the following at September 30, 1998 and
1999 (in thousands):

<TABLE>
<CAPTION>
                                            Useful Life           1998 1999
      <S>                         <C>                             <C>  <C>
      Office furniture and
       equipment                              5 years             $163  $351
      Engineering and production
       equipment                              3 years              173   404
      Computer equipment and
       software                               3 years              335   642
      Leasehold improvements      Lesser of 3 years or lease term  210   210
                                                                  ---- -----
                                                                   881 1,607
      Less: accumulated
       depreciation and
       amortization                                                429   776
                                                                  ---- -----
                                                                  $452  $831
                                                                  ==== =====
</TABLE>

   As of September 30, 1998 and 1999, the Company had approximately $89,000 and
$165,000 (net of approximately $11,000 and $53,000 of accumulated amortization)
of office furniture, computer software and equipment under capital leases,
respectively.

   Depreciation and amortization expense was approximately $88,000, $194,000
and $361,000 for the years ended September 30, 1997, 1998 and 1999,
respectively.

5. BRIDGE LOANS

   During the year ended September 30, 1998, the Company issued a series of
uncollateralized subordinated promissory notes totaling $3,950,000 that were
payable on demand with an interest rate of 10% per annum. As of September 30,
1998, no principal or interest had been paid. In connection with these
promissory notes, the Company granted warrants to purchase 1,645,732 shares of
common stock at an exercise price of $0.37 per share. These warrants were
immediately exercisable on the date of issue and expire after ten years. The
fair value of the warrants on the date of issue of approximately $581,000 was
recorded in stockholders' equity (deficit) and as a discount on the related
notes payable. The discount was amortized as interest expense over the
estimated life of the notes and resulted in additional interest expense of
$348,000 and $233,000 during the years ended September 30, 1998 and 1999,
respectively.

                                      F-12
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   During the year ended September 30, 1999, the Company issued a series of
uncollateralized subordinated promissory notes totaling $1,100,000 that were
payable on demand with interest rates of 10% and 15%. In connection with these
notes, the Company granted warrants to purchase 798,562 shares of the Company's
common stock at an exercise price of $0.37 per share. The fair value of the
warrants on the date of issue of approximately $608,000 was recorded in
stockholders' equity (deficit) and as a discount on the related notes payable.
The discount was amortized as interest expense during the year ended September
30, 1999.

   On January 13, 1999, the Company converted approximately $2,750,000 of the
subordinated promissory notes into 357,142 shares of Series B redeemable
convertible preferred stock ("Series B Preferred") and approximately $2,300,000
of the subordinated promissory notes plus approximately $7,000 of accrued
interest into 299,631 shares of Series C redeemable convertible preferred stock
("Series C Preferred"). The note holders forgave $263,245 of accrued interest
upon the conversion of the subordinated promissory notes. The interest
forgiveness has been recorded as an extraordinary gain on extinguishment of
debt.

6. NOTES PAYABLE

   Notes payable consisted of the following at September 30, 1998 and 1999 (in
thousands):

<TABLE>
<CAPTION>
                                                                      1998  1999
      <S>                                                             <C>   <C>
      Equipment line of credit....................................... $ --  $41
      Note payable...................................................    17 --
      Credit card debt...............................................    44 --
      10% note payable to officer and stockholders...................    21 --
      12% note payable to former officer and stockholder.............     4 --
                                                                      ----- ---
      Total notes payable............................................    86  41
      Less current portion...........................................    86  15
                                                                      ----- ---
      Long-term notes payable........................................ $ --  $26
                                                                      ===== ===
</TABLE>

   In May 1994, the Company issued a $100,000 note payable to a bank with 60-
monthly payments of principal and interest through May 1999. The interest rate
on the note was determined monthly as prime plus 2.25%. In accordance with the
note's terms, this note was paid in full as of May 1999.

   In March 1996, the Company obtained a credit card with a maximum limit of
$50,000. The interest rate on the credit card is prime plus 6.75% (14.75%, 15%
and 15.25% at September 30, 1999, 1998 and 1997, respectively).

   At September 30, 1998, the Company had an uncollateralized 10% interest
bearing note payable of approximately $21,000 with two stockholders. The
original maturity of this note payable was April 30, 1996 and the Company had
been charged a late payment fee of 3% per month since the maturity date. At
September 30, 1998, the Company had an additional uncollateralized 12% interest
bearing note payable of approximately $4,000 with a former officer and
stockholder. No interest or

                                      F-13
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

late fees had been paid on either note as of September 30, 1998. During the
year ended September 30, 1999, the Company entered into an agreement with the
holders of the related party notes whereby the interest rate on each note was
halved, no further interest accrued after January 13, 1999 and all late fees
were waived. In total, approximately $51,000 of interest and late fees were
forgiven during the year ended September 30, 1999. Both notes and the remaining
accrued interest were paid in full in August 1999. The interest forgiveness and
waiver of late fees have been recorded as an extraordinary gain on
extinguishment of debt.

   In November 1998, the Company entered into a line of credit for the purchase
of equipment with a maximum limit of $60,000. The interest rate on the line is
determined on the average daily balance of prime plus 1.0% (9.0% at September
30, 1999). Under the terms of the agreement, any equipment advances that were
outstanding on November 30, 1998 (approximately $56,000) were payable in 34
equal monthly installments of principal, plus accrued interest, commencing
December 31, 1998. Equipment advances, once repaid, may not be re-borrowed. The
line of credit is collateralized by substantially all of the assets of the
Company.

   The aggregate amounts of notes payable due as of September 30, 1999 were as
follows (in thousands):

<TABLE>
      <S>                                                                    <C>
      Year ended September 30,
      2000.................................................................. $22
      2001..................................................................  21
      2002..................................................................   2
                                                                             ---
      Total payments........................................................  45
      Less amounts representing interest....................................   4
                                                                             ---
                                                                              41
      Less amounts due within one year......................................  15
                                                                             ---
      Long-term portion..................................................... $26
                                                                             ===
</TABLE>


   On September 28, 1998, the Company entered into an Accounts Receivable
Purchase Agreement (the "Agreement") with a bank. Under the terms of the
Agreement, the bank agreed to pay the Company 85% of approved receivables and
hold the remaining 15% in reserve until collected by the bank. The total of all
receivables purchased may not exceed $1,000,000 at any time. The Company is
charged a finance fee of 1% per month on outstanding Purchased Receivables and
a one-time administrative fee for each Purchased Receivable of .25% of the
receivable. Receivables purchased are collateralized by all of the assets of
the Company. The term of this Agreement is for one year and from year to year
thereafter unless terminated by either party. No amounts were outstanding under
this Agreement at September 30, 1998 or 1999.


                                      F-14
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

7. STOCKHOLDERS' EQUITY (DEFICIT)

 Redeemable Convertible Preferred Stock

   The following table summarizes redeemable convertible preferred stock
activity (in thousands, except share data):

<TABLE>
<CAPTION>
                                                                 Redeemable
                                                                 Convertible
                                                               Preferred Stock
                                                              -----------------
                                                               Shares   Amount
      <S>                                                     <C>       <C>
      April 1997 issuance of Series A redeemable convertible
       preferred stock.......................................   185,250 $ 1,000
                                                              --------- -------
      Balance, September 30, 1997 and 1998...................   185,250   1,000
      January 1999 issuance of Series B redeemable
       convertible preferred stock upon conversion of bridge
       loans.................................................   357,142   2,750
      January 1999 issuance of Series C redeemable
       convertible preferred stock upon conversion of bridge
       loans.................................................   299,631   2,307
      January 1999 issuance of Series C redeemable
       convertible preferred stock for cash..................   422,102   3,093
      June 1999 issuance of Series C redeemable convertible
       preferred stock for cash..............................   401,816   3,094
      Accretion of redeemable convertible preferred stock to
       redemption value......................................       --      223
                                                              --------- -------
      Balance, September 30, 1999............................ 1,665,941  12,467
      December 1999 issuance of Series D redeemable
       convertible preferred stock for cash (unaudited)...... 3,581,554  25,250
      Accretion of redeemable convertible preferred stock to
       redemption value (unaudited)..........................       --    4,259
                                                              --------- -------
      Balance, March 31, 2000 (unaudited).................... 5,247,495 $41,976
                                                              ========= =======
</TABLE>

   As of September 30, 1999, the Company had three series of redeemable
convertible preferred stock: Series A preferred stock ("Series A Preferred"),
Series B Preferred and Series C Preferred (collectively, the "Preferred Stock")
and had reserved 12,494,557 shares of its common stock for the conversion of
all Preferred Stock.

   The Preferred Stock is convertible into common stock at any time, at the
option of the holder, based on specified formulas, subject to anti-dilution
adjustments, as defined. At September 30, 1999, each share of Preferred Stock
was convertible into 7.5 shares of common stock. Each share of Series B
Preferred and Series C Preferred will automatically convert into common stock
upon an initial public offering of common stock at a price per share of at
least $3.08 and proceeds to the Company of at least $30,000,000. Each share of
Series A Preferred will automatically convert into common stock upon an initial
public offering of common stock at a price per share of at least $2.16 and
proceeds to the Company of at least $10,000,000. Additionally, at the election
of 75% of the

                                      F-15
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

holders of Series A Preferred or Series B Preferred, all shares of Series A
Preferred or Series B Preferred, respectively, will automatically convert into
shares of common stock.

   Holders of the Preferred Stock are entitled to votes equaling the number of
shares of common stock into which their shares may be converted. The holders of
Preferred Stock are entitled to annual, cumulative dividends of $0.432 for
Series A Preferred and $0.693 for Series B Preferred and Series C Preferred
when and if declared by the Company's Board of Directors. If the Company pays
dividends of less than the total amount of unpaid dividends, such payments will
be made first to the holders of Series C Preferred until paid in full, then to
the holders of Series B Preferred until paid in full and then to the holders of
Series A Preferred. No dividends may be paid to the holders of common stock
until all unpaid dividends on the Preferred Stock have been paid.

   In the event of liquidation, dissolution or winding up of the Company, the
holders of Series C Preferred are entitled to a liquidation preference of $7.70
per share plus all declared and unpaid dividends thereon, prior to any
distributions to holders of the Series A Preferred, Series B Preferred or
common stock. Upon satisfaction of the Series C Preferred liquidation
preference, the holders of Series B Preferred are entitled to a liquidation
preference of $7.70 per share plus all declared and unpaid dividends thereon,
prior to any distributions to holders of the Series A Preferred or common
stock. Upon the satisfaction of the Series C Preferred and Series B Preferred
liquidation preferences, the holders of Series A Preferred are entitled to a
liquidation preference of $5.40 per share plus all declared and unpaid
dividends thereon, prior to any distributions to holders of common stock.
However, to the extent any net assets available for distribution to
shareholders exceeds $125 million, the entire amount of such assets would be
distributed ratably among the holders of shares of common stock and Preferred
Stock as if converted into shares of common stock.

   The Company, upon written notice from the holders of at least two-thirds of
the Series C Preferred, is obligated to redeem all or any portion (but not less
than one-third of the shares of the holders electing to redeem) of the
Preferred Stock after January 2003. The redemption price per share for the
Series C Preferred would be the sum of the liquidation value per share and the
amount calculated as the current valuation of the Company less the aggregate
liquidation value for all shares of Preferred Stock divided by the fully
diluted number of outstanding shares of common stock. If based on the then
current valuation of the Company, the net assets available for distribution to
shareholders exceeds $125 million, then the redemption price for each share of
Series C Preferred would be the amount payable if the entire net assets of the
Company were distributed ratably among the holders of shares of common stock
and Preferred Stock as if converted into shares of common stock. The redemption
price per share for Series B Preferred would be the liquidation value per
share. The redemption price per share for holders of Series A Preferred would
be the greater of the liquidation value per share or the current fair market
value per share that factors in aggregate consideration received upon the
assumed exercise of all derivative securities. If the Company does not have
sufficient funds for all requested redemptions, payment will be made first to
the holders of Series C Preferred until paid in full, then to the holders of
Series B Preferred until paid in full and then to the holders of Series A
Preferred. The Company has the option to redeem shares for cash or

                                      F-16
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

in the form of an 18-month pre-payable note bearing interest at prime plus 2%,
secured by the available assets of the Company.

 Common Stock

   On November 12, 1999, the Company completed a three-for-one split of the
Company's common stock, which was effected through a stock dividend (the "1999
Stock Split"). All common stock share and per share amounts that appear in the
financial statements and the notes thereto have been restated to reflect the
1999 Stock Split.

   On May 15, 2000, the Company's Board of Directors approved a 2.5-for-one
split of the Company's common stock, subject to stockholder approval (the "2000
Stock Split"). All common stock share and per share amounts that appear in the
financial statements and the notes thereto have been restated to reflect the
2000 Stock Split. The Board of Directors also approved an increase in the
authorized number of common shares to 60,000,000, subject to stockholder
approval.

   On January 7, 1998, the Company issued 225,000 shares of restricted stock at
$0.07 per share to a director of the Company. In accordance with the restricted
stock agreement, the Company has the right to buy back any unvested shares at
the same purchase price if the director ceases to be affiliated with the
Company. Shares vest 33% as of June 30, 1998 and 8.375% per quarter thereafter.
As of September 30, 1999, 56,532 shares remained unvested.

   Unaudited. In November 1999, the Company issued 637,500 shares of restricted
stock at $0.24 per share to certain officers and directors of the Company. Of
these shares, 75,000 shares vest 50% on November 18, 2000 and 12.5% per quarter
thereafter and 187,500 shares vest 25% on November 18, 2000 and 6.25% per
quarter thereafter. The remaining 375,000 shares vest quarterly upon the
achievement of certain financial targets or in December 2004, whichever is
earlier. As of March 31, 2000, the Company had achieved two quarterly financial
targets and, accordingly, 62,500 shares had vested. Unvested restricted shares
are subject to forfeiture in the event that an employee ceases to be employed
by the Company or a director ceases to be a director of the Company. The
Company recorded deferred stock compensation of approximately $1,206,000, which
represents the excess of the fair value of the restricted shares at the date of
issue over the purchase price. Compensation expense will be recognized ratably
over the vesting period of the restricted stock. For the six months ended
March 31, 2000, the Company recognized approximately $115,000 of related stock
compensation expense.

   In connection with the November 1999 restricted stock grants, the Company
accepted a recourse note payable from an officer of the Company in the amount
of $90,000. This note has an interest rate of 6.08% and is payable on the
earlier of demand by the Company or November 18, 2004.

8. STOCK INCENTIVE PLAN

   Options and awards to purchase shares of the Company's common stock have
been granted to employees and directors under the Company's 1997 Stock
Incentive Plan (the "1997 Plan"), which

                                      F-17
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

was adopted by the Board of Directors in November 1997. On October 21, 1999 the
1997 Plan was terminated and all outstanding options became options under the
1999 Stock Incentive Plan.

   On October 21, 1999, the Company's Board of Directors approved, subject to
shareholder approval, the Company's 1999 Stock Incentive Plan (the "1999
Plan"). Under the 1999 Plan, stock option and restricted stock or other stock-
based awards for up to 4,747,902 shares of common stock may be issued to
employees, officers, directors, consultants and advisors of the Company (see
Note 13). Options are granted for terms of up to ten years and vest over
varying periods, generally 25% on the first anniversary of the grant date and
thereafter in equal quarterly installments over the next three years. The
option price per share is determined by the Board of Directors.

   Stock option activity for the 1997 Plan and 1999 Plan (the "Plans"), since
October 1, 1997 was as follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                             Number of  Exercise
                                                              Options    Price
      <S>                                                    <C>        <C>
      Outstanding, October 1, 1997..........................       --    $ --
        Granted.............................................   882,150    0.07
        Exercised...........................................  (225,000)   0.07
        Canceled............................................   (48,750)   0.07
                                                             ---------
      Outstanding, September 30, 1998.......................   608,400    0.07
        Granted............................................. 1,593,975    0.14
        Exercised...........................................   (22,612)   0.07
        Canceled............................................  (242,610)   0.08
                                                             ---------
      Outstanding, September 30, 1999....................... 1,937,153    0.13
        Granted (unaudited)................................. 2,080,750    1.58
        Exercised (unaudited)...............................  (367,100)   0.10
        Canceled (unaudited)................................  (149,786)   0.18
                                                             ---------
      Outstanding, March 31, 2000 (unaudited)............... 3,501,017    0.99
                                                             =========   =====
</TABLE>

   As of September 30, 1999 and March 31, 2000 (unaudited), options to purchase
199,915 and 92,242 shares of common stock, respectively, were exercisable with
a weighted-average exercise price of $0.08 and $0.10, respectively. No options
were exercisable at September 30, 1998. The weighted average fair value of
options granted during the year ended September 30, 1998 was $0.02 per share;
all options were granted with an exercise price equal to fair market value. For
financial reporting purposes, the weighted average fair values of options
granted during the year ended September 30, 1999 with exercise prices equal to
the fair market value and with exercise prices at below fair market value were
$0.02 (31,875 options) and $1.05 (1,562,100 options) per share, respectively.
As of September 30, 1999 and March 31, 2000 (unaudited), 201,735 and 3,549,785
shares, respectively, were available for future grants under the Plans (see
Note 13).

                                      F-18
<PAGE>

                             NETWORK ENGINES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

   The following table summarizes the stock options outstanding at March 31,
2000 (unaudited):

<TABLE>
<CAPTION>
                            Number of               Remaining               Number of
           Exercise          Options               Contractual               Options
            Price          Outstanding           Life (in years)           Exercisable
           <S>             <C>                   <C>                       <C>
            $0.07             240,820                 7.82                   51,555
             0.13           1,119,352                 9.11                   40,687
             0.24             860,845                 9.60                      --
             1.20             278,250                 9.75                      --
             2.00             740,625                 9.83                      --
             4.00             139,250                 9.88                      --
             6.00             121,875                 9.96                      --
                            ---------                                        ------
                            3,501,017                                        92,242
                            =========                                        ======
</TABLE>

   During the year ended September 30, 1999 and the six months ended March 31,
2000 (unaudited), the Company recorded deferred compensation for restricted
stock and stock options granted to employees at prices deemed to be below fair
market value for financial reporting purposes of approximately $1,566,000 and
$11,299,000, respectively. The Company is recognizing the compensation expense
over the vesting period. The Company recognized compensation expense relating
to deferred compensation of approximately $127,000 and $876,000 for the year
ended September 30, 1999 and the six months ended March 31, 2000 (unaudited),
respectively.

   Had compensation expense for the Company's Plans been determined based on
the fair value at the date of grant for awards made since the Plans' adoption,
consistent with the provisions of SFAS 123, the Company's net loss
attributable to common stockholders and net loss per common share for the
years ended September 30, 1998 and 1999 would have increased to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                               1998                 1999
                                       -------------------- --------------------
                                                      Net                  Net
                                         Net loss    loss     Net loss    loss
                                       attributable   per   attributable   per
                                        to common   common   to common   common
                                       stockholders  share  stockholders  share
                                         (in thousands, except per share data)
      <S>                              <C>          <C>     <C>          <C>
      As reported.....................   $(4,199)   $(1.31)   $(6,053)   $(1.83)
      Pro forma.......................    (4,201)    (1.31)    (6,066)    (1.83)
</TABLE>

   For this purpose, the fair value of options at the date of grant were
estimated using the minimum value method with the following assumptions: risk-
free interest rate of 6.0% and 5.5% for 1998 and 1999, respectively; no
dividend yield; no volatility factor; and a weighted-average expected life of
the options of five years. However, because the determination of the fair
value of all options granted after the Company becomes a publicly-traded
entity will include an expected volatility factor, because most options vest
over periods of up to four years and because additional option grants are
expected to be made subsequent to September 30, 1999, the pro forma effects of
applying the fair value method may be materially different in future years.

                                     F-19
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


9. STOCK WARRANTS

   During the years ended September 30, 1998 and 1999, the Company issued
warrants to purchase 1,645,732 and 798,562 shares of common stock,
respectively, in connection with the issuance of a series of subordinated
promissory notes. Each warrant expires ten years from the date of issuance and
has an exercise price of $0.37 per share. The number of shares and the exercise
price are subject to anti-dilution adjustments. In the event that the Company
is obligated to redeem all or any portion of the Preferred Stock, the Company
must concurrently redeem an equivalent portion of these warrants. The fair
value of the warrants on the date of issue of approximately $588,000 and
$608,000 for the warrants issued in fiscal year 1998 and 1999, respectively,
was recorded in additional paid-in capital and interest expense over the
estimated life of the notes.

   During the year ended September 30, 1999, the Company entered into
agreements with the holders of the 1998 subordinated promissory notes whereby
the warrants originally issued were reduced from the right to purchase
1,645,732 shares of common stock to 1,096,125 shares of common stock. Also,
during the year ended September 30, 1999, the Company issued warrants to
purchase 206,250 shares of common stock to some of the holders of Series C
Preferred, in connection with that financing. Each warrant expires ten years
from the date of issuance and has an exercise price of $0.37 per share. The
number of shares and the exercise price are subject to anti-dilution
adjustments. In the event the Company is obligated to redeem all or any portion
of the Preferred Stock, the Company must concurrently redeem an equivalent
portion of these warrants. The fair value of the warrants of approximately
$157,000 was recorded as a discount on the Series C Preferred and in additional
paid-in capital.

   Prior to October 1, 1997, the Company issued warrants for the right to
purchase 249,487 shares of common stock. These warrants have exercise prices
which range from $0.07 per share to $0.53 per share and expire at various dates
between August 31, 2002 and February 23, 2003. These warrants, which were
issued in connection with notes payable, were determined to have an aggregate
value of $41,000 on the various dates of grant and were recorded in additional
paid-in capital and interest expense over the life of the related notes
payable.

   As of September 30, 1999, the Company had reserved 2,350,424 shares of
common stock for the exercise of all of the Company's outstanding warrants.

10. COMMITMENTS AND CONTINGENCIES

 Operating Leases

   As of September 30, 1999, the Company had five months remaining on its
corporate headquarters lease. This lease provides for base rent and certain
additional expenses such as utilities and taxes. The Company also leases sales
offices in Virginia and California. These additional office leases expire
during fiscal year 2000. Extensions of sales office leases will be executed as
needed. Rent expense was approximately $18,000, $37,000 and $50,000 for the
years ended September 30, 1997, 1998 and 1999, respectively. As of September
30, 1999, the future noncancelable lease payments on all committed operating
leases were $23,502 for the year ended September 30, 2000.

                                      F-20
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Capital Leases

   The Company leases certain furniture, equipment and software under non-
cancelable capital leases. The lease terms range from 36 to 60 months and have
interest rates of 12% to 15.5%. As of September 30, 1999, the required monthly
installment of principal and interest for all capital leases was approximately
$6,000.

   Future minimum lease payments under all noncancelable capital leases as of
September 30, 1999 were as follows (in thousands):

<TABLE>
      <S>                                                                   <C>
      Year ended September 30,
      2000................................................................. $ 74
      2001.................................................................   74
      2002.................................................................   61
      2003.................................................................   13
                                                                            ----
      Total payments.......................................................  222
      Less amounts representing interest...................................   42
                                                                            ----
      Present value of future minimum payments.............................  180
      Less amounts due within one year.....................................   48
                                                                            ----
      Long-term portion.................................................... $132
                                                                            ====
</TABLE>

Contingencies

   As a normal incidence of the nature of the Company's business, various
claims, charges and litigation have been asserted or commenced against the
Company arising from or related to employee relations. Management does not
believe these claims will have a material adverse effect of the financial
position or results of operations of the Company.

11. INCOME TAXES

   Due to the loss incurred during fiscal years 1997, 1998 and 1999, the
Company did not record a provision for any federal or state income taxes in
those years. The following is a reconciliation between the amount of the
Company's income taxes utilizing the U.S. federal statutory rate and the
Company's actual provision for income taxes for the years ended September 30,
1997, 1998 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                      1997    1998     1999
      <S>                                             <C>    <C>      <C>
      At U.S. federal statutory rate................. $(393) $(1,428) $(1,781)
      State taxes, net of federal effect.............   (92)    (261)    (381)
      Research and development credits...............   (17)     (20)     (92)
      Non-deductible stock option compensation
       charge........................................   --       --        43
      Non-deductible expenses and other charges......     1      132     (103)
      Effect of change in valuation allowance........   501    1,577    2,314
                                                      -----  -------  -------
      Provision for income taxes..................... $ --   $   --   $   --
                                                      =====  =======  =======
</TABLE>

   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

                                      F-21
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

purposes. As of September 30, 1998 and 1999, net deferred tax assets consisted
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                1998     1999
      <S>                                                      <C>      <C>
      Net operating losses.................................... $ 1,795  $ 2,690
      Tax credit carryforwards................................      86      238
      Capitalized research and engineering....................     --     1,227
      Temporary differences...................................     298      338
                                                               -------  -------
      Total deferred tax asset................................   2,179    4,493
      Valuation allowance.....................................  (2,179)  (4,493)
                                                               -------  -------
      Net deferred tax asset.................................. $   --   $   --
                                                               =======  =======
</TABLE>

   A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, as of
September 30, 1998 and 1999, a valuation allowance was recorded for the full
amount of the deferred tax asset due to the uncertainty of their realization.

   As of September 30, 1999, the Company had net operating loss carryforwards
for both federal and state income tax purposes of approximately $6.7 million,
which expire at various dates through 2019 and 2004, respectively. The Company
also has available research and development credits for federal and state
income tax purposes of approximately $140,000 and $109,000, respectively, which
expire at various dates through 2014.

12. EMPLOYEE SAVINGS PLAN

   The Company sponsors a savings plan for its employees, who meet certain
eligibility requirements, which is designed to be a qualified plan under
section 401(k) of the Internal Revenue Code. Eligible employees are permitted
to contribute to the 401(k) plan through payroll deductions within statutory
and plan limits. The Company does not contribute to the plan.

13. SUBSEQUENT EVENTS

 Series D Preferred Stock Offering

   On December 20, 1999, the Company issued 3,581,554 shares of Series D
redeemable convertible preferred stock ("Series D Preferred"), for proceeds to
the Company of $25,250,000, prior to any fees or offering costs.

   Each share of Series D Preferred is convertible at any time at the option of
the holder into 2.5 shares of common stock, subject to anti-dilution
adjustments, as defined. Each share of Series D Preferred will automatically be
converted into shares of common stock upon the closing of an initial public
offering of the Company's common stock at a price per share of at least $7.05
and proceeds to the Company of at least $30,000,000.

                                      F-22
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Each share of Series D Preferred entitles the holder to the number of votes
equal to the number of shares of common stock issuable upon conversion. The
Series D Preferred holders have the right to receive cumulative dividends, when
and if declared by the Board of Directors, at a rate of $0.6345 per share per
annum. If the Company pays less than the total amount of dividends then
accrued, such payment will be made first to the holders of Series D Preferred
and Series C Preferred on a pro-rata basis until paid in full before any
payments are made to the holders of Series B Preferred and Series A Preferred.

   The Series D Preferred has a liquidation preference of $7.05 per share plus
all declared and unpaid dividends. If the Company distributes less than the
total liquidation preference, such payments will be made first to the holders
of Series D Preferred and Series C Preferred on a pro-rata basis until paid in
full before any payments are made to holders of Series B Preferred and Series A
Preferred. Both the holders Series D Preferred and Series C Preferred
participate ratably, as if converted into shares of common stock, with holders
of common stock up to a maximum of four times their respective purchase price
per share. However, if the amount of net assets to be distributed to common
shareholders is greater than four times the Series D Preferred and Series C
Preferred purchase price, then the holders of Series D Preferred and Series C
Preferred will be liquidated as if converted into shares of common stock.

   The Series D Preferred has a redemption provision that is substantially
identical to the Series C Preferred except that the Series D Preferred will be
redeemed prior to the Series C Preferred. The redemption option for all series
of Preferred Stock begins on the fourth anniversary of the Series D Preferred
closing and will extend to the time of a public offering. After the affirmative
election of redemption and payment to all holders of Series D Preferred, the
holders of Series C Preferred, Series B Preferred and Series A Preferred may
elect to redeem all or a portion, but not less than one-third, of their shares.

   The Series D Preferred has the same pre-emptive rights as the Series C
Preferred and has anti-dilution protection. In connection with the Series D
Preferred offering, the Company increased the number of authorized shares of
common stock to 16,000,000.

 Litigation

   On December 29, 1999, a former employee commenced a lawsuit against the
Company, a current officer and director and a former officer and director for
unlawful termination of employment. Although the Company intends to vigorously
defend these claims, an adverse resolution could have a material impact of the
Company's future results of operations.

                                      F-23
<PAGE>

                             NETWORK ENGINES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 Office Leases

   During October and November 1999, the Company entered into operating leases
for its new corporate headquarters located in Massachusetts and additional
sales offices located in New York, Virginia and California. The term of the
lease for the corporate headquarters is five years, plus an additional five-
month commitment for temporary office space. The sales offices all have
commitment terms of three months or less. The total noncancelable lease
payments for all new committed operating leases are approximately $3,028,000
over the next five years.

 Increase of Authorized Shares of the 1999 Plan

   In March 2000, the Company's Board of Directors approved, subject to
shareholder approval, an increase of 3,300,000 in the number of shares
authorized under the 1999 Plan.

 Line of Credit

   In April 2000, the Company amended its equipment line of credit to provide
for an additional amount of $2,000,000 and to provide a working capital
revolving line of credit of $4,000,000. The additional equipment line amount is
separated into two consecutive six-month borrowing periods for $1,000,000
beginning on the date of amendment. The equipment line amount has an interest
rate of prime plus 1.25%, which is payable monthly. Any outstanding balances at
the end of each of the equipment line borrowing periods will be repaid in 36
equal monthly installments. The working capital line of credit bears interest
at prime plus 1% and matures in April 2001.

 Sale of P6000 Product Line

   In April 2000, the Company sold all inventory and test equipment related to
its P6000 product line to Copernicus Systems, Inc., a company wholly-owned by a
stockholder and former officer and director of the Company. The production and
development of the P6000 product line had been discontinued and all related
assets and inventory had been reserved as of September 30, 1999. In exchange
for these assets, Copernicus Systems agreed to pay the Company royalties on
future sales of the inventory and agreed to support P6000 units for which the
Company had obligations under warranty or services contracts.

                                      F-24
<PAGE>


   [The inside back cover includes a picture of a cluster of five of our
WebEngine Roadster products. Above the picture appears the following text:
"Internet Server Appliances." Below the picture appears our logo.]
<PAGE>

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

                           [LOGO OF NETWORK ENGINES]

                     6,250,000 Shares of Common Stock

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

                                   PROSPECTUS

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

                          Donaldson, Lufkin & Jenrette

                             Dain Rauscher Wessels

                               Robertson Stephens

                                 DLJdirect Inc.

- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Until          , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter in its offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

   The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.

<TABLE>
   <S>                                                                <C>
   SEC registration fee.............................................. $  24,668
   NASD filing fee...................................................     9,844
   Nasdaq National Market listing fee................................    95,000
   Printing and engraving expenses...................................   200,000
   Legal fees and expenses...........................................   300,000
   Accounting fees and expenses......................................   350,000
   Blue Sky fees and expenses (including legal fees).................    15,000
   Transfer agent and registrar fees and expenses....................    10,000
   Miscellaneous.....................................................    10,488
                                                                      ---------
       Total......................................................... 1,000,000
                                                                      =========
</TABLE>

   The Registrant will bear all expenses shown above.

Item 14. Indemnification of Directors and Officers.

   The Registrant's Second Amended and Restated Certificate of Incorporation
(the "Restated Certificate") provides that, except to the extent prohibited by
the Delaware General Corporation Law (the "DGCL"), the Registrant's directors
shall not be personally liable to the Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Restated
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Registrant has obtained liability
insurance for its officers and directors.

   Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL including for an unlawful payment of dividend or
unlawful stock purchase or redemption, or (iv) for any transaction from which
the director derived an

                                      II-1
<PAGE>

improper personal benefit. The DGCL provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, a vote of stockholders or otherwise. The Restated Certificate
eliminates the personal liability of directors to the fullest extent permitted
by the DGCL and, together with the Registrant's Second Amended and Restated By-
Laws (the "Restated By-Laws"), provides that the Registrant shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.

   The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Act"). Reference is made to
the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.

Item 15. Recent Sales of Unregistered Securities.

   In the three years preceding the filing of this registration statement,
through a series of private placements and its stock option plan, the
Registrant has issued the following securities that were not registered under
the Securities Act (all information in this item has been adjusted to reflect
stock splits effected to date for the Registrants' common stock, including the
2.5-for-1 stock split to be effected prior to the completion of this offering):

     (a)  Issuances of Capital Stock:

  .  On April 9, 1997, the Registrant sold to Pioneer Ventures Limited
     Partnership and Pioneer Ventures Limited Partnership II an aggregate of
     185,250 shares of series A convertible preferred stock for $1,000,000.

  .  On January 7, 1998, the Registrant sold to Mr. Kirshy 225,000 shares of
     our common stock, subject to a stock restriction agreement, for $16,500.

  .  On January 13, 1999, the Registrant sold to Pioneer Ventures Limited
     Partnership and Pioneer Ventures Limited Partnership II an aggregate of
     357,142 shares of series B convertible preferred stock for $2,749,993.

  .  On January 13, 1999, the Registrant sold to existing and new individual
     and venture capital investors an aggregate of 721,733 shares of series C
     convertible participating preferred stock for $5,557,344.10. On June 30,
     1999, we sold to existing and new individual and venture capital
     investors an additional 401,816 shares of series C convertible
     participating preferred stock for $3,093,983.

                                      II-2
<PAGE>


  .  On November 18, 1999, the Registrant sold to Mr. Genovesi, Mr. Blaeser
     and Mr. Kirshy an aggregate of 637,500 shares of our common stock,
     subject to stock restriction agreements, for $153,000. Mr. Genovesi paid
     for his 375,000 shares by making a full recourse promissory note payable
     to the Registrant for $90,000.

  .  On December 20, 1999, the Registrant sold to existing and new individual
     and venture capital investors an aggregate of 3,581,554 shares of series
     D convertible participating preferred stock for $25,249,956.

    (b) Issuances of Warrants. From October 16, 1997 to January 13, 1999, the
Registrant issued warrants to purchase common stock to individual and venture
capital investors at an exercise price of $0.36667. In the case of the warrants
issued from October 16, 1997 to September 8, 1998, the number of shares of
common stock underlying those warrants was amended in exchange for each warrant
holder's waiver of its preemptive rights that would otherwise have been
triggered when the Registrant agreed to sell its shares of series C convertible
participating preferred stock to new and existing individual and venture
capital investors. These warrants were issued in the following numbers on the
following dates:

  .  On October 16, 1997, warrants exercisable for 138,937 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $1,000,000. On December 8,
     1998, the number of shares of common stock underlying these warrants was
     revised to equal 277,500.

  .  On January 30, 1998, warrants exercisable for 104,205 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $750,000. On December 8,
     1998, the number of shares of common stock underlying these warrants was
     revised to equal 208,125.

  .  On May 21, 1998, warrants exercisable for 27,787 shares were issued in
     connection with the issuance of promissory notes made by the Registrant
     on the same date in exchange for $200,000. On December 8, 1998, the
     number of shares of common stock underlying these warrants was revised
     to equal 55,500.

  .  On June 4, 1998, warrants exercisable for 111,150 shares were issued in
     connection with the issuance of promissory notes made by the Registrant
     on the same date in exchange for $800,000. On December 8, 1998, the
     number of shares of common stock underlying these warrants was revised
     to equal 222,000.

  .  On August 12, 1998, warrants exercisable for 159,562 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $1,150,000. On December 8,
     1998, the number of shares of common stock underlying these warrants was
     revised to equal 319,125.

  .  On September 8, 1998, warrants exercisable for 6,937 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $50,000. On December 8,
     1998, the number of shares of common stock underlying this warrant was
     revised to equal 13,875.

                                      II-3
<PAGE>


  .  On November 2, 1998, warrants exercisable for 48,562 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $350,000.

  .  On December 8, 1998, warrants exercisable for 750,000 shares were issued
     in connection with the issuance of promissory notes made by the
     Registrant on the same date in exchange for $750,000.

  .  On January 13, 1999, warrants exercisable for 206,250 shares were issued
     in connection with the sale of 680,639 shares of series C convertible
     participating preferred stock in exchange for an aggregate of
     $5,240,920.

    (c) Grants and Exercises of Stock Options. The Registrant's 1999 Stock
Incentive Plan was approved by the Board of Directors in October 1999, subject
to stockholder approval. As of May 20, 2000, options to purchase and awards of
an aggregate of 1,070,252 shares of common stock granted to the Registrant's
employees and officers had been exercised for a consideration of $272,710 under
the Registrant's 1999 Stock Incentive Plan and options to purchase 3,845,365
shares of common stock granted to the Registrant's employees, officers and
directors were outstanding under the Registrant's 1999 Stock Incentive Plan.

    (d) Issuances of Promissory Notes. On the following dates, the Registrant
issued promissory notes to new and existing individual and venture capital
investors in the following aggregate amounts each bearing interest at 10% per
year, except as otherwise noted:

  .  On October 16, 1997, the Registrant issued notes for an aggregate of
     $1,000,000 in exchange for loans of the same principal amount.

  .  On January 30, 1998, the Registrant issued notes for an aggregate of
     $750,000 in exchange for loans of the same principal amount.

  .  On May 21, 1998, the Registrant issued notes for an aggregate of
     $200,000 in exchange for loans of the same principal amount.

  .  On June 4, 1998, the Registrant issued notes for an aggregate of
     $800,000 in exchange for loans of the same principal amount.

  .  On August 12, 1998, the Registrant issued notes for an aggregate of
     $1,150,000 in exchange for loans of the same principal amount.


                                      II-4
<PAGE>


  .  On September 8, 1998, the Registrant issued notes for an aggregate of
     $50,000 in exchange for loans of the same principal amount.

  .  On November 2, 1998, the Registrant issued notes for an aggregate of
     $350,000 in exchange for loans of the same principal amount.

  .  On December 8, 1998, the Registrant issued notes for an aggregate of
     $750,000 bearing interest at 15% per year in exchange for loans of the
     same principal amount.

   No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

    (a) Exhibits:

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 <C>     <S>
 **1.1   Form of Underwriting Agreement
  *3.1   Amended and Restated Certificate of Incorporation of the Registrant
   3.2   Form of Second Amended and Restated Certificate of Incorporation of
         the Registrant, to be filed upon the closing of this offering
         Form of Amendment to the Registrant's Amended and Restated Certificate
         of Incorporation to be adopted prior to the effective date of this
         registration statement
  *3.3   By-Laws of the Registrant
   3.4   Form of Second Amended and Restated By-Laws of the Registrant, to be
         effective upon the closing of this offering
   3.5   Form of Certificate of Amendment of Amended and Restated Certificate
         of Incorporation of the Registrant
   4.1   Specimen common stock certificate
  *4.2   Provisions of the Second Amended and Restated Certificate of
         Incorporation and Amended and Restated By-Laws of the Registrant
         defining the rights of holders of common stock of the Registrant
         (included in Exhibits 3.1, 3.2, 3.3 and 3.4)
 **5.1   Opinion of Hale and Dorr LLP
 *10.1   Lease for 25 Dan Road, Canton, Massachusetts
 *10.2   The Registrant's 1999 Stock Incentive Plan
 *10.3   Form of Incentive Stock Option Agreement under the Registrant's 1999
         Stock Incentive Plan
  10.4   The Registrant's 2000 Employee Stock Purchase Plan
  10.5   The Registrant's 2000 Director Stock Option Plan
 *10.6   Investor Rights Agreement, dated December 20, 1999, among the
         Registrant and certain investors in our preferred stock and warrants
 *10.7   Voting Trust Agreement, dated October 1, 1995 among Mr. Genovesi and
         Ms. Smith, as trustees, and members of their families.
 *10.8   Restricted Stock Agreement with Lawrence Genovesi, dated November 18,
         1999, under the 1999 Stock Incentive Plan
</TABLE>

                                      II-5
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 <C>     <S>
 *10.9   Restricted Stock Agreement with Dennis Kirshy, dated January 7, 1998,
         under the 1997 Stock Incentive Plan
 *10.10  Restricted Stock Agreement with Dennis Kirshy, dated November 18,
         1999, under the 1999 Stock Incentive Plan
 *10.11  Restricted Stock Agreement with John Blaeser, dated November 18, 1999,
         under the 1999 Stock Incentive Plan
  10.12  P6000 Asset Purchase Agreement between the Registrant and Copernicus
         Systems, Inc. dated April 13, 2000
 *10.13  Loan Modification Agreement, dated as of April 5, 2000, between the
         Registrant and Silicon Valley Bank
  10.14  Restricted Stock Agreement with Michael H. Shanahan, dated April 3,
         2000, under the 1999 Stock Incentive Plan
  10.15  Form of option granted to each of Frank M. Polestra, Robert M.
         Wadsworth and Lawrence Kernan on March 16, 2000
  10.16  Form of First Amendment to the Registrant's 1999 Stock Incentive Plan
  23.1   Consent of Hale and Dorr LLP (included in Exhibit 5.1)
  23.2   Consent of PricewaterhouseCoopers LLP
  24.1   Powers of Attorney (see page II-6)
 *27.1   Financial Data Schedule
 *27.2   Financial Data Schedule
 *27.3   Financial Data Schedule
 *27.4   Financial Data Schedule
 *27.5   Financial Data Schedule
  27.6   Financial Data Schedule
  27.7   Financial Data Schedule
</TABLE>
- ---------------------

* Filed with the Registrant's initial filing of its registration statement on
Form S-1 on April 7, 2000

** To be filed by amendment.

    (b) Financial Statement:

   All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted because
they are not required or because the required information is given in the
Financial Statements or Notes to these statements.

Item 17. Undertakings.

   The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other

                                      II-6
<PAGE>

than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

   The undersigned registrant hereby undertakes that:

   (1) For purpose of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Act shall be deemed to be part of this Registration Statement as of the time it
was declared effective.

   (2) For purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

                                      II-7
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Canton, Massachusetts, on this 19th day of May, 2000.

                                          NETWORK ENGINES, INC.


                                          By   /s/ Lawrence A. Genovesi
                                          _____________________________________
                                                  Lawrence A. Genovesi
                                            Chairman of the Board, President,
                                            Chief Executive Officer and Chief
                                                   Technology Officer


   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                           Title                    Date


<S>                                  <C>                           <C>
     /s/ Lawrence A. Genovesi        Chairman of the Board of         May 19, 2000
____________________________________ Directors, President, Chief
       Lawrence A. Genovesi          Executive Officer and Chief
                                     Technology Officer
                                     (Principal Executive Officer)



      /s/ Douglas G. Bryant          Chief Financial Officer          May 19, 2000
____________________________________ (Principal Financial Officer
         Douglas G. Bryant           and Principal Accounting
                                     Officer)
  *                                  Director                         May 19, 2000
____________________________________
   John A. Blaeser



  *                                  Director                         May 19, 2000
____________________________________
   Lawrence Kernan
</TABLE>

                                      II-8
<PAGE>

<TABLE>
<CAPTION>
             Signature                           Title                    Date



<S>                                  <C>                           <C>
  *                                  Director                         May 19, 2000
____________________________________
   Dennis A. Kirshy



  *                                  Director                         May 19, 2000
____________________________________
   Frank M. Polestra



  *                                  Director                         May 19, 2000
____________________________________
   Michael H. Shanahan



  *                                  Director                         May 19, 2000
____________________________________
   Robert M. Wadsworth



*  /s/ Lawrence A. Genovesi
____________________________________
   Per Power of Attorney
</TABLE>

                                      II-9
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 <C>     <S>
 **1.1   Form of Underwriting Agreement
  *3.1   Amended and Restated Certificate of Incorporation of the Registrant
   3.2   Form of Second Amended and Restated Certificate of Incorporation of
         the Registrant, to be filed upon the closing of this offering
         Form of Amendment to the Registrant's Amended and Restated Certificate
         of Incorporation to be adopted prior to the effective date of this
         registration statement
  *3.3   By-Laws of the Registrant
   3.4   Form of Second Amended and Restated By-Laws of the Registrant, to be
         effective upon the closing of this offering
   3.5   Form of Certificate of Amendment of Amended and Restated Certificate
         of Incorporation of the Registrant
   4.1   Specimen common stock certificate
  *4.2   Provisions of the Second Amended and Restated Certificate of
         Incorporation and Amended and Restated By-Laws of the Registrant
         defining the rights of holders of common stock of the Registrant
         (included in Exhibits 3.1, 3.2, 3.3 and 3.4)
 **5.1   Opinion of Hale and Dorr LLP
 *10.1   Lease for 25 Dan Road, Canton, Massachusetts
 *10.2   The Registrant's 1999 Stock Incentive Plan
 *10.3   Form of Incentive Stock Option Agreement under the Registrant's 1999
         Stock Incentive Plan
  10.4   The Registrant's 2000 Employee Stock Purchase Plan
  10.5   The Registrant's 2000 Director Stock Option Plan
 *10.6   Investor Rights Agreement, dated December 20, 1999, among the
         Registrant and certain investors in our preferred stock and warrants
 *10.7   Voting Trust Agreement, dated October 1, 1995 among Mr. Genovesi and
         Ms. Smith, as trustees, and members of their families.
 *10.8   Restricted Stock Agreement with Lawrence Genovesi, dated November 18,
         1999, under the 1999 Stock Incentive Plan
 *10.9   Restricted Stock Agreement with Dennis Kirshy, dated January 7, 1998,
         under the 1997 Stock Incentive Plan
 *10.10  Restricted Stock Agreement with Dennis Kirshy, dated November 18,
         1999, under the 1999 Stock Incentive Plan
 *10.11  Restricted Stock Agreement with John Blaeser, dated November 18, 1999,
         under the 1999 Stock Incentive Plan
  10.12  P6000 Asset Purchase Agreement between the Registrant and Copernicus
         Systems, Inc. dated April 13, 2000
 *10.13  Loan Modification Agreement, dated as of April 5, 2000, between the
         Registrant and Silicon Valley Bank
  10.14  Restricted Stock Agreement with Michael H. Shanahan, dated April 3,
         2000, under the 1999 Stock Incentive Plan
  10.15  Form of option granted to each of Frank M. Polestra, Robert M.
         Wadsworth and Lawrence Kernan on March 16, 2000
  10.16  Form of First Amendment to the Registrant's 1999 Stock Incentive Plan
  23.1   Consent of Hale and Dorr LLP (included in Exhibit 5.1)
  23.2   Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.               Description
 <C>     <S>
  24.1   Powers of Attorney (see page II-6)
 *27.1   Financial Data Schedule
 *27.2   Financial Data Schedule
 *27.3   Financial Data Schedule
 *27.4   Financial Data Schedule
 *27.5   Financial Data Schedule
  27.6   Financial Data Schedule
  27.7   Financial Data Schedule
</TABLE>
- ---------------------

* Filed with the Registrant's initial filing of its registration statement on
Form S-1 on April 7, 2000

** To be filed by amendment.

<PAGE>

                                                                     Exhibit 3.2
                          SECOND AMENDED AND RESTATED

                         CERTIFICATE OF INCORPORATION

                                      OF

                             NETWORK ENGINES, INC.


     Network Engines, Inc. (hereinafter called the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:

     1. The name of the corporation is Network Engines, Inc. The corporation was
originally incorporated on September 17, 1999.

     2. This Second Amended and Restated Certificate of Incorporation amends and
restates the Amended and Restated Certificate of Incorporation of the
Corporation. At a duly called meeting of the Board of Directors of the
Corporation at which a quorum was present at all times, a resolution was duly
adopted, pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, setting forth a Second Amended and Restated Certificate of
Incorporation of the Corporation and declaring said Second Amended and Restated
Certificate of Incorporation advisable. The stockholders of the Corporation duly
approved said proposed Second Amended and Restated Certificate of Incorporation
by written consent in accordance with Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware. The resolution setting forth the
Second Amended and Restated Certificate of Incorporation is as follows:

RESOLVED:   That the Amended and Restated Certificate of Incorporation of the
- --------    Corporation be, and hereby is, amended and restated in its entirety
            so that the same shall read as follows:

   FIRST.   The name of the Corporation is:

            Network Engines, Inc.

  SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle.  The name of its registered agent at such address is The
Corporation Trust Company.

  THIRD. The nature of the business or purposes to be conducted or promoted by
the Corporation is as follows:

     To engage in any lawful act or activity for which corporations may be
     organized under the General Corporation Law of Delaware.
<PAGE>

  FOURTH.  The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 105,000,000 shares, consisting of
(i)  100,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock").

     The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.

A.   COMMON STOCK.
     ------------

     1. General. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
any outstanding Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.

     2. Voting.  The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders.  There shall be no cumulative
voting.

     The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.

     3. Dividends.  Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.

     4. Liquidation.  Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.

B.   PREFERRED STOCK.
     ----------------

     Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided.  Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law.  Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.

     Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issuance of the shares thereof, to determine and fix such voting powers,
full or limited, or no voting powers, and such designations, preferences and
relative participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights,

                                      -2-
<PAGE>

redemption privileges and liquidation preferences, as shall be stated and
expressed in such resolutions, all to the full extent now or hereafter permitted
by the General Corporation Law of Delaware. Without limiting the generality of
the foregoing, the resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally or be
junior to the Preferred Stock of any other series to the extent permitted by
law. Except as otherwise provided in this Second Amended and Restated
Certificate of Incorporation, no vote of the holders of the Preferred Stock or
Common Stock shall be a prerequisite to the designation or issuance of any
shares of any series of the Preferred Stock authorized by and complying with the
conditions of this Second Amended and Restated Certificate of Incorporation, the
right to have such vote being expressly waived by all present and future holders
of the capital stock of the Corporation.

  FIFTH.  The Corporation shall have a perpetual existence.

  SIXTH.  In furtherance of and not in limitation of powers conferred by
statute, it is further provided:

     1. Election of directors need not be by written ballot, except as and to
the extent provided in the By-Laws of the Corporation.

     2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation, except as and to the extent provided in
the By-Laws of the Corporation.

  SEVENTH. Except as otherwise provided herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this Second
Amended and Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Second Amended and Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.

  EIGHTH.  Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability.  No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.

  NINTH.  1. Actions, Suits and Proceedings Other than by or in the Right of
             ---------------------------------------------------------------
the Corporation.  The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on

                                      -3-
<PAGE>

his behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 7 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation. Notwithstanding anything to the
contrary in this Article, the Corporation shall not indemnify an Indemnitee to
the extent such Indemnitee is reimbursed from the proceeds of insurance, and in
the event the Corporation makes any indemnification payments to an Indemnitee
and such Indemnitee is subsequently reimbursed from the proceeds of insurance,
such Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.

     2.  Actions or Suits by or in the Right of the Corporation.  The
         ------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.

     3.   Indemnification for Expenses of Successful Party.  Notwithstanding the
          ------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith.  Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of

                                      -4-
<PAGE>

guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
          ---- ----------
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.

     4. Notification and Defense of Claim.  As a condition precedent to his
        ---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought.  With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee.  After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such action,
suit, proceeding or investigation, other than as provided below in this Section
4.  The Indemnitee shall have the right to employ his own counsel in connection
with such action, suit, proceeding or investigation, but the fees and expenses
of such counsel incurred after notice from the Corporation of its assumption of
the defense thereof shall be at the expense of the Indemnitee unless (i) the
employment of counsel by the Indemnitee has been authorized by the Corporation,
(ii) counsel to the Indemnitee shall have reasonably concluded that there may be
a conflict of interest or position on any significant issue between the
Corporation and the Indemnitee in the conduct of the defense of such action,
suit, proceeding or investigation, or (iii) the Corporation shall not in fact
have employed counsel to assume the defense of such action, suit, proceeding or
investigation, in each of which cases the fees and expenses of counsel for the
Indemnitee shall be at the expense of the Corporation, except as otherwise
expressly provided by this Article.  The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any claim
brought by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in clause (ii)
above.  The Corporation shall not be required to indemnify the Indemnitee under
this Article for any amounts paid in settlement of any action, suit, proceeding
or investigation effected without its written consent.  The Corporation shall
not settle any action, suit, proceeding or investigation in any manner which
would impose any penalty or limitation on the Indemnitee without the
Indemnitee's written consent.  Neither the Corporation nor the Indemnitee will
unreasonably withhold or delay its consent to any proposed settlement.

     5.  Advance of Expenses. Subject to the provisions of Section 6 of this
         -------------------
Article NINTH, in the event that the Corporation does not assume the defense
pursuant to Section 4 of this Article NINTH of any action, suit, proceeding or
investigation of which the Corporation receives notice under this Article, any
expenses (including attorneys' fees) incurred by an Indemnitee in defending a
civil or criminal action, suit, proceeding or investigation or any appeal
therefrom shall be paid by the Corporation in advance of the final disposition
of such matter; provided, however, that the payment of such expenses incurred by
                --------  -------
an Indemnitee in advance of the final disposition of such matter shall be made
only upon receipt of an undertaking by or on behalf of the Indemnitee to repay
all amounts so advanced in the event that it shall ultimately be determined that
the Indemnitee is not entitled to be indemnified by the Corporation as
authorized in this Article.; and further provided that no such advancement of
expenses shall be made if it is

                                      -5-
<PAGE>

determined (in the manner described in Section 6) that (i) the Indemnitee did
not act in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, or (ii) with respect to any
criminal action or proceeding, the Indemnitee had reasonable cause to believe
his conduct was unlawful. Such undertaking shall be accepted without reference
to the financial ability of the Indemnitee to make such repayment.

     6.  Procedure for Indemnification.  In order to obtain indemnification or
         -----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article NINTH,
the Indemnitee shall submit to the Corporation a written request, including in
such request such documentation and information as is reasonably available to
the Indemnitee and is reasonably necessary to determine whether and to what
extent the Indemnitee is entitled to indemnification or advancement of expenses.
Any such advancement of expenses shall be made promptly, and in any event within
60 days after receipt by the Corporation of the written request of the
Indemnitee, unless with respect to requests under Section 1, 2 or 5 of this
Article NINTH the Corporation determines within such 60-day period that the
Indemnitee did not meet the applicable standard of conduct set forth in Section
1, 2 or 5 of this Article NINTH, as the case may be.  Any such indemnification,
unless ordered by a court, shall be made with respect to requests under Section
1 or 2 only as authorized in the specific case upon a determination by the
Corporation that the indemnification of the Indemnitee is proper because the
Indemnitee has met the applicable standard of conduct set forth in Section 1 or
2, as the case may be.  Such determination shall be made in each instance (a) by
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b)  by a majority vote of
a committee of disinterested directors designated by majority vote of
disinterested directors, whether or not a quorum, (c) a majority vote of a
quorum of the outstanding shares of stock of all classes entitled to vote for
directors, voting as a single class, which quorum shall consist of stockholders
who are not at that time parties to the action, suit or proceeding in question,
(d), if there are no disinterested directors, or if disinterested directors so
direct, by independent legal counsel (who may, to the extent permitted by law,
be regular legal counsel to the Corporation) in a written opinion, or, or
(e) a court of competent jurisdiction.

     7.  Remedies.  The right to indemnification or advances as granted by this
         --------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6.  Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation.  Neither the failure of the
Corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6 of this Article NINTH
that the Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the Indemnitee has not met
the applicable standard of conduct.  The Indemnitee's expenses (including
attorneys' fees) incurred in connection with successfully establishing his right
to indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.

                                      -6-
<PAGE>

     8.  Subsequent Amendment.  No amendment, termination or repeal of this
         --------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.

     9.  Other Rights.  The indemnification and advancement of expenses provided
         ------------
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in any other capacity while holding office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee.  Nothing contained in this Article shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth in this Article.  In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.

     10.  Partial Indemnification.  If an Indemnitee is entitled under any
          -----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.

     11.  Insurance.  The Corporation may purchase and maintain insurance, at
          ---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.

     12.  Merger or Consolidation.  If the Corporation is merged into or
          -----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.

     13.  Savings Clause.  If this Article or any portion hereof shall be
          --------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest

                                      -7-
<PAGE>

extent permitted by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by applicable law.

     14.  Definitions.  Terms used herein and defined in Section 145(h) and
          -----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).

     15.  Subsequent Legislation.  If the General Corporation Law of Delaware is
          ----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.

  TENTH.    Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.  Notwithstanding any other provisions of law, this
Second Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least seventy-five
percent (75%) of the votes which all the stockholders would be entitled to cast
in any annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TENTH.

  ELEVENTH.  Special meetings of stockholders may be called at any time by only
the Chairman of the Board of Directors, the Chief Executive Officer, President
or the Board of Directors.  Business transacted at any special meeting of
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.  Notwithstanding any other provision of law,
this Second Amended and Restated Certificate of Incorporation or the By-Laws of
the Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least seventy-five
percent (75%) of the votes which all the stockholders would be entitled to cast
in any annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.

                                      -8-
<PAGE>

     IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Second Amended and Restated Certificate of Incorporation
to be signed by its duly authorized officer this __________ day of _______,
2000.


                              NETWORK ENGINES, INC.

                              By:
                                 -----------------------------------------
                                    Lawrence A. Genovesi
                                    Chairman of the Board, Chief Executive
                                    Officer and Chief Technology Officer

<PAGE>

                                                                     Exhibit 3.4

                          SECOND AMENDED AND RESTATED

                                    BY-LAWS

                                      OF

                             NETWORK ENGINES, INC.

                          ARTICLE I. -- Stockholders
                          --------------------------

     1. Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors, the Chairman of the Board or the President or,
if not so designated, at the registered office of the corporation.

     2.  Annual Meeting.  The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors, the Chairman of the Board or the President (which date shall not be a
legal holiday in the place where the meeting is to be held) at the time and
place to be fixed by the Board of Directors, the Chairman of the Board or the
President and stated in the notice of the meeting.  If no annual meeting is held
in accordance with the foregoing provisions, the Board of Directors shall cause
the meeting to be held as soon thereafter as is convenient.  If no annual
meeting is held in accordance with the foregoing provisions, a special meeting
may be held in lieu of the annual meeting, and any action taken at that special
meeting shall have the same effect as if it had been taken at the annual
meeting, and in such case all references in these By-Laws to the annual meeting
of the stockholders shall be deemed to refer to such special meeting.

     3. Special Meetings. Special meetings of stockholders may be called at any
time only by the Chairman of the Board, the Chief Executive Officer and
President or the Board of Directors. Business transacted at any special meeting
of stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of meeting.

     4. Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notices of all meetings shall
state the place, date and hour of the meeting. The notice of a special meeting
shall state, in addition, the purpose or purposes for which the meeting is
called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.

     5.  Voting List.  The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the
<PAGE>

meeting, during ordinary business hours, for a period of at least 10 days prior
to the meeting, at a place within the city where the meeting is to be held. The
list shall also be produced and kept at the time and place of the meeting during
the whole time of the meeting, and may be inspected by any stockholder who is
present.

     6.  Quorum.  Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.

     7. Adjournments. Any meeting of stockholders may be adjourned to any other
time and to any other place at which a meeting of stockholders may be held under
these By-Laws by the stockholders present or represented at the meeting and
entitled to vote, although less than a quorum, or, if no stockholder is present,
by any officer entitled to preside at or to act as Secretary of such meeting. It
shall not be necessary to notify any stockholder of any adjournment of less than
30 days if the time and place of the adjourned meeting are announced at the
meeting at which adjournment is taken, unless after the adjournment a new record
date is fixed for the adjourned meeting. At the adjourned meeting, the
corporation may transact any business which might have been transacted at the
original meeting.

     8. Voting and Proxies. Each stockholder entitled to vote in accordance with
the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder, but no
proxy shall be voted after three years from its date unless such proxy provides
for a longer period. Upon the demand of any stockholder, the vote for directors
and the vote upon any question before the meeting, shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation, these By-Laws or the laws of the State of
Delaware.

     A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting,  either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held.  The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

     9. Action at Meeting. When a quorum is present at any meeting, the holders
of a majority of the stock present or represented and voting on a matter (or if
there are two or more classes of stock entitled to vote as separate classes,
then in the case of each such class, the holders of a majority of the stock of
that class present or represented and voting on a matter) shall decide any
matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election.

                                       2
<PAGE>

     10. Nomination of Directors. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nomination for election to the Board of Directors of the corporation at a
meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
10. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days nor more than 90 days prior to such meeting; provided, however,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given to stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (a) as
to each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the corporation's
books, of such stockholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.

     The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.

     11.  Notice of Business at Annual Meetings.  At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting.  To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder.  For business to be properly brought before an annual meeting by a
stockholder, if such business relates to the election of directors of the
corporation, the procedures in Section 10 of Article I must be complied with.
If such business relates to any other matter, the stockholder must have given
timely notice thereof in writing to the Secretary.  To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than 60 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
date on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever occurs first.  A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before

                                       3
<PAGE>

the annual meeting (a) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 11 and except that any stockholder proposal which complies
with Rule 14a-8 of the proxy rules (or any successor provision) promulgated
under the Securities Exchange Act of 1934, as amended, and is to be included in
the corporation's proxy statement for an annual meeting of stockholders shall be
deemed to comply with the requirements of this Section 11.

     The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 11, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.

     12. Action without Meeting. Stockholders may not take any action by written
consent in lieu of a meeting.

     13.  Organization.  The Chairman of the Board, or in his absence the Vice
Chairman of the Board, or the President, in the order named, shall call meetings
of the stockholders to order, and shall act as chairman of such meeting,
provided, however, that the Board of Directors may appoint any stockholder to
act as chairman of any meeting in the absence of the Chairman of the Board.  The
Secretary of the corporation shall act as secretary at all meetings of the
stockholders; but in the absence of the Secretary at any meeting of the
stockholders, the presiding officer may appoint any person to act as secretary
of the meeting.

                           ARTICLE II. -- Directors
                           ------------------------

     1.  General Powers.  The business and affairs of the corporation shall be
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws.  In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.

     2.  Number; Election and Qualification. The number of directors which shall
constitute the whole Board of Directors shall be determined by resolution of the
Board of Directors, but in no event shall be less than three. The number of
directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.

     3. Classes of Directors. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than

                                       4
<PAGE>

any other class. If a fraction is contained in the quotient arrived at by
dividing the designated number of directors by three, then, if such fraction is
one-third, the extra director shall be a member of Class I, and if such fraction
is two-thirds, one of the extra directors shall be a member of Class I and one
of the extra directors shall be a member of Class II, unless otherwise provided
from time to time by resolution adopted by the Board of Directors.

     4. Terms of Office. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such director
was elected; provided, that each initial director in Class I shall serve for a
term ending on the date of the annual meeting of stockholders in 2001; each
initial director in Class II shall serve for a term ending on the date of the
annual meeting of stockholders in 2002, and each initial director in Class III
shall serve for a term ending on the date of the annual meeting of stockholders
in 2003; and provided further, that the term of each director shall be subject
to the election and qualification of his successor and to his earlier death,
resignation or removal.

     5.  Allocation of Directors Among Classes in the Event of Increases or
Decreases in the Number of Directors. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he or she is a
member and (ii) the newly created or eliminated directorships resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to ensure that no one class has more than
one director more than any other class. To the extent possible, consistent with
the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.

     6.  Quorum; Action at Meeting.  A majority of the directors at any time in
office shall constitute a quorum for the transaction of business.  In the event
one or more of the directors shall be disqualified to vote at any meeting, then
the required quorum shall be reduced by one for each director so disqualified,
provided that in no case shall less than one-third (1/3) of the number of
directors fixed pursuant to Section 2 above constitute a quorum.  If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time.  Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the Certificate of
Incorporation or these By-Laws.

     7.  Vacancies.  Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, shall be filled
only by vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director.  A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.

                                       5
<PAGE>

     8.  Resignation. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the Chairman of the
Board or Secretary. Such resignation shall be effective upon receipt unless it
is specified to be effective at some other time or upon the happening of some
other event.

     9. Regular Meetings. Regular meetings of the Board of Directors may be held
without notice at such time and place, either within or without the State of
Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.

     10. Special Meetings. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.

     11. Notice of Special Meetings. Notice of any special meeting of directors
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone at least 24 hours in
advance of the meeting, (ii) by sending a telegram, telecopy or telex,
electronic mail or delivering written notice by hand, to his last known business
or home address at least 24 hours in advance of the meeting, or (iii) by mailing
written notice to his last known business or home address at least 72 hours in
advance of the meeting. A notice or waiver of notice of a meeting of the Board
of Directors need not specify the purposes of the meeting.

     12. Meetings by Telephone Conference Calls. Directors or any members of any
committee designated by the directors may participate in a meeting of the Board
of Directors or such committee by means of conference telephone, video
conference or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.

     13. Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee of the Board of Directors
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent to the action in writing, and the written consents are
filed with the minutes of proceedings of the Board or committee.

     14. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in

                                       6
<PAGE>

the resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
By-Laws for the Board of Directors.

     15. Compensation of Directors. Directors may be paid such compensation for
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.

                          ARTICLE III. -- Officers
                          ------------------------

     1. Enumeration. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.

     2. Election. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.

     3. Qualification. No officer need be a stockholder. Any two or more offices
may be held by the same person.

     4.  Tenure.  Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.

     5. Resignation and Removal. Any officer may resign by delivering his or her
written resignation to the corporation at its principal office or to the
Chairman of the Board, President or Secretary. Such resignation shall be
effective upon receipt unless it is specified to be effective at some other time
or upon the happening of some other event.

     Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.

     Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his

                                       7
<PAGE>

compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.

     6. Vacancies. The Board of Directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave unfilled for such period
as it may determine any offices other than those of President, Treasurer and
Secretary. Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.

     7.  Chairman of the Board and Vice Chairman of the Board.  The Board of
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer.  If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors.  Unless otherwise provided by the
Board of Directors, he shall preside at all meetings of the stockholders, and if
he is a director, at all meetings of the Board of Directors.  If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him or her by
the Board of Directors.  The person designated as the Chief Executive Officer of
the Company shall, subject to the direction of the Board of Directors, have
general charge and supervision of the business of the corporation.

     8. President. Unless the Board of Directors has designated the Chairman of
the Board or another officer as Chief Executive Officer, the President shall be
the Chief Executive Officer of the corporation. The President shall perform such
other duties and shall have such other powers as the Chief Executive Officer or
the Board of Directors may from time to time prescribe.

     9. Vice Presidents. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the Chief Executive Officer may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the Chief Executive Officer, then, in the order determined by the
Board of Directors, the President (if he is not the Chief Executive Officer) and
the Vice President (or if there shall be more than one, the Vice Presidents)
shall perform the duties of the Chief Executive Officer and when so performing
shall have all the powers of and be subject to all the restrictions upon the
Chief Executive Officer. The Board of Directors may assign to any Vice President
the title of Executive Vice President, Senior Vice President or any other title
selected by the Board of Directors.

     10.  Secretary and Assistant Secretaries.  The Secretary shall perform such
duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe.  In addition, the Secretary
shall perform such duties and have such powers as are incident to the office of
the secretary, including without limitation the duty and power to give notices
of all meetings of stockholders and special meetings of the Board of Directors,
to attend all meetings of stockholders and the Board of Directors and keep a
record of the proceedings, to maintain a stock ledger and prepare lists of
stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.

                                       8
<PAGE>

     Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the Chief Executive Officer or the Secretary may from
time to time prescribe.  In the event of the absence, inability or refusal to
act of the Secretary, the Assistant Secretary (or if there shall be more than
one, the Assistant Secretaries in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Secretary.

     In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.

     11.  Treasurer and Assistant Treasurers.  The Treasurer shall perform such
duties and shall have such powers as may from time to time be assigned to him or
her by the Board of Directors or the Chief Executive Officer.  In addition, the
Treasurer shall perform such duties and have such powers as are incident to the
office of treasurer, including without limitation the duty and power to keep and
be responsible for all funds and securities of the corporation, to deposit funds
of the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.

     The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the Chief Executive Officer or the Treasurer may from
time to time prescribe.  In the event of the absence, inability or refusal to
act of the Treasurer, the Assistant Treasurer (or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Treasurer.

     12. Salaries. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.

                         ARTICLE IV. -- Capital Stock
                         ----------------------------

     1. Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.

     2. Certificates of Stock. Every holder of stock of the corporation shall be
entitled to have a certificate, in such form as may be prescribed by law and by
the Board of Directors, certifying the number and class of shares owned by him
or her in the corporation. Each such certificate shall be signed by, or in the
name of the corporation by, the Chairman or Vice Chairman, if any, of the Board
of Directors, or the President or a Vice President, and the Treasurer or any
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.

                                       9
<PAGE>

     Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of stockholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.

     3. Transfers. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-Laws.

     4. Lost, Stolen or Destroyed Certificates. The corporation may issue a new
certificate of stock in place of any previously issued certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.

     5. Record Date. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.

     If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held.  The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.

     A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

                                       10
<PAGE>

                       ARTICLE V. -- General Provisions
                       --------------------------------

     1. Fiscal Year. Except as from time to time otherwise designated by the
Board of Directors, the fiscal year of the corporation shall begin on the first
day of October of each year and end on the last day of September of each year.

     2.  Corporate Seal.  The corporate seal shall be in such form as shall be
approved by the Board of Directors.

     3. Waiver of Notice. Whenever any notice whatsoever is required to be given
by law, by the Certificate of Incorporation or by these By-Laws, a waiver of
such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telecopy or any other available
method, whether before, at or after the time stated in such waiver, or the
appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.

     4. Voting of Securities. Except as the directors may otherwise designate,
the Chairman of the Board or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.

     5.  Evidence of Authority.  A certificate by the Secretary, or an Assistant
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation shall
as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.

     6.  Certificate of Incorporation.  All references in these By-Laws to the
Certificate of Incorporation shall be deemed to refer to the Second Amended and
Restated Certificate of Incorporation of the corporation, as amended and in
effect from time to time.

     7. Transactions with Interested Parties. No contract or transaction between
the corporation and one or more of the directors or officers, or between the
corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:

     a. The material facts as to his relationship or interest and as to the
     contract or transaction are disclosed or are known to the Board of
     Directors or the committee, and the Board or committee in good faith
     authorizes the contract or transaction by the affirmative votes of a
     majority of the disinterested directors, even though the disinterested
     directors be less than a quorum;

     b. The material facts as to his relationship or interest and as to the
     contract or transaction are disclosed or are known to the stockholders
     entitled to vote thereon, and

                                       11
<PAGE>

     the contract or transaction is specifically approved in good faith
     by vote of the stockholders; or

     c. The contract or transaction is fair as to the corporation as of the time
     it is authorized, approved or ratified, by the Board of Directors, a
     committee of the Board of Directors, or the stockholders.

     Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.

     8. Severability. Any determination that any provision of these By-Laws is
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.

     9. Pronouns. All pronouns used in these By-Laws shall be deemed to refer to
the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.

                           ARTICLE VI. -- Amendments
                           -------------------------

     1.  By the Board of Directors.  These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.

     2. By the Stockholders. Subject to the following paragraph, these By-Laws
may be altered, amended or repealed or new by-laws may be adopted by the
affirmative vote of the holders of a majority of the shares of the capital stock
of the corporation issued and outstanding and entitled to vote at any regular or
special meeting of stockholders, provided notice of such alteration, amendment,
repeal or adoption of new by-laws shall have been stated in the notice of such
regular or special meeting.

     3.  Certain Provisions.  Notwithstanding any other provision of law, the
Certificate of Incorporation or these By-Laws (including the preceding
paragraph), and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least seventy-five
percent (75%) of the votes which all the stockholders would be entitled to cast
in any annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provisions inconsistent with, this Article VI
or Article II of these By-Laws.

                                       12

<PAGE>

                                                                     Exhibit 3.5

                           CERTIFICATE OF AMENDMENT

                                      OF

               AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

                                      OF

                             NETWORK ENGINES, INC.

                                  Pursuant to
                        the General Corporation Law of
                             the State of Delaware
                             ---------------------

     Network Engines, Inc. (hereinafter called the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:

     At a meeting of the Board of Directors of the Corporation on March 16,
2000, resolutions were duly adopted, pursuant to the General Corporation Law of
the State of Delaware, setting forth an amendment to the Certificate of
Incorporation of the Corporation and declaring said amendment to be advisable.
The stockholders of the Corporation duly approved said proposed amendment by
written consent in accordance with Sections 228 and 242 of the General
Corporation Law of the State of Delaware.  The resolution setting forth the
amendment is as follows:

RESOLVED:  That the first paragraph of Article FOURTH of the Amended and
           Restated Certificate of Incorporation of the Corporation be and
           hereby is deleted and is replaced in its entirety with the
           following:

           "FOURTH:

           The authorized capital stock of the Corporation consists of:

           60,000,000  shares of Common Stock,
                       $0.01 par value per share ("Common Stock");
                                                   ------------

              185,250  shares of Series A Convertible Preferred
                       Stock, $0.01 par value per share ("Series A
                                                          --------
                       Preferred Stock");
                       ---------------

              357,142  shares of Series B Convertible Preferred Stock,
                       $0.01 par value per share ("Series B Preferred Stock");
                                                   ------------------------
                       and
<PAGE>

            1,123,549  shares of Series C Convertible Participating Preferred
                       Stock, $0.01 par value per share ("Series C Preferred
                                                          ------------------
                       Stock").
                       -----

            3,581,553  shares of Series D Convertible Participating Preferred
                       Stock, $0.01 par value per share ("Series D Preferred
                                                          ------------------
                       Stock")."
                       -----

     IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Lawrence A. Genovesi, its President this       day of
                                                                   -----
                  , 2000.
- -----------------

                               NETWORK ENGINES, INC.


                               -------------------------------
                               Lawrence A. Genovesi, President


                                       2

<PAGE>

                                                                     Exhibit 4.1
NEI-
                                    [LOGO]

                             NETWORK ENGINES, INC.

             INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

                                 COMMON STOCK

THIS CERTIFICATE IS TRANSFERABLE                             CUSIP 64121A 10 7
IN BOSTON, MA OR NEW YORK, NY                                SEE REVERSE FOR
                                                             CERTAIN DEFINITIONS

THIS CERTIFIES THAT _________________________________________________________

is the owner of _____________________________________________________________

FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF ONE
CENT ($.01) EACH OF

                             NETWORK ENGINES, INC.

(hereinafter called the "Corporation") transferable upon the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed.  This Certificate and the
shares represented hereby are issued and shall be subject to all the provisions
of the Second Amended and Restated Certificate of Incorporation and Second
Amended and Restated By-Laws of the Corporation as from time to time amended
(copied of which are on file with the Corporation) to all of which the holder,
by acceptance hereof, assents.  This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.

     IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by the facsimile signatures of its duly authorized officers and its
facsimile corporate seal to be hereunto affixed.

Dated:__________                   COUNTERSIGNED AND REGISTERED:
                                   EQUISERVE TRUST COMPANY, N.A.
                                   TRANSFER AGENT AND REGISTRAR


                                   BY_______________________________
                                          AUTHORIZED SIGNATURE


/s/ Douglas G. Bryant              /s/ Lawrence Genovesi
VICE PRESIDENT, SECRETARY          CHAIRMAN, PRESIDENT AND
AND TREASURER                      CHIEF EXECUTIVE OFFICER

                               [CORPORATE SEAL]
<PAGE>

                             NETWORK ENGINES, INC.

     The Corporation is authorized to issue more than one class of stock.
A statement of the powers, designations, preferences, and the relative
participating, optional, or other rights of each class and series of stock and
the qualifications, limitations or restrictions thereon will be provided without
charge to each stockholder upon request to the Corporation.

     The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>
TEN COM    - as tenants in common          UNIF GIFT MIN ACT - ______Custodian_______
TEN ENT    - as tenants by the entireties                      (Cust)         (Minor)
JT TEN     - as joint tenants with right                       under Uniform Gifts to Minors
             of survivorship and not as                        Act________________
             tenants in common                                        (State)
<S> <C>
</TABLE>

    Additional abbreviations may also be used though not in the above list.

For value received, _____________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
INDENTIFYING NUMBER OF ASSIGNEE

______________________________


_____________________________________________________________________________
  PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_____________________________________________________________________________
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.

Dated,__________________     ________________________________________________
                             NOTICE: The signature to this assignment must
                             correspond with the name as written upon the face
                             of the Certificate, in every particular, without
                             alteration or enlargement, or any change
                             whatsoever.

SIGNATURE(S) GUARANTEED:_____________________________________________________
                        THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
                        LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
                        AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
                        PURSUANT TO S.E.C. RULE 17Ad-15.

<TABLE>
<S>                                                      <C>
              AMERICAN BANK NOTE COMPANY                                PRODUCTION COORDINATOR:
                55TH and SANSOM STREET                                BELINDA BECK: 215-764-8619
                PHILADELPHIA, PA  19139                                 PROOF OF APRIL 24, 2000
                    (215) 764-8600                                       NETWORK ENGINES, INC.
                                                                              H 66191 BK
- --------------------------------------------------------------------------------------------------------------
           SALES:  DAN BURNS:  617-786-7600                                 OPERATOR:    JW
- --------------------------------------------------------------------------------------------------------------
           /HOME16/LIVE JOBS/N/NETWORK 66191                                      NEW
- --------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

                                                                   Exhibit 10.4

                             NETWORK ENGINES, INC.

                       2000 EMPLOYEE STOCK PURCHASE PLAN

     The purpose of this Plan is to provide eligible employees of Network
Engines, Inc. (the "Company") and certain of its subsidiaries with opportunities
to purchase shares of the Company's common stock, $.01 par value (the "Common
Stock").  Seven Hundred and Fifty Thousand (750,000) shares of Common Stock in
the aggregate have been approved for this purpose.  This Plan is intended to
qualify as an "employee stock purchase plan" as defined in Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder, and shall be interpreted consistent therewith.

    1.  Administration.  The Plan will be administered by the Company's Board of
        --------------
Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.

    2.  Eligibility.  All employees of the Company, including Directors who are
        -----------
employees, and all employees of any subsidiary of the Company (as defined in
Section 424(f) of the Code) designated by the Board or the Committee from time
to time (a "Designated Subsidiary"), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 9) to purchase Common
Stock under the Plan provided that:

          (a) they are customarily employed by the Company or a Designated
     Subsidiary for more than twenty (20) hours a week and for more than five
     (5) months in a calendar year; and

          (b) they are employees of the Company or a Designated Subsidiary on
     the first day of the applicable Plan Period (as defined below).

     No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns five percent (5%) or more of the
total combined voting power or value of the stock of the Company or any
subsidiary.  For purposes of the preceding sentence, the attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
employee, and all stock which the employee has a contractual right to purchase
shall be treated as stock owned by the employee.

     3. Offerings. The Company will make one or more offerings ("Offerings") to
        ---------
employees to purchase stock under this Plan. Offerings will begin each November
15 and May 15, or the first business day thereafter (the "Offering Commencement
Dates"). Each Offering Commencement Date will begin a six (6) month period (a
"Plan Period") during which payroll deductions will be made and held for the
purchase of Common Stock at the end of the Plan Period. The Board or the
Committee may, at its discretion, choose a different Plan Period of twelve (12)
months or less for subsequent Offerings. Notwithstanding anything to the
contrary, the first Plan Period shall begin on the first date the Company has
filed an effective registration statement on Form S-8 with the Securities and
Exchange Commission for purposes of registering

<PAGE>

under the Securities Act of 1933 all shares of the Common Stock issuable under
this Plan, and shall end on November 15, 2000.

     4. Participation. An employee eligible on the Offering Commencement Date of
        -------------
any Offering may participate in such Offering by completing and forwarding a
payroll deduction authorization form to the employee's appropriate payroll
office at least five (5) days prior to the applicable Offering Commencement
Date. The form will authorize a regular payroll deduction from the Compensation
received by the employee during the Plan Period. Unless an employee files a new
form or withdraws from the Plan, his deductions and purchases will continue at
the same rate for future Offerings under the Plan as long as the Plan remains in
effect. The term "Compensation" means the amount of money reportable on the
employee's Federal Income Tax Withholding Statement, excluding allowances and
reimbursements for expenses such as relocation allowances for travel expenses,
income or gains on the exercise of Company stock options or stock appreciation
rights, and similar items, whether or not shown on the employee's Federal Income
Tax Withholding Statement, but including, in the case of salespersons, sales
commissions to the extent determined by the Board or the Committee.

     5. Deductions. The Company will maintain payroll deduction accounts for all
        ----------
participating employees. With respect to any Offering made under this Plan, an
employee may authorize a payroll deduction in any dollar amount up to a maximum
of fifteen percent (15%) of the Compensation he or she receives during the Plan
Period or such shorter period during which deductions from payroll are made.
Payroll deductions may be at the rate of up to fifteen percent (15%) in
increments of one percent (1%). The minimum payroll deduction is initially one
percent (1%) of Compensation and may be revised from time to time by the Board
or the Committee.

     No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other
employee stock purchase plan (as defined in Section 423(b) of the Code) of the
Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the Offering Commencement
Date of the Plan Period) for each calendar year in which the Option is
outstanding at any time.

     6.  Deduction Changes.  An employee may decrease or discontinue his payroll
         -----------------
deduction once during any Plan Period, by filing a new payroll deduction
authorization form.  However, an employee may not increase his payroll deduction
during a Plan Period.  If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his election to
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).

                                      -2-
<PAGE>

     7. Interest. Interest will not be paid on any employee accounts, except to
        --------
the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.

     8.  Withdrawal of Funds.  An employee may at any time prior to the close of
         -------------------
business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering.  Partial withdrawals are not
permitted.  The employee may not begin participation again during the remainder
of the Plan Period.  The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.

     9. Purchase of Shares. On the Offering Commencement Date of each Plan
        ------------------
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
as does not exceed the number of shares determined by multiplying $2,083 by the
number of full months in the Offering Period and dividing the result by the
closing price (as defined below) on the Offering Commencement Date of such Plan
Period.

     The purchase price for each share purchased will be eighty-five percent
(85%) of the closing price of the Common Stock on (i) the first business day of
such Plan Period or (ii) the Exercise Date, whichever closing price shall be
less.  Such closing price shall be (a) the closing price on any national
securities exchange on which the Common Stock is listed, (b) the closing price
of the Common Stock on the Nasdaq National Market or (c) the average of the
closing bid and asked prices in the over-the-counter-market, whichever is
applicable, as published in The Wall Street Journal.  If no sales of Common
                            -----------------------
Stock were made on such a day, the price of the Common Stock for purposes of
clauses (a) and (b) above shall be the reported price for the next preceding day
on which sales were made.

     Each employee who continues to be a participant in the Plan on the Exercise
Date shall be deemed to have exercised his Option at the Option Price on such
date and shall be deemed to have purchased from the Company the number of full
shares of Common Stock reserved for the purpose of the Plan that his accumulated
payroll deductions on such date will pay for, but not in excess of the maximum
number determined in the manner set forth above.

     Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock will
be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.

     10. Issuance of Certificates. Certificates representing shares of Common
         ------------------------
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the

                                      -3-
<PAGE>

Company's sole discretion) in the name of a brokerage firm, bank or other
nominee holder designated by the employee. The Company may, in its sole
discretion and in compliance with applicable laws, authorize the use of book
entry registration of shares in lieu of issuing stock certificates.

     11. Rights on Retirement, Death or Termination of Employment. In the event
         --------------------------------------------------------
of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.

     12. Optionees Not Stockholders.  Neither the granting of an Option to an
         --------------------------
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.

     13. Rights Not Transferable. Rights under this Plan are not transferable by
         -----------------------
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.

     14. Application of Funds. All funds received or held by the Company under
         --------------------
this Plan may be combined with other corporate funds and may be used for any
corporate purpose.

     15. Adjustment in Case of Changes Affecting Common Stock. In the event of a
         ----------------------------------------------------
subdivision of outstanding shares of Common Stock, or the payment of a dividend
in Common Stock, the number of shares approved for this Plan, and the share
limitation set forth in Section 9, shall be increased proportionately, and such
other adjustment shall be made as may be deemed equitable by the Board or the
Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.

     16. Merger. If the Company shall at any time merge or consolidate with
         ------
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of

                                      -4-
<PAGE>

one share of the Common Stock was entitled to upon and at the time of such
merger or consolidation, and the Board or the Committee shall take such steps in
connection with such merger or consolidation as the Board or the Committee shall
deem necessary to assure that the provisions of Section 15 shall thereafter be
applicable, as nearly as reasonably may be, in relation to the said securities
or property as to which such holder of such Option might thereafter be entitled
to receive thereunder.

     In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.

     17. Amendment of the Plan. The Board may at any time, and from time to
         ---------------------
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.

     18. Insufficient Shares. In the event that the total number of shares of
         -------------------
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.

     19. Termination of the Plan. This Plan may be terminated at any time by the
         -----------------------
Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.

     20. Governmental Regulations. The Company's obligation to sell and deliver
         ------------------------
Common Stock under this Plan is subject to listing on a national stock exchange
or quotation on the Nasdaq National Market (to the extent the Common Stock is
then so listed or quoted) and the approval of all governmental authorities
required in connection with the authorization, issuance or sale of such stock.

                                      -5-
<PAGE>

     21. Governing Law. The Plan shall be governed by Delaware law except to the
         -------------
extent that such law is preempted by federal law.

     22. Issuance of Shares. Shares may be issued upon exercise of an Option
         ------------------
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.

     23. Notification upon Sale of Shares. Each employee agrees, by entering the
         --------------------------------
Plan, to promptly give the Company notice of any disposition of shares purchased
under the Plan where such disposition occurs within two (2) years after the date
of grant of the Option pursuant to which such shares were purchased.

     24. Effective Date and Approval of Shareholders. The Plan shall take effect
         -------------------------------------------
on March 16, 2000 subject to approval by the shareholders of the Company as
required by Section 423 of the Code, which approval must occur within twelve
(12) months of the adoption of the Plan by the Board.

          Adopted by the Board of Directors: March 16, 2000


          Approved by the stockholders: _____________, 2000

                                      -6-

<PAGE>

                                                                   Exhibit 10.5

                             NETWORK ENGINES, INC.

                        2000 DIRECTOR STOCK OPTION PLAN

1.  Purpose.
    --------

     The purpose of this 2000 Director Stock Option Plan (the "Plan") of Network
Engines, Inc. (the "Company") is to encourage ownership in the Company by non-
employee directors of the Company whose continued services are considered
essential to the Company's future progress and to provide them with a further
incentive to remain as directors of the Company.

2.  Administration.
    ---------------

     The Board of Directors (the "Board") shall supervise and administer the
Plan.  All questions concerning interpretation of the Plan or any options
granted under it shall be resolved by the Board and such resolution shall be
final and binding upon all persons having an interest in the Plan.  The Board
may, to the full extent permitted by or consistent with applicable laws or
regulations, delegate any or all of its powers under the Plan to a committee
appointed by the Board, and if a committee is so appointed, all references to
the Board in the Plan shall mean and relate to such committee.

3.  Participation in the Plan.
    --------------------------

     Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("non-employee directors") shall be eligible to
receive options under the Plan.

4.  Stock Subject to the Plan.
    --------------------------

    (a) The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan shall be
500,000 shares, subject to adjustment as provided in Section 7.

    (b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.

    (c) All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").

    (d) Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
<PAGE>

5.  Terms, Conditions and Form of Options.
    --------------------------------------

     Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:

     (a)  (i)  Automatic Option Grant Dates.  Each date of grant of an option
               ----------------------------
pursuant to this Section 5(a) is hereinafter referred to as an "Option Grant
Date."  Options shall automatically be granted to all non-employee directors as
follows:
          (x)  each person who becomes a non-employee director after the
adoption of this Plan shall be granted an option to purchase 50,000 shares of
Common Stock on the date of his or her initial election to the Board; and

          (y)  each non-employee director shall be granted an option to purchase
15,000 shares of Common Stock on the date of each Annual Meeting of Stockholders
of the Company after the adoption of this Plan commencing with the Annual
Meeting of Stockholders to be held following the end of fiscal year 2000 to be
held in 2001 (other than a director who was initially elected to the Board at
any such Annual Meeting or, if previously elected, at any time after the prior
year's Annual Meeting of Stockholders), provided that he or she is serving as a
director immediately following the date of such Annual Meeting.

          (ii) Periodic Grants of Options. Subject to execution by the non-
               --------------------------
employee director of an appropriate option agreement, the Board may grant
additional options to purchase a number of shares to be determined by the Board
in recognition of services provided by a non-employee director in his or her
capacity as a director, provided that such grants are in compliance with the
requirements of Rule 16b-3, as promulgated under the Securities Exchange Act of
1934, as amended from time to time.

     (b) Option Exercise Price. The option exercise price per share for each
         ---------------------
option granted under the Plan shall equal (i) the closing price on any national
securities exchange on which the Common Stock is listed, (ii) the closing price
of the Common Stock on the Nasdaq National Market or (iii) the average of the
closing bid and asked prices in the over-the-counter market, whichever is
applicable, as published in The Wall Street Journal, on the Option Grant Date.
                            -----------------------
If no sales of Common Stock were made on the Option Grant Date, the price of the
Common Stock for purposes of clauses (i) and (ii) above shall be the reported
price for the next preceding day on which sales were made.

     (c) Transferability of Options. Except as the Board may otherwise determine
         --------------------------
or provide in an option granted under the Plan, any option granted under the
Plan to an optionee shall not be transferable by the optionee other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder, and shall be exercisable during
the optionee's lifetime only by the optionee or the optionee's guardian or legal
representative. References to an optionee, to the extent relevant in the
context, shall include references to authorized transferees.

                                      -2-
<PAGE>

(d)  Vesting Period.
     --------------

     (i)   General. Each option granted under the Plan pursuant to Section
           -------
5(a)(i)(x) above shall become exercisable (vest) in four equal annual
installments beginning on the first anniversary of such Option Grant Date. Each
option granted under the Plan pursuant to Section 5(a)(i)(y) above shall become
exercisable in full upon the earlier of one year from the Option Grant Date or
the date immediately preceding the next Annual Meeting of Stockholders. No
further vesting shall occur with respect to an option granted pursuant to
Section 5(a)(i)(x) or 5(a)(i)(y) after the optionee ceases to be a non-employee
director of the Company. Each option granted under the Plan pursuant to Section
5(a)(ii) above shall become exercisable on such terms as shall be determined by
the Board and set forth in the option agreement with the respective optionee.

     (ii)  Acceleration Upon Acquisition Event. Notwithstanding the foregoing,
           -----------------------------------
each outstanding option granted under the Plan shall immediately become
exercisable in full upon the occurrence of an Acquisition Event (as defined in
Section 8) with respect to the Company.

     (iii) Right to Receive Restricted Stock. Notwithstanding the provisions
           ---------------------------------
of Section 5(d)(i) above, the Board shall have the authority to grant options
(including options granted pursuant to Section 5(a)(i) above) which are
immediately exercisable subject to the Company's right to repurchase any
unvested shares of stock acquired by the optionee on exercise of an option in
the event such optionee's service as a director terminates for any reason.

     (e) Termination. Each option shall terminate, and may no longer be
         -----------
exercised, on the earlier of (i) the date ten years after the Option Grant Date
of such option or (ii) the first anniversary of the date on which the optionee
ceases to serve as a director of the Company.

     (f) Exercise Procedure. An option may be exercised only by written notice
         ------------------
to the Company at its principal office accompanied by (i) payment in cash or by
certified or bank check of the full consideration for the shares as to which
they are exercised, (ii) delivery of outstanding shares of Common Stock (which
have been outstanding for at least six months) having a fair market value on the
last business day preceding the date of exercise equal to the option exercise
price, or (iii) an irrevocable undertaking by a creditworthy broker to deliver
promptly to the Company sufficient funds to pay the exercise price or delivery
of irrevocable instructions to a creditworthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price.

     (g) Exercise by Representative Following Death of Director. An optionee, by
         ------------------------------------------------------
written notice to the Company, may designate one or more persons (and from time
to time change such designation), including his or her legal representative,
who, by reason of the optionee's death, shall acquire the right to exercise all
or a portion of the option. If the person or persons so designated wish to
exercise any portion of the option, they must do so within the term of the
option as provided herein. Any exercise by a representative shall be subject to
the provisions of the Plan.

                                      -3-
<PAGE>

6.   Limitation of Rights.
     ---------------------

     (a) No Right to Continue as a Director. Neither the Plan, nor the granting
         ----------------------------------
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.

     (b) No Stockholders' Rights for Options. An optionee shall have no rights
         -----------------------------------
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.

     (c) Compliance with Securities Laws. Each option shall be subject to the
         -------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or the disclosure of non-
public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board. Nothing herein shall be deemed to require the Company to apply for or
to obtain such listing, registration or qualification, or to satisfy such
condition.

7.  Adjustment Provisions for Mergers, Recapitalizations and Related
    ----------------------------------------------------------------
    Transactions.
    -------------

    If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (ii) additional shares or new or different shares or other
securities of the Company or of another entity are distributed with respect to
such shares of Common Stock, the Board shall make an appropriate and
proportionate adjustment in (w) the maximum number and kind of shares reserved
for issuance under the Plan, (x) the number and kind of shares or other
securities subject to then outstanding options under the Plan, (y) the price for
each share subject to any then outstanding options under the Plan (without
changing the aggregate purchase price for such options), and (z) the number and
kind of securities to be granted pursuant to Section 5(a)(i), to the end that
each option issued or to be issued shall be exercisable, for the same aggregate
exercise price, for such securities as such option holder would have held
immediately following such event if the option had been granted prior to such
event he had exercised such option immediately prior to such event.  No
fractional shares will be issued under the Plan on account of any such
adjustments.

                                      -4-
<PAGE>

8.  Acquisition Event.
    --------------------

    For purposes of the Plan, an "Acquisition Event" shall be deemed to have
occurred only if any of the following events occurs:  (i) any merger or
consolidation which results in the voting securities of the Company outstanding
immediately prior thereto representing immediately thereafter (either by
remaining outstanding or by being converted into voting securities of the
surviving or acquiring entity) less than 50% of the combined voting power of the
voting securities of the Company or such surviving or acquiring entity
outstanding immediately after such merger or consolidation; (ii) any sale of all
or substantially all of the assets of the Company; or (iii) the complete
liquidation of the Company.

9.  Termination and Amendment of the Plan.
    --------------------------------------

    The Board may suspend or terminate the Plan or amend it in any respect
whatsoever.

10. Notice.
    -------

    Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.

11. Governing Law.
    --------------

    The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the internal laws of the State of Delaware (without regard
to any applicable conflicts of laws or principles).

12. Effective Date.
    -----------------

    The Plan shall take effect upon the closing of the Company's initial public
offering of Common Stock.

                              Adopted by the Board of Directors on
                              March 16, 2000.


                              Approved by the Stockholders on
                              ______________, 2000.

                                      -5-

<PAGE>

                                                                  Exhibit 10.12

                            ASSET PURCHASE AGREEMENT

     This Asset Purchase Agreement (the "Agreement") is entered into as of April
13, 2000 ("Effective Date") by and between Copernicus Systems, Inc. (the
"Buyer") and Network Engines, Inc. (the "Seller").

     WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to
purchase, all of Seller's assets relating to the Seller's P6000 and P6000EXP
product lines, as more fully described in Exhibit A hereto.

     NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein, the Buyer and the Seller agree as follows:

1.  THE ASSETS.   Subject to the terms and conditions set forth herein, the
Seller hereby sells, assigns, transfers and delivers to the Buyer, and the Buyer
hereby purchases, acquires and takes assignment and delivery of, free and clear
of all liens and Encumbrances (as defined herein), all right, title and
ownership of the following assets of the Seller relating to Seller's P6000 and
P6000EXP Systems (collectively, the "Assets"):

  (a) those tangible assets relating to Seller's manufacture, testing, packaging
and fulfillment of P6000 and P6000EXP Systems which are listed on Schedule 1(a)
hereto (the "Tangible Assets"); and

  (b) all Seller's inventory of parts, subassemblies, components, finished goods
and other inventory of P6000 and P6000EXP Systems, which inventory is listed on
Schedule 1(b) hereto (the "Inventory"); and

  (c) those computer software programs of Seller known as P6000 Cluster Director
and P6000 Cluster Monitor, as more fully described on Schedule 1(c) hereto (the
"Software"), including all object code and source code therein, and all media of
Seller on which such computer programs reside, but excluding any and all third
party software that may work with, depend on or support the Software (which
excluded third party software includes, without limitation, all software
provided by Microsoft and InterVu); and

  (d) access to a copy of Seller's records relating to the Inventory and
Tangible Assets, including customer lists, supplier lists, bills of materials,
production schedules, shipping manifests, customs forms and similar records (the
"Records"); and

  (e) (i) all patent, copyright and trade secret rights of Seller in and to the
design and layout of the P6000 and P6000EXP Systems and the Software and (ii)
all trademark rights in the marks listed on Schedule 1(d) and all goodwill
therein (collectively, the "Intellectual Property").

Buyer shall obtain no right or interest in or to any other assets of Seller,
whether or not related, directly or indirectly, to the Assets.  In particular,
Buyer shall obtain no right or interest in or to any accounts receivable, cash,
employee benefit plans, leasehold interests, real estate or software or
technology other than the Software.
<PAGE>

2.  PURCHASE PRICE.

     (a)  In consideration hereof, Buyer will pay to the Seller:

          (i) $1.00 upon execution of this Agreement;

          (ii) 10% of sales of complete P6000 and P6000EXP Systems (or
          any successor or derivative system using a substantial portion of the
          intellectual property or software sold to Buyer hereunder
          ("Derivatives")) (the "Systems") manufactured from the Inventory;

          (iii) 10% of the Net Revenue for sales of upgrades or spare
          parts from the Inventory;

          (iv) 2% of the Net Revenue for sales of upgrades or spare
          parts relating to the System or Derivative from inventory that is
          purchased by Buyer not included in the Inventory;

          (v) $242 per System or Derivative sold to The Concorde Group;

          (vi) $300 per any System or Derivative sold to any other third party
          included in Section 2(a)(ii) above; provided however, that this shall
          not include new products, systems or designs created by Buyer or
          licensed by Buyer from any third party; and

          (vii)  the amount set forth in Section 4.

          "Net Revenue" per System shall be the amount actually received by the
          Buyer for each System, less refunds.

     (b)  If the Buyer transfers its ownership rights to, or exclusively
          licenses or leases, all or substantially all of the Tangible Assets or
          Software before the date twelve (12) months after the Effective Date,
          the Buyer will pay Seller 50% of the net proceeds  of such sale ("Net
          Proceeds").  If such sale occurs after the date twelve months from the
          Effective Date, but before the date two years from the Effective Date,
          the Buyer will pay the Seller 25% of such Net Proceeds.  If such sale
          occurs after the date two years from the Effective Date, Buyer will be
          entitled to 100% of such Net Proceeds.

3.  ASSUMPTION OF LIABILITIES.  Buyer hereby assumes the following liabilities
and obligations of the Seller (the "Assumed Liabilities"):

    (a) except as provided in Section 5 below, all warranty, support, repair,
replacement, maintenance and related liabilities and obligations of Seller with
respect to P6000 and P6000EXP (or predecessor) Systems sold or distributed by or
for Seller or Buyer, either prior to or after the Effective Date;
<PAGE>

    (b) all other liabilities and obligations relating to P6000 and P6000EXP (or
predecessor) Systems sold or distributed by or for Seller or Buyer, either prior
to or after the Effective Date, whether for alleged defects, failures, injury or
other damage, and whether sounding in negligence, warranty, strict liability or
any other cause of action;

    (c) all liabilities and obligations of Seller under the Contracts, including
all liability associated with the failure of Seller to obtain necessary consents
to assignment of the Contracts to Buyer; and

    (d) any liability with respect to the bulk sales laws of any state.

4.  LICENSE AND ROYALTY RATIFICATION.  Seller hereby acknowledges and agrees
that prior to the signing of this Agreement the Buyer had a limited exclusive
license to make, sell and use P6000 and P6000EXP Systems, subject to the
obligation to pay the royalty set forth in Section 2 above.  Buyer represents
and warrants to Seller that royalties in the aggregate amount of $4,010.44 are
accrued to date based on Buyer's activities prior to the Effective Date, and
Buyer shall remit such amount to Seller concurrently herewith.

5.  SUPPORT.

    (a) Buyer shall provide customer support, without charge, to existing
Seller customers of the System for Systems currently under warranty, for the
duration of their current warranty periods. To the extent that Buyer must obtain
any hardware from any third party to perform such warranty support, Seller shall
reimburse Buyer for its reasonable, documented out-of-pocket costs for such
parts.

    (b) Notwithstanding Buyer's obligation to provide warranty support
hereunder, Seller shall have the right, for customers designated by Seller, to
continue to provide first-line (initial response) support with respect to P6000
and P6000EXP Systems sold or distributed by Seller prior to the Effective Date.
In such cases, Buyer shall provide second line (technical help) support to
Seller's support personnel or to customers referred to Buyer by Seller's support
personnel at no charge to Seller.

6.  NO OTHER TECHNOLOGY.  Buyer waives any right, title and interest in and to
any of Seller's other technologies, except as set forth herein.

7.  LIABILITY

    (a) EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS SECTION 7, SELLER SELLS
THE ASSETS TO BUYER HEREUNDER "AS IS", "WHERE IS", ON A QUITCLAIM BASIS, WITHOUT
WARRANTY OR CONDITION OF ANY KIND, EXPRESS OR IMPLIED, WRITTEN OR ORAL; AND
SELLER HEREBY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES AND CONDITIONS,
INCLUDING, WITHOUT LIMIATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT.

    (b) Buyer hereby agrees to defend, indemnify and hold Seller and its
officers, directors, shareholders, affiliates, partners and agents (the
"Indemnitees") harmless from and
<PAGE>

against any and all claims, damages, liabilities, losses and expenses incurred
in connection with the Assumed Liabilities. The Indemnitees shall be entitled,
at their expense, to be represented by counsel of their choosing in any action
described in this Section 7(b).

    (c) Under no circumstances will Seller be liable to Buyer for any cause
directly or indirectly relating to the Assets or the transfer thereof under this
Agreement for any consequential, incidental, indirect, exemplary or punitive
damages, no matter what the cause, even if Seller has been made aware of the
possibility of such damages.

    (d) Under no circumstances will Seller be liable to Buyer for direct damages
for any cause directly or indirectly relating to the Assets or the transfer
thereof under this Agreement in an amount greater than the total amount that
Buyer has paid to Seller under this Agreement during the preceding 12-month
period.

    (e) Organization of the Seller; Authority. The Seller is a corporation duly
        -------------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. The Seller has all requisite power and authority to own and hold the
Assets owned or held by it. The Seller has all requisite power, authority and
capacity to execute and deliver this Agreement and to carry out all actions
required of it pursuant to the terms of this Agreement, and this Agreement has
been duly executed and delivered by the Seller and constitutes the legal, valid
and binding obligation of the Seller, enforceable against the Seller in
accordance with its terms.

    (f) Title to Assets. The Seller is the lawful owner of, has good and valid
        ---------------
record and marketable title to, and has the full right to sell, convey,
transfer, assign and deliver the Inventory and Tangible Assets, without
restrictions of any kind. All of the Inventory and Tangible Assets are free and
clear of any security interests, liens, claims, charges, options, mortgages,
debts, leases (or subleases), conditional sales agreements, title retention
agreements, encumbrances of any kind or restrictions against the transfer or
assignment thereof (collectively, "Encumbrances").  To Seller's actual knowledge
(without having conducted any search or investigation) there are no filings in
any registry of deeds in any jurisdiction or under the Uniform Commercial Code
or similar statute in any jurisdiction showing the Seller as debtor which create
or perfect or which purport to create or perfect any Encumbrance in or on any of
the Assets.

8.  LICENSE.  Buyer hereby grants Seller a worldwide, perpetual, irrevocable,
non-exclusive, paid-up, royalty-free license to use the proprietary rights
included in the Assets for any purpose whatsoever.

9.  CONFIDENTIALITY.  The parties acknowledge and agree that as a result of
entering into this Agreement, each party will have access to certain of the
other party's Confidential Information, which for purposes of this Agreement
shall include: (a) the terms and conditions of this Agreement; (b) each party's
trade secrets, business plans, strategies, methods and/or practices; and (c)
other information relating to either party that is not generally known to the
public.  Notwithstanding the foregoing, the term "Confidential Information"
specifically excludes (1) information that is now in the public domain or
subsequently enters the public domain by publication or otherwise through no
action or fault of the other party; (2) information that is known to either
party without restriction prior to receipt from the other party, from its own
<PAGE>

independent sources as evidenced by such party's written records, and which was
not acquired, directly or indirectly, from the other party; (3) information that
either party receives from any third party having a legal right to transmit such
information, and not under any obligation to keep such information confidential;
and (4) information independently developed by either party's employees or
agents; provided however, that Seller acknowledges and agrees that following the
sale of the Assets, Seller will continue to treat as Confidential Information
all information relating to the Assets that it currently considers to be its
Confidential Information.  Each party also understands and agrees that
disclosure of that information could adversely affect the other party's
business.  Accordingly, the parties agree that each party shall: (i) restrict
disclosure of the other party's Confidential Information to its employees,
consultants or independent contractors with a need to know, (ii) not disclose
the other party's Confidential Information to any third party (other than its
legal, accounting, technical and/or business advisors) without the prior written
approval of the other party, and (iii) safeguard the confidentiality of the
Confidential Information by using at least the same physical and other security
measures as that party uses to protect its own Confidential Information.
Notwithstanding the foregoing, it shall not be a breach of this Agreement for
either party to disclose Confidential Information of the other party if required
to do so under law, in a judicial or other governmental investigation or
proceeding or pursuant to the rules of the Securities and Exchange Commission or
any stock exchange or listing system, provided the other party has been given
prior notice and the disclosing party has sought all reasonable safeguards
against widespread dissemination prior to such disclosure.

10.  AUDIT.  Seller shall have the right to audit the books and records of Buyer
relating solely to the arrangements contemplated in this Agreement in order to
verify the amounts owed and to be paid by Buyer to Seller hereunder; provided
that Seller may only conduct such audit twice per year and that Seller provide
Buyer at least 10 days prior written notice before conducting any such audit.
Seller shall be solely responsible for the cost of any such audit, unless the
audit discloses a discrepancy of greater than 10%, in which case Buyer will pay
the reasonable cost of the audit.

11.  BUYER'S ACKNOWLEDGEMENT

   Buyer hereby acknowledges that it has had ample opportunity to inspect and
review the Assets with its advisors, and that Buyer is satisfied with the
condition of the Assets and agrees that the consideration being paid by Buyer to
Seller hereunder is fair and reasonable in view of the condition of the Assets
and the disclaimers and limitations contained in Section 7.

12. GENERAL.

     (a) Expenses. All expenses of the preparation, execution and consummation
         --------
         of this Agreement and of the transactions contemplated hereby,
         including, without limitation, attorneys', accountants' and outside
         advisers' fees and disbursements, shall be borne by the party incurring
         such expenses.

     (b) Notices. All notices, demands and other communications hereunder shall
         -------
         be in writing or by written telecommunication, and shall be deemed to
         have been duly given if delivered personally or if mailed by certified
         mail, return receipt requested, postage prepaid, or sent by written
         telecommunication, as follows:
<PAGE>

                   If Buyer, to:

                   Cheryl Smith
                   Copernicus Systems, Inc.
                   135 King Street
                   Cohasset, MA  02025
                   (781) 383-1906

                   If to Seller, to:

                   Network Engines, Inc.

                   _____________________

                   _____________________

     (c) Entire Agreement. This Agreement contains the entire understanding of
         ----------------
         the parties, supersedes all prior agreements and understandings
         relating to the subject matter hereof and shall not be amended except
         by a written instrument hereafter signed by all of the parties hereto.

     (d) Governing Law. The validity and construction of this Agreement shall be
         -------------
         governed by the internal substantive laws of the Commonwealth of
         Massachusetts.

     (e) Sections and Section Headings. The headings of sections and subsections
         -----------------------------
         are for reference only and shall not limit or control the meaning
         thereof.

     (f) Assigns. This Agreement shall be binding upon and inure to the benefit
         -------
         of the heirs and successors of each of the parties. Neither this
         Agreement nor the obligations of any party hereunder shall be
         assignable or transferable by such party without the prior written
         consent of the other party hereto; provided, however, that nothing
         contained in this Section shall prevent a party, without the consent of
         the other party, from transferring or assigning this Agreement or its
         rights or obligations hereunder to another entity controlling, under
         the control of, or under common control with such party, provided that
         such assignee is financially capable of fulfilling the assigning
         party's responsibilities hereunder.

     (g) Further Assurances. From time to time, at the request of the Buyer and
         ------------------
         at Buyer's expense, the Seller shall execute and deliver such further
         instruments of conveyance and transfer and take such other actions as
         the Buyer may reasonably require more effectively to convey and
         transfer any of the Assets to the Buyer. The Seller and the Buyer shall
         also execute and deliver to the appropriate other party such other
         instruments as may be reasonably required in connection with the
         performance this Agreement and each shall take all such further actions
         as may be reasonably required to carry out the transactions
         contemplated by this Agreement.

<PAGE>

     (h) No Implied Rights or Remedies. Except as otherwise expressly provided
         -----------------------------
         herein, nothing herein expressed or implied is intended or shall be
         construed to confer upon or to give any person, firm or corporation,
         other than the Seller and the Buyer and their respective shareholders,
         any rights or remedies under or by reason of this Agreement.

     (i) Counterparts. This Agreement may be executed in multiple counterparts,
         ------------
         each of which shall be deemed an original, but all of which together
         shall constitute one and the same instrument.

     IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
hereto have caused this Agreement to be duly executed and delivered by their
respective duly authorized officers as an instrument under seal as of the date
and year first above written.


NETWORK ENGINES, INC.              COPERNICUS SYSTEMS, INC.

By:  Douglas G. Bryant             By: /s/ Cherl H. Smith
     -------------------------         ------------------------------

Date:  April 13, 2000                  Date:  April 13, 2000
      ------------------------               ------------------------

<PAGE>
                                                                       Exhibit A

P6000EXP
- --------------------------------------------------------------------------------
Fault-tolerant Load-balanced Clustered Server


- --------------------------      W I N N E R
Data                          B E S T   OF SHOW
Communications                          97
- --------------------------

        LANTIMES
- --------------------------    NETWORK INTEROP 97


                       [Picture of P6000EXP appears here]


                                                                         NETWORK
                                                                         ENGINES

                                          Torque for your Network
<PAGE>

Network Engines' P6000EXP allows you to capitalize on your PC based technology

<TABLE>
<S>                                      <C>
The latest generation of Network         MP700 Communications Ports
Engines' fault-tolerant load-balanced    Ethernet port o Modem port o Digital
clustered servers, the P6000EXP          input port ( ) Serial port o Relay output
combines complete PC compatibility with  port (4)
SNMP-enabled system monitoring and
high-density packaging, providing a
high-reliability environment for
enterprise mission-critical
applications.                            User-defined I/O panel

Key benefits from the P6000EXP platform

   Linear scalability:  100%
   performance increase each time you    Triple redundant 400 watt
   add another engine.                   hot-swappable Telco
                                         grade power supplies
   Clustering support:  With 10
   independent engines in a single
   chassis, clustering is easy and
   affordable.

   Load-balancing:  Eliminates single
   point of failure and ensures
   application response to users.                     [cross section of P6000EXP
                                                                   appears here]
   Fault-tolerance:  Maintenance
   environment to monitor all servers
   via a single user interface.
   Hot-swappable and redundant
   sub-systems, triple Telco grade 400   Scalable engines:
   watt power supplies that are          up to 10 processor engines with Pentium
   load-balanced and load-sharing.       class through Pentium Pro processors

The P6000EXP is ideally suited for use
in enterprise applications such as
internet/intranet, remote access,
thin-client, fax and email.              Optional RAID controller

Up to 10 fully functional independent
Pentium class engines can be configured
in the P6000EXP platform, with up to
twelve disk drives, CD-ROM and           Drive bay power and connections
maintenance processor.  Application      backplane: IDE, SCSI, RAID
engines currently available are:
Pentium through Dual Pentium Pro with
various speeds and memory
configurations.

All engines have onboard SVGA, two       Peripheral sharing subsystem for
serial, parallel, floppy disk, IDE,      floppy disk drive, CD-ROM, mouse,
keyboard, mouse and maintenance port     keyboard, video
support.
</TABLE>
<PAGE>

providing a platform that is clustered load-balanced and fault-tolerant.


Solid state, resettable short-circuit protection
for all backplane segments


Range of backplane choices, including ISA and ISA/PCI. Segmentable processor
backplane with power control, peripheral sharing and application monitoring
parts


Eight redundant cooling fans supply positive
pressures cooling


Easily accessible. Two screws for removal of
covers, for in rack maintenance & upgrades


                                        [cross section of P6000EXP appears here]


Only 6u, 10.5" tall
Standard 19" rack-mount packaging


Control panel with system status indicators


The MP700 embedded maintenance processor controls and monitors all major
P6000EXP subsystems, including power supply voltages, system temperatures,
system status, operating system states, application software states and external
resources


Configurable to twelve hot-swappable disk drives with
power protection and control. Support for SCSI, IDE, and
RAID
<PAGE>

S p e c i f i c a t i o n s


Application Processor Engine

CPU
Select up to 10 independent fully functional application processor engines.
Pentium class through Dual Pentium Pro processors.

Bus Interface
ISA and PCI configurations available.

Cache Memory
512Kbyte.

RAM
Supports up to 512 MB memory (fast page or EDO).

Real Time Clock
On-board real time clock and calendar.

Ethernet Interface
Integrated ethernet option for on-board NIC. (Pentium only).

IDE Interface
On-board support for four IDE devices.

SCSI Interface
Optional on-board SCS1-3 controller (Pentium Pro only).

SVGA Interface On-board SVGA with 1MB memory.

Serial Ports
Two RS232C ports, up to 115k baud, uses IRQ3 and IRQ4, 10 KV ESD protection.

Parallel Port
One bi-directional parallel port, jumper selectable IRQ5, IRQ7 or no IRQ.

Floppy Interface Supports two floppy drives.

Mouse Interface
Standard PS/2 interface.

Keyboard Interface
Standard PS/2 interface.

Battery
On-board battery with ten year life expectancy.

Support and Services

Warranty
One year warranty on all parts and labor, return to factory.

On-Site Service
Worldwide on-site service available.

System Enclosure

Backplane and Expansion
Ability to populate each segment as a complete PC with application processor
engine, memory and application specific cards.
Individual segment power control.
20 slot passive ISA/PCI compatible backplanes, segmented into a variety of
combinations.

System Cooling
Four fans for backplane cooling. Four fans for power supply cooling. Removable
and washable filter.

Disk Drive and Openings
Up to 12 3.5" low profile, hot-swappable drive bays.
Supports IDE, SCSI-2, SCS1-3, and RAID interfaces.

Power Supplies
Triple redundant hot-swappable Telco grade power supplies, 400 watts per power
supply, load-balancing.
Auto ranging AC input 94-284 AC 50-60 Hz. Optional wide range DC input, 24-72 V
DC.

Form Factor
19" rack mountable enclosure 6U (10.5") high.

Application Systems Monitoring
Local and remote reset and power control for individual application processors.
Monitoring support for major applications and operating systems. High-level
application scripting language for automated maintenance support and
notification.
SNMP support.
External resource switching and sensing.
External serial device support.

Operating Environment
Temperature: 0-60(degree)C.
Humidity: 5-95% relative humidity (non-condensing).

MTBF/MTTR
(greater than) 100,000 hours at 25(degree)C/(less than)5 minutes.

Agency Approvals
UL, CSA, CE.

Weight and Dimensions
Weight: -- 80lb. (147.2 Kgs.)
Dimensions: 18.8" wide x 10.5" high x 24.0" deep.
(447.52 mm x 266.7mm x 609.6mm).

Operating Systems and Windows (GUI) Support
MS-DOS, Windows, Windows 95, Windows NT, OS/2, QNX, SCO Unix, Interactive Unix,
Solaris, Netware and Vines.

Clustered Server Support
Network Engines load-balancer
Microsoft Cluster Services
Citrix WinFrame with load-balancing option
RightFax with load-balancing option

                            Network Engines, Inc.      Tel:  781-961-4400
Network                     61 Pleasant Street         Fax:  781-961-4508
Engines                     Randolph, MA  02368-4137   www.NetworkEngines.com
<PAGE>

                                                                   Schedule 1(a)


P6000 TEST EQUIPMENT

Power supply calibration test stand

Drive carrier test system

Power supply and back plane load tester

Maintenance Processor configuration and test system

Cable tester

                                       12
<PAGE>
                                                                   Schedule 1(b)

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
100-1001-00     IC Logic       IC (N) Tri-state           Fairchild           DM74LS244N           DigiKey          DM74LS244N-ND
                               octal buffer               Semiconductor
100-1002-00     IC Logic       IC PWR L OFF V QUAD        National Semi       LM339AN              Digikey          LM339AN-ND
                               COMP 14 DIP
100-1003-00     IC Logic       IC ELECT CIRCUIT           Linear Technology   LTC1153CN8           DigiKey          LTC1153CN8-ND
                               BREAKR 8 DIP
100-1006-00     IC Logic       IC QUAD 2 IN OR            Fairchild           DM74LS32N            DigiKey          DM74LS32N-ND
                               GATE                       Semiconductor
100-1007-00     IC Logic       IC BCD to                  Motorola            74ls42               Newark           O8T SN74LS42N
                               Decimal Decoder
100-1008-00     IC Logic       IC 12 or 24 Bit            Fairchild           FST16211MTD          Arrow
                               Bus Switch                 Semiconductor
100-1009-00     IC Logic       IC SCSI TERMINATOR 9       LINFINITY           LX5212CPD            REPTRON          LX5212CDP
                               LINE, 16 PIN SIOC
100-1010-00     IC Logic       Octal buffer / line        Motorola            74LS244              DigiKey          DM74LS244WM-ND
                               driver 3 state
                               outputs
100-1011-00     IC Logic       Octal Bus                  Motorola            74LS245              DigiKey          DM74LS245WM-ND
                               Transceiver 3 state
                               outputs
100-1012-00     IC Logic       Itty Bitty RC              Micrel              MIC1555BM5 TS        Newark           83F5882
                               Timer
100-1013-00     IC Logic       80ma Low DropOut           Micrel              MIC5203-3.0BM4       Newark           83F6053
                               Regulator                                      TS
100-1014-00     IC             B69000,  Video
                               Accelerator with
                               integrated memory
100-1015-00     IC             74ALS245, BUFFER
100-1016-00     IC             74F32, OR GATE
100-1017-00     IC             PENTIUM CHIP-CLOCK
                               SYNTHESIZER
100-1018-00     IC             LTC 1753CT
100-1019-00     IC             74HCT14, Schmit
                               Inverter
100-1020-00     IC             74F07, BUFFER, OPEN
                               COLLECTOR
1001021-00      IC             74 LVC157, Quad
                               2T01, Data
                               selection/MUX
100-1022-00     IC             74ALS08, QUAD 2
                               I/P AND GATE
100-1023-00     IC             74LVC14,
                               INBERTER
100-1024-00     IC             P13B16224, 12/24 BIT
                               BUS EXCHANGE SWITCH
100-1025-00     IC             LT1587-1.5V,
                               REGULATOR
100-1026-00     IC             LT1587, VOLTAGE
                               REGULATOR, ADJUSTAVLE
100-1027-00     IC             82443GX, HOST                                                       Pioneer Std      FW82443GX
                               BRIDGE
100-1028-00     IC             ICS9179, CLOCK
                               BUFFER, LOW SKEW
100-1029-00     IC             LM79, HARDWARE                                                      Pioneer          LM79CCVF
                               MONITOR
100-1030-00     IC             82093, IOAIPC                                                       Pioneer          S82093AA IOAPIC
100-1031-00     IC             82558, ETHERNET                                                     Pioneer          SV825558B
                               MAC AND PHY
100-1032-00     IC             93C46, 3-WIRE,
                               SERIAL CMOS E2PROMS
100-1033-00     IC             FST 116211, 24
                               BIT BUS SWITCH
100-1034-00     IC             82B715, 12C BUS
                               EXTENDER
100-1035-00     IC             21152, PCI TO                                                       Pioneer          21152-AB
                               PCI BRIDGE                                                                           PCI-PCI bridge

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number              Cost                                            Room                       on Hand          @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
100-1001-00         $0.27
                                                                                                          -       $           -
100-1002-00         $0.75
                                                                                                          -       $           -
100-1003-00         $2.10
                                                                                                          -       $           -
100-1006-00         $0.58
                                                                                                          -       $           -
100-1007-00         $0.63
                                                                                                          -       $           -
100-1008-00         $2.40
                                                                                                          -       $           -
100-1009-00         $1.60
                                                                                                          -       $           -
100-1010-00         $0.64
                                                                                                          -       $           -
100-1011-00         $0.64
                                                                                                          -       $           -
100-1012-00         $0.72
                                                                                                          -       $           -
100-1013-00         $0.66
                                                                                                          -       $           -
100-1014-00         $32.71
                                                                                                          -       $           -
100-1015-00         $0.24
                                                                                                          -       $           -
100-1016-00         $0.08
                                                                                                          -       $           -
100-1017-00         $2.58
                                                                                                          -       $           -
100-1018-00         $2.95
                                                                                                          -       $           -
100-1019-00         $0.13
                                                                                                          -       $           -
100-1020-00         $0.42
                                                                                                          -       $           -
1001021-00          $0.28
                                                                                                          -       $           -
100-1022-00         $0.12
                                                                                                          -       $           -
100-1023-00         $0.22
                                                                                                          -       $           -
100-1024-00         $1.93
                                                                                                          -       $           -
100-1025-00         $3.35
                                                                                                          -       $           -
100-1026-00         $3.40
                                                                                                          -       $           -
100-1027-00         $54.72
                                                                                                          -       $           -
100-1028-00         $2.58
                                                                                                          -       $           -
100-1029-00         $5.55
                                                                                                          -       $           -
100-1030-00         $10.75
                                                                                                          -       $           -
100-1031-00         $23.50
                                                                                                          -       $           -
100-1032-00         $0.27
                                                                                                          -       $           -
100-1033-00         $1.40
                                                                                                          -       $           -
100-1034-00         $2.07
                                                                                                          -       $           -
100-1035-00         $14.30
                                                                                                          -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
100-1036-00     IC             82371EB, P11X4, PCI                                                 Pioneer          FW82371EB ISA
                               TO ISA/IDE                                                                           bridge
                               XECELARATOR
100-1037-00     IC             LTC 1153,
                               Auto-reset
                               electronic circuit
                               breaker
100-1038-00     IC             ISP1040B, SCSI
                               CONTROLLER
100-1039-00     IC             HM62832, 32KX8 HIGH
                               SPEED CMOS SRAM
100-1040-00     IC             ISP 1040B, SCSI
                               TERMINATOR
100-1041-00     IC             IT8671, SUPER
                               I/O CHIP
100-1042-00     IC             ITE8687, I/O
                               BUFFER
100-1043-00     IC             MAX 1617,
                               Remote/local
                               temperature sensor
100-1044-00     IC             LTC 1340, 3.3V
                               SWITCHER
100-1045-00     IC             LTC1326C, Micropower
                               trible supply monitor
100-1046-00     IC             ECP TERMINATION
                               NETWORK
100-1047-00     IC             STATIC RAM
100-1048-00     IC             LTC1326C, Micropower
                               trible supply monitor
100-1049-00     IC             82559, ETHERNET MAC                                                 Pioneer          GD82559 SL3HD
                               AND PHY, PBGA 196                                                                    Device
103-1001-00     IC             IC Serial EPROM            Xilinx                                                    XC1765-PD8C
                Unprogrammed   dip 8 Blank
103-1002-00     IC             IC FPGA Blank              Xilinx                                                    XC3064-160-PQFP
                Unprogrammed
103-1003-00     IC             IC 8 Bit                   scenix              SX28AC/SS            Parallax         SX28AC/SS
                Unprogrammed   Microcontroller
103-1004-00     IC             28F020, FLASH                                                       Pioneer          N28F020-150
                               MEMORY
103-1005-00     IC             8 BIT
                               MICROCONTROLLER
                               TQFP-48
103-1006-00     IC             8 BIT MPU
103-1007-00     IC             SPI SERIAL EEPROM
103-1008-00     IC             FLASH MEMORY
105-1001-00     IC CPU         CPU P586/233MMX W/         Intel                                    Tech Data
                               512K cache stand
                               alone processor for
                               ATX motherboard
105-1002-00     IC CPU         CPU P586/166MMX W/         Intel                                    Tech Data        390925
                               512K cache stand
                               alone processor for
                               ATX motherboard
105-1003-00     IC CPU         CPU P586/200MMX W/         Intel                                    Tech Data
                               512K cache stand
                               alone processor for
                               ATX motherboard
105-1004-00     IC CPU         PENTIUM II 400MHZ                                                   Pioneer
105-1005-00     IC CPU         PENTIUM II 450                                                      Pioneer
                               MHZ
110-1001-00     Simm / Dimm    Memory Flash Simm          Adastra             29F016 Flash
                                                                              5v 120ns Std T
110-1002-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              128 MB EDO
                               module, gold, 32 x                             GOLD
                               32 MB, 5V, 60 ns,
                               EDO, for SBC's
110-1003-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              128 MB EDO TIN
                               module, tin, 32 x
                               32, EDO, 5V, 60 ns
                               for motherboards
110-1004-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              64 MB EDO TIN
                               module, tin, 16 x
                               32, EDO, 5V, 60 ns
                               for motherboards
110-1005-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              32 MB EDO TIN
                               module, tin, 8 x 32,
                               EDO, 5V, 60 ns for
                               motherboards
110-1006-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              8 MB EDO TIN
                               module, tin, 2 x 32,
                               EDO, 5V, 60 ns for
                               motherboards

<CAPTION>
NEI Part          Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number            Cost                                            Room                       on Hand          @ 9/30/99
<S>               <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
100-1036-00       $9.78
                                                                                                        -       $           -
100-1037-00       $2.00
                                                                                                        -       $           -
100-1038-00       $41.00
                                                                                                        -       $           -
100-1039-00       $8.61
                                                                                                        -       $           -
100-1040-00       $2.19
                                                                                                        -       $           -
100-1041-00       $4.00
                                                                                                        -       $           -
100-1042-00       $4.00
                                                                                                        -       $           -
100-1043-00       $3.79
                                                                                                        -       $           -
100-1044-00       $3.25
                                                                                                        -       $           -
100-1045-00       $2.00
                                                                                                        -       $           -
100-1046-00       $0.81
                                                                                                        -       $           -
100-1047-00
                                                                                                        -       $           -
100-1048-00
                                                                                                        -       $           -
100-1049-00       $21.15
                                                                                                        -       $           -
103-1001-00       $3.71
                                                                                                        -       $           -
103-1002-00       $37.30
                                                                                                        -       $           -
103-1003-00       $4.70
                                                                                                        -       $           -
103-1004-00       $3.82
                                                                                                        -       $           -
103-1005-00
                                                                                                        -       $           -
103-1006-00
                                                                                                        -       $           -
103-1007-00
                                                                                                        -       $           -
103-1008-00
                                                                                                        -       $           -
105-1001-00       $287.00
                                                                                                        -       $           -
105-1002-00       $127.00
                                                                                                        -       $           -
105-1003-00
                                                                                                        -       $           -
105-1004-00       $380.00
                                                                                                        -       $           -
105-1005-00       $562.00
                                                                                                        -       $           -
110-1001-00       $91.00
                                                                                                        -       $           -
110-1002-00       $255.00  12
                                                                                                       12       $     3,060.00
110-1003-00       $340.00
                                                                                                        -       $           -
110-1004-00       $175.00
                                                                                                        -       $           -
110-1005-00       $55.00
                                                                                                        -       $           -
110-1006-00       $45.00
                                                                                                        -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
110-1007-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              64 MB EDO GOLD
                               module, gold, 16 x
                               32MB, 5V, 60 ns,
                               EDO, for use in SBC's
110-1008-00     Simm / Dimm    MEMORY 72 pin SIMM,        Qestec              32MB EDO GOLD
                               module, gold, 8 x 32
                               MB, 5V, 60ns, EDO,
                               for use in SBC's
110-1009-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              16MB EDO GOLD
                               module, gold, 4 x 32
                               MB, 5V, 60ns, EDO,
                               for use in SBC's
110-1010-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              8MB EDO GOLD
                               module, gold, 2 x 32
                               MB, 5V, 60ns, EDO,
                               for use in SBC's
110-1011-00     Simm / Dimm    MEMORY 72 pin SIMM         Kingston            KTM-1X36L-60G        Adastra
                               module, single sided
                               1 x 36 MB 70ns, for
                               use in mp700 only
110-1012-00     Simm / Dimm    MEMORY 72 pin SIMM         Qestec              16 MB EDO TIN
                               module, tin, 4 x 32,
                               EDO, 5V, 60 ns for
                               motherboards
110-1013-00     Simm / Dimm    MEMORY 168 pin DIMM        Qestec              64 MB EDO GOLD
                               module, gold,
                               3.3V,EDO, 64MB
110-1014-00     Simm / Dimm    MEMORY 168 pin DIMM        Qestec              128 MB EDO
                               module, gold, 3.3V,                            GOLD
                               EDO, 128MB
110-1015-00     Simm / Dimm    MEMORY 168 pin DIMM        Qestec              256 MB EDO
                               module, gold, 3.3V,                            GOLD
                               EDO, 256MB
110-1016-00     Simm / Dimm    MEMORY 168pin DIMM         Dense-Pac           256MB SDRM
                               module, gold, sdram
                               PC100 256MB
110-1016-00     Simm / Dimm    MEMORY 168pin DIMM         Kentron             256MB SDRM
                               module, gold, sdram
                               PC100 256MB
110-1017-00     Simm / Dimm    MEMORY, 16mb dimm          DPT                 SM4000/16            Tech Data        220066
                               ecc FOR dpt Raid
                               Cache
110-1018-00     Simm / Dimm    MEMORY 168 pin DIMM        Qestec              128 MB SYNC
                               module, gold, 3.3V,                            GOLD
                               SYNC, 128MB
110-1019-00                    168 PIN 128MB PC 100
                               SDRAM DIMM
110-1020-00                    168 PIN 64MB PC 100
                               SDRAM DIMM
120-1001-00     capacitor      CAP 4.7UFD @ 25VDC         Panasonic           ECS-F1EE475K         DigiKey          P2047-ND
                               TANTALUM CAP
120-1002-00     capacitor      CAP .01UF 50V STACK        Panasonic           ECQ-V1H103JL         DigiKey          P4513-ND
                               METAL FILM
120-1003-00     capacitor      CAP .1UF 50V               Panasonic           ECQ-V1H104JL         DigiKey          P4525-ND
                               STACK METAL FILM
120-1004-00     capacitor      CAP  0.1 UF                Panasonic           ECQ-U2A104MV         Digikey          P4610-ND
                               ECQ-UV BOX TYPE
120-1005-00     capacitor      CAP 0.47 UF                Panasonic           ECQ-U2A474MV         Digikey          P4614-ND
                               ECQ-UV BOX TYPE
120-1006-00     capacitor      CAP 1.0 UF                 Panasonic           ECQ-U2A105MV         Digikey          P4616-ND
                               ECQ-UV BOX TYPE
120-1007-00     capacitor      CAP .0022UF UV             Panasonic           ECQ-U2A222MV         Digikey          P4621-ND
                               BOX TYPE
120-1008-00     capacitor      CAP .22MFD 50V STACK       Panasonic           ECQ-V1H224JL         DigiKey          P4667-ND
                               METAL FILM
120-1009-00     capacitor      CAP 560UF 25V HFQ          Panasonic           ECA-1EFQ561          DigiKey          P5706-ND
                               ALUM RADIAL CAP
120-1010-00     capacitor      CAP 1000UF 200V            Panasonic           ECO-S2DP102EA        Digikey          P6129-ND
                               ELECT TSUP
120-1011-00     capacitor      CAP ELECT 100UF            Panasonic           ECE-A1CKS101         DigiKey          P970-ND
                               16V KS RADIAL

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer       Total QTY        Extended Cost
Number              Cost                                            Room                            on Hand          @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                   <C>      <C>
110-1007-00         $135.00  1
                                                                                                             1       $       135.00
110-1008-00         $40.00
                                                                                                             -       $           -
110-1009-00         $22.00   10
                                                                                                            10       $       220.00
110-1010-00         $45.00
                                                                                                             -       $           -
110-1011-00         $91.00   8
                                                                                                             8       $       728.00
110-1012-00         $22.00
                                                                                                             -       $           -
110-1013-00         $126.00  1
                                                                                                             1       $       126.00
110-1014-00         $276.00
                                                                                                             -       $           -
110-1015-00         $550.00
                                                                                                             -       $           -
110-1016-00         $550.00
                                                                                                             -       $           -
110-1016-00         $555.00
                                                                    6                                        6       $     3,330.00
110-1017-00         $809.57
                                                                                                             -       $           -
110-1018-00         $276.00
                                                                                                             -       $           -
110-1019-00         $250.00
                                                                                                             -       $           -
110-1020-00         $135.00
                                                                                                             -       $           -
120-1001-00         $0.23
                                                                                                             -       $           -
120-1002-00         $0.11
                                                                                                             -       $           -
120-1003-00         $0.15
                                                                                                             -       $           -
120-1004-00         $0.83
                                                                                                             -       $           -
120-1005-00         $2.05
                                                                                                             -       $           -
120-1006-00         $3.50
                                                                                                             -       $           -
120-1007-00         $0.61
                                                                                                             -       $           -
120-1008-00         $0.18
                                                                                                             -       $           -
120-1009-00         $0.53
                                                                                                             -       $           -
120-1010-00         $4.50
                                                                                                             -       $           -
120-1011-00         $0.25
                                                                                                             -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
120-1012-00     capacitor      CAP ELECT SM               NIC Components      NACE101M16V6.3X5.    NEWARK           91f6508
                               100UF, 16V                 INC
120-1013-00     capacitor      CAP 4.7UF 16V              Panasonic           ECS-T1CY475R         DIGIKEY          PCS3475CT-ND
                               TANT TE SERIES
120-1014-00     capacitor      CAP .18UF 16V PEN          Panasonic           ECW-U1C184JB         DIGIKEY          PCF1061CT-ND
                               FILM UF(B) SMD
120-1015-00     capacitor      CAP .01UF 50V              Panasonic           ECW-U1H103JB         DIGIKEY          PCF1046CT-ND
                               UF(B) FILM SMD
120-1016-00     capacitor      CAP .12UF 16V PEN          Panasonic           ECW-U1C124JB         DIGIKEY          PCF1059CT-ND
                               FILM UF(B) SMD
120-1017-00     capacitor      CAP 1800 UF 25V            Panasonic           ECA-1EFQ182L         DigiKey          P5714-ND
120-1018-00     capacitor      CAP 100 UF 16V             Panasonic           ECE-V1CA101          DigiKey          PCE-2043CT-ND
                               SMD VA SERIES
120-1019-00     capacitor      CAP HARRIS MOV             GERBER              V275LA20C
120-1020-00     capacitor      10UFD @ 10VDC              Panasonic           ECS-F1AE106K         DigiKey          P2026-ND
                               TANTALUM CAP
120-1021-00     capacitor      CAP .22UF 16V PEN          Panasonic           ECW-U1C224JB9        DigiKey          PCF1062TR-ND
                               FILM UF(B) SMD
120-1022-00     capacitor      CAP 47uf 16 vdc            Panasonic           ECS-FICE476          Digikey          P2042-ND
                               tantalum
120-1023-00     capacitor      CAP ELECT 100UF            Panasonic           ECE-A1CKA101         DigiKey          P833-ND
                               16V KA RADIAL
120-1024-00     capacitor      CAP .1 UF/50 V             Panasonic           ECU-V1H104KBW        DigiKey          PCC104BCT-ND
                               CERAMIC CHIP CAP
130-1001-00     resistor       RES 1.00K OHM 1/4W         Yageo               1K00                 DigiKey          1.00 KXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1002-00     resistor       RES 1.00M OHM 1/4W         Yageo               1M00                 DigiKey          1.00 MXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1003-00     resistor       RES 1.10K OHM 1/4W         Yageo               1K10                 Digikey          1.10kXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1004-00     resistor       RES 1.58K OHM 1/4W         Yageo               1K58                 Digikey          1.58kXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1005-00     resistor       RES 10M OHM 1/8W 5%        Yageo               10M CR-1/8W-B        DigiKey          10 MEBK-ND
                               CARBON FILM                                    5%
130-1006-00     resistor       RES 10.0K OHM 1/4W         Yageo               10K0                 DigiKey          10.0KXTR-ND
                               1% MF TAPE/REEL                                MF-1/4W-T 1%
130-1007-00     resistor       RES 10.0 OHM 1/4W 1%       Yageo               10E0                 DigiKey          10.0XBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1008-00     resistor       RES100K OHM 1/4W 1%        Yageo               100K                 DigiKey          100KXBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1009-00     resistor       RES 100K OHM 1/4W 1%       Yageo               100K                 DigiKey          100 KXBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1010-00     resistor       RES 12.4K OHM 1/4W         Yageo               12K4                 Digikey          12.4kXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1011-00     resistor       RES 121K OHM 1/4W 1%       Yageo               121K                 DigiKey          121 KXBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1012-00     resistor       RES 13.0K OHM 1/4W         Yageo               13K0                 DigiKey          13.0 KXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1013-00     resistor       RES 143 OHM 1/4W 1%        Yageo               143E                 Digikey          143XBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1014-00     resistor       RES 150K OHM 1/4W 1%       Yageo               150K                 DigiKey          150KXBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1015-00     resistor       RES 1.00K OHM 1/4W         Yageo               1K00                 DigiKey          1.00KXTR-ND
                               1% MF TAPE/REEL                                MF-1/4W-T 1%
130-1016-00     resistor       RES 243 OHM 1/4W 1%        Yageo               243E                 Digikey          243XBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1017-00     resistor       RES 332 OHM 1/4W 1%        Yageo               332E                 DigiKey          332 XBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1018-00     resistor       RES 100 OHM 3/8 SQ         Bourns              3386F-1-101          Digikey          3386F-101-ND
                               CERM ST SL POT

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
120-1012-00        $0.37
                                                                                                         -       $           -
120-1013-00        $0.33
                                                                                                         -       $           -
120-1014-00        $0.68
                                                                                                         -       $           -
120-1015-00        $0.40
                                                                                                         -       $           -
120-1016-00        $0.57
                                                                                                         -       $           -
120-1017-00        $1.63
                                                                                                         -       $           -
120-1018-00        $0.49
                                                                                                         -       $           -
120-1019-00        $0.79
                                                                                                         -       $           -
120-1020-00        $0.33
                                                                                                         -       $           -
120-1021-00        $0.34
                                                                                                         -       $           -
120-1022-00        $1.15
                                                                                                         -       $           -
120-1023-00        $0.11
                                                                                                         -       $           -
120-1024-00        $0.40
                                                                                                         -       $           -
130-1001-00        $0.04
                                                                                                         -       $           -
130-1002-00        $0.04
                                                                                                         -       $           -
130-1003-00        $0.04
                                                                                                         -       $           -
130-1004-00        $0.04
                                                                                                         -       $           -
130-1005-00        $0.02
                                                                                                         -       $           -
130-1006-00        $0.02
                                                                                                         -       $           -
130-1007-00        $0.04
                                                                                                         -       $           -
130-1008-00        $0.04
                                                                                                         -       $           -
130-1009-00        $0.04
                                                                                                         -       $           -
130-1010-00        $0.04
                                                                                                         -       $           -
130-1011-00        $0.04
                                                                                                         -       $           -
130-1012-00        $0.02
                                                                                                         -       $           -
130-1013-00        $0.04
                                                                                                         -       $           -
130-1014-00        $0.02
                                                                                                         -       $           -
130-1015-00        $0.02
                                                                                                         -       $           -
130-1016-00        $0.04
                                                                                                         -       $           -
130-1017-00        $0.04
                                                                                                         -       $           -
130-1018-00        $0.89
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
130-1019-00     resistor       RES 1.0K OHM 3/8 SQ        Bourns              3386F-1-102          Digikey          3386F-102-ND
                               CERM ST SL POT
130-1020-00     resistor       RES 10K OHM 3/8 SQ         Bourns              3386F-1-103          DigiKey          3386F-103-ND
                               CERM ST SL POT
130-1021-00     resistor       RES 100K OHM 3/8 SQ        Bourns              3386F-1-104          Digikey          3386F-104-ND
                               CERM ST SL POT
130-1022-00     resistor       RES 2.0K OHM 3/8 SQ        Bourns              3386F-1-202          Digikey          3386F-202-ND
                               CERM ST SL POT
130-1023-00     resistor       RES 100K OHM 3/8 SQ        Bourns              3386P-1-104          DigiKey          3386P-104-ND
                               CERM ST SL POT
130-1024-00     resistor       RES 4.7M OHM 1/8W 5%       Yageo               4M7 CR-1/8W-B        DigiKey          4.7 MEBK-ND
                               CARBON FILM                                    5%
130-1025-00     resistor       RES 4.7K OHM 1/4W 1%       Yageo               4K7 MF-1/4W-T        DigiKey          4.7KXTR-ND
                               MF TAPE/REEL                                   1%
130-1026-00     resistor       RES 432K OHM 1/4W 1%       Yageo               432K                 DigiKey          432 KXBK-ND
                               METAL FILM                                     MF-1/4W-B 1%
130-1027-00     resistor       RES 5.23K OHM 1/4W         Yageo               5K23                 Digikey          5.23kXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1028-00     resistor       RES 51.1K OHM 1/4W         Yageo               51K1                 DigiKey          51.1KXBK-ND
                               1% METAL FILM                                  MF-1/4W-B 1%
130-1029-00     resistor       RES-NET 220 OHM            CTS                 761-3-R220           DigiKey          761-3-R220-ND
                               16DIP 8RES
130-1030-00     resistor       RES-NET 10K OHM            CTS                 770-101-R10K         DigiKey          770-101-R10K-ND
                               10PIN 9RES
130-1031-00     resistor       RES-NET 1K OHM             CTS                 770-101-R1K          DigiKey          770-101-R1K-ND
                               10PIN 9RES
130-1032-00     resistor       RES-NET 220 OHM            CTS                 770-103-R220         DigiKey          770-103-R220
                               10PIN 5RES
130-1033-00     resistor       RES LOB-3.0101%BP          IRC                 LOB-3.0101%BP        Newark    96F3616R0.01(less than)
130-1034-00     resistor       RES LOB-1.0301%BP          IRC                 LOB-1.0301%BP        Newark    96F3617R0.03(less than)
130-1035-00     resistor       RES LOB-1.0501%BP          IRC                 LOB-1.0501%BP        Newark    96F3617R0.05(less than)
130-1036-00     resistor       RES LOB-1.0701%BP          IRC                 LOB-1.0701%BP        Newark    96F3617R0.07(less than)
130-1037-00     resistor       RES LOB-3.0051%BP          IRC                 LOB-3.0051%BP        Newark           96F6782
130-1038-00     resistor       RES SMT                    SPRAGUE             WSR2 R020FRE4        Newark           01F799
                               .455X.275 .02
                               OHM 2W
130-1039-00     resistor       RES SMT                    SPRAGUE             WSR2 R0205RE4        Newark           01F797
                               .455X.276 .005
                               OHM 2W
130-1040-00     resistor       RES 10.0K OHM              Panasonic           ERJ-8ENF1002         DigiKey          P10.0KFCT-ND
                               1/8W 1% 1206 SMD
130-1041-00     resistor       RES 150K OHM               Panasonic           ERJ-8ENF1503         DigiKey          P150KFCT-ND
                               1/8W 1% 1206 SMD
130-1042-00     resistor       RES 100K OHM               Panasonic           ERJ-8ENF1003         DigiKey          P100KFCT-ND
                               1/8W 1% 1206 SMD
130-1043-00     resistor       RES 1.00K OHM              Panasonic           ERJ-8ENF1001         DigiKey          P1.00KFCT-ND
                               1/8W 1% 1206 SMD
130-1044-00     resistor       RES 332 OHM 1/8W           Panasonic           ERJ-8ENF3320         DigiKey          P332FCT-ND
                               1% 1206 SMD
130-1045-00     resistor       RES LOB-1-020                                                       NEWARK           96F3617R0.02
                               1%BP
130-1046-00     resistor       RES LOB-3-020                                                       NEWARK           96F3616R0.02
                               1%BP
130-1047-00     resistor       RES LOB-3-030                                                       Newark           96F3616R0.03
                               1%BP
130-1048-00     resistor       RES 100K OHM 3/8 SQ        Bourns              3386F-104            DIGIKEY          3386F-104-ND
                               CERAMIC SL POT
130-1049-00     resistor       RES 2.0K OHM 3/8 SQ        Bourns              3386F-202            DIGIKEY          3386F-202-ND
                               CERAMIC ST SL POT
130-1050-00     resistor       RES 499K OHM               Yageo               499K                 DIGIKEY          499KXTR-ND
                               1/4W 1% MF                                     MF-1/4W-T 1%

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
130-1019-00        $0.89
                                                                                                         -       $           -
130-1020-00        $0.89
                                                                                                         -       $           -
130-1021-00        $0.89
                                                                                                         -       $           -
130-1022-00        $0.89
                                                                                                         -       $           -
130-1023-00        $0.89
                                                                                                         -       $           -
130-1024-00        $0.30
                                                                                                         -       $           -
130-1025-00        $0.02
                                                                                                         -       $           -
130-1026-00        $0.02
                                                                                                         -       $           -
130-1027-00        $0.04
                                                                                                         -       $           -
130-1028-00        $0.04
                                                                                                         -       $           -
130-1029-00        $0.35
                                                                                                         -       $           -
130-1030-00        $0.15
                                                                                                         -       $           -
130-1031-00        $0.15
                                                                                                         -       $           -
130-1032-00        $0.26
                                                                                                         -       $           -
130-1033-00        $1.19
                                                                                                         -       $           -
130-1034-00        $1.19
                                                                                                         -       $           -
130-1035-00        $1.19
                                                                                                         -       $           -
130-1036-00        $1.19
                                                                                                         -       $           -
130-1037-00        $0.74
                                                                                                         -       $           -
130-1038-00        $1.37
                                                                                                         -       $           -
130-1039-00        $1.37
                                                                                                         -       $           -
130-1040-00        $0.39
                                                                                                         -       $           -
130-1041-00        $0.39
                                                                                                         -       $           -
130-1042-00        $0.39
                                                                                                         -       $           -
130-1043-00        $0.39
                                                                                                         -       $           -
130-1044-00        $0.39
                                                                                                         -       $           -
130-1045-00        $1.21
                                                                                                         -       $           -
130-1046-00        $1.18
                                                                                                         -       $           -
130-1047-00        $1.18
                                                                                                         -       $           -
130-1048-00        $1.00
                                                                                                         -       $           -
130-1049-00        $1.00
                                                                                                         -       $           -
130-1050-00        $0.02
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor     Dist. Part
Number          Type                                                          Part Number                          Number
<S>             <C>            <C>                        <C>                 <C>                  <C>             <C>
130-1051-00     resistor       RES 4.75k OHM              Yageo               4K75                 DigiKey         4.75KXTR-ND
                               1/4W 1% MF                                     MF-1/4W-T 1%
130-1052-00     resistor       RES 1.58K OHM              Yageo               1K58                 DigiKey         1.58KXBK-ND
                               1/4W 1% MF                                     MF-1/4W-B 1%
130-1053-00     resistor       RES 121 OHM 1/4W           Yageo               121E                 Digikey         121XBK-ND
                               1%                                             MF-1/4W-B 1%
130-1054-00     resistor       RES SMT                    SPRAGUE             WSR2 R010FRE4        Newark
                               .455X.275 .01
                               OHM 2W
130-1055-00     resistor       SMT 1.0M OHM
                               1/8W 1206 SMD
140-1001-00     DIODE          DIODE 100V 500MW           Diodes Inc.         1N4148               DigiKey         1N4148CT-ND
                               FAST SWITCHING
140-1002-00     DIODE          DIODE 15V 5%               Diodes Inc.         1N5245B              Digikey         1N5245BCT-ND
                               500MW ZENER
140-1003-00     DIODE          DIODE LED BAR GRAPH        Lite-On Inc         LTA-1000G            DigiKey         LT1067-ND
                               10 SEGMENT GREEN
140-1004-00     DIODE          DIODE LED GREEN            Lite-On Inc         LTL-93BGA1           DigiKey         LT1073-ND
                               DIFFUSED SUB-MINI
140-1005-00     DIODE          DIODE LED GREEN DIFF       Lite-On Inc         LTL-709L             Digikey         LT1086-ND
                               1.8 MM DOT POINT
140-1006-00     DIODE          DIODE LED 3MM PC           Lumex Opto          SSF-LXH103GD         DigiKey         LU20115-ND
                               MNT GRN
140-1007-00     DIODE          DIODE LED 3MM PC           Lumex Opto          SSF-LXH103YD         DigiKey         LU20117-ND
                               MNT YEL
140-1008-00     DIODE          DIODE LED BICOLOR          Lumex Opto          SSL-LX3059IGW        DigiKey         LU204615-ND
                               RED/GRN WHT DIFF T-1
140-1009-00     DIODE          DIODE LED 1 DIGIT          Panasonic           LN516GK              DigiKey         P352-ND
                               GREEN COMMON CATHODE
140-1010-00     DIODE          DIODE RECTIFIER 1          Diodes Inc.         1N4001               DigiKey         1N4001CT-ND
                               AMP 50 PIV SILICON
140-1011-00     DIODE          DIODE RECTIFIER 1AMP       Diodes Inc.         1N4004               Digikey         1N4004CT-ND
                               400 PIV SILICON
140-1012-00     DIODE          DIODE RECTIFIER 1.0A       Diodes Inc.         1N5817               Digikey         1N5817CT-ND
                               20V SCHOTTKY BARRIER
140-1013-00     DIODE          DIODE RECTIFIER 3.0A       Diodes Inc.         1N5822               Digikey         1N5822CT-ND
                               40V SCHOTTKY BARRIER
140-1014-00     DIODE          DIODE RECTIFIER            International       80SQ045              Digikey         80SQ045-ND
                               SCHOTTKY 45V 8A            Rectifier
                               DO-204AR
140-1015-00     DIODE          DIODE SURG ARRESTER        Wickmann            13931-N230           Digikey         WK6005CT-ND
                               230V GASTUBE 2LEAD         USA                 CG2-230L
                                                          CP Clare
140-1016-00     DIODE          DIODE LED GREEN            LITE-ON INC         LTL-94PGK            DigiKey         LT1120CT-ND
                               CLEAR LENS SMD
140-1017-00     DIODE          DIODE Elect circuit        BELL                LTC1153CN8           DigiKey         LTC1153CN8-ND
                               breaker 8 PIN DIP
140-1018-00     DIODE          DIODE 12V 410MW            Diodes Inc.         BZT52-C12DI          Digikey         BZT52-C12DICT-ND
                               ZENER SMD
140-1019-00     DIODE          Diode Small Sig            MICROSEMI           DL4148               DigiKey         DL4148MSCT-ND
                               SMT, 1N4148
140-1020-00     DIODE          DIODE RECTIFIER 1A         MICROSEMI           DL4001               DigiKey         DL4001MSCT-ND
                               50V SMT MELF
140-1021-00     DIODE          DIODE ZENER 10V                                                     Digikey         1N5240BMCT-ND
                               5% 0.5W
140-1022-00     DIODE          DIODE 15V 80A                                                       ARROW           85CNQ15
                               RECTIFIER
140-1023-00     DIODE          DIODE                                                                               65F1459
140-1024-00     DIODE          DIODE Converter            Vicor               M002838
                               30a 30v
                               Rectifier
140-1025-00     DIODE          DIODE LED T1               Lite-On Inc         LTL-4236N            DigiKey         LT1144-ND
                               Green Clear
140-1026-00     DIODE          DIODE LED 3mm red          Lite-On Inc         LTL-4222N            DigiKey         LT1140-ND
                               high eff transparent
140-1027-00     DIODE          DIODE Elect                BELL                LTC1153CS8           DigiKey         LTC1153CS8-ND
                               circuit breaker
                               8 SO
140-1028-00     DIODE          DIODE SCHOT RECT 1A        MICROSEMI           SMB5817              DigiKey         SMB5817MSCT-ND
                               20V SMT SMBJ(SK12)

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
130-1051-00        $0.02
                                                                                                         -       $           -
130-1052-00        $0.11
                                                                                                         -       $           -
130-1053-00        $0.11
                                                                                                         -       $           -
130-1054-00
                                                                                                         -       $           -
130-1055-00        $0.04
                                                                                                         -       $           -
140-1001-00        $0.04
                                                                                                         -       $           -
140-1002-00        $1.10
                                                                                                         -       $           -
140-1003-00        $1.83
                                                                                                         -       $           -
140-1004-00        $0.18
                                                                                                         -       $           -
140-1005-00        $0.18
                                                                                                         -       $           -
140-1006-00        $0.23
                                                                                                         -       $           -
140-1007-00        $0.23
                                                                                                         -       $           -
140-1008-00        $0.63
                                                                                                         -       $           -
140-1009-00        $2.03
                                                                                                         -       $           -
140-1010-00        $0.48
                                                                                                         -       $           -
140-1011-00        $0.06
                                                                                                         -       $           -
140-1012-00        $0.47
                                                                                                         -       $           -
140-1013-00        $0.91
                                                                                                         -       $           -
140-1014-00        $1.44
                                                                                                         -       $           -
140-1015-00        $2.83
                                                                                                         -       $           -
140-1016-00        $0.24
                                                                                                         -       $           -
140-1017-00        $3.25
                                                                                                         -       $           -
140-1018-00        $0.23
                                                                                                         -       $           -
140-1019-00        $0.11
                                                                                                         -       $           -
140-1020-00        $0.20
                                                                                                         -       $           -
140-1021-00        $0.11
                                                                                                         -       $           -
140-1022-00        $7.50
                                                                                                         -       $           -
140-1023-00
                                                                                                         -       $           -
140-1024-00        $3.20
                                                                                                         -       $           -
140-1025-00        $0.23
                                                                                                         -       $           -
140-1026-00        $0.23
                                                                                                         -       $           -
140-1027-00        $2.25
                                                                                                         -       $           -
140-1028-00        $0.36
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
140-1029-00     DIODE          DIODE Dual Schottky                                                 DigiKey          BAT54CCT-ND
                               Diode, common cathode
140-1030-00     DIODE          DIODE Dual Schottky                                                 DigiKey          BAT54SCT-ND
                               Diode, series conn
140-1031-00     DIODE          DIODE LED
                               YELLOW/YELLOW PC
                               MOUNT
140-1032-00     DIODE          DIODE LED GREEN
                               CLEAR LENS SMT
140-1033-00     DIODE          DIODE LED YELLOW
                               CLEAR LENS SMT
140-1034-00     DUAL           LED RED CLEAR
                               LENS SMT
141-1001-00     TRANSISTOR     TRANSISTOR FET 60V         Zetec Inc.          2N7000P              DigiKey          2N7000P-ND
                               0.2A N-CHAN DMOS
                               TO-92
141-1002-00     TRANSISTOR     TRANSISTOR FET             Temic Siliconix                          Bell Ind         SI4435DY
                               S14435DY
141-1003-00     TRANSISTOR     TRANSISTOR FET             Temic Siliconix                          Bell Ind         SI4410DY
                               SI4410DY
141-1004-00     TRANSISTOR     TRANSISTOR                 QT Opto             CNY17-4.300          Digikey          CNY17-4ZQT-ND
                               OPTOISOLATOR
141-1005-00     TRANSISTOR     TRANSISTOR NPN SS GP       Fairchild           PN2222               DigiKey          PN2222-ND
                               (TO-92 CASE)S
141-1006-00     TRANSISTOR     TRANSISTOR FET N           Harris              HUF75345S3S          GERBER
                               CHANNEL ENHANCEMENT
                               MODE TMOS
141-1007-00     TRANSISTOR     TRANSISTOR FET MOS         BELL                SI9939DY
                               DUAL CHANNEL
141-1008-00     TRANSISTOR     TRANSISTOR FET             BELL                SI442DDY
                               SI442DDY
141-1009-00     TRANSISTOR     DUPLICATE OF               BELL                SI9939DY
                               141-1009-00 DO NOT
                               USE
142-1001-00     REGULATOR      REGULATOR VOLTAGE  3       National Semi       LM317LZ              Digikey          LM317LZ-ND
                               TERM POS ADJ  100M
                               TO92
142-1002-00     REGULATOR      REGULATOR VOLTAGE  3       National Semi       LM337T               Digikey          LM337T-ND
                               TERM ADJ. NEG 1.5AMP
142-1003-00     REGULATOR      Regulator                  Maxim               MAX775CPA            Arrow            MAX775CPA
                               Switching
142-1004-00     REGULATOR      REGULATOR Switching        Maxim               MAX775SEA            Arrow            MAX775SEA
                               power supply
                               controller
142-1005-00     REGULATOR      REGULATOR IC,              Maxim               MAX8215CPD           Arrow            MAX8215CPD
                               Interface Comparator
142-1006-00     REGULATOR      REGULATOR                  BELL                MAX472CPA
                               CURRENT AMP
142-1007-00     REGULATOR      REGULATOR VRM FOR          RAYTHEON            1P518679
                               AMD K6-200
142-1008-00     REGULATOR      REGULATOR                  BELL                MAX774CPA            DigiKey          MAX774CPA
                               SWITCHING
150-1001-00     OSCILLATOR     OSC 16.0000MHZ             CTS                 MX045-16.0000        DigiKey          CTX116-ND
                               CMOS/TTL FULLSIZE
151-1001-00     RELAY          RELAY SPST 5V DIP          Hamlin Inc.         HE721A0510           DigiKey          HE101-ND
                               REED W/DIODE
155-1001-00
160-1001-00     FUSE           FUSE POLYSWITCH RUE        Raychem Corp        RUE300               DigiKey          RUE300-ND
                               SERIES 3.0 AMPS
160-1002-00     FUSE           FUSE HOLDER TR-5           Wickmann USA        19560                Digikey          WK0001-ND
                               MACH CONTACTS
160-1003-00     FUSE           FUSE 6.30A FAST            Wickmann            19193-066            Digikey          WK1066-ND
                               ACTING 5 X 20MM            USA                 19649
                                                          FUSE UNLIMITED
160-1004-00     FUSE           FUSE POLYSWITCH RUE        Raychem Corp        RUE400               DigiKey          RUE400-ND
                               SERIES 4.0 AMPS
160-1005-00     FUSE           Fuse Block 5 x             Wickmann USA        19649                DigiKey          WK0011-ND
                               20 mm PC Mount
160-1006-00     FUSE           FUSE Poly Fuse PTC         Littlefuse Inc.     1812L110PR           DigiKey          F2152TR-ND
                               1.1A 6VDC RESETTABLE
                               1812L
170-1001-00     INDUCTOR       INDUCTOR Filter            Corcom                                   Gerber           6ED4
                               line IEC

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
140-1029-00        $0.42
                                                                                                         -       $           -
140-1030-00        $0.42
                                                                                                         -       $           -
140-1031-00        $1.51
                                                                                                         -       $           -
140-1032-00        $0.24
                                                                                                         -       $           -
140-1033-00        $0.04
                                                                                                         -       $           -
140-1034-00        $0.36
                                                                                                         -       $           -
141-1001-00        $0.30
                                                                                                         -       $           -
141-1002-00        $2.75
                                                                                                         -       $           -
141-1003-00        $1.60
                                                                                                         -       $           -
141-1004-00        $0.52
                                                                                                         -       $           -
141-1005-00        $0.08
                                                                                                         -       $           -
141-1006-00        $2.02
                                                                                                         -       $           -
141-1007-00        $1.79
                                                                                                         -       $           -
141-1008-00        $1.27
                                                                                                         -       $           -
141-1009-00
                                                                                                         -       $           -
142-1001-00        $0.68
                                                                                                         -       $           -
142-1002-00        $1.55
                                                                                                         -       $           -
142-1003-00        $2.45
                                                                                                         -       $           -
142-1004-00        $4.41
                                                                                                         -       $           -
142-1005-00        $2.20
                                                                                                         -       $           -
142-1006-00        $2.25
                                                                                                         -       $           -
142-1007-00        $17.24
                                                                                                         -       $           -
142-1008-00        $2.40
                                                                                                         -       $           -
150-1001-00        $2.31
                                                                                                         -       $           -
151-1001-00        $1.66
                                                                                                         -       $           -
155-1001-00
                                                                                                         -       $           -
160-1001-00        $0.99
                                                                                                         -       $           -
160-1002-00        $0.51
                                                                                                         -       $           -
160-1003-00        $0.25
                                                                                                         -       $           -
160-1004-00        $0.83
                                                                                                         -       $           -
160-1005-00        $0.21
                                                                                                         -       $           -
160-1006-00        $0.41
                                                                                                         -       $           -
170-1001-00        $6.97
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
170-1002-00     INDUCTOR       INDUCTOR 2MH COMMON        Magnatek            CMT908-V1            Digikey          10543-ND
                               MODE VERT
170-1003-00     INDUCTOR       INDUCTOR TOROID 50UH       J W Miller Inc.     5711                 Digikey          M5711-ND
                               HIGH CURRENT
170-1004-00     INDUCTOR       INDUCTOR                   Transmag            TM801
170-1005-00     INDUCTOR       INDUCTOR LINE              CORCOM              6ED4C
                               FILTER
171-1001-00     SPEAKER        Sonalert II                Mallory             MSR320               Newark           93F4908
171-1002-00
172-1001-00     SWITCH         SWITCH SPST DIP            CTS                 208-4                DigiKey          CT2084-ND
                               TIN
172-1002-00     SWITCH         SWITCH SPST PC MT          E-Switch            320E1-1-5            DigiKey          EG1305-ND
                               MOM SQUARE RED
172-1003-00     SWITCH         SWITCH PC MT SPST          E-Switch            320.01E1-1-8         DigiKey          EG1328-ND
                               MOM FLT SQ WHT
172-1004-00     SWITCH         SWITCH SLIDE  SPDT         E-Switch            EG1213               DigiKey          EG1906-ND
                               RT ANGLE 30V
172-1005-00     SWITCH         SWITCH POWER P1000 /       E-Switch            RA1066AFX            DigiKey          EG1504-ND
                               2000 SWITCH ROCKER
                               SPST 10A BLK
172-1006-00     SWITCH         SWITCH RESET P1000 /       E-Switch            PS1057A-RED          DigiKey          EG2045-ND
                               2000 PUSHBUTTON
                               SWITCH SPST MOM RED
172-1007-00     SWITCH         SWITCH P2000 /
                               5000
172-1008-00     SWITCH         SWITCH 8                                       435802-9
                               POSITION DIP
172-1009-00     SWITCH         SWITCH PC MOUNT SPST       E-Switch            320E1-1-8            DigiKey          EG1308-ND
                               MOM SQ WHT
172-1010-00     SWITCH         SWITCH 4 position ST                                                Jameco           139002
                               DIP TIN, low profile
172-1011-00     SWITCH         MOM KEY, GULL
                               WING SLD SMD
172-1014-00     SWITCH         ASSEMBLY, P7000
                               AC PWR
180-1001-00     Connector /    CONNECTOR HEADER           3M                  2510-6002UB          Digikey          MHB10K-ND
                contact        SHROUDED 10 POS
                               STRAIGHT
180-1002-00     Connector /    CONNECTOR HEADER           3M                  2516-6002UB          DigiKey          MHB16K-ND
                contact        SHROUDED 16 POS
                               STRAIGHT
180-1003-00     Connector /    CONNECTOR HEADER           3M                  2540-6002UB          DigiKey          MHB40K-ND
                contact        SHROUDED 40 POS
                               STRAIGHT
180-1004-00     Connector /    CONNECTOR HEADER           3M                  2550-6002UB          DigiKey          MHB50K-ND
                contact        SHROUDED 50 POS
                               STRAIGHT
180-1005-00     Connector /    CONNECTOR 40 pin           AMP                 1-746610-9           Glynn            FTR-40-T
                contact        male transition
180-1006-00     Connector /    CONNECTOR HEADER 3         Molex               22-23-2031           DigiKey          WM4201-ND
                contact        CIR.100 STR FRICT
                               LOCK
180-1007-00     Connector /    CONNECTOR HEADER           AMP                 350211-1             DigiKey          A1212-ND
                contact        4-PIN PCB ASSEMBLY
                               TIN
180-1008-00     Connector /    CONNECTOR 8 PIN DIP        AMP                 2-640463-3           DigiKey          A9308-ND
                contact        SOCKET TIN
180-1009-00     Connector /    CONNECTOR ISA              AMP                 645169-2             NEWARK           90F3847
                contact        MBF TH                     KYCON               KSR-98-BR
180-1010-00     Connector /    CONNECTOR 2 CIRCUIT        MOLEX               22-05-2021           DIGIKEY          WM4100-ND
                contact        HEADER, .100 RT ANGLE
180-1011-00     Connector /    CONNECTOR SHROUDED         3M                  2550-5002UB          DIGIKEY          MHD50K-ND
                contact        HEADER 50 POS RT
                               ANGLE
180-1012-00     Connector /    CONNECTOR EISA                                                      GLYNN            HDCE-188G
                contact
180-1013-00     Connector /    CONNECTOR PCI              KYCONCHE            KHDS-120-G
                contact                                   Amp                 646255-1
180-1014-00     Connector /    CONNECTOR 34               AMP                 746610-8             GLYNN            FTR-34-T
                contact        POSITION TRANSITION
                               IDC
180-1015-00     Connector /    CONNECTOR HEADER           PI MFG              13601-026
                contact        26 pin 2x13
180-1016-00     Connector /    CONNECTOR 2POS HEADR       AMP                 350422-1             Digikey          A14367-ND
                contact        VERT MNT TIN COM
180-1017-00     Connector /    CONNECTOR 50 pin           Amp                 1-746610-0           Glynn            FTR-50-G
                contact        male transition

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
170-1002-00        $2.64
                                                                                                         -       $           -
170-1003-00        $7.01
                                                                                                         -       $           -
170-1004-00        $3.75
                                                                                                         -       $           -
170-1005-00
                                                                                                         -       $           -
171-1001-00        $3.84
                                                                                                         -       $           -
171-1002-00
                                                                                                         -       $           -
172-1001-00        $0.86
                                                                                                         -       $           -
172-1002-00        $1.60
                                                                                                         -       $           -
172-1003-00        $1.60
                                                                                                         -       $           -
172-1004-00        $0.42
                                                                                                         -       $           -
172-1005-00        $1.78
                                                                                                         -       $           -
172-1006-00        $1.69
                                                                                                         -       $           -
172-1007-00
                                                                                                         -       $           -
172-1008-00
                                                                                                         -       $           -
172-1009-00        $2.23
                                                                                                         -       $           -
172-1010-00        $0.65
                                                                                                         -       $           -
172-1011-00        $1.01
                                                                                                         -       $           -
172-1014-00        $6.40
                                                                                                         -       $           -
180-1001-00        $1.01
                                                                                                         -       $           -
180-1002-00        $1.17
                                                                                                         -       $           -
180-1003-00        $2.20
                                                                                                         -       $           -
180-1004-00        $2.72
                                                                                                         -       $           -
180-1005-00        $1.70
                                                                                                         -       $           -
180-1006-00        $0.25
                                                                                                         -       $           -
180-1007-00        $0.62
                                                                                                         -       $           -
180-1008-00        $0.03
                                                                                                         -       $           -
180-1009-00        $1.46    85
                                                                                                        85       $       124.10
180-1010-00        $0.13
                                                                                                         -       $           -
180-1011-00        $2.27
                                                                                                         -       $           -
180-1012-00
                                                                                                         -       $           -
180-1013-00        $1.10
                                                                                                         -       $           -
180-1014-00        $1.60
                                                                                                         -       $           -
180-1015-00        $0.16
                                                                                                         -       $           -
180-1016-00        $0.44
                                                                                                         -       $           -
180-1017-00        $1.97
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
180-1018-00     Connector /    CONNECTOR HEADER ST        Sullins             PZC36DAAN            DigiKey          S2011-36-ND
                contact        DUAL ROW M GOLD 72         Electronics Corp
                               PIN
180-1019-00     Connector /    CONNECTOR 15               AMP                 350588-1             Glynn
                contact        position Mate-N-Lok
                               male board mount
180-1020-00     Connector /    Connector 15 pin           AMP                 350992-4             Glynn
                contact        Female
180-1021-00     Connector /    CONNECTOR 16               Amp                 746610-3             Glynn            FTR-16-G
                contact        Position Transition
180-1022-00     Connector /    Connector 12 Pin           AMP                 530844-1             Newark           89F4284
                contact
180-1023-00     Connector /    CONNECTOR HEADER           AMP                 350825-1             Digikey          A14328-ND
                contact        CONN 3POS SOCKET IN
                               UNI
180-1024-00     Connector /    CONN AMPMODU 100PO         AMP                 1-104693-0           NEWARK           66F9150
                contact        SMD.5X.25X.39                                                       Digikey          A3118-ND
180-1025-00     Connector /    CONN AMPMODU 100POS        AMP                 1-104652-0           DigiKey          A3106-ND
                contact        SMD .50 X.50
180-1026-00     Connector /    CONNECTOR 50               BELL INDUSTRIES     SBQ50PD100TG
                contact        POSITION BOARD MOUNT
180-1027-00     Connector /    CONNECTOR 2 BY X
                contact        HEADER
180-1028-00     Connector /    CONNECTOR 1 BY             3M                  929834-01-36-R
                contact        36 .235
180-1029-00     Connector /    CONNECTOR PLCC             AMP                 822273-1
                contact        SOCKET 32 PIN
180-1030-00     Connector /    CONNECTOR 12 PIN           Molex               26-48-1126           DigiKey          WM4710-ND
                contact        HEADER .156
180-1031-00     Connector /    IC 14 PIN DIP SOCKET       AMP                 2-641599-5           DigiKey          A95143-ND
                contact        IC 14 POS PHOS BRZ
                               TIN
180-1032-00     Connector /    IC 16 PIN  DIP             AMP                 2-640358-3           DigiKey          A9316-ND
                contact        SOCKET
180-1033-00     Connector /    Connector H15              ERNI Connector      H15M                 Heilind          414.575
                contact        Male                                                                Electronics
180-1034-00     Connector /    Connector H15              ERNI Connector      H15F                 Heilind          594.750
                contact        Female                                                              Electronics
180-1035-00     Connector /    CONNECTOR 30 pin           Positronics         PLC30F300A1
                contact        straight female
180-1036-00     Connector /    Connector 30 pin           Positronics         PLC30M4B0A1
                contact        right angle Male
180-1037-00     Connector /    Connector 44 Pin           AMP                 1-111626-0-00        Digikey          ASA44K
                contact        Female
180-1038-00     Connector /    Connector 50 Pin           Amp                 1-746285-0           Digikey          AKC50G-ND
                contact        Female  Rcpt GOLD
                               S/C W/POL KEY
180-1039-00     Connector /    Connector 40 Pin           Amp                 1-746285-9           Glynn
                contact        Female Rcpt
180-1040-00     Connector /    CONNECTOR 14 PIN           AMP                 746285-2             DigiKey          AKC14G-ND
                contact        GOLD S/C W/POL KEY
180-1041-00     Connector /    CONNECTOR 16POS            AMP                 111633-3             DigiKey          AKC16A-ND
                contact        RECEPT GOLD W/POL UNI
180-1042-00     Connector /    CONNECTOR 34POS            AMP                 111633-8             DigiKey          AKC34A-ND
                contact        RECEPT GOLD W/POL UNI
180-1043-00     Connector /    CONNECTOR 40 PIN           AMP                 746285-9             DigiKey          AKC40G-ND
                contact        GOLD S/C W/POL KEY
180-1044-00     Connector /    CONNECTOR 20
                contact        POSITION IDC
180-1045-00     Connector /    CONNECTOR 26
                contact        POSITION IDC
180-1046-00     Connector /    Connector 50 Pin           CIRCUIT ASSEMBLY    CA-50IDEC-2F         Glynn            CA-501DEC-2F
                contact        Female Card Edge
180-1047-00     Connector /    CONNECTOR 15                                   DB15-F               Krista           24-420
                contact        position female IDC
180-1048-00     Connector /    CONNECTOR 10 PIN           AMP                 746285-1             DigiKey          AKC10G-ND
                contact        GOLD S/C W/P-K
180-1049-00     Connector /    CONNECTOR RECEPT 44        AMP                 1-111626-0           DigiKey          ASA44K-ND
                contact        POS 2.0MM IDC
180-1050-00     Connector /    CONNECTOR 26
                contact        POSITION IDC
180-1051-00     Connector /    CONNECTOR 50 POSTION       CHAMP
                contact        FEMALE IDC
180-1052-00     Connector /    CONNECTOR 68               PI MFG              1200-068P-SCSI-3
                contact        POSITION MALE IDC
                               SCSI3

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
180-1018-00        $1.74
                                                                                                         -       $           -
180-1019-00        $1.12    54
                                                                                                        54       $        60.48
180-1020-00        $1.60    93
                                                                                                        93       $        148.80
180-1021-00        $1.08
                                                                                                         -       $           -
180-1022-00        $2.20
                                                                                                         -       $           -
180-1023-00        $0.55
                                                                                                         -       $           -
180-1024-00        $6.52    104
                                                                                                        104      $       678.08
180-1025-00        $8.64
                                                                                                         -       $           -
180-1026-00        $2.17
                                                                                                         -       $           -
180-1027-00
                                                                                                         -       $           -
180-1028-00
                                                                                                         -       $           -
180-1029-00        $0.93
                                                                                                         -       $           -
180-1030-00        $1.28
                                                                                                         -       $           -
180-1031-00        $0.07
                                                                                                         -       $           -
180-1032-00        $0.08
                                                                                                         -       $           -
180-1033-00        $6.05    3
                                                                                                         3       $         18.15
180-1034-00        $5.95    3
                                                                                                         3       $         17.85
180-1035-00        $8.63    308
                                                                                                        308      $      2,658.04
180-1036-00        $8.63    107
                                                                                                        107      $        923.41
180-1037-00        $2.26
                                                                                                         -       $           -
180-1038-00        $2.66
                                                                                                         -       $           -
180-1039-00        $1.64
                                                                                                         -       $           -
180-1040-00        $0.94
                                                                                                         -       $           -
180-1041-00        $0.86
                                                                                                         -       $           -
180-1042-00        $1.21
                                                                                                         -       $           -
180-1043-00        $2.20
                                                                                                         -       $           -
180-1044-00
                                                                                                         -       $           -
180-1045-00
                                                                                                         -       $           -
180-1046-00        $5.90
                                                                                                         -       $           -
180-1047-00        $0.75
                                                                                                         -       $           -
180-1048-00        $1.12
                                                                                                         -       $           -
180-1049-00        $3.52
                                                                                                         -       $           -
180-1050-00
                                                                                                         -       $           -
180-1051-00
                                                                                                         -       $           -
180-1052-00        $7.00
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
180-1053-00     Connector /    CONNECTOR 68               PI MFG              1200-068S-SCSI-3
                contact        POSITION FEMALE IDC
                               SCSI3
180-1054-00     Connector /    CONNECTOR 9                                    DB9-M                Krista           24-395
                contact        position male IDC
180-1055-00     Connector /    Connector 10               AMP                 102387-1             Glynn
                contact        Position Modu
180-1056-00     Connector /    CONNECTOR 3 CIRCUIT        Molex               22-01-3037           DigiKey          WM2001
                contact        TERMINAL HOUSING,.100
180-1057-00     Connector /    CONNECTOR 2 PIN            MOLEX               22-01-2027           DigiKey          WM2027
                contact        MOLEX
180-1058-00     Connector /    CONNECTOR 2 PIN            PHILMORE            70-4852
                contact        LOCKING SOCKET
180-1059-00     Connector /    CONNECTOR MOLEX            MOLEX               22-01-2087           DigiKey          WM2087
                contact        8 PIN
180-1060-00     Connector /    CONNECTOR 6                AMP                 1-87499-2
                contact        POSITION MODU
180-1061-00     Connector /    CONNECTOR 2                AMP                 1-87499-4
                contact        POSITION MODU
180-1062-00     Connector /    CONNECTOR 16               AMP                 1-87456-2            DIGIKEY          A3037-ND
                contact        POSITION MODU
180-1063-00     Connector /    CONNECTOR 26               AMP                 2-87456-2            DigiKey          A3041-ND
                contact        POSITION MODU
180-1064-00     Connector /    CONNECTOR 12               AMP                 2-87499-1            DigiKey          A3021-ND
                contact        POSITION HOUSING
180-1065-00     Connector /    CONNECTOR 15               AMP                 2-87499-1            DigiKey          A3024-ND
                contact        POSITION CONTACT
                               HOUSING
180-1066-00     Connector /    CONNECTOR SOCKET,          AMP                 1-480318-0           DigiKey          A1411-ND
                contact        FREE HANGING, 2
                               CIRCUITS
180-1067-00     Connector /    Connector 15 pos           Amp                 350736-1             DigiKey          A14296-ND
                contact        Mate-N-Lok Male
180-1068-00     Connector /    CONN 3POS PLUG 94V-0       Amp                 350766-1             DigiKey          A14280-ND
                contact        UNI-MATE
180-1069-00     Connector /    CONNECTOR  PIN MOLEX       Waldom              1938-4               DigiKey          1938-4-ND
                contact        IC SOCKET NO 1938-4        Electronics
180-1070-00     Connector /    CONNECTOR 16 PIN           AMP                 746285-3             DigiKey          AKC16G-ND
                contact        GOLD S/C W/POL KEY
180-1071-00     Connector /    CONNECTOR 34 PIN           Amp                 746285-8             DigiKey          AKC34G-ND
                contact        GOLD S/C W/POL KEY
180-1072-00     Connector /    CONNECTOR 34 pos           Amp                 746610-8             Glynn
                contact        male transition
180-1073-00     Connector /    Connector 4 Pos                                AMP
                contact        Female
180-1074-00     Connector /    CONNECTOR SOCKET 4         AMP                 1-480424-0           DIGIKEY          A1431-ND
                contact        POSITION FREE HANGING
180-1075-00     Connector /    CONNECTOR 3 POSITION       AMP                 350767-1             DigiKey          A14281-ND
                contact        CAP 94V-0 UNI-MATE
180-1076-00     Connector /    CONNECTOR 6 PIN            Molex               09-50-3061           DigiKey          WM2104-ND
                contact        TERMINAL HOUSING .156
180-1077-00     Connector /    CONNECTOR 3 PIN            Molex               09-50-3031           DigiKey          WM2101-ND
                contact        TERMINAL HOUSING .156
180-1078-00     Connector /    CONNECTOR 15 PIN           NOR CRIMP           T157-00              DigiKey          715M-ND
                contact        MALE CRIMP
180-1079-00     Connector /    CONNECTOR 25 PIN           NOR CRIMP           T25P7                DigiKey          725M-ND
                contact        MALE
180-1080-00     Connector /    CONNECTOR HOOD                                                      KRISTA
                contact        DB9
180-1081-00     Connector /    CONNECTOR DB15                                                      KRISTA           24-776
                contact        HOOD
180-1082-00     Connector /    CONNECTOR DB25                                                      KRISTA           24-779
                contact        HOOD
180-1083-00     Connector /    CONNECTOR 9 PIN            NOR CRIMP           T09P7-00             DigiKey          709M-ND
                contact        MALE CRIMP
180-1084-00     Connector /    CONNECTOR 9 PIN FE         NOR CRIMP           T09S7-01             DigiKey          709F-ND
                contact        MALE CRIMP
180-1085-00     Connector /    CONNECTOR SHORTING         PI MFG              000 JUMPER
                contact        JUMPER 2 POSITION
180-1086-00     Connector /    CONNECTOR Pin 3 Pos        Amp                 350919-3             Glynn
                contact        Mate-N-Lok Male
180-1087-00     Connector /    CONNECTOR MOLEX            MOLEX               08-50-0144
                contact        PIN
180-1088-00     Connector /    CONNECTOR SOCKET           AMP                 60619-1              DigiKey          A1421-ND
                contact        20-14 AWG TIN
180-1089-00     Connector /    CONNECTOR PIN              AMP                                      Glynn            87756-700
                contact        Female Modu
180-1090-00     Connector /    CONNECTOR TERMINAL         MOLEX               08-052-0072          DIGIKEY          WM2302-ND
                contact        CRIMP .156
180-1091-00     Connector /    CONNECTOR PIN              AMP                 350918-3
                contact        MATE-N-LOK

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
180-1053-00        $7.00
                                                                                                         -       $           -
180-1054-00        $0.75
                                                                                                         -       $           -
180-1055-00        $0.68
                                                                                                         -       $           -
180-1056-00        $0.12
                                                                                                         -       $           -
180-1057-00        $0.72
                                                                                                         -       $           -
180-1058-00
                                                                                                         -       $           -
180-1059-00        $0.28
                                                                                                         -       $           -
180-1060-00        $0.28
                                                                                                         -       $           -
180-1061-00
                                                                                                         -       $           -
180-1062-00        $1.43
                                                                                                         -       $           -
180-1063-00        $2.01
                                                                                                         -       $           -
180-1064-00        $0.87
                                                                                                         -       $           -
180-1065-00        $1.22
                                                                                                         -       $           -
180-1066-00        $0.19
                                                                                                         -       $           -
180-1067-00        $0.75    25
                                                                                                        25       $        18.75
180-1068-00        $0.47    34
                                                                                                        34       $        15.98
180-1069-00        $0.01
                                                                                                         -       $           -
180-1070-00        $1.07
                                                                                                         -       $           -
180-1071-00        $1.93
                                                                                                         -       $           -
180-1072-00        $1.57
                                                                                                         -       $           -
180-1073-00
                                                                                                         -       $           -
180-1074-00        $0.40
                                                                                                         -       $           -
180-1075-00        $0.48    93
                                                                                                        93       $        44.64
180-1076-00        $0.47
                                                                                                         -       $           -
180-1077-00        $0.24
                                                                                                         -       $           -
180-1078-00        $0.46
                                                                                                         -       $           -
180-1079-00        $0.46
                                                                                                         -       $           -
180-1080-00        $0.18
                                                                                                         -       $           -
180-1081-00        $0.20
                                                                                                         -       $           -
180-1082-00        $0.26
                                                                                                         -       $           -
180-1083-00        $0.39
                                                                                                         -       $           -
180-1084-00        $0.39
                                                                                                         -       $           -
180-1085-00        $0.02
                                                                                                         -       $           -
180-1086-00        $0.07
                                                                                                         -       $           -
180-1087-00
                                                                                                         -       $           -
180-1088-00        $1.00
                                                                                                         -       $           -
180-1089-00        $0.09
                                                                                                         -       $           -
180-1090-00        $0.73
                                                                                                         -       $           -
180-1091-00        $0.07
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
180-1092-00     Connector /    CONNECTOR Contact          AMP                 60617-1              DigiKey          A1423-ND
                contact        24-18 AWG tin socket
180-1093-00     Connector /    CONNECTOR Panel            AMP                 1-480426-            DigiKey          A1402-ND
                contact        Mount 4 circuit
180-1094-00     Connector /    CONNECTOR Contact          AMP                 60618-1              DigiKey          A1422-ND
                contact        24-18 AWG tin pin
180-1095-00     Connector /    CONNECTOR, 2 pin           Berge               69190-402            Newark           89F4699
                contact        Header .100"
180-1096-00     Connector /    CONNECTOR, 50              JAE                 KX14-50K5D1          Kensington       KX14-50K5D1
                contact        pin smt
180-1097-00     Connector /    CONNECTOR, disk            AMP                 171826-4             Jameco           114999
                contact        drive power, 4 pin,
                               male, RA, PC mount
180-1098-00     Connector /    CONNECTOR, 44 pin          3M                  151244-8422-TB       DigiKey          3M1144-ND
                contact        header, 2MM centers
180-1099-00     Connector /    CONNECTOR, Shrouded        3M                  2540-5002UB          DigiKey          MHD40K-ND
                contact        header 40 pos RT
                               Angle
180-1100-00     Connector /    CONNECTOR, Shrouded        3M                  2534-5002UB          DigiKey          MHD34K-ND
                contact        header 34 pos RT
                               Angle
180-1101-00     Connector /    CONNECTOR, 4 circuit       Waldom              22-05-2041           DigiKey          WM4102-ND
                contact        header .100 RA             Electronics
180-1102-00     Connector /    CONNECTOR 10 pn                                                     Glynn            FTR-10-T
                contact        IDC transition
180-1103-00     Connector /    CONNECTOR 68               CIRCUIT ASSEMBLY    CA-68NFTSL-1T        Newark
                contact        POSITION MALE IDC
                               TRANSITION
180-1104-00     Connector /    CONNECTOR 4circuit         Molex               22-03-2041           DigiKey          WM4002-ND
                contact        sip straight .100
180-1105-00     Connector /    CONNECTOR 3 circuit        Molex               22-03-2031           DigiKey          WM4001-ND
                contact        sip straight .100
180-1106-00     Connector /    CONNECTOR 68               AMP                 174681-7             NEWARK           83F4530
                contact        POSITION
                               SUBMINIATURE D
180-1107-00     Connector /    CONNECTOR 25 dual          AMP                 530843-5             Newark           89F4278
                contact        position card edge
180-1108-00     Connector /    CONNECTOR 3                Molex               22-05-2031           DigiKey          WM4101-ND
                contact        circuit sip RA
                               .100
180-1109-00     Connector /    CONNECTOR,                                                          Jameco           114930
                contact        receptical, 4
                               pin RA
180-1110-00     Connector /    CONNECTOR, PIN                                                      Jameco           114921
                contact        for 114930
180-1111-00     Connector /    50 POS AMPLIMETE RA
                contact        BOARD MOUNT
180-1112-00     Connector /    26 POS AMPLIMITE RA
                contact        BOARD MOUNT
180-1113-00     Connector /    68 POS AMPLIMITE RA
                contact        BOARD MOUNT
180-1116-00     Connector /    AMPLIMITE 50 POS
                contact        PLUG RA
180-1117-00     Connector /    AMPLINITE STACKED
                contact        50/50 RECEPTICAL RA
180-1119-00     Connector /    PLUG, 60 PIN,
                contact        CLUSTER STREAM
180-1121-00     Connector /    SHROUDED 2MM HEADER,
                contact        44 PIN, CD-ROM
180-1124-00     Connector /    RECEPTACLE,
                contact        RJ45, STACKED
180-1125-00     Connector /    PLUG, 26 PIN, KBD,
                contact        MOUSE, &VGA COMBO
180-1128-00     Connector /    RECEPTACLE, 68 PIN,
                contact        SCSI, EXTERNAL
180-1148-00     Connector /    6 POSITION KYBD
                contact        MOUSE RT ANGLE
180-1149-00     Connector /    VGA 15 PIN 4-40
                contact        THREADED FEMALE
180-1150-00     Connector /    ACCESS BUS
                contact
181-1001-00     ADAPTER        ADAPTER PS2 TO
                               "AT" FEMALE
181-1002-00     ADAPTER        ADAPTER SCSI 50            KINGSTON            DX100-NTW
                               TO 68 PIN
181-1003-00     ADAPTER        ADAPTER DB15M TO                                                    KRISTA           237641
                               RJ45
181-1004-00     ADAPTER        ADAPTER RJ45 8                                                      KRISTA           60758
                               POSITION T
181-1005-00     ADAPTER        ADAPTER RJ45 6                                                      KRISTA           60756
                               POSITION T
181-1006-00     ADAPTER        ADAPTER                    Pacer               210ts-050
                               Transceiver
                               Twisted Pair
181-1007-00     ADAPTER        ADAPTER Dual               Siemon Company      YT4-E2-E2            Branch
                               port Ethernet                                                       Elec.
182-1001-00     TERMINATOR     TERMINATOR SCSI            PI MFG              000-50-A-1
                               50 PIN
182-1002-00     TERMINATOR     TERMINATOR SCSI            PI MFG              000-68-A-1
                               68 PIN
182-1003-00     TERMINATOR     TERMINATOR SCSI MALE                                                KRISTA           22162
                               TO FEMALE
182-1004-00     TERMINATOR     TERMINATOR SCSI            PI MFG              Inter-Active-S3
                               68 PIN Female
190-1001-00     Wire           CABLE Buss Bar             TransMag            TM795
                /cable/cord    #14
190-1002-00     Wire           CABLE Hard Drive                                                    Krista           23512
                /cable/cord    Y power
190-1003-00     Wire           CABLE Power 1 unit                                                  Krista           23511
                /cable/cord    of 4 wires  RBBY
190-1004-00     Wire           CORD 6'                                                             Krista           23513S
                /cable/cord    Powercord UL
190-1005-00     Wire           CABLE 44 COND 100'         AMP                 AM44G-100            DigiKey          AM44G-100-ND
                /cable/cord    GRAY RIBBON
190-1006-00     Wire           Cable 34 Cond              PI MFG              F28-34               DigiKey          AM34G-100-ND
                /cable/cord    Flat Ribbon
190-1007-00     Wire           Cable 40 Cond              PI MFG               F28-40              DigiKey          AM40G-100-ND
                /cable/cord    Flat Ribbon

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
180-1092-00
                                                                                                          -       $           -
180-1093-00         $0.38
                                                                                                          -       $           -
180-1094-00         $0.10
                                                                                                          -       $           -
180-1095-00         $0.15
                                                                                                          -       $           -
180-1096-00         $3.10
                                                                                                          -       $           -
180-1097-00         $0.45
                                                                                                          -       $           -
180-1098-00         $3.48
                                                                                                          -       $           -
180-1099-00         $1.71
                                                                                                          -       $           -
180-1100-00         $1.83
                                                                                                          -       $           -
180-1101-00         $0.26
                                                                                                          -       $           -
180-1102-00         $0.40
                                                                                                          -       $           -
180-1103-00         $4.00
                                                                                                          -       $           -
180-1104-00         $0.23
                                                                                                          -       $           -
180-1105-00         $0.18
                                                                                                          -       $           -
180-1106-00         $5.03
                                                                                                          -       $           -
180-1107-00         $2.74
                                                                                                          -       $           -
180-1108-00         $0.18
                                                                                                          -       $           -
180-1109-00         $0.15
                                                                                                          -       $           -
180-1110-00         $0.04
                                                                                                          -       $           -
180-1111-00         $0.00
                                                                                                          -       $           -
180-1112-00         $3.78
                                                                                                          -       $           -
180-1113-00         $4.18
                                                                                                          -       $           -
180-1116-00         $0.00
                                                                                                          -       $           -
180-1117-00         $0.00
                                                                                                          -       $           -
180-1119-00         $1.51
                                                                                                          -       $           -
180-1121-00         $0.93
                                                                                                          -       $           -
180-1124-00         $3.19
                                                                                                          -       $           -
180-1125-00         $2.15
                                                                                                          -       $           -
180-1128-00         $2.45
                                                                                                          -       $           -
180-1148-00         $0.78
                                                                                                          -       $           -
180-1149-00         $0.61
                                                                                                          -       $           -
180-1150-00         $2.58
                                                                                                          -       $           -
181-1001-00
                                                                                                          -       $           -
181-1002-00         $38.33
                                                                                                          -       $           -
181-1003-00         $0.69
                                                                                                          -       $           -
181-1004-00         $0.55
                                                                                                          -       $           -
181-1005-00         $0.34
                                                                                                          -       $           -
181-1006-00         $22.50
                                                                                                          -       $           -
181-1007-00         $4.23
                                                                                                          -       $           -
182-1001-00         $6.50
                                                                                                          -       $           -
182-1002-00         $9.50
                                                                                                          -       $           -
182-1003-00
                                                                                                          -       $           -
182-1004-00         $12.00
                                                                                                          -       $           -
190-1001-00
                                                                                                          -       $           -
190-1002-00         $0.40
                                                                                                          -       $           -
190-1003-00         $0.49
                                                                                                          -       $           -
190-1004-00         $0.84
                                                                                                          -       $           -
190-1005-00         $53.00
                                                                                                          -       $           -
190-1006-00
                                                                                                          -       $           -
190-1007-00
                                                                                                          -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
190-1008-00     Wire           Cable 50 Cond              PI MFG              F28-50               DigiKey          AM50G-100-ND
                /cable/cord    Flat Ribbon
190-1009-00     Wire           CABLE 34COND 100FT         3M                  3659/34(SF)          DigiKey          MC34R-100-ND
                /cable/cord    RND SHIELDED
190-1010-00     Wire           CABLE 40 CONDUCTOR         3M                  3659/40(SF)          DigiKey          MC40R-100-ND
                /cable/cord    RND SHIELDED
190-1011-00     Wire           CABLE 50 CONDUCTOR         3M                  3659/50(SF)          DigiKey          MC50R-100-ND
                /cable/cord    RND SHIELDED
190-1012-00     Wire           CABLE 10 COND 100'         Rikei Wire Corp     R000-100             DigiKey          R000-100-ND
                /cable/cord    MULTI RIBBON
190-1013-00     Wire           CABLE 9 COND 200'          Rikei Wire Corp     R019-200             DigiKey          R019-200-ND
                /cable/cord    GRAY RIBBON
190-1014-00     Wire           CABLE 10 COND 200'         Rikei Wire Corp     B2(10)-7/0.127       DigiKey          R020-200-ND
                /cable/cord    GRAY RIBBON
190-1015-00     Wire           CABLE WIRE 14 gauge        BayState            UL1015-74-41-30
                /cable/cord    stranded Black
190-1016-00     Wire           CABLE WIRE 14 gauge        BayState            UL1015-74-41-30
                /cable/cord    stranded Blue
190-1017-00     Wire           CABLE WIRE 14 gauge        BayState            UL1015-74-41-30
                /cable/cord    stranded Red
190-1018-00     Wire           CABLE WIRE 14 gauge        BayState            UL1015-74-41-30
                /cable/cord    stranded White
190-1019-00     Wire           CABLE WIRE 14 gauge        BayState            UL1015-74-41-30
                /cable/cord    stranded Yellow
190-1020-00     Wire           CABLE WIRE 20 gauge        BayState            UL1061-sr-pvc-20
                /cable/cord    stranded blk / red
                               cable  TP
190-1021-00     Wire           CABLE WIRE 18 AWG
                /cable/cord    green  Stranded
190-1022-00     Wire           CABLE WIRE 20  AWG
                /cable/cord    black stranded
190-1023-00     Wire           CABLE WIRE 20
                /cable/cord    AWG red stranded
190-1024-00     Wire           CABLE WIRE 20  AWG
                /cable/cord    yellow stranded
190-1025-00     Wire           CABLE WIRE
                /cable/cord    jumper
190-1026-00     Wire           CABLE 10 CONDUCTOR
                /cable/cord    SHIELDED FOR RS232
190-1027-00     Wire           CABLE CABLE 16 COND        Rikei Wire Corp     B2(16)-7/0.127       DIGIKEY          R022-200-ND
                /cable/cord    200' GRAY RIBBON
190-1028-00     Wire           CABLE 20 COND 200'         Rikei Wire Corp     B2(20)-7/0.127       DIGIKEY          R023-200-ND
                /cable/cord    GRAY RIBBON
190-1029-00     Wire           CABLE 68 POSITION          MANN                CA68NFC
                /cable/cord    FLAT RIBBON
190-1030-00     Wire           CABLE 25 CONDUCTOR         3M                  6000-60-00
                /cable/cord    FLAT RIBBON
190-1031-00     Wire           CABLE 50 CONDUCTOR         3M                  6000-61-00
                /cable/cord    FLAT RIBBON MULTI
                               COLOR
190-1032-00     Wire           CABLE 68 POSITION
                /cable/cord    ROUND SHIELDED RIBBON
190-1033-00     Wire           CABLE WIRE 18 AWG          Alpha wire and      3075 green /
                /cable/cord    stranded copper            cable               yellow
                               wire, green / yellow
200-1001-00     pcb raw        PCB DRIVE CARRIER          Varitek             2014243
200-1002-01     pcb raw        PCB P6000EXP               Varitek             150 pieces
200-1003-00     pcb raw        PCB MANIFOLD               Varitek             50 pieces
200-1004-00     pcb raw        PCB FRONT PANEL            Varitek             PCB6000107
200-1005-00     pcb raw        PCB FRONT PANEL            Tri-Star            PCB6000108
                               CONTROL
200-1006-00     pcb raw        PCB P6000PS                Varitek
200-1007-00     pcb raw        PCB DISK DRIVE             Varitek
                               POWER
200-1008-00     pcb raw        PCB MPC6000                Varitek
200-108-03                                                                                         pcb raw          mpc 6000 rev
200-1009-00     pcb raw        PCB ORING                  Varitek

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
190-1008-00         $55.17
                                                                                                          -       $           -
190-1009-00         $155.00
                                                                                                          -       $           -
190-1010-00         $192.00
                                                                                                          -       $           -
190-1011-00         $221.00
                                                                                                          -       $           -
190-1012-00         $20.00
                                                                                                          -       $           -
190-1013-00         $25.00
                                                                                                          -       $           -
190-1014-00         $23.00
                                                                                                          -       $           -
190-1015-00
                                                                                                          -       $           -
190-1016-00
                                                                                                          -       $           -
190-1017-00
                                                                                                          -       $           -
190-1018-00
                                                                                                          -       $           -
190-1019-00
                                                                                                          -       $           -
190-1020-00
                                                                                                          -       $           -
190-1021-00
                                                                                                          -       $           -
190-1022-00
                                                                                                          -       $           -
190-1023-00
                                                                                                          -       $           -
190-1024-00
                                                                                                          -       $           -
190-1025-00         $0.10
                                                                                                          -       $           -
190-1026-00
                                                                                                          -       $           -
190-1027-00         $36.98
                                                                                                          -       $           -
190-1028-00         $46.00
                                                                                                          -       $           -
190-1029-00
                                                                                                          -       $           -
190-1030-00
                                                                                                          -       $           -
190-1031-00
                                                                                                          -       $           -
190-1032-00
                                                                                                          -       $           -
190-1033-00
                                                                                                          -       $           -
200-1001-00         $7.90
                                                                                                          -       $           -
200-1002-01         $49.50
                                                                                                          -       $           -
200-1003-00         $12.00   227
                                                                                                         227      $     2,724.00
                                                                                                          -       $           -
200-1004-00         $9.75    52
                                                                                                         52       $       507.00
200-1005-00         $24.17
                                                                                                          -       $           -
200-1006-00         $16.25
                                                                                                          -       $           -
200-1007-00         $5.95
                                                                                          23             23       $       136.85
200-1008-00         $62.00
                                                                                                         30       $     1,860.00
200-108-03                   30
                                                                                                          -       $           -
200-1009-00         $24.75
                                                                                                          -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
200-1010-00     pcb raw        PCB DISK CARRIER           Varitek
                               2.5"
200-1011-00     pcb raw        PCB MP700                  Varitek
                               INTERFACE
200-1012-00     pcb raw        PCB BP4                    Sanmina
200-1013-00     pcb raw        PCB BP10                   Sanmina
200-1014-00     pcb raw        PCB BP10HC                 Sanmina
200-1015-00     pcb raw        PCB BP5-2HC                Sanmina
200-1016-00     pcb raw        PCB BP4HC                  Sanmina
200-1017-01     pcb raw        PCB CDRom                  Varitek
                               Adapter
200-1017-02                                                                                        pcb raw          old style
                                                                                                                    cda rev cdrom
                                                                                                                    adapter board
200-1018-00     pcb raw        PCB Bus Bridge             Varitek
                               for ISA20
200-1019-00     pcb raw        PCB Peripheral             Varitek
                               Sharing Switch Board
200-1020-00     pcb raw        PCB SCSI                   Varitek
                               Backplane 2 slot
200-1021-00     pcb raw        PCB SISCI                  Varitek
                               Backplane 4 slot
200-1022-00     pcb raw        PCB Peripheral             Varitek
                               Sharing Switch
                               Control Board
200-1023-00                                                                                        pcb raw          pcb wide drive
                                                                                                                    carrier
200-1023-03     pcb raw        PCB Wide SCSI              Varitek
                               drive carrier
200-1024-00     pcb raw        PCB 7000-MMB               Sanmina
                               mother board
200-1025-00     pcb raw        PCB 7000-1                 Sanmina
200-1026-00     pcb raw        PCB 7000-2                 Sanmina
200-1027-00     pcb raw        PCB 7000-3                 Sanmina
200-1028-00     PCB            MBB STUNT BOARD
200-1030-00     PCB            7000 CD ROM
                               ADAPTER
210-1001-00     Hardware       HARDWARE Metal             Tech Etch           125LP45-16-02
                Fixings        Gasket 125LP45-16-02
210-1002-00     Hardware       HARDWARE Metal             Tech Etch           95TM-300-02
                Fixings        Gasket 95TM-300-02
210-1003-00     Hardware       HARDWARE Lug
                Fixings        18-20 Terminal
210-1004-00     Hardware       HARDWARE NUT                                                        Mainsource       M2.5D985
                Fixings        M2.5 ss
210-1005-00     Hardware       HARDWARE Rivet 1/8"        WT Tool             Bss42
                Fixings        diameter #30 drill
                               grip 1/16"-1/8"
210-1006-00     Hardware       HARDWARE SPACER            Keystone            1903C                DigiKey          1903CK
                Fixings        .500/6-32 NYLON HEX        Electronics
                               THREAD
210-1007-00     Hardware       HARDWARE SCREW 6-32                                                 Main Source      614PPNBO
                Fixings        X 1/4 PH Pan BO
210-1008-00     Hardware       HARDWARE SCREW                                                      Mainsource       614PPNNY
                Fixings        6-32 X 1/4
210-1009-00     Hardware       HARDWARE SCREW PHIL        Building            NY PMS 632           DigiKey          H554-ND
                Fixings        NYLON 6-32 X 1/4           Fasteners           0025 PH
210-1010-00     Hardware       HARDWARE screw M2.5                                                 Mainsource       M2.5X10D84A
                Fixings        x 10mm Steel Zinc
210-1011-00     Hardware       HARDWARE screw M2.5                                                 MainSource       M2.5x12D84a
                Fixings        x 12mm steel zinc
210-1012-00     Hardware       HARDWARE screw M2.5                                                 Metric           M2.5x14mm
                Fixings        x 14mm Steel Zinc                                                   Screw &
                                                                                                   Tool
210-1013-00     Hardware       HARDWARE Standoff M3                                                Mainsource       M3X6PPNETZ
                Fixings        x 6 PH Pan ETLW
210-1014-00     Hardware       HARDWARE                                                            Mainsource       RAF2104632N
                Fixings
210-1015-00     Hardware       HARDWARE SEM 4-40 X                                                 Main Source      SM414PPNETZ
                Fixings        1/4 PH Pan ETLW
210-1016-00     Hardware       HARDWARE SEM '6-32 x                                                Mainsource       SM612PPNETZ
                Fixings        1/2 PH Pan ETLW

<CAPTION>
NEI Part          Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number            Cost                                            Room                       on Hand            @ 9/30/99
<S>               <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                <C>      <C>
200-1010-00
                                                                                                        -       $           -
200-1011-00
                                              24                                                       24       $           -
200-1012-00
                                                                                                        -       $           -
200-1013-00
                                                                                                        -       $           -
200-1014-00
                                                                                                        -       $           -
200-1015-00
                                                                                                        -       $           -
200-1016-00
                                                                                                        -       $           -
200-1017-01       $4.75    175
                                                                                                       175     $        831.25
200-1017-02       $4.75    24
                                                                                                       24      $        114.00
200-1018-00
                                                                                                        -       $           -
200-1019-00       $35.00   4
                                                                                                        4      $        140.00
200-1020-00       $38.00   50
                                                                                                       50      $      1,900.00
200-1021-00
                                                                                                        -       $           -
200-1022-00       $10.00
                                                                                                        -       $           -
200-1023-00       $9.00    69
                                                                                                       69      $        621.00
200-1023-03       $9.00    41
                                                                                                       41       $       369.00
200-1024-00
                                                                                                        -       $           -
200-1025-00
                                                                                                        -       $           -
200-1026-00
                                                                                                        -       $           -
200-1027-00
                                                                                                        -       $           -
200-1028-00       $29.75
                                                                                                        -       $           -
200-1030-00
                                                                                                        -       $           -
210-1001-00       $1.30    200
                                                                                                       200      $       260.00
210-1002-00       $1.60
                                                                                                        -       $           -
210-1003-00
                                                                                                        -       $           -
210-1004-00       $0.09
                                                                                                        -       $           -
210-1005-00       $0.01
                                                                                                        -       $           -
210-1006-00       $0.29
                                                                                                        -       $           -
210-1007-00       $0.10
                                                                                                        -       $           -
210-1008-00
                                                                                                        -       $           -
210-1009-00       $0.93
                                                                                                        -       $           -
210-1010-00       $0.04
                                                                                                        -       $           -
210-1011-00
                                                                                                        -       $           -
210-1012-00       $0.01
                                                                                                        -       $           -
210-1013-00       $0.06
                                                                                                        -       $           -
210-1014-00
                                                                                                        -       $           -
210-1015-00       $0.03
                                                                                                        -       $           -
210-1016-00       $0.03
                                                                                                        -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
210-1017-00     Hardware       HARDWARE  SEM 6-32x                                                 MainSource       SM6138PPNETZ
                Fixings        1 3/8 PH PAN ETLW Z
210-1018-00     Hardware       HARDWARE SEM 6-32 x                                                 Mainsource       SM614PPNETZ
                Fixings        1/4 PH pan ETLWZ
210-1019-00     Hardware       HARDWARE SEM 6-32x                                                  MainSource       SM634PPNETZ
                Fixings        3/4 PH PAN ETLW Z
210-1020-00     Hardware       HARDWARE SEM 6-32 X                                                 Main Source      SM638PPNETZ
                Fixings        3/8 PH Pan ETLW
210-1021-00     Hardware       HARDWARE Standoff                                                   Mainsource       RAF21433005B
                Fixings        RAF M2143-3005-B-O
210-1022-00     Hardware       HARDWARE Standoff                                                   Mainsource       RAF4530632A
                Fixings        5/16" Brass Hex MF
                               6-32
210-1023-00     Hardware       HARDWARE Standoff                                                   Mainsource       RAF4531632B
                Fixings        6-32 for HDD
                               RAF4531-632-B-O
210-1024-00     Hardware       HARDWARE Standoff                                                   FC Phillips
                Fixings        Brass Bushing 1/4"x
                               7/16"
210-1025-00     Hardware       HARDWARE Rackmount         Cybex               RMK-22
                Fixings        Kit 19" for AV8 Port
                               Autoview
210-1026-00     Hardware       HARDWARE FASTON .187                                                TERMCO           71F-187-20-NBL
                Fixings        INSULATION
210-1027-00     Hardware       HARDWARE CABLE             TTI                 3484-1
                Fixings        CLAMP
210-1028-00     Hardware       HARDWARE LATCH                                 GU2                  DigiKey          T2040
                Fixings        KIT AUI
210-1029-00     Hardware       HARDWARE INSUL             BELL                17371212A
                Fixings        PAD
210-1030-00     Hardware       HARDWARE Machine           NY                  PMS 440 0038         DIGIKEY          H544
                Fixings        Screw 4-40 x 3/8                               PH
                               nylon
210-1031-00     Hardware       HARDWARE T1 Lens                                                    Jameco           143183
                Fixings
210-1032-00     Hardware       HARDWARE LED                                                        Jameco           143095
                Fixings        Assembly
210-1033-00     Hardware       Hardware Nylon                                                      Newark           94F4411
                Fixings        Standoff, 4-40 x
                               .75"
210-1034-00     Hardware       HARDWARE Lug                                                        Termco           BS4B-6
                Fixings        14-16 AWG
210-1035-00     Hardware       HARDWARE nylon                                                      DIGIKEY          3348K-ND
                Fixings        washer #4 x .032 x
                               .250
210-1036-00     Hardware       HARDWARE 6-32                                                       Main Source      KP6Z
                Fixings        Kep Nut
210-1037-00     Hardware       HARDWARE 6-32                                                       Main Source      HN6SMZ
                Fixings        hex nut
210-1038-00     Hardware       HARDWARE SEM 6-32 X                                                 Main Source      638PPNZ
                Fixings        3/8 PH Pan
210-1039-00     Hardware       HARDWARE SEM, 10-32                                                 Main Source      SM1014PPNETZ
                Fixings        x 1/4 PH PAN ETLW
210-1040-00     Hardware       HARDWARE M2 x 5mm                                                   Metric screw
                Fixings        machine screw                                                       and Tool company
210-1041-00     Hardware       HARDWARE M2                                                         Metric screw
                Fixings        washer                                                              and Tool company
210-1042-00     Hardware       HARDWARE Pem               Pem                 KPS6-632-4
                Fixings        Insert
210-1043-00     Hardware       HARDWARE Clear             ASM                 1011 R-N .090
                Fixings        hole spacer
210-1044-00     Hardware       HARDWARE Clear             ASM                 2040-R-N .090
                Fixings        hole spacer
210-1045-00     Hardware       HARDWARE Nylon             Keystone            876                  Hardware         876
                Fixings        spacer, .250"              Electronics                              Spec
210-1046-00     Hardware       HARDWARE  SEM 6-32x                                                 MainSource       SM6138PPNZ
                Fixings        1 3/8 PH PAN  Z
210-1047-00     Hardware       HARDWARE, 4-40                                                      MainSource       RAF47503
                Fixings        JACK SCREW
210-1048-00     Hardware       HARDWARE Terminal                                                   TERMCO           R2C-6
                Fixings        Lug,  16 -18 AWG ,
                               barrel
210-1049-00     Hardware       Epoxy                      Epoxy Technology    730 Part A
                Fixings
210-1050-00     Hardware       Epoxy Hardner              Epoxy Technology    730 Part B
                Fixings                                                       (hardner)
211-1001-00     TIE            TIE Cable                  CATAMOUNT           L-4-18-9-M
212-1001-00     Mechanical     Mechanical                 AIR FILTRATION
                Hardware       Filter AIR                 PRODUCTS
212-1002-00     Mechanical     Mechanical Card                                                     Hardware         DC800
                Hardware       Guides, Pwr.                                                        Spec
                               Supply
212-1003-00     Mechanical     Mechanical Card                                                     Hardware         SDC450
                Hardware       Guides, Disk                                                        Spec
                               Drive
212-1004-00     Mechanical     Mechanical Card                                                     Hardware         SDC250
                Hardware       Guides, Card Cage                                                   Spec

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>               <C>       <C>
210-1017-00         $0.03
                                                                                                          -       $           -
210-1018-00         $0.03
                                                                                                          -       $           -
210-1019-00         $0.03
                                                                                                          -       $           -
210-1020-00         $0.03
                                                                                                          -       $           -
210-1021-00         $0.84
                                                                                                          -       $           -
210-1022-00         $0.32
                                                                                                          -       $           -
210-1023-00         $0.22
                                                                                                          -       $           -
210-1024-00                  1350
                                                                                                       1,350      $           -
210-1025-00         $31.50
                                                                                                          -       $           -
210-1026-00         $0.17
                                                                                                          -       $           -
210-1027-00
                                                                                                          -       $           -
210-1028-00         $0.76
                                                                                                          -       $           -
210-1029-00
                                                                                                          -       $           -
210-1030-00         $0.09
                                                                                                          -       $           -
210-1031-00         $0.18    15
                                                                                                         15       $         2.70
210-1032-00         $1.35    126
                                                                                                         126     $        170.10
210-1033-00         $0.40
                                                                                                          -       $           -
210-1034-00         $0.06
                                                                                                          -       $           -
210-1035-00         $0.02
                                                                                 223                     223      $         3.84
210-1036-00
                                                                                                          -       $           -
210-1037-00
                                                                                                          -       $           -
210-1038-00
                                                                                                          -       $           -
210-1039-00
                                                                                                          -       $           -
210-1040-00
                                                                                                          -       $           -
210-1041-00
                                                                                                          -       $           -
210-1042-00
                                                                                                          -       $           -
210-1043-00
                                                                                                          -       $           -
210-1044-00
                                                                                                          -       $           -
210-1045-00         $0.05
                                                                                                          -       $           -
210-1046-00         $0.03
                                                                                                          -       $           -
210-1047-00
                                                                                                          -       $           -
210-1048-00
                                                                                                          -       $           -
210-1049-00
                                                                                                          -       $           -
210-1050-00
                                                                                                          -       $           -
211-1001-00         $0.15
                                                                                                          -       $           -
212-1001-00         $8.82
                                                                                                          -       $           -
212-1002-00         $0.52    25
                                                                          2               15             42       $        21.84
212-1003-00         $0.20
                                                                          2               15             17       $         3.40
212-1004-00         $0.20
                                                                          2               15             17       $         3.40
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
212-1005-00     Mechanical     Mechanical                 Schroff             20809-396
                Hardware       Handle Switch
                               Bracket
212-1006-00     Mechanical     Mechanical Handle          Promptus            235-242.5AL1032
                Hardware       Front 8"cl 10-32 2.5"
212-1007-00     Mechanical     Mechanical Door                                                     McMaster         1770A52
                Hardware       Lock & Key                                                          Carr
212-1008-00     Mechanical     Mechanical                                                          McMaster         8507K14
                Hardware       Gasket Rubber                                                       Carr
                               door
212-1009-00     Mechanical     Mechanical Slide           General Devices     C-300-128            TriMap           SL28
                Hardware       Rail Set 28"                                                        Ritchie          C-300-128
                                                                                                   Elec
212-1010-00     Mechanical     Mechanical PARALLEL
                Hardware       PORT BRACKET
212-1011-00     Mechanical     MECHANICAL ENET DB         HM SYSTEMS
                Hardware       BRACKET
212-1012-00     Mechanical     MECHANICAL CR ROM          TOSHIBA             TA57BL-ASSY
                Hardware       DRIVE BLK BEZEL
212-1013-00     Mechanical     MECHANICAL MOUNTING                                                                  1P417849
                Hardware       KIT 3.5 TO 5.25 DDS
212-1014-00     Mechanical     MECHANICAL MOUNTING                                                                  1P542003
                Hardware       FRAME 5.25 TO 3.5 DR
212-1015-00     Mechanical     MECHANICAL
                Hardware       Serial Port
                               Bracket
212-1016-00     Mechanical     MECHANICAL 3.5"            TEAC                TEAC235R                              1P860017
                Hardware       MICRO FDD ADAPTER KIT
212-1017-00     Mechanical     Mechanical Serial /
                Hardware       Parallel Port
                               Bracket
212-1018-00     Mechanical     Pull Tab for 34                                                     Digikey          ASPT34-ND
                Hardware       pin IDC
212-1019-00     Mechanical     Pull Tab for 40                                                     Digikey          ASPT40-ND
                Hardware       pin IDC
212-1020-00     Mechanical     Pull Tab for 50                                                     Digikey          ASPT50-ND
                Hardware       pin IDC
212-1021-00     Mechanical     Strain relief / 50         AMP                 499252-4             Digikey          ASSR50-ND
                Hardware       pin socket connector
212-1022-00     Mechanical     Strain relief / 40         AMP                 499252-1             Digikey          ASSR40-ND
                Hardware       pin socket connector
212-1023-00     Mechanical     Strain relief / 34         AMP                 499252-6             Digikey          ASSR34-ND
                Hardware       pin socket connector
212-1024-00     Mechanical     6" adjustable rail         General Devices     B308
                Hardware       extension for
                               C-300-128
212-1025-00     Mechanical     Rack Mount Kit for         Cybex
                Hardware       Cybex Autoview 8
                               port commander
212-1026-00     Mechanical     Handle 3" for              Globe Electronic    S-47017-632-5
                Hardware       P6000EXP Power Supply      Hardware, inc.
212-1027-00     AT BRACKET     AT BRACKET, 68
                               PIN SCSI
215-1001-00     Heatsink       Heat Sink 1                Sweeney             SM6000128
215-1002-00     Heatsink       Heat Sink 2                Sweeney             SM6000130
215-1003-00     Heatsink       Heat Sink EXP              Wakefield Eng
215-1004-00     Heatsink       HEATSINK FAN 486
215-1005-00     Heatsink       HEATSINK FAN 586
215-1006-00     Heatsink       HEATSINK FAN 586
                               LOW PROFILE
215-1007-00     Heatsink       HEATSINK WITH FAN
                               FOR DUAL PII 400MHZ
215-1008-00     Heatsink       HEATSINK WITH FAN
                               FOR DUAL PII 400MHZ

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
212-1005-00        $0.72    73
                                                                                                        73       $        52.56
212-1006-00        $4.73    34
                                                                         2               15             51       $       241.23
212-1007-00        $3.11    8
                                                                                                         8       $        24.88
212-1008-00        $1.43
                                                                                                         -       $           -
212-1009-00        $50.00
                                                                                                         -       $           -
212-1010-00        $1.00
                                                                                                         -       $           -
212-1011-00        $1.00
                                                                                                         -       $           -
212-1012-00        $1.00
                                                                                                         -       $           -
212-1013-00        $6.50
                                                                                                         -       $           -
212-1014-00
                                                                                                         -       $           -
212-1015-00        $1.00    200
                                                                                                        200      $       200.00
212-1016-00
                                                                                                         -       $           -
212-1017-00
                                                                                                         -       $           -
212-1018-00        $0.17
                                                                                                         -       $           -
212-1019-00        $0.19
                                                                                                         -       $           -
212-1020-00        $0.22
                                                                                                         -       $           -
212-1021-00        $0.23
                                                                                                         -       $           -
212-1022-00        $0.20
                                                                                                         -       $           -
212-1023-00        $0.19
                                                                                                         -       $           -
212-1024-00        $10.98
                                                                                                         -       $           -
212-1025-00        $31.50
                                                                                                         -       $           -
212-1026-00        $4.25    40
                                                                                                        40       $       170.00
212-1027-00
                                                                                                         -       $           -
215-1001-00        $4.09    16
                                                                         4               23             43       $       175.87
215-1002-00        $4.09    17
                                                                         4               23             44       $       179.96
215-1003-00        $4.50    296
                                                                                                        296      $     1,332.00
215-1004-00        $0.00
                                                                                                         -       $           -
215-1005-00
                                                                                                         -       $           -
215-1006-00
                                                                                                         -       $           -
215-1007-00        $7.25
                                                                                                         -       $           -
215-1008-00        $4.80
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
260-1001-00     Metal Fab      METAL Bezel DISK           Sweeney             SM6000131
                               DRIVE Front Panel
260-1002-00     Metal Fab      METAL Bezel FLOPPY         Sweeney             SM6000132
                               DRIVE Front Panel
260-1003-00     Metal Fab      METAL Latch Disk           Sweeney             SM6000133
                               Drive
260-1004-00     Metal Fab      METAL PS Chassis           Sweeney             SM600045
                               Pan (EXP)
206-1004-01                                                                                                         metal board
                                                                                                                    support
260-1005-00     Metal Fab      METAL Board                Sweeney             SM6000043
                               Support
260-1006-00     Metal Fab      METAL                      Sweeney             SM6000046
                               Motherboard
                               Chassis
260-1007-00     Metal Fab      METAL Box                  Sweeney             SM6000047
                               Connector
260-1008-00     Metal Fab      METAL Chassis              Sweeney             SM6000048
                               Assembly
260-1009-00     Metal Fab      METAL AT Support           Sweeney             SM6000049
                               Assembly
260-1010-00     Metal Fab      METAL Front                Sweeney             SM6000051
                               Panel SMCD
260-1011-00     Metal Fab      METAL Support              Sweeney             SM6000105
                               Disk Top
260-1012-00     Metal Fab      METAL Support              Sweeney             SM6000106
                               Disk Bottom
260-1013-00     Metal Fab      METAL Support              Sweeney             SM6000107
                               Drive Right
260-1014-00     Metal Fab      METAL Bracket              Sweeney             SM6000108
                               Disk Con
260-1015-00     Metal Fab      METAL Support AT           Sweeney             SM6000109
                               Interface Assembly
260-1016-00     Metal Fab      METAL Cover                Sweeney             SM6000110
260-1017-00     Metal Fab      METAL Side Panel           Sweeney             SM6000111
                               Right
260-1018-00     Metal Fab      METAL Side Panel           Sweeney             SM6000112
                               Left
260-1019-00     Metal Fab      METAL Front                Sweeney             SM6000113
                               Panel Switch
                               Bracket
260-1020-00     Metal Fab      METAL Chassis,             Sweeney             SM6000114
                               Power Supply
260-1021-00     Metal Fab      METAL Pan Chassis          Sweeney             SM6000115
260-1022-00     Metal Fab      METAL Support              Sweeney             SM6000116
                               Board
260-1023-00     Metal Fab      METAL Bracket Fan          Sweeney             SM6000117
260-1024-00     Metal Fab      METAL Door                 Sweeney             SM6000118
                               Assembly
260-1025-00     Metal Fab      METAL Support              Sweeney             SM6000120
                               Drive Hinge
260-1026-00     Metal Fab      METAL Support              Sweeney             SM6000121
                               Drive Left
260-1027-00     Metal Fab      METAL Hinge                Sweeney             SM6000124
                               Modified
260-1028-00     Metal Fab      METAL Clamp AT             Sweeney             SM6000127
                               Board
260-1029-00     Metal Fab      METAL Power Supply         Sweeney             SM6000129
                               Switch Bracket Clamp
260-1030-00     Metal Fab      METAL CD ROM               Sweeney             SM6000135
                               Mount
260-1031-00     Metal Fab      METAL Connector            Sweeney             SM6000136
                               Box
260-1032-00     Metal Fab      METAL Slot Cover                                                    Win
                               AT Rear Bracket                                                     Enterprises
260-1033-00     Metal Fab      METAL P6000 REAR           Sweeney
                               CONNECTOR BRACKET
260-1034-00     Metal Fab      METAL Serial               Sweeney             SM600055
                               /Parallel Port
                               Cover
260-1035-00     Metal Fab      METAL P6000EXP             Sweeney             SM600053
                               Blanking Panel
260-1036-00     Metal Fab      METAL P6000 Rear           Sweeney
                               Connector Blanking
                               Panel
260-1037-00     Metal Fab      METAL P6000EX pan          Sweeney             SM600054
                               chassis screen
260-1038-00     Metal Fab      METAL P6000EX PS           Sweeney             SM600052             SM600052D-R1
                               chassis assy
260-1039-00     Metal Fab      METAL Slider 1             Sweeney             SM600040             SM600040D-R2     2
260-1040-00     Metal Fab      METAL Slider 2             Sweeney             SM600041             SM600041D-R3     3
260-1041-00     Metal Fab      METAL Pan Chassis          Sweeney             SM600042             SM600042D-R4     4
260-1042-00     Metal Fab      METAL Support AT           Sweeney             SM600044             SM600044-R2      2
                               Interface
260-1043-00     Metal Fab      Duplicate                  Duplicate           Duplicate            Duplicate        Duplicate

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                <C>      <C>
260-1001-00         $6.55    157
                                                                                                         157      $     1,028.35
260-1002-00         $7.70    172
                                                                                                         172      $     1,324.40
260-1003-00         $4.66    452
                                                                                                         452      $     2,106.32
260-1004-00         $13.46
                                                                                                          -       $           -
206-1004-01         $13.46   62
                                                                                                         62       $       834.52
260-1005-00         $14.97
                                                                                                          -       $           -
260-1006-00         $42.18
                                                                                                          -       $           -
260-1007-00         $15.96
                                                                                           8              8       $       127.68
260-1008-00         $73.85
                                                                                                          -       $           -
260-1009-00         $33.20
                                                                                          16             16       $       531.20
260-1010-00         $30.90            7
                                                                          2               43             52       $     1,606.80
260-1011-00         $11.98
                                                                          2               21             23       $       275.54
260-1012-00         $13.75
                                                                          2               24             26       $       357.50
260-1013-00         $6.02
                                                                          2               42             44       $       264.88
260-1014-00         $20.49
                                                                          2               15             17       $       348.33
260-1015-00         $33.40
                                                                          4               23             27       $       901.80
260-1016-00         $19.67
                                                                         13                              13       $       255.71
260-1017-00         $19.83
                                                                          4               29             33       $       654.39
260-1018-00         $19.83
                                                                          4               29             33       $       654.39
260-1019-00         $5.90    33
                                                                                                         33       $       194.70
260-1020-00         $18.50
                                                                                          40             40       $       740.00
260-1021-00         $37.60
                                                                          4               23             27       $     1,015.20
260-1022-00         $14.50
                                                                          4               23             27       $       391.50
260-1023-00         $9.67
                                                                          2               15             17       $       164.39
260-1024-00         $40.52
                                                                                                          -       $           -
260-1025-00         $7.75
                                                                          2               21             23       $       178.25
260-1026-00         $2.57
                                                                          2               36             38       $        97.66
260-1027-00         $9.28    9
                                                                                                          9       $        83.52
260-1028-00         $2.16
                                                                          4               23             27       $        58.32
260-1029-00         $3.79
                                                                                                          -       $           -
260-1030-00         $5.64    38
                                                                                          18             56       $       315.84
260-1031-00         $13.10
                                                                          4               23             27       $       353.70
260-1032-00         $0.20
                                                                                                          -       $           -
260-1033-00
                                                                                                          -       $           -
260-1034-00         $1.95    296
                                                                                                         296      $       577.20
260-1035-00         $9.64    51
                                                                                                         51       $       491.64
260-1036-00         $1.95
                                                                                                          -       $           -
260-1037-00         $3.00    9
                                                                                                          9       $        27.00
260-1038-00
                                                                                                          -       $           -
260-1039-00
                                                                                                          -       $           -
260-1040-00
                                                                                                          -       $           -
260-1041-00
                                                                                                          -       $           -
260-1042-00
                                                                                                          -       $           -
260-1043-00
                                                                                                          -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
260-1044-00     Metal Fab      METAL Slider 3             Sweeney             SM600050             SM600050D-R1     1
260-1045-00     Metal Fab      METAL Door                 Sweeney             SM6000119            IA12E16D         A
260-1046-00     Metal Fab                                 Sweeney             SM6000122
260-1047-00     Metal Fab      METAL Retainer             Sweeney             SM6000123            MD13D01D         A
                               Spring
260-1048-00     Metal Fab      METAL Bracket,             Sweeney             SM6000125            MD13D03D         A
                               Filter BT
260-1049-00     Metal Fab      METAL Bracket,             Sweeney             SM6000126            MD13D04D         A
                               Filter TP
260-1050-00     Metal Fab      METAL Chassis              Sweeney             SM600056             SM600056D        -
                               Assy BK
260-1051-00     Metal Fab      METAL, board               Sweeney             sm600043 rev3
                               support
260-1052-00     Metal Fab      METAL, Disk                Sweeney
                               Carrier Blank
                               Plate
260-1053-00     Metal Fab      METAL, Double              Sweeney
                               floppy front
                               bezel
260-1054-00     Metal Fab      MBB TBD
260-1055-00     Metal Fab      MBB TBD
260-1056-00     Metal Fab      MBB TBD
260-1057-00     Metal Fab      MBB TBD
260-1058-00     Metal Fab      MBB TBD
260-1059-00     Metal Fab      MBB TBD
260-1060-00     Metal Fab      MBB TBD
260-1061-00     Metal Fab      MBB TBD
260-1062-00     Metal Fab      MBB TBD
260-1063-00     Metal Fab      MBB TBD
260-1064-00     Metal Fab      7000 RACK MOUNT
                               MOUNTING BRACKET
260-1065-00     Metal Fab      7000 PAN ASSEMBLY
206-1066-00
260-1067-00     Metal Fab      7000 STACKING
                               CONNECTOR 1
260-1068-00     Metal Fab      7000 STACKING
                               CONNECTOR  2
260-1068-00     Metal Fab      7000 PCI CLIP
260-1074-03     PLASTIC        7000 BEZEL
260-1079-00     PLASTIC        700 CD ROM SLED
260-1080-00     PLASTIC        7000 DRIVE SLED
260-1081-00     PLASTIC        7000 CD ROM COVER
300-1001-00     Converter      Converter DC/DC            Astec               AL60A-300L-12F09     Reptron
                               12VDC
300-1002-00     Converter      Converter DC/DC            Astec               BM80A-300L-050F60    Reptron
                               5VDC
300-1003-00     Converter      Converter                  Vicor               VI-ARM-C12
                               Autoranging Rectifer
                               Module
300-1005-00     Converter      Converter Power            Vicor
                               Supply
301-1001-00     Monitor        MONITOR 14" color          Viewsonic           1000S-2              D&H              XT4871
                               monitor SVGA, beige
301-1002-00     Monitor        Monitor 14"                                                         TriMap           RMM06-14C
                               Color SVGA w/
                               shelf
302-1001-00     Keyboard       Keyboard 104 Key           Keytronics          LTDESIGNER
                               with PS/2 connector
                               black
302-1002-00     Keyboard       Keyboard Rackmount                                                  TriMap           RMKB6
                               with trackball, 1U
                               Black
303-1001-00     Mouse          Mouse 2 button             Microsoft
                               PS/2
303-1002-00     Mouse          MOUSE 2 BUTTO
                               SERIAL
304-1001-00     Fan            FAN 12VDC 1.78W 60MM       Panasonic           FBA06T12H            Digikey          P9725-ND
                               FAB HYDRO
304-1002-00     Fan            FAN 12VDC 2.4W 80MM        Panasonic           FBA08T12H            Digi-Key         P9733-ND
                               FBA HYDRO
304-1003-00     fan            COMAIR ROTRON 12
                               VOLT BRUSHLESS DC

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>         <C>   <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
260-1044-00
                                                                                                         -       $           -
260-1045-00
                                                                                                         -       $           -
260-1046-00
                                                                                                         -       $           -
260-1047-00
                                                                                                         -       $           -
260-1048-00
                                                                                                         -       $           -
260-1049-00
                                                                                                         -       $           -
260-1050-00
                                                                                                         -       $           -
260-1051-00
                                                                                                         -       $           -
260-1052-00           $6.55      188
                                                                                                        188      $     1,231.40
260-1053-00           $6.28       60
                                                                                                        60       $       376.80
260-1054-00
                                                                                                         -       $           -
260-1055-00
                                                                                         12             12       $           -
260-1056-00
                                                                                         16             16       $           -
260-1057-00
                                                                                                         -       $           -
260-1058-00
                                                                                         62             62       $           -
260-1059-00          $29.05
                                                                                         62             62       $     1,801.10
260-1060-00           $8.15
                                                                                         36             36       $       293.40
260-1061-00
                                                                                         33             33       $           -
260-1062-00
                                                                                                         -       $           -
260-1063-00
                                                                                                         -       $           -
260-1064-00           $1.85
                                                                                         39             39       $        72.15
260-1065-00         $102.50
                                                                                                         -       $           -
206-1066-00
                                                                                         92
260-1067-00           $3.50
                                                                                                         -       $           -
260-1068-00           $3.80
                                                                                                         -       $           -
260-1068-00          $13.75
                                                                                                         -       $           -
260-1074-03           $4.42
                                                                                         60             60       $       265.20
260-1079-00           $1.00
                                                                                                         -       $           -
260-1080-00           $1.00
                                                                                                         -       $           -
260-1081-00           $1.00
                                                                                                         -       $           -
300-1001-00        $93.00      68
                                                                                                        68       $     6,324.00
300-1002-00        $182.00     71
                                                                                                        71       $    12,922.00
300-1003-00        $41.00      32
                                                                                                        32       $     1,312.00
300-1005-00
                                                                                                         -       $           -
301-1001-00        $140.00
                                                                                                         -       $           -
301-1002-00        $565.00
                                                                                                         -       $           -
302-1001-00        $31.00
                                                                                                         -       $           -
302-1002-00        $250.00
                                                                                                         -       $           -
303-1001-00        $22.00
                                                                                                         -       $           -
303-1002-00        $21.90
                                                                                                         -       $           -
304-1001-00        $7.69    20
                                                                                                        20       $       153.80
304-1002-00        $7.69
                                                                                                         -       $           -
304-1003-00        $5.95
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
306-1001-00     Disk Drive     DISK DRIVE 9.1GB           Seagate             ST39173N
                Internal       SCSI HARD DRIVE,
                               BARRACUDA, 3.5" LP
306-1002-00     Disk Drive     DISK DRIVE 1.44MB          TEAC                FD235HF7429
                Internal       Floppy 3.5" Black                              19307772-40
                               bezel
306-1003-00     Disk Drive     DISK DRIVE 9.1GB           Seagate             ST39173FC
                Internal       SCSI Wide, 80 pin
                               LP,10,000 RPM SCA /
                               FIBER CHANNEL
306-1004-00     Disk Drive     DISK DRIVE 4.5GB           Seagate             ST34501FC
                Internal       SCSI Wide Cheetah,
                               10,000RPM, LP, 80
                               pin SCA / FIBER
                               CHANNEL
306-1005-00     Disk Drive     DISK DRIVE 4.3GB           Seagate             Not available                         Not available
                Internal       SCSI Wide Cheetah,
                               10,000RPM, LP, 80
                               pin SCA
306-1006-00     Disk Drive     DISK DRIVE 2.14GB          Seagate             Not available                         Not available
                Internal       SCSI WIDE Cheetah,
                               10,000 RPM, LP, 80
                               pin SCA
306-1007-00     Disk Drive     DISK DRIVE 1.7GB IDE       Seagate             ST31720A                              Not available
                Internal       Hard drive 3.5"LP
                               Medalist Int.
306-1008-00     Disk Drive     DISK DRIVE 2.5GB IDE       Seagate             ST32531A                              Not available
                Internal       Hard drive 3.5"LP
                               Medalist int.
306-1009-00     Disk Drive     DISK DRIVE 4.3GB IDE       Seagate             ST34342A
                Internal       Hard drive 3.5"LP                              ST34321A
                               Medalist int.
306-1010-00     Disk Drive     DISK DRIVE 2.17GB          Seagate             ST32171N                              Not available
                Internal       SCSI Hard drive,
                               Barracuda 3.5"LP int.
306-1011-00     Disk Drive     DISK DRIVE 4.35GB          Seagate             ST34371N                              Not available
                Internal       SCSI Hard drive,
                               Barracuda 3.5"LP int.
306-1012-00     Disk Drive     DISK DRIVE 4.5GB           Seagate             ST34572N
                Internal       SCSI HARD DRIVE
                               BARRACUDA 3.5" LP
                               INT
306-1013-00     Disk Drive     DISK DRIVE 9.1GB IDE       Seagate             ST39140A
                Internal       HARD DRIVE, MEDALIST
                               3.5", LP
306-1014-00     Disk Drive     DISK DRIVE 2.26GB          Seagate             ST32272N                              Not available
                Internal       SCSI Hard drive,
                               Barracuda 3.5"LP int.
306-1015-00     Disk Drive     DISK DRIVE 9.1GB           Seagate             ST39173W
                Internal       Ultra Wide SCSI HARD
                               DRIVE, BARRACUDA,
                               3.5" LP
306-1016-00     Disk Drive     DISK DRIVE 2.2GB           Seagate             ST32272N                              Not available
                Internal       SCSI HARD DRIVE,
                               BARRACUDA, 3.5" LP
306-1017-00     Disk Drive     DISK DRIVE 4.5GB           Seagate             ST34572W
                Internal       ULTRA WSCSI HARD
                               DRIVE BARRACUDA 3.5"
                               LP INT
306-1018-00     Disk Drive     DISK DRIVE 2.15GB          Seagate             ST32151N                              Not available
                Internal       SCSI Hard drive,
                               Barracuda 3.5"LP int.
306-1019-00     Disk Drive     DISK DRIVE 4.5GB IDE       Seagate             ST34520A
                Internal       Hard drive 3.5"LP
                               Medalist int.
306-1020-00     Disk Drive     DISK DRIVE 6.5GB IDE                           ST36531A             Tech Data        800928
                Internal       Hard drive 3.5"LP
                               Medalist int.
306-1021-00     Disk Drive     ST310240A, 10.2GB,
                Internal       Seagate drive,
                               5400RPM MEDALILST
306-1022-00     Disk Drive     ST318275LW, 18.2GB,
                Internal       LOW VOLTAGE
                               DIFFERENTIAL WIDE
                               ULTRA 2 SCSI
306-1023-00                    ST39102LW, 9.1GB Low
                               voltage wide ultra2
                               10,000
308-1001-00     CD-ROM Drive   CD ROM DRIVE 16X           TEAC                CD-316E
                Internal IDE   super slim
308-1002-00     CD-ROM Drive   CD ROM DRIVE               Toshiba             XM5702B
                Internal SCSI  24Xblack bezel
                               internal
308-1003-00     CD-ROM Drive   CD ROM INTERNAL IDE        TEAC                CD-220E
                Internal IDE   DRIVE 20X SUPER SLIM
308-1004-00     CD-ROM Drive   CD ROM DRIVE IDE           TOSHIBA             6102B-S
                Internal IDE
308-1005-00     CD-224E        TEAC CD ROM INTERNAL
                               IDE DRIVE 24X SUPER
                               SLIM

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
306-1001-00        $587.27
                                                                                                         -       $           -
306-1002-00        $29.00
                                                                                                         -       $           -
306-1003-00        $675.00
                                                                                                         -       $           -
306-1004-00        $581.00
                                                                                                         -       $           -
306-1005-00
                                                                                                         -       $           -
306-1006-00
                                                                                                         -       $           -
306-1007-00        $118.56
                                                                                                         -       $           -
306-1008-00        $169.00
                                                                                                         -       $           -
306-1009-00        $129.83
                                                                                                         -       $           -
306-1010-00
                                                                                                         -       $           -
306-1011-00
                                                                                                         -       $           -
306-1012-00        $352.88
                                                                                                         -       $           -
306-1013-00        $287.34
                                                                                                         -       $           -
306-1014-00
                                                                                                         -       $           -
306-1015-00        $587.00
                                                                                                         -       $           -
306-1016-00        $327.45
                                                                                                         -       $           -
306-1017-00        $353.88
                                                                                                         -       $           -
306-1018-00
                                                                                                         -       $           -
306-1019-00        $161.02
                                                                                                         -       $           -
306-1020-00        $145.92
                                                                                                         -       $           -
306-1021-00        $179.00
                                                                                                         -       $           -
306-1022-00        $889.00
                                                                                                         -       $           -
306-1023-00        $557.00
                                                                                                         -       $           -
308-1001-00        $204.00
                                                                                                         -       $           -
308-1002-00        $135.00
                                                                                                         -       $           -
308-1003-00        $146.00
                                                                                                         -       $           -
308-1004-00        $135.00
                                                                                                         -       $           -
308-1005-00        $146.00
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
310-1001-00     Tape Drive     DAT Tape Drive             Exabyte                                  Tech Data        888701
                               5/10 GB
320-1001-00     PERIPHERAL     Autoview                   Cybex               AV-8A                Tech Data        128060
                               Commander 8 Port
320-1002-00     PERIPHERAL     MODEM FAX                  US Robotics         000839-0
                               External 33.6MHZ
320-1003-00     PERIPHERAL     MODEM FAX                  US Robotics         000840-0
                               Internal  33.6MHZ
320-1004-00     PERIPHERAL     A/B T1 Switch              DataProbe
320-1005-00     PERIPHERAL     Dual Circuit               DataProbe           K2-AB-RJ8-R
                               Failover Relay
                               Switch
320-1006-00     PERIPHERAL     6MP Laser Printer          HP                                       Tech Data        546110
320-1007-00     PERIPHERAL     Digi 8 Port                Digi                                     Tech Data        195837
                               SerialPCI  Board
320-1008-00     PERIPHERAL     Autoview                   Cybex               AV-16A               Tech Data        128527
                               Commander 16
                               Port
330-1001-00     NIC 3rd party  NIC Token Ring             SMC                 Token Ring ISA
                               ISA 16/4
330-1002-00     NIC 3rd party  NIC Intel Pro              Intel               IntelPro100B
                               100B ISA
                               10/100MB
330-1003-00     NIC 3rd party  NIC EtherLink 3            3Com                3C515B-TX
                               16-Bit ISA Ethernet
                               TP Adapter ; RJ45
                               only 10MB/100MBsec
330-1004-00     NIC 3rd party  NIC EtherLink 3 16         3Com                3C509B-COMBO
                               Bit, ISA Ethernet
                               Combo Adapter ;
                               RJ45/BNC/AUI 10MB/Sec
330-1005-00     NIC 3rd party  NIC EtherLink XL PCI       3Com                3C905-TX
                               Fast Ethernet 100
                               BaseT/10 BaseT
                               Adapter 10/100MB/Sec
330-1006-00     NIC 3rd party  NIC Intel Pro              Intel               IntelPRO100TX
                               100 TX PCI
                               10/100MB
330-1007-00     NIC 3rd party  TOKEN RING MAU             KINGSTON            KTR-8UTP
330-1008-00     NIC 3rd party  100 MB Ethernet            HM Systems
                               daughter card,
                               single port
330-1009-00     NIC 3rd party  100 MB Ethernet            HM Systems
                               daughter card, dual
                               port
330-1010-00     NIC 3rd party  NIC Intel Pro              Intel               IntelPRO100T4
                               100 T4 PCI
                               10/100MB
330-1011-00     NIC 3rd party  HM single to               HM Systems
                               dual enet upgrade
330-1012-00                    Intel Pro100B
                               10/100TX Dual
                               Port
340-1001-00     SCSI ADAPTER   SCSI-2 PI/O for            Adaptec             AHA-1520A
                3rd party      DOS/Windows/95/NT/OS/2/
                               UNIX/NetWare
                               16 Bit ISA Fast
                               SCSI-2  host Adapter
360-1001-00     SCSI ADAPTER   SCSI-2 FAST 16 Bit         Adaptec             AHA-1540CP
                3rd party      ISA PnP Host
                               adapter; BusMaster;
                               no Floppy support
                               EZ-SCSI 14.0
360-1002-00     SCSI ADAPTER   SCSI-2 FAST 16 Bit         Adaptec             AHA-1542CP
                3rd party      ISA PnP Host
                               Adapter; BusMaster;
                               Floppy support, EZ
                               SCSI 4.0
360-1003-00     SCSI ADAPTER   SCSI-3 Ultra Wide          Adaptec             AHA-2940UW
                3rd party      32-Bit PCI
                               BusMaster Host
                               Adapter; PhaseEngine
                               RISC; 40 MBPS, 15
                               SCSI devices support
360-1004-00     SCSI ADAPTER   SCSI BusMaster             DPT                 PM2041W
                3rd party      Adapter SmartCache
                               IV ISA-to-Wide
360-1005-00     SCSI ADAPTER   SCSI BusMaster             DPT                 PM2044W
                3rd party      Adapter SmartCache
                               IV PCI-to-Wide
360-1006-00     SCSI ADAPTER   SCSI- ISA to Fast          Adaptec             AHA-1520B            Tech Data        76091
                3rd party      SCSI Plug and Play
360-1007-00     SCSI ADAPTER   3 Channel Ultra wide       Adaptec             AAA-133 Kit          Tech Data        76094
                3rd party      SCSI Raid controller
                               PCI
360-1008-00     SCSI ADAPTER   SCSI PCI  ADAPTER          ADVAN               APB930
                3rd party

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>       <C>     <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
310-1001-00         $627.16
                                                                                                          -       $           -
320-1001-00         $557.79
                                                                                                          -       $           -
320-1002-00         $142.00
                                                                                                          -       $           -
320-1003-00         $118.00
                                                                                                          -       $           -
320-1004-00         $575.00
                                                                                                          -       $           -
320-1005-00         $161.25
                                                                                                          -       $           -
320-1006-00         $861.04
                                                                                                          -       $           -
320-1007-00         $591.79
                                                                                                          -       $           -
320-1008-00         $1,118.70
                                                                                                          -       $           -
330-1001-00         $175.92   5
                                                                                                          5       $       879.60
330-1002-00         $82.00    2
                                                                                                          2      $        164.00
330-1003-00         $140.00   7
                                                                                                          7       $       980.00
330-1004-00         $96.00    5
                                                                                                          5       $       480.00
330-1005-00         $83.29
                                                                                                          -       $           -
330-1006-00         $82.00    1
                                                                                                          1       $        82.00
330-1007-00         $278.00
                                                                                                          -       $           -
330-1008-00         $78.00    2
                                                                                                          2       $       156.00
330-1009-00         $150.00   4
                                                                                                          4       $       600.00
330-1010-00         $82.00
                                                                                                          -       $           -
330-1011-00         $70.00
                                                                                                          -       $           -
330-1012-00         $221.00
                                                                                                          -       $           -
340-1001-00         $89.00
                                                                                                          -       $           -
360-1001-00         $168.00
                                                                                                          -       $           -
360-1002-00         $179.00
                                                                                  2                       2       $       358.00
360-1003-00         $229.00
                                                                                                          -       $           -
360-1004-00         $173.37   10
                                                                                                         10       $     1,733.70
360-1005-00         $237.00
                                                                                                          -       $           -
360-1006-00         $96.56
                                                                                                          -       $           -
360-1007-00         $635.88
                                                                                                          -       $           -
360-1008-00         $0.00     1
                                                                                                          1       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
360-1010-00                    QLOGIC QLA1080 PCI
                               64-bit SCSI adaptor
360-1017-00                    st34573W 4.5 GB
                               ultra wscso jard
                               drove barracida 3.5"
                               lp int
370-1001-00     RAID           RAID Integrated            DPT                 RC4040/4
                CONTROLLER     Caching Module for
                3rd Party      SmartCache IV
                               adapters; 4MB
                               ECC-ported SIMM
370-1002-00     RAID           RAID Integrated            DPT                 RC4040
                CONTROLLER     Caching Module for
                3rd Party      SmartCache IV
                               adapters; no SIMM
370-1003-00     RAID           Raid controller            Adaptec             AAA-130
                CONTROLLER
                3rd Party
370-1004-00     RAID           Raid controller            Compaq
                CONTROLLER
                3rd Party
380-1001-00     Video Card     VIDEO Trident 9680P        Trident             9680P
                3rd Party      64 Bit accelerator 1
                               MB UPG 2 MB  PCI
450-1001-00     Label          Label, 1.5" x              Brady               WML-517-292
                               2.5" wire
                               marker, WHITE
450-1002-00     Label          Label, 1.5" x              Brady               CL-217-621
                               .4" Clear
450-1003-00     Label          Label, "Tested"            Brady               CLWO-317-4
                               Green
450-1004-00     Label          Label, "HI POT"            Brady               NE100HP
450-1005-00     Label          Label, "Shock              Brady               NE568x500
                               Hazard"
450-1006-00     Label          Label, "Ground             Screenprint Dow
                               Symbol"
450-1007-00     Label          Label,                     Screenprint Dow
                               "ClusterDirector"
450-1008-00     Label          Label, "P6000              Screenprint Dow
                               Front Panel
                               Status"
450-1009-00     Label          Label, "P6000              Screenprint Dow
                               Serial Number"
450-1010-00     Label          Label, " P6000             Screenprint Dow
                               Rating"
450-1011-00     Label          Label, "P1000              Screenprint Dow
                               Serial Number"
450-1012-00     Label          Label, P2000               Screenprint Dow
                               Serial Number"
450-1014-00                    P7000 front
                               panel overlay
450-1015-00     Label          P7000 AGENCY
                               LABEL
460-1001-00     Logo           Logo Custom for            NEI                 Logo
                               racks customer
                               provided artwork
460-1002-00     Logo           P7000 front
                               panel logo lavel
497-1001-00     Procedure, MFG P1000 Assembly and         NEI
                               Systems Integration
                               Procedure
497-1002-00     Procedure, MFG P2000 Assembly and         NEI
                               Systems Integration
                               Procedure
497-1003-00     Procedure, MFG P6000 Assembly and         NEI
                               Systems Integration
                               Procedure
497-1004-00     Procedure, MFG P6000/EXP Assembly         NEI
                               and Systems
                               Integration Procedure
497-1005-00     Procedure, MFG Hi-Pot Test                NEI
                               Procedure
497-1006-00     Procedure, MFG MP700 Flash                NEI
                               Installation and
                               Testing Procedure
497-1007-00     Procedure, MFG WindowsNT OEM              NEI
                               Rollback Procedure
498-1001-00     Process        Final Inspection           NEI
                Document, MFG  Check List P6000
498-1002-00     Process        Final Assembly             NEI
                Document, MFG  Check List P6001
498-1003-00     Process        Packing and Shipping       NEI
                Document, MFG  Check List P6000

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number             Cost                                            Room                       on Hand          @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
360-1010-00        $431.00  6
                                                                                                         6       $     2,586.00
360-1017-00        $353.88
                                                                                                         -       $           -
                                                                                                         -       $           -
370-1001-00        $623.00
                                                                                 3                       3       $     1,869.00
370-1002-00        $327.64
                                                                                 4                       4       $     1,310.56
370-1003-00        $398.00
                                                                                                         -       $           -
370-1004-00
                                                                                                         -       $           -
380-1001-00        $35.00
                                                                                                         -       $           -
450-1001-00
                                                                                                         -       $           -
450-1002-00
                                                                                                         -       $           -
450-1003-00
                                                                                                         -       $           -
450-1004-00
                                                                                                         -       $           -
450-1005-00
                                                                                                         -       $           -
450-1006-00
                                                                                                         -       $           -
450-1007-00
                                                                                                         -       $           -
450-1008-00
                                                                                                         -       $           -
450-1009-00
                                                                                                         -       $           -
450-1010-00
                                                                                                         -       $           -
450-1011-00
                                                                                                         -       $           -
450-1012-00
                                                                                                         -       $           -
450-1014-00
                                                                                                         -       $           -
450-1015-00
                                                                                                         -       $           -
460-1001-00        $50.00
                                                                                                         -       $           -
460-1002-00
                                                                                                         -       $           -
497-1001-00
                                                                                                         -       $           -
497-1002-00
                                                                                                         -       $           -
497-1003-00
                                                                                                         -       $           -
497-1004-00
                                                                                                         -       $           -
497-1005-00
                                                                                                         -       $           -
497-1006-00
                                                                                                         -       $           -
497-1007-00
                                                                                                         -       $           -
498-1001-00
                                                                                                         -       $           -
498-1002-00
                                                                                                         -       $           -
498-1003-00
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
498-1004-00     Process        Accessories List           NEI
                Document, MFG  P6000
498-1005-00     Process        Product                    NEI
                Document, MFG  Categorie Codes
498-1006-00     Process        ClusterDirector            NEI
                Document, MFG  Check List
620-1001-00     Box Packaging  Box Shipping               NEI                 P2000BX
                               P2000
620-1002-00     Box Packaging  Box Shipping               NEI                 P6000BX
                               P6000
700-1001-00     SBC            SBC Maintenance            Adastra             NPC-486E-DX2-66-SGS
                               Processor, Cluster
                               Director
700-1002-00     SBC            SBC AMD K6-200 PCI         HM Systems          H10K200-4
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32)
700-1003-00     SBC            SBC P586 Pentium           Trenton             TR-P6V2/200/0
                               Pro, PCI, IDE, PCI
                               Ultra SCSI, PCI SVGA
                               w/2MB, 256k cache 0MB
700-1004-00     SBC            SBC P586 Pentium           Trenton             TR-P6V5/200/0
                               Pro, PCI, IDE, PCI
                               Ultra SCSI, PCI SVGA
                               w/2MB, 512k cache 0MB
700-1005-00     SBC            SBC P586 Dual              Trenton             TR-DP52/200/0
                               Pentium Pro, PCI,
                               IDE, 256k cache, 0MB
                               supports up to 512MB
700-1006-00     SBC            SBC AMD K6-233 PCI         HM Systems          H10K233-4
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32)
700-1007-00     SBC            SBC P586/233 PCI IDE       HM Systems          H10M233-4
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32)
700-1008-00     SBC            SBC P586/166 PCI IDE       HM Systems          H10M166-4                             $850.00
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32)
700-1009-00     SBC            SBC P586 Dual              Trenton             TR-DP65/200/0
                               Pentium Pro, PCI,
                               IDE, 512k cache, 0MB
                               supports up to 512MB
700-1010-00     SBC            SBC P586/200 PCI IDE       HMSystems           H10M200-4
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32)
700-1011-00     SBC            SBC P586/166 PCI IDE       HM Systems          H10M166-4E
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               ENET DB
700-1012-00     SBC            SBC P586/200 PCI IDE       HMSystems           H10M200-4E
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               ENET DB
700-1013-00     SBC            SBC P586/233 PCI IDE       HM Systems          H10M233-4E
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               ENET DB
700-1014-00     SBC            SBC AMD K6-200 PCI         HM Systems          H10K200-4E
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ ENET
                               DB
700-1015-00     SBC            SBC AMD K6-233 PCI         HM Systems          H10K233-4E
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ ENET
                               DB
700-1016-00     SBC            SBC P586/166 PCI IDE       HM Systems          H10M166-2FE
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ ENET DB
700-1017-00     SBC            SBC P586/166 PCI IDE       HM Systems          H10M166-2F
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm LP
700-1018-00     SBC            SBC P586/200 PCI IDE       HMSystems           H10M200-2FE
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ ENET DB
700-1019-00     SBC            SBC P586/200 PCI IDE       HMSystems           H10M200-2F
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm LP

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>       <C>     <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
498-1004-00
                                                                                                          -       $           -
498-1005-00
                                                                                                          -       $           -
498-1006-00
                                                                                                          -       $           -
620-1001-00         $7.00
                                                                                                          -       $           -
620-1002-00         $49.00
                                                                                                          -       $           -
700-1001-00         $590.00
                                                                                 12                      12       $     7,080.00
700-1002-00         $825.00
                                                                                                          -       $           -
700-1003-00         $1,644.00
                                                                                                          -       $           -
700-1004-00         $2,482.00
                                                                                                          -       $           -
700-1005-00         $2,338.00
                                                                                                          -       $           -
700-1006-00         $850.00   3
                                                                                                          3       $     2,550.00
700-1007-00         $730.00
                                                                                                          -       $           -
700-1008-00         $720.00
                                                                                                          -       $           -
700-1009-00         $4,014.00
                                                                                                          -       $           -
700-1010-00         $925.00
                                                                                                          -       $           -
700-1011-00         $900.00
                                                          -                                               -       $           -
700-1012-00         $800.00   4
                                                                                                          4       $     3,200.00
700-1013-00         $810.00   4
                                                                                                          4       $     3,240.00
700-1014-00         $875.00
                                                                                                          -       $           -
700-1015-00         $900.00
                                                                                                          -       $           -
700-1016-00         $900.00
                                                                                                          -       $           -
700-1017-00         $850.00
                                                                                                          -       $           -
700-1018-00         $800.00
                                                                                                          -       $           -
700-1019-00         $720.00   2
                                                                                                          2       $     1,440.00
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
700-1020-00     SBC            SBC P586/233 PCI IDE       HM Systems          H10M233-2FE                           $1,075.00
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ ENET DB
700-1021-00     SBC            SBC P586/233 PCI IDE       HM Systems          H10M233-2F
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm LP
700-1022-00     SBC            SBC AMD K6-200 PCI         HM Systems          H10K200-2FE
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ ENET DB
700-1023-00     SBC            SBC AMD K6-200 PCI         HM Systems          H10K200-2F
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm LP
700-1024-00     SBC            SBC AMD K6-233 PCI         HM Systems          H10K233-2FE
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ ENET DB
700-1025-00     SBC            SBC AMD K6-233 PCI         HM Systems          H10K233-2F
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm LP
700-1026-00     SBC            SBC P586/133               HM SYSTEMS
                               MUSTANG
700-1027-00     SBC            SBC P586/166               HM SYSTEMS
                               MUSTANG
700-1028-00     SBC            SBC P586/166 PCI IDE       HM SYSTEMS          H10M166-2FE2                          $970.00
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ Dual ENET DB
700-1029-00     SBC            SBC P586/200 PCI IDE       HM SYSTEMS          H10M200-2FE2                          $1,045.00
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ Dual ENET DB
700-1030-00     SBC            SBC P586/233 PCI IDE       HM SYSTEMS          H10M233-2FE2
                               SVGA w/1MB 512k
                               cache. 0MB 2 simm
                               LP, w/ Dual ENET DB
700-1031-00     SBC            SBC AMD K6-200 PCI         HM SYSTEMS          H10K200-2FE2
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ Dual ENET DB
700-1032-00     SBC            SBC AMD K6-233 PCI         HM SYSTEMS          H10K233-2FE2
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ Dual ENET DB
700-1033-00     SBC            SBC P586/166 PCI IDE       HM SYSTEMS          H10M166-4E2                           $970.00
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               Dual ENET DB
700-1034-00     SBC            SBC P586/200 PCI IDE       HM SYSTEMS          H10M200-4E2
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               Dual ENET DB
700-1035-00     SBC            SBC P586/233 PCI IDE       HM SYSTEMS          H10M233-4E2
                               SVGA w/1MB 512k
                               cache. 0MB (32 bit
                               EDO, n x 32), w/
                               Dual ENET DB
700-1036-00     SBC            SBC AMD K6-200 PCI         HM SYSTEMS          H10K200-4E2
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ Dual
                               ENET DB
700-1037-00     SBC            SBC AMD K6-233 PCI         HM SYSTEMS          H10K233-4E2
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ Dual
                               ENET DB
700-1038-00     SBC            SBC AMD K6-266 PCI         HM Systems          H10K266-2FE
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ ENET DB
700-1039-00     SBC            SBC AMD K6-300 PCI         HM Systems          H10K300-2FE
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ ENET DB
700-1040-00     SBC            SBC AMD K6-266 PCI         HM SYSTEMS          H10K266-2FE2
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ Dual ENET DB

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>       <C>     <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
700-1020-00        $810.00
                                                                                                         -       $           -
700-1021-00        $1,025.00
                                                                                                         -       $           -
700-1022-00        $875.00
                                                                                                         -       $           -
700-1023-00        $825.00
                                                                                                         -       $           -
700-1024-00        $900.00
                                                                                                         -       $           -
700-1025-00        $850.00
                                                                                                         -       $           -
700-1026-00        $930.00   3
                                                                                                         3       $     2,790.00
700-1027-00        $880.00   4
                                                                                                         4       $     3,520.00
700-1028-00        $870.00
                                                                                                         -       $           -
700-1029-00        $870.00
                                                                                                         -       $           -
700-1030-00        $1,145.00
                                                                                                         -       $           -
700-1031-00        $945.00
                                                                                                         -       $           -
700-1032-00        $970.00
                                                                                                         -       $           -
700-1033-00        $870.00
                                                                                                         -       $           -
700-1034-00        $1,045.00
                                                         1                                               1       $     1,045.00
700-1035-00        $880.00
                                                                                                         -       $           -
700-1036-00        $945.00
                                                                                                         -       $           -
700-1037-00        $970.00
                                                                                                         -       $           -
700-1038-00        $1,005.00
                                                                                                         -       $           -
700-1039-00        $1,150.00
                                                                                                         -       $           -
700-1040-00        $1,075.00
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
700-1041-00     SBC            SBC AMD K6-300 PCI         HM SYSTEMS          H10K300-2FE2
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm
                               LP, w/ Dual ENET DB
700-1042-00     SBC            SBC AMD K6-266 PCI         HM Systems          H10K266-4E
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ ENET
                               DB
700-1043-00     SBC            SBC AMD K6-300 PCI         HM Systems          H10K300-4E
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ ENET
                               DB
700-1044-00     SBC            SBC AMD K6-266 PCI         HM SYSTEMS          H10K266-4E2
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ Dual
                               ENET DB
700-1045-00     SBC            SBC AMD K6-300 PCI         HM SYSTEMS          H10K300-4E2
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32), w/ Dual
                               ENET DB
700-1046-00     SBC            SBC AMD K6-266 PCI         HM Systems          H10K266-2F
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm LP
700-1047-00     SBC            SBC AMD K6-300 PCI         HM Systems          H10K300-2F
                               IDE SVGA w/1MB 512k
                               cache 0MB, 2 simm LP
700-1048-00     SBC            SBC AMD K6-266 PCI         HM Systems          H10K266-4
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32)
700-1049-00     SBC            SBC AMD K6-300 PCI         HM Systems          H10K300-4
                               IDE SVGA w/1MB 512k
                               cache 0MB (32 bit
                               EDO n x32)
700-1050-00     SBC            SBC, Pentium II            Trenton
                               233MHZ
700-1051-00     SBC            SBC Dual PII 400MHZ,       Diversified         LBC8523
                               PC100 Compatible
                SBC            SBC Dual PII 450MHZ,       Diversified         LBC8525
                               PC100 Compatible
700-1052-00     SBC            SBC Dual PII 300MHZ,       Texas Micro
                               PC100 Compatible
700-1053-00     SBC            SBC HH1 Rev C to           HM Systems          HH1REVUPG
                               Rev E Upgrade
700-1054-00     SBC            SBC Dual PII 400MHZ,       Diversified         LBC8524
                               GX, PC100 Compatible
700-1055-00     SBC            SBC Single                 Diversified         LBC8516
                               Pentium II,
                               400MHZ
700-1056-00     SBC            SBC2300ST, SINGLE
                               PENTIUM II, 300MHZ
700-1057-00     SBC            SBC2400ST, SINGLE
                               PENTIUM II, BX,
                               400MHZ
700-1080-00     SBC            HH1 AMD 400Mhz SBC                                                  sbc              HHI AMP 400
                               Dual Ethernet                                                                        MHZ SBC
700-1058-00     SBC            SBC2450DD, Dual
                               Pentium ii 450mhz,
                               GX, scsi, dual enet
701-1001-00     BPL Untested   BPL Backplane,             NEI                 BP4
                               PCI/ISA, 17 slots, 4
                               fixed segments
701-1002-00     BPL Untested   BPL Backplane, ISA,        NEI                 BP10
                               20 slots,
                               segmentable in
                               groups of 2
701-1003-00     BPL Untested   BPL Segment                NEI                 6000SB
                               bridge for BP10
701-1004-00     BPL Untested   BPL Backplane 14           NEI                                      TriMap           BP14-10/4
                               slots  10 ISA and 4
                               PCI
701-1005-00     BPL Untested   BPL Backplane 14           NEI                                      TriMap           BP14
                               slot ISA Board non
                               segmented
701-1006-00     BPL Untested   BPL Backplane 20           NEI                 ISA20
                               slot ISA,
                               segmentable in
                               groups of 2 slots
701-1007-00     BPL Untested   BPL Segment                NEI
                               bridge for ISA20
701-1008-00     BPL Untested   BPL Backplane              NEI                 BP5-2
                               BP5HC
701-1009-00     BPL Untested   BPL Backplane              NEI                 BP4HC
                               BP4HC

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>        <C>    <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
700-1041-00        $1,220.00
                                                                                                         -       $           -
700-1042-00        $1,005.00
                                                                                                         -       $           -
700-1043-00        $1,150.00
                                                                                                         -       $           -
700-1044-00        $1,075.00
                                                                                                         -       $           -
700-1045-00        $1,220.00
                                                                                                         -       $           -
700-1046-00        $955.00
                                                                                                         -       $           -
700-1047-00        $1,100.00
                                                                                                         -       $           -
700-1048-00        $955.00
                                                                                                         -       $           -
700-1049-00        $1,100.00
                                                                                                         -       $           -
700-1050-00        $1,451.001
                                                                                                         1       $     1,451.00
700-1051-00        $3,602.003
                                                                         3                               6       $    21,612.00
                   $3,108.00
                                                         3                                               3       $     9,324.00
700-1052-00        $3,845.00
                                                                                                         -       $           -
700-1053-00        $25.00
                                                                                                         -       $           -
700-1054-00        $3,547.00
                                                                                                         -       $           -
700-1055-00        $2,500.001
                                                                                                         1       $     2,500.00
700-1056-00        $1,500.00
                                                                                                         -       $           -
700-1057-00        $1,673.00
                                                                                                         -       $           -
700-1080-00        $990.00    2
                                                                                                         2       $     1,980.00
700-1058-00        $3,262.00
                                                                                                         -       $           -
701-1001-00        $307.84
                                                         11              2               22             35       $    10,774.40
701-1002-00        $426.32
                                                         9               2               20             31       $    13,215.92
701-1003-00        $5.00      85
                                                                                                        85       $       425.00
701-1004-00        $193.00
                                                                                                         -       $           -
701-1005-00        $94.00
                                                                                                         -       $           -
701-1006-00        $695.00
                                                                                                         -       $           -
701-1007-00        $3.25      17
                                                                                                        17       $        55.25
701-1008-00        $492.42
                                                         7        1                                      8       $     3,939.36
701-1009-00        $392.42
                                                         19       8                                     27       $    10,595.34
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
702-1001-00     MBD Untested   MBD Mother Board ATX       Micronics           M7S-HI006
                               for use in P1000
702-1002-00     MBD Untested   MBD 7000-MMB               Sanmina
                               motherboard
703-1001-00     PCA Untested   PCA FLOPPY DRIVE           NEI                                      SANMINA
                               CARRIER
703-1002-00     PCA Untested   PCA SCSI DRIVE             NEI                                      SANMINA
                               CARRIER
703-1003-00     PCA Untested   PCA IDE DRIVE              NEI                                      SANMINA
                               CARRIER
703-1004-00     PCA Untested   PCA MANIFOLD               NEI                                      SANMINA
703-1005-00     PCA Untested   PCA FRONT PANEL            NEI                                      SANMINA
703-1006-00     PCA Untested   PCA FRONT PANEL            NEI                                      CUSTOM
                               CONTROL                                                             COMPUTER
703-1007-00     PCA Untested   PCA BP10                   NEI                                      SANMINA
703-1008-00     PCA Untested   PCA BP4                    NEI                                      SANMINA
703-1009-00     PCA Untested   PCA DISK DRIVE             NEI                                      SANMINA
                               POWER
703-1010-00     PCA Untested   PCA MPC6000                NEI                                      SANMINA
703-1011-00     PCA Untested   PCA ORING                  NEI
703-1012-00     PCA Untested   PCA DISK CARRIER           NEI
                               2.5"
703-1013-00     PCA Untested   PCA P6000 POWER            NEI
                               SUPPLY
703-1014-00     PCA Untested   PCA BUS JUMPER             NEI
                               EVERGREEN
703-1015-00     PCA Untested   PCA CDRom                  NEI
                               Adapter
703-1016-00     PCA Untested   PCA Peripheral             NEI
                               Switch Board
703-1017-00     PCA Untested   PCA SCSI                   NEI
                               Backplane 4 slot
703-1018-00     PCA Untested   PCA SCSI                   NEI
                               Backplane 2 slot
703-1019-00     PCA Untested   PCA Wide SCSI              NEI
                               Drive Carrier SMT
703-1020-00     PCA Untested   PCA Peripheral             NEI
                               Sharing Switch
                               Control Board
703-1021-00     PCA Untested   PCA 7000-1                 Sanmina
703-1022-00     PCA Untested   PCA 7000-2                 Sanmina
703-1023-00     PCA Untested   PCA 7000-3                 Sanmina
703-1024-00     PCA Untested   PCA IDE drive              Sanmina
                               carrier SMT
703-1025-00     PCA Untested   PCA Floppy                 Sanmina
                               carrier SMT
703-1026-00     PCA Untested   PCANarrow SCSI             Sanmina
                               Drive carrier SMT
703-1027-00
703-1028-00
703-1029-00
703-1030-00     PCA Untested   P7000 CDROM
                               ADAPTER BOARD
711-1001-00     Programmed     PROGRAMMED Serial                                                                    XC1765-PD8C
                Part           EPROM dip 8
711-1002-00     Programmed     PROGRAMMED FPGA            Xilinx                                                    XC3064-160-PQFP
                Part
730-1001-00     CARRIER Sub    Carrier, hot               NEI                 carrier/s
                assembly       swappable, SCSI hard
                               drive
730-1002-00     CARRIER Sub    Carrier, P6000             NEI                 Carrier/B
                assembly       blanking
730-1003-00     CARRIER Sub    Carrier, hot               NEI                 Carrier/F
                assembly       swappable,
                               floppy drive
730-1004-00     CARRIER Sub    Carrier, hot               NEI                 Carrier/I
                assembly       swappable, IDE
                               hard drive
730-1005-00     CARRIER Sub    Carrier hot                Sanmina             Carrier/Wide
                assembly       swappable for Wide                             SCSI
                               SCSI drive
730-1006-00     CARRIER Sub    CARRIER HOT                KINGSTON            DE-100I-A/B
                assembly       SWAPPABLE IDE
                               REMOVEABLE
730-1007-00     CARRIER Sub    Carrier, hot               Sanmina
                assembly       swappable, floppy
                               drive SMT
730-1008-00     CARRIER Sub    Carrier, hot               Sanmina
                assembly       swappable, IDE hard
                               drive SMT
703-109-01/01   CARRIER Sub    Carrier, hot               Sanmina
                assembly       swappable, NSCSI
                               drive SMT

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY        Extended Cost
Number              Cost                                            Room                       on Hand          @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>             <C>       <C>
702-1001-00         $161.00
                                                                                                       -        $           -
702-1002-00         $624.56
                                                                                                       -        $           -
703-1001-00         $49.38
                                                                                 60                   60        $     2,962.80
703-1002-00         $52.47
                                                                                                       -        $           -
703-1003-00         $52.47
                                                                                 19                   19        $       996.93
703-1004-00         $126.17
                                                                                 24                   24        $     3,028.08
703-1005-00         $49.72
                                                                          4      13                   17        $       845.24
703-1006-00         $115.47
                                                                                 11                   11        $     1,270.17
703-1007-00         $425.48  3
                                                                                                       3        $     1,276.44
703-1008-00         $307.84
                                                                                                       -        $           -
703-1009-00         $25.09
                                                72                       12                           84        $     2,107.56
703-1010-00         $76.62   8
                                                                                                       8        $       612.96
703-1011-00         $73.84   4
                                                                                          23          27        $     1,993.68
703-1012-00
                                                                                                       -        $           -
703-1013-00                  8
                                                                                                       8        $           -
703-1014-00
                                                                                                       -        $           -
703-1015-00
                                                                                 29                   29        $           -
703-1016-00         $167.47
                                                                          1      39                   40        $     6,698.80
703-1017-00         $39.10
                                                                                                       -        $           -
703-1018-00         $44.40
                                                          59                                          59        $     2,619.60
703-1019-00
                                                          56                                          56        $           -
703-1020-00         $26.30   18
                                                          49                                          67        $     1,762.10
703-1021-00         $9.95
                                                                                                       -        $           -
703-1022-00         $8.85
                                                                                                       -        $           -
703-1023-00
                                                                                                       -        $           -
703-1024-00
                                                                                 11                   11        $           -
703-1025-00         $39.10
                                                                                                       -        $           -
703-1026-00
                                                                                                       -        $           -
703-1027-00         $29.75
                                                                                                       -        $           -
703-1028-00         $8.67
                                                                                                       -        $           -
703-1029-00         $11.40
                                                                                                       -        $           -
703-1030-00
                                                                                                       -        $           -
711-1001-00         $3.71
                                                                                                       -        $           -
711-1002-00         $37.30
                                                                                                       -        $           -
730-1001-00         $60.90
                                                                                                       -        $           -
730-1002-00         $19.00
                                                                                                       -        $           -
730-1003-00         $58.81
                                                                                                       -        $           -
730-1004-00         $60.90
                                                                                                       -        $           -
730-1005-00         $81.91
                                                                                  4                    4        $       327.64
730-1006-00
                                                                                                       -        $           -
730-1007-00         $69.26
                                                                                                       -        $           -
730-1008-00         $60.90
                                                                                                       -        $           -
703-109-01/01       $75.39
                                                                                 110                  110       $     8,292.90
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
730-1010-00     CARRIER Sub    Carrier, hot               Sanmina
                assembly       swappable, Dual
                               Floppy drive SMT
735-1001-00     CHASSIS Sub    Chassis assembly
                assembly       P6000
735-1002-00     CHASSIS Sub    Chassis assembly           Sweeney Metal
                assembly       P6000EXP
735-1003-00     CHASSIS Sub    Chassis Assambly                                                    TriMap           RM4U17-14
                assembly       P2000  19 x 7 x 17 (                                                                 (RM062)
                               14 slot backplane
                               not included)
735-1004-00     CHASSIS Sub    Chassis Assembly                                                    TriMap           RM 4U24-14
                assembly       P2000  19 x 7 x 24                                                                   (RM071)
                               (14  slot backplane
                               not included)
735-1005-00     CHASSIS Sub    Chassis Assembly                                                    Tri-Map          RM4U17-ATX
                assembly       P1000 19 x 7 x 17,
                               motherboard not
                               included
735-1006-00     CHASSIS Sub    CHASSIS Fan                PTI                 FAN-CAGE
                assembly       Assembly; 4
                               replacement fans
                               mounted on bracket
                               for card cage in
                               P6000
740-1001-00     Cable assembly Cable 15',  COAX,          Cybex               CUFC-15
                               VGA, PS/2/AT
                               Keyboard, PS/2
                               /SERIAL Mouse
740-1002-00     Cable assembly Cable, 30', COAX,          Cybex               CUFC-30
                               VGA, PS/2/AT
                               Keyboard, PS/2
                               /SERIAL Mouse
740-1003-00     Cable assembly Cable, 6', COAX,           Cybex               CUFC-6
                               VGA, PS/2/AT
                               Keyboard, PS/2
                               /SERIAL Mouse
740-1004-00     Cable assembly Cable, 8',  COAX,          Cybex               CUFC-8
                               VGA, PS/2/AT
                               Keyboard, PS/2
                               /SERIAL Mouse
740-1005-00     Cable assembly Cable, MPC6000
                               Backplane Control 24"
740-1006-00     Cable assembly Cable Front Panel
                               Controller Data
                               Cable / MP700 Data
740-1007-00     Cable assembly Cable Front Panel
                               Controller Power
                               Cable 5.5"
740-1008-00     Cable assembly Cable, MP700
                               Power  5"
740-1009-00     Cable assembly Cable, Floppy Drive
                               Data 34 conductor,
                               24.5"
740-1010-00     Cable assembly Cable, IDE Single
                               Drive Data 40
                               Conductor, 20"
740-1011-00     Cable assembly Cable, IDE Double
                               Drive Data 40
                               Conductor, 20"
740-1012-00     Cable assembly Cable, CD Rom Drive
                               Data 44 Conductor,
                               24"
740-1013-00     Cable assembly Cable Balance
                               Power Monitor
740-1014-00     Cable assembly Cable, MP700 DIO
                               35"
740-1015-00     Cable assembly Cable, MP700 AUI
                               35"
740-1016-00     Cable assembly Cable, MP700 S1
                               43.5"
740-1017-00     Cable assembly Cable, MP700 S2
                               43.5"
740-1018-00     Cable assembly Cable, Oring to
                               BP Power Harness
740-1019-00     Cable assembly Cable, Backplane
                               Fan Assembly
740-1020-00     Cable assembly Cable, Drive Bay
                               Transition Data
740-1021-00     Cable assembly Cable, MPC6000
                               Power
740-1022-00     Cable assembly Cable, Front
                               Panel Transition
740-1023-00     Cable assembly Cable, Drive
                               Power
740-1024-00     Cable assembly Cable, Floppy Drive
                               Carrier Transition
740-1025-00     Cable assembly Cable, IDE Drive
                               Carrier
                               Transition
740-1026-00     Cable assembly Cable, Narrow SCSi
                               Drive Carrier
                               Transition
740-1027-00     Cable assembly CABLE SERIAL PORT          PI MFG              000-F903
                               WITH BRACKET
740-1028-00     Cable assembly CABLE PARALLEL PORT        PI MFG              000-23201
                               WITH BRACKET
740-1029-00     Cable assembly CABLE EXTERNAL
                               SCSI
740-1030-00     Cable assembly CABLE 2 POSITION           PI MFG              ID-22
                               MODU CONNECTOR RESET

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>        <C>      <C>   <C>                 <C>      <C>
730-1010-00         $67.84
                                                                       1       1                          2       $       135.68
735-1001-00         $549.97
                                                                                                          -       $           -
735-1002-00         $527.47
                                                                      35                                 35       $    18,461.45
735-1003-00         $242.00
                                                                                                          -       $           -
735-1004-00         $290.00
                                                                                                          -       $           -
735-1005-00         $242.00
                                                                                                          -       $           -
735-1006-00
                                                                                                          -       $           -

740-1001-00         $59.50
                                                                                                          -       $           -
740-1002-00         $91.00
                                                                                                          -       $           -
740-1003-00         $28.00
                                                                                                          -       $           -
740-1004-00         $38.50
                                                                                                          -       $           -
740-1005-00         $4.57    12
                                                                                                         12       $        54.84
740-1006-00         $3.04    19
                                                                                                         19       $        57.76
740-1007-00         $1.80    12
                                                                                                         12       $        21.60
740-1008-00         $2.40    23
                                                                                                         23       $        55.20
740-1009-00         $10.35
                                                                                                          -       $           -
740-1010-00         $10.38
                                                                                                          -       $           -
740-1011-00         $12.99
                                                                                                          -       $           -
740-1012-00         $6.67    1
                                                                                                          1       $         6.67
740-1013-00         $9.09    5
                                                                                                          5       $        45.45
740-1014-00         $3.78    3
                                                                                                          3       $        11.34
740-1015-00         $3.78    2
                                                                                                          2       $         7.56
740-1016-00         $5.08    3
                                                                                                          3       $        15.24
740-1017-00         $5.08    3
                                                                                                          3       $        15.24
740-1018-00         $9.60    9
                                                                                                          9       $        86.40
740-1019-00         $40.22
                                                                                                          -       $           -
740-1020-00         $5.26    6
                                                                                                          6       $        31.56
740-1021-00         $3.44
                                                                                                          -       $           -
740-1022-00         $3.26
                                                                                                          -       $           -
740-1023-00         $3.08
                                                                                                          -       $           -
740-1024-00         $4.04    9
                                                                                                          9       $        36.36
740-1025-00         $3.20
                                                                                                          -       $           -
740-1026-00         $3.87    15
                                                                                                         15       $        58.05
740-1027-00         $0.46    2
                                                                                                          2       $         0.92
740-1028-00         $0.90    125
                                                                                                         125      $       112.50
740-1029-00
                                                                                                          -       $           -
740-1030-00         $0.70    140
                                                                                                         140      $        98.00
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
740-1031-00     Cable assembly CABLE INTERNAL IDE         PI MFG              940-329              123
                               CONTROL 20"
740-1032-00     Cable assembly CABLE INTERNAL
                               FLOPPY DISK
740-1033-00     Cable assembly CABLE INTERNAL
                               SCSI DISK
740-1034-00     Cable assembly CABLE  INTERNAL
                               PARALLEL PORT
740-1035-00     Cable assembly CABLE FLOPPY ADAPTER
                               POWER
740-1036-00     Cable assembly CABLE PS2 MALE             PI MFG              000-PS-KOI           KRISTA           23642
                               ADAPTER
740-1037-00     Cable assembly CABEL PS2 FEMALE
                               ADAPTER
740-1038-00     Cable assembly CAB;E 44 POSITION          PI MFG              250-CONVERT-IDE
                               IDE CONVERTER
740-1039-00     Cable assembly CABLE 44 POSITION          PI MFG              1200-250
                               2.5" DRIVE DABLE
740-1040-00     Cable assembly CABLE PEB / AEB
740-1041-00     Cable assembly CABLE 16 POSITION
                               MPC6000 TRANSITION
740-1042-00     Cable assembly CABLE MOTHERBOARD          PI MFG              PK-P8P9-EXT
                               POWER EXTENSION
740-1043-00     Cable assembly CABLE EXTERNAL
                               PARALLEL PORT
740-1044-00     Cable assembly CABLE SCSI DRIVE           PI MFG              ID-32
                               LED
740-1045-00     Cable assembly CABLE SVGE                 STARTECK            MXT101
                               EXTENSION 6'
740-1046-00     Cable assembly CABLE 9 POSITION M/F       STARTECK            MXT100
                               EXTENSION 6'
740-1047-00     Cable assembly CABLE SCSI 2 M/M           MICRO ELECRONICS    M03-1196
                               EXTENSION                  INC
740-1048-00     Cable assembly CABLE SCSI 3 .50 M/M
                               EXTENSION
740-1049-00     Cable assembly CABLE SCSI 2 .50 M/M
                               EXTENSION
740-1050-00     Cable assembly CABLE ETHERNET AUI
                               EXTERNAL
740-1051-00     Cable assembly CABLE P6000EX                                                       KRISTA           23513S
                               LINE CARD
740-1052-00     Cable assembly CABEL CAT 5
                               ETHERNET 8'
740-1053-00     Cable assembly CABLE LINE CORD
                               EUROPE
740-1054-00     Cable assembly CABLE MP700 RJ45
                               40"
740-1055-00     Cable assembly CABLE CD ROM
                               DRIVE POWER
740-1056-00     Cable assembly CABLE SCSI II
                               .050 FLAT RIBBON
740-1057-00     Cable assembly CABLE Serial /
                               Parallel Port with
                               Bracket
740-1058-00     Cable assembly CABLE 40 pin IDE for
                               CD Rom drive 24"
740-1059-00     Cable assembly Cable SCSI
                               single drive data
740-1060-00     Cable assembly Cable SCSI two
                               drive data
740-1061-00     Cable assembly Cable SCSI three
                               drive data
740-1062-00     Cable assembly Cable SCSI four
                               drive data
740-1063-00     Cable assembly Cable, Null Modem          PI MFG              833-0706-551
740-1064-00     Cable assembly Cable, Wide SCSI
                               carrier
                               transition
740-1065-00     Cable assembly Cable, IDE CDROM
                               40/40 14"
740-1066-00     Cable assembly Cable, IDE CDROM
                               40/40 18"
740-1066-00     Cable assembly IDE CD ROM 19",
                               SBC2000 TO PSH
740-1067-00     Cable assembly Cable, Floppy
                               Drive Data 34
                               pos 22"
740-1068-00     Cable assembly Cable, Floppy
                               Drive Data 50
                               pos 8"
740-1069-00     Cable assembly Cable, SCSI 68
                               pos 24"
740-1070-00     Cable assembly Cable, PSH
                               control 9"
740-1071-00     Cable assembly Cable, NSCSI
                               Data 50 pos 24"
740-1072-00     Cable assembly Cable, Floppy
                               Data, 34 pos, 13"
740-1073-00     Cable assembly Cable, IDE CD
                               Rom 40/40, 12"
740-1074-00     Cable assembly Cable, HDD Power
740-1075-00     Cable assembly Cable, Floppy
                               Power
740-1076-00     Cable assembly Cable Cluster
                               Stream, 50
                               position
740-1077-00     Cable assembly Cable, 26 pin, Kbd,
                               Mouse, VGA Com
740-1080-00     Cable assembly P7000 FRONT PANEL
740-1081-00     Cable assembly P7000 INTERNAL
                               POWER

<CAPTION>
NEI Part           Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number             Cost                                            Room                       on Hand            @ 9/30/99
<S>                <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
740-1031-00        $0.58
                                                                                                         -       $           -
740-1032-00
                                                                                                         -       $           -
740-1033-00
                                                                                                         -       $           -
740-1034-00        $0.86
                                                                                                         -       $           -
740-1035-00                 5
                                                                                                         5       $           -
740-1036-00        $1.00
                                                                                                         -       $           -
740-1037-00        $0.66
                                                                                                         -       $           -
740-1038-00        $6.50
                                                                                                         -       $           -
740-1039-00        $2.75
                                                                                                         -       $           -
740-1040-00
                                                                                                         -       $           -
740-1041-00
                                                                                                         -       $           -
740-1042-00        $1.22
                                                                                                         -       $           -
740-1043-00
                                                                                                         -       $           -
740-1044-00        $0.75    41
                                                                                                        41       $        30.75
740-1045-00                 7
                                                                                                         7       $           -
740-1046-00
                                                                                                         -       $           -
740-1047-00
                                                                                                         -       $           -
740-1048-00
                                                                                                         -       $           -
740-1049-00
                                                                                                         -       $           -
740-1050-00
                                                                                                         -       $           -
740-1051-00        $0.83
                                                                                                         -       $           -
740-1052-00
                                                                                                         -       $           -
740-1053-00
                                                                                                         -       $           -
740-1054-00
                                                                                                         -       $           -
740-1055-00
                                                                                                         -       $           -
740-1056-00
                                                                                                         -       $           -
740-1057-00        $1.00
                                                                                                         -       $           -
740-1058-00        $9.13
                                                                                                         -       $           -
740-1059-00                 13
                                                                                                        13       $           -
740-1060-00        $16.50
                                                                                                         -       $           -
740-1061-00
                                                                                                         -       $           -
740-1062-00                 2
                                                                                                         2       $           -
740-1063-00        $1.98
                                                         22                                             22       $        43.56
740-1064-00        $10.00   190
                                                                                                        190      $     1,900.00
740-1065-00        $6.76    6
                                                                                                         6       $        40.56
740-1066-00        $6.76
                                                                                                         -       $           -
740-1066-00        $6.76    70
                                                                                                        70       $       473.20
740-1067-00        $7.48    62
                                                                                                        62       $       463.76
740-1068-00        $6.51    22
                                                                                                        22       $       143.22
740-1069-00
                                                                                                         -       $           -
740-1070-00        $3.66    5
                                                                                                         5       $        18.30
740-1071-00        $16.00   70
                                                                                                        70       $     1,120.00
740-1072-00        $6.50
                                                                                                         -       $           -
740-1073-00        $7.24
                                                                                                         -       $           -
740-1074-00
                                                                                                         -       $           -
740-1075-00
                                                                                                         -       $           -
740-1076-00        $17.78
                                                                                                         -       $           -
740-1077-00        $14.69
                                                                                                         -       $           -
740-1080-00        $2.60
                                                                                                         -       $           -
740-1081-00        $5.98
                                                                                                         -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
740-1082-00     Cable assembly P7000 DUAL WSCSI
740-1083-00     Cable assembly P7000 DUAL IDE
740-1084-00     Cable assembly P7000 CD ROM
740-1085-00     Cable assembly P7000 DISK DRIVE
                               POWER
740-1086-00     Cable assembly SERIAL PORT IDC                                                                      VOLEX
                               PIN TO PIN
740-1087-00                    BULKLEAD CABLE
                               ULTRAII WIDE SCSI
780-1001-00     SYSTEM         SYSTEM ENCLOSURE                                                    Tri-Map
                ENCLOSURE      P2000/PCI/24"
                Assembly
780-1002-00     SYSTEM         SYSTEM ENCLOSURE                                                    Tri-Map
                ENCLOSURE      P1000/ATX/17'
                Assembly
780-1003-00     SYSTEM         SYSTEM ENCLOSURE           NEI
                ENCLOSURE      P6000EXP
                Assembly
780-1004-00     SYSTEM         SYSTEM ENCLOSURE                                                    Tri-Map
                ENCLOSURE      P2000/ISA/24"
                Assembly
780-1005-00     SYSTEM         SYSTEM ENCLOSURE           NEI                                                       $1,754.99
                ENCLOSURE      P6000
                Assembly
780-1006-00     SYSTEM         SYSTEM ENCLOSURE                                                    Tri-Map
                ENCLOSURE      P2000/ISA/17"
                Assembly
780-1007-00     SYSTEM         SYSTEM ENCLOSURE 22u       NETSHELETR          NS-22U               Tech Data        83247
                ENCLOSURE      EQUIPMENT RACK             APC Rack            AR1100 22U
                Assembly
780-1008-00     SYSTEM         SYSTEM ENCLOSURE 42u       NETSHELETR          NS-42U               Tech Data        83380
                ENCLOSURE      EQUIPMENT RACK             APC Rack            AR1000 42U
                Assembly
780-1009-00                    System Enclosure
                               P7000
790-1001-00     POWER SUPPLY   Power Supply 350           NEI                 350WATT
                Assembly       watt for P6000
790-1002-00     POWER SUPPLY   Power Supply 400                                                    TriMap           PS400-80
                Assembly       Watt for P2000
790-1003-00     POWER SUPPLY   Power Supply 300                                                    TriMap           PS300-80
                Assembly       Watt for P1000, ATX
790-1004-00     POWER SUPPLY   Power Supply                                   400WATT
                Assembly       400W for P6000EXP
790-1005-00     POWER SUPPLY   150 WATT FOR                                                        Foresight        US155-301
                Assembly       P7000                                                               Elect
805-1001-00     Software 3rd   SOFTWARE WindowsNT         Microsoft           236-00001
                party          Workstation 4.0 OEM
805-1002-00     Software 3rd   SOFTWARE WindowsNt         Microsoft           NTServer 4.0
                party          Server version 4.0,                            OEM
                               OEM
805-1003-00     Software 3rd   SOFTWARE WindowsNt         Microsoft           Ntworkstation
                party          Workstation version
                               4.0, stand alone
805-1004-00     Software 3rd   SOFTWARE Window NT         Microsoft           NT 4.0 Server
                party          Server, version 4.0,                           Add on
                               per user add-on over
                               10 user
805-1005-00     Software 3rd   SOFTWARE WindowsNT         Microsoft           NTserver 50
                party          Server, 50 user                                User
                               licsense pack
805-1006-00     Software 3rd   SOFTWARE WindowsNT         Microsoft           NT Client
                party          Client version                                 3.5.1 Single
                               3.5.1, single user                             User
                               licsense
805-1007-00     Software 3rd   SOFTWARE WindowsNT         Microsoft           NT Client 4.0
                party          Client version 4.0,                            20 User
                               20 user licsense
805-1008-00     Software 3rd   SOFTWARE MS-DOS            Microsoft           147095V622
                party          version 6.22 upgrade

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>        <C>    <C>        <C>      <C>        <C>     <C>          <C>            <C>      <C>
740-1082-00         $8.76
                                                                                                          -       $           -
740-1083-00         $5.15
                                                                                                          -       $           -
740-1084-00         $7.10
                                                                                                          -       $           -
740-1085-00         $2.45
                                                                                                          -       $           -
740-1086-00         $0.46
                                                                                                          -       $           -
740-1087-00
                                                                     13                                  13       $           -
780-1001-00         $663.00
                                                                                                          -       $           -
780-1002-00         $557.00
                                                                                                          -       $           -
780-1003-00         $3,029.30
                                                                                                          -       $           -
780-1004-00         $564.00
                                                                                                          -       $           -
780-1005-00         $2,472.48
                                                                                                          -       $           -
780-1006-00         $486.00
                                                                                                          -       $           -
780-1007-00         $1,280.00
                                                                                                          -       $           -
780-1008-00         $1,466.81
                                                                                                          -       $           -
780-1009-00         $267.23
                                                                                                          -       $           -
790-1001-00         $352.00
                                                                                          23             23       $     8,096.00
790-1002-00         $180.00
                                                                                                          -       $           -
790-1003-00         $98.00
                                                                                                          -       $           -
790-1004-00         $567.36
                                                          58                                             58       $    32,906.88
790-1005-00         $106.00
                                                                                                          -       $           -
805-1001-00         $275.23
                                                                                                          -       $           -
805-1002-00         $701.00
                                                                                                          -       $           -
805-1003-00         $275.00
                                                                                                          -       $           -
805-1004-00
                                                                                                          -       $           -
805-1005-00         $1,841.00
                                                                                                          -       $           -
805-1006-00
                                                                                                          -       $           -
805-1007-00
                                                                                                          -       $           -
805-1008-00         $33.00
                                                                                                          -       $           -
</TABLE>
<PAGE>

NETWORK ENGINES                  P6000 INVENTORY                         9/30/99

<TABLE>
<CAPTION>
NEI Part        Generic Part   Description                Manufacturer        Manufacturer         Distributor      Dist. Part
Number          Type                                                          Part Number                           Number
<S>             <C>            <C>                        <C>                 <C>                  <C>              <C>
805-1009-00     Software 3rd   SOFTWARE WindowsNT         Microsoft           227-00367
                party          server 4.0  -  10
                               user
805-1010-00     Software 3rd   SOFTWARE Web load          F5                  Web Balance
                party          balancing software
805-1012-00     Software       SOFTWARE P7000
                               CLUSTERDIRECTOR
805-1013-001
805-1014-00     Software       p7000 cluster
                               control
880-1001-00     Software TLA   SOFTWARE MP 150            PTI                 MP150 Software
                               maintenance system,
                               software only
880-1002-00     Software TLA   SOFTWARE MP150             PTI                 MP150
                               maintenance system,
                               complete package
880-1003-00     Software       SOFTWARE P6000
                               DRIVER LIBRARY

                               Concord Group
                               Exactel/Copernicus

                               Great Plains
                               P6000 and
                               P6000EXP
                               Canton P6000/EXP

                               Total P6000/EXP
                               Inventory

                               West Coast Demo
                               Ciber Network
                               Global Network
                               Intervu
                               Telecommunications
                               Microsoft DC
                               Wells Fargo
                               Intel
                               Learningstation

<CAPTION>
NEI Part            Unit     Rack 1   Rack 2     Rack 3    Table    Back     Cube     Trailer  Total QTY          Extended Cost
Number              Cost                                            Room                       on Hand            @ 9/30/99
<S>                 <C>      <C>      <C>        <C>       <C>      <C>      <C>      <C>                 <C>     <C>
805-1009-00         $948.00
                                                                                                          -       $           -
805-1010-00
                                                                                                          -       $           -
805-1012-00
                                                                                                          -       $           -
805-1013-001
                                                                                                          -       $           -
805-1014-00
                                                                                                          -       $           -
880-1001-00
                                                                                                          -       $           -
880-1002-00
                                                                                                          -       $           -
880-1003-00         $3.00
                                                                                                          -       $           -
                                                                    Concord Group                                 $   276,343.82
                                                                                                                  $    12,763.00
                                                                    Exactel/Copernicus                            $     5,000.00
                                                                                                                  --------------
                                                                    Great Plains                                  $   294,106.82
                                                                    P6000/EXP                                     $    17,579.99
                                                                    Canton P6000/EXP                              $    25,094.27
                                                                                                                  --------------
                                                                    Total P6000/EXP Inventory                     $   336,781.08
                                                                                                                  ==============
                                                                    West Coast Demo                               $     7,395.00
                                                                    Ciber Network
                                                                    Global Network                  8/17/99       $    14,753.00
                                                                    Intervu                                       $    11,832.00
                                                                    Telecommunications              9/23/99       $            -
                                                                    Microsoft DC                                  $    10,354.00
                                                                    Wells Fargo                      7/6/99
                                                                    Intel
                                                                    Learningstation                               $     8,707.00
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   1
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                     <C>                <C>     <C>               <C>         <C>
Ranges:                 From               To:                       From:       To:
      Item Number       First              Last    Commodity Code    First       Last
      Item Description  First              Last
      Item Generic      First              Last
      Bin               First              Last
      Site              P6000              P6000
      Account Number    From:  -  -  -
                        To:    -  -  -
</TABLE>

Sorted By Site By:  Item Number
Include items with zero quantities:  No
     Include Serial/Lot numbers:  Yes

<TABLE>
<CAPTION>
Item Number                Item Description                                          QTY On Hand       QTY Allocated
- -----------------------------------------------------------------------------------------------------------------------
                   QTY Back         QTY On Order           QTY Requisitioned        Current Cost      Inventory Value
                   Ordered
- -----------------------------------------------------------------------------------------------------------------------
<S>                         <C>                      <C>                       <C>           <C>                <C>
130-1031-00                    RES-NET 1K OHM 10PIN 9RES                                        190                  0
                            0                        0                         0             $0.150             $28.50
130-1065-00                    RES, CHIP, OE, O.1W                                            2,901                  0
                            0                        0                         0             $0.004             $11.60
140-1003-00                    DIODE LED BAR GRAPH 10 SEGMENT GREEN                              23                  0
                            0                        0                         0             $1.830             $42.09
140-1006-00                    DIODE LED 3MM PC MNT GREN                                        178                  0
                            0                        0                         0             $0.230             $40.94
140-1007-00                    DIODE LED 3MM PC MNT YEL                                         208                  0
                            0                        0                         0             $0.230             $47.84
140-1008-00                    DIODE LED BICOLOR RED/GRN WHT DIFF T-1                           349                  0
                            0                        0                         0             $0.630            $219.87
140-1009-00                    DIODE LED 1 DIGIT GREEN COMMON CATHODE                            20                  0
                            0                        0                         0             $2.030             $40.60
140-1016-00                    DIODE LED GREEN CLEAR LENS SMD                                 1,335                  0
                            0                        0                         0             $0.210            $320.40
140-1032-00                    DIODE LED GREEN CLEAR LENS SMT                                    40                  0
                            0                        0                         0             $0.210              $9.60
160-1001-00                    FUSE POLYSWITCH RUE SERIES 3.0 AMPS                               30                  0
                            0                        0                         0             $0.990             $29.70
160-1003-00                    FUSE 6.30A FAST ACTING 5 X 20MN                                   93                  0
                            0                        0                         0             $0.250             $23.25
160-1004-00                    FUSE POLYSWITCH RUE SERIES 4.0 AMPS                               27                  0
                            0                        0                         0             $0.830             $22.41
160-1006-00                    FUSE POLY FUSE PTC 1.1A 6VDC RESETTABLE 1812L                     21                  0
                            0                        0                         0             $0.410              $8.61
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   2
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
170-1001-00                    INDUCTOR FILTER LINE IEC                                          10                  0
                            0                        0                         0             $6.970             $69.70
172-1002-00                    SWITCH SPST PC MT MOM SQUARE RED                                   6                  0
                            0                        0                         0             $1.600              $9.60
172-1003-00                    SWITCH PC MT SPST MOM FLT SQ WHT                                   5                  0
                            0                        0                         0             $1.600              $8.00
172-1004-00                    SWITCH SLIDE SPDT RT ANGLE 30V                                   214                  0
                            0                        0                         0             $0.420             $89.88
172-1007-00                    SWITCH P2000/5000                                                 18                  0
                            0                        0                         0             $0.000              $0.00
172-1008-00                    SWITCH 8 POSITION DIP                                            474                  0
                            0                        0                         0             $0.000              $0.00
172-1009-00                    SWITCH PC MOUNT SPST MOM SQ WHT                                   60                  0
                            0                        0                         0             $2.230            $133.80
172-1010-00                    SWITCH 4 POSITION ST DIP TIN, LOW PROFILE                         28                  0
                            0                        0                         0             $0.650             $18.20
180-1003-00                    CONNECTOR HEADER SHROUDED 40 POS STRAIGHT                         35                  0
                            0                        0                         0             $2.200             $77.00
180-1004-00                    CONNECTOR HEADER SHROUDED 50 POS STRAIGHT                         63                  0
                            0                        0                         0             $2.720            $171.36
180-1005-00                    CONNECTOR 40 PIN MALE TRANSITION                                 111                  0
                            0                        0                         0             $1.700            $188.70
180-1007-00                    CONNECTOR HEADER 4-PIN PCB ASSEMBLY TIN                           63                  0
                            0                        0                         0             $0.620             $39.06
180-1010-00                    CONNECTOR 2 CIRCUIT HEADER, .100 RT ANGLE                        164                  0
                            0                        0                         0             $0.130             $21.32
180-1011-00                    CONNECTOR SHROUDED HEADER 50 POS RT ANGLE                        225                  0
                            0                        0                         0             $2.270            $510.75
180-1013-00                    CONNECTOR PCI                                                    110                  0
                            0                        0                         0             $1.100            $121.00
180-1014-00                    CONNECTOR 34 POSITION TRANSITION IDC                             113                  0
                            0                        0                         0             $1.600            $180.80
180-1016-00                    CONNECTOR 2POS HEADR VERT MNT TIN COM                             30                  0
                            0                        0                         0             $0.440             $13.20
180-1017-00                    CONNECTOR 50 PIN MALE TRANSITION                                 158                  0
                            0                        0                         0             $1.970            $311.26
180-1018-00                    CONNECTOR HEADER ST DUAL ROW M GOLD 72 PIN                        47                  0
                            0                        0                         0             $1.740             $81.78
180-1021-00                    CONNECTOR 16 POSITION TRANSITION                                 111                  0
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   3
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
                            0                        0                         0             $1.080            $119.88
180-1022-00                    CONNECTOR 12 PIN                                                  71                  0
                            0                        0                         0             $2.200            $156.20
180-1023-00                    CONNECTOR HEADER CONN 3POS SOCKET IN UNI                          17                  0
                            0                        0                         0             $0.550              $9.35
180-1027-00                    CONNECTOR 2 BY X HEADER                                          500                  0
                            0                        0                         0             $0.000              $0.00
18-1028-00                     CONNECTOR 1 BY 36 .235                                            94                  0
                            0                        0                         0             $0.000              $0.00
180-1030-00                    CONNECTOR 12 PIN HEADER .156                                       7                  0
                            0                        0                         0             $1.280               8.96
180-1031-00                    IC 14 PIN DIP SOCKET IC 14 POS PHOS BRZ TIN                       67                  0
                            0                        0                         0             $0.070              $4.69
180-1038-00                    CONNECTOR 50 PIN FEMALE RCPT GOLD S/C W/POL K                     81                  0
                            0                        0                         0             $2.660            $215.46
180-1041-00                    CONNECTOR 16POS RECEPT GOLD W/POL UNI                            103                  0
                            0                        0                         0             $0.860             $88.58
180-1043-00                    CONNECTOR 40 PIN GOLD S/C W/POL KEY                              107                  0
                            0                        0                         0             $2.200            $235.40
180-1044-00                    CONNECTOR 20 POSITION IDC                                         24                  0
                            0                        0                         0             $0.000              $0.00
180-1045-00                    CONNECTOR 26 POSITION IDC                                         29                  0
                            0                        0                         0             $0.000              $0.00
180-1046-00                    CONNECTOR 50 PIN FEMALE CARD EDGE                                 98                  0
                            0                        0                         0             $5.900            $578.20
180-1047-00                    CONNECTOR 15 POSITION FEMALE IDC                                 116                  0
                            0                        0                         0             $0.750             $87.00
180-1048-00                    CONNECTOR 10 PIN GOLD S/C W/POL KEY                               12                  0
                            0                        0                         0             $1.120             $13.44
180-1049-00                    CONNECTOR RECEPT 44 POS. 2.OMM IDC                                76                  0
                            0                        0                         0             $1.717            $267.52
180-1051-00                    CONNECTOR 50 POSITION FEMALE IDC                                   9                  0
                            0                        0                         0             $0.000              $0.00
180-1052-00                    CONNECTOR 68 POSITION MALE IDC SCSI3                               8                  0
                            0                        0                         0             $7.000             $56.00
180-1054-00                    CONNECTOR 9 POSITION MALE IDC                                     25                  0
                            0                        0                         0             $0.750             $18.75
180-1055-00                    CONNECTOR 10 POSITION MODU                                       152                  0
                            0                        0                         0             $0.680            $103.36
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   4
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
180-1056-00                    CONNECTOR 3 CIRCUIT TERMINAL HOUSING, .100                        98                  0
                            0                        0                         0             $0.120             $11.76
180-1057-00                    CONNECTOR 2 PIN MOLEX                                            703                  0
                            0                        0                         0             $0.720            $506.16
180-1058-00                    CONNECTOR 2 PIN LOCKING SOCKET                                    16                  0
                            0                        0                         0             $0.000              $0.00
180-1059-00                    CONNECTOR MOLEX 8 PIN                                             72
                            0                        0                         0             $0.000              $0.00
180-1060-00                    CONNECTOR 6 POSITION MODU                                        352                  0
                            0                        0                         0             $0.280              $0.00
180-1061-00                    CONNECTOR 2 POSITION MODU                                         67                  0
                            0                        0                         0             $0.000              $0.00
180-1062-00                    CONNECTOR 16 POSITION MODU                                       362                  0
                            0                        0                         0             $1.430            $517.66
180-1063-00                    CONNECTOR 26 POSITION MODU                                        37                  0
                            0                        0                         0             $2.010             $74.37
180-1064-00                    CONNECTOR 12 POSITION HOUSING                                     10                  0
                            0                        0                         0             $0.870              $8.70
180-1065-00                    CONNECTOR 15 POSITION CONTACT HOUSING                              4                  0
                            0                        0                         0             $1.220              $4.88
180-1071-00                    CONNECTOR 34 PIN GOLD S/C W/POL KEY                              189                  0
                            0                        0                         0             $0.905            $364.77
180-1074-00                    CONNECTOR SOCKET 4 POSITION FREE HANGING                           6                  0
                            0                        0                         0             $0.400              $2.40
180-1076-00                    CONNECTOR 6 PIN TERMINAL HOUSING .156                              8                  0
                            0                        0                         0             $0.470              $3.76
180-1077-00                    CONNECTOR 3 PIN TERMINAL HOUSING .156                              7                  0
                            0                        0                         0             $0.240              $1.68
180-1078-00                    CONNECTOR 15 PIN MALE CRIMP                                       37                  0
                            0                        0                         0             $0.460             $17.02
180-1085-00                    CONNECTOR SHORTING JUMPER 2 POSITION                             275                  0
                            0                        0                         0             $2.000            $550.00
180-1086-00                    CONNECTOR PIN 3 POS MATE-N-LOK MALE                              100                  0
                            0                        0                         0             $0.070              $7.00
180-1087-00                    CONNECTOR MOLEX PIN                                              100                  0
                            0                        0                         0             $0.000              $0.00
180-1088-00                    CONNECTOR SOCKET 20-14 AWG TIN                                 1,200                  0
                            0                        0                         0             $1.000          $1,200.00
180-1089-00                    CONNECTOR PIN FEMALE MODU                                        200                  0
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   5
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
                            0                        0                         0             $0.090             $18.00
180-1090-00                    CONNECTOR TERMINAL CRIMP .156                                    130
                            0                        0                         0             $0.730             $94.90
180-1091-00                    CONNECTOR PIN MATE-N-LOK                                         600                  0
                            0                        0                         0             $0.070             $42.00
180-1092-00                    CONNECTOR CONTACT 24-18 AWG TIN SOCKET                           560                  0
                            0                        0                         0             $0.000              $0.00
180-1093-00                    CONNECTOR PANEL MOUNT 4 CIRCUIT                                  101                  0
                            0                        0                         0             $0.380             $38.38
180-1094-00                    CONNECTOR CONTACT 24-18 AWG TIN PIN                              156                  0
                            0                        0                         0             $0.100             $15.60
180-1095-00                    CONNECTOR, 2 PIN HEADER .100"                                     19                  0
                            0                        0                         0             $0.890             $16.91
180-1096-00                    CONNECTOR, 50 PIN SMT                                             89                  0
                            0                        0                         0             $3.100            $275.00
180-1097-00                    CONNECTOR, DISK DRIVE POWER, 4 PIN, MALE, RA                     118                  0
                            0                        0                         0             $0.450             $53.10
180-1099-00                    CONNECTOR, SHROUDED HEADER 40 POS RT ANGLE                        50                  0
                            0                        0                         0             $1.710             $85.50
180-1100-00                    CONNECTOR, SHROUDED HEADER 34 POS RT ANGLE                        44                  0
                            0                        0                         0             $1.830             $80.52
180-1101-00                    CONNECTOR, 4 CIRCUIT HEADER .100 RA                              100                  0
                            0                        0                         0             $0.260             $26.00
180-1102-00                    CONNECTOR 10 PN IDC TRANSITION                                   127                  0
                            0                        0                         0             $0.400             $50.80
180-1103-00                    CONNECTOR 68 POSITION MALE IDC TRANSITION                         90                  0
                            0                        0                         0             $4.000            $360.00
180-1104-00                    CONNECTOR 4CIRCUIT SIP STRAIGHT .100                             100                  0
                            0                        0                         0             $0.230             $23.00
180-1105-00                    CONNECTOR 3 CIRCUIT SIP STRAIGHT .100                             97                  0
                            0                        0                         0             $0.180             $17.46
180-1106-00                    CONNECTOR 68 POSITION SUBMINIATURE D                             100                  0
                            0                        0                         0             $5.030            $503.00
180-1107-00                    CONNECTOR 25 DUAL POSITION CARD EDGE                               5                  0
                            0                        0                         0             $2.740             $13.70
180-1108-00                    CONNECTOR 3 CIRCUIT SIP RA .100                                  310                  0
                            0                        0                         0             $0.180             $55.80
180-1109-00                    CONNECTOR, RECEPTICAL, 4 PIN RA                                   60                  0
                            0                        0                         0             $0.150              $9.00
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   6
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
180-1129-00                    CONNECTOR, RECEPTACLE, SCSI, 68 PIN, INTERNAL                     67                  0
                            0                        0                         0             $1.880            $125.96
180-1132-00                    CONNECTOR, PLUG, 26 PIN, PARALLEL                                 49                  0
                            0                        0                         0             $0.660             $32.34
180-1134-00                    HEADER, 30 PIN, 2X15                                             300                  0
                            0                        0                         0             $1.420            $426.00
180-1135-00                    HEADER, 3 PIN, 1X3                                               100                  0
                            0                        0                         0             $0.070              $7.00
180-1136-00                    HEADER, 4 PIN, 1X4                                               173                  0
                            0                        0                         0             $0.050              $8.65
180-1137-00                    HEADER, 4 PIN, 1X4                                               255                  0
                            0                        0                         0             $0.050             $12.75
180-1138-00                    HEADER, 2 PIN, 1X2                                               174                  0
                            0                        0                         0             $0.050              $8.70
180-1139-00                    HEADER 2 PIN, 1X2                                                 70                  0
                            0                        0                         0             $0.030              $2.10
180-1145-00                    CONNECTOR .100 KK CRIMP TERMINAL 18-20 GA.                        20                  0
                            0                        0                         0             $0.180              $3.60
180-1146-00                    RECEPTICAL 4 POSITION 5.25" PWR                                   90                  0
                            0                        0                         0             $0.000              $0.00
180-1158-00                    CONNECTOR 5 PIN TERMINAL HOUSING .156                             69                  0
                            0                        0                         0             $0.120              $8.28
181-1001-00                    HEADER SHROUDED 10 POS STRAIGHT                                   97                  0
                            0                        0                         0             $0.000              $0.00
181-1005-00                    ADAPTER RJ45 6 POSITION T                                         91
                            0                        0                         0             $0.340             $30.94
181-1006-00                    ADAPTER TRANSCEIVER TWISTED PAIR                                   6                  0
                            0                        0                         0            $22.500            $135.00
181-1007-00                    ADAPTER DUAL PORT ETHERNET                                        10                  0
                            0                        0                         0             $4.230             $42.30
182-1001-00                    TERMINATOR SCSI 50 PIN                                            16                  0
                            0                        0                         0             $6.500            $104.00
182-1003-00                    TERMINATOR SCSI MALE TO FEMALE                                     7                  0
                            0                        0                         0             $0.000              $0.00
212-1008-00                    MECHANIC GASKET RUBBER CALDOOR                                 1,001                  0
                            0                        0                         0             $1.430          $1,431.43
306-1012-00                    4.5GB SCSI HARD DRIVE 7,200 RPM 3.5"                               4                  0
                            0                        0                         0           $443.980          $1,775.92
306-1017-00                    4.5GB ULTRA WSCSI HARD DRIVE 7,200 RPM 3.5"                        7                  0
</TABLE>
<PAGE>

System:   04/03/2000  7:54:03 PM     Network Engines, Inc.       Page:   7
User Date: 4/03/2000                  STOCK STATUS REPORT        User ID:  DougB
                                      Inventory Control

<TABLE>
<S>                         <C>                      <C>                       <C>           <C>                <C>
                            0                        0                         0           $469.240          $3,284.68
740-1029-00                    CABLE EXTERNAL SCSI                                                3                  0
                            0                        0                         0             $0.000              $0.00
740-1031-00                    CABLE INTERNAL IDE CONTROL 20"                                    59                  0
                            0                        0                         0             $0.580             $34.22
740-1033-00                    CABLE INTERNAL SCSI DISK                                          10                  0
                            0                        0                         0             $0.000              $0.00
740-1037-00                    CABLE PS2 FEMALE ADAPTER                                           6                  0
                            0                        0                         0             $0.000              $0.00
740-1038-00                    CABLE 44 POSITION IDE CONVERTER                                   23                  0
                            0                        0                         0             $6.500            $149.50
740-1039-00                    CABLE 44 POSITION 2.5" DRIVE CABLE                                 5                  0
                            0                        0                         0             $2.750             $13.75
740-1040-00                    CABLE PEB/AEB                                                      8                  0
                            0                        0                         0             $0.000              $0.00
740-1042-00                    CABLE MOTHERBOARD POWER EXTENSION                                 29                  0
                            0                        0                         0             $1.220             $35.38
740-1043-00                    CABLE EXTERNAL PARALLEL PORT                                       6                  0
                            0                        0                         0             $0.000              $0.00
740-1046-00                    CABLE 9 POSITION M/F EXTENSION 6'                                 19                  0
                            0                        0                         0             $0.000              $0.00
740-1047-00                    CABLE SCSI 2 M/M EXTENSION                                         1                  0
                            0                        0                         0             $0.000              $0.00
740-1049-00                    CABLE SCSI 2 .50 M/M EXTENSION                                     4                  0
                            0                        0                         0             $0.000              $0.00
740-1050-00                    CABLE ETHERNET AUI EXTERNAL                                        7                  0
                            0                        0                         0             $0.000              $0.00
740-1052-00                    CABEL CAT 5 ETHERNET 8'                                            1                  0
                            0                        0                         0             $0.000              $0.00
740-1053-00                    CABLE LINE CORD EUROPE                                             5                  0
                            0                        0                         0             $0.830              $4.15
        126 Items for Site: P6000                      Total Inventory Value for Site P6000                 $17,579.99
                                                                               Total Inventory Value        $17,579.99
</TABLE>
<PAGE>

- ----------------------------------------------------------------------
Network Engines, Inc.
- ----------------------------------------------------------------------
P6000 Stock Removed by  Copernicus Systems, Inc.
- ----------------------------------------------------------------------
March, 2000
- ----------------------------------------------------------------------
          Part #                Qty           Cost       Total Cost
- ----------------------------------------------------------------------
100-002-00                            48          0.75         $36.00
- ----------------------------------------------------------------------
100-1006-00                          119          0.58         $63.80
- ----------------------------------------------------------------------
100-1007-00                           18          0.63         $11.34
- ----------------------------------------------------------------------
100-1008-00                          132           2.4        $316.80
- ----------------------------------------------------------------------
100-1009-00                            8           1.6         $12.80
- ----------------------------------------------------------------------
100-1010-00                           28          0.33          $9.24
- ----------------------------------------------------------------------
100-1011-00                           50         0.332         $16.60
- ----------------------------------------------------------------------
100-1012-00                           48          0.72         $34.56
- ----------------------------------------------------------------------
100-1013-00                          133          0.66         $87.78
- ----------------------------------------------------------------------
100-1016-00                           19          0.08          $1.52
- ----------------------------------------------------------------------
100-1018-00                          116          2.95        $342.20
- ----------------------------------------------------------------------
100-1019-00                           20          0.13          $2.60
- ----------------------------------------------------------------------
100-1021-00                           19          0.28          $5.32
- ----------------------------------------------------------------------
100-1022-00                           35          0.12          $4.20
- ----------------------------------------------------------------------
103-1006                            1188          1.99      $2,364.12
- ----------------------------------------------------------------------
103-1006-00                            0          1.99          $0.00
- ----------------------------------------------------------------------
103-1008-00                            0             0          $0.00
- ----------------------------------------------------------------------
103-1009-00                            0             0          $0.00
- ----------------------------------------------------------------------
120-1001-00                          250          0.23         $57.50
- ----------------------------------------------------------------------
120-1002-00                           60          0.11          $6.60
- ----------------------------------------------------------------------
120-1004-00                          112          0.83         $92.96
- ----------------------------------------------------------------------
120-1005-00                           75          2.05        $153.75
- ----------------------------------------------------------------------
120-1006-00                          643           3.5        $255.50
- ----------------------------------------------------------------------
120-1007-00                          131          0.61         $79.91
- ----------------------------------------------------------------------
120-1008-00                          104          0.18         $18.72
- ----------------------------------------------------------------------
120-1009-00                          106          0.53         $56.18
- ----------------------------------------------------------------------
120-1010-00                           42           4.5        $189.00
- ----------------------------------------------------------------------
120-1011-00                          181          0.25         $45.25
- ----------------------------------------------------------------------
120-1012-00                          413          0.37        $152.81
- ----------------------------------------------------------------------
120-1013-00                         1037          0.33        $342.21
- ----------------------------------------------------------------------
120-1014-00                          156          0.68        $106.08
- ----------------------------------------------------------------------
120-1015-00                         1125           0.4        $450.00
- ----------------------------------------------------------------------
120-1016-00                          799          0.57        $455.43
- ----------------------------------------------------------------------
120-1017-00                           32          1.63         $52.16
- ----------------------------------------------------------------------
120-1018-00                          426          0.49        $208.74
- ----------------------------------------------------------------------
120-1019-00                           52          0.79         $41.08
- ----------------------------------------------------------------------
120-1021-00                          615          0.34        $209.10
- ----------------------------------------------------------------------
120-1022-00                           31          1.15         $35.65
- ----------------------------------------------------------------------
<PAGE>

- ----------------------------------------------------------------------
120-1023-00                           78          0.11          $8.58
- ----------------------------------------------------------------------
120-1035-00                          825          0.15        $123.75
- ----------------------------------------------------------------------
120-1050-00                          212          0.19         $40.28
- ----------------------------------------------------------------------
120-1065-00                            0             0          $0.00
- ----------------------------------------------------------------------
130-1001-00                            0             0          $0.00
- ----------------------------------------------------------------------
130-1002-00                          134          0.04          $5.36
- ----------------------------------------------------------------------
130-1004-00                           54          0.04          $2.15
- ----------------------------------------------------------------------
130-1005-00                         4720          0.02         $94.40
- ----------------------------------------------------------------------
130-1006-00                         4412          0.02         $88.24
- ----------------------------------------------------------------------
130-1007-00                          182          0.04          $7.28
- ----------------------------------------------------------------------
130-1008-00                          170          0.04          $6.80
- ----------------------------------------------------------------------
130-1010-00                           41          0.04          $1.65
- ----------------------------------------------------------------------
130-1011-00                          103          0.04          $4.12
- ----------------------------------------------------------------------
130-1013-00                          106          0.04          $4.24
- ----------------------------------------------------------------------
130-1014-00                          828          0.02         $16.56
- ----------------------------------------------------------------------
130-1015-00                         4212          0.02          $8.24
- ----------------------------------------------------------------------
130-1016-00                          102          0.04          $4.08
- ----------------------------------------------------------------------
130-1017-00                          239          0.04          $9.56
- ----------------------------------------------------------------------
130-1018-00                           84          0.89         $74.76
- ----------------------------------------------------------------------
130-1019-00                           75          0.89         $66.75
- ----------------------------------------------------------------------
130-1020-00                           15          0.89         $13.35
- ----------------------------------------------------------------------
130-1021-00                           54          0.89         $48.06
- ----------------------------------------------------------------------
130-1022-00                           55          0.89         $48.95
- ----------------------------------------------------------------------
130-1023-00                            5          0.89          $4.45
- ----------------------------------------------------------------------
130-1028-00                          293          0.04         $11.72
- ----------------------------------------------------------------------
130-1029-00                           44          0.35         $15.40
- ----------------------------------------------------------------------
130-1032-00                           84          0.26         $21.84
- ----------------------------------------------------------------------
130-1033-00                           18          1.19         $21.42
- ----------------------------------------------------------------------
130-1034-00                          553          1.19        $658.07
- ----------------------------------------------------------------------
130-1035-00                           18          1.19         $21.42
- ----------------------------------------------------------------------
130-1036-00                           35          1.19         $41.65
- ----------------------------------------------------------------------
130-1037-00                           30          0.74         $22.20
- ----------------------------------------------------------------------
130-1038-00                          134          1.37        $183.58
- ----------------------------------------------------------------------
130-1039-00                          106          1.37        $145.22
- ----------------------------------------------------------------------
130-1046-00                           40          1.18         $47.20
- ----------------------------------------------------------------------
130-1047-00                          176          1.18        $207.68
- ----------------------------------------------------------------------
130-1050-00                           24          0.02          $0.48
- ----------------------------------------------------------------------
130-1051-00                         4212          0.02         $84.24
- ----------------------------------------------------------------------
130-1053-00                          109          0.11         $11.99
- ----------------------------------------------------------------------
130-1054-00                          169          0.03          $5.07
- ----------------------------------------------------------------------
130-1073-00                            0             0          $0.00
- ----------------------------------------------------------------------
130-089-00                          4841          0.03        $145.23
- ----------------------------------------------------------------------
140-1002-00                          519           1.1        $570.90
- ----------------------------------------------------------------------
140-1005-00                          125          0.18         $22.50
- ----------------------------------------------------------------------
140-1010-00                           54          0.48         $25.92
- ----------------------------------------------------------------------
<PAGE>

- ----------------------------------------------------------------------
140-1012-00                           98          0.47         $46.06
- ----------------------------------------------------------------------
140-1013-00                           20          0.91         $18.20
- ----------------------------------------------------------------------
140-1014-00                           53          1.44         $76.32
- ----------------------------------------------------------------------
140-1015-00                           43          2.83        $121.69
- ----------------------------------------------------------------------
140-1017-00                           55          3.25        $178.75
- ----------------------------------------------------------------------
140-1018-00                           47          0.23         $10.81
- ----------------------------------------------------------------------
140-1019-00                          201          0.11         $22.11
- ----------------------------------------------------------------------
140-1020-00                          633           0.2        $126.50
- ----------------------------------------------------------------------
140-1021-00                          100          0.11         $11.00
- ----------------------------------------------------------------------
140-1022-00                           10           7.5         $75.00
- ----------------------------------------------------------------------
140-1023-00                            2             1          $2.00
- ----------------------------------------------------------------------
140-1024-00                           21           3.2         $67.20
- ----------------------------------------------------------------------
140-1025-00                          105          0.23         $24.15
- ----------------------------------------------------------------------
140-1026-00                           45          0.23         $10.35
- ----------------------------------------------------------------------
140-1027-00                          167          2.25        $375.75
- ----------------------------------------------------------------------
140-1028-00                            6          0.36          $2.16
- ----------------------------------------------------------------------
141-1001-00                          237           0.3         $71.10
- ----------------------------------------------------------------------
141-1002-00                          120          2.75        $330.00
- ----------------------------------------------------------------------
141-1003-00                         2353           1.6      $3,764.80
- ----------------------------------------------------------------------
141-1004-00                           89          0.52         $46.28
- ----------------------------------------------------------------------
141-1006-00                           13          2.02         $26.26
- ----------------------------------------------------------------------
141-1007-00                          368          1.79        $658.72
- ----------------------------------------------------------------------
141-1008-00                            0             0          $0.00
- ----------------------------------------------------------------------
141-1014-00                          118          0.05          $5.90
- ----------------------------------------------------------------------
142-1001-00                           47          0.68         $31.96
- ----------------------------------------------------------------------
142-1002-00                           51          1.55         $79.05
- ----------------------------------------------------------------------
142-1003-00                           19          2.45         $46.55
- ----------------------------------------------------------------------
142-1005-00                            0             0          $0.00
- ----------------------------------------------------------------------
142-1006-00                           84          2.25        $189.00
- ----------------------------------------------------------------------
142-1007-00                           32         17.24         $51.72
- ----------------------------------------------------------------------
142-1008-00                            4           2.4          $9.60
- ----------------------------------------------------------------------
151-1001-00                           50          1.66         $83.00
- ----------------------------------------------------------------------
160-1005-00                          417          0.21         $87.57
- ----------------------------------------------------------------------
160-1008-00                          100         0.445         $44.50
- ----------------------------------------------------------------------
170-1002-00                           25          2.64         $66.00
- ----------------------------------------------------------------------
170-1003-00                           53          7.01        $371.53
- ----------------------------------------------------------------------
170-1004-00                           27          3.75        $101.25
- ----------------------------------------------------------------------
172-1005-00                           20          1.78         $35.60
- ----------------------------------------------------------------------
172-1006-00                           30          1.69         $50.70
- ----------------------------------------------------------------------
180-1024-00                          447          6.52      $2,914.44
- ----------------------------------------------------------------------
180-1025-00                          184          8.64      $1,589.76
- ----------------------------------------------------------------------
108-1026-00                           29          2.17         $62.93
- ----------------------------------------------------------------------
180-1111-00                            6            10         $60.00
- ----------------------------------------------------------------------
180-1113-00                            5          4.18         $20.90
- ----------------------------------------------------------------------
180-116-00                             8             3         $24.00
- ----------------------------------------------------------------------
<PAGE>

- ----------------------------------------------------------------------
180-1117-00                            8             3         $24.00
- ----------------------------------------------------------------------
180-1118-00                          163           2.1        $342.30
- ----------------------------------------------------------------------
180-1120-00                          235          5.82      $1,367.70
- ----------------------------------------------------------------------
180-1123-00                            0          1.41          $0.00
- ----------------------------------------------------------------------
180-1125-00                          180          2.15        $387.00
- ----------------------------------------------------------------------
180-1126-00                           72           1.8        $129.60
- ----------------------------------------------------------------------
180-1128-00                          160          2.45        $392.00
- ----------------------------------------------------------------------
180-1129-00                            0                        $0.00
- ----------------------------------------------------------------------
180-1154-00                           96             5        $480.00
- ----------------------------------------------------------------------
180-1157-00                         1166           0.4        $466.40
- ----------------------------------------------------------------------
181-1004-00                           44          0.55         $24.20
- ----------------------------------------------------------------------
181-1003-00                           46          0.69         $31.74
- ----------------------------------------------------------------------
210-1088-00                         6274         0.019        $119.21
CDR1S10PK (80663D)                    60
                                                        -------------
                                                           $25,094.27
                                                        =============
- ----------------------------------------------------------------------
<PAGE>

                                                                   Schedule 1(c)

[GRAPHIC: NETWORK ENGINES]

Network Engines
ClusterDirector(TM)
User's Manual

61 Pleasant Street
Randolph MA 02368
Phone: 781-961-4400
Fax: 781 961-4508
Revision B

                                                                      June, 1998
<PAGE>

Warranty

Network Engines, Inc. (NEI) warrants its Products for a period of one (1) year
from the date of shipment to be free from defects in material and workmanship
provided the Products are installed, operated and maintained in accordance with
NEI specifications. Equipment purchased under this Agreement will be newly
manufactured by NEI from new and serviceable used parts which are equivalent to
new in performance in this Equipment. During the warranty period, NEI will, at
its option repair or replace any Equipment it deems to be defective. Warranty
service is return-to-factory and a Return Material Authorization (RMA) number
must be obtained from NEI Customer Support before any Equipment may be returned.
Standard warranty repair turn-around time is approximately ten (10) business
days after receipt of the defective product, FOB Randolph, MA 02368. Repaired or
replaced Equipment will be warranted for the remainder of the standard warranty
period.

Exclusions, Disclaimers and Limits on Warranty

a)  No Other Warranties. No representation or other affirmation of fact, oral or
    written, including but not limited to statements regarding capacity,
    suitability for use or performance of Products, whether made by NEI
    employees or otherwise, shall be deemed to be a warranty by NEI for any
    purpose, or give rise to any liability of NEI whatsoever unless contained in
    this Agreement. The express warranty stated in the section above entitled
    "Warranty" is the only warranty given. THERE ARE NO OTHER WARRANTIES,
    EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, FOR PRODUCTS OR
    SERVICES FURNISHED IN CONNECTION WITH THIS AGREEMENT. NEI DISCLAIMS ALL
    IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PURPOSE.

b)  Should NEI be unable to correct a defect covered under the section entitled
    "Warranty" after the expenditure of reasonable efforts and time,
    "reasonable" to be defined by the nature of the defect when encountered,
    Buyer shall be entitled to return the Product and receive a refund at the
    net purchase price paid for the returned Product, and such refund shall
    constitute NEI's maximum liability for breach of warranty.

LIMITATION OF REMEDY AND LIABILITY: General Limitation. IN NO EVENT SHALL NEI BE
LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES
WHATSOEVER, INCLUDING BUT NOT LIMITED TO LOST PROFITS AND DAMAGES RESULTING FROM
LOSS OF USE OR LOST DATA EVEN IF NEI HAS BEEN ADVISED, KNEW OR SHOULD HAVE KNOWN
OF THE POSSIBILITY THEREOF.

NEI shall not be liable for any errors of fact or omissions of fact contained
herein, or for incidental, indirect, special or consequential damages in
connection with the furnishing , performance, or use of this and related
documentation.

Product Returns

The equipment must be returned postage-prepaid. Package it securely and insure
it. You will be charged for parts and labor if you lack proof of date of
purchase, or if the warranty period is expired.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              ii
<PAGE>

Copyrights

All rights reserved. No part of this publication may be reproduced, transmitted,
transcribed, stored in a retrieval system, or translated into any language or
computer language, in any form or by any means, electronic, mechanical,
magnetic, optical, chemical, manual or otherwise, without the prior written
permission of Network Engines Inc.

Network Engines ClusterDirector User's Manual, Rev B,  June, 1998.

Trademarks

3Com(R), the 3Com logo, EtherDisk(R), Etherlink(R), EtherLink II(R), EtherLink
Plus(R), NetAge(R), Parallel Tasking(R), Smart Agent(R), and Transcend(R) are
registered trademarks of 3Com Corporation.

The Citrix(R) logo, WinFrame(R), and ICA(R) are registered trademarks, and
MultiWin(TM) is a trademark of Citrix Systems, Inc.

Microsoft(R), Windows(R), and Windows NT(R) are registered trademarks of
Microsoft Corporation.

Network Engines(TM), the Network Engines Logo, Torque for Your Network(TM),
ClusterDirector(TM), ClusterMonitor(TM), and ClusterBalance(TM) are trademarks
of Network Engines, Inc.

PC/AT and PS/2 are registered trademarks of International Business Machines,
(IBM).

Pentium(TM) is a trademark of Intel Corporation, Inc.

PICMG is a registered trademark of the PICMG Consortium.

Super I/O is a trademark of National Semiconductor, Inc.

Other brand and product names may be registered trademarks or trademarks of
their respective companies

- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              iii
<PAGE>

Notice

This product was found to be compliant with the radiated emissions and line
conducted emissions requirements of AS3548/CISPR 22.

This equipment has been tested and found to comply with the limits for a Class A
digital device, pursuant to part 15 of the FCC Rules. These limits are designed
to provide reasonable protection against harmful interference when the equipment
is operated in a commercial environment. This equipment generates, uses, and can
radiate radio frequency energy and, if not installed and used in accordance with
the instruction manual, may cause harmful interference to radio communications.

Operation of this equipment in a residential area is likely to cause harmful
interference in which case the user will be required to correct the interference
at his own expense.

Changes or modifications not expressly approved by the manufacturer could void
the user's FCC granted authority to operate the equipment.

Caution

Lithium batteries may explode and can cause physical injury if they are replaced
incorrectly. Replace only with the same or an equivalent type recommended by the
manufacturer. Dispose of used batteries according to the manufacturer's
instructions. Never expose Lithium batteries to fire or extreme temperature
conditions.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              iv
<PAGE>

Contents
- --------------------------------------------------------------------------------

Preface.....................................................................viii
   Scope....................................................................viii
   Audience...................................................................ix
   Typographical Conventions..................................................ix
   Related Publications and Internet Links....................................ix
   How to Contact Us..........................................................xi

Chapter 1
Introduction.................................................................xii
   Description...............................................................xii
   Maintenance Scenarios....................................................xiii
   Administration...........................................................xiii
     Monitoring Applications.................................................xiv
     Monitoring External Events..............................................xiv

Chapter 2
Using the Console..............................................................1
   Logging on the system.......................................................1
   Using Console Commands......................................................2

Chapter 3
Mapping System Addresses.......................................................3
   Backplane Configuration.....................................................3
   Control ID Numbers..........................................................4
   DIO Port Signals............................................................6

Chapter 4
Modifying Configuration Files..................................................9
   NEIbase.cfg File............................................................9
     File Variables...........................................................10
     Sample NEIbase.cfg file..................................................12
   NEIsystems.cfg File........................................................13

Chapter 5
Using TCP/IP..................................................................19
   Listening Ports............................................................19
   TCP/IP Commands............................................................19


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              v
<PAGE>

Chapter 6
Receiving Event Notifications.................................................22
   Watchdog Timers............................................................22
     Creating the Timer.......................................................23
   Alert Message Destinations.................................................23

Chapter 7
Writing Script Commands.......................................................25
   Syntax.....................................................................25
     Comments.................................................................25
     Variables................................................................25
     On-Conditions............................................................26
   Commands...................................................................28
     alert....................................................................29
     assign...................................................................30
     comment..................................................................31
     define...................................................................32
     dump.....................................................................33
     on; on-end...............................................................34
     print....................................................................35
     reboot...................................................................36
     reset....................................................................37
     send.....................................................................38
     stop.....................................................................39
     save.....................................................................40
     switch...................................................................41
     variable>system-start - system-end.......................................42
   Understanding I/O Signals..................................................45

Chapter 8
Using the ClusterMonitor......................................................47
   Overview...................................................................47
   Basic Operations...........................................................48
     Menu Bar.................................................................49
     Context-Sensitive Menus..................................................50
   Adding a New ClusterDirector...............................................51
     Example..................................................................52
   Updating Text Files........................................................56
   Notifications..............................................................58


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              vi
<PAGE>

Appendix A
Sample Configuration Files....................................................59
   Default NEIsystems.cfg File................................................59
   NEIsystems.cfg with Failover Scenario......................................72

Index.........................................................................87


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              vii
<PAGE>

Preface
- --------------------------------------------------------------------------------

               This section is divided into the following main parts:

               o  A description of the scope of this manual

               o  A description of the intended audience

               o  A list of typographical conventions used in this manual

               o  Related publications and internet links

Scope

               This manual describes the ClusterDirector(TM) System. The
               following list gives a brief description of each chapter in this
               manual.

               Chapter 1. Introduction. This chapter gives a general description
               of the system architecture, maintenance scenarios, and
               administration procedures.

               Chapter 2. Using the Console. This chapter describes the
               procedures used to log on the system and explains how to issue
               commands from the console.

               Chapter 3. Mapping System Addresses. This chapter explains how to
               map backplane configurations and gives port addresses, segment
               and relay ID numbers, and power supply signals.

               Chapter 4. Modifying Configuration Files. This chapter explains
               how to make changes to the system's two main configuration files,
               NEIbase.cfg and NEIsystems.cfg.

               Chapter 5. Using TCP/IP. This chapter gives the rules and
               commands for using the TCP/IP protocol.

               Chapter 6. Receiving Event Notifications. This chapter explains
               how to set the watchdog timer to provide notification of system
               error conditions by pager, console, and management software.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              viii
<PAGE>

                                                                         Preface
- --------------------------------------------------------------------------------

               Chapter 7. Writing Script Commands. This chapter provides syntax
               rules for and examples of all the script commands.

               Chapter 8. Using the ClusterMonitor. This chapter describes the
               ClusterDirector Monitor, a graphical user interface that manages
               one or more ClusterDirector systems.

               Appendix A. Sample Configuration Files. This appendix provides
               the default NEIsystems.cfg file and a sample NEIsystems.cfg file
               illustrating a failover scenario.

Audience

               This manual is written for Information Technology professionals
               and system engineers who are responsible for installing and
               maintaining P6000 Clustered Server Systems.

Typographical Conventions

               The following typographical conventions are used in this manual.

               -----------------------------------------------------------------
                 Convention                           Example
               -----------------------------------------------------------------
                 Angle brackets separate single       Press <Esc> to exit the
                 keys that you press from the         menu.
                 surrounding text.
               -----------------------------------------------------------------
                 Boldface identifies numbers and      Type reset (dio) AC-OK-2.
                 characters that you must type.
               -----------------------------------------------------------------
                 Courier indicates code lines and     on IPport-1 = S
                 screen displays.
               -----------------------------------------------------------------
                 Italics emphasize file names and     See the NEIbase.cfg file.
                 variable information.
               -----------------------------------------------------------------

Related Publications and Internet Links

               o  82430HX PCIset Cache/Memory Subsystem; Intel 1995

               o  Chips & Technology 65548 High Performance Flat Panel/CRT GUI
                  Accelerator; Chips & Technology 1995

               o  IBM Personal Computer AT Technical Reference; IBM; 1984


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              ix
<PAGE>

                                                                         Preface
- --------------------------------------------------------------------------------

               o  IBM Personal System/2 and Personal Computer BIOS Interface
                  Technical Reference; IBM; 1987

               o  IEEE-P996 specification Draft D2.02; IEEE

               o  Intel Pentium P54C Microprocessor Reference; Intel 1995

               o  MAX705 Microprocessor Reset Circuit data sheet; Maxim; 1995

               o  National Semiconductor PC87306 SuperI/O Enhanced Sidewinder
                  Lite; National Semiconductor; 1995.

               o  Network Engines ClusterDirector User's Manual, Revision A,
                  April, 1998.

               o  PICMG PCI card edge connector specification Rev2.0; PICMG
                  Consortium; 1994

               Selected internet links and URLs are given in Table 1

                            Table 1. Selected Internet Links
       -------------------------------------------------------------------------
        Company               Internet Address               Product
       -------------------------------------------------------------------------
        AMI                   www.american.megatrends.com    BIOS
       -------------------------------------------------------------------------
        AMP                   www.amp.com                    Connectors
       -------------------------------------------------------------------------
        Chips & Technology    www.chips.com                  Video Controller &
                                                             BIOS
       -------------------------------------------------------------------------
        Dallas                www.dalsemi.com                MicroLAN Temp.
                                                             Sensor
       -------------------------------------------------------------------------
        Network Engines,      www.networkengines.com         Board Information,
        Inc.                                                 sales & customer
                                                             support
       -------------------------------------------------------------------------
        Intel Corp            www.intel.com                  Processor & Chipset
       -------------------------------------------------------------------------
        Maxim                 www.maxim-ic.com               Voltage Monitor &
                                                             RS485
       -------------------------------------------------------------------------
        National              www.national.com               Super I/O
        Semiconductor                                        Controller
       -------------------------------------------------------------------------


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              x
<PAGE>

                                                                         Preface
- --------------------------------------------------------------------------------

         -----------------------------------------------------------------------
          Pericom               www.pericom.com                Quiet ISA Bus
                                                               Buffers
         -----------------------------------------------------------------------
          USB                   www.usb.org                    USB information
         -----------------------------------------------------------------------

How to Contact Us

               For sales information or technical assistance, please telephone
               (781) 961-4400 or Fax (781) 961-4508. Or, use the following
               on-line addresses:

               Email: [email protected]

               URL:   www.networkengines.com

               Network Engines is located at 61 Pleasant Street, Randolph, MA
               02368


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              xi
<PAGE>

Chapter 1

Introduction
- --------------------------------------------------------------------------------

               This chapter is divided in the following main parts:

               o  Description

               o  Maintenance Scenarios

               o  Administration

Description

               The Network Engines ClusterDirector(TM) is an embedded
               maintenance processor that dramatically improves the reliability
               of a P6000 clustered server by allowing individual applications
               to recover from both simple and catastrophic system failures. The
               ClusterDirector provides remote notification, external resource
               configuration, and processor fail-over response for the P6000.
               These capabilities guarantee a high level of availability and
               continuous compatibility with the network.

               A ClusterDirector System consists of one or more ClusterDirectors
               and a ClusterMonitor(TM), a portable, remote graphical user
               interface (GUI) that gives information about, and control over,
               all the ClusterDirectors connected to it. The ClusterMonitor is
               described briefly in Chapter 8.

               The ClusterDirector reports the following information about the
               performance of a P6000 clustered server:

               o  Status of individual systems (OS, services on Windows NT(R),
                  or daemons on UNIX(R) platforms )

               o  Status of external resources

               The ClusterDirector uses the information reported to it to make
               decisions about the availability of each processor in the server
               unit.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              xii
<PAGE>

                                                                    Introduction
- --------------------------------------------------------------------------------

Maintenance Scenarios

               The ClusterDirector uses a high-level scripting language to
               create different maintenance scenarios for system failures. The
               language uses plain English statements and straightforward
               syntax.

               The scenarios can be written for automatic, semi-automatic, and
               manual response. Examples of each kind of scenario are given
               below:

               o  Automatic: a failure causes the external resources to be
                  switched automatically to a back-up system before notifying
                  service personnel of the problem.

               o  Semi-automatic: a failure causes a predetermined number of
                  alarms to be transmitted to service personnel before switching
                  to a backup system.

               o  Manual: a failure causes continuous alarms to be sent and
                  waits for instructions from service personnel at the console.

               The scripting language allows new maintenance scenarios to be
               created easily. The language contains descriptions for
               communicating with various systems, including application
               processors, UPSs, and remote maintenance environments. It also
               provides conditional statements for testing the status of various
               systems and making decisions about them.

Administration

               The ClusterDirector can be administered from both local and
               remote terminals. Local administration is accomplished by
               connecting the P6000 to a terminal or PC via a serial port or a
               network connection. Remote administration is achieved using a
               Telnet, FTP, or SNMP interface over a network. Network Engines
               also offers a graphical interface ClusterMonitor that controls
               multiple ClusterDirectors remotely. The ClusterMonitor is
               described in Chapter 8.

               Remote administration can be performed using a modem-to-modem
               connection between the ClusterDirector and a terminal or


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              xiii
<PAGE>

                                                                    Introduction
- --------------------------------------------------------------------------------

               PC. A modem-to-modem connection provides the same support
               capabilities as a local connection.

               Monitoring Applications

               The key to the P6000's fault-tolerant environment is the
               ClusterDirector's ability to monitor individual OSs, services,
               and daemons. The ClusterDirector also listens for messages from
               the ClusterMonitor. In case any event should occur, the
               ClusterDirector performs the actions specified by the scenario
               for that event.

               A watch dog timer system allows the ClusterDirector to determine
               whether a monitored system is running. The system sends a message
               that indicates it will communicate within a predetermined period
               of time. If the system fails to respond within the time
               specified, the ClusterDirector decides that system is no longer
               running and performs the actions specified by the scenario.

               Monitoring External Events

               The ClusterDirector monitors external events and systems through
               the following interfaces:

               o  Four output relays that control switching between external
                  resources, such as telephone lines, fiber optics, and coax
                  cable.

               o  Four digital input contacts that sense external events, like
                  contact closures and alarm conditions.

               o  Two serial ports that communicate with devices like network
                  hubs, routers, bridges, UPSs, and other computer equipment.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              xiv
<PAGE>

Chapter 2

Using the Console
- --------------------------------------------------------------------------------

               This section explains how to use the console for manual
               operations.

               This chapter is divided in the following main parts:

               o  Logging on the system

               o  Using console commands

Logging on the system

               Perform the following steps to log on the ClusterDirector.

               1. Verify that you have a valid connection to the system through
                  one of the following interfaces:

                  A network connection using TELNET, port 2000, and the IP
                  address of the ClusterDirector

                  A direct serial connection to a terminal (Serial 1)

                  A serial connection to a terminal through a modem (Serial 2)

               2. Press <?>

                  The system displays the following prompt
                  Password:

               3. Enter your password.

                  The default password is powerst.

                  If the password is correct, the system displays the following
                  message:
                  Successful log on.

                  If the password is not correct, the system displays this
                  message:
                  Wrong password.

               4. Press any key to display a list of console commands.
                  The console displays a list showing each command and a brief
                  description of its purpose. The commands are described in the
                  following section.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              1
<PAGE>

                                                               Using the Console
- --------------------------------------------------------------------------------

Using Console Commands

               Table 2-1 lists the commands that are available after you log
               into the system in column one. Column two lists the on-screen
               help message that is displayed. The information in this table is
               displayed on screen when you type ? at the prompt.

                              Table 2-1. Console Commands
           --------------------------------------------------------------------
           Command          Description
           --------------------------------------------------------------------
             #x               Sets the focus of the console to system number
                              x.(1)
           --------------------------------------------------------------------
             @@               Scroll through and change any DIO output lines.(2)
           --------------------------------------------------------------------
             $A               About ClusterDirector
           --------------------------------------------------------------------
             $D               Display event history, previously saved
                              following user "save" commands.
           --------------------------------------------------------------------
             $G               Print listing of "global" and any local
                              variables defined by system in focus.
           --------------------------------------------------------------------
             $I               Initialize the variables and event states for
                              the system in focus.
           --------------------------------------------------------------------
             $P               Change password.
           --------------------------------------------------------------------
             $R               Report events noted by the system in focus
                              including watchdog status.
           --------------------------------------------------------------------
             $Z               Reboot the system in focus.
           --------------------------------------------------------------------
             $O               Log off.
           --------------------------------------------------------------------
             $E               Put system in `service' mode.
           --------------------------------------------------------------------
             $X               Exit from ClusterDirector program.
           --------------------------------------------------------------------
            1. The procedure for numbering systems is explained in the following
               section.

            2. Do not change the state of a DIO bit that is currently under
               program.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              2
<PAGE>

Chapter 3

Mapping System Addresses
- --------------------------------------------------------------------------------

               Commands to, and messages from the ClusterDirector are identified
               by a Control ID number. This section describes the backplanes
               available for the P6000 and explains the rules for assigning
               Control ID numbers, for identifying relay and power supply
               signals, and for specifying I/O port addresses.

               This chapter is divided in the following main parts:

               o  Backplane configuration

               o  Control ID numbers

               o  DIO port signals

Backplane Configuration

               The P6000 can be configured with a BP4 or BP10 backplane to
               provide different services.

               BP4 Backplane

               The BP4 backplane has 17 slots hard-wired in four segments. Each
               of the first three segments has one CPU slot, one ISA slot, and
               two PCI slots. The fourth segment has an additional ISA slot.
               Each segment supports one engine and any combination of network,
               fax, voice, or other application cards. The PCI buses on the BP4
               provide extremely high data throughput.

               BP10 Backplane

               The BP10 backplane has 20 ISA slots, hard wired in ten groups
               with two slots each. In this configuration, the BP10 backplane
               supports up to ten independent processors.

               The slot pairs on the BP10 can be bridged to form larger segments
               with more than two slots in them. The backplane can be segmented
               in any combination of slots that is a multiple of two, ranging
               from one to ten segments per chassis. Each segment


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              3
<PAGE>

                                                        Mapping System Addresses
- --------------------------------------------------------------------------------

               supports one engine and as many network, fax, voice, or other
               application cards as the number of slots allows.

               In both the BP4 and BP10 backplanes, segments provide independent
               power and data busses to their respective slots.

               The segments are numbered sequentially, counting from the
               leftmost segment, and the engine and its application cards are
               mapped to the ClusterDirector by a logical control ID derived
               from this segment number.

Control ID Numbers

               The Control ID number is a logical representation of the segment
               number on the backplane. It is associated with the port address
               for the segment.

               Each digital I/O (dio) signal is mapped by two numbers. The first
               number identifies the main signal, and the second number
               identifies the input line for the signal if the main signal is
               output. If the main signal is input, the second number is zero.

               The Control ID, Reset command, and dio mapping for each possible
               chassis segment are given in Table 1.

                            Table 1 - Segment IDs and DIO Mapping
               -----------------------------------------------------------------
                                               DIO         Reset         DIO
                 Segment   Control ID(1,2)  Mapping(3)    Command     Mapping(4)
               -----------------------------------------------------------------
                    1         CONTROL-1        81 1       RESET-1       33 49
               -----------------------------------------------------------------
                    2         CONTROL-2        82 2       RESET-2       34 50
               -----------------------------------------------------------------
                    3         CONTROL-3        83 3       RESET-3       35 51
               -----------------------------------------------------------------
                    4         CONTROL-4        84 4       RESET-4       36 52
               -----------------------------------------------------------------
                    5         CONTROL-5        85 5       RESET-5       37 53
               -----------------------------------------------------------------
                    6         CONTROL-6        86 6       RESET-6       38 54
               -----------------------------------------------------------------
                    7         CONTROL-7        87 7       RESET-7       39 55
               -----------------------------------------------------------------


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              4
<PAGE>

                                                        Mapping System Addresses
- --------------------------------------------------------------------------------

               -----------------------------------------------------------------
                                               DIO         Reset         DIO
                 Segment   Control ID(1,2)  Mapping(3)    Command     Mapping(4)
               -----------------------------------------------------------------
                    8         CONTROL-8        88 8       RESET-8       40 56
               -----------------------------------------------------------------
                    9         CONTROL-9        89 9       RESET-9       41 57
               -----------------------------------------------------------------
                   10         CONTROL-10       90 10      RESET-10      42 58
               -----------------------------------------------------------------
                1. The ID must represent a real segment. For example, if a
                   chassis has four segments, Control ID numbers 5 through 10
                   are not used.
                2. If a segment has no engine mounted in it, the ID number is
                   nevertheless valid.
                3. Parameters in the first column should not be changed. Those
                   in the second column can be changed following the rules on
                   page 6.
                4. Number combinations cannot be changed.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              5
<PAGE>

                                                        Mapping System Addresses
- --------------------------------------------------------------------------------

               When two or more slot pairs are bridged to form one segment, the
               additional slot-pairs are added to the Control ID number. The
               number of each additional slot pair is appended to the Control ID
               number, separated by a plus (+) sign. For example, if the first
               four slot pairs on the back plane are bridged together, the
               Control ID for segment 1 is mapped as shown in the following
               definition statement:

               define (dio) CONTROL-1 81 1+2+3+4

               Where:

               CONTROL-1     identifies the first segment on the backplane

               81 1   is the port address for the first slot pair in the segment

               +2+3+4 identify the additional pairs included in segment 1

               This statement specifies that the command to power up CONTROL-1
               must turn on pairs 1, 2, 3 and 4.

               Note: Segments can be bridged on the BP10 and BP10 HC backplanes
                     only.

DIO Port Signals

               DIO signals to the ClusterDirector are routed through the 15-pin
               DIO port connector mounted on the rear of the P6000 chassis.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              6
<PAGE>

                                                        Mapping System Addresses
- --------------------------------------------------------------------------------

               Relays
               Table 3-2 gives relay mapping information for the connector.

                        Table 3-2 - Relay Mapping to Auxiliary I/O Connector
                              -----------------------------------------
                                                           DIO
                                 Pin        RELAY          Mapping(1)
                              -----------------------------------------
                                   1        RELAY-1        17  21
                              -----------------------------------------
                                   2        RELAY-2        18  23
                              -----------------------------------------
                                   3        RELAY-3        19  24
                              -----------------------------------------
                                   4        RELAY-4        20  25
                              -----------------------------------------
                                   5        DATAIN-1       117  0
                              -----------------------------------------
                                   6        DATAIN-2       118  0
                              -----------------------------------------
                                   7        DATAIN-3       119  0
                              -----------------------------------------
                                   8        DATAIN-4       120  0
                              -----------------------------------------

                              1.   Number combinations cannot be changed.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              7
<PAGE>

                                                        Mapping System Addresses
- --------------------------------------------------------------------------------

               Power Supplies

               The P6000A mounts two load-sharing, 350 Watt, telco-grade
               supplies. Table 3-3 gives signal mapping information for the
               P6000A power supply units.

                         Table 3-3 - P6000A Power Supply Signal Mapping
                    ----------------------------------------------------------
                    Power                   DIO                    DIO
                    Unit        DC Signal   Mapping    AC Signal   Mapping(1)
                    ----------------------------------------------------------
                      1          DC-OK-1     113  0     AC-OK-1     115  0
                    ----------------------------------------------------------
                      2          DC-OK-2     114  0     AC-OK-2     116  0
                    ----------------------------------------------------------

                               1.   Number combinations cannot be changed.

               The P6000B mounts two load-sharing, 400 Watt, telco-grade power
               supplies. A third supply is optional. Table 3-4 gives signal
               mapping for the P6000B power supplies.

                            Table 3-4 - P6000B Power Supply Signal Mapping
                                 ------------------------------------
                                 Power      DC Signal  DIO Mapping(1)
                                 Unit
                                 ------------------------------------
                                   1          DC-OK-1    113  0
                                 ------------------------------------
                                   2          DC-OK-2    114  0
                                 ------------------------------------
                                   3          DC-OK-3    116  0
                                 ------------------------------------

                               1.   Number combinations cannot be changed.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              8
<PAGE>

Chapter 4

Modifying Configuration Files
- --------------------------------------------------------------------------------

               This chapter describes the two system configuration files that
               users can modify. The chapter is divided in the following main
               parts:

               o  NEIbase.cfg file

               o  NEIsystems.cfg file

NEIbase.cfg File

               At startup, the ClusterDirector first performs initialization
               functions, using user defined .cfg files, and then it performs
               task switching functions

               The initialization function opens ports and configures them with
               user defined parameters. It then builds three linked lists that
               define structures used to diagnose system performance and
               identify alert events.

               Task switching is performed according to maintenance scenarios
               written for the ClusterDirector.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              9
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------


               File Variables

               The variables in the NEIbase.cfg file are listed in column one of
               Table 4-1Error! Reference source not found.. The function of each
               variable is described briefly in column two.

                            Table 4-1. NEIbase.cfg File Variables
              ------------------------------------------------------------------
              Variable               Function(1)
              ------------------------------------------------------------------
                debug                  Reserved.
              ------------------------------------------------------------------
                hardware-wd            Hardware watchdog enabling flag for
                                       ClusterDirector.
                                       1 = active
                                       0 = inactive
              ------------------------------------------------------------------
                hardware-wd-addr       Reserved.
              ------------------------------------------------------------------
                nr-dio-bits            Reserved.
              ------------------------------------------------------------------
                log on-time-out        Time in miliseconds for timeout of remote
                                       log on process.
              ------------------------------------------------------------------
                hist-files             Number of files allowed for event history
                                       log. Default=3.
              ------------------------------------------------------------------
                hist-rows              Number of lines allowed in history files.
                                       Default=20.
              ------------------------------------------------------------------
                nr-comm-ports          The number of communications ports.(2)
              ------------------------------------------------------------------
               1. An explanation of each variable's function is included as a
                  comment field in the file.
               2. The systems to be connected are identified by LINK-1 to
                  LINK-10. The actual value assigned to each LINK port is its
                  Control ID number plus 2. The following two serial connections
                  are always defined:
                  comm CONSOLE = 1
                  comm MODEM = 2

                  In the following example, two control ports are defined for
                  two surveyed systems:
                  nr-comm-ports 4

                  comm CONSOLE     1

                  comm MODEM       2


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              10
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

                  comm LINK-1      3

                  comm LINK-2      4

               All the variables listed in Error! Reference source not found.
               may be changed by the user unless comments are displayed in the
               file that caution against it.

               If the user inadvertently deletes a variable line, most variables
               default to the value 0. However, the hist-files variable defaults
               to 3, and hist-rows to 20.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              11
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

               Sample NEIbase.cfg file

               An example of the NEIbase.cfg file is shown below. Your file may
               not be identical to this example.

               hardware-wd        1         ; 0=no h/w timer, 1=h/w timer
                                            ; with address following
               hardware-wd-addr   1296      ; decimal number for h/w timer
                                            ; reset = 0x443
               nr-dio-bits        200       ; number of dio bits allowed in
                                            ; system
               logon-timeout      10000000  ; Set the delay for automatic
                                            ; logoff when user does not
               hist-files         3
               hist-rows          20        ; set the maximum number of files
                                            ; to keep track of events and the
                                            ; rows into these files. (see
                                            ; "save" function).
                                            ; The default numbers sugested by
                                            ; Network Engines, Inc. are 3 and
                                            ; 20. User can change them with
                                            ; caution, noting available disk
                                            ; space. Only values greater than
                                            ; one for hist-files and greater
                                            ; than 5 for hist-rows are
                                            ; allowed. For invalid values the
                                            ; system restores the defaults.
               nr-comm-ports      12
               comm CONSOLE       1
               comm MODEM         2
               comm LINK-1        3
               comm LINK-2        4
               comm LINK-3        5
               comm LINK-4        6
               comm LINK-5        7
               comm LINK-6        8
               comm LINK-7        9
               comm LINK-8        10
               comm LINK-9        11
               comm LINK-10       12

               modem-server       192.168.50.192 5000 ON
               email-server       207.180.73.17 [email protected]
                                  [email protected] ON
               master-address     MASTER 192.168.50.193 2050

               include /configure/NEIsystems.cfg


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              12
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

NEIsystems.cfg File

               The NEIsystems.cfg file provides the user with a consistent way
               to represent user defined variables, hardware signals, and
               communication ports.

               Independent tasks in a round robin scheduling strategy include
               updating variables and checking to determine if their state has
               changed. To accomplish this, on-condition blocks are written in
               the configuration files to trap changes of variable status, or
               events.

               Each monitored system has a unique description where all its
               variables are defined. Global variables, such as hardware
               mapping, are described at the beginning of the configuration
               file, so that they can be available for all systems. These
               variables define a generic system.

               The beginning of a system's description is established by a
               system-start line and the end by the line, system-end. An example
               system start line is shown below:

               system-start NEIsystems 192.168.110.67  2000

               After the system-start line, one or more lines of variable
               definitions follow, for example, for dio variables (hardware
               mapping), var (user defined variables), and com (communication
               variables).

               The following definition is an example of a user defined variable
               that will put all systems in either automatic or manual mode:

               define (var) MANUAL = 1      ; default value is Manual Mode

               Automatic mode means that desired actions take place in response
               to some events without user intervention. In manual mode, alerts
               are sent, but no actions are taken in response to the event.

               Manual mode avoids automatic reactions and is primarily used for
               maintenance and test purposes. This variable is used as filter
               for other events.

               The following definition maps segments on the BP10 backplane:

               define (dio) CONTROL-1 = 81 1+2+3


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              13
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

               CONTROL-1 maps the power switch for the first segment. From the
               software point of view, CONTROL-1 is the first system to be
               surveyed.

               In the example, the first number (81) defines the dio mapping, or
               an offset.

               Note:  The user must not change dio mapping numbers.

               The string, 1+2+3, is reflects the fact that three physical
               segments are bridged together to form first system. One power
               command powers up the three segments, and signals from three
               power sensors should be detected.

               If no bridges are used, segment to CONTROL mapping will be
               one-to-one.

               The following two defined variables are involved in event
               trapping:

               on CONTROL-1 = 0 & MANUAL = 1

                                  send MASTER  CONTROL-1 OFF

               on-end

               on CONTROL-1 = 0 & MANUAL = 0

                                  send MASTER CONTROL-1 OFF

                                  power up SPARE_SERVER

                                  send MODEM ATDT9,17813218932,,,11001145

               on-end

               In this situation, a power failure of the first system,
               MAIN_SERVER, causes a message to be sent to a higher decision
               layer, MASTER. In automatic mode, the spare system is powered up
               and an alert is transmitted about the failure to a pager number.
               (The string at the end of the modem command can include letters
               if the pager is able to display them.) The user can write
               whatever he can interpret at the reception port.

               Whatever follows after the words, send MASTER, will be the string
               transmitted through TCP/IP to the port and address that are
               associated with MASTER.

               The following is a sample NEIsystems.cfg file:

               system-start NEIsystems 192.168.110.67  2000


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              14
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

                  define (dio) BUZZER   = 5 25            ; sound


                  define (dio) RESET-1  = 33 49           ; hardware reset for
                                                          ; main

                  define (dio) RESET-2 = 34 50

                  define (dio) RESET-3 = 35 51

                  define (dio) RESET-3 = 36 52

                  define (dio) RELAY-1 = 17 21

                  define (dio) RELAY-2 = 18 22

                  define (dio) RELAY-3 = 19 23

                  define (dio) RELAY-4 = 20 24

                  define (dio) DC-OK-1 = 113 0

                  define (dio) DC-OK-2 = 114 0

                  define (dio) AC-OK-1 = 115 0

                  define (dio) AC-OK-2 = 116 0


                  define (dio) CONTROL-1 = 81 1+2        ; Power switch for main

                  define (dio) CONTROL-2 = 82 3+4        ; Power switch for
                                                         ; spare

                  define (dio) CONTROL-3 = 83 5+6+7

                  define (dio) CONTROL-4 = 84 8+9+10


                  define (var) ON  = 1

                  define (var) OFF = 0

                  define (var) Welcome = ON              ; Start-up flag

                  define (var) SCSI = ON

                  define (var) SPAREON = 0

                  define (var) MANUAL = 1


                  on Welcome = ON

                      alert NEISYSTEMS. (C) NEI, 1996.

                  on-end


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              15
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

                  on dio AC-OK-1 = 1

                      reset (dio) BUZZER = OFF

                      reset (dio) BUZZER =  ON           ; activate sound on
                                                         ; power failure

                      send MASTER 9110030903 AC POWER UNIT 1 FAILURE

                  on-end

                  on dio AC-OK-1 = 0

                      reset (dio) AC-OK-1

                      reset (dio) BUZZER = OFF           ; disable sound

                      send MASTER 4110030907 AC POWER UNIT 1 BACK ONLINE

                  on-end

                  on dio AC-OK-2 = 1

                      reset (dio) BUZZER =  OFF

                      reset (dio) BUZZER =  ON

                      send MASTER 9110030904 AC POWER UNIT 2 FAILURE

                  on-end

                  on dio AC-OK-2 = 0

                      reset (dio) AC-OK-2

                      reset (dio) BUZZER = OFF

                      send MASTER 4110030908 AC POWER UNIT 2 BACK ONLINE

                  on-end

                  on dio DC-OK-1 = 1

                      alert DC POWER UNIT 1 FAILURE

                      reset (dio) BUZZER =  OFF

                      reset (dio) BUZZER =  ON

                      send MASTER 9110030901 DC POWER UNIT 1 FAILURE

                  on-end

                  on dio DC-OK-1 = 0

                      reset (dio) BUZZER = OFF

                      reset (dio) DC-OK-1

                      send MASTER 4110030905 DC POWER UNIT 1 BACK ONLINE

                  on-end

                  on dio DC-OK-2 = 1

                      reset (dio) BUZZER =  OFF


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              16
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

                     reset (dio) BUZZER =  ON

                     send MASTER 9110030902 DC POWER UNIT 2 FAILURE

                 on-end

                 on dio DC-OK-2 = 0

                     reset (dio) BUZZER = OFF

                     reset (dio) DC-OK-2

                     send MASTER 4110030906 DC POWER UNIT 2 BACK ONLINE

                 on-end

                 on dio CONTROL-1 = 1 & SCSI = OFF & MANUAL = 0

                     reset (dio) CONTROL-1 = 0

                 on-end

                 on dio CONTROL-1 = 1 & MANUAL = 1

                      send MASTER 4110030011 CONTROL-1 ON

                 on-end

                 on dio CONTROL-1 = 1 & SCSI = ON & SPAREON = 0 & MANUAL = 0

                      send MASTER 4110030011 CONTROL-1 ON

                 on-end

                 on dio CONTROL-1 = 0 & MANUAL = 1

                     reset (dio) CONTROL-1

                     send MASTER 9110030012 CONTROL-1 OFF

                 on-end

                 on dio CONTROL-1 = 0 & SCSI = ON & SPAREON = 0 & MANUAL = 0

                     reset (dio) CONTROL-1

                     reset (dio) CONTROL-2 = 1 ; start Spare Server

                     send MASTER 9110030012 CONTROL-1 OFF

                 on-end

                 on dio CONTROL-1 = 1 & SPAREON = 1 & MANUAL = 0

                     reset (dio) CONTROL-1 = 0

                 on-end

                 on dio CONTROL-2 = 0 & MANUAL = 1

                     reset (dio) CONTROL-2

                     assign SPAREON = 0

                 on-end

                 on dio CONTROL-2 =1 & SCSI = OFF & MANUAL = 0


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              17
<PAGE>

                                                   Modifying Configuration Files
- --------------------------------------------------------------------------------

                     reset (dio) CONTROL-2 = 0

                 on-end

                 on dio CONTROL-2 = 1  & CONTROL-1 = 0 & SCSI = 1

                     assign SPAREON = 1

                     send MASTER 4110031011 CONTROL 2 ON

                 on-end

                 on dio CONTROL-2 = 1 & CONTROL-1 = 1 & SPAREON = 0 & MANUAL = 0

                     reset (dio) CONTROL-2 = 0

                 on-end

                 on dio  CONTROL-2 = 0 & SCSI = ON & SPAREON = 1 & MANUAL = 0

                     reset (dio) CONTROL-2

                     assign SPAREON = 0

                     reset (dio) CONTROL-1 = 1           ; start Main Server

                     send MASTER 9110031012 CONTROL-2 OFF

                 on-end

                 on dio CONTROL-3 = 1

                      send MASTER 4110032011 CONTROL 3 ON

                 on-end

                 on dio CONTROL-3 = 0

                     reset (dio) CONTROL-3

                     send MASTER 9110032012 CONTROL 3 OFF

                 on-end

                 on dio CONTROL-4 = 1

                      send MASTER 4110033011 CONTROL 4 ON

                 on-end

                 on dio CONTROL-3 = 0

                     reset (dio) CONTROL-4

                     send MASTER 9110033012 CONTROL 4 OFF

                 on-end

              system-end


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              18
<PAGE>

Chapter 5

Using TCP/IP
- --------------------------------------------------------------------------------

               This chapter defines the protocols and commands required for
               connecting to the ClusterDirector through a TCP/IP interface. The
               chapter is divided in the following main parts:

               o Listening ports

               o TCP/IP commands

Listening Ports

               The listening port assignments for connections are given in Table
               5-1.

                              Table 5-1. Listening Port Assignments
              ------------------------------------------------------------------
              Port        Function             Description
              ------------------------------------------------------------------
                2000        Maintenance          Maintenance information
                                                 including requests for
                                                 information ("get" command),
                                                 and console mode access
                                                 (telnet).
              ------------------------------------------------------------------
                3000        Inter-               Maintenance information with no
                            ClusterDirector      requests. All NEIsystems.cfg
                            Communication        commands are supported.
              ------------------------------------------------------------------

TCP/IP Commands

               get backplane returns the backplane mapping.

               get global <VAR-NAME> returns the global variable value (as
               string) or "UNKNOWN" if the variable was not defined .

               get local <VAR-NAME> from <SYSTEM-NAME> returns local variable as
               above, and the variable is searched in the definition of the
               system specified in the command line.


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              19
<PAGE>

                                                                    Using TCP/IP
- --------------------------------------------------------------------------------

               get messages {IP Address} directs the alert messages, as in send
               MASTER statements in NEIsystems.cfg, to the given destination,
               for example, to port 2050. Previously, a listening port should be
               created at this address.

               get messages MASTER disables a message redirection. This command
               should be sent before closing a connection in the maintenance
               screen. You must close the socket in the data arrival event after
               the response is received.

               Sockets are numbered in increments of 10 as shown below:

               2010 - the listening port for the first segment.

               2020 - the listening port for the second segment.

               . . . . . . . . . . . .

               2100 - the listening port for the tenth segment.

               3000 - the port dedicated to receiving remote commands (commands
               for maintenance system from higher decision level application)

               get systems returns on the open socket the names of the connected
               systems as written in the NEIsystems.cfg file, starting with the
               name of the ClusterDirector. The names are comma delimited in the
               returned string.

               get version  returns the current ClusterDirector version number.

               get watchdog  returns "INACTIVE," "STARTED," or "EXPIRED."

               power down <CONTROL-NUMBER> power up the control identified by
               CONTROL-NUMBER (can be 1 through 10)

               power down <SYSTEM-NAME> power up the system with the specified
               name.

               power down all power down all controls on the P6000.

               power up <CONTROL-NUMBER> power up the control identified by
               CONTROL-NUMBER (can be 1 through 10), i.e power up 1,., power up
               10


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              20
<PAGE>

                                                                    Using TCP/IP
- --------------------------------------------------------------------------------

               power up <SYSTEM-NAME> power up the system with the specified
               name. In the original file this name is 'CPU-1' through 'CPU-10'
               but we strongly recommend that you replace these names with the
               ones you currently use.

               power up all power up all controls on the P6000 one a time,
               starting with segment one.

               reboot RESET-n reboot the system connected to the segment n. The
               range of values is RESET-1 through RESET-10, depending on the
               backplane configuration. This is a hardware reset.

               reset (dio) <DIO-OUTPUT> = 0 change status of the named dio
               output line in 0

               reset (dio) <DIO-OUTPUT> = 1 change status of the named dio
               output line in 1

               reset (var) <VARIABLE-NAME> = 0 change the status of a variable
               to 0

               reset (var) <VARIABLE-NAME> = 1 change the status of a variable
               to 1


- --------------------------------------------------------------------------------
ClusterDirector User's Manual                                              21
<PAGE>

                                 Schedule 1(d)

                                  Trademarks
                                  ----------

1.  P6000
2.  P6000EXP

<PAGE>

                                                                   EXHIBIT 10.14

                             NETWORK ENGINES, INC.


                          Restricted Stock Agreement
                    Granted Under 1999 Stock Incentive Plan
                    ---------------------------------------


     AGREEMENT made this 16th day of March, 2000, between Network Engines,
                         ----        -----
Inc., a Delaware corporation (the "Company"), and Michael Shanahan, a Director
                                                  ----------------
of the Company (the "Participant").

     For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:

     1.  Purchase of Shares.
         ------------------

     The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set forth
in this Agreement and in the Company's 1999 Stock Incentive Plan (the "Plan")
5,000 shares (the "Shares") of common stock, $.01 par value, of the Company
- -----
("Common Stock"), at a purchase price of $15.00 per share.  The aggregate
                                         ------
purchase price for the Shares shall be paid by the Participant by check payable
to the order of the Company or such other method as may be acceptable to the
Company. Upon receipt by the Company of payment for the Shares, the Company
shall issue to the Participant one or more certificates in the name of the
Participant for that number of Shares purchased by the Participant. The
Participant agrees that the Shares shall be subject to the Purchase Option set
forth in Section 2 of this Agreement and the restrictions on transfer set forth
in Section 4 of this Agreement.

     2.  Purchase Option.
         ---------------

     (a) In the event that the Participant ceases to be a Director of the
Company for any reason or no reason, with or without cause, prior to the earlier
of the first anniversary date of the grant of the option ( the "Grant Date") or
the day prior to the Company's annual meeting that will take place in 2001, the
Company shall have the right and option (the "Purchase Option") to purchase from
the Participant, for a sum of $15.00 per share (the "Option Price"), some or all
                              ------
of the Unvested Shares (as defined below).

     "Unvested Shares" means the total number of Shares multiplied by the
Applicable Percentage at the time the Purchase Option becomes exercisable by the
Company.  The "Applicable Percentage" shall begin as 100% and shall be

                                       1
<PAGE>

reduced to zero on or after the earlier of the first anniversary date of the
grant of the option (the "Grant Date") or the day prior to the Company's annual
meeting that will take place 2001.

     (b) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.

     3.  Exercise of Purchase Option and Closing.
         ---------------------------------------

     (a) The Company may exercise the Purchase Option by delivering or mailing
to the Participant (or his estate), within 60 days after the termination of the
employment of the Participant with the Company, a written notice of exercise of
the Purchase Option.  Such notice shall specify the number of Shares to be
purchased.  If and to the extent the Purchase Option is not so exercised by the
giving of such a notice within such 60-day period, the Purchase Option shall
automatically expire and terminate effective upon the expiration of such 60-day
period.

     (b) Within 10 days after his receipt of the Company's notice of the
exercise of the Purchase Option pursuant to subsection (a) above, the
Participant (or his estate) shall tender to the Company at its principal offices
the certificate or certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this Agreement, duly
endorsed in blank or with duly endorsed stock powers attached thereto, all in
form suitable for the transfer of such Shares to the Company.  Upon its receipt
of such certificate or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price therefor.

     (c) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Participant on account of such Shares
or permit the Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Shares.

     (d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the
Participant to the Company or in cash (by check) or both.

     (e) The Company shall not purchase any fraction of a Share upon exercise of
the Purchase Option, and any fraction of a Share resulting from a computation
made pursuant to Section 2 of this Agreement shall be rounded to the nearest
whole Share (with any one-half Share being rounded upward).

                                       2
<PAGE>

     4.  Restrictions on Transfer.
         ------------------------

     The Participant shall not sell, assign, transfer, pledge, hypothecate or
otherwise dispose of, by operation of law or otherwise (collectively
"transfer"):

     (a) any Shares, or any interest therein, that are subject to the Purchase
Option, except that the Participant may transfer such Shares to or for the
benefit of any spouse, child or grandchild, or to a trust for their benefit,
provided that such Shares shall remain subject to this Agreement (including
- --------
without limitation the restrictions on transfer set forth in this Section 4, the
Purchase Option and the right of first refusal set forth in Section 5) and such
permitted transferee shall, as a condition to such transfer, deliver to the
Company a written instrument confirming that such transferee shall be bound by
all of the terms and conditions of this Agreement; or

     (b) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.

     5.  Right of First Refusal.
         ----------------------

     (a) If the Participant proposes to transfer any Shares that are no longer
subject to the Purchase Option (either because they are no longer Unvested
Shares or because the Purchase Option expired unexercised), then the Participant
shall first give written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed transferee and state
the number of such Shares he proposes to transfer the ("Offered Shares"), the
price per share and all other material terms and conditions of the transfer.

     (b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice.  In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in form suitable for
transfer of the Offered Shares to the Company.  Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares;  provided that if the
                                                       -------- ----
terms of payment set forth in the Transfer Notice were other than cash against
delivery, the Company

                                       3
<PAGE>

may pay for the Offered Shares on the same terms and conditions as were set
forth in the Transfer Notice.

     (c) If the Company does not elect to acquire all of the Offered Shares, the
Participant may, within the 30-day period following the expiration of the option
granted to the Company under subsection (b) above, transfer the Offered Shares
to the proposed transferee, provided that such transfer shall not be on terms
                            -------- ----
and conditions more favorable to the transferee than those contained in the
Transfer Notice.  Notwithstanding any of the above, all Offered Shares
transferred pursuant to this Section 5 shall remain subject to this Agreement
(including without limitation the restrictions on transfer set forth in Section
4 and the right of first refusal set forth in this Section 5) and such
transferee shall, as a condition to such transfer, deliver to the Company a
written instrument confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement.

     (d) After the time at which the Offered Shares are required to be delivered
to the Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Participant on account of such Offered
Shares or permit the Participant to exercise any of the privileges or rights of
a stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Offered Shares.

     (e) The following transactions shall be exempt from the provisions of this
Section 5:

         (1) a transfer of Shares to or for the benefit of any spouse, child or
grandchild of the Participant, or to a trust for their benefit;

         (2) any transfer pursuant to an effective registration statement filed
by the Company under the Securities Act of 1933, as amended (the "Securities
Act"); and

         (3) the sale of all or substantially all of the shares of capital stock
of the Company (including pursuant to a merger or consolidation);

provided, however, that in the case of a transfer pursuant to clause (1) above,
- --------  -------
such Shares shall remain subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and the right of first
refusal set forth in this Section 5) and such transferee shall, as a condition
to such transfer, deliver to the Company a written instrument confirming that
such transferee shall be bound by all of the terms and conditions of this
Agreement.

                                       4
<PAGE>

     (f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 5 to one or more persons or entities.

     (g) The provisions of this Section 5 shall terminate upon the earlier of
the following events:

         (1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed by the Company under the Securities Act; or

         (2) the sale of all or substantially all of the capital stock, assets
or business of the Company, by merger, consolidation, sale of assets or
otherwise.

     6.  Agreement in Connection with Public Offering.
         --------------------------------------------

     The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such initial offering.

     7.  Effect of Prohibited Transfer.
         -----------------------------

     The Company shall not be required (a) to transfer on its books any of the
Shares which shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement, or (b) to treat as owner of such Shares
or to pay dividends to any transferee to whom any such Shares shall have been so
sold or transferred.

     8.  Escrow.
         ------

     The Participant shall, upon the execution of this Agreement, execute Joint
Escrow Instructions in the form attached to this Agreement as Exhibit A.  The
Joint Escrow Instructions shall be delivered to the Clerk of the Company, as
escrow agent thereunder.  The Participant shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of the Participant, the certificate(s)
evidencing

                                       5
<PAGE>

the Shares issued hereunder. Such materials shall be held by such escrow agent
pursuant to the terms of such Joint Escrow Instructions.

     9.  Restrictive Legend.
         ------------------

     All certificates representing Shares shall have affixed thereto a legend in
substantially the following form, in addition to any other legends that may be
required under federal or state securities laws:

         "The shares of stock represented by this certificate are
         subject to restrictions on transfer and an option to
         purchase set forth in a certain Stock Restriction
         Agreement between the corporation and the registered
         owner of these shares (or his predecessor in interest),
         and such Agreement is available for inspection without
         charge at the office of the Clerk of the corporation."

         "The shares represented by this certificate have not
         been registered under the Securities Act of 1933, as
         amended, and may not be sold, transferred or otherwise
         disposed of in the absence of an effective registration
         statement under such Act or an opinion of counsel
         satisfactory to the corporation to the effect that such
         registration is not required."

     10. Provisions of the Plan.
         ----------------------

     This Agreement is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this Agreement.

     11. Investment Representations.
         --------------------------

     The Participant represents, warrants and covenants as follows:

     (a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act, or any rule or
regulation under the Securities Act.

     (b) The Participant has had such opportunity as he has deemed adequate to
obtain from representatives of the Company such information as is

                                       6
<PAGE>

necessary to permit him to evaluate the merits and risks of his investment in
the Company.

     (c) The Participant has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.

     (d) The Participant can afford a complete loss of the value of the Shares
and is able to bear the economic risk of holding such Shares for an indefinite
period.

     (e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with; and (iv) there is now no registration statement on
file with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to register
the Shares under the Securities Act.

                                       7
<PAGE>

     12. Withholding Taxes; Section 83(b) Election.
         -----------------------------------------

     (a) The Participant acknowledges and agrees that the Company has the right
to deduct from payments of any kind otherwise due to the Participant any
federal, state or local taxes of any kind required by law to be withheld with
respect to the purchase of the Shares by the Participant or the lapse of the
Purchase Option.

     (b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed with
the Internal Revenue Service within 30 days of the transfer of shares to the
Participant; and that the Participant is solely responsible for making such
election.

     13. Severability.
         ------------

     The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, and each other provision of this Agreement shall be severable and
enforceable to the extent permitted by law.

     14. Waiver.
         ------

     Any provision for the benefit of the Company contained in this Agreement
may be waived, either generally or in any particular instance, by the Board of
Directors of the Company.

     15. Binding Effect.
         --------------

     This Agreement shall be binding upon and inure to the benefit of the
Company and the Participant and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Sections 4 and 5 of this Agreement.

     16. Notice.
         ------

     All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its

                                       8
<PAGE>

respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.

     17.  Pronouns.
          --------

     Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns and pronouns shall include the plural, and vice versa.

     18.  Entire Agreement.
          ----------------

     This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.

     19.  Amendment.
          ---------

     This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Participant.

     20.  Governing Law.
          -------------

     This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.

                                       9
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

                                    NETWORK ENGINES, INC.

                                    By:___________________________
                                    Title: President, CEO and CTO
                                           -----------------------



                                    ______________________________
                                    Michael Shanahan


                                    Address:

                                    ______________________________
                                    ______________________________

                                       10
<PAGE>

                                   Exhibit A

                             Network Engines, Inc.

                           Joint Escrow Instructions
                           -------------------------



                                March 16, 2000



Secretary
Network Engines, Inc.
61 Pleasant Street
Randolph, MA 02368-4137

Dear Secretary:

     As Escrow Agent for Network Engines, Inc., a Delaware corporation (the
"Company"), and the undersigned Participant ("Holder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Restricted Stock Agreement (the "Agreement") of even date
herewith, to which a copy of these Joint Escrow Instructions is attached, in
accordance with the following instructions:

     1.   Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares.  Holder does
hereby irrevocably constitute and appoint you as his attorney-in-fact and agent
for the term of this escrow to execute with respect to such Shares all documents
necessary or appropriate to make such Shares negotiable and to complete any
transaction herein contemplated.  Subject to the provisions of this paragraph 1
and the terms of the Agreement, Holder shall exercise all rights and privileges
of a stockholder of the Company while the Shares are held by you.

     2.   Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice specifying
the purchase price for the Shares, as determined pursuant to the Agreement, and
the time for a closing hereunder (the "Closing") at the principal

                                       11
<PAGE>

office of the Company. Holder and the Company hereby irrevocably authorize and
direct you to close the transaction contemplated by such notice in accordance
with the terms of said notice.

     3.   At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.

     4.   The Holder shall have the right to withdraw from this escrow any
Shares as to which the Purchase Option (as defined in the Agreement) has
terminated or expired.

     5.   Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

     6.   You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in good
faith and in the exercise of your own good judgment, and any act done or omitted
by you pursuant to the advice of your own attorneys shall be conclusive evidence
of such good faith.

     7.   You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company, excepting
only orders or process of courts of law, and are hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court.  In case you
obey or comply with any such order, judgment or decree of any court, you shall
not be liable to any of the parties hereto or to any other person, firm or
Company by reason of such compliance, notwithstanding any such order, judgment
or decree being subsequently reversed, modified, annulled, set aside, vacated or
found to have been entered without jurisdiction.

     8.   You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

                                       12
<PAGE>

     9.   You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.

     10.  Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party.  In the event of any such termination, the Company shall
appoint any officer of the Company as successor Escrow Agent.

     11.  If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

     12.  It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

     13.  Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.

          COMPANY:       Network Engines, Inc.
                         61 Pleasant Street
                         Randolph, MA 02368-4137

          HOLDER:        Notices to Holder shall be sent to the address set
                         forth below Holder's signature below.

          ESCROW AGENT:  Douglas G. Bryant
                         -----------------
                         61 Pleasant St.
                         ---------------
                         Randolph, MA 02368
                         -------------------

                                       13
<PAGE>

     14.  By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.

     15.  This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.

                              Very truly yours,

                              Network Engines, Inc.


                              By: /s/ Lawrence Genovesi
                                  ---------------------
                              Title:  President, CEO and CTO
                                      ----------------------


                              HOLDER:


                              /s/ Michael Shanahan
                              --------------------
                                       (Signature)

                              Michael Shanahan
                              ---------------------------
                                         Print Name


                              Address:


                              ____________________________________

                              ____________________________________

                              Date Signed:________________________

ESCROW AGENT:

/s/ Douglas G. Bryant
- ---------------------

                                       14

<PAGE>

                                                                   EXHIBIT 10.15

                             NETWORK ENGINES, INC.


                      Nonstatutory Stock Option Agreement
                    Granted Under 1999 Stock Incentive Plan
                    ---------------------------------------


1.   Grant of Option.
     ---------------

     This agreement evidences the grant by Network Engines, Inc., a Delaware
corporation (the "Company") on March 16, 2000 to Robert Wadsworth , a Director
                                                 -----------------
of the Company (the "Participant"), of an option to purchase, in whole or in
part, on the terms provided herein and in the Company's 1999 Stock Incentive
Plan (the "Plan"),  a total of 5,000 shares of common stock, $.01 par value per
                               -----
share,  of the Company ("Common Stock") (the "Shares") at $15.00 per Share.
                                                          ------
Unless earlier terminated, this option shall expire on March 15, 2010 (the
                                                       --------------
"Final Exercise Date").

     It is intended that the option evidenced by this agreement shall not be an
incentive stock option as defined in Section 422 of the Internal Revenue Code of
1986, as amended and any regulations promulgated thereunder (the "Code").
Except as otherwise indicated by the context, the term "Participant", as used in
this option, shall be deemed to include any person who acquires the right to
exercise this option validly under its terms.

2.   Vesting Schedule.
     ----------------

     This option will become exercisable ("vest") as to 100 % of the original
                                                        ---
number of Shares on the earlier of the first anniversary date of the grant of
the option (the "Grant Date") or the day prior to the Company's annual meeting
that will take place in 2001.

     The right of exercise shall be cumulative so that to the extent the option
is not exercised in any period to the maximum extent permissible it shall
continue to be exercisable, in whole or in part, with respect to all shares for
which it is vested until the earlier of the Final Exercise Date or the
termination of this option under Section 3 hereof or the Plan.
<PAGE>

3.   Exercise of Option.
     ------------------

     (a) Form of Exercise.  Each election to exercise this option shall be in
         ----------------
writing, signed by the Participant, and received by the Company at its principal
office, accompanied by this agreement, and payment in full in the manner
provided in the Plan.  The Participant may purchase less than the number of
shares covered hereby, provided that no partial exercise of this option may be
for any fractional share.

     (b) Continuous Relationship with the Company Required.  Except as otherwise
         -------------------------------------------------
provided in this Section 3, this option may not be exercised unless the
Participant, at the time he or she exercises this option, is, and has been at
all times since the date of grant of this option, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an
"Eligible Participant").

     (c) Termination of Relationship with the Company.  If the Participant
         --------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as provided in
paragraphs (d) and (e) below, the right to exercise this option shall terminate
three months after such cessation (but in no event after the Final Exercise
Date), provided that this option shall be exercisable only to the extent that
       -------- ----
the Participant was entitled to exercise this option on the date of such
cessation.  Notwithstanding the foregoing, if the Participant, prior to the
Final Exercise Date, violates the non-competition or confidentiality provisions
of any employment contract, confidentiality and nondisclosure agreement or other
agreement between the Participant and the Company, the right to exercise this
option shall terminate immediately upon written notice to the Participant from
the Company describing such violation.

     (d) Exercise Period Upon Death or Disability.  If the Participant dies or
         ----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to
the Final Exercise Date while he or she is an Eligible Participant and the
Company has not terminated such relationship for "cause" as specified in
paragraph (e) below, this option shall be exercisable, within the period of one
year following the date of death or disability of the Participant, by the
Participant, provided that this option shall be exercisable only to the extent
             -------- ----
that this option was exercisable by the Participant on the date of his or her
death or disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.

     (e) Discharge for Cause.  If the Participant, prior to the Final Exercise
         -------------------
Date, is discharged by the Company for "cause" (as defined below), the right to
exercise this option shall terminate immediately upon the effective date of such
discharge. "Cause" shall mean willful misconduct by the Participant or willful
failure by the Participant to
<PAGE>

perform his or her responsibilities to the Company (including, without
limitation, breach by the Participant of any provision of any employment,
consulting, advisory, nondisclosure, non-competition or other similar agreement
between the Participant and the Company), as determined by the Company, which
determination shall be conclusive. The Participant shall be considered to have
been discharged for "Cause" if the Company determines, within 30 days after the
Participant's resignation, that discharge for cause was warranted.

4.   Right of First Refusal.
     ----------------------

     (a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this option,
then the Participant shall first give written notice of the proposed transfer
(the "Transfer Notice") to the Company.  The Transfer Notice shall name the
proposed transferee and state the number of such Shares the Participant proposes
to transfer (the "Offered Shares"), the price per share and all other material
terms and conditions of the transfer.

     (b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the Offered
Shares at the price and upon the terms set forth in the Transfer Notice.  In the
event the Company elects to purchase all of the Offered Shares, it shall give
written notice of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant shall tender to
the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Participant or
with duly endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company.  Upon receipt of such certificate
or certificates, the Company shall deliver or mail to the Participant a check in
payment of the purchase price for the Offered Shares;  provided that if the
                                                       -------- ----
terms of payment set forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.

     (c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to subsection (b)
above, the Company shall not pay any dividend to the Participant on account of
such Shares or permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Offered Shares, but shall, in so
far as permitted by law, treat the Company as the owner of such Offered Shares.

     (d) If the Company does not elect to acquire all of the Offered Shares, the
Participant may, within the 30-day period following the expiration of the option
<PAGE>

granted to the Company under subsection (b) above, transfer the Offered Shares
to the proposed transferee, provided that such transfer shall not be on terms
                            -------- ----
and conditions more favorable to the transferee than those contained in the
Transfer Notice.  Notwithstanding any of the above, all Offered Shares
transferred pursuant to this Section 4 shall remain subject to the right of
first refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the terms and
conditions of this Section 4.

     (e)  The following transactions shall be exempt from the provisions of this
Section 4:

          (i)   any transfer of Shares to or for the benefit of any spouse,
child or grandchild of the Participant, or to a trust for their benefit;

          (ii)  any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and

          (iii) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;

provided, however, that in the case of a transfer pursuant to clause (1) above,
- --------  -------
such Shares shall remain subject to the right of first refusal set forth in this
Section 4 and such transferee shall, as a condition to such transfer, deliver to
the Company a written instrument confirming that such transferee shall be bound
by all of the terms and conditions of this Section 4.

     (f)  The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or entities.

     (g)  The provisions of this Section 4 shall terminate upon the earlier of
the following events:

          (1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective registration statement
filed by the Company under the Securities Act; or

          (2) the sale of all or substantially all of the capital stock, assets
or business of the Company, by merger, consolidation, sale of assets or
otherwise.

     (h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of any of the
provisions set
<PAGE>

forth in this Section 4, or (b) to treat as owner of such Shares or to pay
dividends to any transferee to whom any such Shares shall have been so sold or
transferred.

5.   Agreement in Connection with Public Offering.
     --------------------------------------------

     The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such offering.

6.   Withholding.
     -----------

     No Shares will be issued pursuant to the exercise of this option unless and
until the Participant pays to the Company, or makes provision satisfactory to
the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option.

7.   Nontransferability of Option.
     ----------------------------

     This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.

8.   Provisions of the Plan.
     ----------------------

     This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.



     IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer.  This option shall take
effect as a sealed instrument.
<PAGE>

                             NETWORK ENGINES, INC.


Dated: March 16, 2000    By: ____________________________

                             Name:   Lawrence A. Genovesi
                                     --------------------
                             Title:  President, CEO & CTO
                                     --------------------


                           PARTICIPANT'S ACCEPTANCE

     The undersigned hereby accepts the foregoing option and agrees to the terms
and conditions thereof.  The undersigned hereby acknowledges receipt of a copy
of the Company's 1999 Stock Incentive Plan.

                    PARTICIPANT:


                    _____________________________

                    Address: _____________________

                             _____________________

<PAGE>
                                                                   Exhibit 10.16

                             NETWORK ENGINES, INC.

                           1999 Stock Incentive Plan

                                First Amendment
                                ---------------

     The Network Engines, Inc. 1999 Stock Incentive Plan, pursuant to Section
9(e) thereof, is hereby amended as follows, effective as of March 16, 2000.

     Section 4(a) is amended to read in its entirety as follows:

          Subject to adjustment under Section 4(c), Awards may initially be made
          under the Plan for up to an aggregate of 8,047,902 shares (after
          taking into account the 2.5-for-1 stock split approved by the Board on
          May 15, 2000 (the "Stock Split")) of Common Stock; provided, however,
          that on October 1 of each year commencing on October 1, 2000 through
          and including October 1, 2008, the number of shares of Common Stock
          reserved for issuance under the Plan shall be automatically increased
          by the lesser of (a) 4,000,000 shares (after taking into account the
          Stock Split), (b) 5% of the Company's outstanding stock on such date
          or (c) an amount determined by the Board. Except as provided below, in
          no event may the aggregate number of shares of Common Stock issued
          pursuant to Incentive Stock Options (as hereinafter defined) and any
          other Awards during the life of the Plan exceed 20,047,902 (after
          taking into account the Stock Split). If any Award expires or is
          terminated, surrendered or canceled without having been fully
          exercised or is forfeited in whole or in part or results in any Common
          Stock not being issued, the unused Common Stock covered by such Award
          shall again be available for the grant of Awards under the Plan,
          subject, however, in the case of Incentive Stock Options, to any
          limitation required under the Code. Shares issued under the Plan may
          consist in whole or in part of authorized but unissued shares or
          treasury shares.

                               Adopted by the Board of Directors: March 16, 2000


                               Approved by the Stockholders:            , 2000
                                                             -----------

<PAGE>

                                                                    Exhibit 23.2

                       CONSENT OF INDEPENDENT ACCOUNTANTS

   We hereby consent to the use in this Registration Statement on Form S-1
(File No. 333-34286) of our report dated November 22, 1999, except as to Note
13 for which the date is May 15, 2000, relating to the financial statements of
Network Engines, Inc., which appears in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.

PricewaterhouseCoopers LLP

Boston, Massachusetts

May 19, 2000

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   6-MOS
<FISCAL-YEAR-END>                          SEP-30-2000             SEP-30-2000
<PERIOD-START>                             JAN-01-2000             OCT-01-1999
<PERIOD-END>                               MAR-31-2000             MAR-31-2000
<CASH>                                          16,793                       0
<SECURITIES>                                         0                       0
<RECEIVABLES>                                    5,498                       0
<ALLOWANCES>                                       287                       0
<INVENTORY>                                      3,949                       0
<CURRENT-ASSETS>                                27,289                       0
<PP&E>                                           2,056                       0
<DEPRECIATION>                                       0                       0
<TOTAL-ASSETS>                                  29,979                       0
<CURRENT-LIABILITIES>                            6,792                       0
<BONDS>                                              0                       0
                           41,976                       0
                                          0                       0
<COMMON>                                            49                       0
<OTHER-SE>                                    (18,947)                       0
<TOTAL-LIABILITY-AND-EQUITY>                    29,979                       0
<SALES>                                          6,051                  10,466
<TOTAL-REVENUES>                                 6,051                  10,466
<CGS>                                            4,192                   6,805
<TOTAL-COSTS>                                    4,192                   6,805
<OTHER-EXPENSES>                                 6,360                   9,778
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                                  10                      30
<INCOME-PRETAX>                                (4,221)                 (5,807)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                            (4,221)                 (5,807)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                   (4,221)                 (5,807)
<EPS-BASIC>                                     (4.91)                  (3.06)
<EPS-DILUTED>                                   (4.91)                  (3.06)


</TABLE>

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   6-MOS
<FISCAL-YEAR-END>                          SEP-30-1999             SEP-30-1999
<PERIOD-START>                             JAN-01-1999             OCT-01-1998
<PERIOD-END>                               MAR-31-1999             MAR-31-1999
<CASH>                                           1,558                       0
<SECURITIES>                                         0                       0
<RECEIVABLES>                                      273                       0
<ALLOWANCES>                                       107                       0
<INVENTORY>                                        618                       0
<CURRENT-ASSETS>                                 2,526                       0
<PP&E>                                             464                       0
<DEPRECIATION>                                       0                       0
<TOTAL-ASSETS>                                   3,016                       0
<CURRENT-LIABILITIES>                              898                       0
<BONDS>                                              0                       0
                            9,150                       0
                                          0                       0
<COMMON>                                             5                       0
<OTHER-SE>                                     (7,135)                       0
<TOTAL-LIABILITY-AND-EQUITY>                     3,016                       0
<SALES>                                            893                   1,116
<TOTAL-REVENUES>                                   893                   1,116
<CGS>                                              883                   1,268
<TOTAL-COSTS>                                      883                   1,268
<OTHER-EXPENSES>                                 1,335                   2,413
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                                   6                      19
<INCOME-PRETAX>                                (1,314)                 (3,484)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                            (1,314)                 (3,484)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                    314                     314
<CHANGES>                                            0                       0
<NET-INCOME>                                     1,000                 (3,170)
<EPS-BASIC>                                     (0.76)                  (0.96)
<EPS-DILUTED>                                   (0.76)                  (0.96)


</TABLE>


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