OCTEL COMMUNICATIONS CORP, DEF 14A, 1995-10-18

OCTEL COMMUNICATIONS CORP
DEF 14A, 1995-10-18
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE> 1

SCHEDULE 14A INFORMATION

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

Filed by the registrant /X/

Filed by a party other than the registrant / /

Check the appropriate box:

/ / Preliminary proxy statement

/X/ Definitive proxy statement

/ / Definitive additional materials

/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

OCTEL COMMUNICATIONS CORPORATION
----------------------------------------------------
Name of Registrant as Specified in its Charter)

OCTEL COMMUNICATIONS CORPORATION
----------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of filing fee (Check the appropriate box):

/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).

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

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

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

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

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

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1

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

(4) Proposed maximum aggregate value of transaction:

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

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

(1) Amount previously paid:

$125

(2) Form, schedule or registration statement no.:

Schedule 14A

(3) Filing party:

Octel Communications Corporation

(4) Date filed:

September 28, 1995

(1) Set forth the amount on which the filing fee is calculated and state how it
was determined.

<PAGE> 2

OCTEL COMMUNICATIONS CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 1995

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Octel
Communications Corporation (the "Company") will be held on November 16, 1995 at
2:00 p.m., local time, at the Company's principal offices at 1001 Murphy Ranch
Road, Milpitas, California 95035 for the following purposes:

1. To elect seven directors to serve until the next annual meeting of
stockholders and until their successors are duly elected.

2. To amend the Company's 1985 Incentive Stock Plan (the "Option Plan") to
extend the term of the Option Plan for an additional ten-year period and change
the name of the Option Plan to the "1995 Incentive Stock Plan."

3. To approve an amendment to the Company's 1987 Employee Stock Purchase
Plan (the "Purchase Plan") increasing the number of shares of Common Stock
reserved for issuance by 475,000 shares.

4. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock of the Company to
100,000,000.

5. To consider a stockholder proposal by the State of Wisconsin Investment
Board requiring the Board of Directors to adopt a policy prohibiting the
repricing of stock options without stockholder approval.

6. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the fiscal year ending June 30, 1996.

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

Only stockholders of record at the close of business on September 19, 1995
are entitled to notice of and to vote at the meeting.

All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to sign and
return the enclosed proxy as promptly as possible in the postage prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if the stockholder has previously returned a proxy.

By Order of the Board of Directors

Derek S. Daley, Secretary
Milpitas, California

October 10, 1995

<PAGE> 3

OCTEL COMMUNICATIONS CORPORATION

PROXY STATEMENT FOR 1995
ANNUAL MEETING OF STOCKHOLDERS
------------------------

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed Proxy is solicited on behalf of the Board of Directors of
Octel Communications Corporation (the "Company") for use at the Annual Meeting
of Stockholders to be held on Thursday, November 16, 1995 at 2:00 p.m., local
time, or at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
will be held at the Company's principal offices at 1001 Murphy Ranch Road,
Milpitas, California 95035.

The proxy solicitation materials were mailed on or about October 17, 1995
to all stockholders entitled to vote at the meeting.

RECORD DATE AND SHARE OWNERSHIP

Stockholders of record at the close of business on September 19, 1995 (the
"Record Date") are entitled to notice of the meeting and to vote at the meeting.
At the Record Date, 24,593,596 shares of the Company's Common Stock were issued
and outstanding and held of record by approximately 3,247 registered
stockholders. Each stockholder is entitled to one vote for each share held. No
shares of the Company's Preferred Stock were outstanding. See "Security
Ownership of Certain Beneficial Owners and Management" below for information
regarding beneficial owners of more than five percent of the Company's Common
Stock.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the meeting and voting in person.

VOTING AND SOLICITATION

Each stockholder voting for the election of directors (Proposal No. 1) may
cumulate his votes, giving one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of shares which the
stockholder is entitled to vote, or distributing the stockholder's votes on the
same principle among as many candidates as the stockholder chooses, provided
that votes may not be cast for more than seven candidates. However, no
stockholder shall be entitled to cumulate votes unless the candidates' names
have been placed in nomination prior to the voting and the stockholder, or any
other stockholder, has given notice at the meeting prior to the voting of the
intention to cumulate the stockholder's votes. Any such notice should be
directed to the Inspector of Elections at the meeting. On all other matters
(Proposals No. 2-6), each share has one vote.

This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. The Company has retained Chemical Mellon to aid in
the solicitation of proxies from brokers, banks and other institutional
nominees. The fees and expenses of such firm are not expected to exceed $11,000.
In addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegraph or personal
solicitations by directors, officers or employees of the Company. No additional
compensation will be paid for any such services.

<PAGE> 4

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.

While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of a controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.

In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes should not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Accordingly, the Company intends to treat broker non-votes
in this manner. Thus, a broker non-vote will not have any effect on the outcome
of the voting on a proposal.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS

Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1996 Annual Meeting of Stockholders must
have been received by the Company no later than June 13, 1996 in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.

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PROPOSAL NO. 1 -- ELECTION OF DIRECTORS

NOMINEES

A board of seven directors is to be elected at the Annual Meeting of
Stockholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's nominees named below. In the event
that any nominee of the Company is unable or declines to serve as a director at
the time of the Annual Meeting of the Stockholders, the proxies will be voted
for any nominee who shall be designated by the present Board of Directors to
fill the vacancy. It is not expected that any nominee will be unable or will
decline to serve as a director. In the event that additional persons are
nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner (in accordance with cumulative voting)
as will assure the election of as many of the nominees listed below as possible,
and in such event the specific nominees to be voted for will be determined by
the proxy holders. The term of office of each person elected as a director will
continue until the next Annual Meeting of Stockholders or until a successor has
been elected and qualified.

The nominees, and certain information about them as of the Record Date, are
set forth below:

<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) SINCE
- ------------------------------------------ --- ------------------------------------- --------
<S> <C> <C> <C>
Robert Cohn............................... 46 Chairman of the Board, President and 1982
Chief Executive Officer
Anson M. Beard, Jr........................ 59 Director 1994
Leo J. Chamberlain........................ 65 Director 1989
Deborah A. Coleman........................ 42 Director 1994
Nathaniel de Rothschild................... 49 Director 1994
Dag Tellefsen............................. 53 Director 1982
W. Michael West........................... 45 Vice Chairman of the Board 1995
</TABLE>

Mr. Cohn, a founder of the Company, served as its President and Chief
Executive Officer from the Company's inception in 1982 until October 1990, and
then resumed those positions in November 1993. Mr. Cohn has served as a director
from the Company's inception and, in June 1990, the Board of Directors appointed
Mr. Cohn Chairman of the Board. Prior to founding the Company, he was employed
by Acurex Corporation, a manufacturer of microprocessor-based measurement and
control systems, from 1979 to 1982. From 1976 to 1979, he was employed by
McKinsey & Co., Inc., a management consulting company. Mr. Cohn holds a B.S. in
Mathematics and Computer Science from the University of Florida and an M.B.A.
from Stanford University. Mr. Cohn is also a director of Global Village
Communication, Inc., a manufacturer of communications hardware and software for
personal computers.

Mr. Beard has served as a director of the Company since June 1994. He
joined Morgan Stanley & Co. Incorporated in May 1977, and from 1980 until his
retirement in February 1994 served as Managing Director of its Worldwide Equity
Division. In 1986, he was appointed as a director of Morgan Stanley Group, the
holding company for Morgan Stanley & Co. Incorporated. He retains the position
of Advisory Director of Morgan Stanley & Co. Incorporated. Mr. Beard is also a
member of the Wheaton College Board of Trustees, and from 1990 to 1992 was a
director of the National Association of Securities Dealers, Inc. (the "NASD"),
serving as Vice Chairman of the NASD in 1992.

Mr. Chamberlain has served as a director of the Company since March 1989.
Until ROLM's acquisition by IBM in 1984, Mr. Chamberlain served on the Board of
Directors of ROLM, where he had been employed as Executive Vice President until
his retirement in 1982. Mr. Chamberlain is also a director of KLA Instruments
Corporation, a manufacturer of semiconductor inspection equipment.

Ms. Coleman has served as a director of the Company since March 1994. Since
June 1994, Ms. Coleman has been Chairman and Chief Executive Officer of Merix
Corporation, a manufacturer of technologically advanced components for
sophisticated electronic equipment. From April 1993 to June 1994, Ms. Coleman

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<PAGE> 6

served as Vice President of Materials Operations for Tektronix, Inc., a
worldwide high technology equipment design and manufacturing firm. From June
1985 to April 1993, she held officer-level positions with Apple Computer, Inc.,
including Vice President -- World Wide Operations and Vice President -- Chief
Financial Officer. Ms. Coleman has been a director of Software Publishing
Corporation, a publisher of personal computer software, since November 1991.

Mr. de Rothschild has served as a director of the Company since June 1994.
He is President of Nathaniel de Rothschild Holdings Ltd., a private investment
company that he founded in 1988. Mr. de Rothschild is also Chairman of the Board
of Global Asset Management (USA) Inc., the U.S. subsidiary of Global Asset
Management Ltd., a worldwide money management firm, and a director of St. James
Place Capital, Plc.

Mr. Tellefsen has served as a director of the Company since September 1982.
He is a general partner of Glenwood Management and Glenwood II Management
Corporation, investment management firms and the general partners of Glenwood
Ventures I and Glenwood Ventures II, respectively, which are venture capital
funds. He has been with Glenwood Management since 1982. Mr. Tellefsen is also a
director of KLA Instruments Corporation, a manufacturer of semiconductor
inspection equipment, Arix Computer Corporation, a manufacturer of symmetrical
multiprocessing UNIX systems, and Iwerks Entertainment, Inc., a producer of
out-of-home entertainment systems and software.

Mr. West serves as Vice Chairman of the Company. He joined the Company in
September 1986 as Executive Vice President and was responsible for sales and
customer service. From 1979 to September 1986, Mr. West was employed by ROLM,
serving for three years during this period as President of an operating
subsidiary of ROLM and then as General Manager of its National Sales Division.
Mr. West attended Southern Illinois University.

John Freidenrich, a director since January 1986, and Robert Hawk, a
director since March 1987, will not be standing for reelection this year. Both
have served the Company very well during their tenure and contributed to the
Company's success and growth. The Company appreciates the enormous service that
each of these board members has given and will miss their presence and
contributions. The Company intends to fill one or both of these seats over the
next few years.

There are no family relationships between directors or executive officers
of the Company.

VOTE REQUIRED

The seven nominees receiving the highest number of affirmative votes of the
shares entitled to be voted for them shall be elected as directors. Votes
withheld from any director are counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but have no legal effect
under Delaware law.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership as of the Record Date of the Company's Common Stock as to (i) each
director, (ii) each of the executive officers listed in the Summary Compensation
Table below, (iii) all executive officers and directors as a group and (iv) each
person known by the Company to beneficially own five percent or more of the
outstanding shares of Common Stock.

<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND NO. OF SHARES
FIVE PERCENT STOCKHOLDERS(1) BENEFICIALLY OWNED PERCENTAGE
- --------------------------------------------------------------- ------------------ ----------
<S> <C> <C>
Capital Guardian Trust......................................... 1,751,000 7.1%
533 S. Hope Street
Los Angeles, CA 90071
Capital Research & Management.................................. 1,925,000 7.8%
333 S. Hope Street
Los Angeles, CA 90071
State of Wisconsin Investment Board............................ 2,371,000 9.6%
121 East Wilson Street
Madison, WI 53702
Anson M. Beard, Jr.(2)......................................... 20,000 *
Donald L. Campodonico(3)....................................... 41,612 *
Leo J. Chamberlain(4).......................................... 26,603 *
Robert Cohn(5)................................................. 708,567 2.8%
Deborah A. Coleman(6).......................................... 11,000 *
Derek S. Daley(7).............................................. 71,587 *
John Freidenrich(8)............................................ 63,371 *
Robert C. Hawk(9).............................................. 49,155 *
David Ladd(10)................................................. 138,144 *
Nathaniel de Rothschild(11).................................... 6,080 *
Dag Tellefsen(12).............................................. 22,000 *
W. Michael West(13)............................................ 191,935 *
All Directors and executive officers as a group (18 1,488,810 5.9%
persons)(14).................................................
</TABLE>

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

*Represents less than 1% of the outstanding shares of Common Stock.

(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes hereunder.

(2) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(3) Includes 39,200 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(4) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(5) Includes shares held of record by a trust for the benefit of Mr. Cohn, his
wife and their children. Also includes 376,330 shares issuable upon
exercise of options which are exercisable within 60 days of the Record
Date.

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<PAGE> 8

(6) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(7) Includes 43,805 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(8) Represents holdings by the Freidenrich Family Trust of 37,396 shares and by
the Freidenrich Family Partnership (of which the Freidenrich Family Trust
is a 50% beneficial owner) of 3,975 shares. Includes 21,000 shares issuable
upon exercise of options which are exercisable within 60 days of the Record
Date.

(9) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(10) Includes 45,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(11) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(12) Includes 21,000 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(13) Includes 109,065 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

(14) Includes 848,035 shares issuable upon exercise of options that are
exercisable within 60 days of the Record Date.

As of the Record Date, the per share market value of the Company's Common
Stock was $40.25, based on the closing price on that date on The Nasdaq National
Market.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of seven meetings during
the fiscal year ended June 30, 1995. The Audit Committee held seven meetings,
the Compensation Committee held four meetings and the Nominating Committee held
one meeting during the fiscal year ended June 30, 1995. Each director attended
at least 75% of Board and, where applicable, committee meetings held during the
fiscal 1995.

Messrs. Beard and Freidenrich and Ms. Coleman served on the Audit Committee
of the Board of Directors until the end of fiscal 1995. As of the beginning of
fiscal 1996, Ms. Coleman and Mr. Beard serve on the Audit Committee. The purpose
of the Audit Committee is to review with the Company's management and
independent auditors the financial statements and internal financial reporting
system and controls of the Company, recommend resolutions for any dispute
between the Company's management and its auditors and review other matters
relating to the relationship of the Company with its auditors.

Messrs. Chamberlain, de Rothschild and Tellefsen and Ms. Coleman currently
serve on the Compensation Committee. The purpose of the Compensation Committee
is to review and approve the salaries of the Company's executive officers and
certain highly compensated employees for each fiscal year. The compensation of
the President and Chief Executive Officer of the Company remains subject to
approval by the full Board of Directors.

Messrs. Beard, Freidenrich, de Rothschild and Tellefsen served on the
Nominating Committee until the end of fiscal 1995. As of the beginning of fiscal
1996, Messrs. Beard, de Rothschild and Tellefsen serve on the Nominating
Committee. The purpose of the Nominating Committee is to develop criteria for
nominating new members of the Board and to identify potential candidates for
such nomination. The Nominating Committee will consider stockholder
recommendations for new directors. However, the final determination of whether a
candidate will be nominated to become a member of the Company's Board of
Directors is reserved for the Nominating Committee. Any suggestions may be
submitted in writing, attention "Nominating Committee of the Board of
Directors," at the Company's principal offices.

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<PAGE> 9

COMPENSATION OF DIRECTORS

During fiscal 1995, each of the directors was compensated for participating
in Board and committee meetings as follows: $5,000 annual fee, provided that the
director attended at least five of the six non-telephonic meetings of the Board
during the fiscal year; $1,500 for each meeting of the Board which the director
attended in person; $250 for each meeting of the Board which the director
attended via telephone; $500 for each meeting of a committee of the board
(except the Stock Option Committee) which the director attended in person; and
$500 per year for each member of the Stock Option Committee. In addition, the
Company reimburses all directors for travel and other necessary business
expenses incurred in fulfilling their duties as directors. Directors also
receive stock options granted pursuant to the 1988 Directors' Stock Option Plan.
See "1988 Directors' Stock Option Plan" below.

CERTAIN TRANSACTIONS

Sales to U.S. West were approximately $22.9 million, 4.8% of the Company's
total net revenues, during the Company's fiscal year ended June 30, 1995. Robert
C. Hawk, a director of the Company who is not standing for reelection this year,
is an executive officer of U.S. West. Based on its sales terms and prices for
similar products to similar companies (RBOCs), the Company believes that sales
to U.S. West were made on an arms' length basis.

Sales to Hewlett-Packard Company, a holder of more than 5% of the Company's
Common Stock for part of the fiscal year ended June 30, 1995, were approximately
$3.1 million, 0.7% of the Company's total net revenues, during the year. Based
on its sales terms and prices for similar products to similar companies, the
Company believes that sales to Hewlett-Packard Company were made on an arms'
length basis.

In November 1993, prior to merging with the Company, VMX, Inc. ("VMX")
loaned David Ladd, an officer of the Company, $100,000 for personal use pursuant
to a promissory note currently secured by 8,000 shares of the Company's Common
Stock and due in four years with interest at the Bank of America prime rate plus
one percent. The note was repaid in full on September 27, 1994.

In December 1994, the Company loaned $1,019,027 to Robert Cohn, an
executive officer and director of the Company, in connection with the exercise
of and payment of taxes regarding an incentive stock option to purchase 75,000
shares of Common Stock at $11.125 per share, with interest payable at a rate of
6.66%, compounded semi-annually, and a term of three years. The loan is secured
by 50,952 shares of the Company's Common Stock having a market value of
$2,050,818 at September 19, 1995. In February 1995, the Company loaned $267,000
to Derek S. Daley, an executive officer of the Company, in connection with the
exercise of an incentive stock option to purchase 24,000 shares of Common Stock
at $11.125 per share, with interest payable at a rate of 7.43%, compounded
annually, and a term of three years. The loan is secured by 12,420 shares of the
Company's Common Stock having a market value of $499,905 at September 19, 1995.
As of September 19, 1995, the total amount outstanding on Mr. Cohn's notes was
$1,070,126 and the total amount outstanding on Mr. Daley's note was $279,066.

The stock option agreements between the Company and certain of its officers
and key employees provide for full acceleration of exercisability if their
employment is terminated or their compensation is reduced in connection with a
change of control of the Company. See "Compensation Committee Report -- Chairman
and CEO Compensation" and "Proposal No. 2 -- Approval of Amendment Extending the
Term of the 1985 Incentive Stock Plan -- Terms Of Options."

The Company has entered into indemnification agreements with each of its
directors and officers. Such agreements require the Company to indemnify such
individuals to the full extent permitted by Delaware law if certain claims are
brought against them in their capacities with the Company.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or

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<PAGE> 10

Form 5 with the Securities and Exchange Commission (the "SEC"). Such officers,
directors and ten percent stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports they file.

Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that Forms 5 have been
filed for such persons as required, the Company believes that, during the year
ended June 30, 1995, all reporting persons complied with Section 16(a) filing
requirements applicable to them.

COMPENSATION COMMITTEE REPORT

The following is the Report of the Compensation Committee of the Company,
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended June 30, 1995. The information contained in the
report shall not be deemed to be "soliciting material" or to be "filed" with the
SEC nor shall such information be incorporated by reference into any future
filing under the Securities Act of 1933, as amended, or the Exchange Act except
to the extent that the Company specifically incorporates it by reference into
such filing.

COMPENSATION COMMITTEE REPORT

The Compensation Committee (the "Committee") of the Board of Directors of
Octel Communications Corporation determines the Company's executive compensation
policies. The Committee is comprised of four non-employee directors. The
Chairman and CEO participates as a non-voting member. After evaluating
management's performance, the Committee recommends compensation programs and pay
levels to the full Board for approval.

COMPENSATION PHILOSOPHY

The goals of the executive compensation program are to attract, retain and
reward executive officers who contribute to the success of the Company.
Compensation opportunities are aligned with the Company's business objectives.
The compensation programs are designed to motivate executive officers to meet
annual corporate performance goals and enhance long-term stockholder value.

In designing and administering the individual elements of the executive
compensation program, the Committee strives to balance short- and long-term
incentive objectives and use prudent judgment in establishing performance
criteria, evaluating performance and determining actual incentive awards.

Using the assistance of an independent compensation consulting firm, the
Committee regularly evaluates the competitiveness and appropriateness of the
Company's executive compensation program by comparing its pay practices with
other companies in the industry. For this comparison, compensation levels are
compared to those of a select group of similar high-technology companies with
approximately the same market capitalization, revenues and growth pattern as the
Company. The comparison group is subject to occasional changes as the Company or
the selected companies change their focus, merge or are acquired, or as new
companies emerge. Sales growth, operating income, P/E ratio, compound annual
growth rate and market capitalization are evaluated to ensure the comparative
companies have successful track records.

COMPENSATION VEHICLES

The Company's executive compensation program includes base salary, annual
incentive and long-term incentive compensation components.

BASE SALARY

The Company reviews base salaries annually for market competitiveness. In
determining competitive levels, the job responsibilities of each executive are
matched with like jobs in the comparison group. Individual

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base salary increases may vary and reflect individual performance. This allows
the Company to attract and retain the key employees necessary to meet its
business objectives and enhance stockholder value.

As a cost-containment measure, fiscal year 1996 base salary increases for
the executive officers were deferred for six months and will be reviewed again
in January 1996.

ANNUAL INCENTIVE PLAN

The annual incentive portion of the 1995 executive compensation program
provided cash rewards based on achievement of corporate financial goals and
corporate business objectives. In 1995, the incentive target per individual was
defined as a percentage of his or her base compensation. The annual incentive
was based on the Company's achievement of revenue, operating income and customer
satisfaction objectives and the Company's achievement of certain business
objectives approved by the Board. The Company reviews the incentive targets
annually for market competitiveness based on job level and responsibilities. The
Company's philosophy is to leverage total compensation to provide competitive
pay for the achievement of aggressive performance measures. The amount of
compensation actually paid under this plan is variable or "at risk," because it
is tied directly to achievement of specific corporate performance goals.

In fiscal year 1995, all named executives received a cash award for the
corporate performance portion of the Annual Incentive Plan. The Company met
98.7% of its revenue goals and 86.2% of its operating income goals, which
(because the calculation of bonus payments for corporate financial achievement
has aggressive downside slope and is further modified based on achievement of
corporate business and customer satisfaction objectives) translated to bonus
payments equal to 80% of the target bonus being paid.

The Bonus Plan for fiscal year 1996 will have similar financial measures of
revenue and operating income and, for certain executives, will be partially
based on the performance of their respective business units. A portion of the
bonus (80% of the target bonus percentage) will be paid on a semi-annual basis
and will be based on these financial measures. The remaining 20% of the target
bonus percentage will be paid annually and will be based on achievement of
objectives regarding market share, customer satisfaction and performance on key
corporate projects.

CHAIRMAN AND CEO COMPENSATION

The Committee bases compensation of all officers (except the Chairman and
CEO) on the policies and procedures described above. The Chairman's base salary
is $250,000 per year, well below competitive norms for a company of comparable
size. He has no annual incentive bonus. The greatest portion of the Chairman and
CEO's compensation is directly associated with the long-term capital growth of
the Company. Although Mr. Cohn was not granted any options in fiscal 1995, he
was, concurrent with his appointment to the position of Chairman and Chief
Executive Officer of the Company in fiscal 1994, granted the following options
to purchase Common Stock of the Company:

350,000 shares at $25.00 per share;

200,000 shares at $35.00 per share; and

200,000 shares at $50.00 per share.

These options become exercisable as to 20% of the total shares under option
one year after the date of grant and up to an additional 20% after the end of
each subsequent twelve-month period. These options contain acceleration
provisions consistent with other stock purchases and options Mr. Cohn has made
and received. The Company believes that the rewards Mr. Cohn may receive are
tied to the stock price performance of the Company, from which other
stockholders will derive substantial benefit as well.

STOCK OPTIONS

To balance the annual incentive plan, stock options focus the executives'
attention on the long-term performance of the Company and maximizing stockholder
value. Stock options are granted with an exercise price equal to fair market
value at the time of grant. Grant ranges have been established for each officer
level

9
<PAGE> 12

that are based on competitive norms of the comparison group. Individual grants
may vary within the range to reflect individual performance and potential. The
option program also utilizes vesting periods to encourage retention of key
employees.

No options were granted to the five highest paid officers during Fiscal
Year 1995.

Specific information regarding compensation of the Chief Executive Officer
and other executive officers is contained in the accompanying table.

TAX POLICY

Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
deductions for certain executive compensation in excess of $1 million. The
Company endeavors to structure its compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives. With respect to non-equity compensation arrangements, the
Committee has reviewed the terms of those arrangements most likely to be subject
to Section 162(m).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee currently consists of directors Chamberlain,
Coleman, de Rothschild and Tellefsen. Robert Cohn, the Chairman of the Board,
President and Chief Executive Office of the Company, currently attends meetings
of the Compensation Committee but does not vote. There are no interlocks between
the Company's Board of Directors or Compensation Committee and boards of
directors or compensation committees of other companies.

LEO CHAMBERLAIN
DEBORAH COLEMAN
NATHANIEL DE ROTHSCHILD
DAG TELLEFSEN

10
<PAGE> 13

STOCK PERFORMANCE GRAPH

In accordance with Exchange Act regulations, the following performance
graph compares the cumulative total stockholder return on the Company's Common
Stock to the cumulative total return on the Nasdaq Index and on the Hambrecht &
Quist Technology Index over the same period. The graph assumes the value of the
investment in the Company's Common Stock and each index was $100 at June 30,
1990 and that all dividends were reinvested.

<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Octel NASDAQ H&Q Tech
<S> <C> <C> <C>
6/90 100.0 100.0 100.0
9/90 40.66 75.13 72.34
12/90 50.55 82.47 81.59
3/91 82.26 107.12 105.88
6/91 107.69 105.89 100.60
9/91 101.65 118.14 104.85
12/90 98.90 132.35 120.62
3/92 138.46 136.54 124.63
6/92 101.10 127.17 114.31
9/92 83.52 132.37 119.18
12/92 92.31 154.00 138.75
3/93 110.99 156.89 136.72
6/93 97.80 159.89 139.66
9/93 102.20 173.36 142.15
12/93 121.98 176.79 151.41
3/94 110.99 169.38 152.78
6/94 72.53 161.50 141.70
9/94 92.04 174.87 161.66
12/94 91.21 172.86 175.74
3/95 91.21 188.80 195.60
6/95 128.57 215.32 237.29
</TABLE>

11
<PAGE> 14

COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE

The following table sets forth, for the three fiscal years ended June 30,
1995, certain compensation information with respect to the Company's Chief
Executive Officer during fiscal 1995 and each of the four other most highly
compensated executive officers other than the Chief Executive Officer who were
serving as executive officers as of June 30, 1995 (collectively, the "Named
Executive Officers"), based upon salary and bonus earned by such executive
officers and individuals in fiscal 1995.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
BONUS COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) ($) (#)(2) ($)
- ----------------------------------------------- ---- ---------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Cohn.................................... 1995 $257,933 -- $ 6,167(3) -- 7,005(4)
Chairman of the Board, 1994 237,692 -- 5,776(3) 750,000 9,318(4)
President and Chief 1993 237,026 -- 5,522(3) -- 8,255(4)
Executive Officer
W. Michael West................................ 1995 231,888 92,400 -- -- 5,595(4)
Vice Chairman of the Board 1994 238,658 92,450 -- 67,500 8,861(4)
1993 226,431 60,425 -- 20,000 8,389(4)
David Ladd..................................... 1995 190,435 82,000 -- -- 7,364(4)
Executive Vice President and 1994 185,208 53,199 -- 105,000 363(4)
Chief Technology Officer 1993 162,292 59,193 -- -- 333(4)
Donald L. Campodonico.......................... 1995 188,222 67,500 -- -- 9,511(4)
Senior Vice President 1994 193,467 65,441 -- 60,000 8,493(4)
1993 175,496 30,975 -- 10,500 7,643(4)
Derek S. Daley................................. 1995 178,183 306,800(5) -- -- 7,449(4)
Vice President, General Counsel 1994 178,183 56,850 -- 35,500 6,793(4)
and Secretary 1993 169,784 38,825 -- 9,500 6,153(4)
</TABLE>

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

(1) Includes bonuses earned in the applicable fiscal year but paid or to be paid
in the following fiscal year.

(2) No SARs were granted.

(3) Comprised of Mr. Cohn's portion of the profit-sharing payments made to most
employees of the Company.

(4) Comprised of premiums for insurance policies where the officers are the
beneficiaries.

(5) Includes a one-time bonus in the amount of $250,000 in recognition of
reduced outside legal fees and successful results in Octel v. Theis, a major
patent lawsuit decided in favor of the Company.

ANNUAL INCENTIVE PLAN

The Company's Board of Directors has adopted an Annual Incentive Plan (the
"Bonus Plan") providing for cash bonuses to officers and senior managers. Under
the Bonus Plan, fiscal year 1995 bonuses to all officers, including executive
officers, of the Company in an aggregate amount of approximately $1,031,000 were
awarded as percentages of the individuals' salaries, based on the Company's
achievement of revenue, operating income, corporate business and customer
satisfaction objectives approved by the Board of Directors.

12
<PAGE> 15

EMPLOYEE STOCK PLANS

The following is a brief summary of the Company's employee stock plans in
effect during the fiscal year ended June 30, 1995 under which officers,
employees, consultants and directors of the Company received benefits. The
closing sale price of the Company's Common Stock on the Record Date, as reported
by The Nasdaq National Market, was $40.25 per share.

1985 INCENTIVE STOCK PLAN

The Company's 1985 Incentive Stock Plan (the "Option Plan"), under which
9,600,000 shares are currently reserved for issuance, was adopted by the Board
of Directors in 1985 and approved by the Company's stockholders in 1985.
Amendments to the Option Plan were approved by the Board of Directors and the
stockholders in each of the last six years and by the Board of Directors in
September 1995. The Option Plan permits the direct sale of shares and the grant
of both "incentive stock options" (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Tax Code")) and nonstatutory
stock options to employees and officers of, and consultants to, the Company.

As of the Record Date under the Option Plan, 690,070 shares had been sold
directly, options to purchase 5,482,828 shares were outstanding at a weighted
average exercise price of $22.69 per share, options for 2,695,035 shares had
been exercised and 732,067 shares were available for future option grant or
direct sale. During fiscal 1995, options to purchase 172,500 shares at a
weighted average exercise price of $18.74 per share were granted to executive
officers of the Company and options to purchase 1,090,500 shares at a weighted
average exercise price of $21.47 per share were granted to other employees of
the Company.

The Option Plan is administered by the Board of Directors or a committee
appointed by the Board. The Board or committee determines the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof. The exercise price of all options to purchase
shares of Common Stock under the Option Plan must be at least equal to the fair
market value of such shares on the date of grant, and the maximum term of each
incentive stock option is ten years. Options granted to officers and certain key
employees under the Option Plan provide for full acceleration of exercisability
in the event that, following a change in control of the Company, the optionee's
employment is terminated or the optionee's compensation and benefits are
reduced. See Proposal No. 2 for a more detailed description of the Option Plan
and a proposal to extend the term of the Option Plan for an additional ten
years.

AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995
AND OPTION/SAR VALUES AS OF JUNE 30, 1995

The following table sets forth certain information regarding options for
the purchase of the Company's Common Stock that were exercised or held by the
Named Executive Officers during fiscal 1995.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON OPTIONS/SARS AT OPTIONS/SARS
EXERCISE VALUE REALIZED JUNE 30, 1995 AT JUNE 30, 1995($)(2)
NAME ($) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------- ----------- --------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert Cohn................. 75,000 $ 665,625 206,064/620,266 $ 1,313,660/1,557,321
W. Michael West............. -- -- 83,872/94,093 850,718/565,085
David Ladd.................. -- -- 37,500/82,500 480,375/675,375
Donald L. Campodonico....... 4,700 56,988 26,700/61,500 222,188/440,187
Derek S. Daley.............. 24,000 249,000 34,005/43,500 407,466/275,313
</TABLE>

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

(1) Difference between the fair market value of the Common Stock purchased and
the exercise price on the date of exercise.

(2) Difference between the fair market value of the underlying Common Stock and
the exercise price, for in-the-money options, on June 30, 1995.

13
<PAGE> 16

1987 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1987 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in October 1987 and approved by the
stockholders in November 1987. Amendments to the Purchase Plan were approved by
the Board of Directors and the stockholders in each of the last six years and by
the Board of Directors in July 1995. A total of 1,650,000 shares of Common Stock
is currently reserved for issuance under the Purchase Plan (see Proposal No. 3
for the proposed addition of 475,000 shares). The Purchase Plan, which is
intended to qualify under Section 423 of the Tax Code, is implemented by one
offering during each six-month period. Offering periods commence on or about May
1 and November 1 of each year. The Purchase Plan is administered by the Board of
Directors of the Company or by a committee appointed by the Board. Employees are
eligible to participate if they are employed by the Company for at least 20
hours per week and more than five months per year. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation, at 85% of the lower of the
fair market value of the Common Stock at the beginning or at the end of each
offering period. See Proposal No. 3 for a more detailed description of the
Purchase Plan.

As of the Record Date, 1,619,061 shares had been sold under the Purchase
Plan at a weighted average purchase price per share of $15.20 and 30,939 shares
remained available for future issuance. See Proposal No. 3 regarding the
addition of 475,000 shares to the Purchase Plan.

PURCHASE PLAN

The following table sets forth, as to the Named Executive Officers, all
current executive officers as a group and all other employees who participated
in the Purchase Plan: (i) the number of shares of the Company's Common Stock
purchased under the Purchase Plan during the last fiscal year; and (ii) the
dollar value of the benefit (see footnote (1) to the table):

<TABLE>
<CAPTION>
(I)
NUMBER OF (II)
SHARES DOLLAR VALUE
NAME OF INDIVIDUAL OR IDENTITY OF GROUP PURCHASED ($)(1)
- ------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Robert Cohn........................................................ 751 $ 8,188
W. Michael West.................................................... 804 8,240
David Ladd......................................................... -- --
Donald L. Campodonico.............................................. 642 4,991
Derek S. Daley..................................................... 954 8,379
All current executive officers as a group (11 persons)............. 4,206 36,805
All other employees as a group..................................... 365,551 3,060,226
</TABLE>

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

(1) Market value on date of purchase, minus the purchase price.

1988 DIRECTORS' STOCK OPTION PLAN

The Company's 1988 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in November 1988, was amended in 1989 and was
approved by the Company's stockholders in 1989. Amendments to the Directors'
Plan were approved by the Board and the stockholders in 1990 and 1994 and by the
Board in November 1991 and April 1992. A total of 350,000 shares of Common Stock
is reserved for issuance under the Directors' Plan. The Directors' Plan is
administered by the Board of Directors. Only non-employee directors are eligible
to participate in the Directors' Plan. Eligible directors are automatically
granted an option to purchase 25,000 shares of the Company's Common Stock on the
date they are first elected a director, such option becoming exercisable
cumulatively with respect to 5,000 shares on each of the first five
anniversaries of the date of grant, unless accelerated because of a director's
death or disability. On the date of the Annual Meeting of Stockholders each
year, all non-employee directors who have served since the previous Annual
Meeting of Stockholders and are reelected receive an immediately exercisable
option for 3,000 shares. The exercise price of an option granted under the
Directors' Plan is the fair market value (based on The Nasdaq National Market
closing price) of the stock on the date the option is granted.

14
<PAGE> 17

PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT EXTENDING THE TERM
OF THE 1985 INCENTIVE STOCK PLAN

GENERAL

The 1985 Incentive Stock Plan (the "Option Plan") was amended by the Board
of Directors in June 1995, subject to approval by the Company's stockholders, to
extend the term of the Option Plan for an additional ten-year period and to
change the name of the Option Plan to the "1995 Incentive Stock Plan."

The Option Plan is the principal means through which the Company provides
equity incentives to its employees. The extension of the Option Plan's term will
ensure that the Board of Directors can continue to create the equity incentives
necessary to assist the Company in attracting, retaining and motivating the best
available personnel for the successful conduct of the Company's business.

VOTE REQUIRED

The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the amendment to the Option Plan.

THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
OPTION PLAN, AS AMENDED.

The essential features of the Option Plan are outlined below.

PURPOSES

The purposes of the Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees and consultants of the Company and to
promote the success of the Company's business.

ADMINISTRATION; LIMITS ON GRANTS

With respect to grants of options to employees who are also officers or
directors of the Company, the Option Plan, as amended, shall be administered by
(i) the Board of Directors of the Company if the Board may administer the Option
Plan in compliance with Rule 16b-3 under the Exchange Act ("Rule 16b-3") with
respect to a plan intended to qualify under Rule 16b-3 as a discretionary plan
or (ii) a committee designated by the Board of Directors to administer the
Option Plan, which committee shall be constituted in such a manner as to permit
the Option Plan to comply with Rule 16b-3 with respect to a plan intended to
qualify thereunder as a discretionary plan. With respect to grants of options to
employees or consultants who are neither officers nor directors of the Company,
the Option Plan shall be administered by (i) the Board of Directors or (ii) a
committee designated by the Board, which committee shall be constituted in such
a manner as to satisfy the legal requirements relating to the administration of
incentive stock option plans, if any, of Delaware corporate law, federal and
state and securities laws and the Tax Code. If permitted by Rule 16b-3, the
Option Plan may be administered by different bodies with respect to directors,
non-director officers and employees who are neither officers nor directors and
consultants who are not directors. For the purposes of this plan description,
"Board" shall mean either the Board of Directors or a committee appointed by the
Board of Directors to administer the Option Plan.

ELIGIBILITY

The Option Plan provides for the grant of options and sale of shares to
employees of and consultants to the Company. Only employees may be granted
incentive stock options. The Board selects the purchasers and optionees and
determines the number of shares to be sold or made subject to option. As of the
date of this Proxy Statement, directors who are not also employees of the
Company are not eligible to participate in the Option Plan. However, prior to
March 10, 1988, such directors were eligible to participate in the Option Plan
and they may still exercise options granted to them prior to that date.

At the Record Date, the Company employed approximately 2,850 people,
approximately 2,700 of whom were eligible to participate in the Option Plan.

15
<PAGE> 18

TERMS OF OPTIONS

Each option granted under the Option Plan is evidenced by a written stock
option agreement between the Company and the optionee. Options are generally
subject to the terms and conditions set forth below, but specific terms may
vary.

(a) Exercise of the Option. The Board determines when options may be
exercised. In no event may any incentive stock option granted under the Option
Plan be exercised more than ten years after the date of grant. Incentive stock
options currently being granted generally expire after five years and six
months. An option is exercised by giving written notice of exercise to the
Company specifying the number of full shares of Common Stock to be purchased and
by tendering payment of the purchase price. Payment for shares purchased upon
exercise of an option shall be in such form of consideration as is authorized by
the Option Plan and determined by the Board, and such form of consideration may
vary for each option.

(b) Exercise Price. The exercise price of options granted under the Option
Plan is determined by the Board and may not be less than 100% of the fair market
value of the Common Stock on the date the option is granted. In the case of
incentive stock options granted to an optionee who owns more than 10% of the
voting power or value of all classes of stock of the Company, the exercise price
must not be less than 110% of the fair market value on the date of grant. The
fair market value of the Common Stock is the closing sale price on The Nasdaq
National Market on the date of grant.

(c) Termination of Employment. If the optionee's employment or association
with the Company terminates for any reason (other than death or disability), the
optionee may, but only within 30 days (or such other period as may be determined
by the Board, but not exceeding three months for incentive stock options)
following the date of such termination, exercise any option granted under the
Option Plan, but only to the extent such option was exercisable on the date of
termination. To the extent that the option is not exercised within such 30-day
(or other) period, the option terminates.

(d) Disability. In the event that an employee or consultant is unable to
continue his employment or consulting relationship with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of the Tax
Code), exercisability generally is accelerated from the usual four-year period
to a three-year period, and the optionee may, but only within three months (or
such other period of time not exceeding one year as is determined by the Board
at the time of grant of the option) from the date of termination, exercise the
option to the extent it was otherwise exercisable at the date of such
termination. To the extent that the option is not exercised within such period,
the option terminates.

(e) Death. If an optionee should die while employed by, or within one
month after termination of employment with, the Company, exercisability of
options under the Option Plan generally is accelerated from the usual four-year
period to a three-year period, and the option may be exercised at any time
within six months after death by the optionee's estate, but only to the extent
such options were exercisable on the date of death or termination, as the case
may be.

(f) Liquidation or Acquisition. In the event of a proposed dissolution or
liquidation of the Company, options under the Option Plan terminate unless
otherwise provided by the Board. In such event, the Board, in its sole
discretion, may determine to make options immediately exercisable as to all
shares.

Current option agreements provide that in the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, options shall be assumed or equivalent
options shall be substituted by such successor corporation or its affiliate. If
such successor corporation refuses to assume an option or to substitute an
equivalent option, the Board shall provide for the optionee to have the right to
exercise the option as to all of the Common Stock subject to the option. Most
options before December 1987 allowed the Board the right to accelerate the
exercisability of options whether or not a successor corporation was willing to
assume such options.

16
<PAGE> 19

Option agreements for officers and certain key employees provide for full
acceleration of exercisability in the event that, following a change in control
of the Company, the optionee's employment is terminated or the optionee's
compensation and benefits are reduced. The Board may, in its discretion, provide
in individual option agreements for an optionee to have the right to return an
option to the Company for a cash payment equal to the net value of the option
upon the occurrence of a merger, sale of all or substantially all assets of the
Company, tender offer or other transaction or series of related transactions
resulting in a change of ownership of more than 50% of the voting securities of
the Company.

(g) Non-transferability of Options. An option is generally not
transferable by the optionee, other than by will or the laws of descent and
distribution. However, the Board may grant or amend options in individual cases
to allow an option to be transferable to a trust for the benefit of an employee
or the employee's family members. Options are generally exercisable during the
optionee's lifetime only by the optionee unless transferred to a trust as
described above.

(h) Withholding of Shares to Pay Tax Liability. The Option Plan allows the
Company to withhold shares as to which an option has been exercised in order to
comply with regulations requiring the Company to withhold taxes upon certain
exercises of options. See "Tax Information -- Nonstatutory Options."

(i) Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as may be
determined by the Board or its committee.

OPTIONS OUTSTANDING

Options granted under the Option Plan generally become exercisable in
installments. Most options granted before June 2, 1994 become exercisable as to
20% of the total shares under option one year after the date of beginning
employment (for new employees) or the date of option grant (for existing
employees), and as to an additional 20% after each subsequent twelve-month
period so long as the optionee remains an employee of the Company. Most options
granted on and after June 2, 1994 become exercisable as to 25% of the total
shares under option one year after the date of beginning employment (for new
employees) or the date of option grant (for existing employees), and as to an
additional 25% after each subsequent twelve-month period so long as the optionee
remains an employee of the Company. Exercisability is accelerated in the case of
death or disability or, in certain cases, by termination of employment or
reduction in compensation following a change in control, as described above.
Exercisability is delayed by leaves of absence or temporary reductions in work
hours. Options being granted at this time generally expire five years and six
months from the date of grant.

At the Record Date, 690,070 shares had been sold directly, options to
purchase 2,695,035 shares of the Company's Common Stock had been exercised,
options to purchase 5,482,828 shares were outstanding, and 732,067 shares
remained available for future sale or grant under the Option Plan. The range of
exercise prices per share for options outstanding under the Option Plan at the
Record Date was from $0.05 to $50.00, and the weighted average exercise price
per share was approximately $22.69. Expiration dates for outstanding options
range from September 22, 1995 to March 15, 2001.

CAPITAL CHANGES

In the event any change is made in the Company's capitalization which
results in an exchange of Common Stock for a greater or lesser number of shares
without receipt of consideration, appropriate adjustment will be made in the
exercise price and in the number of shares subject to options outstanding under
the Option Plan, as well as in the number of shares reserved for issuance under
the Option Plan.

AMENDMENT AND TERMINATION OF THE PLAN

The Board may at any time amend, alter, suspend or discontinue the Option
Plan, but no amendment, alteration, suspension or discontinuation shall be made
which would impair the rights of any optionee under any grant theretofore made
without such optionee's consent. In addition, to the extent necessary and
desirable to comply with Rule 16b-3 or with Section 422 of the Tax Code (or any
other applicable law or regulation, including the requirements of the NASD or an
established stock exchange), the Company shall obtain stockholder approval of
any amendment to the Option Plan in such a manner and to such a degree as
required.

17
<PAGE> 20

TAX INFORMATION -- THE OPTION PLAN

Options granted under the Option Plan may be either "incentive stock
options," as defined in Section 422 of the Tax Code, or nonstatutory options.

An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
unless the exercise subjects the optionee to the alternative minimum tax. Upon
the sale or exchange of the shares more than two years after grant of the option
and one year after exercising the option, any gain or loss will be treated as
long-term capital gain or loss. If these holding periods are not satisfied, the
optionee will recognize ordinary income at the time of sale or exchange equal to
the difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option exercise or (ii) the sale price of
the stock. A different timing rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director or
10% stockholder of the Company. The Company will be entitled to a deduction in
the same amount as the ordinary income recognized by the optionee. Any gain or
loss recognized on such a premature disposition of the shares in excess of the
amount treated as ordinary income will be characterized as long-term or
short-term capital gain or loss, depending on the holding period.

All other options which do not qualify as incentive stock options are
referred to as "nonstatutory options." An optionee will not recognize any
taxable income at the time of grant of a nonstatutory option. However, upon its
exercise, the optionee will recognize taxable income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.

The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the Optionee with respect to shares acquired upon
exercise of a nonstatutory option.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE OPTIONEE AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF
OPTIONS UNDER THE OPTION PLAN AND DOES NOT PURPORT TO BE COMPLETE. REFERENCE
SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS
SUMMARY DOES NOT DISCUSS THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH THE OPTIONEE MAY RESIDE.

18
<PAGE> 21

PROPOSAL NO. 3 -- APPROVAL OF AMENDMENT TO
THE 1987 EMPLOYEE STOCK PURCHASE PLAN

The 1987 Employee Stock Purchase Plan (the "Purchase Plan") was amended by
the Board of Directors in July 1995 to reserve an additional 475,000 shares of
Common Stock for issuance thereunder, bringing the total number of shares under
the Purchase Plan to 2,125,000.

The Company believes that its Purchase Plan is an important factor in
attracting and retaining skilled personnel. Each year the Company reviews the
number of shares available for issuance under the Purchase Plan and, based on
the Company's estimates of the number of shares expected to be purchased under
the Purchase Plan during the coming year, management presents to the Board of
Directors a recommendation for the addition of shares to the pool reserved for
issuance under the Purchase Plan. The Board then reviews this recommendation and
presents a proposal such as this one to the stockholders for approval.

The initial offering period under the Purchase Plan began on February 26,
1988, and from that date to the Record Date 1,619,061 shares of the Company's
Common Stock were sold under the Purchase Plan. The number of shares sold in
each offering period will vary with the number of participants, the amount of
their payroll deductions and the fair market value of the Company's Common
Stock.

VOTE REQUIRED

The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the amendment to the Purchase Plan.

THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
PURCHASE PLAN AS AMENDED, INCLUDING THE ADDITION OF SHARES TO THE POOL RESERVED
FOR ISSUANCE THEREUNDER.

The essential features of the Purchase Plan are outlined below.

GENERAL

The Purchase Plan, and the right of participants to make purchase
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. See "Tax Information -- The Purchase Plan."

PURPOSE

The purpose of the Purchase Plan is to provide employees of the Company
with an opportunity to purchase Common Stock of the Company at a discount
through accumulated payroll deductions.

ADMINISTRATION

The Purchase Plan is administered by the Board of Directors or a committee
of members of the Board appointed by the Board, who receive no separate
additional compensation for such service. All questions of interpretation or
application of the Purchase Plan are determined by the Board or its appointed
committee, whose decisions are final and binding upon all participants. Members
of the Board who are eligible employees are permitted to participate in the
Purchase Plan but may not vote on any matter affecting the administration of the
Purchase Plan or the grant of any option pursuant to the Purchase Plan.

ELIGIBILITY

Any person who is customarily employed at least 20 hours per week and five
months per calendar year by the Company during the applicable offering period is
eligible to participate in the Purchase Plan, unless the employee would own five
percent or more of the total combined voting power or value of all classes of
stock of the Company or of its subsidiaries (including stock issuable upon
exercise of options held by such person) at the end of the offering period, or
the employee would receive more than $25,000 worth of stock (computed as of the
date of grant) pursuant to the Purchase Plan in any calendar year.

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At the Record Date, the Company employed approximately 2,850 people,
approximately 2,700 of whom were eligible to participate in the Purchase Plan.
Approximately 1,500 employees were participating in the Purchase Plan as of the
Record Date.

OFFERING DATES

The Purchase Plan is generally implemented by one offering during each
six-month period. Offering periods will commence on or about May 1 and November
1 of each year. Prior to this time offering periods began on January 1 and July
1 of each year, and the Company's current offering period began July 1, 1995 and
will end April 30, 1996 in order to move the offering period to the new dates
approved by the Board in June 1995.

ENROLLMENT IN THE PLAN

Eligible employees become participants in the Purchase Plan by delivering
to the Company's payroll office a subscription agreement authorizing payroll
deductions. Employees hired after the first day of an offering period (or who
otherwise become eligible after such date) may begin participation in the
Purchase Plan on the first business day of the calendar month following the
month in which they are hired (or become eligible). Under the Purchase Plan,
once an employee elects to participate in the Purchase Plan, enrollment in each
successive offering period occurs automatically unless the employee withdraws
from participation in the Purchase Plan.

PURCHASE PRICE

The purchase price per share under the Purchase Plan is the lower of (i)
85% of the fair market value of a share of Common Stock on the date of
commencement of the offering (or for employees beginning participation later,
the date such participation began) or (ii) 85% of the fair market value of a
share of Common Stock on the last day of the offering period. The fair market
value of the Common Stock on a given date is the closing sale price on The
Nasdaq National Market.

PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS

The purchase price of the shares is accumulated by after-tax payroll
deductions over the offering period. The deductions may not exceed 10% of a
participant's compensation. The total number of shares purchased by any
participant shall in no event exceed, in any calendar year, the number of shares
of Common Stock which $25,000 could purchase at the fair market value of a share
of the Company's Common Stock, calculated as of the offering date. A participant
may discontinue participation in the Purchase Plan, and may decrease but not
increase the rate of payroll deductions, during the offering period.

PURCHASE OF STOCK; EXERCISE OF OPTION

By executing a subscription agreement to participate in the Purchase Plan,
the employee is entitled to have shares placed under option to him. The maximum
number of shares placed under option to a participant in an offering is that
number determined by dividing the total amount of the participant's contribution
for the offering period by the lower of (i) 85% of the fair market value of the
Common Stock at the beginning of the offering period (or date his participation
began) or (ii) 85% of the fair market value of the Common Stock at the end of
the offering period, but in no event shall more than the number of shares of
Common Stock which $25,000 could purchase at the fair market value of a share of
the Company's Common Stock, calculated as of the offering date, be placed under
option to a single participant in any one calendar year. Unless the employee's
participation is discontinued, the option for the purchase of shares will be
exercised automatically at the end of the offering period at the applicable
price. No fractional shares will be issued upon exercise of the option. Any
amounts insufficient to purchase a full share remaining in a participant's
account after exercise of the option will be credited to the participant and
used in a future offering period. No interest will accrue on the payroll
deductions of a participant in the Purchase Plan.

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WITHDRAWAL

A participant's interest in a given offering may be terminated by signing
and delivering to the Company a notice of withdrawal from the Purchase Plan.
Upon withdrawal from the Purchase Plan, accrued but unused payroll deductions
are returned to the employee. Such withdrawal may be elected at any time prior
to the end of the applicable six-month offering period. A participant's
withdrawal from an offering will not have any effect upon such participant's
eligibility to participate in subsequent offering periods under the Purchase
Plan.

TERMINATION OF EMPLOYMENT

Termination of a participant's employment for any reason, including
retirement or death, cancels participation in the Purchase Plan immediately. In
such event the payroll deductions credited to the participant's account will be
returned without interest to such participant, or, in the case of death, to the
person or persons entitled thereto as specified by the employee in the
subscription agreement.

CAPITAL CHANGES

In the event of changes in the capitalization of the Company, such as stock
splits or stock dividends, which result in an increase or decrease in the number
of shares of Common Stock without receipt of consideration by the Company,
appropriate adjustments will be made by the Company in the number of shares
subject to purchase and in the price per share.

EFFECT OF LIQUIDATION, DISSOLUTION, SALE OF ASSETS OR MERGER

In the event of a liquidation or dissolution of the Company, an employee's
participation in the Purchase Plan will be terminated immediately before
consummation of such event unless otherwise provided by the Board. In the event
of a sale of all or substantially all of the assets of the Company or a merger
of the Company with or into another corporation, the employee's rights may be
satisfied by assumption of the Company's obligations by such acquiring or
successor corporation. If such corporation refuses to assume those obligations,
the Board shall allow the immediate exercise of the employee's rights for 30
days, after which the employee's rights under the Purchase Plan shall terminate.

NON-ASSIGNABILITY

No rights or accumulated payroll deductions of an employee under the
Purchase Plan may be pledged, assigned or transferred for any reason, and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.

REPORTS

Individual accounting will be maintained for each participant in the
Purchase Plan. Each participant receives as promptly as practicable after the
end of the six-month offering period a report showing the details of the
participant's account.

AMENDMENT AND TERMINATION OF THE PLAN

The Board may at any time amend, alter, suspend or discontinue the Purchase
Plan, but, except under certain conditions, no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any
participant arising out of any offering period which has already commenced
without such participant's written consent. In addition, to the extent necessary
and desirable to comply with Rule 16b-3 under the Exchange Act or with Section
423 of the Tax Code (or any other applicable law or regulation, including the
requirements of the NASD or an established stock exchange), the Company shall
obtain stockholder approval of any Purchase Plan amendment in such a manner and
to such a degree as required.

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TAX INFORMATION -- THE PURCHASE PLAN

The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Tax Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of more than two
years from the first day of the offering period, the participant will recognize
ordinary income measured as the lesser of (a) the excess of the fair market
value of the shares at the time of such sale or disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the offering period. Any additional gain will be treated as
long-term capital gain. If the shares are sold or otherwise disposed of before
the expiration of this holding period, the participant will recognize ordinary
income generally measured as the excess of the fair market value of the shares
on the date the shares are purchased over the purchase price. Any additional
gain or loss on such sale or disposition will be long-term or short-term capital
gain or loss, depending on the holding period. The Company is not entitled to a
deduction for amounts taxed as ordinary income or capital gain to a participant
except to the extent of ordinary income recognized by participants upon a sale
or disposition of shares prior to the expiration of the holding period(s)
described above.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED UNDER
THE PURCHASE PLAN AND DOES NOT PURPORT TO BE COMPLETE. REFERENCE SHOULD BE MADE
TO THE APPLICABLE PROVISIONS OF THE TAX CODE. IN ADDITION, THIS SUMMARY DOES NOT
DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.

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PROPOSAL NO. 4 -- APPROVAL OF AMENDMENT TO
CERTIFICATE OF INCORPORATION

The Company's Restated Certificate of Incorporation (the "Certificate"), as
currently in effect, provides that the Company is authorized to issue 5,000,000
shares of Preferred Stock, par value $.001 per share, and 50,000,000 shares of
Common Stock, par value $.001 per share. In June 1995, the Board of Directors
authorized an amendment to the Certificate to increase the authorized number of
shares of Common Stock to 100,000,000 shares.

Under the proposed amendment, the Sections 1 and 2 of Article FOURTH of the
Certificate would be amended to read as follows:

"Section 1. The total number of shares which the Corporation shall
have authority to issue is 105,000,000 shares of capital stock.

"Section 2. Of such authorized shares, one hundred million
(100,000,000) shares shall be designated 'Common Stock,' and have a par
value of $.001."

At the Record Date, 24,593,596 shares of Common Stock were issued and
outstanding, approximately 6,265,689 additional shares were issuable upon
exercise of outstanding options or purchase rights and approximately 874,067
shares were reserved for future grants under the Company's stock plans.

PURPOSE AND EFFECT OF AMENDMENT

The principal purpose of the proposed amendment to the Certificate is to
authorize additional shares of Common Stock which will be available in the event
that the Board of Directors determines to authorize stock dividends or stock
splits, to raise additional capital through the sale of securities, to acquire
another company or its business or assets or to establish a strategic
relationship with a corporate partner. If the proposed amendment is adopted,
50,000,000 additional shares of Common Stock of the Company will be available
for issuance by the Board of Directors without any further stockholder approval,
although certain large issuances of shares may require stockholder approval in
accordance with the requirements of The Nasdaq National Market. The Board of
Directors believes it desirable that the Company have the flexibility to issue
the additional shares without further stockholder approval. The holders of
Common Stock have no preemptive rights to purchase any stock of the Company. The
additional shares could be issued at such times and under such circumstances as
to have a dilutive effect on earnings per share and on the equity ownership of
the present holders of Common Stock. No actions are currently being taken with
respect to any large issuance of additional shares.

The flexibility of the Board of Directors to issue additional shares of
stock could enhance the Board's ability to negotiate on behalf of the
stockholders in a takeover situation. Although it is not the purpose of the
proposed amendment, the authorized but unissued shares of Common Stock (as well
as the authorized but unissued shares of Preferred Stock) also could be used by
the Board of Directors to discourage, delay or make more difficult a change in
the control of the Company. For example, such shares could be privately placed
with purchasers who might align themselves with the Board of Directors in
opposing a hostile takeover bid. The issuance of additional shares could serve
to dilute the stock ownership of persons seeking to obtain control and thereby
increase the cost of acquiring a given percentage of the outstanding stock. The
Company has previously adopted certain measures that may have the effect of
delaying or preventing an unsolicited takeover attempt, including a Common
Shares Rights Agreement, provisions in the 1985 Incentive Stock Plan providing
for the acceleration of exercisability of outstanding options under certain
circumstances in the event of a sale of assets or merger and provisions of the
Certificate authorizing the Board to issue up to 5,000,000 shares of Preferred
Stock with terms, provisions and rights fixed by the Board. The Board of
Directors is not aware of any pending or proposed effort to acquire control of
the Company.

VOTE REQUIRED

The approval of the amendment to the Certificate requires the affirmative
vote of a majority of the outstanding shares of Common Stock of the Company. An
abstention or nonvote is not an affirmative vote and, therefore, will have the
same effect as a vote against the proposal.

THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.

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PROPOSAL NO. 5 -- STOCKHOLDER PROPOSAL REGARDING
OPTION EXCHANGE PROGRAMS

The Company receives many suggestions from stockholders, some as formal
stockholder proposals. All are given careful attention by the Company, and
management has adopted a number of the suggestions made.

Management of the Company disagrees strongly with the adoption of the
resolution proposed below and asks all stockholders to read through the
Company's entire response which follows the stockholder's proposal.

The author and proponent of the following resolution, the State of
Wisconsin Investment Board ("SWIB"), Lake Terrace, 121 East Wilson Street,
Madison, Wisconsin 53707, has required the Company to present the following
proposal at the Annual Meeting of Stockholders. The proponent owns 2,371,000
shares of the Company's Common Stock as of the Record Date. The SWIB proposal is
quoted verbatim below:

STOCKHOLDER RESOLUTION

"WHEREAS, the Octel Communications (OCTL) board has supported the
adoption of numerous incentive compensation plans over the years,
regardless of company or stock performance; and

"WHEREAS, during the previous several years, the company has granted
options for millions of OCTL shares pursuant to such plans; and

"WHEREAS, this practice has led to an unacceptable level of potential
dilution to existing shareholders, especially in light of company stock
performance; and

"WHEREAS, notwithstanding extreme levels of dilution and poor company
stock performance over the past five years, OCTL continues to retain a
policy that outstanding options can be repriced to a lower exercise price
at such time as the board shall determine;

"NOW THEREFORE, BE IT RESOLVED:

"That OCTL shareowners request the OCTL board of directors to adopt a
policy which prohibits the repricing of any stock options to a lower strike
price, without shareowner approval."

PROPONENT'S STATEMENT IN SUPPORT OF RESOLUTION

"Stock option plans have been used by corporate management to incentivize,
attract and retain qualified employees for many years. Shareholders
generally support the use of reasonable incentive compensation to provide a
competitive employment environment. However, excessive reliance on such
plans is unfair to existing shareholders.

"Certain companies have continued to expand the use of such plans to the
point where existing shareholders face serious potential dilution. In 1994,
OCTL had options granted or available for grant to employees of over 8
million shares, representing potential dilution of over 33%. OCTL has been
identified by the Investor Responsibility Research Center as near the top
of option plan dilution for all publicly traded companies. In all, the
level of potential dilution and the trend toward even higher grants should
not be encouraged.

"Notwithstanding repeated requests, the company has refused to adopt a
policy against repricing of 'underwater-options.' As if the current
dilution isn't enough, this refusal allows existing option holders to
replace options which are out-of-the-money for new options with a reduced
exercise price. Notwithstanding stock price deterioration, OCTL has
persistently made large option grants, while preserving the right to
reprice if OCTL's stock drops. This raises serious questions as to
management and director vigilance in monitoring the significant dilution
impact to existing shareholders. We urge management to raise the stock
price, not lower the exercise price.

"We believe OCTL has been irresponsible in its use of incentive
compensation, since options are authorized, issued and can be repriced
without regard to performance. While we support the concept of incentive
compensation, the above program is unjustified and inequitable to existing
shareholders. The

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above resolution will help restore a modicum of discipline and fairness to
the use of incentive compensation at OCTL."

MANAGEMENT'S RESPONSE

Before responding to the specific proposal made by SWIB, management of
Octel believes it is important to review the underlying facts and clarify
potential misunderstandings that may arise out of a reading of SWIB's proposal
reproduced above.

Incentive Stock Plans

As is typical among Silicon Valley businesses, which compete for skilled
engineers, sales people and managers, Octel adopted a stock option plan in 1985.
This plan was adopted after approval by both the Board of Directors and the
stockholders of the Company. Both the Board of Directors and the stockholders
were given full disclosure regarding the operation of the 1985 Incentive Stock
Plan and understood that stock options were a means of aligning employee
incentives with those of stockholders.

At various times over the last ten years, management has proposed adding to
the shares reserved for use under the 1985 Incentive Stock Plan in order to
grant additional options. These additions of shares to the reserves were made
only after full disclosure and careful consideration by the Board of Directors
and upon the approval of both the Board of Directors and the stockholders.
Addition of shares to the reserves and the grant of additional options was
necessary in order to renew and create incentives for continuing and new
employees as both older stock options were exercised and hundreds of new
employees joined the Company. In addition, the Company assumed similar stock
option plans of VMX, Inc. ("VMX") in connection with a merger with VMX completed
in March of 1994.

Because a stock option only becomes exercisable if an employee remains with
the Company, stock options are an important means of motivating employees to
remain at Octel. As stock options become fully exercisable and are exercised,
their impact in motivating employees to remain with the Company dissipates, and
it becomes necessary to grant new stock options to such employees. Nearly all
large Silicon Valley companies use stock options to attract and retain
outstanding employees, and there is significant competition to obtain skilled
and experienced engineers, sales people and managers in Silicon Valley.
Accordingly, stock option-based incentives are an important part of the benefits
package for employees.

The 1985 Incentive Stock Plan and the similar VMX plans are the major means
by which Octel provides stock-based incentives to its employees.

Other Plans

In connection with becoming a publicly held company, Octel adopted two
other stock-based incentive plans widely used in Silicon Valley and elsewhere:
the 1987 Employee Stock Purchase Plan and the 1988 Directors' Stock Plan. The
1987 Employee Stock Purchase Plan allows employees to buy stock in the Company
at a discount through payroll deductions. It does not permit the kind of option
exchange program (what SWIB refers to as a "repricing") that SWIB's resolution
is intended to affect.

The 1988 Directors' Stock Plan provides for automatic grants of stock
options to directors at fixed times as a means of attracting experienced
directors and rewarding them for their service on the board in direct proportion
to increases in the value of the Company's stock. While there is no restriction
beyond their fiduciary obligations preventing the Board of Directors from
creating an option exchange program with respect to their own options, the Board
of Directors has never done so, even in times when it was felt necessary to
create an option exchange program for employees.

Use of Option Exchange Programs

It is important to stockholders to understand the reason the Board of
Directors might adopt an option exchange program. Under some market conditions,
such as those experienced in 1990 and 1994, the exercise price that employees
would have to pay in order to exercise their stock options exceeds the price at
which

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anyone could buy stock in the market. This can be because of a decline in the
Company's stock price due to factors beyond the Company's control such as stock
market pressures and trends or because of Company performance. Such "underwater"
stock options have little incentive value to employees and may in fact be a
cause of low morale and motivation. When, in the good faith judgment of the
Board of Directors, this situation appears to be more damaging to the Company
and its stockholders than would be the dilutive effect of an option exchange
program, the Board of Directors needs to have the ability to replace such
"underwater" stock options promptly with options having an exercise price equal
to the then fair market value of the stock, thus restoring the opportunity for
employees to receive value in the near term by building the Company and causing
the market value of the stock to increase. A number of prestigious Silicon
Valley businesses have used option exchange programs in the past few years.

The Company has been judicious in its use of an option exchange program,
authorizing such a program in only two of its thirteen years, 1990 and 1994.
Contrary to SWIB's assertions, on each of these occasions, the Board of
Directors carefully considered market conditions, employee turnover, employee
morale and Company performance. The deliberations of the Board of Directors
prior to authorizing such a program gave consideration to the effect on existing
stockholders and determined that such a program would be in the best interest of
all stockholders. Octel's policy of having the Board of Directors determine if
and when an option exchange program can be authorized is conventional in the
industry, and SWIB is the only entity that has written to the Company requesting
a change to this policy.

What Optionees Give Up; No Director Exchanges

Even when an option exchange program has been approved, there have been
restrictions and quid pro quo's for optionees. For example, in the 1994 program,
optionees were required to give up 10% of their total options, restart their
vesting on a four-year track and wait to exercise their options until either (i)
the market price of the stock was as high as their original exercise price or
(ii) they had held the option for over five years. In the 1990 program, which
was instituted in the face of extraordinary declines in the value of technology
stocks (including the Company's stock), all employees were offered the chance to
participate in the program but were required to refrain from exercising their
options for a nine-month "blackout" period and to delay their exercisability
schedules for a full year. Senior management's options were excluded from the
1994 option exchange program in recognition of the potential unfairness in cases
where managers may have been partly responsible for poor Company performance.
The Board of Directors has never authorized an exchange program for its own
options.

Mischaracterization by SWIB

After reviewing the facts presented, management believes that the
stockholders will understand why Octel objects to SWIB's characterization of the
Company's incentive compensation practices as "irresponsible." Stockholders
should also note that the Company objects to a number of comparative phrases in
SWIB's proposal that use unstated standards, such as "unacceptable level of
potential dilution," "extreme levels of dilution," "excessive reliance,"
"persistently made large option grants" and "inequitable to existing
shareholders." When viewed in light of the applicable circumstances, Octel
believes these SWIB comments are incorrect and unfair.

Some Current Facts

Here are the facts as of the Record Date: Octel's stock-based incentive
plans consist of the 1985 Incentive Stock Plan (see Proposals Nos. 2 and 3), the
similar VMX plans, the 1987 Employee Stock Purchase Plan and the 1988 Director's
Stock Option Plan. Under 1985 Incentive Stock Plan and the VMX plans, combined,
4,076,346 shares have been issued in the past, and such shares are in the
"issued and outstanding category" shown on the Company's balance sheet.
6,059,750 more shares may be issued in the future upon exercise of outstanding
stock options, and 732,067 shares are reserved for issuance upon exercise of
options that may be granted in the future.

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Octel also maintains the 1987 Employee Stock Purchase Plan, pursuant to
which approximately 1,619,061 shares have been sold in the past and are in the
"issued and outstanding category" shown on the Company's balance sheet. An
additional 30,939 shares are currently reserved for issuance to employees on a
payroll deduction plan. Option exchange programs do not affect this plan. See
Proposal No. 3.

Octel's director plan is the 1988 Director's Option Plan, pursuant to which
33,000 shares have been issued in the past, and such shares are in the "issued
and outstanding category" shown on the Company's balance sheet. 175,000 more
shares may be issued in the future upon exercise of outstanding stock options,
and 142,000 shares are reserved for issuance upon exercise of options that may
be issued in the future.

Octel has a total of 24,593,596 shares issued and outstanding as of the
Record Date (net of stock repurchased by the Company during the year, the effect
of which is to increase both the stock price per share and the percentage of the
outstanding shares represented by stock options). The outstanding options from
all of Octel's plans combined represent 25.5% of the total number of outstanding
shares, and this percentage increases to 29.0% when shares that are reserved for
issuance pursuant to additional stock options that may be granted in the future
are included.

Efforts to Reduce Potential Dilution

The Company recognizes that the number of outstanding stock options is
relatively high in comparison to the number of shares outstanding and some other
companies. The reasons for this are complex, and include (i) "entitlement"
philosophies of some executives that have since been replaced, (ii) options
granted in connection with mergers and acquisitions where the acquired
companies' employees did not have an equity-based interest to the extent that
Octel employees did and Octel's management believed that it would be essential
to achieving integration and consistent motivation to grant options to such new
employees, (iii) options granted in order to help the Company attract a CEO at a
key time for the Company -- stockholders should note that the majority of Mr.
Cohn's stock options were granted at exercise prices ($35 and $50 per share)
well above the market price of the Company's stock at the time they were granted
so that his incentives are tightly aligned with those of stockholders in
increasing the value of the Company; and (iv) the effect of completely
restarting vesting requirements in connection with the option exchange program
in 1994. The Company and its management team are striving to improve the
fundamentals of the business, be wise in the granting of new options, increase
the value of the Company so that existing options will be exercised and continue
to attract and retain the best individuals to build the value of the Company.
The Company believes that the Board of Directors needs continued flexibility to
create and approve an option exchange program without undue delay or expense if
events in the market, whether or not directly related to Octel's performance,
make it prudent for the good of the Company.

The SWIB Proposal

Turning to the specific proposal recommended by SWIB, the Company believes
that requiring stockholders to approve the rare action of the Board of Directors
in authorizing an option exchange program would be unnecessary, time consuming
and wasteful of the Company's money. The Board of Directors is a group of
experienced executives elected by the stockholders specifically because of their
experience and judgment. Each director has a fiduciary obligation to the
stockholders to approve only those actions that are for the benefit of the
Company and its stockholders. The directors of the Company are personally
sensitive to the morale, motivations and incentives of, as well as the
competitive hiring environment faced by, Octel employees. Octel's management
believes that to substitute the sometimes distant understanding of certain
stockholders, many of whom may be unfamiliar with the operations of Octel and
the use of equity compensation tools in Silicon Valley, for the judgment of
directors who are in a better position to be well-informed about the Company's
operations, would result in poorer management of the Company and decreased value
to the stockholders.

One of the alternatives to authorizing an option exchange program
recommended by SWIB is payment of higher salaries. Because this would
immediately reduce earnings significantly, stockholders would be likely to see
an immediate drop in the value of their investments. Further, equity-based
compensation is of significant

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importance in Silicon Valley and the Company would either have to pay
substantially increased salaries or forego hiring of some of the best and
brightest employees. This proposed solution appears to the Company's Board of
Directors to be a poor one for the Company and its stockholders.

Corporate Governance Philosophy

Octel believes that the American system of corporate governance using
qualified directors to manage and oversee companies' operations on a day to day
basis is sound and that stockholders who disagree with the decisions of
directors and management should seek to replace such individuals rather than
restrict their ability to make decisions.

MANAGEMENT RECOMMENDATION AND VOTE REQUIRED

The affirmative vote of the majority of the Votes Cast will be required
under Delaware law to approve the above stockholder proposal.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE AGAINST THE ABOVE
PROPOSAL.

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PROPOSAL NO. 6 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has nominated KPMG Peat Marwick LLP to audit the
consolidated financial statements of the Company for the fiscal year ending June
30, 1996. Such nomination is being presented to the stockholders for
ratification at the meeting. A representative of KPMG Peat Marwick LLP is
expected to be present at the meeting, will have the opportunity to make a
statement and is expected to be available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the meeting is required
to ratify the Board's selection. If the stockholders reject the nomination, the
Board will reconsider its selection.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S AUDITORS.

OTHER MATTERS

The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Company may recommend.

By Order of the Board of Directors

Derek S. Daley, Secretary
Milpitas, California

October 10, 1995

29
<PAGE> 32

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
OCTEL COMMUNICATIONS CORPORATION

1995 ANNUAL MEETING OF STOCKHOLDERS

The undersigned stockholder(s) of Octel Communications Corporation, a
Delaware corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement, each dated October 10, 1995, and
hereby appoints Robert Cohn and Derek S. Daley, and each of them, Proxies and
Attorneys-in-Fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1995 Annual Meeting
of Stockholders of Octel Communications Corporation, to be held on November 16,
1995, at 2:00 p.m., local time, at the Company's principal offices at 1001
Murphy Ranch Road, Milpitas, California 95035, and at any adjournments thereof,
and to vote all shares of Common Stock which the undersigned is entitled to vote
on the matters set forth below:

THIS BALLOT WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 6, AGAINST PROPOSAL 5 AND
AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.

(Continued and to be signed on the other side)

<PAGE> 33

/X/ Please mark your
votes in the box

The Board of Directors recommends a vote FOR Proposals 1, 2, 3, 4 and 6.

1. ELECTION OF DIRECTORS:

NOMINEES: Robert Cohn, Anson M. Beard, Jr., Leo J. Chamberlain, Deborah A.
Coleman, Nathaniel de Rothschild, Dag Tellefsen, W. Michael West

FOR all WITHHOLD authority to vote for all
nominees listed nominees listed below
(except as indicated)
/ / / /

- --------------------------------------------------------------------------------
If you wish to withhold authority to vote for any individual nominee, write that
nominee's name on the line above:

2. Proposal to amend the 1985 Incentive FOR AGAINST ABSTAIN
Stock Plan (the "Option Plan") to extend
the term of the Option Plan for an / / / / / /
additional ten-year period and change
the name of the Option Plan to the "1995
Incentive Stock Plan."

3. Proposal to amend the 1987 Employee
Stock Purchase Plan to increase the / / / / / /
number of shares reserved for issuance
thereunder.

4. Proposal to amend the Company's
Certificate of Incorporation to increase / / / / / /
the authorized number of shares of
Common Stock to 100,000,000

The Board of Directors recommends a vote
AGAINST Stockholder Proposal 5.

5. Stockholder proposal requiring the
board of directors to adopt a policy
prohibiting the repricing of stock / / / / / /
options without stockholder approval.

6. Proposal to ratify the appointment of
KPMG Peat Marwick LLP as independent / / / / / /
auditors of the Company for the 1996
fiscal year.

In their discretion the Proxies are authorized to vote upon such other business
as may properly come before the meeting.

This Proxy should be marked, dated, signed by the stockholder(s) exactly as the
stockholder's name appears herein and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. If shares
are held by joint tenants or as community property, both should sign.

Signature: Date
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