NETWORK GENERAL CORPORATION, 10-K, 1997-06-27

NETWORK GENERAL CORPORATION
10-K, 1997-06-27
COMPUTER COMMUNICATIONS EQUIPMENT

Previous: OPTICAL SECURITY GROUP INC, 10KSB/A, 1997-06-27

Next: PUTNAM MANAGED MUNICIPAL INCOME TRUST, NSAR-A, 1997-06-27

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(Mark One)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED] For the fiscal year ended March 31, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED]

For the transition period from to
</TABLE>

Commission file number 0-17431

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

NETWORK GENERAL CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 77-0115204
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
</TABLE>

4200 BOHANNON DRIVE, MENLO PARK, CA 94025

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: 415/473-2000

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

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value
------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant on May 31, 1997 was $653,571,371 based on the
closing sales price of the Company's Common Stock as reported on The NASDAQ
National Market. As of May 31, 1997, the registrant had outstanding 42,724,094
shares of Common Stock, par value $0.01, of which the Company believes
35,568,510 are owned by persons other than the Company's executive officers and
members of the Board of Directors and the beneficial owners of 5% or more of the
voting stock of the Company.

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy statement for the Annual Meeting of Stockholders scheduled to be
held August 8, 1997 is incorporated by reference into Part III.

The Exhibit Index begins on page 47.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NETWORK GENERAL CORPORATION

1997 FORM 10-K REPORT

TABLE OF CONTENTS

<TABLE>
<S> <C>
PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal proceedings
ITEM 4. Submission of matters to a vote of security holders

PART II
ITEM 5. Market for the registrant's common equity and related stockholder matters
ITEM 6. Selected financial data
ITEM 7. Management's discussion and analysis of financial condition and results of
operations
ITEM 8. Financial statements and supplementary data
ITEM 9. Changes in and disagreements with accountants on accounting and financial
disclosures

PART III
ITEM 10. Directors and executive officers of the registrant
ITEM 11. Executive compensation
ITEM 12. Security ownership of certain beneficial owners and management
ITEM 13. Certain relationships and related transactions

PART IV
ITEM 14. Exhibits, financial statement schedules and reports on Form 8-K
</TABLE>

2
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect the Company's current
judgment on those issues. Because such statements apply to future events, they
are subject to risks and uncertainties and, therefore, the actual results may
differ materially. Important factors which could cause actual results to differ
materially are described in the following paragraphs and are particularly noted
under BUSINESS RISKS contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and in other reports filed
with the U.S. Securities and Exchange Commission from time to time.

PART I

ITEM 1. BUSINESS

INTRODUCTION

Network General Corporation ("Network General" or the "Company") was
incorporated in California in May 1986 and reincorporated in Delaware in
December 1987. The Company designs, manufactures, markets and supports
software-based fault and performance (also known as analysis and monitoring)
solutions for managing computer networks. Recognizing the growing diversity of
network technologies and the need to make them work together, Network General
develops products and provides services which help maximize network productivity
and minimize downtime. The Company's products consist of portable tools and
centralized systems incorporating a proprietary technology linking advanced
protocol decodes with expert analysis capabilities to facilitate real-time
identification, diagnosis and resolution of network problems. The Company also
provides product support, education and network consulting services.

The Company's portable tools are designed to analyze local area networks,
wide area networks, internetwork segments and enterprise network environments.
Network General's flagship portable product is the Expert
Sniffer-Registered Trademark- Network Analyzer. All of the Company's portable
network analysis tools consist of software and a choice of network interface
cards that run on a variety of portable and notebook personal computers.

Network General's Distributed Sniffer System-Registered Trademark- product
is designed for monitoring and troubleshooting distributed enterprise and
client/server networks, including Ethernet, Fast Ethernet, token ring, and FDDI
local area networks ("LAN") as well as bridged and routed internetworks or wide
area networks (WANs). The Distributed Sniffer System product line consists of
centralized console software which receives and displays information received
from distributed servers.

In March 1997, the Company purchased 3DV Technology, Inc. ("3DV"), a
provider of software tools for evaluating and managing the performance of
heterogeneous enterprise networks. 3DV's family of products are primarily used
by network engineers in maintaining the day-to-day operational level of network
infrastructure devices. They provide specific applications for the analysis of
Cisco routers, Bay Networks and Cabletron hubs, as well as RMON-based LAN
switches. Utilizing a sophisticated, rules-based expert system for analyzing a
device, the products identify abnormalities in device operation which impact
device performance. Left untreated, these abnormalities may lead to diminished
network performance and eventual device failure.

Network General sells its products and services to domestic end users
principally through its direct sales force, although the Company also maintains
an indirect distribution channel using authorized resellers and systems
integrators. Internationally, the Company sells its products and services
through its direct sales force in several countries, as well as through a
combination of distributors, systems integrators and authorized resellers
worldwide.

Unless the context otherwise requires "Network General" and the "Company"
refer to Network General Corporation and its predecessors and subsidiaries.

3
<PAGE>
THE MARKET FOR NETWORK FAULT AND PERFORMANCE MANAGEMENT

NETWORK MANAGEMENT PERSONNEL. Network General's largest group of customers
can be classified as network management personnel who are directly responsible
for supporting the operation of sophisticated data networks. Generally, these
users are charged with the management of an enterprise-wide network which serves
a department, a division of a large organization or an entire organization. The
Company's products are designed to enable local LAN and WAN managers to do their
jobs more effectively with the following benefits to the organization:

MINIMIZATION OF NETWORK DOWNTIME. Network General's products provide fault
isolation and performance management capabilities which help find and solve
problems quickly and minimize network downtime. The Company's artificial
intelligence-based Expert Analysis software facilitates the pinpointing of
problem origins and suggests diagnoses to expedite complex problem resolution.

PROACTIVE NETWORK MANAGEMENT. Identifying problems before they occur is the
key to effective network management. The Company's Sniffer and Distributed
Sniffer System family of products automatically forewarns network professionals
of symptoms before they become problems. Network General-Registered Trademark-
products help companies understand network activity and detect changes in
network behavior which, in turn, assist network managers in proactively managing
network expansion. As a result, employees continue to perform key business
functions on a network without interruption.

REDUCED OPERATING COSTS. Network General's systems products provide
centralized monitoring and analysis capabilities to help solve remote problems
from a single location. By reducing the time needed to resolve problems, the
Company's products maximize existing network personnel resources and minimize
the need to hire additional network management professionals.

OPTIMIZATION OF NETWORK INVESTMENTS. Network General products assist
network managers with effective bandwidth planning, helping eliminate
unnecessary purchases of network infrastructure such as bridges and routers.
Network General Services group provides educational, consulting and product
support services to increase network managers' productivity and to solve
problems where there may be scarce expertise.

SYSTEMS INTEGRATORS AND FIELD SERVICE ORGANIZATIONS. Many data processing
and data communications organizations offer systems integration and service
options to their customers. These services include designing, purchasing,
implementing, and servicing the customer's entire data network and/or servicing
only the equipment and software which they have supplied. In either case,
determining the cause of network problems is an ongoing issue for systems
integrators and field service organizations. Diagnostic tools, including network
fault and performance tools and systems such as those offered by the Company,
are useful in resolving such issues. Benefits to these organizations include:

INCREASED CUSTOMER SATISFACTION. The Company's network fault and
performance management products aid integrators and field service
organizations in resolving customer problems quickly and enhancing customer
satisfaction.

REDUCED SERVICE EXPENSE. The network manager's ability to resolve
problems rapidly, at the location site or from a central office, lowers the
cost of service calls.

GREATER LEVERAGE OF TECHNICAL EXPERTS. Network General's products allow
relatively unskilled field service personnel to capture customer problems at
the source for remote analysis by technical experts. As a consequence,
technical experts do not need to travel or replicate problems, and their
resources can be used more effectively.

4
<PAGE>
TECHNOLOGY AND ARCHITECTURE

Network General's fault and performance management products are designed to
help network professionals effectively manage their growing networks. The
Company's technology is available on portable platforms (the Expert Sniffer
Network Analyzer and the Sniffer Internetwork Analyzer) and as comprehensive
systems (the Distributed Sniffer System and the Service Level Manager-TM-
products). These products are available in a variety of operating systems and
prices to enable customers to tailor monitoring and analysis solutions to their
specific networks and operating budgets.

NETWORK FAULT AND PERFORMANCE MANAGEMENT PRODUCTS. The Company's network
fault and performance management products consist of software and the
communications cards necessary to run the software. The specialized analysis
software code interprets over 250 network protocols and utilizes artificial
intelligence-based technology to diagnose network problems. Network General's
analysis software operates on networks utilizing a mix of operating systems,
protocols and physical connection technologies.

Different software is written for each physical network connection
technology. This software must manage the capture of packets of data in real
time for display and analysis. It is extremely important that this software be
highly efficient, since Expert Sniffer Network Analyzer products examine data
packets on the network rather than just packets destined for a particular node.

Since 1992, Network General's analysis software has incorporated artificial
intelligence-based technology, referred to as "Expert Analysis." Expert Analysis
"learns" network configurations automatically as it captures network data for
analysis. By automating the real-time identification and diagnosis of network
problems, Expert Analysis enables faster problem resolution. The Expert Analysis
technology, which is a component of the Sniffer and Distributed Sniffer System
family of products, provides network managers with a complete set of actionable
information about their networks. The Expert Analysis automated recognition of
problems allows less experienced network managers to manage their networks more
effectively. Network General originally developed Expert Analysis for the
portable Sniffer Network Analyzers. Subsequently, the Company developed Expert
Analysis capability for the Distributed Sniffer System. Today, the Distributed
Sniffer System with Expert Analysis console software is compatible with UNIX and
Microsoft Windows operating systems.

The Company continues to develop new releases of its portable Expert Sniffer
Network Analyzer software including additional topology and hardware platform
options. In 1993, the Company introduced the Notebook Sniffer Network Analyzer
to address the growing demand for lighter-weight, portable network analysis
platforms. The first Expert Analysis product to support the Personal Computer
Memory Card International Association (PCMCIA) Type II standard, the Notebook
Sniffer Network Analyzer (composed of software and a PCMCIA network interface
card) supports a variety of popular, lightweight Pentium-based notebook
computers. In 1994, the Company began shipping Network General Reporter, an
application that allows users to easily generate management reports from
information generated by other Network General products. In 1995, the Company
expanded its customers' visibility beyond the traditional network with products
that monitor and analyze database client/server applications from Oracle
Corporation.

In 1995, Network General introduced and shipped the Integrated Services
Digital Network ("ISDN") package for the Sniffer Internetwork Analyzer (Primary
Rate), as well as Sniffer Network Analyzer for Fast Ethernet, an emerging high
speed network standard. In 1996, the Company introduced and shipped the Sniffer
Network Analyzer for ATM, another emerging high speed network standard, as well
as the ISDN Package for the Sniffer Internetwork Analyzer (Basic Rate). Also
introduced in 1996 is the Database Module (with Expert Analysis) for Sybase and
Microsoft SQL*Server--which allows network professionals to understand the
impact of these database applications on network performance. In 1997, the
Company introduced the Fast Ethernet Notebook Sniffer Network Analyzer, which
uses the PCMCIA CardBus standard and is the first Fast Ethernet Analysis product
to use this standard.

5
<PAGE>
Today, portable Sniffer Network Analyzers and the Distributed Sniffer System
deliver Expert Analysis solutions that respond in real time, automatically learn
about each network segment, and expedite solutions to network problems. Portable
Expert Sniffer Network Analyzers and Distributed Sniffer Systems examine network
segments for symptoms, diagnose problems, explain diagnoses, and recommend
corrective action.

TOTAL NETWORK VISIBILITY-TM- ARCHITECTURE. During fiscal 1997, the Company
announced its Total Network Visibility Architecture TNV. Total Network
Visibility is an open, distributed application architecture for enterprise-wide
management of complex heterogeneous client/server environments. The architecture
is designed to support a variety of fault and performance management solutions
for distributed enterprise networks while working with existing network
management technologies including a variety of data collection agents and
probes. Total Network Visibility is a platform-independent, three-tier
architecture that consists of distributed data collection devices, domain-level
server intelligence, and an integrated suite of management applications. The
architecture leverages Network General's Experience Technology with Windows
NT-based domain-level server engines to enable data to be collected from a
variety of sources, including RMON, RMON2, MIB2, customized MIBs, the Company's
Distributed Sniffer System products and management platforms. The collected data
is correlated, filtered and presented as actionable information, via
solution-oriented management applications, helping network managers prioritize
their workloads and handle problems more efficiently. In addition to direct
communication with data sources throughout the network, Total Network Visibility
applications are designed to share information with other systems, platforms and
frameworks. These applications will be able to operate in a standalone
environment or co-exist with and be deployed from management systems such as HP
OpenView, IBM Netview, Sun Net Manager, Cabletron SPECTRUM, and Tivoli TME. The
first Total Network Visibility product--Service Level Manager--was announced in
October 1996 and began shipping in February 1997. The acquisition of 3DV
technology provided a source for additional Total Network Visibility
applications for the analysis of routers, switches and hubs.

PRODUCTS AND SERVICES

During fiscal 1997, the Company reorganized its product lines into business
units, to provide more focus to the target markets and on the products for which
they have responsibility. The business units are not only chartered with the
continuing development and enhancement of their products, but for creating
related marketing programs. The following is a brief description of the business
units, their charters and products:

ANALYSIS TOOLS BUSINESS UNIT: The Analysis Tools Business Unit provides
fault and performance management products designed to help network
professionals effectively manage their growing Local Area Networks and
networked applications. The Tools products are available on
portable/notebook PC platforms (e.g., the Expert Sniffer Network Analyzer)
and as comprehensive systems (e.g., the Distributed Sniffer System). These
products are available for a variety of LAN and application types such as
Ethernet, Fast Ethernet, Token Ring, FDDI, Oracle7, Microsoft SQL*Net, and
Sybase, and in a variety of operating systems and prices to enable customers
to tailor monitoring and analysis solutions to their specific networks and
operating budgets.

WAN/BROADBAND BUSINESS UNIT: The WAN/Broadband Business Unit is
responsible for the Network General products which provide fault and
performance management of data communication and ATM networks based on
existing technologies such as T1/E1, frame relay, ISDN, high speed corporate
backbone, telecommunications remote access and international carrier
services. The business unit intends to address emerging technologies such as
OC-12 and SONET. The current products of the business unit are the Sniffer
Internetwork Analyzer, the WAN Sniffer Analyzer NB, the Sniffer Internetwork
Server and the ATM Sniffer Analyzer.

6
<PAGE>
SYSTEMS TECHNOLOGY BUSINESS UNIT: The Systems Technology Business Unit
provides systems-level products for enterprise reporting and analysis to
help managers increase the reliability, availability and serviceability of
their complex heterogeneous networks. The product offerings include Service
Level Manager, 3DV Analysis and Exception Reporting, Distributed Sniffer
Systems, and NetScout RMON-based probes and console.

INTERNET BUSINESS UNIT: The Internet Business Unit is chartered with the
creation of products to detect external intrusion into a user's network
organizations over the Internet as well as from within the network and to
locate and resolve performance problems with a user's Web site.

SERVICES BUSINESS UNIT: This business unit provides Network General
customers with support, educational and consulting services. Customer
support is provided through the unit's PrimeSupport-Registered Trademark-
program. Education is made available through the Company's Sniffer
University classes held in five training centers in the U.S. and the United
Kingdom as well as in over 40 major cities throughout the world. Network
Consulting Services are delivered through headquarters and field personnel.

PORTABLE EXPERT SNIFFER ANALYZER PRODUCTS. Network General began shipping
Sniffer Network Analyzer products in September 1986. To address the growing
complexity of multivendor, multiprotocol, multitopology network environments,
Network General designed and tested its software to run on a variety of computer
platforms. The product is intended to be used as a portable tool, either on a
portable or notebook size computer platform, but it can also be installed on a
desktop computer platform.

Network General markets its Expert Sniffer Network Analyzer software in a
module-level configuration which includes software and a communications card.
Each Analyzer offers customers a combination of the following: (i) multiple
physical connection technologies, (ii) over 250 protocol interpreter suites,
(iii) Expert Analysis technology, and (iv) software configured for a variety of
computer platforms. As a result, Expert Sniffer Network Analyzer products can
adapt to customers' specific analysis needs as their network configurations
change.

While the functions performed by the Sniffer family of products are complex,
a significant amount of design effort has gone into making the use of each
Expert Sniffer Network Analyzer relatively simple. A unique user interface with
an intuitive menuing system allows customers to become productive quickly.

Network General offers the ability to capture information from a number of
different physical connection technologies; ATM, Ethernet and Fast Ethernet,
16/4 Mbps token ring, FDDI, and internetworks (including T-1, ISDN and Frame
Relay). Network General offers the following protocol interpreter suites with
Expert Sniffer Network Analyzers:

TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk,
Banyan VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open, SQL*NET,
XNS/MS-Net, IBM LAN Server, Bridge/ Router HDLC, X.25 and Frame Relay.

In addition to the families of protocol interpreters provided by Network
General, network managers can write their own protocol interpreters using the
Company's defined and documented interface for custom protocol interpreters.

SNIFFER INTERNETWORK ANALYZER. The Sniffer Internetwork Analyzers are the
Company's wide area network (WAN) line of products. A WAN is a data
communications network spanning relatively long distances, typically using a
public telephone network or a public data communications network as its data
transmission media. WANs must be monitored, maintained, corrected and expanded
to optimize the amount and speed of data transmitted on the networks. The
Company's line of protocol and internetwork analyzers allow a user to test a
data communications path and monitor and analyze the data traveling over the
path for a variety of purposes, including configuring a network, monitoring the
health of a network and analyzing a network when it malfunctions.

7
<PAGE>
WAN ATM SNIFFER ANALYZER. In 1996, Network General began shipping its ATM
Sniffer Analyzer, a portable fault and performance management tool specifically
designed for troubleshooting complex network problems and optimizing
client/server applications across ATM networks at speeds up to OC-3. The optimal
ATM Traffic Generator, announced during fiscal 1997, performs stress tests on
ATM network devices to help validate throughput capabilities and is designed to
complement the ATM Sniffer Network Analyzer. During fiscal 1997, Network General
announced and began shipping the WAN Sniffer Analyzer NB, a troubleshooting and
analysis tool for both wide and local area networks. The product, designed for
use on PC-based notebooks, is a WAN expert protocol analyzer solution designed
to isolate and troubleshoot complex LAN protocol problems over WAN
internetworks, including traditional router-based interfaces, digital transport
links (such as T1 and E1) and frame relay services.

DISTRIBUTED SNIFFER SYSTEM. Network General first shipped its Distributed
Sniffer System product in June 1991 and has been enhancing the product since,
primarily by adding additional protocol decoders and system functionality.
Distributed Sniffer System allows customers to monitor and diagnose problems on
complex, multisegment networks from centralized locations. With the addition of
expert analysis capabilities, Distributed Sniffer System provides automatic
problem diagnosis and recommends solutions which are displayed on a console. A
Distributed Sniffer System solution consists of one or more servers and
consoles.

Distributed Sniffer Systems solutions are composed of
SniffMaster-Registered Trademark- consoles and distributed intelligent Sniffer
servers which analyze, process and consolidate information from individual
network segments. When placed on distributed segments, Sniffer servers
communicate through the network to one or more central SniffMaster consoles.
Information from the same Sniffer server can be viewed by network managers at
various locations concurrently. Sniffer servers provide continuous 24-hour alarm
functions and analysis of network segments. Distributed Sniffer System
communicates alarm information to network management stations to integrate
analysis with other network management functions on a single console. To enhance
centralized network analysis and further maximize customers' hardware
investments, Distributed Sniffer System monitoring and analysis solutions are
integrated with leading network management system platforms and operating
systems.

Distributed Sniffer System analysis products are available for Ethernet,
16/4 Mbps token ring, FDDI and internetwork topologies (including T-1 and Frame
Relay). Network General offers the following protocol interpreters with the
Distributed Sniffer System:

TCP/IP, Novell NetWare, DECnet, Sun NFS, X-Window, IBM, AppleTalk,
Banyan VINES, OSI, NetBIOS, OS/2 LAN Manager, 3Com 3+Open, XNS/MS-Net, IBM
LAN Server, Bridge/Router HDLC, X.25, ISDN and Frame Relay.

MANAGEMENT REPORTING PRODUCTS. Network General's Service Level Manager
(SLM) is a Windows NT based solution which provides network and IS managers with
high-level network health and availability information to assess trends, manage
performance, and isolate problems quickly. Service Level Manager was launched at
Fall InterOp '96 and began shipping in February 1997. A UNIX version is under
development and will be released in the second half of calendar 1997.

Service Level Manager is based on Network General's new three tier Total
Network Visibility Architecture which uses intelligent agents (1st tier)
distributed throughout the network to collect data, advanced middleware called
Experience Technology Engines (2nd tier) to consolidate and correlate data into
a central SQL-based database and high-level network management applications (3rd
tier) of which SLM is the first, to present actionable information for
monitoring and analysis.

SLM utilizes network instrumentation already embedded in major network
components--segments, routers, servers (NT-based and Novell), and RMON I and II
based probes to exploit the customer's existing investment in network
management. SLM automatically correlates this data into summaries that can be
used in real-time for immediate troubleshooting by focusing the Distributed
Sniffer System using

8
<PAGE>
SLM's integrated Distributed Sniffer System viewer on a problem segment for
expert problem analysis and resolution, or can report historical service levels
that illustrate changes over time and show the network manager how to address
future resource needs.

DEVICE ANALYSIS AND EXCEPTION REPORTING PRODUCTS. The 3DV family of
advanced network device analysis tools provide intelligent diagnostics for
network devices such as Routers, Switches, and Hubs. Through a continuous
process of monitoring and checking the data against a modifiable rules-based
inference engine, the RouterPM-TM- tool identifies abnormalities within the
network., automatically generates web browsable graphs and diagnostic reports,
and recommends specific solutions to many impending difficulties before they
become significant. The 3DV family of products was acquired by Network General
in March 1997.

STANDARDS-BASED MONITORING PRODUCTS. NetScout RMON-based network probes,
sold under a July 1996 distribution agreement with NetScout Systems, provide
cost-effective, standards-based network instrumentation for monitoring network
utilization and activity and are available for all popular network topologies
including ethernet, token ring, FDDI and WAN. NetScout Systems' UNISON
architecture optimizes the NetScout probes to provide monitoring-level
visibility into switched network architectures. With the NetScout family, the
network administrator can choose different price points matching the performance
needs of the network. NetScout probes are the recommended data sources for
Network General's Service Level Manager to provide visibility into networks
which are not adequately instrumented with embedded RMON or MIB data sources.
The NetScout RMON console provides access to all nine levels of RMON data
gathered by the NetScout probes and is available for Sun, Hewlett-Packard and
IBM UNIX-based workstations as well as Microsoft Windows-based management
stations.

NETWORK GENERAL REPORTER. The Company's reporter applications use
information provided by Distributed Sniffer System and the Sniffer Network
Analyzer to document network performance with a range of reports including
network usage over time, error summaries, baseline comparisons and other
important network data. Reporter is available for Windows NT or UNIX platforms.
These products save the end user time by providing a wide selection of
preformatted reports; improve the end user's network knowledge by supplying
reports on network status; and facilitate trend analyses by providing reports on
historical information.

SERVICES

Network General supports its products domestically on a direct basis and
internationally through a combination of direct support and with the assistance
of distributors. The Company offers a range of services, including product
support, education and network consulting.

Network General's products are typically sold with a support agreement of up
to one year included in the sales price. Network General also offers support
services for its products beyond this initial period, for a fixed fee, through
its PrimeSupport program. Customers whose Network General products are covered
under support agreements receive software updates, phone-in technical support,
and various electronic support options. Support agreements also include repair
coverage on all hardware components purchased from the Company. Warranty costs
to date have not been significant.

From fiscal year 1994 through fiscal year 1997, Network General expanded its
sales efforts related to extended software service support agreements by
promoting the purchase of these agreements at the time of the original product
order. Because the Company recognizes the revenues from these agreements over
the term of the agreement, sales of these agreements contributed to a
significant increase in deferred revenue related to support services. In fiscal
year 1997, the Company opened a technical assistance center in the United
Kingdom to better serve its European end user and sales channel customers.

9
<PAGE>
The Company also offers a wide range of education services for its products,
known as Sniffer University. The Company believes education creates increased
awareness of and demand for the Company's products. In fiscal year 1997, Network
General expanded its Sniffer University education program with a new training
center in Woodbridge, New Jersey, its fifth training center in North America.
Education courses are also conducted in over 40 major cities throughout the
United States and 18 cities internationally, as well as at customer facilities.

Network General offers consulting services which provide both proactive and
reactive network services to customers. These services assist customers in
deploying the Company's products throughout their networks, in integrating
products with other network management systems, and in performing fault and
performance analysis.

DISTRIBUTION, MARKETING AND CUSTOMERS

DISTRIBUTION. Network General sells its products to end users in the United
States and Canada primarily through its direct sales force (including a
telesales organization) and, to a lesser extent, through resellers and systems
integrators. The Company sells its products internationally to end users
directly in several countries and through a combination of authorized
distributors, resellers, and systems integrators worldwide and through an
independent sales representative in the Middle East. The Company's distributors,
resellers, and systems integrators do not receive sales commissions, but are
entitled to purchase at a discount (relative to suggested end-user prices) for
the products which they resell.

UNITED STATES AND CANADIAN DIRECT SALES. In the United States and Canada
approximately 75% of fiscal year 1997 revenues from this territory were derived
from the Company's direct sales force. In an effort to expand its direct sales
force in North America, in March 1995, the Company reacquired the exclusive
right to distribute its products in Canada from Atelco, Limited ("Atelco")
through an Asset Purchase Agreement. In connection with that agreement, the
Company's wholly owned subsidiary, Network General (Canada) Limited hired a
direct sales force of approximately 10 people from Atelco.

UNITED STATES AND CANADIAN INDIRECT SALES. Network General also sells its
products, to a lesser extent, to end users in the United States and Canada
through authorized distributors, resellers and systems integrators. In fiscal
year 1997, approximately 25% of U.S. and Canadian orders were generated through
indirect channels and the Company intends to continue to leverage its North
American indirect channels to contribute to order generation.

INTERNATIONAL DISTRIBUTION. International sales accounted for approximately
$65.6 million, $44.7 million and $31.0 million in revenues in fiscal 1997, 1996
and 1995, respectively. As of March 31, 1997, the Company had 72 employees whose
responsibilities primarily included sales outside the United States, compared to
50 on March 31, 1996.

The Company reestablished its direct sales efforts in France, Germany and
Switzerland during fiscal year 1996 and in the United Kingdom, Australia and New
Zealand during fiscal 1997. However, the Company generates most of its
international revenues from sales by distributors, resellers and system
integrators. No single distributor accounted for 10% or more of the Company's
revenues in any one of the three fiscal years ended March 31, 1997, March 31,
1996 or March 31, 1995. The Company had 54 international distributors as of
March 31, 1997, 46 as of March 31, 1996 and 56 international distributors as of
March 31, 1995. Network General retains the option to terminate these
relationships if sales quotas are not attained.

Network General is subject to the normal risks of conducting business
internationally, including longer payment cycles and greater difficulty in
accounts receivable collection. The Company generally offers 30 day net terms in
the United States, Canada and Europe and 45 day net terms in other parts of the
world. Collection of overdue receivables generally is more difficult overseas
than it is in the United States. Prior to fiscal 1994, all sales outside of the
United States were denominated in U.S. dollars. However, the

10
<PAGE>
Company began to make direct sales in foreign currencies during fiscal year
1994. The amount of revenues from direct sales in foreign currencies was not a
significant portion of international revenues in fiscal years 1994 through 1996,
and the Company has not experienced any material adverse effects due to
fluctuating exchange rates. With the increase of direct sales in foreign
currencies to international markets in fiscal 1997, the Company began utilizing
hedging arrangements to reduce its exposure against such risks.

Network General's distributors, systems integrators, and resellers sell and
represent other companies' products which have not been competitive with those
of Network General. While Network General encourages these distributors,
integrators, and resellers to focus on its products through marketing and
support programs, there is risk they may give higher priority to products of
other suppliers, thus reducing their efforts to sell Network General's products.
In addition, these distributors, systems integrators and resellers may not have
the resources to expand their operations to meet increased demand for Network
General's products.

MARKETING. Network General's marketing efforts focus on defining Network
General products and services to meet customers' changing needs for network
fault and performance management. Network General supports these efforts through
market education and demand generation programs in an effort to increase company
awareness and build brand value. Some of the programs in which the Company is
involved include participation in industry trade shows, advertising in the trade
press, conducting executive seminars and electronic marketing through the
Internet.

The Company has established cooperative relationships with other networking
industry leaders in order to be in a position to support new developments in
networking as soon as possible. Network General believes that these
relationships are made possible by the fact that Network General, unlike its
principal competitors, does not offer network products in competition with many
of these industry leaders.

CUSTOMERS. As of March 31, 1997, Network General has shipped over 85,000
units of its portable Sniffer Network Analyzer and Distributed Sniffer System
products. Network General products are purchased by 80% of the Fortune 500
industrial companies. In addition, Network General has provided products to many
leading education, government, health care, and service organizations. No single
customer accounted for more than 10% of revenues during fiscal years 1997, 1996
or 1995.

Many of Network General's customers have purchased multiple product
components. Since the market for LAN and WAN fault and performance management
tools and systems is subject to changing competitive forces and new
functionality in products, it is difficult for Network General to precisely
estimate the requirements of its customers and, therefore, the size of its
potential market.

COMPETITION

Network General currently experiences substantial competition from
established and emerging computer, communications, intelligent network wiring,
network management and test equipment companies and expects such competition to
increase in the future. The primary competitor for Network General products is
Hewlett-Packard Company ("HP"). HP has greater name recognition, more extensive
engineering, manufacturing and marketing organizations and substantially greater
financial, technological and personnel resources than those available to Network
General. Other competitors include Azure Technologies Incorporated, Concord
Communications, Kaspia Systems, DeskTalk Systems, Wandel & Goltermann, Inc.,
Shomiti Systems, Inc., embedded systems companies and other reporting and
analysis vendors.

Network General competes principally on the basis of the Company's
reputation as a market leader in network fault and performance management. The
Company believes this leadership position is a direct result of developing
products and services that meet customers' changing requirements for network
fault and performance management.

11
<PAGE>
Network General differentiates itself from the competition with a wide range
of product offerings that deliver multivendor, multitopology, multiprotocol
capabilities and standards-based solutions that work for these heterogeneous
network environments. Network General has been able to compete successfully due
to the functional advantage and multivendor interoperability of its products
versus those of its competitors. Additional competitive advantages include
Network General's product name recognition and relationships with other industry
vendors to develop products that provide complementary fault and performance
management capabilities, its services capabilities, strong distribution channels
and existing customer relations.

The LAN and WAN industries are characterized by rapid technological advances
and can be significantly affected by product introductions and market activities
of industry participants. In addition to its current principal competitors,
Network General expects substantial competition from established and emerging
computer, communications, intelligent network wiring, network management,
embedded systems and test instrument companies. There can be no assurance
Network General will be able to compete successfully in the future with existing
or anticipated competitors.

Competitive pressures from existing manufacturers who offer lower prices or
introduce new products have, in some instances, resulted in delayed or deferred
purchasing decisions by potential customers of Network General. Purchase delays
or deferrals by potential customers of the Company's products may require
Network General to reduce its prices. These competitive scenarios could
materially adversely affect Network General's revenues and operating margins.

PRODUCT DEVELOPMENT

Network General believes its future success depends on its ability to
enhance existing products and develop new products that maintain technological
leadership and continue to meet a wider range of customer needs. Accordingly,
Network General intends to focus its product development efforts on complete
solutions for network fault and performance management, enabling network
managers to enhance performance of client/server applications, manage the
deployment of high-bandwidth technologies, leverage staff resources and optimize
overall network performance.

In order to successfully develop new products, Network General is dependent
upon timely access to information about new developments relating to such
technology and standards. There can be no assurance such information will
continue to be available, that Network General will be able to develop and
market new products successfully or that Network General will be able to respond
effectively to technological changes or new product announcements by others.

In 1995, the Company shipped Network General Reporter which collects
information gathered by the Sniffer and Distributed Sniffer System products and
generates reports for the end user. The Company also introduced in 1995 an
add-on module for the Sniffer Network Analyzer to include Oracle protocol
decodes. In September 1995 the Company began shipping the Fast Ethernet 10/100
Sniffer Network Analyzer, a fault and performance tool which monitors and
analyzes both 10 and 100 megabits per second (Mbps) Ethernet networks. This
product is the first analysis tool to provide visibility into new 100 Mbps Fast
Ethernet networks, as well as 10 Mbps legacy Ethernet LANs. Other products
released by the Company in 1995 include the Sniffer Server for FDDI and Sniffer
Reporter for use in Windows applications.

In 1996, the Company shipped the ATM Sniffer Network Analyzer which monitors
and analyzes 155 MB/s asynchronous transfer mode (ATM) networks. The Company's
development efforts in 1995 and 1996 led to the release of the ISDN Packages for
the Sniffer Internetwork Analyzers. The ISDN Packages are available for both
Basic Rate Interface and Primary Rate Interface and provide protocol decodes for
National ISDN 1 and 2 (United States), EuroISDN (Europe), AT&T Custom, Northern
Telecom and NTT ISNet (Japan) to support the various ISDN switch standards.

12
<PAGE>
In April 1996, Network General announced a new release of Sniffer Network
Analyzer--Version 5.0, which includes Banyan expert and Novell 4.0 protocol
decodes and incorporates enhancements which optimize Expert Analysis of high
speed technologies such as FDDI and Fast Ethernet. Also in Version 5.0, the
Company significantly enhanced the database analysis modules. Version 5.0
supports two database analysis modules, Oracle and Sybase/Microsoft and adds
significant Expert analysis to both of these modules, including Expert analysis
of the actual Structured Query Language (SQL) statements. Network General was
the first company to release Expert analysis of network SQL requests for Oracle,
Sybase, and Microsoft SQL databases.

In June 1996, Network General started shipping Version 4.0 of its
Distributed Sniffer System which included the new capabilities found in Version
5.0 of the Sniffer Network Analyzer. Network General also released the UNIX
version of its Reporter product line, which reports on statistics gathered by
Distributed Sniffer System servers.

During fiscal 1997, Network General announced the new Service Level Manager
product (SLM), based on the Company's three-tier Total Network Visibility
architecture. The SLM product, which began shipping in February 1997, quickly
won several important awards, including the award for Best of Show (Network
Management category) award at the Networld+Interop industry conference in
Atlanta. Network General started shipping Service Level Manager in February,
1997.

In February 1997, Network General announced a new Sniffer WAN product, the
WAN Sniffer Analyzer NB for notebook computers. The WAN Sniffer Analyzer NB,
which extends WAN Sniffer product functionality to the laptop market, began
shipping in March 1997.

In March 1997, the Company completed its acquisition of 3DV Technology,
Inc., a privately held, New Hampshire-based provider of software tools for
evaluating and managing the performance of heterogeneous enterprise networks.
The 3DV products include RouterPM, SwitchPM-TM-, and HubPM-TM-. These three
products provide superior visibility into router, switch, and hub environments.
The 3DV products, when combined with Network General's Service Level Manager,
will create a suite of applications that can be used by network managers to
further the goals of Total Network Visibility into their networks.

In June, 1997, Network General began shipping its Fast Ethernet Notebook
Sniffer Analyzer, the first notebook PC-based analyzer for 10 and 100 Mbps
Ethernet networks. The Fast Ethernet Notebook uses a PCMCIA CardBus standard
interface card in conjunction with the Expert Sniffer Analyzer software to
provide a lightweight, convenient solution for analyzing Fast Ethernet networks.

During fiscal 1997, 1996 and 1995, research and development expenses were
approximately $30.9 million, $27.4 million and $20.0 million, respectively.

THIRD PARTY PRODUCTS

To further spread the product line into all areas of network management,
Network General Corporation announced in October, 1996, a partnership with
Ganymede Software Inc. This agreement enables Network General and its
distributors to resell Ganymede Software's Chariot network performance testing
software worldwide. Furthering Network General's commitment to deliver Total
Network Visibility, Chariot generates realistic application traffic, stress
tests network links, and provides a true portrait of network performance so
network managers can make intelligent changes to their network while minimizing
risk of disruption to service. Also in March, Network General took an equity
position in Ganymede Software, Inc. This equity investment will allow Ganymede
and Network General to further the integration of the Sniffer and Chariot
product lines.

In July 1996, the Company announced a distribution agreement with Frontier
Software Development (now known as NetScout Systems, Inc.). The agreement allows
Network General to resell the entire NetScout RMON (remote monitoring management
information base) product line and complement its other product offerings for
Total Network Visibility.

13
<PAGE>
MANUFACTURING AND SUPPLIERS

Network General's manufacturing operations consist primarily of final
assembly, testing and quality control of materials, components, subassemblies
and systems. Network General believes its quality control procedures have been
instrumental in achieving the high performance and reliability of its products.
To date, Network General has experienced minimal return of its products by
users. Network General's manufacturing operations do not require any capital
expenditures for environmental control facilities or any special activities for
protection of the environment.

Network General's product line is designed to work with a variety of network
topologies and computer platforms available from multiple manufacturers. The
Company relies on a limited number of suppliers for certain critical components
of its products. Some of Network General's products are designed around a
specific computer platform available only from certain manufacturers. In the
case of the Company's Analyzer products, customers purchase the required
platform either from the Company or from suppliers. As a result of product
transitions by its computer platform vendors, the Company has found it necessary
to purchase and inventory computer platforms for resale to customers. Any
significant shortage of computer platforms or other critical components for the
Company's products could lead to cancellations or delays of purchases of the
Company's products which would materially and adversely affect the Company's
results of operations. If purchases of computer platforms or other components
exceed demand, the Company could incur expenses for disposing of excess
inventory, which would also adversely affect the Company's results of
operations.

While the total time elapsed from first contact with a potential customer to
receipt of a valid purchase order can typically consume three to six months,
Network General attempts to ship its products to customers within two weeks of
receipt of a purchase order. Consequently, Network General typically operates
with very little backlog, and most of its revenues in each quarter result from
orders received in that quarter. Backlog of orders generally represents less
than one month's revenues and, as such, is not considered significant.

The Company establishes its expenditure levels based upon its expectations
as to future revenues and, if revenue levels were below expectations, this could
cause expenses to be disproportionately high. Therefore, a decrease in near-term
demand would adversely affect the Company's results of operations.

PROPRIETARY RIGHTS AND LICENSES

As of the end of fiscal year 1997, Network General held one patent in the
WAN protocol analysis field (which the Company believes is not material to its
business) and relies primarily upon copyright, trademark and trade secret laws
to establish its proprietary rights in its products. Because the LAN and WAN
industry is characterized by rapid technological change, Network General relies
principally upon innovative management, technical expertise, business
partnerships, and marketing skills to develop, enhance and market its products.

EMPLOYEES

As of March 31, 1997, Network General employed a total of 818 persons,
including 461 in sales, marketing and services, 216 in product development and
technical support, 30 in manufacturing, and 111 in management, administration
and finance. During fiscal year 1997, the vast majority of research and
development efforts and sales have been performed by Company employees rather
than outside consultants or resellers. None of Network General's employees is
represented by a labor union. Network General has experienced no work stoppages
and believes its employee relations are good.

Competition in the recruiting of personnel in the computer and
communications industry is intense particularly in the research and development
and sales arenas. Network General believes its future success will depend, in
part, on its continued ability to hire and retain qualified management,
marketing, sales and technical employees.

14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Network General and their ages as of June 1, 1997
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ----- ---------------------------------------------------------
<S> <C> <C>

Leslie G. Denend............ 56 President, Chief Executive Officer and Director

David M. Carver............. 50 Executive Vice President, Chief Operating Officer

James T. Richardson......... 49 Senior Vice President, Chief Financial Officer and
Assistant Secretary

John R. Stringer............ 50 Senior Vice President, Worldwide Field Operations

Scott C. Neely.............. 48 Vice President, General Counsel and Secretary

Bernard J. Whitney.......... 40 Vice President and Controller
</TABLE>

Mr. Denend was promoted to President and Chief Executive Officer of the
Company and was elected a director of the Company in June 1993. He served as the
Company's Senior Vice President of Products from February 1993 to June 1993.
Prior to joining Network General, he was President of Vitalink, a manufacturer
of internetworking products, from October 1990 to December 1992. From 1989 to
1990, Mr. Denend served in a variety of positions at 3Com Corporation, a data
networking company, most recently as Executive Vice President for Product
Operations. From 1983 to 1989, he was a principal with McKinsey & Company, a
management consulting firm.

Mr. Carver was promoted to Executive Vice President and Chief Operating
Officer in January 1997. He served as Vice President of Services from November
1995 through January 1997. Prior to joining Network General, Mr. Carver was an
independent consultant affiliated with Institutional Venture Partners, from
April 1994 to October 1995. From 1974 to March 1994, Mr. Carver held various
positions in marketing and general management functions at Hewlett Packard
Company, most recently as Software Business Manager responsible for Hewlett
Packard Customer Support business unit.

Mr. Richardson was named Senior Vice President, Corporate Operations, Chief
Financial Officer and Secretary in April 1994. Prior to joining Network General,
Mr. Richardson was Vice President, Chief Financial Officer and Secretary for
Logic Modeling Corporation, a simulation modeling software company, from July
1992 to April 1994. From 1989 to July 1992, he served as Vice President of
Finance and Administration, Chief Financial Officer, Treasurer and Secretary of
Advanced Logic Research, a microcomputer company. From 1977 to 1989, Mr.
Richardson held various positions at Floating Point Systems, Inc., a scientific
computer company, the last one of which was as Vice President of Finance and
Administration and Chief Financial Officer.

Mr. Stringer was promoted to Senior Vice President, Worldwide Field
Operations in October 1996. He served as the Company's Vice President, North
American Sales from January 1995 to October 1996. Prior to joining Network
General, Mr. Stringer served from July 1992 to December 1994 as Vice President
and General Manager, Worldwide Marketing and Sales, for IT Corporation of
America, a provider of computer outsourcing services to financial institutions
in South America. From November 1990 to June 1992, Mr. Stringer was a consultant
advising with respect to alternative sales channels of distribution, new
business development and acquisitions.

Mr. Neely was named Vice President, General Counsel and Secretary in
February 1997. From November 1994 until joining Network General, Mr. Neely held
similar positions for Phoenix Technologies Ltd., a supplier of standards-based
system enabling software for the personal computer and information appliance
industries. For more than three years prior to that, Mr. Neely served as Vice
President, General

15
<PAGE>
Counsel and Assistant Secretary of The ASK Group, Inc. a developer of
application software and relational database software products.

Mr. Whitney was named Vice President and Controller in May 1996. He joined
Network General in June 1995 as Corporate Controller. Prior to joining Network
General, he worked for Conner Peripherals, Inc., a hard disk drive and storage
solutions manufacturer, serving in a variety of positions in corporate finance
from February 1987 to June 1995, most recently as Assistant Corporate
Controller.

ITEM 2. PROPERTIES

Network General's principal administrative, marketing, manufacturing and
product development facilities consist of approximately 170,000 square feet in
buildings in Menlo Park, California. Network General occupies this space under
lease agreements that expire no later than June 2002 (with a five year extension
option). In addition, Network General leases development facilities in Oak
Brook, Illinois and Beaverton, Oregon. The Company also maintains sales offices
in the United States and Canada and sales offices in Belgium, France, Germany,
Italy, Switzerland, the United Kingdom, Singapore, Australia and Hong Kong.
Total rent expense was approximately $6,092,000, $4,785,000 and $4,115,000 in
fiscal years 1997, 1996 and 1995, respectively.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in various suits and is subject to various claims
which arise in the normal course of business. In the opinion of management, the
ultimate disposition of these claims will not have a material adverse effect on
the consolidated financial position, liquidity or results of operations of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

STOCK LISTING

Network General's common stock is traded on the NASDAQ National Market under
the symbol NETG. As of May 31, 1997, there were 42,724,094 shares of common
stock outstanding held by 413 stockholders of record.

PRICE RANGE OF COMMON STOCK

<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
First Quarter.............................................................. $ 27.00 $ 18.19 $ 14.28 $ 11.53
Second Quarter............................................................. 26.31 16.06 21.87 12.81
Third Quarter.............................................................. 30.25 22.19 22.12 16.31
Fourth Quarter............................................................. 29.75 19.63 22.00 15.06
</TABLE>

DIVIDEND INFORMATION

Network General has never declared cash dividends and presently intends to
continue this policy.

16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

CONSOLIDATED STATEMENTS OF INCOME DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 240,668 $ 188,845 $ 139,755 $ 114,900 $ 86,483
Income from operations................................ 38,577 35,438 31,768 13,915 10,415
Net income............................................ 25,093 27,425 25,411 11,276 8,645
Earnings per share.................................... $ 0.55 $ 0.60 $ 0.57 $ 0.27 $ 0.22
Weighted average common and common equivalent shares
outstanding......................................... 45,703 45,822 44,626 42,346 39,614
</TABLE>

CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital...................................... $ 124,018 $ 125,841 $ 101,536 $ 65,457 $ 41,014
Total assets......................................... 263,271 223,330 196,190 160,846 132,033
Long-term obligations................................ 3,860 3,248 2,225 2,134 1,555
Total stockholders' equity........................... 179,396 180,117 165,587 132,283 109,562
</TABLE>

QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1996 1996 1996 1996 1995 1995 1995
--------- --------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AND STOCK PRICE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 68,005 $ 65,438 $ 55,545 $ 51,680 $ 53,786 $ 51,590 $ 43,729 $ 39,740
Gross margin........................... 50,505 48,326 41,438 38,707 41,220 39,430 33,655 30,619
Income (loss) from operations.......... (1,950) 17,189 12,533 10,805 13,130 12,057 1,650 8,601
(685) 18,715 14,138 12,496 14,891 13,776 3,510 10,347
Income (loss) before provision for
income taxes.........................
Net income (loss)...................... (6,425) 13,007 9,826 8,685 10,350 9,574 310 7,191
Earnings (loss) per share.............. (0.15) 0.28 0.22 0.19 0.22 0.21 0.01 0.16
Price range of common stock............ 29.75- 30.25- 26.31- 27.00- 22.00- 22.12- 21.87- 14.28-
19.63 22.19 16.06 18.19 15.06 16.31 12.81 11.53
</TABLE>

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

(1) Amounts for fiscal year 1993 have been restated in order to comply with
Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION".

(2) All periods reflect combined results for Network General Corporation and
its subsidiaries, including ProTools, Inc. ("ProTools"), a wholly owned
subsidiary of Network General Corporation. ProTools was acquired in January
1994 and the merger was accounted for as a pooling of interests.
Accordingly, the financial statements for prior periods have been restated
to include the results of ProTools. Total charges related to the merger were
approximately $4,903,000, or $0.09 per share, and were recorded in the
fourth quarter of fiscal year 1994.

(3) Second quarter fiscal year 1996 results of operations include charges of
$7,153,000, or $0.17 per share, related to acquired in-process research and
development in connection with the acquisition of AIM Technology ("AIM") in
a transaction in September 1995 accounted for as a purchase. Accordingly,
the results of operations of AIM have been included in the results of the
Company from the date of acquisition.

(4) Fourth quarter fiscal year 1997 results of operations include charges of
$19,504,000, or $0.43 per share, related to acquired in-process research and
development in connection with the acquisition of 3DV Technology, Inc.
("3DV") in a transaction on March 31, 1997 accounted for as a purchase.

(5) Fiscal year 1996 and prior periods reflect the 2-for-1 stock split, in the
form of a stock dividend, approved by the Company's Board of Directors which
was effective May 1996.

17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INCOME STATEMENT HIGHLIGHTS

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................ $ 240,668 27% $ 188,845 35% $ 139,755
Gross margin........................................ 178,976 23% 144,924 34% 107,956
Percentage of revenues.............................. 74% 77% 77%
Operating expenses.................................. 140,399 (1) 28 % 109,486 (1) 44 % 76,188
Percentage of revenues.............................. 58% 58% 55%
Net income.......................................... 25,093 (9)% 27,425 8 % 25,411
Earnings per share(2)............................... 0.55 (3) (8)% 0.60 (4) 5 % 0.57
</TABLE>

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

(1) Exclusive of acquisition and related non-recurring costs, operating
expenses would have been $120,895,000 in 1997 and $102,333,000 in 1996.

(2) Fiscal year 1996 and prior periods reflect the 2-for-1 stock split, in the
form of a stock dividend, approved by the Company's Board of Directors which
was effective May 1996.

(3) Exclusive of the costs associated with the acquisition of 3DV in the fourth
quarter, earnings per share for fiscal year 1997 would have been $0.98.

(4) Exclusive of the costs associated with the acquisition of AIM in the second
quarter, earnings per share for fiscal year 1996 would have been $0.77.

REVENUES

18
<PAGE>
Revenues for the fiscal year ended March 31, 1997 increased 27% to
$240,668,000 compared to fiscal year 1996 revenues of $188,845,000. Fiscal year
1996 revenues increased 35% over fiscal year 1995 revenues. In both fiscal
years, revenue growth was fueled by continued acceptance of the Company's tool
and system products and services offerings, as well as expansion into indirect
channels and international markets. The Company plans to continue expansion into
indirect channels and international markets in fiscal year 1998.

Domestic revenues increased 21% to $175,056,000 for fiscal year 1997
compared to $144,144,000 for fiscal year 1996. The decrease in the domestic
growth rate from fiscal year 1996 to fiscal year 1997 is the result of the
Company's focus on growth in international markets, especially Europe, and
increased competition in domestic markets. Fiscal year 1996 domestic revenues
increased 33% compared to $108,773,000 for fiscal year 1995.

International revenues increased 47% for fiscal year 1997 compared to fiscal
1996. European revenues grew 54% from fiscal year 1996 to fiscal year 1997 as a
result of the Company's European sales strategy involving both direct and
indirect sales channels. Pacific Rim, Latin American and Canadian revenues
increased 42% from fiscal year 1996 to fiscal year 1997 as a result of increased
sales volumes by the Company's exclusive partner in Japan as well as increased
sales volumes in Australia, Canada and Korea. Fiscal year 1996 international
revenues increased 44% over fiscal year 1995 international revenues.

<TABLE>
<CAPTION>
SOURCES OF REVENUES 1997 CHANGE 1996 CHANGE 1995
- ------------------------------------------------------------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Tool products(1)............................................. $ 121,199 27% $ 95,310 30% $ 73,114
PERCENTAGE OF TOTAL REVENUES............................... 50% 51% 52%
System products(2)........................................... 68,433 19% 57,346 44% 39,872
PERCENTAGE OF TOTAL REVENUES............................... 29% 30% 29%
Subtotal product revenues.................................... 189,632 24% 152,656 35% 112,986
PERCENTAGE OF TOTAL REVENUES............................... 79% 81% 81%
Services(3).................................................. 51,036 41% 36,189 35% 26,769
PERCENTAGE OF TOTAL REVENUES............................... 21% 19% 19%
Total revenues............................................... 240,668 27% 188,845 35% 139,755
</TABLE>

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

(1) Tool Products include revenues from the Sniffer Network Analyzer
("Sniffer") local area network (LAN) analysis products, wide area network
(WAN) analysis products, the NETSYS Technologies, Inc. line of connectivity
and performance tools, the Ganymede Software, Inc. line of Chariot network
performance test tools and royalties from license agreements. In both fiscal
years 1996 and 1995, revenues from Tool Products also include Sniffer
product rentals.

(2) System Products consist of revenues from the Distributed Sniffer System
analysis products, performance measurement analysis products, the Foundation
probe and agent remote monitoring products, the SharpShooter monitoring
products, the DATACOM Systems, Inc. line of network switching devices and
NetScout Systems, Inc. (formerly known as Frontier Software Development,
Inc.) line of NetScout remote monitoring products.

(3) Services revenues include first-year warranty revenues as defined by
Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION," and revenues
from software support, maintenance contracts and education and consulting
services. In fiscal 1997, services revenues also include Sniffer product
rentals.

The Company's tool products revenues increased 27% for fiscal year 1997 to
$121,199,000 from $95,310,000 for fiscal year 1996. Fiscal year 1996 tool
products revenues increased 30% from $73,114,000 in fiscal year 1995. The growth
in both periods reflects continued expansion in the customer base for the
Company's Sniffer Network Analyzer products which accounted for substantially
all of the Company's tool

19
<PAGE>
products revenue in fiscal years 1997, 1996 and 1995. Tool products revenues
represented 50% of total revenues in fiscal year 1997 compared to 51% in fiscal
year 1996 and 52% in fiscal year 1995.

Revenues for fiscal year 1997 included $68,433,000 of system products
revenues, a 19% increase, compared to $57,346,000 for fiscal year 1996. The
decrease in the growth rate of system products revenues from fiscal year 1996 to
fiscal year 1997 was due to increased competition and the growth in indirect
channel sales which are comprised primarily of tool products and services.
Fiscal year 1996 system products revenues increased 44% from $39,872,000 in
fiscal year 1995. The Distributed Sniffer System analysis products accounted for
the majority of the Company's systems product revenues in fiscal years 1997,
1996 and 1995.

Services revenues include revenues from software support, maintenance
contracts, and education and consulting services, as well as those revenues from
the first year warranty period of customer support which have been deferred and
recognized in accordance with Statement of Position 91-1, "SOFTWARE REVENUE
RECOGNITION." For fiscal year 1997, services revenues increased 41% to
$51,036,000 compared to $36,189,000 for fiscal year 1996. Fiscal year 1996
services revenues increased 35% from $26,769,000 in fiscal year 1995. The
increase in services revenues resulted from growth in all categories of services
revenues but principally due to the growth of the installed customer base and
the resulting renewal of maintenance contracts. In addition, demand increased
for the Company's education and consulting services. As a percentage of total
revenues, services revenues represented 21% of revenues in fiscal year 1997 and
19% of revenues in each of fiscal years 1996 and 1995.

GROSS MARGIN

Cost of revenues consists of manufacturing costs, cost of services,
royalties and warranty expenses. Gross margin as a percentage of revenues
decreased to 74% for fiscal year 1997 from 77% in each of fiscal years 1996 and
1995. The decrease resulted from: changes in the mix of products sold (increased
sales of third party products and platforms which have a lower gross margin than
the Company's own products); higher growth in services revenues which have
historically lower gross margins than those of the Company's products; and
increased market pressure to reduce prices or offer higher price discounts on
the Company's products. The Company expects to continue offering third party
products and platforms and to grow its services business, but also intends to
increase its sales and licensing of internally developed products and reduce
certain of its platform resale activities. During fiscal year 1997, the Company
was able to offset the impact of reduced gross margins with a reduction in
operating expenses as a percentage of revenues. There can be no assurance the
Company will be able to offset reduced gross margins through continued cost
management.

SALES AND MARKETING EXPENSES

Sales and marketing expenses increased 19% to $74,638,000 in fiscal year
1997 compared to $62,533,000 in fiscal year 1996. Fiscal year 1996 sales and
marketing expenses increased 33% compared to fiscal year 1995 sales and
marketing expenses of $47,049,000. The increases in fiscal years 1997 and 1996
were due primarily to increased staffing, commission expenses and promotional
activities required to support increased sales volumes. As a percentage of
revenues, sales and marketing expenses decreased to 31% in fiscal year 1997
compared to 33% and 34% in fiscal years 1996 and 1995, respectively. The
decrease is attributable to the increased use of indirect distribution channels
to sell the Company's products and services, thereby reducing the amount of
direct selling costs related to such sales of the Company's products and
services.

20
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses were $30,891,000 in fiscal year 1997
compared to $27,417,000 in fiscal year 1996 and $19,968,000 in fiscal year 1995.
As a percentage of revenues, research and development expenses decreased to 13%
for fiscal year 1997, compared to 15% and 14% in fiscal years 1996 and 1995,
respectively. The percentage decrease between fiscal year 1997 and 1996 resulted
from significant expenses incurred in fiscal year 1996 to support accelerated
development efforts of high speed network technology products. The increase in
actual spending was a result of increased staffing and equipment expense to
support growth in the Company's breadth of product and services offerings. The
Company believes continued commitment to research and development is required to
remain competitive and, as such, expects research and development expenses in
absolute dollars to increase in fiscal year 1998.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for fiscal year 1997 increased 24% to
$15,366,000 compared to $12,383,000 for fiscal year 1996. Fiscal year 1996
expenses increased 35% compared to expenses of $9,171,000 for fiscal year 1995.
The increase in general and administrative expenses in both fiscal years was
primarily due to increased staffing to support operations. General and
administrative expenses as a percentage of revenues were 6% in fiscal year 1997
and 7% for each of fiscal years 1996 and 1995, respectively.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

Acquired in-process research and development was $19,504,000 in fiscal year
1997 and $7,153,000 in fiscal year 1996. Acquired in-process research and
development in 1997 reflects the value of development projects in process at the
time of the acquisition of 3DV Technology, Inc. ("3DV") which was charged to
operations on March 31, 1997, the effective date of the acquisition. Acquired
in-process research and development in fiscal year 1996 reflects the value of
development projects in process at the time of the acquisition of AIM Technology
("AIM") which was charged to operations in the second quarter of fiscal year
1996. In both fiscal years, the amount allocated to acquired in-process research
and development related to projects which had not reached technological
feasibility and had no probable alternative future uses. (See Note 2 of Notes to
Consolidated Financial Statements.)

There were no acquired in-process research and development charges in fiscal
year 1995.

INTEREST INCOME, NET

Interest income, net decreased 14% to $6,087,000 in fiscal year 1997
compared to $7,086,000 in fiscal year 1996. The decrease in interest income is
primarily the result of the repositioning of a portion of the Company's
investment portfolio from taxable U.S. debt to tax-exempt municipal securities
which paid lower pre-tax interest income. Interest income, net increased 33% in
fiscal year 1996 compared to $5,328,000 in fiscal year 1995 as a result of
higher balances of cash equivalents and marketable securities, as well as an
investment diversification from tax-free municipal to taxable U.S. debt
securities which paid higher pre-tax interest during fiscal year 1996. Due to
the Company's continued commitment to its systematic share repurchase program
and the reduction in cash balances available for investment as a result of the
3DV acquisition at the end of fiscal 1997, interest income is expected to
decline in fiscal 1998.

PROVISION FOR INCOME TAXES

The provision for income taxes was 43.8% for fiscal year 1997, compared to
35.5% for fiscal year 1996 and 31.5% for fiscal year 1995. Excluding the impact
of the 3DV acquisition during fiscal year 1997 and the impact of the AIM
acquisition during fiscal year 1996, the provision for income taxes would have
been 30.5% in each of fiscal years 1997 and 1996. Excluding the impact of the
3DV acquisition, the fiscal year 1997 provision rate of 30.5% resulted from the
Company's ability to utilize certain operating loss

21
<PAGE>
carryforwards. Substantially all of these operating loss carryforwards were
fully utilized at the end of fiscal year 1997 and, as a result, the provision
for income taxes is expected to be between 33% and 35% in fiscal year 1998.

EARNINGS PER SHARE

Earnings per share for fiscal year 1997 decreased 8% to $0.55 per share
compared to $0.60 per share in fiscal year 1996. Excluding one-time charges to
write-off acquired in-process research and development related to 3DV in fiscal
year 1997 and AIM in fiscal year 1996, earnings per share would have been $0.98
and $0.77 in fiscal years 1997 and 1996, respectively. Excluding these one-time
charges, the increase in earnings per share from fiscal year 1996 to fiscal year
1997 was due to increased revenues and gross margin dollars and lower operating
expenses as a percentage of revenues. Excluding the effect of AIM, earnings per
share for fiscal year 1996 increased 35% over fiscal year 1995 earnings per
share of $0.57.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable securities increased $16,842,000,
$22,683,000, and $37,355,000 in fiscal years 1997, 1996 and 1995, respectively.
The primary source of these funds in all periods was cash provided by operating
activities, as well as proceeds from the issuance of common stock under the
Company's stock option and employee stock purchase plans.

Net cash generated from operations in fiscal year 1997 was $52,794,000
compared to $39,873,000 in fiscal year 1996 and $33,144,000 in fiscal year 1995.
The primary source of these funds was net income before depreciation and
amortization for all periods. The net increase in 1997, after adjustments
related to depreciation, amortization and acquired in-process research and
development, reflects increases in accounts payable and accrued liabilities and
deferred revenue, offset by increases in accounts receivable and deferred taxes,
net. The net increase in fiscal year 1996, after adjustments related to
depreciation, amortization and acquired in-process research and development,
reflects increases in accounts payable and accrued liabilities and deferred
revenue, offset by an increase in accounts receivable. The net increase in
fiscal year 1995, after adjustments related to depreciation and amortization,
reflects a decrease in deferred taxes, net, an increase in deferred revenue and
reductions in accounts receivable, partially offset by an increase in
inventories and prepaid expenses and other assets.

Net cash used in investing activities was $12,014,000, $11,748,000, and
$26,373,000 during fiscal years 1997, 1996 and 1995, respectively. Net cash used
in investing activities during fiscal 1997, 1996 and 1995 reflects purchases of
investments and net additions to property and equipment, offset by proceeds from
the sales/maturities of investments reinvested in cash and cash equivalents.
Additionally, the Company used cash of $6,501,000 to complete the purchase of
AIM in fiscal 1996.

Net cash used in financing activities during fiscal 1997 was $26,182,000.
The primary use of those funds was to repurchase 2,200,000 shares of the
Company's common stock at an average price of $24.07 per share, partially offset
by proceeds from the issuance of common stock under the Company's stock option
and employee stock purchase plans. Net cash used in financing activities was
$12,895,000 for fiscal year 1996. The primary use of those funds was to
repurchase 1,700,000 shares of the Company's common stock at an average price of
$18.16, which was partially offset by proceeds from the issuance of common stock
under the Company's stock option and employee stock purchase plans. Net cash
provided by financing activities was $7,893,000 for fiscal year 1995. The
primary source of those funds was proceeds from the issuance of common stock
under the Company's stock option and employee stock purchase plans, partially
offset by repurchases of 790,000 shares of the Company's common stock at an
average price of $11.08. As of March 31, 1997, the Company was authorized to
repurchase up to an additional 3,310,000 of its shares on the open market. The
Company anticipates it will continue its systematic share repurchase program.

22
<PAGE>
As of March 31, 1997, the Company's principal sources of liquidity included
cash, cash equivalents, marketable securities and long-term investments totaling
$164,901,000. The Company currently has no outstanding bank borrowings nor any
established lines of credit. The Company believes cash generated from
operations, together with existing cash and investment balances, will be
sufficient to satisfy operating cash and capital expenditure requirements
through at least the next twelve months.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("SFAS 128")
which is required to be adopted by the Company in its third quarter of fiscal
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate earnings per share amounts for
all prior periods. Under the new requirements for calculating earnings per
share, primary earnings per share will be replaced with basic earnings per share
and fully diluted earnings per share will be replaced with diluted earnings per
share. Under basic earnings per share, the dilutive effect of stock options will
be excluded. The Company does not expect the effect of adopting SFAS 128 to have
a material impact on earnings per share.

BUSINESS RISKS

The following is a summary of risks affecting the business and results of
Network General Corporation ("Network General") and should be read in
conjunction with the description of the Company's business contained in the
other sections of the Company's Form 10-K for the year ended March 31, 1997 (the
"1997 10-K").

FLUCTUATIONS IN PERIODIC RESULTS. The Company's operating results can vary
substantially from period to period. In April 1997, the Company announced that
it expected its earnings growth rate for the first half of fiscal 1998 to be
lower than it was in fiscal 1997. Management expects the lower growth rate to be
a result of a number of factors, including lower order growth rates than
experienced in recent periods, increased staffing in the Company's research and
development, direct sales and service organizations, anticipated decreases in
investment balances, the dilutive effect of 3DV operations and a higher planned
tax rate. The Company's order rates for the first two months of the first
quarter of fiscal year 1998 were lower, as a percentage of quarterly planned
orders, than the Company had experienced during its fiscal year 1997 quarters.
There can be no assurance that the Company's actual results will meet the
operating plan for fiscal year 1998 or any particular quarter.

The timing and amount of the Company's product revenues are subject to a
number of factors that make estimating operating results prior to the end of a
quarter extremely uncertain. Historically, the Company has not maintained a
significant level of backlog and, as a result, product revenues in any quarter
are dependent on contracts entered into or orders booked and shipped in that
quarter. During fiscal 1997, the Company generally experienced a trend toward
higher order receipts toward the end of each month of a quarter, resulting in a
higher percentage of revenue shipments during the last month of a quarter than
in fiscal 1996, which makes predicting results more difficult. The timing of
closing of large product sales or licensing transactions increases the risks of
quarter-to-quarter fluctuations and the uncertainty of estimating quarterly
operating results.

Over the last two fiscal years, gross margin as a percentage of revenue
declined from 77% to 74% due principally to three factors: increased sales of
third party products which generally have lower gross margins for the Company;
increased revenue attributable to services which have a high labor cost; and
increased pressure to reduce prices or grant higher price discounts. The Company
has been successful in offsetting these declines in gross margin by controlling
operating expenses. If the Company is unable to continue to offset future gross
margin declines, if any, by continued control of operating expenses, the
Company's operating results could be materially adversely affected.

23
<PAGE>
Planned operating expenses are normally targeted to planned revenue levels
for the period and are incurred ratably throughout the period. If expenses
remain relatively fixed, but the Company's revenues are less than planned in any
quarter, Network General's operating results would be adversely affected for
that quarter. Recently the Company has experienced a trend toward higher order
rates and revenue shipments in the last month of a quarter. These trends make it
more difficult to minimize the impact of a revenue shortfall by reducing
spending levels. In addition, incurring unplanned expenses could adversely
affect operating results for the period in which such expenses are incurred.

Failure to achieve periodic revenue, earnings and other operating and
financial results as forecasted or anticipated by brokerage firms or industry
analysts could result in an immediate and adverse effect on the market price of
the Company's common stock. The Company may not discover, or be able to confirm,
revenue or earnings shortfalls until the end of a quarter, which could result in
a greater immediate and adverse effect on the Company's stock price.

CUSTOMER PURCHASE DECISIONS. The products offered by the Company may be
considered to be capital purchases by certain customers or prospective
customers. Capital purchases are often considered discretionary and, therefore,
are cancelled or delayed if the customer experiences a downturn in its business
or prospects or as a result of economic conditions in general. Any such
cancellation or delay could adversely affect the Company's operating results.

PRODUCT DEVELOPMENT. Network General's long-term success will depend on its
ability to enhance its product offerings and to introduce new products on a
timely and cost-effective basis which meet the needs of its current and future
customers. The Company remains committed to adding new technologies and products
through continued investments in research and development and through strategic
acquisitions. During fiscal year 1997, the Company announced its Total Network
Visibility open application architecture intended to provide enterprise-wide
management of complex heterogeneous client-server environments. The success of
the architecture is dependent on the development of applications to help manage
key areas of interest for users and customer acceptance of those applications.
However, there can be no assurance Network General will be successful in
developing new products or in enhancing existing products or that new or
enhanced products will meet market requirements. Network General has, from time
to time, experienced delays in introducing new products. While the Company
believes such delays have not been materially harmful to the Company's business
or reputation, future delays could adversely impact acceptance of and revenue
generated from the sale of any delayed products.

INTEGRATION OF 3DV TECHNOLOGY, INC. The Company acquired 3DV with the
expectation the acquisition would result in beneficial synergies for the
combined operation, including the enhancement of the suite of products offered
by the Company's Systems Technology Business Unit. That suite of products
requires the successful integration of both technology (key 3DV technology with
the Company's Total Network Visibility architecture) and personnel (the
engineering departments of 3DV and the Company's Systems Technology Business
Unit), as well as customer acceptance of the 3DV technology. In addition, the
Company intends to continue selling 3DV products on a standalone basis for the
foreseeable future, the success of which is dependent on the integration of the
two companies' sales forces and the training of Network General's sales force as
to 3DV products. There can be no assurance the integration of technology,
engineering departments or sales organizations will be successful or will not
take longer than anticipated.

INTERNATIONAL SALES AND ACTIVITIES. Revenues derived from Network General's
international operations continue to increase in absolute dollars as well as a
percentage of total revenues. Europe is one of the Company's key international
markets. The Company's selling strategy in Europe continues to transition from
indirect to direct selling. Additionally, management believes that there is some
weakening in the European market for networking products. These factors may
limit the Company's ability to achieve its growth objectives in Europe in the
near term. While most of the Company's sales or license transactions are U.S.
dollar denominated, a growing number of transactions, particularly in Europe,
are invoiced in

24
<PAGE>
local currency. The Company has sales and support offices throughout Europe and,
to a lesser extent, the Pacific Rim and Latin American territories. Expenses of
the overseas operations are incurred in local currency. Accordingly, Network
General has exposure for potential losses in the value of foreign currency
transactions relative to the U.S. dollar between the time the transaction is
entered on the Company's financial statements and the time the receivable or
expense is paid. To minimize the impact of foreign currency fluctuations, the
Company maintains a hedging program to cover forecasted foreign currency based
transaction exposures. The current program uses foreign exchange forward
contracts and may, in the future, include other means such as foreign currency
option contracts. There can be no assurance the Company's hedging program will
continue to minimize any adverse impact of foreign currency exchange rate
fluctuations. Also, Network General's operations could be adversely affected by
other factors associated with international operations such as uncertainties
relative to regional economic circumstances, political instability in emerging
markets and difficulties staffing and managing foreign operations.

COMPETITION. As described in the Business section of this document, the
Company competes with an array of established and emerging computer,
communications, intelligent network wiring, network management and test
equipment companies. Some of these companies have greater financial,
technological and personnel resources than those of Network General. The smaller
competitors are often willing to offer lower pricing or other favorable terms
for products competitive with those of the Company. This could result in
pressure on the Company to reduce pricing on its products unless it is able to
prevail on the sale by successfully differentiating the benefits and
functionality of the Company's products compared to those of the competitor.
Moreover, new competitors, new technology and new marketing techniques may cause
customer confusion, thereby lengthening the sales cycle process for the
Company's products.

RETENTION OF KEY PERSONNEL. The Company's ability to achieve its revenue
and operating performance objectives will depend in large part on its ability to
attract and retain technically qualified and highly skilled sales, consulting,
technical, marketing and management personnel. Network General competes for
engineers for its development organizations principally in California's Silicon
Valley and in Oregon against companies with far greater resources and broader
focus in the networking industry. It vies for all of its personnel with other
members of the networking product industry, where competition for such personnel
is intense and is expected to remain so for the foreseeable future. Failure to
retain and grow its key employee population could adversely affect Network
General's business and operating results.

INTELLECTUAL PROPERTY. The Company relies on a combination of trade secret,
copyright, and trademark laws and contractual provisions to protect its
proprietary rights in its products. There can be no assurance these protections
will be adequate or that competitors will not independently develop technologies
that are substantially equivalent or superior to Network General's products.
There has been a trend toward litigation regarding patent and other intellectual
property rights in the software industry. Although there are currently no
lawsuits pending against the Company regarding possible infringement claims,
there can be no assurance such claims will not be asserted in the future or that
such assertions will not materially adversely affect the Company's business,
financial condition and results of operation. Any such suit, whether or not
having merit, would be costly to the Company in terms of employee time and
defense costs and could materially adversely affect Network General and its
business, financial condition and results of operations. If an infringement or
misappropriation claim is asserted against Network General, the Company may need
to obtain a license from the claimant to use the intellectual property rights.
There can be no assurance that such a license will be available on reasonable
terms or at all. Failure to obtain a license on commercially reasonable terms
could materially adversely affect the Company's business, financial condition
and results of operations.

SALES CHANNELS. The Company has expanded its use of indirect product resale
channels in certain territories (particularly North America) and has added a
direct sales force in other territories (particularly Europe) previously served
only by indirect sales channels. The existence of direct and indirect sales
channels may lead to conflict for the same customer, pressure by current and
prospective customers for

25
<PAGE>
price reductions on the Company's products and reductions in the Company's gross
margin and operating profit. In addition, the success of a direct sales
organization in a territory formerly covered by an independent distributor is
dependent on a number of factors, including the ability to attract and retain
qualified sales personnel, timely and effective training of the sales force and
obtaining access to and penetrating the prospective customer base previously
addressed by the prior reseller. For certain countries, the Company maintains a
resale agreement with a single reseller that either has exclusive distribution
rights for the territory or has no other Network General reseller competing with
it in the territory. The failure of such a reseller to perform its sales
generation and support obligations under the distribution agreement could
adversely affect the Company's revenue from, and reputation with, customers in
the territory.

SUPPLIER DEPENDENCE. Certain of the Company's products contain critical
components supplied by a single or a limited number of third parties. The
Company has been required to purchase and inventory certain of the computer
platforms around which it designs its products so as to ensure an available
supply of the product for its customers. Any significant shortage of these
platforms or other components or the failure of the third party supplier to
maintain or enhance these products could lead to cancellations of customer
orders or delays in placement of orders which could materially adversely affect
the Company's results of operations. If the Company's purchase of such
components or platforms exceeds demand, the Company could incur losses or other
charges in disposing of excess inventory, which could also materially adversely
affect the Company's operating results.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE NUMBER
-----------------
<S> <C>
Consolidated Balance Sheets..................................................... 27
Consolidated Statements of Income............................................... 28
Consolidated Statements of Stockholders' Equity................................. 29
Consolidated Statements of Cash Flows........................................... 30
Notes to Consolidated Financial Statements...................................... 31
Report of Independent Public Accountants........................................ 41
</TABLE>

26
<PAGE>
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
SHARE AND PER
SHARE AMOUNTS)
ASSETS

Current Assets:
Cash and cash equivalents............................................................... $ 48,778 $ 34,180
Marketable securities................................................................... 83,661 81,417
Accounts receivable, net of allowances of $3,411 in 1997 and $2,445 in 1996............. 51,461 34,043
Inventories............................................................................. 5,307 4,863
Prepaid expenses and deferred tax assets................................................ 14,826 11,303
---------- ----------
Total current assets.................................................................. 204,033 165,806

Property and Equipment:
Demonstration and rental equipment...................................................... 10,500 9,968
Office and development equipment........................................................ 34,732 27,443
Leasehold improvements.................................................................. 5,680 2,771
---------- ----------
50,912 40,182
Less--accumulated depreciation and amortization......................................... (30,035) (23,006)
---------- ----------
Net property and equipment............................................................ 20,877 17,176

Long-term investments..................................................................... 32,462 37,139
Other assets.............................................................................. 5,899 3,209
---------- ----------
$ 263,271 $ 223,330
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable........................................................................ $ 28,173 $ 4,300
Accrued liabilities..................................................................... 20,626 14,749
Deferred revenue........................................................................ 31,216 20,916
---------- ----------
Total current liabilities............................................................. 80,015 39,965

Long-term deferred revenue and taxes...................................................... 3,860 3,248

Stockholders' Equity:
Preferred stock--$.01 par value
Authorized--2,000,000 shares
Outstanding--none..................................................................... -- --
Common stock--$.01 par value
Authorized--100,000,000 shares
Issued--43,248,588 shares at March 31, 1997 and 46,068,302 shares at March 31, 1996... 432 461
Additional paid-in capital.............................................................. 62,072 127,482
Retained earnings....................................................................... 116,892 91,799
Less treasury stock, at cost--2,490,000 shares at March 31, 1996........................ -- (39,625)
---------- ----------
Total stockholders' equity............................................................ 179,396 180,117
---------- ----------
$ 263,271 $ 223,330
---------- ----------
---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues:
Product.................................................................... $ 189,632 $ 152,656 $ 112,986
Services................................................................... 51,036 36,189 26,769
---------- ---------- ----------
Total revenues............................................................... 240,668 188,845 139,755

Cost of Revenues:
Product.................................................................... 46,493 33,072 23,437
Services................................................................... 15,199 10,849 8,362
---------- ---------- ----------
Total cost of revenues....................................................... 61,692 43,921 31,799
---------- ---------- ----------
Gross margin............................................................... 178,976 144,924 107,956

Operating Expenses:
Sales and marketing........................................................ 74,638 62,533 47,049
Research and development................................................... 30,891 27,417 19,968
General and administrative................................................. 15,366 12,383 9,171
Acquired in-process research and development............................... 19,504 7,153 --
---------- ---------- ----------
Total operating expenses..................................................... 140,399 109,486 76,188
Income from operations..................................................... 38,577 35,438 31,768
Interest income, net......................................................... 6,087 7,086 5,328
---------- ---------- ----------
Income before provision for income taxes................................... 44,664 42,524 37,096
Provision for income taxes................................................... 19,571 15,099 11,685
---------- ---------- ----------
Net income................................................................... $ 25,093 $ 27,425 $ 25,411
---------- ---------- ----------
---------- ---------- ----------
Earnings per share........................................................... $ 0.55 $ 0.60 $ 0.57
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and common equivalent shares outstanding............. 45,703 45,822 44,626
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
BALANCE MARCH 31, 1994................... 41,919,530 $ 420 $ 92,900 $ 38,963 $ -- $ 132,283

Issuance of common stock under the
Employee Stock Purchase Plan at
$6.80-$6.85 per share.................. 239,778 2 1,635 -- -- 1,637
Exercise of stock options at $.01-$10.25
per share.............................. 2,291,106 23 10,106 -- -- 10,129
Tax benefit of stock options............. -- -- 4,882 -- -- 4,882
Repurchase of common stock at
$8.37-$14.44 per share................. -- -- -- -- (8,755) (8,755)
Net income............................... -- -- -- 25,411 -- 25,411
------------ ----- ---------- ---------- ---------- ----------
BALANCE MARCH 31, 1995................... 44,450,414 445 109,523 64,374 (8,755) 165,587

Issuance of common stock under the
Employee Stock Purchase Plan at
$10.57-$13.97 per share................ 176,584 2 2,155 -- -- 2,157
Exercise of stock options at $2.19-$16.31
per share.............................. 1,441,304 14 9,459 -- -- 9,473
Tax benefit of stock options............. -- -- 6,345 -- -- 6,345
Repurchase of common stock at
$11.87-$21.81 per share................ -- -- -- -- (30,870) (30,870)
Net income............................... -- -- -- 27,425 -- 27,425
------------ ----- ---------- ---------- ---------- ----------
BALANCE MARCH 31, 1996................... 46,068,302 461 127,482 91,799 (39,625) 180,117

Issuance of common stock under the
Employee Stock Purchase Plan at
$14.98-$15.09 per share................ 198,518 2 2,984 -- -- 2,986
Exercise of stock options at $0.33-$20.00
per share.............................. 1,671,768 16 15,259 -- -- 15,275
Tax benefit of stock options............. -- -- 8,874 -- -- 8,874
Repurchase of common stock at
$17.63-$28.13 per share................ -- -- -- -- (52,949) (52,949)
Retirement of treasury stock............. (4,690,000) (47) (92,527) -- 92,574 --
Net income............................... -- -- -- 25,093 -- 25,093
------------ ----- ---------- ---------- ---------- ----------
BALANCE MARCH 31, 1997................... 43,248,588 $ 432 $ 62,072 $ 116,892 $ -- $ 179,396
------------ ----- ---------- ---------- ---------- ----------
------------ ----- ---------- ---------- ---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 25,093 $ 27,425 $ 25,411
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 11,524 9,201 6,837
Deferred taxes, net...................................................... (4,278) (516) 2,599
Acquired in-process research and development............................. 19,504 7,153 --
Changes in operating assets and liabilities, net of effects from purchase
of 3DV Technology, Inc. and AIM Technology:
Accounts receivable.................................................... (16,993) (14,896) 1,638
Inventories............................................................ (444) (637) (2,194)
Prepaid expenses and other assets...................................... (663) 1,058 (3,405)
Accounts payable and accrued liabilities............................... 8,222 3,609 202
Deferred revenue....................................................... 10,829 7,476 2,056
----------- ----------- -----------
Net cash provided by operating activities............................ 52,794 39,873 33,144
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity investments................................ (112,062) (204,626) (114,264)
Purchases of available-for-sale investments.............................. (35,707) -- --
Proceeds from maturities of held-to-maturity investments................. 112,977 213,262 96,643
Proceeds from sales/maturities of available-for-sale investments......... 37,516 -- --
Cash used to purchase AIM Technology..................................... -- (6,501) --
Net additions to property and equipment.................................. (14,738) (13,883) (8,752)
----------- ----------- -----------
Net cash used in investing activities.................................. (12,014) (11,748) (26,373)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................... 26,767 17,975 16,648
Repurchases of common stock.............................................. (52,949) (30,870) (8,755)
----------- ----------- -----------
Net cash (used in) provided by financing activities.................... (26,182) (12,895) 7,893
----------- ----------- -----------
Net increase in cash and cash equivalents.................................. 14,598 15,230 14,664
Cash and cash equivalents at beginning of period........................... 34,180 18,950 4,286
----------- ----------- -----------
Cash and cash equivalents at end of period................................. $ 48,778 $ 34,180 $ 18,950
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Income taxes........................................................... $ 11,856 $ 9,042 $ 5,368
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS

Network General Corporation ("Network General" or the "Company") designs,
manufactures, markets and supports software-based fault and performance
solutions for managing computer networks. The Company also provides software
update and maintenance, education and consulting services. The Company's markets
are worldwide and include the communications, banking, finance, insurance,
manufacturing, services and government industries. The Company was incorporated
in 1986 as a California corporation and changed its state of incorporation to
Delaware in fiscal year 1988.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

ACQUISITIONS. On March 31, 1997, the Company acquired all of the
outstanding capital stock and options of 3DV Technology, Inc. ("3DV") for
$20,000,000. The acquisition was funded with existing cash and was accounted for
using the purchase method of accounting. The purchase price was paid subsequent
to fiscal year 1997 and, as such, the purchase price is included in accounts
payable and other related acquisition costs are included in accrued liabilities
at March 31, 1997.

A portion of the purchase price was allocated to the net assets acquired and
liabilities assumed based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $1,180,000 and $216,000,
respectively. In addition, $19,504,000 of the purchase price was allocated to
in-process research and development projects that had not reached technological
feasibility and had no probable alternative future uses, which the Company
expensed at the date of acquisition. The remainder of the acquisition purchase
price was allocated to goodwill and will be amortized over four years.

The following table reflects the unaudited pro forma combined results of
operations of the Company and 3DV on the basis that the acquisition had taken
place at the beginning of the fiscal year for each of the periods presented:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues.............................................................. $ 242,250 $ 189,528
Net income............................................................ 24,225 27,190
Earnings per share.................................................... $ 0.53 $ 0.59
Shares used in computation............................................ 45,703 45,822
</TABLE>

In September 1995, the Company acquired all of the remaining 90% voting
interest of AIM Technology ("AIM"), which it did not own, for approximately
$7,101,000, including $600,000 invested by the Company in fiscal year 1995 for
10% of the voting interest of AIM. The acquisition was funded with existing cash
and was accounted for using the purchase method of accounting. Accordingly, the
results of AIM's operations have been included with those of the Company since
the date of acquisition.

31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$1,385,000 and $1,437,000, respectively. In addition, $7,153,000 of the purchase
price was allocated to in-process research and development projects that had not
reached technological feasibility and had no probable alternative future uses,
which the Company expensed at the date of acquisition.

The following table reflects the unaudited pro forma combined results of
operations of the Company and AIM on the basis that the acquisition had taken
place at the beginning of the fiscal year for each of the periods presented:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues.............................................................. $ 190,740 $ 142,537
Net income............................................................ 27,526 25,327
Earnings per share.................................................... $ 0.60 $ 0.57
Shares used in computation............................................ 45,822 44,626
</TABLE>

REVENUES. The Company recognizes product revenues upon shipment of systems
or software and defers and recognizes warranty revenue in accordance with
Statement of Position 91-1, "SOFTWARE REVENUE RECOGNITION." Revenues on rental
units under operating leases and service agreements are recognized ratably over
the term of the rental or service period. Revenues for education courses are
recognized once the course has been completed by the customer. Payments received
in advance under such contracts are recorded as deferred revenues. Royalty
income is recognized based on the number of copies of software sold to the
licensees of software products.

Export revenues as a percentage of revenues were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Europe................................................................... 11% 9% 12%
Asia/Americas/Canada..................................................... 16% 15% 10%
-- -- --
Total export revenues.................................................... 27% 24% 22%
-- -- --
-- -- --
</TABLE>

CASH AND CASH EQUIVALENTS. The Company considers certificates of deposits,
commercial paper and money market funds with an original maturity date of three
months or less to be cash equivalents.

MARKETABLE DEBT AND EQUITY SECURITIES AND LONG-TERM INVESTMENTS. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the company has the
positive intent and ability to hold the securities to maturity. Marketable debt
and equity securities and long-term investments not classified as
held-to-maturity are classified as available-for-sale. Held-to-maturity
investments are stated at cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Available-for-sale debt and equity
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity, if significant. No debt or
equity securities were classified as available-for-sale at March 31, 1996.

32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of March 31, the following is a summary of held-to-maturity and
available-for-sale securities:

HELD-TO-MATURITY SECURITIES
(IN THOUSANDS)

<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
1997: COST FAIR VALUE GAINS
----------- ----------- -------------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and other U.S. government
agencies.................................................................... $ 9,955 $ 9,955 $ --
Debt securities issued by states of the United States and political
subdivisions of the states.................................................. 74,784 74,890 106
----------- ----------- -----
$ 84,739 $ 84,845 $ 106
----------- ----------- -----
----------- ----------- -----
</TABLE>

AVAILABLE-FOR-SALE SECURITIES
(IN THOUSANDS)

<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
1997: COST FAIR VALUE GAINS (LOSSES)
----------- ----------- ---------------
<S> <C> <C> <C>
Debt securities issued by states of the United States and political
subdivisions of the states.............................................. $ 26,720 $ 26,770 $ 50
Equity securities issued by corporations.................................. 5,043 4,614 (429)
----------- ----------- -----
$ 31,763 $ 31,384 $ (379)
----------- ----------- -----
----------- ----------- -----
</TABLE>

HELD-TO-MATURITY SECURITIES
(IN THOUSANDS)

<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
1996: COST FAIR VALUE GAINS (LOSSES)
---------- ---------- -----------------
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury and other U.S. government
agencies.................................................................... $ 41,071 $ 41,053 $ (18)
Debt securities issued by states of the United States and political
subdivisions of the states.................................................. 77,485 77,962 477
---------- ---------- -----
$ 118,556 $ 119,015 $ 459
---------- ---------- -----
---------- ---------- -----
</TABLE>

FOREIGN EXCHANGE FORWARD CONTRACTS. The Company enters into foreign
exchange forward contracts as a hedge against foreign accounts receivable and
cash. Gains and losses on foreign exchange forward contracts are included in net
income.

33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market and include material and related manufacturing overhead. As
of March 31, inventories consist of:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Purchased parts............................................................ $ 1,386 $ 2,650
Finished goods............................................................. 3,921 2,213
--------- ---------
$ 5,307 $ 4,863
--------- ---------
--------- ---------
</TABLE>

Certain of the Company's products contain critical components supplied by a
single or a limited number of third parties. The Company has been required to
purchase and inventory certain of the computer platforms around which it designs
its products so as to ensure an available supply of the product for its
customers. Any significant shortage of these platforms or other components or
the failure of the third party supplier to maintain or enhance these products
could materially adversely affect the Company's results of operations.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed by the straight-line method for financial reporting
purposes. Estimated useful lives range from two to five years for demonstration,
rental, office and developmental equipment. Leasehold improvements are amortized
over the corresponding lease term.

SOFTWARE DEVELOPMENT COSTS. The Company anticipates capitalizing eligible
computer software development costs upon the establishment of technological
feasibility, which the Company has defined as completion of a working model. The
period of time beginning with the establishment of a working model and ending
when a product is offered for sale is typically very short. Accordingly, costs
which were eligible for capitalization are insignificant and, thus, the Company
has charged all software development costs to research and development expense
in the accompanying consolidated statements of income.

EARNINGS PER SHARE. Earnings per share are computed using the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Fully diluted earnings per share are the same as
primary earnings per share.

The Board of Directors authorized a 2-for-1 stock split in the form of a
stock dividend of the Company's $0.01 par value common stock which was effective
May 1996. All references in the accompanying consolidated financial statements
to the number of common shares and per share amounts for fiscal year 1996 and
prior periods presented have been restated to reflect the stock split.

PRESENTATION. Fiscal year 1995 financial statement balances have been
reclassified to conform to fiscal year 1997 and 1996 presentations.

3. CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has investment policies that limit the amount of credit
exposure with any one issuer and restrict placement of these investments to
issuers evaluated as creditworthy. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base and their dispersion across many different
industries and geographies. No single customer accounted for more than 10% of
revenues in fiscal years 1997, 1996 or 1995.

34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. FOREIGN EXCHANGE FORWARD CONTRACTS

During fiscal year 1997, the Company began hedging its exposure to foreign
currency fluctuations through foreign exchange forward contracts. Gains and
losses associated with currency rate changes on foreign exchange forward
contracts are recorded currently in income as they offset corresponding gains
and losses on the foreign currency denominated assets being hedged.

5. ACCRUED LIABILITIES

As of March 31, accrued liabilities consist of the following:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Accrued compensation and related taxes.................................. $ 7,197 $ 5,583
Accrued acquisition and merger costs.................................... 2,126 293
Accrued commissions..................................................... 1,636 1,126
Accrued income taxes.................................................... 1,198 1,157
Other accrued expenses.................................................. 8,469 6,590
--------- ---------
$ 20,626 $ 14,749
--------- ---------
--------- ---------
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under noncancelable
operating lease agreements. As of March 31, 1997, the minimum future lease
payments under these leases are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 5,707
1999.......................................................................... 5,302
2000.......................................................................... 5,194
2001.......................................................................... 4,001
2002.......................................................................... 1,470
-------
$ 21,674
-------
-------
</TABLE>

Total rent expense was $6,092,000, $4,785,000 and $4,115,000 in fiscal years
1997, 1996 and 1995, respectively.

7. SHARE REPURCHASE PROGRAM

In July 1993, the Company's Board of Directors authorized the Company to
repurchase up to 4,000,000 shares of its common stock on the open market to
satisfy commitments under its stock option and stock purchase plans. In fiscal
year 1996, up to an additional 4,000,000 shares of the Company's common stock
were authorized for repurchase for the same purpose. As of March 31, 1997, the
Company had repurchased and retired 4,690,000 shares at an aggregate cost of
$92,574,000.

35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMPENSATION AND BENEFIT PROGRAMS

STOCK OPTION PLANS. Under the Company's 1989 Employee Stock Option Plan,
key employees and consultants may be granted either incentive or non-qualified
options to purchase common stock at the discretion of the Board of Directors.
The Company currently has authorized a total of 16,000,000 shares for issuance
under this plan. The exercise price of the stock options may not be less than
the fair market value of the common stock on the date of the grant. Employees
can receive an initial option grant upon joining the Company and employees may
be granted subsequent options based upon performance. Prior to July 19, 1993,
initial option grants vested ratably each year over a three-year period from the
grant date, while subsequent option grants generally vested in a lump sum amount
three years after the date on which each subsequent option was granted. In
fiscal year 1994, the vesting schedules were amended for any options granted on
or after July 19, 1993. Generally, initial option grants vest 25% at the end of
the first year and then ratably each month for an additional three years, while
subsequent option grants vest ratably each month beginning one month after the
grant date for four years. Options issued prior to July 19, 1993, not submitted
for repricing in fiscal year 1994, continue to vest according to their original
schedule.

In April 1989, the Company established the 1989 Outside Directors Stock
Option Plan, whereby outside directors may be granted non-qualified options to
purchase common stock. The number of shares of common stock authorized for
issuance under this plan is 1,020,000. The exercise price of the stock option
may not be less than the fair market value of the common stock on the date of
the grant. Each outside director is granted an initial option grant of 40,000
shares upon election to the Board and an option grant of 5,000 shares each
subsequent year. Prior to July 19, 1993, initial option grants vested ratably
each year over a three-year period from the grant date, while subsequent option
grants generally vested in a lump sum amount three years after the date on which
each subsequent option was granted. In fiscal year 1994, the vesting schedules
were amended for any options granted on or after July 19, 1993. Generally,
initial option grants now vest 25% at the end of the first year and then ratably
each month for an additional three years, while subsequent option grants now
vest ratably each month between the third and fourth year after the grant date.
Directors were excluded from participating in both the fiscal year 1994 and the
fiscal year 1993 option repricing. Options issued prior to July 19, 1993,
continue to vest either ratably over a three-year period or in a lump sum amount
at the end of three years.

In connection with the acquisition of ProTools, Inc. ("ProTools") in January
1994, the Company assumed the outstanding stock options of ProTools. At the time
of the merger, 545,660 equivalent ProTools incentive stock options were
outstanding. As of March 31, 1997, 7,042 incentive stock options remain
outstanding, all of which are fully vested and exercisable at $0.33 per share.

EMPLOYEE STOCK PURCHASE PLAN. The Company has authorized 1,500,000 shares
of common stock for issuance under the 1989 Employee Stock Purchase Plan.
Employees may elect to withhold up to 10% of their compensation for the purchase
of the Company's common stock. The amounts withheld are used to purchase the
Company's common stock at a price equal to 85% of the fair market value of the
stock on the first or last day of a six-month offering period, whichever is
lower. The Company issued 198,518 shares at an average price of $15.04 per share
in fiscal 1997, 176,584 shares at an average price of $12.21 per share in fiscal
1996 and 239,778 shares at an average price of $6.82 per share in fiscal 1995.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"), and related
interpretations in accounting for its stock options and employee stock purchase
plan because, as discussed below, the alternative fair value accounting provided
for under Financial Accounting Standards Board Statement No. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION" ("SFAS 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock

36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMPENSATION AND BENEFIT PROGRAMS (CONTINUED)
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.

Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options and employee stock purchase plan under the fair value
method of SFAS 123. The fair value for the stock options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for fiscal years 1997 and 1996: risk-free interest
rates in the range of 5.20% to 6.61%; dividend yields of zero; an expected
volatility factor of the market price of the Company's common stock of 0.60; and
an expected life of the option of 0.59 years after vest date. The
weighted-average estimated fair value of options granted during fiscal 1997 and
1996 was $8.61 and $7.68 per share, respectively. The fair value of the
employees' purchase rights was also estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions for fiscal years
1997 and 1996: risk-free interest rates in the range of 5.09% to 6.10%; dividend
yields of zero; an expected volatility factor of the market price of the
Company's stock of 0.60; and an expected life of 6 months. The weighted-average
estimated fair value of shares issued under the employee stock purchase plan for
fiscal years 1997 and 1996 was $5.12 and $4.72, respectively.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility and
expected option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods. The Company's
pro forma net income would have been $13,055,000 and $21,950,000 for fiscal
years 1997 and 1996, respectively. Pro forma net income per common and common

37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMPENSATION AND BENEFIT PROGRAMS (CONTINUED)
equivalent share would have been $0.29 and $0.48 for fiscal years 1997 and 1996,
respectively. A summary of the Company's stock option activity, and related
information for the years ended March 31 follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year.... 7,590,559 $ 11.65 6,763,141 $ 7.60 7,120,678 $ 5.53
Granted.......................... 1,889,050 18.85 3,329,670 16.92 3,429,076 9.27
Exercised........................ (1,671,768) 8.97 (1,441,304) 6.61 (2,291,106) 4.36
Forfeited........................ (758,135) 13.76 (1,060,948) 9.19 (1,495,507) 6.57
--------- --------- ---------
Outstanding-end of year.......... 7,049,706 13.99 7,590,559 11.65 6,763,141 7.60
Exercisable-end of year.......... 2,066,709 10.60 1,540,331 7.73 900,062 6.27
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE EXERCISE AT EXERCISE
EXERCISE PRICES 3/31/97 (IN YEARS) PRICE 3/31/97 PRICE
- ----------------- -------------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.33 7,042 5.77 $ 0.33 7,042 $ 0.33
3.88-- 6.44 860,600 5.15 5.26 536,352 5.35
6.81-- 10.25 1,677,970 7.15 8.77 761,850 8.76
11.53-- 17.38 2,477,889 8.80 15.30 526,604 14.77
17.75-- 25.13 2,009,205 8.98 20.41 234,861 19.50
$27.38 17,000 9.75 27.38 -- --
</TABLE>

COMMON STOCK AWARD PLAN. In June 1989, the Board of Directors approved the
1989 Common Stock Award Plan and reserved 240,000 shares for issuance
thereunder. Under this plan, awards are made to independent sales
representatives and consultants based upon individual sales performance
criteria. The shares are issued at fair market value and the related value of
the shares is charged to sales and marketing expense over the vesting period.
The shares generally vest over three years and the Company can reacquire any
unvested shares upon termination of the individual's relationship with the
Company. No shares of common stock were awarded under this plan in fiscal years
1997, 1996 or 1995. As of March 31, 1997, the number of shares that has been
awarded under this plan is 58,936, all of which are fully vested.

<TABLE>
<S> <C>
COMMON STOCK RESERVED FOR FUTURE ISSUANCE.
As of March 31, 1997:
1989 Employee Stock Option Plan................................................. 9,076,958
1989 Outside Directors Stock Option Plan........................................ 517,500
1989 Employee Stock Purchase Plan............................................... 247,198
1989 Common Stock Award Plan.................................................... 181,064
1990 ProTools, Inc. Stock Option Plan........................................... 7,042
---------
10,029,762
---------
---------
</TABLE>

EMPLOYEE SAVINGS PLAN. In September 1988, the Board of Directors approved
an employee savings plan (the "Plan") which is intended to be qualified and
exempt from tax under Section 401(k) of the Internal Revenue Code. Under the
Plan, employees may elect to contribute up to 15% of their gross compensation,
subject to annual I.R.S. limitations. The Company contributes to the Plan in
amounts determined at the

38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMPENSATION AND BENEFIT PROGRAMS (CONTINUED)
discretion of the Board of Directors. All contributions by the Company are
funded currently and vest ratably over three years. All employee contributions
are fully vested. Annual amounts provided by the Company under the Plan to date
have not been material.

9. INCOME TAXES

Pre-tax income from continuing operations for the years ended March 31 was
taxed in the following jurisdictions:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic..................................................... $ 43,243 $ 42,119 $ 36,535
Foreign...................................................... 1,421 405 561
--------- --------- ---------
$ 44,664 $ 42,524 $ 37,096
--------- --------- ---------
--------- --------- ---------
</TABLE>

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Federal
Current payable............................................ $ 18,291 $ 13,990 $ 11,311
Deferred tax asset......................................... (1,433) (1,399) (605)
Non-current deferred....................................... (1,233) (503) (1,673)
--------- --------- ---------
Total federal.............................................. 15,625 12,088 9,033
--------- --------- ---------
State
Current payable............................................ 3,825 2,730 2,876
Non-current deferred....................................... (617) (189) (489)
Total state................................................ 3,208 2,541 2,387
--------- --------- ---------
Foreign...................................................... 738 470 265
--------- --------- ---------
Total provision.............................................. $ 19,571 $ 15,099 $ 11,685
--------- --------- ---------
--------- --------- ---------
</TABLE>

Deferred tax assets are comprised of the following at March 31:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred revenue currently recognized for tax purposes................... $ 959 $ 1,058
Reserves and accruals not currently deductible for tax purposes.......... 5,807 4,183
State taxes not currently deductible for federal tax purposes............ 147 307
Depreciation and amortization............................................ 3,456 2,763
Operating loss carryover of ProTools, AIM and 3DV........................ 968 2,472
--------- ---------
Total deferred tax asset................................................. 11,337 10,783
Valuation allowance...................................................... (968) (2,472)
--------- ---------
Net deferred tax asset................................................... $ 10,369 $ 8,311
--------- ---------
--------- ---------
</TABLE>

39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (CONTINUED)
The valuation allowance consists of the operating losses of ProTools, a
wholly owned subsidiary, acquired in January 1994 in a transaction accounted for
as a pooling of interests, AIM, a wholly owned subsidiary, acquired in September
1995 in a transaction accounted for as a purchase and 3DV, a wholly owned
subsidiary, acquired March 31, 1997 in a transaction accounted for as a
purchase. The operating losses are subject to certain annual limitations as a
result of the acquisitions and may expire before the Company can utilize them.
The Company believes sufficient uncertainty exists regarding the realizability
of these losses on a separate entity basis, and accordingly, a valuation
allowance has been established.

Realization of the remaining net deferred tax asset of $10,369,000 as of
March 31, 1997 is dependent on generating sufficient taxable income to offset
future deduction of the related items. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.

U.S. income taxes were not provided for on a cumulative total of
approximately $1,846,000 of undistributed earnings for certain non-U.S.
subsidiaries. The Company intends to reinvest these earnings indefinitely in
operations outside the United States.

The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at U.S. statutory rates........................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit........................ 5.5 5.2 5.1
Permanent differences................................................. (11.2) (10.4) (8.6)
Change in valuation allowance......................................... (4.3) -- --
Merger, acquisition and related costs................................. 18.8 5.7 --
--------- --------- ---
43.8% 35.5% 31.5%
--------- --------- ---
--------- --------- ---
</TABLE>

10. RELATED PARTY TRANSACTION

In connection with the acquisition of ProTools, Network General assumed
certain royalty obligations to a company whose principal stockholder was also an
officer of Network General. The royalty obligations called for royalty payments
through December 31, 1999 or until $920,000 in aggregate royalties had been
paid. In fiscal 1995, Network General negotiated a lump sum payment of $572,000
to this company in full settlement of all royalties owed under this agreement.
The prepaid royalty was being expensed as a cost of goods sold as related
revenues were recognized and was fully expensed as of March 31, 1996.

11. RECENTLY ISSUED ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("SFAS 128"),
which is required to be adopted by the Company in its third quarter of fiscal
1998. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate earnings per share for all
prior periods. Under the new requirements for calculating earnings per share,
primary earnings per share will be replaced with basic earnings per share and
fully diluted earnings per share will be replaced with diluted earnings per
share. Under basic earnings per share, the dilutive effect of stock options will
be excluded. The Company does not expect the effect of adopting SFAS 128 to have
a material impact on earnings per share.

40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders

Network General Corporation:

We have audited the accompanying consolidated balance sheets of Network
General Corporation (a Delaware corporation) and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Network General Corporation
and subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California

April 18, 1997

41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Not applicable.

PART III

Certain information required by Part III is omitted from this report. The
Company will file its definitive proxy statement (the "Proxy Statement")
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report and certain information included therein is
incorporated by reference in this report, as indicated below.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to the directors of the Company will be set forth under
the caption "Information about Network General--Management" in the Company's
definitive Proxy Statement in connection with the Annual Meeting of Stockholders
to be held August 8, 1997. Such information is incorporated herein by reference.
Information relating to the executive officers of the Company is set forth in
Part I of this report under the caption "Executive Officers of the Registrant."

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.

Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
all filing requirements applicable to the Company's executive officers,
directors and persons who beneficially own more than 10% of the Company's Common
Stock were complied with, except as set forth under the caption "Executive
Compensation and Other Matters" in the Company's definitive Proxy Statement in
connection with the Annual Meeting of Stockholders to be held August 8, 1997.
Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to executive compensation will be set forth under the
caption "Executive Compensation and Other Matters" in the Company's definitive
Proxy Statement in connection with the Annual Meeting of Stockholders to be held
August 8, 1997. Such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to ownership of equity securities of the Company by
certain beneficial owners and management will be set forth under the caption
"Information about Network General--Stock Ownership of Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement in connection with
the Annual Meeting of Stockholders to be held August 8, 1997. Such information
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions will
be set forth under the caption "Information about Network General
Management--Certain Transactions with Management" in the Company's definitive
Proxy Statement in connection with the Annual Meeting of Stockholders to be held
August 8, 1997. Such information is incorporated herein by reference.

42
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
PAGE NUMBER(S)
-------------------
<S> <C> <C>
(A)(1) FINANCIAL STATEMENTS:
Consolidated Balance Sheets:
March 31, 1997 and 1996....................................................... 27
Consolidated Statements of Income:
Years ended March 31, 1997, 1996 and 1995..................................... 28
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1997, 1996 and 1995..................................... 29
Consolidated Statements of Cash Flows
Years ended March 31, 1997, 1996 and 1995..................................... 30
Notes to Consolidated Financial Statements.................................... 31
Report of Independent Public Accountants...................................... 41
</TABLE>

(A)(2) FINANCIAL STATEMENT SCHEDULES: Information required in financial
statement schedules has been included in the accompanying financial statements
or is in amounts not sufficient to require submission of schedules, except as
follows:

<TABLE>
<CAPTION>
SCHEDULE PAGE NUMBER(S)
- --------------------------------------------------------------------------------------- -------------------
<S> <C>
II Valuation and Qualifying Accounts.................................................. 44
</TABLE>

(A)(3) EXHIBITS:

See Index to Exhibits on Page 47.

(B) REPORTS ON FORM 8-K:

The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1997.

43
<PAGE>
NETWORK GENERAL CORPORATION

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND AGAINST BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES REVENUES DEDUCTIONS(1) OF PERIOD
- ----------------------------------------------- ----------- ------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
ACCOUNTS RECEIVABLE ALLOWANCES:

Fiscal year ended--

March 31, 1995............................... $ 716 $ 631 $ 892 $ (747) $ 1,492
----------- ----- ----------- ------------- ------
----------- ----- ----------- ------------- ------
March 31, 1996............................... $ 1,492 $ 558 $ 1,710 $ (1,315) $ 2,445
----------- ----- ----------- ------------- ------
----------- ----- ----------- ------------- ------
MARCH 31, 1997............................... $ 2,445 $ 494 $ 4,136 $ (3,664) $ 3,411
----------- ----- ----------- ------------- ------
----------- ----- ----------- ------------- ------
</TABLE>

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

(1) Deductions represent charges against the allowances for the purposes for
which the allowances were established, as well as changes in estimates of
the required allowances.

44
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Network General Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

/s/ LESLIE G. DENEND
-----------------------------------------
Leslie G. Denend
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: June 27, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

President and Chief
/s/ LESLIE G. DENEND Executive Officer Dated: June 27,
- ------------------------------ (Principal Executive 1996
Leslie G. Denend Officer)

Senior Vice President and
/s/ JAMES T. RICHARDSON Chief Financial Officer Dated: June 27,
- ------------------------------ (Principal Financial 1996
James T. Richardson Officer)

/s/ BERNARD J. WHITNEY Vice President and
- ------------------------------ Controller (Principal Dated: June 27,
Bernard J. Whitney Accounting Officer) 1996

/s/ HARRY J. SAAL
- ------------------------------ Chairman and Director Dated: June 27,
Harry J. Saal 1996

/s/ CHARLES J. ABBE
- ------------------------------ Director Dated: June 27,
Charles J. Abbe 1996

/s/ DOUGLAS C. CHANCE
- ------------------------------ Director Dated: June 27,
Douglas C. Chance 1996

/s/ HOWARD FRANK
- ------------------------------ Director Dated: June 27,
Howard Frank 1996

45
<PAGE>
<TABLE>
<C> <S> <C>
/s/ GREGORY M. GALLO
- ------------------------------ Director Dated: June 27,
Gregory M. Gallo 1996

/s/ LAURENCE R. HOOTNICK
- ------------------------------ Director Dated: June 27,
Laurence R. Hootnick 1996

/s/ JANET L. HYLAND
- ------------------------------ Director Dated: June 27,
Janet L. Hyland 1996
</TABLE>

46
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Third restated certificate of Incorporation of Network General Corporation, a Delaware Corporation,
which is incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8
(Registration No. 333-12187) filed with the SEC on September 17, 1996.

3.2 Amended and Restated Bylaws of Network General Corporation, which is incorporated by reference to
Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.

4.1 Registration Rights Agreement between the Company and certain investors dated December 31, 1987, which
is incorporated by reference to Exhibit 4.2 of the Company's Registration Statement No. 33-26107 on
Form S-1, which became effective February 2, 1989 ("Form S-1").

4.2 Rights Agreement between the Company and Chemical Trust Company of California dated June 26, 1992, as
amended, which is incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form
10-K for the year ended March 31, 1993.

10.1 Standard Business Lease (Net) for the Company's principal facility dated June 18, 1991, between the
Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the year ended March 31, 1991.

10.2 First Amendment to Lease dated June 10, 1992, between the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the
year ended March 31, 1992 ("1992 Form 10-K").

10.3 Standard Business Lease (Net) for the Company's principal facility dated March 11, 1992, between the
Company and Menlo Oaks Partners, L.P., which is incorporated by reference to Exhibit 10.4 of the
1992 Form 10-K.

10.4 First Amendment to Lease dated June 18, 1992, between the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.5 of the 1992 Form 10-K.

10.5 Lease dated March 31, 1992, between the Company and Equitable Life Assurance Society of the United
States, which is incorporated by reference to Exhibit 10.4 of the 1992 Form 10-K.

10.6 Description of the Company's Cash Bonus Plan, which is incorporated by reference to Exhibit 10.6 of
the Form S-1.

10.7 Form of Director and Officer Indemnification Agreement, which is incorporated by reference to Exhibit
10.7 of the Form S-1.

10.8 Amended and Restated 1989 Outside Directors Stock Option Plan and related documentation, which is
incorporated by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the "September 1996 10-Q").

10.9 Form of Stock Purchase Agreement used in conjunction with the 1989 Outside Directors Stock Option
Plan, which is incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended March 31, 1989.
</TABLE>

47
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------------------------
10.10 OEM Agreement dated August 3, 1991 between the Company and NCR Corporation which is incorporated by
reference to Exhibit 10.18 of the Company's Registration Statement No. 33-45580 on Form S-3 which
became effective on April 6, 1992.
<C> <S>

10.12 Agreement dated April 8, 1994 between the Company and PNJ Engineering providing for a lump sum
settlement of a royalty obligation between the Company and PNJ engineering, which is incorporated by
reference to Exhibit 10.19 of the 1994 Form 10-K.

10.13 Employment agreement dated April 6, 1994 between the Company and Leslie Denend which is incorporated
by reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994 ("June 1994 Form 10-Q").

10.14 Employment agreement dated April 6, 1994 between the Company and James T. Richardson, which is
incorporated by reference to Exhibit 10.22 of the June 1994 Form 10-Q.

10.15 Employment agreement dated April 6, 1994 between the Company and Richard Lewis, which is incorporated
by reference to Exhibit 10.23 of the June 1994 Form 10-Q.

10.16 Second Amendment to Lease dated February 1, 1995 between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to exhibit 10.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994 ("December 1994 Form 10-Q").

10.17 Third Amendment to Lease dated February 1, 1995 between the Company and Menlo Oaks Partners, L.P.,
which is incorporated by reference to Exhibit 10.23 of the December 1994 Form 10-Q.

10.18 Fourth Amendment to Lease dated May 31, 1995 between the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.27 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 31, 1995 ("June 1995 Form 10-Q").

10.19 Fifth Amendment to Lease dated June 13, 1995 between the Company and Menlo Oaks Partners, L.P., which
is incorporated by reference to Exhibit 10.28 of the June 1995 Form 10-Q.

10.20 Network General Corporation 1989 Stock Option Plan, as amended August 9, 1996, and related
documentation which is incorporated by reference to Exhibit 10.17 of the September 1996 Form 10-Q.

10.21 Network General Corporation 1989 Employee Stock Option Plan, as amended August 9, 1996, and related
documentation which is incorporated by reference to Exhibit 10.18 of the September 1996 Form 10-Q.

10.22 Employment Agreement dated August 19, 1995 between the Company and Michael Kremer, which is
incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1996.

10.23 Lease dated July 3, 1996 between the Company and Campbell Avenue Associates -- incorporated by
reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.
</TABLE>

48
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------------------------
10.24 Secured Loan Agreement dated October 29, 1996 between the Company and John Richard Stringer --
incorporated by reference to Exhibit 10.21 of the September 1996 Form 10-Q.
<C> <S>

10.25 Sixth Amendment to Lease dated November 29, 1996 between the Company and Menlo Oaks Partners, L.P. --
incorporated by reference to Exhibit 10.22 of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996.

10.26 Confidential Retirement Agreement and General Release of Claims dated as of December 10, 1996 by and
between the Company and Richard H. Lewis.

10.27 Confidential Resignation Agreement and General Release of Claims dated as of January 10, 1997 by and
between the Company and Michael H. Kremer.

10.28 Agreement made as of April 1, 1997 between the Company and David M. Carver.

10.29 Agreement made as of April 1, 1997 between the Company and John R. Stringer.

21.1 Subsidiaries of Network General Corporation.

23.1 Consent of Independent Public Accountants.

27.0 Financial Data Schedule.
</TABLE>

<PAGE>
EXHIBIT 10.26

CONFIDENTIAL RETIREMENT AGREEMENT
AND GENERAL RELEASE OF CLAIMS

This Confidential Retirement Agreement and General Release of Claims (this
"AGREEMENT") is dated as of December 10, 1996 by and between Network General
Corporation, a Delaware corporation, located at 4200 Bohannon Drive, Menlo Park,
CA 94025 (the "COMPANY") and Richard H. Lewis, a resident at 2910 Willow Green
Court, Roswell, GA 30076 ("LEWIS").

WHEREAS, Lewis has expressed an interest in retiring from the Company and
the Company has considered Lewis' interest; accordingly, since it is in the best
interest of both parties to provide for a smooth transition, the parties desire
to provide for certain terms with respect to such Retirement.

THEREFORE, in consideration of the mutual promises and covenants set forth
below, and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Company and Lewis agree as follows:

1. Lewis hereby retires and voluntarily terminates his employment with
the Company effective December 31, 1997 (the "Separation Date"). Lewis
hereby retires voluntarily from his position as Senior Vice President,
Worldwide Field Operations, effective January 6, 1997 (the "Retirement
Date"). From the day following the Retirement Date through May 31, 1997 (the
"Initial Period"), Lewis shall provide transitional support, services and
guidance as may be requested by Les Denend, President and CEO of the
Company, in the capacity of Consulting Senior Vice President. During the
period from June 1, 1997 through the Separation Date (the "Severance
Period"), Lewis shall continue in the capacity of Consulting Vice President
to finalize all transitional issues subject to paragraph 3 below.

2. In exchange for the release of claims set forth below and for the
other promises and obligations set forth herein, the Company agrees to
provide Lewis with the following compensation and benefits subject to
paragraph 3 below:

(a) (i) continued payment of Lewis' current base salary ($14,166.67
per month) in accordance with the Company's normal payroll procedures,
less applicable withholding, through March 31, 1997. Through this date,
Lewis will be eligible for commission payments for the fiscal year ending
March 31, 1997 in accordance with Lewis' FY97 Compensation Plan.

(ii) continued payment of Lewis' current base salary ($14,166.67
per month) in accordance with the Company's normal payroll
procedures, less applicable withholding, through the remainder of the
Initial Period. During the remainder of the Initial Period, Lewis
shall not be entitled to any commissions. In April 1997, Lewis shall
receive an executive bonus calculated and paid in accordance with the
Company's then standard executive bonus practice. Such bonus shall be
for the period of October 1, 1996 through March 31, 1997. In
addition, Lewis will continue to accrue personal time off (PTO)
through the Initial Period. Any accrued by unused PTO will be paid to
Lewis in his May 31, 1997 paycheck. Thereafter and through the
Severance Period, Lewis shall accrue no additional PTO.

(iii) during the Severance Period, the Company will make payments
to Lewis of $5,000 per month in accordance with the Company's normal
payroll procedures, less applicable withholding. During the Severance
Period, Lewis shall not be entitled to any commissions or bonus
payments.

(b) continued provision of the Company's group health, life and
disability insurance through January 31, 1997. As of June 1, 1997, Lewis
will not be eligible for group life and disability insurance, but shall
be entitled to elect continued group health insurance coverage in

49
<PAGE>
accordance with applicable provisions of federal law (COBRA) and the
Company shall pay the cost of such COBRA coverage through the Separation
Date. Thereafter, Lewis shall be responsible for such COBRA payments
through the end of the COBRA election period as established under federal
law.

(c) with respect to any stock options granted to Lewis by the
Company, Lewis shall continue vesting in any unvested shares subject to
those options through the Separation Date; in all other respects, Lewis'
stock options shall remain subject to the terms and conditions of any
previous stock option plans or agreements between Lewis and the Company.

(d) Lewis shall be able to continue the use of his voice mail and
electronic mail box through the Separation Date; and

(e) the Company hereby grants Lewis all right, title and interest in
that certain laptop computer purchased by the Company, which computer is
currently in Lewis' possession. Lewis acknowledges and agrees to allow an
authorized Company representative to inspect such computer for the
purpose of locating and deleting any Company information contained on
such computer. Lewis agrees to assist the Company in retrieval and
deletion of all Company information and files and further agrees that he
shall not make copies of any such materials or information for his own
use or for any other purpose.

3. In the event that Lewis accepts employment with, or provides any
services to (whether as a partner, consultant, joint venturer or otherwise),
any person or entity which offers products or services that are competitive
with any products or services offered by the Company or with any products or
services that Lewis is aware of that the Company intends to offer, Lewis
shall be deemed to have resigned from his employment with the Company
effective immediately upon such acceptance of employment or provision of
services. Upon such retirement, Lewis shall not be entitled to any further
payments or benefits under paragraph 2.

4. Any payments to be made pursuant to Section 2 above, shall not be
made until this Agreement becomes effective after the seven (7) day period
elapses in accordance with the provisions of Section 11 below. Lewis
understands and acknowledges that he shall not be entitled to any benefits
from the Company other than those expressly set forth in this Agreement.

5. In exchange for the benefits described in Section 2 above, Lewis, on
behalf of himself and his successors and assigns, releases and absolutely
releases and discharges the Company and its parent corporation,
shareholders, directors, officers, employees, agents, attorneys, legal
successors and assigns (collectively, "Agents") of and from any and all
claims, actions and causes of action, whether now known or unknown, which
Lewis now has, or at an other time had, or shall or may have against the
Company or its Agents based upon or arising out of any matter, cause, fact,
thing, act or omission whatsoever occurring or existing at any time to and
including the date hereof, including, but not limited to, any claims of
wrongful discharge, breach of contract or national origin, race, age, sex or
other discrimination under the Civil Rights Act of 1964, the Age
Discrimination in Employment Act of 1967, the Americans with Disabilities
Act, the Fair Employment and Housing Act or any other applicable state or
federal law save and except for applicable rights pursuant to the Workers
Compensation laws of the state of California. As used herein, the "Company"
includes any and all parents, divisions, subsidiaries or affiliated entities
of Network General Technology Corporation.

6. Lewis acknowledges that he has read section 1542 of the Civil Code
of the State of California which states:

A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor.

50
<PAGE>
Lewis hereby waives any right or benefit which he has or may have under
section 1542 of the Civil Code of the State of California as well as under
any similar provision under Georgia law to the full extent that he may
lawfully waive such rights and benefits pertaining to the subject matter of
this general release of claims.

7. Lewis acknowledges and agrees that he shall continue to be bound by
and comply with the terms of any proprietary rights or confidentiality
agreements between the Company and Lewis.

8. As further consideration for the benefits described in Section 2
above, Lewis agrees that for a period of one year after the Separation Date,
he shall not, either directly or indirectly, solicit the services, or
attempt to solicit the services of, nor hire any employee of the Company,
its parent corporation, subsidiaries or other affiliated entities to any
other person or entity.

9. Lewis agrees that he shall not directly or indirectly disclose
either the existence of this Agreement or any of the terms of this Agreement
to anyone other than his immediate family or counsel, except as such
disclosure may be required for accounting or tax reporting purposes or as
otherwise may be required by law.

10. This Agreement, or any of the rights hereunder, may not be assigned
or otherwise transferred by Lewis.

11. This Agreement represents the complete understanding of the parties
with respect to its subject matter hereof and supersedes all prior
negotiations and agreements including but not limited to that certain
Employment Agreement dated April 6, 1994 between Lewis and the Company,
whether written or oral, except for any agreements of confidentiality or
assignment previously entered into by the Company (or any of its affiliated
entities) and Lewis, which shall survive in accordance with their terms.
This Agreement will be construed and enforced in accordance with the laws of
the State of California and applicable federal laws as interpreted therein.
The Parties agree that any dispute arising under this Agreement will be
resolved in the state or federal courts within the Northern District of
California and each Party expressly consents to jurisdiction therein. This
Agreement may not be altered or amended except by a written document signed
by the Company and Lewis.

12. LEWIS UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE MAY HAVE
AGAINST THE COMPANY BY SIGNING THIS AGREEMENT. LEWIS FURTHER UNDERSTANDS
THAT HE MAY HAVE TWENTY-ONE (21) CALENDAR DAYS TO CONSIDER THIS AGREEMENT,
THAT HE MAY REVOKE IT AT ANY TIME DURING THE SEVEN (7) CALENDAR DAYS AFTER
HE SIGNS IT, AND THAT IT SHALL NOT BECOME EFFECTIVE UNTIL THAT SEVEN (7)-DAY
PERIOD HAS PASSED (THE "EFFECTIVE DATE") . LEWIS FURTHER ACKNOWLEDGES THAT
HE IS SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND VOLUNTARILY IN
EXCHANGE FOR THE BENEFITS IN SECTION 2.

<TABLE>
<C> <S> <C>
Dated: 12/30, 1996 By: /s/ RICHARD H. LEWIS
--------------------------------------
Richard H. Lewis

Dated: 12/10, 1996 NETWORK GENERAL CORPORATION

By: /s/ LESLIE G. DENEND
--------------------------------------
Leslie G. Denend
Its: President
</TABLE>

<PAGE>
EXHIBIT 10.27

CONFIDENTIAL RESIGNATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS

This Confidential Resignation Agreement and General Release of Claims (this
"AGREEMENT") is dated as of January 10, 1997 by and between Network General
Corporation, a Delaware corporation, located at 4200 Bohannon Drive, Menlo Park,
CA 94025 (the "COMPANY") and Michael H. Kremer, a resident at 1147 Pulora Court,
Sunnyvale, CA 94087 ("KREMER").

WHEREAS, Kremer has expressed an interest in resigning from the Company and
the Company has considered Kremer's interest; accordingly, since it is in the
best interest of both parties to provide for a smooth transition, the parties
desire to provide for certain terms with respect to such Resignation.

1. Kremer hereby resigns and voluntarily terminates his employment with
the Company effective December 31, 1997 (the "Separation Date"). Kremer
hereby resigns voluntarily from his position as Senior Vice President,
Product Development, effective January 31, 1997 (the "Resignation Date")
following his three month paid leave of absence. From the day following the
Resignation Date through December 31, 1997 (the "Severance Period") Kremer
will not be required to provide any work or services to the Company, except
as agreed upon by Kremer and the Company.

2. In exchange for the release of claims set forth below and for the
other promises and obligations set forth herein, the Company agrees to
provide Kremer with the following compensation and benefits subject to
paragraph 3 below:

(a) payment of $10,000 per month as Kremer's base salary in
accordance with the Company's normal payroll procedures, less applicable
withholding, through December 31, 1997. PTO will be paid to Kremer in his
January 31, 1997 paycheck. Thereafter and through the Severance Period,
Kremer shall accrue no additional PTO. During the Severance Period,
Kremer shall not be entitled to any bonus payments.

(b) continued provision of the Company's group health, life and
disability insurance through January 31, 1997. As of February 1, 1997,
Kremer will not be eligible for group life and disability insurance, but
shall be entitled to elect continued group health insurance coverage in
accordance with applicable provisions of federal law (COBRA) and the
Company shall pay the cost of such COBRA coverage through the Separation
Date. Thereafter, Kremer shall be responsible for such COBRA payments
through the end of the COBRA election period as established under federal
law; and

(c) with respect to any stock options granted to Kremer by the
Company, Kremer shall continue vesting in any unvested shares subject to
those options through the Separation Date; in all other respects,
Kremer's stock options shall remain subject to the terms and conditions
of any previous stock option plans or agreements between Kremer and the
Company.

3. In the event that Kremer accepts employment with, or provides any
services to (whether as a partner, consultant, joint venturer or otherwise),
any person or entity which offers products or services that are competitive
with any products or services offered by the Company or with any products or
services that Kremer is aware of that the Company intends to offer, Kremer
shall be deemed to have resigned from his employment with the Company
effective immediately upon such acceptance of employment or provision of
services. Upon such resignation, Kremer shall not be entitled to any further
payments or benefits under paragraph 2.

52
<PAGE>
4. Any payments to be made pursuant to Section 2 above, shall not be
made until this Agreement becomes effective after the seven (7) day period
elapses in accordance with the provisions of Section 11 below. Kremer
understands and acknowledges that he shall not be entitled to any
compensation or benefits from the Company other than those expressly set
forth in this Agreement.

5. In exchange for the benefits described in Section 2 above, Kremer,
on behalf of himself and his successors and assigns, releases and absolutely
releases and discharges the Company and its shareholders, directors,
officers, employees, agents, attorneys, legal successors and assigns
(collectively, "Agents") of and from any and all claims, actions and causes
of action, whether now known or unknown, which Kremer now has, or at an
other time had, or shall or may have against the Company or its Agents based
upon or arising out of any matter, cause, fact, thing, act or omission
whatsoever occurring or existing at any time to and including the date
hereof, including, but not limited to, any claims of wrongful discharge,
breach of contract, fraud, defamation, infliction of emotional distress or
national origin, race, age, sex, disability or other discrimination or
harassment under the Civil Rights Act of 1964, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act, the Fair
Employment and Housing Act or any other applicable state or federal law save
and except for applicable rights pursuant to the Workers Compensation laws
of the state of California. As used herein, the "Company" includes any and
all parents, divisions, subsidiaries or affiliated entities of Network
General Corporation and Network General Technology Corporation.

6. Kremer acknowledges that he has read section 1542 of the Civil Code
of the State of California which states:

A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the
debtor.

Kremer hereby waives any right or benefit which he has or may have under
section 1542 of the Civil Code of the State of California to the full extent
that he may lawfully waive such rights and benefits pertaining to the subject
matter of this general release of claims.

7. Kremer acknowledges and agrees that he shall continue to be bound by
and comply with the terms of any proprietary rights or confidentiality
agreements between the Company and Kremer.

8. As further consideration for the benefits described in Section 2
above, Kremer agrees that for a period of one year after the Separation
Date, he shall not, either directly or indirectly, solicit any employee of
the Company, its parent corporation, subsidiaries or other affiliated
entities to terminate his/her employment with such entity.

9. Kremer agrees that he shall not directly or indirectly disclose
either the existence of this Agreement or any of the terms of this Agreement
to anyone other than his immediate family or counsel, except as such
disclosure may be required for accounting or tax reporting purposes or as
otherwise may be required by law. Kremer further agrees that he shall not at
any time in the future, make any critical or disparaging statements
regarding the company, its employees or products, unless such statements are
made truthfully in response to a subpoena or other legal process.

10. This Agreement, or any of the rights hereunder, may not be assigned
or otherwise transferred by Kremer.

11. This Agreement represents the complete understanding of the parties
with respect to its subject matter and supersedes all prior negotiations and
agreements including but not limited to that certain Employment Agreement
dated August 19, 1995 between Kremer and the Company, whether written or
oral, except for any agreements regarding confidentiality or assignment of
inventions previously entered into by the Company (or any of its affiliated
entities) and Kremer, which shall survive in accordance with their terms.
This Agreement will be construed and enforced in accordance

53
<PAGE>
with the laws of the State of California. The Parties agree that any dispute
arising under this Agreement will be resolved exclusively in the state or
federal courts within the Northern District of California and each Party
expressly consents to jurisdiction therein. This Agreement may not be
altered or amended except by a written document signed by the Company and
Kremer.

12. KREMER UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE MAY HAVE
AGAINST THE COMPANY BY SIGNING THIS AGREEMENT. KREMER FURTHER UNDERSTANDS
THAT HE MAY HAVE TWENTY-ONE (21) CALENDAR DAYS TO CONSIDER THIS AGREEMENT,
THAT HE MAY REVOKE IT AT ANY TIME DURING THE SEVEN (7) CALENDAR DAYS AFTER
HE SIGNS IT, AND THAT IT SHALL NOT BECOME EFFECTIVE UNTIL THAT SEVEN (7)-DAY
PERIOD HAS PASSED (THE "EFFECTIVE DATE") . KREMER FURTHER ACKNOWLEDGES THAT
HE IS SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND VOLUNTARILY IN
EXCHANGE FOR THE BENEFITS IN SECTION 2.

Dated: 1/22, 1997 /s/ MICHAEL H. KREMER
---------------------------
Michael H. Kremer

Dated: 1/13, 1997 NETWORK GENERAL CORPORATION

By: /s/ LESLIE G. DENEND
---------------------------
Its: President

<PAGE>
EXHIBIT 10.28

AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into as of
April 1, 1997 (the "Effective Date"), by and between Network General
Corporation, a Delaware corporation (the "Company") and David M. Carver
("Employee").

RECITALS

The Company recognizes that the possibility of a change of control or other
event may occur which may change the nature and structure of the Company and
that uncertainty regarding the consequences of such events may adversely affect
the Company's ability to retain its key employees. The Company also recognizes
that the Employee possesses an intimate and essential knowledge of the Company
upon which the Company may need to draw for objective advice and continued
services in connection with any acquisition of the Company or other change of
control that is potentially advantageous to the Company's stockholders. The
Company believes that the existence of this Agreement will serve as an incentive
to Employee to remain in the employ of the Company and will enhance its ability
to call on and rely upon the Employee in connection with a change of control.

The Company and the Employee desire to enter into this Agreement in order to
provide additional compensation and benefits to the Employee in recognition of
past services and to encourage Employee to continue to devote his full attention
and dedication to the Company and to continue his employment with the Company.

1. DEFINITIONS. As used in this Agreement, unless the context requires a
different meaning, the following terms shall have the meanings set forth herein:

(a) "CAUSE" means:

(i) theft, a material act of dishonesty, fraud, the falsification of
any employment or Company records or the commission of any criminal act
which impairs Employee's ability to perform his/her duties under this
Agreement;

(ii) improper disclosure of the Company's confidential, business or
proprietary information by the Employee;

(iii) any action by Employee which the Company's Board of Directors
(the "Board") reasonably believes has had or will have a material
detrimental effect on the Company's reputation or business; or

(iv) persistent failure of the Employee to perform the lawful duties
and responsibilities assigned by the Company which is not cured within a
reasonable time following the Employee's receipt of written notice of
such failure from the Company.

(b) "CHANGE OF CONTROL EVENT" means an Ownership Change in which the
shareholders of the Company before such Ownership Change do not retain, directly
or indirectly, at a least a majority of the beneficial interest in the voting
stock of the Company after such transaction or in which the Company is not the
surviving corporation. For purposes of this Agreement, an "Ownership Change"
shall be deemed to have occurred in the event any of the following occurs with
respect to the Company:

(i) the direct or indirect sale or exchange by the shareholders of the
Company of all or substantially all of the stock of the Company;

(ii) a merger or consolidation in which the Company is a party and in
which the shareholders of the Company before such Ownership Change do not
retain, directly or indirectly, at a least a majority

55
<PAGE>
of the beneficial interest in the voting stock of the Company after such
transaction or in which the Company is not the surviving corporation;

(iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or

(iv) a liquidation or dissolution of the Company.

(c) "CONSTRUCTIVE TERMINATION" means one or more of the following that
occurs within two (2) years after the occurrence of any Change of Control Event:

(i) without the Employee's express written consent, the assignment to
the Employee of any duties, or any limitation of the Employee's
responsibilities, substantially inconsistent with the Employee's positions,
duties, responsibilities and status with the Company immediately prior to
the date of the Change of Control Event;

(ii) without the Employee's express written consent, the removal of the
Employee from the Employee's position with the Company as held by the
Employee immediately prior to the Change of Control Event, except in
connection with the termination of the employment of the Employee by the
Company for Cause or as a result of the death or Permanent Disability of the
Employee;

(iii) without the Employee's express written consent, the relocation of
the principal place of the Employee's employment to a location that is more
than twenty-five (25) miles from the Employee's principal place of
employment immediately prior to the date of the Change of Control Event, or
the imposition of travel requirements on the Employee substantially
inconsistent with such travel requirements existing immediately prior to the
date of the Change of Control Event;

(iv) any failure by the Company to pay, or any reduction by the Company
of (a) the Employee's base salary in effect immediately prior to the date of
the Change of Control Event (unless reductions comparable in amount and
duration are concurrently made for all other employees of the Company with
responsibilities, organizational level and title comparable to the
Employee), or (b) the Employee's bonus compensation in effect immediately
prior to the date of the Change of Control Event (subject to applicable
performance requirements with respect to the actual amount of bonus
compensation earned by the Employee and all other participants in the bonus
program);

(v) any failure by the Company to (a) continue to provide the Employee
with the opportunity to participate, on terms no less favorable than those
in effect for the benefit of any executive, management or administrative
group which customarily includes a person holding the employment position or
a comparable position with the Company then held by the Employee, any
benefit or compensation plans and programs, including, but not limited to,
the Company's life, disability, health, dental, medical, savings, profit
sharing, stock purchase and retirement plans in which the Employee was
participating immediately prior to the date of the Change of Control Event,
or their equivalent, or (b) provide the Employee with all other fringe
benefits (or their equivalent) from time to time in effect for the benefit
of any executive, management or administrative group which customarily
includes a person holding the employment position or a comparable position
with the Company then held by the Employee;

(vi) any failure or refusal of a successor company to assume the
Company's obligations under this Agreement as required by Section 12; or

(d) "EFFECTIVE DATE" means the day and year first set forth above.

(e) "PERMANENT DISABILITY" means that:

(i) the Employee has been incapacitated by bodily injury or disease so
as to be prevented thereby from engaging in the performance of the
Employee's duties;

(ii) such total incapacity shall have continued for a period of six
consecutive months; and

56
<PAGE>
(iii) such incapacity will, in the opinion of a qualified physician, be
permanent and continuous during the remainder of the Employee's life.

(f) "TERMINATION UPON CHANGE OF CONTROL" means any one of the following:

(i) any termination of the employment of the Employee by the Company
without Cause within two (2) years after the occurrence of any Change of
Control Event;

(ii) any termination of the employment of the Employee by the Company
without Cause during the period commencing thirty (30) days prior to the
date of the Company's first public announcement that the Company has entered
into a definitive agreement to effect an Ownership Change (even though still
subject to approval by the Company's stockholders and other conditions and
contingencies) and ending on the date of the Change of Control Event; or

(iii) any resignation by the Employee immediately following any
Constructive Termination that occurs within two (2) years after the
occurrence of any Change of Control Event.

"Termination Upon Change of Control" shall not include any termination of
the employment of the Employee (a) by the Company for Cause; (b) by the Company
as a result of the Permanent Disability of the Employee; (c) as a result of the
death of the Employee; or (d) as a result of the voluntary termination of
employment by the Employee that is not deemed to be a Constructive Termination
pursuant to Subsection 1(c) above.

2. POSITION AND DUTIES. Employee shall continue to be an at-will employee
of the Company employed in his/her current position at his/her then current
salary. Employee shall also be entitled to continue to participate in and to
receive benefits on the same basis as other executive or senior staff members
under any of the Company's employee benefit plans as in effect from time to
time. In addition, Employee shall be entitled to the benefits afforded to other
employees similarly situated under the Company's vacation, holiday and business
expense reimbursement policies. Employee agrees to devote his/ her full business
time, energy and skill to his/her duties at the Company. These duties shall
include, but not be limited to, any duties consistent with his/her position
which may be assigned to Employee from time to time.

3. BENEFITS UPON VOLUNTARY TERMINATION, PERMANENT DISABILITY OR DEATH. In
the event that Employee voluntarily terminates his/her employment relationship
with the Company at any time and such termination is not deemed to be a
Constructive Termination as described in Subsection 1(c) above, or in the event
that Employee's employment terminates as a result of his/her death or Permanent
Disability, Employee shall be entitled to no compensation or benefits from the
Company other than those earned under Section 2 above through the date of
his/her termination of employment.

4. TERMINATION UPON CHANGE OF CONTROL.

(a) In the event of the Employee's Termination Upon Change of Control,
Employee shall be entitled to the following separation benefits:

(i) those benefits earned under Section 2 (other than any unpaid
incentive bonus) through the date of Employee's termination;

(ii) Employee's employment as an officer of the Company shall terminate
immediately; however, the Company shall continue Employee's employment as a
non-officer employee of the Company for one (1) year (the "Severance
Period"). During such period, Employee shall be entitled to Employee's then
current salary plus an amount equal to the entire target bonus and/or target
commission pursuant to target bonus or commission plans in effect for the
Employee at the time of the Change of Control Event, less applicable
withholding, payable in accordance with the Company's normal payroll
practices;

57
<PAGE>
(iii) within ten (10) days of submission of proper expense reports by the
Employee, the Company shall reimburse the Employee for all expenses
reasonably and necessarily incurred by the Employee in connection with the
business of the Company prior to his/her termination of employment;

(iv) continued provision of the Company's standard employee medical
insurance coverages through the end of the Severance Period; thereafter,
Employee shall be entitled to elect continued medical insurance coverage in
accordance with the applicable provisions of federal law (COBRA).
Notwithstanding the above, in the event Employee becomes covered under
another employer's group health plan during the period provided for herein,
the Company shall cease provision of continued group health insurance for
Employee; and

(v) notwithstanding any provisions to the contrary contained in any
stock option agreement between the Company and the Employee, upon a
Termination Upon Change of Control all stock options granted by the Company
to the Employee prior to the Change of Control Event shall become fully
vested and immediately exercisable in full to the extent such stock options
remain outstanding and unexercised at the time of such Termination Upon
Change of Control. This Subsection 4(a)(v) shall apply to all such stock
option agreements, whether heretofore or hereafter entered into, between the
Company and the Employee.

(b) In the event that Employee accepts employment with, or provides any
services to (whether as a partner, consultant, joint venturer or otherwise), any
person or entity which offers products or services that are competitive with any
products or services offered by the Company or with any products or services
that Employee is aware the Company intends to offer, Employee shall be deemed to
have resigned from his employment with the Company effective immediately upon
such acceptance of employment or provision of services. Upon such resignation,
Employee shall not be entitled to any further payments or benefits as provided
under this Section 4.

(c) In the event that Employee accepts employment with, or provides any
services to (whether as a partner, consultant, joint venturer or otherwise), any
person or entity while Employee continues to receive any separation benefits
pursuant to this Section 4, Employee shall immediately notify the Company of
such acceptance and provide to the Company information with respect to such
person or entity as the Company may reasonably request in order to determine if
that person's or entity's products or services are competitive with the
Company's.

5. LIMITATION OF PAYMENTS AND BENEFITS.

(a) To the extent that any of the payments and benefits provided for in this
Agreement or otherwise payable to the Employee constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code (the "Code")
and, but for this Section 5, would be subject to the excise tax imposed by
Section 4999 of the Code, the aggregate amount of such payments and benefits
shall be reduced such that none of the payments and benefits are subject to
excise tax pursuant to Section 4999 of the Code.

(b) Within sixty (60) days after the later of termination of employment or
the related Change of Control Event, the Company shall notify the Employee in
writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Subsection 5(a). If the
Company determines that any such reduction is required, it will provide the
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction. The Company shall determine,
in a fair and equitable manner after consultation with the Employee, which
payments and benefits are to be reduced so as to result in the maximum benefit
for the Employee.

(c) Within thirty (30) days after the Employee's receipt of the Company's
notice pursuant to Subsection 5(b), the Employee shall notify the Company in
writing if the Employee disagrees with the amount of reduction determined by the
Company, or the selection of the payments and the benefits to be

58
<PAGE>
reduced. As part of such notice, the Employee shall also advise the Company of
the amount of reduction, if any, that the Employee has, in good faith,
determined to be necessary to comply with the provisions of Subsection 5(b)
and/or the payments and benefits to be reduced. Failure by the Employee to
provide this notice within the time allowed will be treated by the Company as
acceptance by the Employee of the amount of reduction determined by the Company
and/or the payments and benefits to be reduced. If any differences regarding the
amount of the reduction and/or the payments and benefits to be reduced have not
been resolved by mutual agreement within sixty (60) days after the Employee's
receipt of the Company's notice pursuant to Subsection 5(b), the amount of
reduction and/or the payments and benefits to be reduced determined by the
Employee will be conclusive and binding on both parties unless, prior to the
expiration of such sixty (60) day period, the Company notifies the Employee in
writing of the Company's intention to have the matter submitted to arbitration
for resolution and proceeds to do so promptly. If the Company gives no notice to
the Employee of a required reduction as provided in Subsection 5(b), the
Employee may unilaterally determine the amount of reduction required, if any,
and/or the payments and benefits to be reduced, and, upon written notice to the
Company, the amount and/or the payments and benefits to be reduced will be
conclusive and binding on both parties.

(d) If, as a result of the reductions required by Subsection 5(a), the
amounts previously paid to the Employee exceed the amount to which the Employee
is entitled, the Employee will promptly return the excess amount to the Company.

6. EXCLUSIVE REMEDY. Under any claim for breach of this Agreement or
wrongful termination, the payments and benefits provided for in Section 4 shall
constitute the Employee's sole and exclusive remedy for any alleged injury or
other damages arising out of the cessation of the employment relationship
between the Employee and the Company in the event of Employee's termination.
Except as expressly set forth herein, the Employee shall be entitled to no other
compensation, benefits, or other payments from the Company as a result of any
termination of employment with respect to which the payments and/or benefits
described in Section 4 have been provided to the Employee.

7. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Employee agrees to
continue to abide by the terms and conditions of the Company's confidentiality
and/or proprietary rights agreement between the Employee and the Company, a copy
of which is attached hereto as EXHIBIT A.

8. CONFLICT OF INTEREST. Employee agrees that for a period of one (1) year
after termination of his/her employment with the Company, he/she will not,
directly or indirectly, solicit the services of or in any other manner persuade
employees or customers of the Company to discontinue that person's or entity's
relationship with or to the Company as an employee or customer, as the case may
be.

9. ARBITRATION. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in San Mateo County or Santa
Clara County, California; provided, however, that this arbitration provision
shall not preclude the Company from seeking injunctive relief from any court
having jurisdiction with respect to any disputes or claims relating to or
arising out of the misuse or misappropriation of the Company's trade secrets or
confidential and proprietary information. All costs and expenses of arbitration
or litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the Employee, shall be paid by the Company. Judgment may
be entered on the award of the arbitration in any court having jurisdiction.

10. INTERPRETATION. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.

11. CONFLICT IN BENEFITS. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement; provided, however, that this Agreement is not intended
to and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are either in writing or regularly made
available to a significant number

59
<PAGE>
of employees of the Company, (ii) any agreement or arrangement with the Employee
that has been reduced to writing and which does not relate to the subject matter
hereof, or (iii) any agreements or arrangements hereafter entered into by the
parties in writing, except as otherwise expressly provided herein.

12. SUCCESSORS AND ASSIGNS.

(a) SUCCESSORS OF THE COMPANY. The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to
the effectiveness of any such succession transaction shall be a breach of
this Agreement and shall entitle the Employee to terminate his or her
employment with the Company within three months thereafter and to receive
the benefits provided under Section 4(c) of this Agreement in the event of
Termination Upon Change of Control. As used in this Agreement, "Company"
shall mean the Company as defined above and any successor or assign to its
business and/ or assets as aforesaid which executes and delivers the
agreement provided for in this Section 12 or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of law.

(b) HEIRS OF EMPLOYEE. This Agreement shall inure to the benefit of
and be enforceable by the Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devises and
legatees. If the Employee should die after the conditions to payment of
benefits set forth herein have been met and any amounts are still payable to
him or her hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
Employee's beneficiary, successor, devisee, legatee or other designee or, if
there be no such designee, to the Employee's estate. Until a contrary
designation is made to the Company, the Employee hereby designates as his or
her beneficiary under this Agreement the person whose name appears below his
or her signature on this Agreement.

13. NOTICES. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:

<TABLE>
<S> <C>
if to the Network General Corporation
Company: 4200 Bohannon Drive
Menlo Park, CA 94025
Attn: Legal Department
</TABLE>

and if to the Employee at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.

14. NO REPRESENTATIONS. Employee acknowledges that he/she is not relying
and has not relied on any promise, representation or statement made by or on
behalf of the Company which is not set forth in this Agreement.

15. VALIDITY. If any one or more of the provisions (or any part thereof)
of this Agreement shall be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
(or any part thereof) shall not in any way be affected or impaired thereby.

16. MODIFICATION. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.

60
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year written below.

<TABLE>
<S> <C> <C> <C>
NETWORK GENERAL CORPORATION EMPLOYEE

By: /s/ LESLIE G. DENEND By: /s/ DAVID M. CARVER
---------------------------------------- ----------------------------------------
Name: Leslie G. Denend Name: David M. Carver
Title: President and Chief Executive
Officer
</TABLE>

<PAGE>
EXHIBIT 10.29

AGREEMENT

RECITALS

1. DEFINITIONS. As used in this Agreement, unless the context requires a
different meaning, the following terms shall have the meanings set forth herein:

(a) "CAUSE" means:

(ii) improper disclosure of the Company's confidential, business or
proprietary information by the Employee;

(iii) any action by Employee which the Company's Board of Directors
(the "Board") reasonably believes has had or will have a material
detrimental effect on the Company's reputation or business; or

(b) "CHANGE OF CONTROL EVENT" means an Ownership Change in which the
shareholders of the Company before such Ownership Change do not retain,
directly or indirectly, at a least a majority of the beneficial interest in
the voting stock of the Company after such transaction or in which the
Company is not the surviving corporation. For purposes of this Agreement, an
"Ownership Change" shall be deemed to have occurred in the event any of the
following occurs with respect to the Company:

(i) the direct or indirect sale or exchange by the shareholders of
the Company of all or substantially all of the stock of the Company;

(ii) a merger or consolidation in which the Company is a party and
in which the shareholders of the Company before such Ownership Change do
not retain, directly or indirectly, at a least

62
<PAGE>
a majority of the beneficial interest in the voting stock of the Company
after such transaction or in which the Company is not the surviving
corporation;

(iii) the sale, exchange, or transfer of all or substantially all of
the assets of the Company; or

(iv) a liquidation or dissolution of the Company.

(c) "CONSTRUCTIVE TERMINATION" means one or more of the following that
occurs within two (2) years after the occurrence of any Change of Control
Event:

(i) without the Employee's express written consent, the assignment
to the Employee of any duties, or any limitation of the Employee's
responsibilities, substantially inconsistent with the Employee's
positions, duties, responsibilities and status with the Company
immediately prior to the date of the Change of Control Event;

(ii) without the Employee's express written consent, the removal of
the Employee from the Employee's position with the Company as held by the
Employee immediately prior to the Change of Control Event, except in
connection with the termination of the employment of the Employee by the
Company for Cause or as a result of the death or Permanent Disability of
the Employee;

(iii) without the Employee's express written consent, the relocation
of the principal place of the Employee's employment to a location that is
more than twenty-five (25) miles from the Employee's principal place of
employment immediately prior to the date of the Change of Control Event,
or the imposition of travel requirements on the Employee substantially
inconsistent with such travel requirements existing immediately prior to
the date of the Change of Control Event;

(iv) any failure by the Company to pay, or any reduction by the
Company of (a) the Employee's base salary in effect immediately prior to
the date of the Change of Control Event (unless reductions comparable in
amount and duration are concurrently made for all other employees of the
Company with responsibilities, organizational level and title comparable
to the Employee), or (b) the Employee's bonus compensation in effect
immediately prior to the date of the Change of Control Event (subject to
applicable performance requirements with respect to the actual amount of
bonus compensation earned by the Employee and all other participants in
the bonus program);

(v) any failure by the Company to (a) continue to provide the
Employee with the opportunity to participate, on terms no less favorable
than those in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the
employment position or a comparable position with the Company then held
by the Employee, any benefit or compensation plans and programs,
including, but not limited to, the Company's life, disability, health,
dental, medical, savings, profit sharing, stock purchase and retirement
plans in which the Employee was participating immediately prior to the
date of the Change of Control Event, or their equivalent, or (b) provide
the Employee with all other fringe benefits (or their equivalent) from
time to time in effect for the benefit of any executive, management or
administrative group which customarily includes a person holding the
employment position or a comparable position with the Company then held
by the Employee;

(vi) any failure or refusal of a successor company to assume the
Company's obligations under this Agreement as required by Section 12; or

(d) "EFFECTIVE DATE" means the day and year first set forth above.

(e) "PERMANENT DISABILITY" means that:

(i) the Employee has been incapacitated by bodily injury or disease
so as to be prevented thereby from engaging in the performance of the
Employee's duties;

63
<PAGE>
(ii) such total incapacity shall have continued for a period of six
consecutive months; and

(iii) such incapacity will, in the opinion of a qualified physician,
be permanent and continuous during the remainder of the Employee's life.

(f) "TERMINATION UPON CHANGE OF CONTROL" means any one of the following:

(i) any termination of the employment of the Employee by the Company
without Cause within two (2) years after the occurrence of any Change of
Control Event;

(ii) any termination of the employment of the Employee by the
Company without Cause during the period commencing thirty (30) days prior
to the date of the Company's first public announcement that the Company
has entered into a definitive agreement to effect an Ownership Change
(even though still subject to approval by the Company's stockholders and
other conditions and contingencies) and ending on the date of the Change
of Control Event; or

(iii) any resignation by the Employee immediately following any
Constructive Termination that occurs within two (2) years after the
occurrence of any Change of Control Event.

"Termination Upon Change of Control" shall not include any termination
of the employment of the Employee (a) by the Company for Cause; (b) by the
Company as a result of the Permanent Disability of the Employee; (c) as a
result of the death of the Employee; or (d) as a result of the voluntary
termination of employment by the Employee that is not deemed to be a
Constructive Termination pursuant to Subsection 1(c) above.

4. TERMINATION UPON CHANGE OF CONTROL.

(a) In the event of the Employee's Termination Upon Change of Control,
Employee shall be entitled to the following separation benefits:

(i) those benefits earned under Section 2 (other than any unpaid
incentive bonus) through the date of Employee's termination;

64
<PAGE>
(iii) within ten (10) days of submission of proper expense reports by the
Employee, the Company shall reimburse the Employee for all expenses
reasonably and necessarily incurred by the Employee in connection with the
business of the Company prior to his/her termination of employment;

(v) notwithstanding any provisions to the contrary contained in any
stock option agreement between the Company and the Employee, upon a
Termination Upon Change of Control all stock options granted by the Company
to the Employee prior to the Change of Control Event shall become fully
vested and immediately exercisable in full to the extent such stock options
remain outstanding and unexercised at the time of such Termination Upon
Change of Control. This Subsection 4(a)(v)
shall apply to all such stock option agreements, whether heretofore or
hereafter entered into, between the Company and the Employee.

5. LIMITATION OF PAYMENTS AND BENEFITS.

65
<PAGE>
reduced. As part of such notice, the Employee shall also advise the Company of
the amount of reduction, if any, that the Employee has, in good faith,
determined to be necessary to comply with the provisions of Subsection 5(b)
and/or the payments and benefits to be reduced. Failure by the Employee to
provide this notice within the time allowed will be treated by the Company as
acceptance by the Employee of the amount of reduction determined by the Company
and/or the payments and benefits to be reduced. If any differences regarding the
amount of the reduction and/or the payments and benefits to be reduced have not
been resolved by mutual agreement within sixty (60) days after the Employee's
receipt of the Company's notice pursuant to Subsection 5(b), the amount of
reduction and/or the payments and benefits to be reduced determined by the
Employee will be conclusive and binding on both parties unless, prior to the
expiration of such sixty (60) day period, the Company notifies the Employee in
writing of the Company's intention to have the matter submitted to arbitration
for resolution and proceeds to do so promptly. If the Company gives no notice to
the Employee of a required reduction as provided in Subsection 5(b), the
Employee may unilaterally determine the amount of reduction required, if any,
and/or the payments and benefits to be reduced, and, upon written notice to the
Company, the amount and/or the payments and benefits to be reduced will be
conclusive and binding on both parties.

10. INTERPRETATION. Employee and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.

66
<PAGE>
of employees of the Company, (ii) any agreement or arrangement with the Employee
that has been reduced to writing and which does not relate to the subject matter
hereof, or (iii) any agreements or arrangements hereafter entered into by the
parties in writing, except as otherwise expressly provided herein.

12. SUCCESSORS AND ASSIGNS.

(a) SUCCESSORS OF THE COMPANY. The Company will require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, expressly, absolutely and unconditionally to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction shall be a breach of this
Agreement and shall entitle the Employee to terminate his or her employment with
the Company within three months thereafter and to receive the benefits provided
under Section 4(c) of this Agreement in the event of Termination Upon Change of
Control. As used in this Agreement, "Company" shall mean the Company as defined
above and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 12 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.

(b) HEIRS OF EMPLOYEE. This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees. If the
Employee should die after the conditions to payment of benefits set forth herein
have been met and any amounts are still payable to him or her hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's beneficiary, successor, devisee,
legatee or other designee or, if there be no such designee, to the Employee's
estate. Until a contrary designation is made to the Company, the Employee hereby
designates as his or her beneficiary under this Agreement the person whose name
appears below his or her signature on this Agreement.

if to the Company: Network General Corporation
4200 Bohannon Drive
Menlo Park, CA 94025
Attn: Legal Department

16. MODIFICATION. This Agreement may only be modified or amended by a
supplemental written agreement signed by Employee and the Company.

67
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year written below.

<TABLE>
<S> <C>
NETWORK GENERAL CORPORATION EMPLOYEE

By: /s/ LESLIE G. DENEND By: /s/ JOHN STRINGER
----------------------------------------- -----------------------------------------
Name: Leslie G. Denend Name: John Stringer
Title: President and Chief Executive
Officer
</TABLE>

<PAGE>
EXHIBIT 21.1

SUBSIDIARIES OF NETWORK GENERAL CORPORATION

The Registrant's subsidiaries are ProTools, Inc. a Delaware corporation,
Network General Technology Corporation, a Delaware corporation, 3DV Technology,
Inc., Network General Australia Pty. Ltd., an Australian corporation, Network
General Europe N.V., a Belgium corporation, Network General (Canada) Ltd., a
Canadian corporation, Network General France S.A.R.L., a French corporation,
Network General (Deutschland) GmbH, a German corporation, Network General/NGC
AG, a Swiss corporation, Network General Japan K.K., a Japanese corporation,
Network General Singapore Pte. Ltd., a Singapore corporation, and Network
General Europe B.V., a Dutch corporation, all of which are wholly owned by the
Registrant.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement Nos. 33-53570, 33-53558, 33-45232, 33-28567, 33-70780,
33-70782, 33-74356 and 333-12187 on Form S-8.

ARTHUR ANDERSEN LLP

San Jose, California

June 27, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN PART II, ITEM 8 OF FORM 10-K DATED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 48,778
<SECURITIES> 83,661
<RECEIVABLES> 54,872
<ALLOWANCES> (3,411)
<INVENTORY> 5,307
<CURRENT-ASSETS> 204,033
<PP&E> 50,912
<DEPRECIATION> (30,035)
<TOTAL-ASSETS> 263,271
<CURRENT-LIABILITIES> 80,015
<BONDS> 0
0
0
<COMMON> 432
<OTHER-SE> 178,964
<TOTAL-LIABILITY-AND-EQUITY> 263,271
<SALES> 189,632
<TOTAL-REVENUES> 240,668
<CGS> 46,493
<TOTAL-COSTS> 61,692
<OTHER-EXPENSES> 139,905
<LOSS-PROVISION> 494
<INTEREST-EXPENSE> (6,087)
<INCOME-PRETAX> 44,664
<INCOME-TAX> 19,571
<INCOME-CONTINUING> 25,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,093
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55

</TABLE>