NETWORK EQUIPMENT TECHNOLOGIES INC, 10-Q, 1998-08-14

NETWORK EQUIPMENT TECHNOLOGIES INC
10-Q, 1998-08-14
COMPUTER COMMUNICATIONS EQUIPMENT

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 28, 1998

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period ended ______________ or

Commission File Number 0-15323

NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-2904044
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)

6500 Paseo Padre Parkway
Fremont, CA 94555
(510) 713-7300
(Address, including zip code, and telephone number
including area code, of registrant's
principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

Yes _X_ No___

The number of shares outstanding of the registrant's Common Stock, $.01 par
value, on June 28, 1998 was 21,641,433.

================================================================================

This document consists of 11 pages of which this is page 1.

<PAGE>

NETWORK EQUIPMENT TECHNOLOGIES, INC.

INDEX
-----

Page
Number
------

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Condensed Consolidated Balance Sheets -
June 28, 1998 and March 31, 1998.............................. 3

Condensed Consolidated Statements of Income -
three months ended June 28, 1998 and June 29, 1997............ 4

Condensed Consolidated Statements of Cash Flows -
three months ended June 28, 1998 and June 29, 1997............ 5

Notes to Condensed Consolidated Financial Statements.......... 6

Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................. 7

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.............................. 10

SIGNATURE .............................................................. 11

2.
<PAGE>

NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)

<TABLE>
<CAPTION>
June 28, March 31,
1998 1998
--------- ---------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 43,913 $ 59,512
Temporary cash investments 102,547 101,990
Accounts receivable, net of allowances of $3,603
at June 28 and $3,926 at March 31 75,441 71,714
Inventories 19,445 19,713
Deferred income taxes 9,836 9,836
Prepaid expenses and other assets 6,911 7,254
--------- ---------
Total current assets 258,093 270,019
Property and equipment, net 50,544 42,657
Software production costs, net 5,869 5,491
Other assets 18,515 16,390
--------- ---------
$ 333,021 $ 334,557
========= =========

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,035 $ 21,890
Accrued liabilities 42,507 48,239
--------- ---------
Total current liabilities 61,542 70,129
Deferred income taxes 2,933 1,954
7-1/4% convertible subordinated debentures 25,821 25,821
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none -- --
Common stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 21,641,000 shares at June 28 and
21,454,000 shares at March 31 216 215
Additional paid-in capital 178,182 176,452
Treasury stock (1,069) (1,430)
Net unrealized gain on available-for-sale securities 5,507 3,759
Accumulated translation adjustment (1,152) (436)
Retained earnings 61,041 58,093
--------- ---------
Total stockholders' equity 242,725 236,653
--------- ---------
$ 333,021 $ 334,557
========= =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

3.
<PAGE>

NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts - unaudited)

Three Months Ended
-----------------------
June 28, June 29,
1998 1997
-------- --------

Revenue:
Product revenue $ 45,662 $ 53,517
Service and other revenue 25,764 26,456
-------- --------
Total revenue 71,426 79,973
-------- --------

Cost of sales:
Cost of product revenue 18,633 20,428
Cost of service and other revenue 14,846 17,070
-------- --------
Total cost of sales 33,479 37,498
-------- --------

Gross margin 37,947 42,475

Operating expenses:
Sales and marketing 21,608 22,206
Research and development 10,283 10,151
General and administrative 2,888 2,784
-------- --------
Total operating expenses 34,779 35,141
-------- --------

Income from operations 3,168 7,334

Other income (expense):
Interest income 1,660 1,623
Interest expense (508) (476)
Other (126) (165)
-------- --------

Income before income taxes 4,194 8,316

Income tax provision 1,246 2,661
-------- --------

Net income $ 2,948 $ 5,655
======== ========

Earnings Per Share:
Basic $ .14 $ .27
======== ========
Diluted $ .13 $ .26
======== ========

Shares used in per share computation:
Basic 21,570 21,064
======== ========
Diluted 22,433 21,753
======== ========

See Notes to Condensed Consolidated Financial Statements.

4.
<PAGE>

NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)

<TABLE>
<CAPTION>
Three Months Ended
--------------------
June 28, June 29,
1998 1997
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $ 59,512 $ 39,141
-------- --------
Cash Flows from Operating Activities:
Net income 2,948 5,655
Adjustments to reconcile net income to cash
provided by (used for) operations:
Depreciation and amortization 4,706 4,617
Restricted stock compensation 82 90
Changes in assets and liabilities:
Accounts receivable (3,678) (3,841)
Inventories 267 1,598
Prepaid expenses and other assets 351 (922)
Accounts payable (2,856) (2,834)
Accrued liabilities (5,717) 162
-------- --------
Net cash provided by (used for) operations (3,897) 4,525
-------- --------

Cash Flows from Investing Activities:
Purchases of temporary cash investments (14,461) (23,311)
Proceeds from maturities of temporary cash investments 13,732 25,216
Purchases of property and equipment (12,035) (5,454)
Additions to software production costs (946) (1,293)
Other 664 (260)
-------- --------
Net cash used for investing activities (13,046) (5,102)
-------- --------

Cash Flows from Financing Activities:
Sale of Common Stock 2,010 1,183
-------- --------
Net cash provided by financing activities 2,010 1,183
-------- --------

Effect of exchange rate changes on cash (666) 230
-------- --------

Net increase (decrease) in cash and cash equivalents (15,599) 836
-------- --------

Cash and Cash Equivalents at End of Period $ 43,913 $ 39,977
======== ========

Other Cash Flow Information:
Cash paid (refunded) for:
Interest $ 966 $ 934
Income taxes $ (471) $ 10,809
Non-cash investing and financing activities:
Net unrealized gain on available-for-sale securities $ 1,748 $ 123
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

5.
<PAGE>

NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany accounts and transactions have been
eliminated.

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) considered necessary to present fairly the
financial position as of June 28, 1998, and the results of operations and
cash flows for the three months ended June 28, 1998 and June 29, 1997.
These financial statements should be read in conjunction with the March 31,
1998 audited consolidated financial statements and notes thereto. The
results of operations for the three months ended June 28, 1998 are not
necessarily indicative of the results to be expected for the fiscal year
ending March 31, 1999.

2. Inventories

Inventories consist of (in thousands):

June 28, March 31,
1998 1998
------- --------
(unaudited)

Purchased components $ 3,677 $ 4,340
Work-in-process 14,442 13,371
Finished goods 1,326 2,002
------- -------
$19,445 $19,713
======= =======

3. Earnings Per Share

Basic earnings per share has been computed based upon the weighted average
number of common shares outstanding for the periods presented. For diluted
earnings per share, shares used in the per share computation include
weighted average common and potentially dilutive shares outstanding.
Potentially dilutive shares consist of shares issuable upon the assumed
exercise of dilutive stock options and totaled 862,000 and 689,000 for the
three months ended June 28,1998 and June 29, 1997, respectively.

4. Comprehensive Income

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", in the first quarter of fiscal 1999.
For the three months ended June 28, 1998 and June 29, 1997, comprehensive
income was $3,977,000 and $6,820,000, respectively, and represents net
income for the period, as adjusted for the net unrealized gain on
available-for-sale securities and the cumulative translation adjustment,
net of taxes.

5. Recently Issued Accounting Standard

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for a Company's
business segments and related disclosures about its products, services,
geographic areas, and major customers. The Company has not yet identified
its SFAS reporting segments. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations or cash
flows. This statement is effective for the Company for fiscal year 1999.

6.
<PAGE>

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

This discussion and analysis should be read in conjunction with Management's
Discussion and Analysis in the Company's 1998 Annual Report to Shareholders and
Part I of the Company's Form 10-K for the fiscal year ended March 31, 1998.

Statements made in this Management's Discussion and Analysis or elsewhere in
this quarterly report or other communications (including press releases and
analyst calls) that are not statements of historical fact are forward-looking
statements, including without limitation, those related to the Company's future
revenues, gross margins, and other financial and economic targets, trends or
goals. Forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from
statements made, including those discussed in the Company's Annual Report to
Stockholders for the fiscal year ended March 31, 1998. The Company does not
undertake an obligation to update its forward-looking statements or risk factors
to reflect future events or circumstances.

RESULTS OF OPERATIONS

The following table depicts selected data derived from the Company's
Consolidated Statements of Income expressed as a percentage of revenue for the
periods presented:

- --------------------------------------------------------------------------------
Three Months Ended
------------------
Percent of Revenue June 28, 1998 June 29, 1997
- --------------------------------------------------------------------------------
Product revenue 63.9% 66.9%
Service and other revenue 36.1 33.1
----- -----
Total revenue 100.0 100.0
----- -----

Product gross margin 59.2 61.8
Service and other revenue gross margin 42.4 35.5
----- -----
Total gross margin 53.1 53.1
----- -----

Sales and marketing 30.3 27.8
Research and development 14.4 12.6
General and administrative 4.0 3.5
----- -----
Total operating expenses 48.7 43.9
----- -----

Income from operations 4.4 9.2
----- -----

Net income 4.1% 7.1%
===== =====
- --------------------------------------------------------------------------------

Revenue

Total revenue for the first quarter of fiscal 1999 decreased 10.7% to $71.4
million from $80.0 million for the first quarter of fiscal 1998. Product revenue
decreased $7.9 million and service and other revenue decreased $0.7 million
quarter-over-quarter. The 14.7% decrease in product revenue was principally due
to a 62.5% decline in sales in the Asia Pacific/Latin America channel. The
Company's other sales channels were relatively flat quarter-over-quarter.

7.
<PAGE>

In the first quarter of fiscal 1999, the Company's new Promina(TM) product line
represented $31.9 million, or 69.9% of product sales.

The decrease in service and other revenue was due to a decrease in systems
integration services in support of product sales to the U.S. government.

Gross Margin

Total gross margin as a percentage of total revenue was 53.1% for the first
quarter of fiscal 1999 and the first quarter of fiscal 1998. Product gross
margin decreased to 59.2% in fiscal 1999 from 61.8% in the first quarter of
fiscal 1998. A favorable channel mix, resulting from a decrease in Asia
Pacific/Latin America revenue which has lower gross margins, was offset by
Promina upgrade promotional programs.

Service and other revenue gross margin increased to 42.4% in the first quarter
of fiscal 1999 from 35.5% in the first quarter of fiscal 1998. The increase is
primarily the result of cost reductions and consolidation of the Company's
service operations.

Management expects total gross margin in fiscal 1999 to remain fairly constant.

Operating Expenses

Operating expenses decreased slightly in the first quarter of fiscal 1999 from
the first quarter of fiscal 1998, and increased as a percentage of total revenue
to 48.7% from 43.9%, respectively, due to lower revenue. Management expects
operating expenses to increase during the remainder of fiscal 1999.

Sales and marketing expense decreased slightly in the first quarter of fiscal
1999 from the first quarter of fiscal 1998, and increased as a percentage of
total revenue to 30.3% from 27.8%, respectively. The decrease in the first
quarter of fiscal 1999 was due to lower marketing expenses related to
advertising, promotions and trade shows. Management expects sales and marketing
expense to increase during fiscal 1999.

Research and development expense remained relatively flat for the first quarter
of fiscal 1999 as compared to the first quarter of fiscal 1998, and increased as
a percentage of total revenue to 14.4% from 12.6%, respectively. In the first
quarter of fiscal 1999, lower expenses for consulting and direct materials was
offset by a decrease in the amount of capitalizable software production costs.
Management plans to continue funding research and development efforts at levels
necessary to advance product programs and expects research and development
spending to increase during the remainder of fiscal 1999.

General and administrative expense remained flat for the first quarter of fiscal
1999 as compared to the first quarter of fiscal 1998. Management expects general
and administrative expense to increase slightly for the remainder of fiscal
1999.

In the fourth quarter of fiscal 1998, the Company recorded a $3.3 million charge
related to the relocation of the Company's facilities. The charge was composed
primarily of the remaining lease commitment on the old facility for the period
the Company expected the facility to be vacant. The Company also expected to
incur moving expenses of approximately $1.0 million

8.
<PAGE>

in the first quarter of fiscal year 1999. While the Company did incur nearly
$1.0 million in move costs during the first quarter of fiscal 1999, these costs
were offset by an early lease termination on portions of the old facility, as
well as a gain from the sale of equipment not moved to the new facility.
Management expects future move-related charges to be immaterial.

Non-Operating Items

Interest income and interest expense remained flat for the first quarter of
fiscal 1999 as compared to the first quarter of fiscal 1998.

For the first quarter of fiscal 1999, the Company recorded income tax expense of
$1.2 million as compared to $2.7 million for fiscal 1998, at an effective rate
of 30% and 32% for fiscal 1999 and fiscal 1998, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of June 28, 1998, the Company had cash, cash equivalents and temporary cash
investments of $146.5 million, as compared to $161.5 million at the end of
fiscal 1998. Cash used for operations was $3.9 million in the first quarter of
fiscal 1999 as compared to $4.5 million of cash provided from operations in the
comparable period of the prior year. This year-to-year net $8.4 million decrease
in cash flow was due to a reduction of other current liabilities during the
first quarter of fiscal 1999 as compared to an increase during the first quarter
of fiscal 1998, as well as lower net income and a smaller reduction in inventory
in the first quarter of fiscal 1999.

Net cash used for investing activities in fiscal 1999 consisted primarily of
purchases of property and equipment of $12.0 million, primarily related to the
new facility, and additions to software production costs of $1.0 million.

Net cash provided by financing activities in fiscal 1999 was composed
principally of $2.0 million from the issuance of Common Stock related to the
employee stock benefit plans.

As of June 28,1998, the Company had available an unsecured $10.0 million line of
credit. Borrowings under this committed borrowing facility are available through
May 1999 and bear interest at the bank's base rate (which approximates prime).
At June 28,1998, there were no outstanding borrowings under this facility.

In April 1997, the Company announced a 12-year operating lease agreement
pursuant to which a new corporate headquarters facility was constructed in
Fremont, California. In conjunction with the project management and design and
construction of the new facility, the Company has incurred $8.3 million, net of
landlord contributions, in the first quarter of fiscal 1999, most of which has
been capitalized. The Company estimates that $5.0 million of additional capital
expenditures related to this new facility will be made over the remainder of
fiscal 1999.

The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through fiscal 1999.

9.
<PAGE>

PART II

OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.1 Registrant's 1993 Stock Option Plan, as amended.
99.2 Registrant's 1997 Stock Option Program, as amended.

(b) Reports on Form 8-K

During the fiscal quarter ended June 28, 1998, the Company filed a
report on Form 8-K relating to the restatement of the Company's
earnings per share numbers in accordance with Financial Accounting
Standards No. 128 "Earnings Per Share."

10.
<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

NETWORK EQUIPMENT
TECHNOLOGIES, INC.

Dated: August 12, 1998 /s/ Craig M. Gentner
--------------------
Craig M. Gentner
Senior Vice President, Chief Financial
Officer and Corporate Secretary
(Principal Financial and Accounting
Officer)

11.

NETWORK EQUIPMENT TECHNOLOGIES, INC.
1993 STOCK OPTION PLAN
AMENDED AND RESTATED APRIL 14, 1998

TABLE OF CONTENTS

ARTICLE ONE....................................................................3

GENERAL PROVISIONS.............................................................3
I. PURPOSES OF PLAN......................................................3
II. ADMINISTRATION OF PLAN................................................3
III. STOCK SUBJECT TO PLAN.................................................4

ARTICLE TWO....................................................................6

DISCRETIONARY OPTION GRANTS....................................................6
I. ELIGIBILITY FOR OPTION GRANTS.........................................6
II. TERMS AND CONDITIONS OF OPTIONS.......................................6
III. INCENTIVE OPTIONS.....................................................9
IV. CORPORATE TRANSACTION................................................10
V. CANCELLATION AND REGRANT OF OPTIONS..................................11
VI. STOCK APPRECIATION RIGHTS; HOSTILE TAKE-OVER;
CHANGE IN CONTROL....................................................11

ARTICLE THREE.................................................................14

AUTOMATIC OPTION GRANT PROGRAM................................................14
I. ELIGIBILITY..........................................................14
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS......................14
III. CORPORATE TRANSACTION; CHANGE IN CONTROL;
HOSTILE TAKE-OVER....................................................17

ARTICLE FOUR..................................................................18

RESTRICTED STOCK AWARDS.......................................................18
I. DETERMINATION OF ELIGIBILITY AND AMOUNT OF AWARDS....................18
II. RESTRICTED STOCK.....................................................18
III. VESTING SCHEDULE.....................................................18

<PAGE>

ARTICLE FIVE..................................................................22

MISCELLANEOUS.................................................................22
I. AMENDMENT OF PLAN....................................................22
II. TAX WITHHOLDING......................................................22
III. TERM OF PLAN.........................................................22
IV. USE OF PROCEEDS......................................................23
V. REGULATORY APPROVALS.................................................23
VI. NO EMPLOYMENT/SERVICE RIGHTS.........................................23
VII. MISCELLANEOUS PROVISIONS.............................................23

2
<PAGE>

AMENDED AND RESTATED

NETWORK EQUIPMENT TECHNOLOGIES, INC.

1993 STOCK OPTION PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSES OF PLAN

A. This 1993 Stock Option Plan (the "Plan") is adopted as of August 11,
1993 (the "Effective Date") to promote the interests of Network Equipment
Technologies, Inc., a Delaware corporation (the "Corporation"), by allowing
eligible individuals to acquire or increase proprietary interests in the
Corporation as an incentive to remain in the service of the Corporation (or its
"parent" or "subsidiary" corporations, as defined in Section 424 of the Internal
Revenue Code).

B. This Plan is the successor to the Network Equipment Technologies, Inc.
1983 Stock Option Plan (the "1983 Plan"). No options shall be granted under the
1983 Plan from and after the Effective Date. The terms and conditions of options
granted under the 1983 Plan before the Effective Date are not affected by the
adoption of this Plan.

C. This Plan is amended and restated as of April 14, 1998 to include the
provisions of and provide a successor plan for the Corporation's 1988 Restricted
Stock Award Plan (the "1988 Plan"). No restricted stock shall be granted under
the 1988 Plan from and after April 14, 1998. The terms and conditions of
restricted stock granted under the 1988 Plan before April 14, 1998 are not
affected by the amendment of this Plan.

II. ADMINISTRATION OF PLAN

A. This Plan shall be administered by a committee (the "Plan Administrator"
or "Committee") of two or more non-employee Directors appointed by the
Corporation's Board of Directors (the "Board"). Committee members shall serve
for such periods as the Board may determine and may be removed by the Board at
any time.

B. The Plan Administrator shall have full authority (subject to the
provisions of this Plan) to establish such rules and regulations as it deems
appropriate for the proper administration of this Plan and to make such
determinations and interpretations

3
<PAGE>

concerning this Plan and options granted under this Plan as it deems necessary
or advisable. Decisions of the Plan Administrator shall be final and binding
upon all parties.

C. The Plan Administrator shall have full authority to grant options and
stock appreciation rights pursuant to Article Two and restricted stock pursuant
to Article Four of this Plan and to determine in its sole discretion which
eligible individuals are to receive such options, rights, or restricted stock,
the number of shares to be covered by each such option or grant, whether each
option is to be an incentive stock option intended to satisfy the requirements
of Section 422 of the Internal Revenue Code ("Incentive Option") or a
non-statutory option not intended to satisfy those requirements, the time(s) at
which each option or grant is to become vested or exercisable, and the maximum
term for which each option is to be outstanding.

III. STOCK SUBJECT TO PLAN

A. An aggregate of 9,406,415 shares of the Corporation's common stock, par
value $0.01 per share ("Common Stock") is available for issuance under this
Plan, and the predecessor 1983 Plan, subject to adjustment from time to time in
accordance with this Section III. These shares may be authorized but unissued
shares of Common Stock or reacquired shares of Common Stock, including shares
repurchased by the Corporation on the open market. The number of shares of
Common Stock available for issuance under this Plan shall be reduced,
share-for-share, by the number of shares issued with respect to options granted
under the 1983 Plan that are outstanding at the Effective Date and are
subsequently exercised.

B. To the extent that an option granted under this Plan or the 1983 Plan or
a restricted stock award under the 1988 Plan expires or terminates for any
reason before exercise or vesting in full (including any option canceled in
accordance with the cancellation-regrant provisions of Section V of Article Two
of this Plan), the shares then subject to the option or restricted stock award
shall again be available for grant under this Plan. Shares subject to any
option, restricted stock award or portion thereof surrendered or canceled in
accordance with Section VI of Article Two or Section III of Article Three, and
shares repurchased by the Corporation pursuant to any repurchase rights
available under this Plan, shall not again become available for option grants
under this Plan. If the exercise price of an option granted under this Plan (or
the 1983 Plan) is paid with shares of Common Stock, or if shares of Common Stock
otherwise issuable under this Plan are withheld by the Corporation in
satisfaction of withholding taxes incurred upon the exercise of an option, then
the number of shares available for issuance under this Plan shall be reduced by
the gross number of shares for which the option is exercised and not by the net
number of shares issued to the option holder.

C. If a change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, or other similar
change, then

4
<PAGE>

appropriate adjustments shall be made to (i) the number and/or class of shares
issuable under this Plan, (ii) the number and/or class of shares and price per
share in effect under each then-outstanding option or restricted stock award
granted under this Plan (or the 1983 Plan), and (iii) the number of shares of
Common Stock to be made the subject of each subsequent automatic option grant
under Article Three of this Plan. The purpose of adjustments to outstanding and
restricted stock awards options shall be to preclude the enlargement or dilution
of rights and benefits under such options or awards. The adjustments determined
by the Plan Administrator shall be final, binding, and conclusive.

D. The Corporation may not issue stock options covering in the aggregate
more than 350,000 shares of Common Stock (subject to adjustments as required
under this Plan) to any one participant in any one-year period.

5
<PAGE>

ARTICLE TWO

DISCRETIONARY OPTION GRANTS

I. ELIGIBILITY FOR OPTION GRANTS

The following persons are eligible to participate in the Discretionary
Option Grant Program of this Plan:

A. Officers and other key employees of the Corporation (or its parent or
subsidiary corporations) whose services contribute to the management, growth,
and financial success of the Corporation (or its parent or subsidiary
corporations), and

B. Those consultants and independent contractors who provide valuable
services to the Corporation (or its parent or subsidiary corporations).

II. TERMS AND CONDITIONS OF OPTIONS

Options granted pursuant to this Article Two may, at the Plan
Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not employees may be granted only non-statutory
options. Each option shall be evidenced by one or more written instruments in a
form approved by the Plan Administrator. Each such instrument shall comply with
the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall also be subject to Section III of this Article Two.
Failure to issue, or (if agreement is required) to agree to, an instrument
evidencing an option shall not invalidate the option grant; however, the option
shall not be exercisable until a written instrument has been issued and (if
required) agreed to.

A. Option Price.

1. The option price per share shall be fixed by the Plan Administrator, but
shall not be less than the "fair market value" (defined below) per share of
Common Stock on the date of the option grant.

2. The option price shall, subject to Section III below, be immediately due
upon exercise of the option and shall be payable in one or a combination of the
following forms:

(a) cash or check payable to the Corporation;

(b) shares of Common Stock held by the optionee for the period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at "fair market value" on the exercise date;
or

6
<PAGE>

(c) a broker-dealer sale-and-remittance procedure pursuant to which
the optionee shall provide irrevocable written instructions (i) to a
designated brokerage firm to effect the immediate sale of the option shares
and remit to the Corporation, from the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate option price plus
all income and employment taxes required to be withheld by the Corporation
in connection with the exercise, and (ii) to the Corporation to deliver the
certificates for the purchased shares directly to the brokerage firm to
complete the transaction.

3. The Plan Administrator may assist any optionee (including any Officer)
in the exercise of any option granted under this Article Two and the
satisfaction of any federal and state income and employment tax obligations
arising therefrom, by (a) authorizing a loan to the optionee by the Corporation,
or (b) permitting the optionee to pay the option price in installments over a
period of months or years. The terms of any loan or installment method of
payment (including the interest rate and terms of repayment) will be established
by the Plan Administrator in its sole discretion. Loans and installment payments
may be allowed with or without security or collateral (other than to optionees
who are consultants or independent contractors, who must adequately secure any
loan by collateral other than the purchased shares), but the maximum credit
available to the optionee shall not exceed the sum of (i) the aggregate option
price (less par value) of the purchased shares, plus (ii) any federal and state
income and employment tax liability incurred by the optionee in connection with
the exercise of the option.

4. The "fair market value" per share of Common Stock on any relevant date
shall be determined as follows:

(a) If the Common Stock is listed or admitted to trading on any
national stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the
stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as officially quoted on the composite tape of
transactions on that exchange. If there is no reported sale of Common Stock
on that exchange on the date in question, the fair market value shall be
the closing selling price on the exchange on the next preceding date for
which a closing selling price is quoted.

(b) If the Common Stock is not listed or admitted to trading on any
national stock exchange, but is traded on the NASDAQ National Market
System, the fair market value shall be the closing selling price per share
of Common Stock on the date in question as reported on that system. If
there is no closing selling price for the Common Stock on the date in
question, then the fair market value shall be the closing selling price for
the next preceding date for which a closing selling price is quoted.

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<PAGE>

B. Term and Exercise of Options.

1. Each option granted under this Article Two shall be exercisable at such
time(s), during such period, and for such number of shares as shall be
determined by the Plan Administrator and set forth in the written instrument
evidencing the option. No option granted under this Article Two shall have a
term in excess of ten (10) years after the grant date.

2. During the lifetime of the optionee, the option shall be exercisable
only by the optionee and shall not be assignable or transferable by the optionee
otherwise than by will or by the laws of descent and distribution following the
optionee's death.

3. Exercise of an option shall be effected by delivery to the Corporation
of a written notice in a form approved by the Plan Administrator specifying the
number of shares as to which the option is being exercised, accompanied by
payment of the exercise price (or provision for payment acceptable to the Plan
Administrator), and containing such other provisions as the Plan Administrator
approves from time to time.

C. Termination of Service.

1. Except as otherwise approved by the Plan Administrator, if the
optionee's service to the Corporation is terminated:

(a) for cause, each then-outstanding option held by the optionee shall
terminate immediately;

(b) for any reason other than cause, death, or permanent disability,
each then-outstanding option held by the optionee shall expire no later
than three (3) months after the termination date;

(c) by reason of permanent disability (as defined in Section 22(e)(3)
of the Internal Revenue Code), each then-outstanding option held by the
optionee shall expire no later than twelve (12) months after the
termination date; or

(d) by reason of the optionee's death, or if the optionee dies during
the three (3) months following termination of his or her employment other
than for cause or by reason of permanent disability, each then-outstanding
option held by the optionee shall expire no later than twelve (12) months
following the termination date. Following the optionee's death, the option
may be exercised by the personal representative of the optionee's estate or
by the person(s) to whom the option is transferred pursuant to the
optionee's will or in accordance with the laws of descent and distribution.

8
<PAGE>

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

3. Following termination of the optionee's service, an option shall not be
exercisable to any greater extent than on the termination date; provided,
however, that the Plan Administrator shall have complete discretion, at any time
while the option remains outstanding, to permit the option to be exercised, not
only with respect to the number of shares for which the option is exercisable at
the time of the termination, but also with respect to one or more subsequent
installments of purchasable shares for which the option would otherwise have
become exercisable had termination not occurred.

4. For purposes of this Plan:

(a) An optionee shall be deemed to remain in service to the
Corporation for so long as he or she renders (or in the case of consultants
or advisors, has agreed to render) services on a periodic basis to the
Corporation (or any parent or subsidiary) as an employee, a non-employee
Director, or an independent consultant or advisor.

(b) An optionee shall be considered to be an employee for so long as
he or she remains in the employ of the Corporation (or any parent or
subsidiary), subject to the control and direction of the employer entity as
to the work to be performed and the manner and method of performance.

D. Stockholder Rights.

An optionee shall have no stockholder rights with respect to any option
shares until he or she has exercised the option and paid (or made arrangements
satisfactory to the Plan Administrator to pay) the option price for the
purchased shares.

III. INCENTIVE OPTIONS

In addition to other application terms and conditions of this Plan, the
following provisions shall apply:

A. Incentive Options may be granted only to employees. Options specifically
designated as "non-statutory" options when issued shall not be subject to this
Section III.

B. If any individual to whom an Incentive Option is granted is the owner of
stock (as determined under Section 424(d) of the Internal Revenue Code)
possessing 10% or more of the total combined voting power of all classes of
stock of the Corporation or any of its parent or subsidiary corporations ("10%
Stockholder"), then the option price per share shall not be less than 110% of
the fair market value per share of

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<PAGE>

Common Stock on the grant date, and the option term shall not exceed five (5)
years from the grant date.

IV. CORPORATE TRANSACTION

A. In the event of any of the following stockholder-approved transactions
(a "Corporate Transaction"):

1. a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction whose principal purpose is to
change the State of the Corporation's incorporation,

2. the sale, transfer, or other disposition of all or substantially
all of the assets of the Corporation in liquidation or dissolution, or

3. any "reverse" merger in which the Corporation is the surviving
entity, but in which securities possessing more than 50% of the total
combined voting power of the Corporation's outstanding securities are
transferred to holders other than those who owned such voting power
immediately before the merger, then immediately before the Effective Date
of the Corporate Transaction, each option granted under this Article Two
shall become fully exercisable ("accelerate") with respect to the total
number of shares of Common Stock then subject to the option. However, an
option shall not accelerate if and to the extent: (i) the option is, in
connection with the Corporate Transaction, either to be assumed by the
successor corporation or parent thereof or to be replaced by an equivalent
option to purchase shares of the capital stock of the successor corporation
or parent thereof, or (ii) acceleration of the option is subject to other
limitations imposed by the Plan Administrator at the time of grant. The
determination of equivalence under clause (i) above shall be made by the
Plan Administrator and shall be final, binding, and conclusive.

B. Upon the consummation of the Corporate Transaction, all options granted
under this Article Two shall terminate and cease to be outstanding, except to
the extent assumed by the successor (or surviving) corporation or its parent
company.

C. Each option granted under this Article Two that is replaced by an
equivalent option in a Corporate Transaction, or that otherwise continues in
effect, shall be appropriately adjusted, immediately after the Corporate
Transaction, to apply to the number and class of securities that would have been
issued in the Corporate Transaction to an actual holder of the number of shares
of Common Stock that were subject to the option immediately before the Corporate
Transaction. Appropriate adjustment shall also be made to the option price
payable per share, provided the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of

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<PAGE>

securities available for issuance under this Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.

D. The grant of options under this Article Two shall not affect the right
of the Corporation to adjust, reclassify, reorganize, or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate, or
sell or transfer all or any part of its business or assets.

V. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator may, at any time and from time to time, with the
consent of the affected optionees, cancel any or all outstanding options granted
under this Article Two and grant in substitution new options covering the same
or different numbers of shares of Common Stock but having an option price per
share not less than the fair market value of the Common Stock on the new grant
date (or 110% of fair market value in the case of an Incentive Option granted to
a 10% Stockholder).

VI. STOCK APPRECIATION RIGHTS; HOSTILE TAKE-OVER; CHANGE IN CONTROL

A. As determined by the Plan Administrator in its sole discretion, one or
more optionees may be granted the right, exercisable upon such terms and
conditions as the Plan Administrator may establish, to surrender all or part of
an unexercised option granted under this Article Two in exchange for a payment
by the Corporation of an amount equal to the excess of (i) the fair market value
(on the option surrender date) of the number of shares in which the optionee is
at the time vested under the surrendered option (or part thereof), over (ii) the
aggregate option price payable for those shares.

B. No surrender of an option shall be effective hereunder unless it is
approved by the Plan Administrator. If the surrender is approved, then the
payment to the optionee under this Section VI may be made in shares of Common
Stock valued at fair market value on the option surrender date, in cash, or
partly in shares and partly in cash, as the Plan Administrator determines in its
sole discretion.

C. If the surrender of an option is rejected by the Plan Administrator,
then the optionee shall retain whatever rights he or she had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time before the later of (i) five (5)
business days after receipt of the rejection notice, or (ii) the last day on
which the option is otherwise exercisable in accordance with its terms, but in
no event more than ten (10) years after the date of the option grant.

D. Each Officer of the Corporation subject to the short-swing profit
restrictions of the federal securities laws shall have the following limited
stock

11
<PAGE>

appreciation rights in tandem with each option received under this Article Two.
Upon the occurrence of a Hostile Take-Over (defined below), each option with a
limited stock appreciation right in effect for at least six (6) months shall
automatically be canceled and the optionee shall be entitled to a cash payment
by the Corporation in the amount of the excess of (i) the Take-Over Price
(defined below) of the shares of Common Stock subject to the canceled option
(whether or not the option is otherwise exercisable for such shares), over (ii)
the aggregate exercise price payable for such shares. The payment shall be made
within five (5) days after consummation of the Hostile Take-Over. Neither the
approval of the Plan Administrator nor the consent of the Board shall be
required in connection with such option cancellation and cash payment.

E. A "Hostile Take-Over" shall be deemed to occur if (i) any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation) directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than
50% of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer that the Board does not
recommend that the Corporation's stockholders accept, and (ii) more than 50% of
the securities so acquired are accepted from holders other than Officers and
Directors of the Corporation subject to Section 16 of the Exchange Act. The
"Take-Over Price" per share shall be the greater of (a) the fair market value
per share on the date of cancellation, as determined pursuant to the valuation
provisions of Section II.A.4 of this Article Two, or (b) the highest reported
price per share paid in effecting such Hostile Take-Over. However, if the
canceled option is an Incentive Option, the Take-Over Price shall not exceed the
clause (a) price per share.

F. The Plan Administrator shall have full discretionary authority,
exercisable either in advance of, or at the time of, a Change in Control
(defined below), to provide for the automatic acceleration of options granted
under this Article Two upon the occurrence of the Change in Control. The Plan
Administrator shall also have full discretionary authority to condition any such
acceleration upon the subsequent termination of the optionee's service to the
Corporation (or a parent or subsidiary) within a specified period after the
Change in Control. The Plan Administrator hereby exercises such discretion to
accelerate vesting of all outstanding options held by Officers of the
Corporation whose employment is terminated in conjunction with, or within a year
of, a Change in Control or Corporate Transaction. Any option accelerated in
connection with the Change in Control shall remain fully exercisable until the
expiration of the option term. For all purposes of this Plan, a "Change in
Control" shall mean a change in control of the Corporation of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), whether or not the Corporation is then subject

12
<PAGE>

to such reporting requirement, other than a Corporate Transaction; provided
that, without limitation, a Change in Control shall be deemed to have occurred
if:

1. any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity, or any syndicate or group
deemed to be a "person" under Section 14(d)(2) of the Exchange Act, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 40% or more of the combined
voting power of the Corporation's then-outstanding securities entitled to
vote in the election of Directors of the Corporation, pursuant to a tender
or exchange offer that the Board does not recommend that the Corporation's
stockholders accept; or

2. during any period of two (2) consecutive years, individuals who, at
the beginning of such period, constituted the Board and any new members of
the Board, whose election by the Board or nomination for election by the
Corporation's stockholders was approved by a vote of at least
three-quarters (3/4) of the Directors then in office who either were
Directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority thereof.

G. The shares of Common Stock subject to any option surrendered or canceled
for an appreciation distribution pursuant to this Section VI shall not be
available for subsequent option grant under the Plan.

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<PAGE>

ARTICLE THREE

AUTOMATIC OPTION GRANT PROGRAM

I. ELIGIBILITY

A. Eligible Optionees. The individuals eligible to receive automatic option
grants pursuant to this Article Three shall be limited to (i) Directors who are
first elected or appointed as non-employee Directors on or after the Effective
Date, whether through appointment by the Board or election by the Corporation's
stockholders, and who have not previously been employees of the Corporation (or
any parent or subsidiary corporation), and (ii) Directors who continue to serve
as non-employee Directors at one or more annual stockholders meetings held while
this Automatic Grant Program remains in effect, commencing with the 1994 annual
meeting.

B. Limitation. Except for the option grants to be made pursuant to this
Article Three (and any automatic grants made under the corresponding provisions
of the 1983 Plan), non-employee Directors shall not be eligible to receive
option grants or stock issuances under this Plan or any other stock plan of the
Corporation (or its parent or subsidiaries).

II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS

A. Grant Dates. Option grants will be made under this Article Three on the
dates specified below:

1. Each individual who first becomes a non-employee Director at any
time after the Effective Date, whether through election at an annual
stockholder meeting or through appointment by the Board, shall
automatically be granted upon the terms and conditions of this Article
Three, at the time of such initial election or appointment, a non-statutory
stock option to purchase the lesser of (a) 12,000 shares of Common Stock,
or (b) a number of shares of Common Stock equal to 12,000 multiplied by a
fraction, the numerator of which is the number of partial or whole calendar
months remaining between such election or appointment and the next
scheduled annual stockholder meeting at which such Director's term will
expire and the denominator of which is 36.

2. Each non-employee Director who first becomes a member of an active
standing committee of the Board at any time after the Effective Date shall
automatically be granted, upon the terms and conditions of this Article
Three, at the time of such initial appointment, a non-statutory stock
option to purchase the lesser of (a) 4,000 shares of Common Stock, or (b) a
number of shares of Common Stock equal to 4,000 multiplied by a fraction,
the numerator of which is the number of partial or whole

14
<PAGE>

calendar months remaining between such appointment and the next scheduled
annual stockholder meeting and the denominator of which is 12.

3. Each non-employee Director who first becomes chairman of an active
standing committee of the Board at any time after the Effective Date shall
automatically be granted upon the terms and conditions of this Article
Three, at the time of such initial appointment, a non-statutory stock
option to purchase the lesser of (a) 4,000 shares of Common Stock, or (b) a
number of shares of Common Stock equal to 4,000 multiplied by a fraction,
the numerator of which is the number of partial or whole calendar months
remaining between such appointment and the next scheduled annual
stockholder meeting and the denominator of which is 12.

4. On the date of each annual stockholder meeting held after the
Effective Date, beginning with the 1994 annual stockholder meeting, each
non-employee Director who is at the time standing for reelection as a
non-employee Director shall automatically be granted a non-statutory stock
option under this Article Three to purchase 12,000 shares of Common Stock.

5. On the date of each annual stockholder meeting held after the
Effective Date, beginning with the 1994 annual stockholder meeting, each
non-employee Director shall automatically be granted, whether or not he or
she is standing for re-election as a Director at that time, a non-statutory
stock option under this Article Three to purchase 4,000 shares of Common
Stock for each active standing committee on which he or she serves as a
member, plus an additional 4,000 shares for each committee on which he or
she serves as chairman.

The 12,000-share limitation on the initial and periodic automatic option
grants and the 4,000-share limitation on committee grants to be made to each
non-employee Director shall be subject to adjustment pursuant to Section III.C
of Article One. For purposes of this Article Three, a committee shall be deemed
to be an active standing committee if so designated by the Board and if it has
met or transacted business within the twelve (12) months preceding the date of
grant of an automatic option.

B. Exercise Price. The exercise price per share shall be equal to 100% of
the fair market value per share of Common Stock on the automatic grant date.

C. Payment. The option price shall become immediately due upon exercise of
the option and shall be payable as provided in Section II.A of Article Two.

D. Option Term. Each option granted under this Article Three shall have a
maximum term of ten (10) years measured from the grant date.

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<PAGE>

E. Exercisability.

1. Each option granted under this Article Three shall be come exercisable
for one-third (1/3) of the option shares one year after the date of grant and
for the balance of the option shares in a series of twenty-four (24) equal
monthly installments beginning one month thereafter, provided the optionee
remains a Director through each such date.

2. Each option granted under this Article Three shall also become fully
exercisable upon the date of the optionee's cessation of Board service by reason
of death or retirement, provided the option has been outstanding for at least
one year, and the optionee has served on the Board for at least three (3) years,
at the time of cessation of Board service. A Director shall be deemed to have
ceased Board service by reason of retirement if he or she has attained the age
of 65 at the time of the cessation.

3. Each option shall remain exercisable until the expiration or sooner
termination of the option term.

F. Non-Transferability. During the optionee's lifetime, an option granted
under this Article Three (together with the limited stock appreciation right
pertaining to the option) shall be exercisable only by the optionee and shall
not be assignable or transferable by the optionee other than by will or by the
laws of descent and distribution following his or her death.

G. Effect of Termination of Board Membership.

1. If a Director ceases to be a Board member for any reason (other than
death) while holding an option granted under this Article Three, he or she shall
have three (3) months following the date of cessation of Board membership in
which to exercise the option for any or all of the shares of Common Stock for
which the option is exercisable at the time of the cessation.

2. If a Director dies while serving as a Board member or during the three
(3) months following his or her cessation of Board service, an option granted
under this Article Three may be exercised, for any or all of the shares of
Common Stock for which the option is exercisable at the time of cessation of
Board membership, by the personal representative of his or her estate or by the
person(s) to whom the option is transferred pursuant to the Director's will or
in accordance with the laws of descent and distribution. Any such exercise must,
however, occur within twelve (12) months after the date of the Director's death.

3. In no event shall any option granted under this Article Three remain
exercisable after the specified expiration date of its ten (10)-year term. Upon
the

16
<PAGE>

expiration of the applicable exercise period in accordance with subparagraphs 1
and 2 above or (if earlier) upon the expiration of the ten (10)-year option
term, the option shall terminate and cease to be exercisable.

H. Stockholder Rights. The holder of an option granted under this Article
Three shall have no stockholder rights with respect to any option shares until
he or she has exercised the option and paid (or made arrangement satisfactory to
the Plan Administrator to pay) the exercise price for the purchased shares.

I. Remaining Terms. The remaining terms and conditions of each option grant
under this Article Three shall be as set forth in the form of Director Automatic
Grant Agreement attached as Exhibit A to this Plan.

III. CORPORATE TRANSACTION; CHANGE IN CONTROL; HOSTILE TAKE-OVER

A. Each option granted under this Article Three that is outstanding at the
time of a Corporate Transaction or a Change in Control shall, immediately before
the specified Effective Date for the Corporation Transaction or Change in
Control, become fully exercisable with respect to the total number of shares of
Common Stock then subject to the option. Upon the consummation of the
Corporation transaction, all options granted under this Article Three shall
terminate.

B. Upon the occurrence of a Hostile Take-Over, each option that has been
outstanding under this Article Three for at least six (6) months shall
automatically be canceled and the optionee shall be entitled to a cash payment
by the Corporation calculated in accordance with Section VI.D. of Article Two
and payable at the time and manner set forth in Section VI.E of Article Two.
Neither the approval of the Plan Administrator nor the consent of the Board
shall be required in connection with such option cancellation and cash payment.

C. The automatic option grants under this Article Three shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize, or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

D. The shares of Common Stock subject to each option canceled in connection
with a Hostile Take-Over shall not be available for subsequent issuance under
this Plan.

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<PAGE>

ARTICLE FOUR
RESTRICTED STOCK AWARDS

I. DETERMINATION OF ELIGIBILITY AND AMOUNT OF AWARDS

The persons who shall be eligible to receive restricted stock awards under
this Article Four shall be such key employees of the Corporation or its
subsidiaries, including officers and directors, as the Plan Administrator shall
select from time to time. In no event, however, shall any employee owning stock
possessing more than ten percent (10%) of the total combined voting power or
value of all classes of stock of the Corporation or any subsidiary be eligible
to receive shares under this Article Four.

II. RESTRICTED STOCK

A. Restricted stock awards shall be made from time to time under the Plan
in recognition of the services rendered to the Corporation or its subsidiaries
by the selected participants. All such restricted stock awards shall provide for
the issuance, either as soon as practicable following the time of the award or
at a later date specified in the agreement evidencing the award, of shares of
the Corporation's Common Stock.

B. Each recipient of a restricted stock award under the Plan shall, at the
time the shares of Common Stock are issued in payment of such award, pay to the
Corporation, in cash or cash equivalent, an amount equal to the aggregate par
value of the issued shares.

III. VESTING SCHEDULE

A. The interest of an employee in the shares of Common Stock issued to such
employee under this Article Four may, in the discretion of the Plan
Administrator, be fully and immediately vested upon issuance or may vest in one
or more installments in accordance with the vesting provisions of Section III.C.
Except as otherwise provided in Section III.F., the employee may not transfer
any of the Common Stock in which he or she does not have a vested interest.
Accordingly, all unvested shares issued to an employee under the Plan shall bear
the restrictive legend specified in Section III.D.1., until such legend is
removed in accordance with Section III.D.2. The employee, however, shall have
all the rights of a stockholder with respect to the shares of Common Stock
issued to him or her hereunder, whether or not his or her interest in such
shares is vested. Accordingly, the employee shall have the right to vote such
shares and to receive any cash dividend paid on such shares. Any new, additional
or different shares of stock or other property (including money paid other than
as a cash dividend) which the holder of unvested Common Stock may have the right
to receive by reason of a stock dividend,

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<PAGE>

stock split or reclassification of Common Stock or by reason of a merger,
consolidation, liquidation or other change in the capital structure of the
Corporation shall be issued to the employee, subject to (i) the same vesting
schedule applicable to his or her unvested Common Stock and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.

B. In the event an employee should, while his or her interest in the Common
Stock remains unvested, (i) attempt to transfer (other than by way of a
permissible gift under Section III.F.) any of the unvested Common Stock or any
interest therein or (ii) cease employment with the Corporation for any reason
whatsoever, then the certificates evidencing the employee's unvested Common
Stock (other than shares which become vested by reason of, or upon, such
termination in accordance with the agreement evidencing the award) shall be
immediately surrendered to the Corporation for cancellation and the employee
shall no longer have any stockholder rights with respect to the canceled Common
Stock. In exchange for the surrendered certificates the employee shall receive a
cash payment from the Corporation equal to the aggregate par value of the
canceled shares. For purposes of this Article Four, the employee shall not be
deemed to have ceased employment with the Corporation for so long as the
employee remains in the active employ of the Corporation or one or more of its
subsidiaries.

C. Vesting; Corporate Transaction; Change in Control.

1. Any shares of Common Stock issued under this Article Four that are not
vested at the time of such issuance shall vest in one or more installments
thereafter. The elements of the vesting schedule applicable to the issued
shares, including the number of installments in which the shares are to vest,
the interval or intervals (if any) which are to lapse between installments and
the effect which death, disability or other event designated by the Plan
Administrator is to have upon the vesting schedule, shall be determined by the
Plan Administrator and shall be specified in the stock restriction agreement
executed by the employee at the time the shares are issued.

2. Should the Corporation's Common Stock be converted into cash or other
shares or securities of the Corporation or any other corporation as a result of
a Corporate Transaction (as defined in Article Two, Section IV.A.), then the
shares of Common Stock outstanding at such time under this Article Four shall
likewise be converted into cash or such other shares or securities, and such
assets may, in the discretion of the Plan Administrator, be held in escrow by
the Corporation or its successor and shall thereafter be distributed to the
employees from time to time as their interests therein vest in accordance with
the same vesting schedules which are in effect for their shares of Common Stock
immediately prior to such conversion. However, the interest each employee has in
the shares of Common Stock issued to him or her under this Article Four
(together with any cash or other shares or securities into which such Common
Stock is to be converted) shall become vested immediately prior to the specified
effective date

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<PAGE>

for the Corporate Transaction if the Company's rights to repurchase or cancel
unvested shares under this Article Four (for a payment equal to the par value of
the shares) are not to be assigned to the successor corporation or parent
thereof in connection with the Corporate Transaction. If the Corporation is to
be acquired by a reverse merger in which it is to remain the surviving entity,
then no accelerated vesting under the Plan shall occur, unless the Plan is to be
terminated in connection with such reverse merger.

3. In the event of a Change in Control (as defined in Article Two, Section
VI.F.), then the Plan Administrator shall have full power and authority
(exercisable before or after the Change in Control) to accelerate the vesting of
the interests of one or more of the employees in the shares of Common Stock
issued to him or her under this Article Four.

4. In the event of a Corporate Transaction, then any outstanding
obligations or commitments to issue Common Stock pursuant to this Article Four
shall be assumed by the successor corporation or parent thereof.

D. Restrictive Legends.

1. Each certificate representing unvested shares of Common Stock (or other
securities) issued under this Article Four shall bear the following restrictive
legend:

"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND TO CANCELLATION IN ACCORDANCE WITH THE TERMS
AND CONDITIONS OF ARTICLE FOUR OF THE CORPORATION'S 1993 STOCK OPTION PLAN
AND THE STOCK RESTRICTION AGREEMENT EXECUTED THEREUNDER BY THE CORPORATION
AND THE REGISTERED HOLDER (OR HIS PREDECESSOR IN INTEREST). A COPY OF THE
1993 STOCK OPTION PLAN AND STOCK RESTRICTION AGREEMENT MAY BE OBTAINED FROM
THE SECRETARY OF THE CORPORATION."

2. As the interest of the employee vests in the shares of Common Stock
issued under this Article Four, the Corporation shall, upon the employee's
delivery of the certificate for such shares, issue a new certificate for the
vested shares without the restrictive legend of Section III.D.1. and a second
certificate for any remaining unvested shares with the Section III.D.1. legend
endorsed thereon. If any unvested shares of the employee are surrendered and
canceled under Section III.C.3., then the Corporation shall at the time the
cancellation is effected deliver a new certificate, without the restrictive
legend of Section III.D.1., representing the number of shares (if any) in which
the employee is at such time vested and which are accordingly no longer subject
to cancellation by the Corporation.

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<PAGE>

E. The Plan Administrator may in its discretion waive, in whole or in part,
any cancellation of unvested Common Stock (or other assets) to which an employee
would otherwise be subject under Section III.B. Such a waiver shall result in
the immediate vesting of the employee's interest in the shares of Common Stock
(or other assets) as to which the waiver applies.

F. As used in this Section III, the term "transfer" shall include (without
limitation) any sale, pledge, encumbrance, gift or other disposition of the
shares of Common Stock issued under Article Four. However, the employee shall
have the right to make a gift of any or all of his unvested shares under Article
Four to his spouse, parents or children or to a trust established for such
spouse, parents or children, provided the recipient of the gifted shares
delivers to the Corporation a written agreement to be bound by all the
provisions of the Plan and the stock restriction agreement executed by the
employee with respect to such shares.

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ARTICLE FIVE

MISCELLANEOUS

I. AMENDMENT OF PLAN

The Board shall have complete and exclusive authority to amend or modify
this Plan in any or all respects whatsoever. However, no such amendment or
modification shall, without the consent of the option or restricted stock
holders, adversely affect rights and obligations with respect to options or
awards at the time outstanding under the Plan. No amendment shall require
stockholder approval except when (i) required by Section 422 of the Internal
Revenue Code for incentive stock options; (ii) required by other applicable
laws, regulations or rules (including rules of the New York Stock Exchange); or
(iii) otherwise deemed advisable by the Board.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares or cash upon exercise of
options, stock appreciation rights or restricted stock awards, granted under
this Plan shall be subject to the satisfaction of all federal, state, and local
income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion and upon such terms and
conditions as it deems appropriate, provide any or all optionees under Article
Two with the election to have the Corporation withhold, from the shares of
Common Stock otherwise issuable upon the exercise of options, one or more shares
with an aggregate fair market value equal to a designated percentage (any whole
multiple of 5% specified by the optionee) of the federal and state income taxes
("Taxes") incurred in connection with the acquisition of such shares. In lieu of
direct withholding, optionees may be granted the right to deliver shares of
Common Stock to the Corporation in satisfaction of such Taxes. The withheld or
delivered shares shall be valued at the fair market value on the applicable
determination date for such Taxes.

III. TERM OF PLAN

A. This Plan shall terminate upon the earlier of (i) August 10, 2003, or
(ii) the date on which all shares available for issuance under this Plan have
been issued pursuant to restricted stock awards or the exercise of options
granted under this Plan and (to the extent outstanding on the Effective Date)
the 1983 Plan. If the date of termination is determined under clause (i) above,
then no options or awards outstanding on such date shall be affected by the
termination of this Plan.

B. Options may be granted under this Plan to purchase shares of Common
Stock in excess of the number of shares then available for issuance under this

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<PAGE>

Plan, provided each option granted is not to become exercisable, in whole or in
part, at any time before stockholder approval of an amendment authorizing a
sufficient increase in the number of shares issuable under the Plan.

IV. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
pursuant to options or restricted stock awards granted under this Plan may be
used for general corporate purposes.

V. REGULATORY APPROVALS

A. The implementation of this Plan, the granting of any option hereunder,
and the issuance of stock for any restricted stock award or upon the exercise or
surrender of any such option shall be subject to the procurement by the
Corporation of all approvals and permits required by regulatory authorities
having jurisdiction over this Plan, the options granted under it, and the stock
issued pursuant to it.

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

VI. NO EMPLOYMENT/SERVICE RIGHTS

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

VII. MISCELLANEOUS PROVISIONS

A. Except as otherwise provided in this Plan, the right to acquire Common
Stock or other assets under this Plan may not be assigned, encumbered, or
otherwise transferred by any optionee.

B. The provisions of this Plan shall be governed by the laws of the State
of California, as such laws are applied to contracts entered into and performed
in that State.

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C. The provisions of this Plan shall inure to the benefit of, and be
binding upon, the Corporation and its successors or assigns, and the optionees,
the legal representatives of their respective estates, their respective heirs or
legatees, and their permitted assignees.

o0o

NETWORK EQUIPMENT TECHNOLOGIES, INC.
1997 N.E.T. STOCK OPTION PROGRAM
AMENDED AND RESTATED APRIL 14, 1998

TABLE OF CONTENTS

ARTICLE ONE...................................................................2

GENERAL PROVISIONS............................................................2
I. PURPOSES OF PROGRAM..................................................2
II. ADMINISTRATION OF PROGRAM............................................2
III. STOCK SUBJECT TO PROGRAM.............................................3

ARTICLE TWO...................................................................5

DISCRETIONARY OPTION GRANTS...................................................5
I. ELIGIBILITY FOR OPTION GRANTS........................................5
II. TERMS AND CONDITIONS OF OPTIONS......................................5
III. CORPORATE TRANSACTION................................................8
IV. CANCELLATION AND REGRANT OF OPTIONS.................................10
V. STOCK APPRECIATION RIGHTS; HOSTILE TAKE-OVER;
CHANGE IN CONTROL...................................................10

ARTICLE THREE................................................................13

RESTRICTED STOCK AWARDS......................................................13
I. DETERMINATION OF ELIGIBILITY AND AMOUNT OF AWARDS...................13
II. RESTRICTED STOCK....................................................13
III. VESTING SCHEDULE....................................................13

ARTICLE FOUR.................................................................17

MISCELLANEOUS................................................................17
I. AMENDMENT OF PROGRAM................................................17
II. TAX WITHHOLDING.....................................................17
III. TERM OF PROGRAM.....................................................17
IV. USE OF PROCEEDS.....................................................18
V. REGULATORY APPROVALS................................................18
VI. NO EMPLOYMENT/SERVICE RIGHTS........................................18
VII. MISCELLANEOUS PROVISIONS............................................18

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N.E.T. STOCK OPTION PROGRAM

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSES OF PROGRAM

A. This N.E.T. Stock Option Program (the "Program") is adopted by the Board
of Directors ("Board") of Network Equipment Technologies, Inc. ("N.E.T." or the
"Corporation") as of April 1, 1997 (the "Effective Date") to promote the
interests of Network Equipment Technologies, Inc., a Delaware corporation (the
"Corporation"), by allowing eligible individuals to acquire or increase
proprietary interests in the Corporation as an incentive to remain in the
service of the Corporation (or its "parent" or "subsidiary" corporations, as
defined in Section 424 of the Internal Revenue Code).

B. This Program is intended to provide for the granting of options to
employees and consultants who are not Officers or Directors of the Corporation
on substantively the same terms and conditions as the Network Equipment
Technologies, Inc. 1993 Stock Option Plan.

C. This Program is amended and restated as of April 14, 1998 to include the
provisions of and provide a successor plan for the Corporation's 1988 Restricted
Stock Award Plan (the "1988 Plan"). No restricted stock shall be granted under
the 1988 Plan from and after April 14, 1998. The terms and conditions of
restricted stock granted under the 1988 Plan before April 14, 1998 are not
affected by the amendment of this Program.

II. ADMINISTRATION OF PROGRAM

A. This Program shall be administered by a committee (the "Program
Administrator" or "Committee") of two (2) or more non-employee Directors
appointed by the Corporation's Board. Committee members shall serve for such
periods as the Board may determine and may be removed by the Board at any time.
As of the Effective Date, the Compensation Committee of the Board is the Program
Administrator.

B. The Program Administrator shall have full authority (subject to the
provisions of this Program) to establish such rules and regulations as it deems
appropriate for the proper administration of this Program and to make such
determinations and interpretations concerning this Program and options granted
under this Program as it deems necessary or advisable. Decisions of the Program
Administrator shall be final and binding upon all parties.

C. The Program Administrator shall have full authority to grant options and
stock appreciation rights pursuant

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<PAGE>

to this Program and restricted stock pursuant to this Program and to determine
in its sole discretion which eligible individuals are to receive such options,
rights, or restricted stock, the number of shares to be covered by each such
option or grant, the time(s) at which each option or grant is to become vested
or exercisable, and the maximum term for which each option is to be outstanding.
Only non-statutory options ("Non-qualified Options") will be issuable under this
Program.

III. STOCK SUBJECT TO PROGRAM

A. An aggregate of 1,000,000 shares of the Corporation's common stock, par
value $0.01 per share ("Common Stock") is available for issuance under this
Program. These shares may be authorized but unissued shares of Common Stock or
reacquired shares of Common Stock, including shares repurchased by the
Corporation on the open market. The Program Administrator shall periodically
recommend to the Board the shares to be issued pursuant to this Program and the
Board shall authorize such issuance as it deems to be in the best interests of
the Corporation.

B. To the extent that an option granted under this Program or a restricted
stock award under the 1988 Plan expires or terminates for any reason before
exercise or vesting in full (including any option canceled in accordance with
the cancellation-regrant provisions of this Program), the shares then subject to
the option or restricted stock award shall again be available for grant under
this Program. Shares repurchased by the Corporation pursuant to any repurchase
rights available under this Program, shall not again become available for option
grants under this Program. If the exercise price of an option granted under this
Program is paid with shares of Common Stock, or if shares of Common Stock
otherwise issuable under this Program are withheld by the Corporation in
satisfaction of withholding taxes incurred upon the exercise of an option, then
the number of shares available for issuance under this Program shall be reduced
by the gross number of shares for which the option is exercised and not by the
net number of shares issued to the option holder.

C. If a change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, or other similar
change, then appropriate adjustments shall be made to (i) the number and/or
class of shares issuable under this Program, and (ii) the number and/or class of
shares and price per share in effect under each then-outstanding option or
restricted stock award granted under this Program. The purpose of adjustments to
outstanding and restricted stock awards options shall be to preclude the
enlargement or dilution of rights and benefits under such options or awards. The
adjustments determined by the Program Administrator shall be final, binding, and
conclusive.

3
<PAGE>

D. The Corporation may not issue stock options covering in the aggregate
more than 100,000 shares of Common Stock (subject to adjustments as required
above) to any one participant in any one-year period.

4
<PAGE>

ARTICLE TWO

DISCRETIONARY OPTION GRANTS

I. ELIGIBILITY FOR OPTION GRANTS

The following persons are eligible to participate in this Program:

A. Key employees of the Corporation (or its parent or subsidiary
corporations) whose services contribute to the management, growth, and financial
success of the Corporation (or its parent or subsidiary corporations), and

B. Those consultants and independent contractors who provide valuable
services to the Corporation (or its parent or subsidiary corporations).

C. Notwithstanding the foregoing, members of the Board of Directors and
Officers of the Corporation shall not be eligible to participate in this
Program.

II. TERMS AND CONDITIONS OF OPTIONS

Options granted pursuant to this Program may only be Non-qualified Options.
Each option shall be evidenced by one or more written instruments in a form
approved by the Program Administrator. Each such instrument shall comply with
the terms and conditions specified below. Failure to issue, or (if agreement is
required) to agree to, an instrument evidencing an option shall not invalidate
the option grant; however, the option shall not be exercisable until a written
instrument has been issued and (if required) agreed to.

A. Option Price.

1. The option price per share shall be fixed by the Program Administrator,
but shall not be less than the "fair market value" (defined below) per share of
Common Stock on the date of the option grant.

2. The option price shall, subject to Section III below, be immediately due
upon exercise of the option and shall be payable in one or a combination of the
following forms:

(a) cash or check payable to the Corporation;

5
<PAGE>

3. The Program Administrator may assist any optionee in the exercise of any
option granted under this Program and the satisfaction of any federal and state
income and employment tax obligations arising therefrom by (a) authorizing a
loan to the optionee by the Corporation, or (b) permitting the optionee to pay
the option price in installments over a period of months or years. The terms of
any loan or installment method of payment (including the interest rate and terms
of repayment) will be established by the Program Administrator in its sole
discretion. Loans and installment payments may be allowed with or without
security or collateral (other than to optionees who are consultants or
independent contractors, who must adequately secure any loan by collateral other
than the purchased shares), but the maximum credit available to the optionee
shall not exceed the sum of (i) the aggregate option price (less par value) of
the purchased shares, plus (ii) any federal and state income and employment tax
liability incurred by the optionee in connection with the exercise of the
option.

4. The "fair market value" per share of Common Stock on any relevant date
shall be determined as follows:

(a) If the Common Stock is listed or admitted to trading on any
national stock exchange, then the fair market value shall be the closing
selling price per share of Common Stock on the date in question on the
stock exchange determined by the Program Administrator to be the primary
market for the Common Stock, as officially quoted on the composite tape of
transactions on that exchange. If there is no reported sale of Common Stock
on that exchange on the date in question, the fair market value shall be
the closing selling price on the exchange on the next preceding date for
which a closing selling price is quoted.

(b) If the Common Stock is not listed or admitted to trading on any
national stock exchange, but is traded

6
<PAGE>

on the Nasdaq National Market System, the fair market value shall be the
closing selling price per share of Common Stock on the date in question as
reported on that system. If there is no closing selling price for the
Common Stock on the date in question, then the fair market value shall be
the closing selling price for the next preceding date for which a closing
selling price is quoted.

B. Term and Exercise of Options.

1. Each option granted under this Program shall be exercisable at such
time(s), during such period, and for such number of shares as shall be
determined by the Program Administrator and set forth in the written instrument
evidencing the option. No option granted under this Program shall have a term in
excess of ten (10) years after the grant date.

2. During the lifetime of the optionee, the option shall be exercisable
only by the optionee and shall not be assignable or transferable by the optionee
other than by will or by the laws of descent and distribution following the
optionee's death.

3. Exercise of an option shall be effected by delivery to the Corporation
of a written notice in a form approved by the Program Administrator specifying
the number of shares as to which the option is being exercised, accompanied by
payment of the exercise price (or provision for payment acceptable to the
Program Administrator), and containing such other provisions as the Program
Administrator approves from time to time.

C. Termination of Service.

1. Except as otherwise approved by the Program Administrator, if the
optionee's service to the Corporation is terminated:

(a) for cause, each then-outstanding option held by the optionee shall
terminate immediately;

(b) for any reason other than cause, death, or permanent disability,
each then-outstanding option held by the optionee shall expire no later
than three (3) months after the termination date;

(d) by reason of the optionee's death, or if the optionee dies during
the three (3) months following

7
<PAGE>

termination of his or her employment other than for cause or by reason of
permanent disability, each then-outstanding option held by the optionee
shall expire no later than twelve (12) months following the termination
date. Following the optionee's death, the option may be exercised by the
personal representative of the optionee's estate or by the person(s) to
whom the option is transferred pursuant to the optionee's will or in
accordance with the laws of descent and distribution.

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

3. Following termination of the optionee's service, an option shall not be
exercisable to any greater extent than on the termination date; provided,
however, that the Program Administrator shall have complete discretion, at any
time while the option remains outstanding, to permit the option to be exercised,
not only with respect to the number of shares for which the option is
exercisable at the time of the termination, but also with respect to one or more
subsequent installments of purchasable shares for which the option would
otherwise have become exercisable had termination not occurred.

4. For purposes of this Program:

D. Stockholder Rights.

An optionee shall have no stockholder rights with respect to any option
shares until he or she has exercised the option and paid (or made arrangements
satisfactory to the Program Administrator to pay) the option price for the
purchased shares.

III. CORPORATE TRANSACTION

A. In the event of any of the following stockholder-approved transactions
(a "Corporate Transaction"):

8
<PAGE>

1. a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction whose principal purpose is to
change the state of the Corporation's incorporation,

2. the sale, transfer, or other disposition of all or substantially
all of the assets of the Corporation in liquidation or dissolution, or

3. any "reverse" merger in which the Corporation is the surviving
entity, but in which securities possessing more than 50% of the total
combined voting power of the Corporation's outstanding securities are
transferred to holders other than those who owned such voting power
immediately before the merger, then immediately before the Effective Date
of the Corporate Transaction, each option granted under this Program shall
become fully exercisable ("accelerate") with respect to the total number of
shares of Common Stock then subject to the option. However, an option shall
not accelerate if and to the extent: (i) the option is, in connection with
the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or to be replaced by an equivalent option to
purchase shares of the capital stock of the successor corporation or parent
thereof, or (ii) acceleration of the option is subject to other limitations
imposed by the Program Administrator at the time of grant. The
determination of equivalence under clause (i) above shall be made by the
Program Administrator and shall be final, binding, and conclusive.

B. Upon the consummation of the Corporate Transaction, all options granted
under this Program shall terminate and cease to be outstanding, except to the
extent assumed by the successor (or surviving) corporation or its parent
company.

C. Each option granted under this Program that is replaced by an equivalent
option in a Corporate Transaction, or that otherwise continues in effect, shall
be appropriately adjusted, immediately after the Corporate Transaction, to apply
to the number and class of securities that would have been issued in the
Corporate Transaction to an actual holder of the number of shares of Common
Stock that were subject to the option immediately before the Corporate
Transaction. Appropriate adjustment shall also be made to the option price
payable per share, provided the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of
securities available for issuance under this Program following the consummation
of the Corporate Transaction shall be appropriately adjusted.

D. The grant of options under this Program shall not affect the right of
the Corporation to adjust, reclassify, reorganize, or otherwise change its
capital or business structure

9
<PAGE>

or to merge, consolidate, dissolve, liquidate, or sell or transfer all or any
part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Program Administrator may, at any time and from time to time, with the
consent of the affected optionees, cancel any or all outstanding options granted
under this Program and grant in substitution new options covering the same or
different numbers of shares of Common Stock but having an option price per share
not less than the fair market value of the Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS; HOSTILE TAKE-OVER; CHANGE IN CONTROL

A. As determined by the Program Administrator in its sole discretion, one
or more optionees may be granted the right, exercisable upon such terms and
conditions as the Program Administrator may establish, to surrender all or part
of an unexercised option granted under this Program in exchange for a payment by
the Corporation of an amount equal to the excess of (i) the fair market value
(on the option surrender date) of the number of shares in which the optionee is
at the time vested under the surrendered option (or part thereof), over (ii) the
aggregate option price payable for those shares.

B. No surrender of an option shall be effective hereunder unless it is
approved by the Program Administrator. If the surrender is approved, then the
payment to the optionee under this Section V may be made in shares of Common
Stock valued at fair market value on the option surrender date, in cash, or
partly in shares and partly in cash, as the Program Administrator determines in
its sole discretion.

C. If the surrender of an option is rejected by the Program Administrator,
then the optionee shall retain whatever rights he or she had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time before the later of (i) five (5)
business days after receipt of the rejection notice, or (ii) the last day on
which the option is otherwise exercisable in accordance with its terms, but in
no event more than ten (10) years after the date of the option grant.

D. In the event that an individual optionee under this Program thereafter
becomes a member of the Board of Directors or a Corporate Officer of the
Corporation and is subject to the short-swing profit restrictions of the federal
securities laws, then that individual shall have the following limited stock
appreciation rights in tandem with each option

10
<PAGE>

received under this Program. Upon the occurrence of a Hostile Take-Over (defined
below), each option with such a limited stock appreciation right in effect for
at least six (6) months shall automatically be canceled and the optionee shall
be entitled to a cash payment by the Corporation in the amount of the excess of
(i) the Take-Over Price (defined below) of the shares of Common Stock subject to
the canceled option (whether or not the option is otherwise exercisable for such
shares), over (ii) the aggregate exercise price payable for such shares. The
payment shall be made within five (5) days after consummation of the Hostile
Take-Over. Neither the approval of the Program Administrator nor the consent of
the Board shall be required in connection with such option cancellation and cash
payment.

E. A "Hostile Take-Over" shall be deemed to occur if (i) any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation) directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended [the
"Exchange Act"]) of securities possessing more than 50% of the total combined
voting power of the Corporation's outstanding securities pursuant to a tender or
exchange offer that the Board does not recommend that the Corporation's
stockholders accept, and (ii) more than 50% of the securities so acquired are
accepted from holders other than Officers and Directors of the Corporation
subject to Section 16 of the Exchange Act. The "Take-Over Price" per share shall
be the greater of (a) the fair market value per share on the date of
cancellation, as determined pursuant to the valuation provisions of Section
II.A.4 of this Program, or (b) the highest reported price per share paid in
effecting such Hostile Take-Over.

F. The Program Administrator shall have full discretionary authority,
exercisable either in advance of, or at the time of, a Change in Control
(defined below), to provide for the automatic acceleration of options granted
under this Program upon the occurrence of the Change in Control. The Program
Administrator shall also have full discretionary authority to condition any such
acceleration upon the subsequent termination of the optionee's service to the
Corporation (or a parent or subsidiary) within a specified period after the
Change in Control. The Program Administrator hereby exercises such discretion to
accelerate vesting of all outstanding options held by Officers of the
Corporation whose employment is terminated in conjunction with, or within a year
of, a Change in Control or Corporate Transaction. Any option accelerated in
connection with the Change in Control shall remain fully exercisable until the
expiration of the option term. For all purposes of this Program, a "Change in
Control" shall mean a change in control of the Corporation of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A

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<PAGE>

promulgated under the Exchange Act, whether or not the Corporation is then
subject to such reporting requirement, other than a Corporate Transaction;
provided that, without limitation, a Change in Control shall be deemed to have
occurred if:

G. The shares of Common Stock subject to any option surrendered or canceled
for an appreciation distribution pursuant to this Section V shall not be
available for subsequent option grant under this Program.

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<PAGE>

ARTICLE THREE

RESTRICTED STOCK AWARDS

I. DETERMINATION OF ELIGIBILITY AND AMOUNT OF AWARDS

The persons who shall be eligible to receive restricted stock awards under
this Article shall be such key employees of the Corporation or its subsidiaries,
excluding officers and directors, as the Program Administrator shall select from
time to time. In no event, however, shall any employee owning stock possessing
more than ten percent (10%) of the total combined voting power or value of all
classes of stock of the Corporation or any subsidiary be eligible to receive
shares under this Article.

II. RESTRICTED STOCK

A. Restricted stock awards shall be made from time to time under the
Program in recognition of the services rendered to the Corporation or its
subsidiaries by the selected participants. All such restricted stock awards
shall provide for the issuance, either as soon as practicable following the time
of the award or at a later date specified in the agreement evidencing the award,
of shares of the Corporation's Common Stock.

B. Each recipient of a restricted stock award under the Program shall, at
the time the shares of Common Stock are issued in payment of such award, pay to
the Corporation, in cash or cash equivalent, an amount equal to the aggregate
par value of the issued shares.

III. VESTING SCHEDULE

A. The interest of an employee in the shares of Common Stock issued to such
employee under this Article may, in the discretion of the Program Administrator,
be fully and immediately vested upon issuance or may vest in one or more
installments in accordance with the vesting provisions of Section III.C. Except
as otherwise provided in Section III.F., the employee may not transfer any of
the Common Stock in which he or she does not have a vested interest.
Accordingly, all unvested shares issued to an employee under the Program shall
bear the restrictive legend specified in Section III.D.1., until such legend is
removed in accordance with Section III.D.2. The employee, however, shall have
all the rights of a stockholder with respect to the shares of Common Stock
issued to him or her

13
<PAGE>

hereunder, whether or not his or her interest in such shares is vested.
Accordingly, the employee shall have the right to vote such shares and to
receive any cash dividend paid on such shares. Any new, additional or different
shares of stock or other property (including money paid other than as a cash
dividend) which the holder of unvested Common Stock may have the right to
receive by reason of a stock dividend, stock split or reclassification of Common
Stock or by reason of a merger, consolidation, liquidation or other change in
the capital structure of the Corporation shall be issued to the employee,
subject to (i) the same vesting schedule applicable to his or her unvested
Common Stock and (ii) such escrow arrangements as the Program Administrator
shall deem appropriate.

B. In the event an employee should, while his or her interest in the Common
Stock remains unvested, (i) attempt to transfer (other than by way of a
permissible gift under Section III.F.) any of the unvested Common Stock or any
interest therein or (ii) cease employment with the Corporation for any reason
whatsoever, then the certificates evidencing the employee's unvested Common
Stock (other than shares which become vested by reason of, or upon, such
termination in accordance with the agreement evidencing the award) shall be
immediately surrendered to the Corporation for cancellation and the employee
shall no longer have any stockholder rights with respect to the canceled Common
Stock. In exchange for the surrendered certificates the employee shall receive a
cash payment from the Corporation equal to the aggregate par value of the
canceled shares. For purposes of this Article, the employee shall not be deemed
to have ceased employment with the Corporation for so long as the employee
remains in the active employ of the Corporation or one or more of its
subsidiaries.

C. Vesting; Corporate Transaction; Change in Control.

1. Any shares of Common Stock issued under this Article that are not vested
at the time of such issuance shall vest in one or more installments thereafter.
The elements of the vesting schedule applicable to the issued shares, including
the number of installments in which the shares are to vest, the interval or
intervals (if any) which are to lapse between installments and the effect which
death, disability or other event designated by the Program Administrator is to
have upon the vesting schedule, shall be determined by the Program Administrator
and shall be specified in the stock restriction agreement executed by the
employee at the time the shares are issued.

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<PAGE>

the Program Administrator, be held in escrow by the Corporation or its successor
and shall thereafter be distributed to the employees from time to time as their
interests therein vest in accordance with the same vesting schedules which are
in effect for their shares of Common Stock immediately prior to such conversion.
However, the interest each employee has in the shares of Common Stock issued to
him or her under this Article (together with any cash or other shares or
securities into which such Common Stock is to be converted) shall become vested
immediately prior to the specified effective date for the Corporate Transaction
if the Company's rights to repurchase or cancel unvested shares under this
Article (for a payment equal to the par value of the shares) are not to be
assigned to the successor corporation or parent thereof in connection with the
Corporate Transaction. If the Corporation is to be acquired by a reverse merger
in which it is to remain the surviving entity, then no accelerated vesting under
the Program shall occur, unless the Program is to be terminated in connection
with such reverse merger.

3. In the event of a Change in Control (as defined in Article Two, Section
V.F.), then the Program Administrator shall have full power and authority
(exercisable before or after the Change in Control) to accelerate the vesting of
the interests of one or more of the employees in the shares of Common Stock
issued to him or her under this Article.

4. In the event of a Corporate Transaction, then any outstanding
obligations or commitments to issue Common Stock pursuant to this Article shall
be assumed by the successor corporation or parent thereof.

D. Restrictive Legends.

1. Each certificate representing unvested shares of Common Stock (or other
securities) issued under this Article shall bear the following restrictive
legend:

"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND TO CANCELLATION IN ACCORDANCE WITH THE TERMS
AND CONDITIONS OF ARTICLE THREE OF THE CORPORATION'S 1997 STOCK OPTION
PROGRAM AND THE STOCK RESTRICTION AGREEMENT EXECUTED THEREUNDER BY THE
CORPORATION AND THE REGISTERED HOLDER (OR HIS PREDECESSOR IN INTEREST). A
COPY OF THE 1997 STOCK OPTION PROGRAM AND STOCK RESTRICTION AGREEMENT MAY
BE OBTAINED FROM THE SECRETARY OF THE CORPORATION."

2. As the interest of the employee vests in the shares of Common Stock
issued under this Article, the Corporation shall, upon the employee's delivery
of the certificate for such shares, issue a new certificate for the vested
shares without the restrictive legend of Section III.D.1. and a second
certificate for any remaining unvested shares with the Section III.D.1. legend
endorsed thereon. If any unvested shares of the employee

15
<PAGE>

are surrendered and canceled under Section III.C.3., then the Corporation shall
at the time the cancellation is effected deliver a new certificate, without the
restrictive legend of Section III.D.1., representing the number of shares (if
any) in which the employee is at such time vested and which are accordingly no
longer subject to cancellation by the Corporation.

E. The Program Administrator may in its discretion waive, in whole or in
part, any cancellation of unvested Common Stock (or other assets) to which an
employee would otherwise be subject under Section III.B. Such a waiver shall
result in the immediate vesting of the employee's interest in the shares of
Common Stock (or other assets) as to which the waiver applies.

F. As used in this Section III, the term "transfer" shall include (without
limitation) any sale, pledge, encumbrance, gift or other disposition of the
shares of Common Stock issued under Article Four. However, the employee shall
have the right to make a gift of any or all of his unvested shares under Article
to his spouse, parents or children or to a trust established for such spouse,
parents or children, provided the recipient of the gifted shares delivers to the
Corporation a written agreement to be bound by all the provisions of the Program
and the stock restriction agreement executed by the employee with respect to
such shares.

16
<PAGE>

ARTICLE FOUR

MISCELLANEOUS

I. AMENDMENT OF PROGRAM

The Board shall have complete and exclusive authority to amend or modify
this Program in any or all respects whatsoever. However, no such amendment or
modification shall, without the consent of the optionee or restricted stock
award holders, adversely affect rights and obligations with respect to options
or awards at the time outstanding under this Program.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares or cash upon exercise of
options or stock appreciation rights or restricted stock awards granted under
this Program shall be subject to the satisfaction of all federal, state, and
local income and employment tax withholding requirements.

B. The Program Administrator may, in its discretion and upon such terms and
conditions as it deems appropriate, provide any or all optionees under this
Program with the election to have the Corporation withhold, from the shares of
Common Stock otherwise issuable upon the exercise of options, one or more
share(s) with an aggregate fair market value equal to a designated percentage
(any whole multiple of 5% specified by the optionee) of the federal and state
income taxes ("Taxes") incurred in connection with the acquisition of such
shares. In lieu of direct withholding, optionees may be granted the right to
deliver shares of Common Stock to the Corporation in satisfaction of such Taxes.
The withheld or delivered shares shall be valued at the fair market value on the
applicable determination date for such Taxes.

III. TERM OF PROGRAM

A. This Program shall terminate on (i) August 10, 2003, or (ii) the date on
which all shares available for issuance under this Program have been issued
pursuant to restricted stock awards or the exercise of options granted under
this Program. If the date of termination is determined under clause (i) above,
then no options or awards outstanding on such date shall be affected by the
termination of this Program.

17
<PAGE>

B. Options may be granted under this Program to purchase shares of Common
Stock in excess of the number of shares then available for issuance under this
Program, provided each option granted is not to become exercisable, in whole or
in part, at any time before Board approval of issuance of a sufficient increase
in the number of shares issuable under this Program.

IV. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
pursuant to options or restricted stock awards granted under this Program may be
used for general corporate purposes.

V. REGULATORY APPROVALS

A. The implementation of this Program, the granting of any option
hereunder, and the issuance of stock for any restricted stock award or upon the
exercise or surrender of any such option shall be subject to the procurement by
the Corporation of all approvals and permits required by regulatory authorities
having jurisdiction over this Program, the options granted under it, and the
stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or delivered
under this Program unless and until there shall have been compliance with all
applicable requirements of federal and state securities laws, including the
filing and effectiveness of a Form S-8 registration statement for the shares of
Common Stock issuable under this Program, and all applicable listing
requirements of any securities exchange on which stock of the same class is then
listed.

VI. NO EMPLOYMENT/SERVICE RIGHTS

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

VII. MISCELLANEOUS PROVISIONS

A. Except as otherwise provided in this Program, the right to acquire
Common Stock or other assets under this Program may not be assigned, encumbered,
or otherwise transferred by any optionee.

18
<PAGE>

B. The provisions of this Program shall be governed by the laws of the
State of California, as such laws are applied to contracts entered into and
performed in that state.

C. The provisions of this Program shall inure to the benefit of, and be
binding upon, the Corporation and its successors or assigns, and the optionees,
the legal representatives of their respective estates, their respective heirs or
legatees, and their permitted assignees.

o0o

<ARTICLE> 5
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<S> <C>
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<PERIOD-END> JUN-28-1998
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<PP&E> 133,563
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0
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<CGS> 18,633
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