<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-Q
                            ------------------------
 
(MARK ONE)
 
   [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
                FOR THE QUARTERLY PERIOD ENDED OCTOBER 24, 1997
 
                                       OR
 
   [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
                         FOR THE TRANSITION PERIOD FROM
                               --------------- TO
                                ---------------
 
                         COMMISSION FILE NUMBER 0-27130
                            ------------------------
 
                            NETWORK APPLIANCE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<S>                                           <C>
                  CALIFORNIA                                    77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION          IRS EMPLOYER IDENTIFICATION
               OR ORGANIZATION)
 
   2770 SAN TOMAS EXPRESSWAY, SANTA CLARA,                        95051
                   CALIFORNIA
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                     (ZIP CODE)
</TABLE>

 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 367-3000
 
                            ------------------------
 
     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 the number of shares outstanding of the issuer's class of common
stock, as of the latest practicable date.
 

<TABLE>
<CAPTION>
                                                              OUTSTANDING AT
                    CLASS                                    OCTOBER 24, 1997
- --------------------------------------------------------------------------------------------
<S>                                           <C>
                 Common Stock                                   16,603,188
</TABLE>

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

<PAGE>   2
 
                               TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                                                                        PAGE NO.
                                                                                        --------
<S>        <C>                                                                          <C>

                                 PART I. FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements
           Condensed Consolidated Balance Sheets as of October 24, 1997 and April 30,
             1997.....................................................................       3
           Condensed Consolidated Statements of Income for the three and six-month
             periods ended October 24, 1997 and October 25, 1996......................     4-5
           Condensed Consolidated Statements of Cash Flows for the six-month periods
             ended October 24, 1997 and October 25, 1996..............................       6
           Notes to Condensed Consolidated Financial Statements.......................       7

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
             Operations...............................................................       9
 

                                   PART II. OTHER INFORMATION

Item 1.    Legal Proceedings..........................................................      12

Item 2.    Changes in Securities......................................................      12

Item 3.    Defaults Upon Senior Securities............................................      13

Item 4.    Submission of Matters to a Vote of Securityholders.........................      13

Item 5.    Other Information..........................................................      13

Item 6.    Exhibits and Reports on Form 8-K...........................................      13
SIGNATURE.............................................................................      14
</TABLE>

 
                                        2

<PAGE>   3
 

                         PART I. FINANCIAL INFORMATION
 

ITEM 1. FINANCIAL STATEMENTS
 
                            NETWORK APPLIANCE, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                  OCTOBER 24, 1997     APRIL 30, 1997
                                                                  ----------------     --------------
                                                                    (UNAUDITED)
<S>                                                               <C>                  <C>
                                               ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.....................................      $ 28,520            $ 21,520
  Short-term investments........................................         5,250               6,916
  Accounts receivable, net......................................        23,113              13,911
  Inventories...................................................        11,718               9,920
  Prepaid expenses and other....................................         1,621               1,253
  Deferred taxes................................................         3,139               3,100
                                                                       -------             -------
          Total current assets..................................        73,361              56,620
                                                                       -------             -------
PROPERTY AND EQUIPMENT, NET.....................................        10,231               9,238
OTHER ASSETS....................................................         3,006               3,083
                                                                       -------             -------
                                                                      $ 86,598            $ 68,941
                                                                       =======             =======
 
                                LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..............................................      $  5,424            $  4,415
  Income taxes payable..........................................         3,491               1,023
  Accrued compensation and related benefits.....................         5,164               4,666
  Other accrued liabilities.....................................         2,924               2,280
  Deferred revenue..............................................         3,476               2,317
                                                                       -------             -------
          Total current liabilities.............................        20,479              14,701
                                                                       -------             -------
LONG-TERM OBLIGATIONS...........................................           180                 211
SHAREHOLDERS' EQUITY:
  Common stock..................................................        57,457              54,653
  Retained earnings (Accumulated deficit).......................         8,482                (624)
                                                                       -------             -------
          Total shareholders' equity............................        65,939              54,029
                                                                       -------             -------
                                                                      $ 86,598            $ 68,941
                                                                       =======             =======
</TABLE>

 
     See accompanying notes to condensed consolidated financial statements.
 
                                        3

<PAGE>   4
 
                            NETWORK APPLIANCE, INC.
 
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                         THREE MONTHS ENDED
                                                                -------------------------------------
                                                                OCTOBER 24, 1997     OCTOBER 25, 1996
                                                                ----------------     ----------------
<S>                                                             <C>                  <C>
NET SALES.....................................................      $ 38,401             $ 21,048
COST OF SALES.................................................        15,746                8,582
                                                                     -------              -------
  Gross margin................................................        22,655               12,466
                                                                     -------              -------
 
OPERATING EXPENSES:
  Sales and marketing.........................................         9,672                5,538
  Research and development....................................         3,903                1,980
  General and administrative..................................         1,493                  932
                                                                     -------              -------
          Total operating expenses............................        15,068                8,450
                                                                     -------              -------
INCOME FROM OPERATIONS........................................         7,587                4,016
OTHER INCOME, NET.............................................           229                  261
                                                                     -------              -------
INCOME BEFORE INCOME TAXES....................................         7,816                4,277
PROVISION FOR INCOME TAXES....................................         2,931                1,497
                                                                     -------              -------
NET INCOME....................................................      $  4,885             $  2,780
                                                                     =======              =======
NET INCOME PER SHARE..........................................      $   0.27             $   0.16
                                                                     =======              =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES..........        18,038               17,403
                                                                     =======              =======
 
PRO FORMA NET INCOME PER SHARE (NOTE 7).......................      $   0.14             $   0.08
                                                                     =======              =======
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
  (NOTE 7)....................................................        36,076               34,806
                                                                     =======              =======
</TABLE>

 
     See accompanying notes to condensed consolidated financial statements.
 
                                        4

<PAGE>   5
 
                            NETWORK APPLIANCE, INC.
 
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                -------------------------------------
                                                                OCTOBER 24, 1997     OCTOBER 25, 1996
                                                                ----------------     ----------------
<S>                                                             <C>                  <C>
NET SALES.....................................................      $ 71,821             $ 39,508
COST OF SALES.................................................        29,316               16,176
                                                                     -------              -------
  Gross margin................................................        42,505               23,332
                                                                     -------              -------
 
OPERATING EXPENSES:
  Sales and marketing.........................................        18,165               10,206
  Research and development....................................         7,318                3,703
  General and administrative..................................         2,849                2,152
  Litigation settlement.......................................            --                4,300
                                                                     -------              -------
          Total operating expenses............................        28,332               20,361
                                                                     -------              -------
INCOME FROM OPERATIONS........................................        14,173                2,971
OTHER INCOME, NET.............................................           397                  552
                                                                     -------              -------
INCOME BEFORE INCOME TAXES....................................        14,570                3,523
PROVISION FOR INCOME TAXES....................................         5,464                1,233
                                                                     =======              =======
NET INCOME....................................................      $  9,106             $  2,290
                                                                     =======              =======
NET INCOME PER SHARE..........................................      $   0.51             $   0.13
                                                                     =======              =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES..........        17,837               17,353
                                                                     =======              =======
 
PRO FORMA NET INCOME PER SHARE (NOTE 7).......................      $   0.26             $   0.07
                                                                     =======              =======
PRO FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
  (NOTE 7)....................................................        35,674               34,706
                                                                     =======              =======
</TABLE>

 
     See accompanying notes to condensed consolidated financial statements.
 
                                        5

<PAGE>   6
 
                            NETWORK APPLIANCE, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                -------------------------------------
                                                                OCTOBER 24, 1997     OCTOBER 25, 1996
                                                                ----------------     ----------------
<S>                                                             <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income..................................................      $  9,106             $  2,290
  Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
     Depreciation and amortization............................         2,426                1,274
     Provision for doubtful accounts..........................            91                   --
     Deferred income taxes....................................           (39)                  --
     Deferred rent............................................           (21)                 (36)
     Changes in assets and liabilities:
       Accounts receivable....................................        (9,293)              (5,536)
       Inventories............................................        (1,798)              (3,493)
       Prepaid expenses and other.............................          (433)                (398)
       Accounts payable.......................................         1,009                2,303
       Income taxes payable...................................         2,468                   --
       Accrued compensation and related benefits..............           498                  328
       Other accrued liabilities..............................           644                  356
       Deferred revenue.......................................         1,159                1,115
                                                                     -------             --------
          Net cash provided by (used in) operating
            activities........................................         5,817               (1,797)
                                                                     -------             --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments.........................        (5,250)             (10,851)
  Redemptions of short-term investments.......................         6,916                4,983
  Purchases of property and equipment.........................        (3,262)              (2,214)
                                                                     -------             --------
          Net cash used in investing activities...............        (1,596)              (8,082)
                                                                     -------             --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of long-term obligations.........................           (10)                  (7)
  Proceeds from sale of common stock, net.....................         2,789                  493
                                                                     -------             --------
          Net cash provided by financing activities...........         2,779                  486
                                                                     -------             --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..........         7,000               (9,393)
 
CASH AND CASH EQUIVALENTS:
  Beginning of period.........................................        21,520               24,637
                                                                     -------             --------
  End of period...............................................      $ 28,520             $ 15,244
                                                                     =======             ========
</TABLE>

 
     See accompanying notes to condensed consolidated financial statements.
 
                                        6

<PAGE>   7
 
                            NETWORK APPLIANCE, INC.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
     The accompanying condensed consolidated financial statements have been
prepared by Network Appliance, Inc. (the Company) without audit and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position and the results of operations of the
Company for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles. The results of operations for the
three and six-month periods ended October 24, 1997 are not necessarily
indicative of the operating results to be expected for the full fiscal year or
future operating periods. The information included in this report should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended April 30, 1997 and the risk factors as set
forth in the Company's Annual Report on Form 10-K, including, without
limitation, risks relating to history of operating losses, fluctuating operating
results, dependence on new products, rapid technological change, dependence on
growth in the network file server market, expansion of international operations,
product concentration, changing product mix, competition, recent management
additions, management of expanding operations, dependence on high-quality
components, dependence on proprietary technology, intellectual property rights,
dependence on key personnel, volatility of stock price, shares eligible for
future sale and the effect of certain anti-takeover provisions. Any party
interested in reviewing these publicly available documents should contact the
SEC or the Chief Financial Officer of the Company.
 
 2. INVENTORIES
 
     Inventories consist of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                       OCTOBER 24, 1997   APRIL 30, 1997
                                                       ----------------   --------------
        <S>                                            <C>                <C>
        Purchased components.........................      $  5,785           $6,775
        Work in process..............................         1,747            1,524
        Finished goods...............................         4,186            1,621
                                                            -------           ------
                                                           $ 11,718           $9,920
                                                            =======           ======
</TABLE>

 
 3. COMMON STOCK
 
     On September 25, 1997, the Company's shareholders approved a 1,600,000
share increase in the number of shares of common stock authorized for issuance
under the Network Appliance 1995 Stock Incentive Plan.
 
 4. NET INCOME PER SHARE
 
     Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include stock options (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
anti-dilutive.
 
 5. LITIGATION SETTLEMENT
 
     The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995, a lawsuit of this nature was
filed against the Company and two of its shareholders (the Whipsaw Litigation).
During the first quarter of fiscal 1997, the Company settled the Whipsaw
litigation and
 
                                        7

<PAGE>   8
 
                            NETWORK APPLIANCE, INC.
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)
 
recorded a pre-tax expense of $4.3 million ($3.5 million in payments to the
plaintiffs and $0.8 million in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.
 
 6. 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). The
Company is required to adopt SFAS 128 in the third quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces
current EPS reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
 
     If SFAS 128 had been in effect during the current and prior-year fiscal
periods, net income per share would have been as follows:
 

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED               SIX MONTHS ENDED
                                        ---------------------------     ---------------------------
                                        OCTOBER 24,     OCTOBER 25,     OCTOBER 24,     OCTOBER 25,
                                           1997            1996            1997            1996
                                        -----------     -----------     -----------     -----------
        <S>                             <C>             <C>             <C>             <C>
        Basic.........................     $0.30           $0.17           $0.55           $0.14
        Diluted.......................     $0.27           $0.16           $0.51           $0.13
</TABLE>

 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. The adoption is
not expected to have a material effect on the financial statements.
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). This statement requires that
financial information be reported on the basis used internally for evaluating
segment performance and deciding how to allocate resources to segments. SFAS 131
is effective for fiscal years beginning after December 15, 1997 and requires
restatement of all previously reported information for comparative purposes.
 
  7. SUBSEQUENT EVENT
 
     On November 11, 1997, the Board of Directors approved a two-for-one stock
split of the Company's common stock to be distributed on or about December 18,
1997 to holders of record on December 8, 1997. Pro forma share and per-share
amounts have been presented within the Condensed Consolidated Statements of
Income.
 
                                        8

<PAGE>   9
 

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
 

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED               SIX MONTHS ENDED
                                            ---------------------------     ---------------------------
                                            OCTOBER 24,     OCTOBER 25,     OCTOBER 24,     OCTOBER 25,
                                               1997            1996            1997            1996
                                            -----------     -----------     -----------     -----------
    <S>                                     <C>             <C>             <C>             <C>
    Net Sales.............................     100.0%          100.0%          100.0%          100.0%
    Cost of Sales.........................      41.0            40.8            40.8            40.9
                                               -----           -----           -----           -----
      Gross margin........................      59.0            59.2            59.2            59.1
                                               -----           -----           -----           -----
    Operating Expenses:
      Sales and marketing.................      25.2            26.3            25.3            25.8
      Research and development............      10.2             9.4            10.2             9.4
      General and administrative..........       3.9             4.4             4.0             5.5
      Litigation settlement...............        --              --              --            10.9
                                               -----           -----           -----           -----
              Total operating expenses....      39.3            40.1            39.5            51.6
                                               -----           -----           -----           -----
    Income from operations................      19.7            19.1            19.7             7.5
    Other income, net.....................        .6             1.2              .6             1.4
                                               -----           -----           -----           -----
    Income before income taxes............      20.3            20.3            20.3             8.9
    Provision for income taxes............       7.6             7.1             7.6             3.1
                                               -----           -----           -----           -----
              Net Income..................      12.7%           13.2%           12.7%            5.8%
                                               =====           =====           =====           =====
</TABLE>

 
     Net Sales -- Net sales were $38.4 million for the three months ended
October 24, 1997 and $71.8 million for the six months ended October 24, 1997,
representing increases of 82.4% and 81.8%, respectively, over the comparable
periods of the prior fiscal year. The increase in net sales for these periods
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp(TM) F630, the NetApp F520 and the
NetApp F230. Net sales also grew for the three and six-month periods as a result
of increased multiprotocol system shipments, the licensing of multiprotocol
software to pre-existing customers and increased service and software
subscription revenues due to a growing installed base. For the three and six
months ended October 24, 1997 compared to the corresponding periods of the prior
year, average selling prices were impacted by price reductions on 4 gigabyte
drives.
 
     International net sales (including United States exports) grew by 134.5%
and 149.3% for the three and six-month periods ended October 24, 1997,
respectively, compared to comparable periods of the prior fiscal year.
International net sales were $8.6 million, or 22.5% of total net sales, and
$16.1 million, or 22.4% of total net sales, for the three and six months ended
October 24, 1997, respectively.
 
     There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
 
     Gross Margin -- Gross margin decreased from 59.2% for the three months
ended October 25, 1996 to 59.0% for the three months ended October 24, 1997.
This decrease in gross margin was primarily attributable to price reductions on
4 gigabyte drives, partially offset by the increase in product volume, lower
costs of key components, increased manufacturing efficiencies and by the sale of
the Company's new product line with cost-reduced designs introduced in June and
July 1997. Gross margin was also favorably impacted by the licensing of
multiprotocol software and by growth in software subscription and service
revenues due to a larger installed base.
 
                                        9

<PAGE>   10
 
     Gross margin for the six months ended October 24, 1997 was 59.2%, compared
to 59.1% for the comparable period of the prior fiscal year. This increase in
gross margin was primarily attributable to the increase in product volume, lower
costs of key components, increased manufacturing efficiencies and by the sale of
the Company's new product line with cost-reduced designs introduced in June and
July 1997. Gross margin was also favorably impacted by the licensing of
multiprotocol software and by growth in software subscription and service
revenues due to a larger installed base. Factors contributing to gross margin
growth were partially offset by price reductions on 4 gigabyte drives.
 
     The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, including
software licensing, new product introductions and enhancements and the cost of
components and manufacturing labor. In particular, the Company's gross margin
varies based upon the configuration of systems that are sold and whether they
are sold directly or through indirect channels. Highly configured systems
typically generate lower overall gross margin percentages due to greater disk
drive and memory content.
 
     Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 74.6% from $5.5
million for the three months ended October 25, 1996 to $9.7 million for the
three months ended October 24, 1997. For the six months ended October 24, 1997,
sales and marketing expenses of $18.2 million reflect an increase of 78.0% over
the comparable period of fiscal 1997. These expenses were 25.2% and 26.3% of net
sales for the three months ended October 24, 1997 and October 25, 1996,
respectively, and were 25.3% and 25.8%, respectively, of net sales for the six
months then ended. The increase in absolute dollars was primarily related to the
expansion of the Company's sales and marketing organization, including growth in
the domestic and international direct sales forces and increased commission
expenses. The Company expects to continue to increase its sales and marketing
expenses in an effort to expand domestic and international markets, introduce
new products and establish and expand new distribution channels. The Company
believes that its continued growth and profitability is dependent in part on the
successful expansion of its international operations, and therefore, has
committed significant resources to international sales.
 
     Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 97.1% from $2.0 million for the three months
ended October 25, 1996 to $3.9 million for the three months ended October 24,
1997. These expenses represented 10.2% and 9.4% of net sales for the quarters
ended October 24, 1997 and October 25, 1996, respectively. For the six-month
periods, research and development expenses increased 97.6% from $3.7 million in
fiscal 1997 to $7.3 million in fiscal 1998 and represented 9.4% and 10.2% of net
sales, respectively, for those periods. Expenses for the three and six-month
periods increased as a result of increased headcount, prototyping expenses
associated with the development of new products and ongoing support of current
and future product development and enhancement efforts. The Company believes
that significant investments in research and development will be required to
remain competitive and expects that such expenditures will continue to increase
in absolute dollars. For the three and six months ended October 24, 1997 and
October 25, 1996, no software development costs were capitalized as amounts that
qualified for capitalization were immaterial.
 
     General and Administrative -- General and administrative expenses were $1.5
million in the three months ended October 24, 1997, compared to $0.9 million in
the three months ended October 25, 1996. These expenses represented 3.9% and
4.4%, respectively, of net sales for such periods. For the six-month periods,
general and administrative expenses increased 32.4% from $2.2 million in fiscal
1997 to $2.8 million in fiscal 1998 and represented 5.5% and 4.0% of net sales,
respectively, for those periods. Increases in absolute dollars related primarily
to increased headcount and growth in other expenses, partially offset by reduced
legal fees over the corresponding periods of the prior year. The Company
believes that its general and administrative expenses will increase as the
Company continues to build its infrastructure.
 
     Litigation Settlement -- The computer industry is characterized by frequent
litigation regarding intellectual property rights. During fiscal 1995 a lawsuit
of this nature was filed against the Company and two of its
 
                                       10

<PAGE>   11
 
shareholders (the Whipsaw Litigation). During the first quarter of fiscal 1997,
the Company settled the Whipsaw litigation and recorded a pre-tax expense of
$4.3 million ($3.5 million in payments to the plaintiffs and $0.8 million in
legal fees). In connection with the settlement, the Whipsaw group released the
Company from all liabilities.
 
     Other Income, net -- Other income, net, was $0.2 million and $0.3 million
for the three months ended October 24, 1997 and October 25, 1996, respectively.
During the six months ended October 24, 1997, other income, net was $0.4
million, compared to $0.6 million in the corresponding period of the prior year.
For the six months ended October 24, 1997, other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in the first quarter of fiscal 1998.
 
     Provision for Income Taxes -- The Company's effective tax rate during the
three and six months ended October 24, 1997 was 37.5% compared with 35.0% for
the corresponding periods of the prior year. The higher tax rate in fiscal 1998
relates to increased earnings, which reduce the impact of research and
development and other tax credits on the effective tax rate. Additionally,
fiscal 1997 included a benefit for the reversal of a valuation allowance
previously provided against deferred tax assets which will not occur in fiscal
1998.
 
     The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition; the size and timing of significant orders; product
configuration and mix; market acceptance of new products and product
enhancements; new product announcements or introductions by the Company or its
competitors; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs; supply constraints;
the Company's success in expanding its sales and marketing programs;
technological changes in the network file server market; the mix of sales among
the Company's sales channels; levels of expenditure on research and development;
changes in Company strategy; personnel changes; the Company's ability to
successfully expand international operations; general economic trends and other
factors.
 
     The Company conducts business internationally. Accordingly, the Company's
future operating results could be materially adversely affected by a variety of
uncontrollable and changing factors including foreign currency exchange rates,
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements, and government
spending patterns, among other factors. Although operating results have not been
materially adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry and the Company's
international sales growth and goal to continue international expansion, there
can be no assurance that the Company's future operating results will not be
adversely affected by seasonality.
 
     Sales for any future quarter are not predictable with any significant
degree of certainty. The Company generally operates with limited order backlog
because its products typically are shipped shortly after orders are received. As
a result, product sales in any quarter are generally dependent on orders booked
and shipped in that quarter. Product sales are also difficult to forecast
because the network file server market is rapidly evolving and the Company's
sales cycle varies substantially from customer to customer. A significant
portion of the Company's revenues in any quarter may be derived from sales to a
limited number of customers. Any significant deferral of these sales could have
a material adverse effect on the Company's results of operations in any
particular quarter; and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future sales. As a result, if sales levels are below expectations, net income
may be disproportionately affected. Although the Company has experienced
significant revenue growth in recent periods, the Company does not believe such
growth is indicative of future operating results. The Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indicator of future performance.
Due to all of the foregoing factors, it is possible that in some future quarter
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's common stock
would likely be materially adversely affected.
 
                                       11

<PAGE>   12
 
     This Form 10-Q may contain forward-looking statements about future results
which are subject to risks and uncertainties. Network Appliance's actual results
may differ significantly from the results discussed in the forward-looking
statements. The Company is subject to a variety of other additional risk
factors, more fully described in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     For the six months ended October 24, 1997, the Company's cash, cash
equivalents and short-term investments increased by $5.3 million to $33.8
million. The Company's working capital increased during the six months ended
October 24, 1997 by $11.0 million to $52.9 million. For the six months ended
October 24, 1997, the Company generated cash from operating activities totaling
$5.8 million, principally related to net income of $9.1 million and to an
increase in income taxes payable, partially offset by increases in accounts
receivable and inventories. Net cash used in operating activities during the six
months ended October 25, 1996 principally related to increases in accounts
receivable and inventories, partially offset by net income and increases in
accounts payable.
 
     The Company used $3.3 million and $2.2 million to purchase property and
equipment during the six-month periods ended October 24, 1997 and October 25,
1996, respectively. Net maturities of short-term investments provided $1.7
million for the six months ended October 24, 1997. The Company used $5.9 million
during the six months ended October 25, 1996 for net investment purchases.
Financing activities provided $2.8 million and $0.5 million for the six months
ended October 24, 1997 and October 25, 1996, respectively, due primarily to
proceeds from the exercise of stock options in such periods.
 
     The Company currently has no significant capital commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources are sufficient to fund its operations for at
least the next twelve months.
 
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). The
Company is required to adopt SFAS 128 in the third quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces
current EPS reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.
 
     If SFAS 128 had been in effect during the current and prior-year fiscal
periods, net income per share would have been as follows:
 

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED               SIX MONTHS ENDED
                                        ---------------------------     ---------------------------
                                        OCTOBER 24,     OCTOBER 25,     OCTOBER 24,     OCTOBER 25,
                                           1997            1996            1997            1996
                                        -----------     -----------     -----------     -----------
        <S>                             <C>             <C>             <C>             <C>
        Basic.......................       $0.30           $0.17           $0.55           $0.14
        Diluted.....................       $0.27           $0.16           $0.51           $0.13
</TABLE>

 

 
                          PART II. OTHER INFORMATION
 

ITEM 1. LEGAL PROCEEDINGS
 
     None
 

ITEM 2. CHANGES IN SECURITIES
 
     None
 
                                       12

<PAGE>   13
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
     None
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
 
     The following proposals were voted upon by the Company's shareholders at
the Annual Meeting of Shareholders held on September 25, 1997 (Annual
Shareholders Meeting):
 
     1. The following persons were elected as directors of the Company to serve
        for a term ending upon the next Annual Shareholders Meeting and until
        their successors are elected and qualified:
 

<TABLE>
<CAPTION>
                                                            VOTES FOR      VOTES WITHHELD
                                                            ----------     --------------
        <S>                                                 <C>            <C>
        Daniel J. Warmenhoven.............................  14,918,757         160,082
        Donald T. Valentine...............................  14,968,888         109,951
        Carol A. Bartz....................................  14,971,457         107,382
        Larry R. Carter...................................  14,973,037         105,802
        Michael R. Hallman................................  14,972,351         106,488
        Robert T. Wall....................................  14,973,537         105,302
</TABLE>

 
     2. A proposal to ratify the election of Deloitte & Touche LLP, as the
        Company's independent auditors for the fiscal year ending April 30, 1998
        was approved as follows:
 

<TABLE>
<CAPTION>
 IN FAVOR      OPPOSED     WITHHELD    BROKER NON-VOTES
- ----------     -------     -------     ----------------
<S>            <C>         <C>         <C>
15,030,083     22,464      26,292                 --
</TABLE>

 
     3. To approve a series of amendments to the Company's 1995 Stock Incentive
        Plan, including a 1,600,000 share increase in the maximum number of
        shares of common stock authorized for issuance under the plan:
 

<TABLE>
<CAPTION>
IN FAVOR       OPPOSED      WITHHELD    BROKER NON-VOTES
- ---------     ---------     -------     ----------------
<S>           <C>           <C>         <C>
8,978,284     4,643,943     142,881         1,002,834
</TABLE>

 

ITEM 5. OTHER INFORMATION
 
     None
 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) EXHIBITS
 
     10.12 Facility lease, dated August 18, 1997, by and between McCandless-San
           Tomas No. 2 and the Registrant.
 
     27.1  Financial Data Schedule
 
     (b) REPORTS ON FORM 8-K
 
     On November 26, 1997, the Company filed a current report on Form 8-K
announcing a two-for-one stock split, to be distributed on or about December 18,
1997 to shareholders of record on December 8, 1997.
 
                                       13

<PAGE>   14
 

                                   SIGNATURE
 
     Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
 
                                          NETWORK APPLIANCE, INC.
                                          (Registrant)
 
                                          /s/ JEFFRY R. ALLEN
 
                                          --------------------------------------
                                          By: Jeffry R. Allen
                                          Vice President Finance and
                                          Operations, Chief Financial Officer
                                          (Principal Financial Officer)
 
Date: December 5, 1997
 
                                       14

<PAGE>   15

                               INDEX TO EXHIBITS

Exhibit                           Description
- -------                           -----------
 10.12             Facility lease, dated August 18, 1997, by and between
                   McCandless-San Tomas No. 2 and the Registrant.

 27.1              Financial Data Schedule





<PAGE>   1


                          McCANDLESS - SAN TOMAS NO. 2

                                      AND

                            NETWORK APPLIANCE, INC.

                                     LEASE




<PAGE>   2

                                SUMMARY OF LEASE
                          McCANDLESS - SAN TOMAS NO. 2





<TABLE>
<S>                                            <C>
1.       DATE OF LEASE


2.       LANDLORD:                             McCandless
                                               - San Tomas No. 2
                                               3945 Freedom Circle, Suite 640
                                               Santa Clara, California  95054



3.       TENANT:                               Network Appliance, Inc.,
                                               a California corporation



4.       PREMISES:                             2730 San Tomas
                                               Expressway, Suite 100
                                               Santa Clara, California


5.       SQUARE FEET:                          22,654 sq. ft.



6.       PERMITTED USE:                        General office / research
                                               and development



7.       TERM:                                 Five (5) years

         (a) SCHEDULED COMMENCEMENT DATE:      January 1, 1998

         (b) SCHEDULED EXPIRATION DATE:        December 31, 2002



8.       RENT:

         (a) BASIC RENT:                       $33,981.00 per month (Lease months 1-12)
                                               $35,113.70 per month (Lease months 13-24)
                                               $36,246.40 per month (Lease months 25-36)
                                               $37,379.10 per mouth (Lease months 37-48)
                                               $38,511.80 per month (Lease months 49-60)


         (b) TENANT'S ESTIMATED SHARE OF
             COMMON AREA CHARGES:              $11,327.00 per month

9.       SECURITY DEPOSIT:                     $33,981.00

10.      PARKING SPACES PROVIDED:              Eighty-Five (85)

11.      OTHER IMPORTANT PROVISIONS:           Tenant Improvement Allowance
</TABLE>





THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE
ATTACHED LEASE.  IN THE  EVENT  OF ANY CONFLICT OR INCONSISTENCY THE PROVISIONS
OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL GOVERN.


<PAGE>   3
                               TABLE OF CONTENTS


1.
       USE
2.       TERM
3.       POSSESSION
4.       MONTHLY RENT
5.       ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
6.       RESTRICTION ON USE
7.       COMPLIANCE WITH LAWS
8.       ALTERATIONS
9.       REPAIR AND MAINTENANCE
10.      LIENS
11.      INSURANCE
12.      UTILITIES AND SERVICE
13.      TAXES AND OTHER CHARGES
14.      ENTRY BY LANDLORD
15.      COMMON AREA; PARKING
16.      DAMAGE BY FIRE; CASUALTY
17.      INDEMNIFICATION
18.      ASSIGNMENT AND SUBLETTING
19.      DEFAULT
20.      LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
21.      EMINENT DOMAIN
22.      NOTICE AND COVENANT TO SURRENDER
23.      TENANT'S QUITCLAIM
24.      HOLDING OVER
25.      SUBORDINATION
26.      CERTIFICATE OF ESTOPPEL
27.      SALE BY LANDLORD
28.      ATTORNMENT TO LENDER OR THIRD PARTY
29.      DEFAULT BY LANDLORD
30.      CONSTRUCTION CHANGES
31.      MEASUREMENT OF PREMISES
32.      ATTORNEY FEES
33.      SURRENDER
34.      WAIVER
35.      EASEMENTS; AIRSPACE RIGHTS
36.      RULES AND REGULATIONS
37.      NOTICES
38.      NAME
39.      GOVERNING LAW; SEVERABILITY
40.      DEFINITIONS
41.      TIME
42.      INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
43.      ENTIRE AGREEMENT
44.      CORPORATE AUTHORITY
45.      RECORDING
46.      EXHIBITS AND ATTACHMENTS
47.      REAL ESTATE BROKERS
48.      ENVIRONMENTAL MATTERS
49.      SIGNAGE
50.      SUBMISSION OF LEASE
51.      PREMISES TAKEN "AS IS"
52.      ADDITIONAL RENT

<PAGE>   4
53.      LANDLORD'S OPTION TO RELOCATE PREMISES
54.      TENANT IMPROVEMENT ALLOWANCE
55.      EARLY ACCESS
56.      CAPITAL IMPROVEMENTS

<PAGE>   5
                                  OFFICE LEASE




         THIS LEASE is made this 18th day of August of
1997, by and between McCANDLESS - SAN TOMAS NO. 2, a California
general partnership ("Landlord"), and NETWORK APPLIANCE, INC., a
California corporation ("Tenant").



                              W I T N E S S E T H:



         Landlord leases to Tenant and Tenant leases from Landlord those
certain premises outlined in red on Exhibit A (the "Premises") commonly known
as 2730 San Tomas Expressway, Suite 100, Santa Clara, California, which
Landlord and Tenant hereby agree consists of approximately twenty-two thousand
six hundred fifty-four (22,654) square feet.  As used herein the term "Project"
shall mean and include all of the land described in Exhibit B and all the
buildings, improvements, fixtures and equipment now or hereafter situated on
said land.

         Tenant covenants, as a material part of the consideration of this
lease, to perform and observe each and all of the terms, covenants and
conditions set forth below, and this lease is made upon the condition of such
performance and observance.


         1.      USE

                 Subject to the restrictions contained in paragraph 6, Tenant
shall use the Premises for general office use, light manufacturing and research
and development and shall not use or permit the Premises to be used for any
other purpose.

         2.      TERM

The term shall be for five (5) years (unless sooner terminated as hereinafter
provided) and, subject to paragraph 3, shall commence on January 1, 1998 and
end on December 31, 2002.

         3.      POSSESSION

                 (a)      If Landlord for any reason cannot deliver possession
of the Premises to Tenant by the scheduled commencement date set forth in
paragraph 2, this lease shall not be void or voidable, Landlord shall not be
liable to Tenant for any loss or damage on account thereof and Tenant shall not
be liable for rent until Landlord delivers possession of the Premises to
Tenant.  If the term





                                       1

<PAGE>   6


commences on a date other than the date specified in paragraph 2 above, then
the parties shall immediately execute an amendment to this lease stating (or a
letter acknowledging) the actual date of commencement and the revised
expiration date.  The expiration date of the term shall be extended by the same
number of days that Tenant's possession of the Premises was delayed from that
set forth in paragraph 2.

                 (b)      Tenant's inability or failure to take possession of
the Premises when delivery is tendered by Landlord shall not delay the
commencement of the term of this lease or Tenant's obligation to pay rent.
Tenant acknowledges that Landlord shall incur significant expenses upon the
execution of this lease, even if Tenant never takes possession of the Premises,
including without limitation brokerage commissions and fees, legal fees and
other professional fees.  Tenant acknowledges that all of said expenses shall
be included in measuring Landlord's damages should Tenant breach the terms of
this lease.

         4.      MONTHLY RENT

                 (a)      Basic Rent.  Tenant shall pay to Landlord as basic
rent for the Premises, in advance and subject to adjustment as provided in
paragraph 5, the sum of Thirty-Three Thousand Nine Hundred Eighty-one Dollars
($33,981.00) on or before the first day of the first full calendar month of the
term and on or before the first day of each and every successive calendar
month.  Basic rent for any partial month shall be payable in advance and shall
be prorated based on the actual number of days during the lease term occurring
in such month divided by the total number of days in such month.

                 (b)      Direct Expenses.  In addition to the above basic rent
and as additional rent, Tenant shall pay to Landlord, subject to adjustment and
reconciliation as provided in paragraph 5(b) of this lease, the sum of Eleven
Thousand Three Hundred Twenty-Seven Dollars ($11,327.00) on or before the first
day of the first full calendar month of the term and on the first day of each
and every successive calendar month, said sum representing Tenant's estimated
payment of its percentage share of direct expenses as provided for in paragraph
5(b) of this lease.  Payment for direct expenses for any partial month shall be
payable in advance and shall be prorated based on the actual number of days
during the lease term occurring in such month divided by the total number of
days in such month.

                 (c)      Manner and Place of Payment.  All payments of basic
rent and direct expenses shall be paid to Landlord, without deduction or
offset, in lawful money of the United States of America, at the office of
Landlord at 3945 Freedom Circle, Suite 640, Santa Clara, California 95054, or
to such other person or place as Landlord may from time to time designate in
writing.





                                       2

<PAGE>   7

                 (d)      First Month's Rent. On or before December 1, 1997,
Tenant shall deposit with Landlord the sum of Forty-Five Thousand Three Hundred
Eight Dollars ($45,308.00) to be applied against the basic rent and direct
expenses for the first lease month of the term.

                 (e)      Security Deposit.  Concurrently with Tenant's
execution of this lease, Tenant shall deposit with Landlord the sum of
Thirty-Three Thousand Nine Hundred Eighty-One Dollars ($33,981.00), which sum
shall be held by Landlord as a security deposit for the faithful performance by
Tenant of all of the terms, covenants and conditions of this lease to be kept
and performed by Tenant.  If Tenant defaults with respect to any provision of
this lease, including but not limited to the provisions relating to the payment
of basic rent and direct expenses, Landlord may (but shall not be required to)
use, apply or retain all or any part of this security deposit for the payment
of any amount which Landlord may spend by reason of Tenant's default or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default.  If any portion of said deposit is so used, Tenant
shall, within ten (10) days after written demand therefor, deposit cash with
Landlord in the amount sufficient to restore the security deposit to its
original amount; Tenant's failure to do so shall be a material breach of this
lease.  Landlord shall not be required to keep this security deposit separate
from its general funds and Tenant shall not be entitled to interest on such
deposit.  If Tenant is not in default at the expiration or termination of this
lease, the security deposit or any balance thereof shall be returned to Tenant
within thirty (30) days after Tenant has vacated the Premises.  In the event of
termination of Landlord's interest in this lease, Landlord shall transfer said
deposit to Landlord's successor in interest, and Tenant agrees that Landlord
shall thereupon be released from liability for the return of such deposit or
any accounting therefor.

         5.      ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES

                 (a)      Adjustments to Basic Rent.  The basic rent provided
for in paragraph 4(a) shall be adjusted periodically and the monthly basic rent
for each period shall be as set forth below:

                 Lease Months 1 - 12 $33,981.00 per month

                 Lease Months 13 - 24 $35,113.70 per month

                 Lease Months 25 - 36 $36,246.40 per month

                 Lease Months 37 - 48 $37,379.10 per month

                 Lease Months 49 - 60 $38,511.80 per month







                                       3

<PAGE>   8
                 (b)      Adjustments to Direct Expenses.  Tenant's percentage
share of the direct expenses of the Project shall be nine and fifty-three
one-hundredths percent (9.53%) and Tenant's percentage share of the direct
expenses of the building in which the Premises are located shall be forty-eight
and sixty-seven one-hundredths percent (48.67%).

                 Tenant shall be required to pay to Landlord, as additional
rent in accordance with paragraph 4(b) of this lease, Tenant's percentage share
of direct expenses for each calendar year (or portion thereof) during the term
of this lease.  Tenant's estimated share of the monthly direct expenses payable
by Tenant during the calendar year in which the term commences is set forth in
paragraph 4(b) of this lease.  A written estimate of Tenant's monthly share of
direct expenses for each succeeding calendar year shall be delivered to Tenant
prior to the commencement of each such succeeding calendar year (or as soon as
practicable thereafter).  Tenant shall pay to Landlord in accordance with
paragraph 4(b) of this lease its monthly share of direct expenses as estimated
by Landlord.  Landlord reserves the right to revise such written estimate
during a calendar year if Landlord's actual or projected direct expenses shows
an increase or decrease in excess of ten percent (10%) from that of an earlier
written estimate delivered to Tenant, and if Landlord elects to revise the
earlier estimate, Landlord shall deliver the revised estimate to Tenant,
together with an explanation of the reasons therefor, and Tenant shall revise
its payments accordingly.  Statements of the actual direct expenses for the
calendar year in which the term commences and for each succeeding calendar year
(herein called "statement of actual direct expenses") shall be delivered to
Tenant within one hundred twenty (120) days following the expiration of each
such calendar year (or as soon as practicable thereafter).  If the statement of
actual direct expenses for any such calendar year shows that Tenant's
percentage share of actual direct expenses for the year is in excess of the
aggregate amount Tenant has paid as direct expenses for that calendar year,
Tenant shall pay such excess to Landlord within thirty (30) days after receipt
of the statement of actual direct expenses.  In the event that any statement of
actual direct expenses shall show that Tenant has paid Landlord an aggregate
amount in excess of the actual direct expenses for the preceding calendar year
and Tenant is not in default in the performance or observance of any of the
terms, covenants or conditions of this lease at the time such statement of
actual direct expenses is delivered, Landlord shall, at its option, promptly
either refund such excess to Tenant or credit the amount thereof to the monthly
direct expenses next becoming due from Tenant.  The respective obligations of
Landlord and Tenant under this paragraph shall survive the expiration or other
termination of this lease.

                 As used in this lease, "direct expenses" shall include, but
not be limited to, (i) real property taxes, assessments, and other costs
identified as direct expenses in paragraph 13, (ii) insurance premiums and other
costs identified as direct expenses in 





                                       4

<PAGE>   9
paragraph 11, (iii) the cost of all utilities and services including water, gas
and sewer charges, electricity, heat, air conditioning, refuse collection, and
janitorial services identified as direct expenses in paragraph 12, (iv) the
costs of operating and maintaining the Common Area identified as direct expenses
in paragraph 15, including, but not limited to, the landscaping, elevators,
parking lots, paving, sidewalks, showers, and security and exterminator
services, (v) the costs and expenses of maintaining and repairing the Project
identified as direct expenses in paragraph 9, (vi) the cost of certain
alterations identified as direct expenses in paragraph 8, (vii) amortization of
such capital improvements having a useful life greater than one year as Landlord
may have installed for the purpose of reducing operating costs and/or to comply
with all laws, rules and regulations of federal, state, county, municipal and
other governmental authorities now or hereafter in effect (Tenant's share of
such capital improvement shall equal Tenant's percentage share of the fraction
of the cost of such capital improvement equal to the remaining term of the lease
over the useful life of such capital improvement), (viii) wages, salaries,
employee benefits (including union benefits) and related expenses of all on-
site and off-site personnel engaged in the operation and maintenance of the
Project (or the building in which the Premises are located) and payroll taxes
applicable thereto and all costs incurred to maintain a management office in or
near the Project (including, without limitation, rental payments therefor or the
reasonable rental value of the space so occupied), (ix) supplies, materials,
equipment and tools used or required in connection with the operation and
maintenance of the Project, (x) licenses, permits and inspection fees, (xi) all
other operating costs incurred by Landlord in maintaining and operating the
Project, and (xii) an amount equal to five percent (5%) of the actual
expenditures for the aggregate of all other direct expenses as compensation for
Landlord's accounting and processing services.  The following shall not
constitute "direct expenses" for the purposes of this lease, and nothing
contained herein shall be deemed to require Tenant to pay any of the following:
(i) legal fees, brokerage commissions, advertising costs and other related
expenses incurred in connection with the leasing of the Project; (ii) damage and
repairs covered under any warranty or insurance policy carried by Landlord in
connection with the Building or Project for which Landlord does not incur any
cost, or such cost is reimbursed to Landlord; (iii) damage and repairs
necessitated by the negligence or willful misconduct of Landlord or Landlord's
employees, contractors or agents; (iv) executive salaries of Landlord (i.e.
persons above the level of Property Manager); (v) payments of principal or
interest on any mortgage or other encumbrance including ground lease payments
and points, commissions and legal fees associated with financing the Project;
(vi) initial costs of construction of the Project; (vii) legal fees,
accountants, fees and other expenses incurred in connection with disputes with
other tenants or occupants of the Project or associated with the enforcement of
any leases or defense of Landlord's title to or interest in the Building or any
part





                                       5

<PAGE>   10

thereof; (viii) costs (including permit, license and inspection fees) incurred
in renovating or otherwise improving, decorating, painting or altering space
for other tenants in the Project; (ix) costs incurred due to violation by
Landlord or any other tenant in the Project of the terms and conditions of any
lease; (x) the cost of any service provided to Tenant or other occupants of the
Project f or which Landlord is otherwise reimbursed; (xi) charitable or
political contributions; (xii) any cost or expense related to the testing for,
removal, transportation or storage of Hazardous Materials from the Project;
(xiii) interest, penalties or other costs arising out of Landlord's failure to
make timely payments of its obligations (except if disputed by Landlord in good
faith); (xiv) costs incurred in advertising and promotional activities for the
Project; and (xv) costs to repair the structural elements of the building,
including, without limitation, the exterior walls and the roof structure (not
the roof membrane).

         6.      RESTRICTION ON USE

                 Tenant shall not do or permit to be done in or about the
Premises or the Project, nor bring or keep or permit to be brought or kept in
or about the Premises or Project, anything which is prohibited by or will in
any way increase the existing rate of, or otherwise affect, fire or any other
insurance covering the Project or any part thereof , or any of its contents, or
will cause a cancellation of any insurance covering the Project or any part
thereof, or any of its contents.  Tenant shall not do or permit to be done
anything in or about the Premises or the Project which will constitute waste or
which will in any way obstruct or interfere with the rights of other tenants or
occupants of the Project or injure or annoy them, or use or allow the Premises
to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit
any nuisance in or about the Premises or the Project.  No loudspeaker or other
device, system or apparatus which can be heard outside the Premises shall be
used in or at the Premises without the prior written consent of Landlord.
Tenant shall not use the Premises for sleeping, washing clothes, cooking or in
any manner that will cause or emit any objectionable odor, noise or light into
the adjoining premises or Common Area.  Tenant, shall not do anything on the
Premises that will cause damage to the Project and Tenant shall not overload
the floor capacity of the Premises or the Project.  No machinery, apparatus or
other appliance shall be used or operated in or on the Premises that will in
any manner injure, vibrate or shake the Premises.  Landlord shall be the sole
judge of whether such odor, noise, light or vibration is such as to violate the
provisions of this paragraph 6. No waste materials or refuse shall be dumped
upon or permitted to remain upon any part of the Premises or the Project by
Tenant, Tenant's agents, contractors, employees and invitees, except in trash
containers placed inside exterior enclosures designated for that purpose by
Landlord, or where otherwise designated by Landlord; and no toxic or hazardous
materials shall be disposed of through the plumbing or sewage system by Tenant,
Tenant's agents, contractors, employees and invitees.  





                                       6

<PAGE>   11
No materials, supplies, equipment, finished products or semi-finished products,
raw materials or articles of any nature shall be stored or permitted to remain
outside of the building proper.  No retail sales shall be made on the Premises.

         7.      COMPLIANCE WITH LAWS

                 Tenant shall, in connection with its use and occupation of the
Premises, at its sole cost and expense, promptly observe and comply with (i)
all laws, statutes, ordinances and governmental rules, regulations and
requirements of federal, state, county, municipal and other governmental
authorities, now or hereafter in effect, which shall impose any duty on
Landlord or Tenant with respect to the use, occupancy or alteration of the
Premises, (ii) with the requirements of any board of fire underwriters or other
similar body now or hereafter constituted and (iii) with any direction or
occupancy certificate issued pursuant to law by any public authority; provided,
however, that no such failure shall be deemed a breach of these provisions if
Tenant, immediately upon notification, commences to remedy or rectify said
failure.  Notwithstanding the foregoing, Tenant's obligation regarding
alterations to the Premises and/or Project required by law shall be as
specified in paragraph 8 below.  The judgment of any court of competent
jurisdiction or the admission of Tenant in any action against Tenant (whether
or not Landlord is a party thereto), that Tenant has violated any such law,
statute, ordinance or governmental rule, regulation, requirement, direction or
provision, shall be conclusive of that fact as between Landlord and Tenant.
This lease shall remain in full force and effect notwithstanding any loss of
use or other effect on Tenant's enjoyment of the Premises by reason of any
governmental laws, statutes, ordinances, rules, regulations and requirements
now or hereafter in effect.  Tenant shall comply with any covenant, condition
or restriction ("C.C.& R.'s") affecting the Premises.

         8.      ALTERATIONS

                 Tenant shall not make or suffer to be made any alteration,
addition or improvement to or of the Premises or any part thereof (collectively
referred to herein as "alterations") without (i) the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed, (ii) a
valid building permit issued by the appropriate governmental authority and
(iii) otherwise complying with all applicable laws, regulations and
requirements of governmental agencies having jurisdiction and with the rules,
regulations and requirements of any board of fire underwriters or similar body.
Notwithstanding the foregoing, Tenant shall have the right to make
non-structural alterations to the Premises which do not affect the Building
systems and which cost less than Ten Thousand Dollars ($10,000) each (and not
more than Twenty-Five Thousand Dollars ($25,000) in the aggregate in any period
of twelve (12) consecutive months) without the prior written consent of
Landlord, provided that (a) Tenant gives Landlord prior





                                       7

<PAGE>   12

written notice of the nature and scope of the alterations, the cost of the
alterations and the contractors engaged to perform the work, and (b) such
alterations shall otherwise be made in accordance with the terms of this lease
(including compliance with clauses (ii) and (iii) of the preceding sentence.)
Landlord's consent to any requested alteration shall not create on the part of
Landlord or cause Landlord to incur any responsibility or liability for such
alteration's compliance with all laws, rules and regulations of federal, state,
county, municipal and other governmental authorities.  Any alteration made by
Tenant (excluding moveable furniture and trade fixtures not attached to the
Premises) shall at once become a part of the Premises and belong to Landlord.
Without limiting the foregoing, all heating, lighting, electrical (including
all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air
conditioning, partitioning, drapery, window covering and carpet installations
made by Tenant, regardless of how attached to the Premises, together with all
other alterations that have become an integral part of the Project in which the
Premises are a part, shall be and become part of the Premises and belong to
Landlord upon installation and shall not be deemed trade fixtures and, subject
to Landlord's right to require removal and restoration as specified herein,
shall remain upon and be surrendered with the Premises at the termination of
the lease.

                 If Landlord consents to the making of any alteration by Tenant,
the same shall be made by Tenant at its sole risk, cost and expense and only
after Landlord's written approval of any contractor or person selected by Tenant
for that purpose, and the same shall be made at such time and in such manner as
Landlord may from time to time designate, provided that Tenant shall not be
required to incur overtime charges in connection therewith. Tenant shall, if
required by Landlord, secure at Tenant's cost a completion and lien indemnity
bond for such work. Upon the expiration or sooner termination of the term,
Landlord may, at its sole option, require Tenant, at Tenant's sole cost and
expense, to promptly remove any such alteration made by Tenant and designated by
Landlord to be removed, repair any damage to the Premises caused by such removal
and restore the Premises to their condition prior to Tenant's alteration, unless
Landlord agrees, otherwise in writing. Any moveable furniture and equipment or
trade fixtures remaining on the Premises at the expiration-or other termination
of the term shall become the property of the Landlord; provided, however, in
addition to all other remedies available to Landlord at law or in equity,
Landlord may (i) require Tenant to remove same or (ii) remove same at Tenant's
cost, and Tenant shall be liable to Landlord for all damages incurred by
Landlord related thereto.

                 If during the term any alteration, addition or change of the
Premises, the Common Area, the Project or the building in which the Premises are
located is required by law, regulation, ordinance or order of any public
authority due to Tenant's specific use of the Premises (as opposed to office or
research and development uses generally) or alterations or improvements
voluntarily made to the





                                       8

<PAGE>   13

Premises by Tenant, Tenant, at its sole cost and expense, shall promptly make
the same.  If during the term any alterations, additions or chances to the
Premises or to the Common Area or to the Project or building in which the
Premises are located is required by law, regulation, ordinance or order of any
public or quasi-public authority, for which Tenant is not responsible as
specified in the preceding sentence, Landlord shall make such alterations,
additions or changes and the cost thereof shall be a direct expense charge and,
subject to paragraph 56 below, Tenant shall pay its percentage share of said
costs to Landlord as Provided in paragraphs 4 and 5.  Notwithstanding the
above, direct expenses shall not include and Tenant shall not he responsible
for the cost of any alterations, additions or changes which are required by law
to be made to the Premises 1 the Common Area or the Project prior to the
commencement date of this Lease.

                 Notwithstanding any provision to the contrary in this lease,
Landlord has approved the alterations shown on the floor plans attached hereto
as Exhibit C, subject to the terms and conditions specified therein and the
consent letter attached hereto as Exhibit D.

         9.      REPAIR AND MAINTENANCE

                 Landlord represents and warrants to Tenant that, as of the
commencement date of this Lease, all of the Building systems, including but not
1imited to the mechanical, electrical, plumbing and sewage systems, shall be in
good working condition and repair.  Subject to paragraph 16, Landlord shall
maintain and keep in good repair the Common Area and the mechanical electrical,
plumbing and sewage systems, windows, window frames, plate glass, glazing,
elevator;, gutters and downspouts, the roof, exterior walls, structural
elements and the heating, ventilating and air conditioning systems (excepting
special air conditioning of Tenant's computer room(s) as set forth below) of
the Premises and the Project; provided, however, that Landlord shall not be
required to perform repairs made necessary by the negligence or abuse of such
improvements or property by Tenant or its employees, agents, subtenants or
permitees to the extent the cost thereof is not covered by insurance maintained
by Landlord.  The cost of all maintenance and repairs made by Landlord pursuant
to this paragraph 9, including without limitation maintenance contracts and
supplies, materials, equipment and tools used in such repairs and maintenance,
shall be direct expenses and Tenant shall pay its percentage share of such
costs to Landlord as provided in paragraphs 4 and 5.

                 By entry hereunder, subject to Landlord's representations in
the preceding paragraph, Tenant accepts the Premises as being in good and
sanitary order, condition and repair.  Subject to paragraphs 16 and 21, and
excepting repairs and maintenance required by this paragraph 9 to be made by
Landlord, Tenant at its cost shall keep the interior, non-structural parts of
the Premises





                                       9

<PAGE>   14

and every part thereof in good and sanitary order, condition and repair and
Tenant shall be solely responsible f or the cost and maintenance of, and
electricity supplied to, any special air conditioning for Tenant's computer
facilities.  Further, Tenant shall repair (or, at the option of Landlord,
reimburse Landlord if Landlord elects to repair) damage to improvements or
other property located on or about the Project where such repairs are made
necessary by the negligence of or abuse of such improvement or other property
by Tenant or its employees, agents, subtenants or permitees.  However, in no
event shall Tenant's obligation to repair under this paragraph extend to (i)
damage and repairs to the extent the cost thereof is covered under any
insurance policy carried by Landlord as provided in paragraph 11 below; (ii)
damage caused in whole or in part by the negligence or willful misconduct of
Landlord or Landlord's agents, contractors or employees; (iii) conditions
covered under any warranties of Landlord's contractors Tenant waives all rights
and benefits under California Civil Code Sections 1932(l), 1941, and 1942 and
under any similar law, statute or ordinance now or hereafter in effect or (iv)
repairs included in direct expenses as specified above in this paragraph 9
(provided, however, Tenant shall pay its percentage share of such direct
expenses).

         10.     LIENS

                 Tenant shall keep the Premises and the Project free any liens
arising out of any work performed, materials furnished or obligations incurred
by Tenant, its agents, employees or contractors.  Upon Tenant's receipt of a
preliminary twenty (20) day notice filed by a claimant pursuant to California
Civil Code Section 3097, Tenant shall immediately provide Landlord with a copy
of such notice.  Should any lien be recorded against the Project, Tenant shall
give immediate notice of such lien to Landlord.  In the event that Tenant shall
not, within ten (10) business days following the imposition of such lien, cause
the same to be released of record, Landlord shall have, in addition to all
other remedies provided herein and by law, the right, but no obligation, to
cause the same to be released by such means as it shall deem proper, including
payment of the claim giving rise to such lien.  All sums paid by Landlord for
such, and all expenses (including reasonable attorneys, fees) incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the rate of ten percent (10%) per annum or the maximum rate
permitted by law, whichever is less.  Landlord shall have the right at all
times to post and keep posted on the Premises any notices permitted or required
by law, or which Landlord shall deem proper for the protection of Landlord, the
Premises and the Project and any other party having an interest therein, from
mechanics' and materialmen's liens and like liens.  Tenant shall give Landlord
at least ten (10) days, prior notice of the date of commencement of any
construction on the Premises in order to permit the posting of such notices. In
the event Tenant is required to post an improvement bond with a public agency
in connection with any work





                                       10

<PAGE>   15

performed by Tenant on or to the Premises, Tenant shall include Landlord as an
additional obligee.

         11.     INSURANCE

                 Tenant, at its sole cost and expense, shall keep in force
during the term (i) commercial general liability and property damage insurance
with a combined single limit of at least $2,000,000 per occurrence insuring
against personal or bodily injury to or death of persons occurring in, on or
about the Premises or Project and any and all liability of the insureds with
respect to the Premises or arising out of Tenant's maintenance, use or
occupancy of the Premises and all areas appurtenant thereto, (ii) direct
physical loss-special insurance covering the leasehold improvements in the
Premises and all of Tenant's equipment, trade fixtures, appliances, furniture,
furnishings, and personal property from time to time located in, on or about
the Premises, with coverage in the amount of the full replacement cost thereof,
and (iii) Worker's Compensation Insurance as required by law, together with
employer's liability coverage with a limit of not less than $1,000,000 for
bodily injury for each accident and for bodily injury by disease for each
employee.  Tenant's commercial general liability and property damage insurance
and Tenant's Workers Compensation Insurance shall be endorsed to provide that
said insurance shall not be cancelled or reduced except upon at least thirty
(30) days prior written notice to Landlord.  Further, Tenant's commercial
general liability and property damage insurance shall be primary and shall be
endorsed to provide that Landlord and McCandless Management Corporation, and
their respective partners, officers, directors and employees and such other
persons or entities as directed from time to time by Landlord shall be named as
additional insureds for all liability using ISO Bureau Form CG20111185 (or a
successor form) or such other endorsement form reasonably acceptable to
Landlord; shall contain a severability of interest clause and a cross-liability
endorsement; shall be endorsed to provide that the limits and aggregates apply
per location using ISO Bureau Form CG25041185 (or a successor form) or such
other endorsement form reasonably acceptable to Landlord; and shall be issued
by an insurance company admitted to transact business in the State of
California and rated A+VIII or better in Best's Insurance Reports (or successor
report).  The deductibles for all insurance required to be maintained by Tenant
hereunder shall be reasonably satisfactory to Landlord.  The commercial general
liability insurance carried by Tenant shall specifically insure the performance
by Tenant of the indemnification provisions set forth in paragraph 17 of this
lease provided, however, nothing contained in this paragraph 11 shall be
construed to limit the liability of Tenant under the indemnification provisions
set forth in said paragraph 17.  If Landlord or any of the additional insureds
named on any of Tenant's insurance, have other insurance which is applicable to
the covered loss on a contributing, excess or contingent basis, the amount of
the Tenant's insurance company's liability under the policy of insurance
maintained by Tenant shall





                                       11

<PAGE>   16

not be reduced by the existence of such other insurance.  Any insurance carried
by Landlord or any of the additional insureds named on Tenant's insurance
policies shall be excess and non-contributing with the insurance so provided by
Tenant.

                 Tenant shall, prior to the commencement of the term and at
least thirty (30) days prior to any renewal date of any insurance policies
required to be maintained by Tenant pursuant to this paragraph, provide
Landlord with a completed Certificate of Insurance, using a form acceptable in
Landlord's reasonable judgement, attaching thereto copies of all endorsements
required to be provided by Tenant under this lease.  Tenant agrees to increase
the coverage or otherwise comply with changes in connection with said
commercial general liability, property damage, direct physical loss and
Worker's Compensation Insurance as Landlord or Landlord's lender may from time
to time reasonably require exercising reasonable business judgment, but in no
event more than once in any two (2) year period.

                 Landlord shall obtain and keep in force a policy or policies
of insurance covering loss or damage to the Premises and Project, in the amount
of the full replacement value thereof, providing protection against those
perils included within the classification of "all risk" insurance, with
increased cost of reconstruction and contingent liability (including
demolition), plus a policy of rental income insurance in the amount of one
hundred percent (100%) of twelve (12) months' rent (including sums paid as
additional rent) and such other insurance as Landlord or Landlord's lender may
from time to time require.  Landlord may, but shall not be obligated to, obtain
flood and/or earthquake insurance.  Landlord shall have no liability to Tenant
if Landlord elects not to obtain flood and/or earthquake insurance.  The cost
of all such insurance purchased by Landlord, plus any charges for deferred
payment of premiums and the amount of any deductible incurred upon any covered
loss within the Project, shall be direct expenses and Tenant shall pay to
Landlord its percentage share of such costs as provided in paragraphs 4(b) and
5(b).  Notwithstanding any provision to the contrary herein, in the event that
Tenant's percentage share of the deductible for earthquake insurance exceeds
Seventy-Five Thousand Dollars ($75,000), the amount of such excess shall be
amortized in equal monthly installments over the ten (10) year period from the
date of the casualty (including interest at the rate of ten percent (10%) per
year and Tenant shall pay each such monthly installment which arises during the
term of this lease (and any extended term) at the same time and in the same
manner as payments of basic rent are due hereunder and Tenant shall not be
obligated for the unamortized portion of the deductible remaining at the end of
the lease term.  If the cost of insurance is increased due to Tenant's use of
the Premises, then Tenant shall pay to Landlord upon demand the full cost of
such increase.





                                       12

<PAGE>   17
                 Landlord and Tenant hereby mutually waive any and all rights
of recovery against one another for real or personal property loss or damage
occurring to the Premises or the Project, or any part thereof, or to any
personal property therein, from perils insured against under fire and extended
insurance and any other property insurance policies existing for the benefit of
the respective parties.  The property insurance coverage obtained by each party
pursuant to this lease shall include, without limitation, a waiver or
subrogation by the carrier which conforms to the provisions of this paragraph.

                 If Tenant does not take out and maintain insurance as required
pursuant to this paragraph 11, Landlord may, but shall not be obligated to,
take out the necessary insurance and pay the premium therefor, and Tenant
shall repay to Landlord promptly on demand, as additional rent, the amount so
paid.  In addition, Landlord may recover from Tenant and Tenant agrees to pay,
as additional rent, any and all reasonable expenses (including attorney fees)
and damages which Landlord may sustain by reason of the failure of Tenant to
obtain and maintain such insurance, it being expressly declared that the
expenses and damages of Landlord shall not be limited to the amount of the
premiums thereon.

         12.     UTILITIES AND SERVICE

                 Landlord shall furnish to the Premises and to the Project,
during reasonable business hours of generally recognized business days (i.e.,
Mondays through Fridays from 7 a.m. to 7 p.m. and Saturdays 9 a.m. through 4
p.m., excluding locally and nationally recognized holidays), to be determined
by Landlord in Landlord's reasonable discretion, and subject to the rules and
regulations of the Project, reasonable quantities of water, gas and electricity
suitable for the intended use of the Premises and the Project, heat and air
conditioning required in Landlord's judgment for the comfortable use and
occupation of the Premises and the Project, refuse collection and janitorial
services.  Tenant agrees that at all times it will cooperate fully with
Landlord and abide by all regulations and requirements that Landlord may
prescribe for the proper functioning and protection of the heating, ventilating
and air conditioning systems.  The cost of all utilities and services furnished
by Landlord to the Premises and to the Project shall be direct expenses and
Tenant shall pay its percentage share of such costs to Landlord as provided in
paragraphs 4 and 5. In addition, Tenant shall pay to Landlord the reasonable
cost of providing HVAC during non-business hours.  The current hourly charge
for such additional HVAC is $25.00 per hour, subject to change in Landlord's
reasonable discretion.

                 Landlord shall not be liable for, and Tenant shall not be
entitled to any abatement or reduction of rent by reason of, Landlord's failure
to furnish any of the foregoing services when such failure is caused by
accident, breakage, repairs, strikes, lockouts or other labor disturbances or
labor disputes of any





                                       13

<PAGE>   18
character, governmental moratoriums, regulations or other governmental actions,
or by any other cause, similar or dissimilar, beyond the reasonable control of
Landlord.  In addition, Tenant shall not be relieved from the performance of
any covenant or agreement in this lease because of any such failure, and no
eviction of Tenant shall result from such failure.

                 Tenant will not, without the written consent of Landlord, use
any apparatus or device in the Premises (including, without limitation,
electronic data processing machines, punch card machines or machines using
current in excess of 110 volts) which will in any way increase the amount of
electricity, water or air conditioning usually furnished or supplied to
premises in the Project being used as general office space, or connect with
electric current (except through existing electrical outlets in the Premises)
or with water pipes any apparatus or device for the purpose of using electric
current or water.  If Tenant shall require water or electric current in excess
of that usually furnished or supplied to premises in the Project being used as
general office space, then Tenant shall first obtain the written consent of
Landlord, which consent shall not be unreasonably withheld, and Tenant shall
pay to Landlord promptly on demand, as additional rent, the full cost of such
excess use.  Landlord may cause an electric current or water meter to be
installed in the Premises in order to measure the amount of electric current or
water consumed for any such excess use.  The cost of any such meter and of the
installation, maintenance and repair thereof, and all charges for such excess
water and electric current consumed (as shown by meters and at the rates then
charged by the furnishing public utility) plus any additional expense incurred
by Landlord in keeping account of electric current or water so consumed, shall
be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon
demand by Landlord.  Whenever heat generating machines or equipment are used in
the Premises by Tenant which affect the temperature otherwise maintained by the
air conditioning system, Landlord shall have the right to install supplementary
air conditioning units in the Premises and the cost thereof, including the cost
of installation and the cost of operation and maintenance thereof, shall be
paid by Tenant to Landlord upon demand by Landlord as additional rent.

                 Tenant shall install, at Tenant's cost, a by-pass timer (to be
approved by Landlord) to monitor and measure Tenant's usage of HVAC system
after normal business hours to permit billing for excess usage as provided
above.

         13.     TAXES AND OTHER CHMGES

                 All real estate taxes and assessments and other taxes, fees
and charges of every kind or nature, foreseen or unforeseen, which are levied,
assessed or imposed upon Landlord and/ or against the Premises, building,
Common Area or Project or any part thereof by any federal, state, county,
regional, municipal or other





                                       14

<PAGE>   19

governmental or quasi-governmental or special district authority, together with
any increases therein whether resulting from increased rate and/or valuation,
shall be a direct expense and Tenant shall pay its percentage share of such
costs to Landlord as provided in paragraphs 4 and 5. By way of illustration and
not limitation, "other taxes, fees and charges" as used herein include any and
all taxes payable by Landlord (other than state and federal personal or
corporate income taxes measured by the net income of Landlord from all sources,
premium taxes and Landlord's franchise, estate, inheritance and gift taxes),
whether or not now customary or within the contemplation of the parties hereto,
(i) upon, allocable to, or measured by the rent payable hereunder, including,
without limitation, any gross income or excise tax levied by the local, state
or federal government with respect to the receipt of such rent, (ii) upon or
with respect to the possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any part
thereof, (iii) upon or measured by the value of Tenant's personal property or
leasehold improvements located in the Premises, (iv) upon this transaction or
any document to which Tenant is a party creating or transferring an interest or
estate in the Premises, (v) upon or with respect to vehicles, parking or the
number of persons employed on or about the Project, and (vi) any tax, license,
franchise fee or other imposition upon Landlord which is otherwise measured by
or based in whole or in part upon the Project or any portion thereof.  The
following shall not constitute real property taxes for the purposes of this
lease, and nothing contained herein shall be deemed to require Tenant to pay
any of the following: (i) any state, local, federal, personal or corporate
income tax measured by the net income of Landlord (as opposed to rents or
receipts); (ii) any estate or inheritance taxes; (iii) any franchise,
succession or transfer taxes; (iv) interest on taxes or penalties resulting
from Landlord's failure to pay taxes; or (v) any increases in taxes
attributable to additional improvements to the Project to the extent such
improvements are above building standard and constructed for one tenant's sole
benefit.  If Landlord contests any such tax, fee or charge, the cost and
expense incurred by Landlord thereby (including, but not limited to, reasonable
costs of attorneys and experts) shall also be direct expenses and Tenant shall
pay its percentage share of such costs to Landlord as provided in paragraphs 4
and 5. In the event the Premises and any improvements installed therein by
Tenant or Landlord are valued by the assessor disproportionately higher than
those of other tenants in the building or Project or in the event alterations
or improvements are made to the Premises, Tenant's percentage share of such
taxes, assessments, fees and/or charges shall be readjusted upward accordingly
and Tenant agrees to pay such readjusted share.  Such determination shall be
made by Landlord from the respective valuations assigned in the assessor's work
sheet or such other information as may be reasonably available and Landlord's
determination thereof shall be conclusive.





                                       15

<PAGE>   20
                Tenant agrees to pay, before delinquency, any and all taxes
levied or assessed during the term hereof upon Tenant's equipment, furniture,
fixtures and other personal property located in the Premises, including
carpeting and other property installed by Tenant notwithstanding that such
carpeting or other property has become a part of the Premises.  If any of
Tenant's personal property shall be assessed with the Project, Tenant shall pay
to Landlord, as additional rent, the amounts attributable to Tenant's personal
property within ten (10) business days after receipt of a written statement from
Landlord setting forth the amount of such taxes, assessments and public charges
attributable to Tenant's personal property.

         14.     ENTRY BY LANDLORD

                 Landlord reserves, and shall at all reasonable times have, the
right to enter the Premises (i) to inspect the Premises, (ii) to supply
services to be provided by Landlord hereunder, (iii) to show the Premises to
prospective purchasers, lenders or tenants and during the last six (6) months
of the term only to put I for sale' or 'for lease' signs thereon, (iv) to post
notices required or allowed by this lease or by law, (v) to alter, improve or
repair the Premises and any portion of the Project, and (vi) to erect
scaffolding and other necessary structures in or through the Premises or the
Project where reasonably required by the character of the work to be performed.
Any such entry onto the Premises by Landlord shall be preceded by notice
thereof to Tenant at lease twenty-four (24) hours in advance (except in the
case of emergency, in which event no such notice shall be necessary) and
conducted in a reasonable manner, with due consideration to minimizing
interference to Tenant and Tenant's use of the Premises.  Landlord shall not be
liable in any manner for any inconvenience, disturbance, loss of business,
nuisance or other damage arising from Landlord's entry and acts pursuant to
this paragraph 14 and Tenant shall not be entitled to an abatement or reduction
of rent if Landlord exercises any rights reserved in this paragraph 14.  For
each of the foregoing purposes, Landlord shall at all times have and retain a
key with which to unlock all of the doors in, on and about the Premises
(excluding Tenant's vaults, safes and similar areas designated in writing by
Tenant in advance), and Landlord shall have the right to use any and all means
which Landlord may deem proper to open said doors in an emergency in order to
obtain entry to the Premises.  Any entry by Landlord to the Premises pursuant
to this paragraph 14 shall not under any circumstances be construed or deemed
to be a forcible or unlawful entry into or a detainer of the Premises or an
eviction, actual or constructive, of Tenant from the Premises or any portion
thereof.

         15.     COMMON AREA; PARKING

                 Subject to the terms and conditions of this lease and such
rules and regulations as Landlord may from time to time prescribe, Tenant and
Tenant's employees and invitees shall, in





                                       16

<PAGE>   21

common with other occupants of the Project, and their respective employees and
invitees and others entitled to the use thereof, have the nonexclusive right
to use those areas of the Common Area designated by Landlord for the general
use and convenience of the occupants of the Project (which areas and facilities
shall include, but not be limited to, common lobbies, corridors, restrooms and
showers; telephone, electrical, janitorial and mechanical rooms; elevators,
stairwells, vertical duct shafts; sidewalks; parking, refuse, landscape and
plaza areas; roofs; building exteriors; electrical, mechanical, plumbing and
HVAC systems; and storage areas), which areas and facilities are referred to
herein as "Common Area".  This right shall terminate upon the termination of
this lease.

                 Landlord reserves the right from time to time to make changes
in the shape, size, location, amount and extent of the Common Area.  Landlord
shall also have the right at any time to change the name, number or designation
by which the Project is commonly known.  Landlord further reserves the right to
promulgate such rules and regulations relating to the use of the Common Area,
and any part thereof, as Landlord may deem appropriate for the best interests
of the occupants of the Project.  The rules and regulations shall be binding
upon Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by
them and cooperate in their observance.  Such rules and regulations may be
amended by Landlord from time to time, with or without advance notice.

                 Tenant shall have the nonexclusive use of eighty-five (85)
parking spaces in the Common Area as designated from time to time by Landlord.
Landlord reserves the right at its sole option to assign and label parking
spaces, but it is specifically agreed that Landlord is not responsible for
policing any such parking spaces.  Tenant shall not at any time park or permit
the parking of Tenant's trucks or other vehicles, or the trucks or other
vehicles of others, adjacent to loading areas so as to interfere in any way
with the use of such areas; nor shall Tenant at any time park or permit the
parking of Tenant's vehicles or trucks, or the vehicles or trucks of Tenant's
suppliers or others, in any portion of the Common Area not designated by
Landlord for such use by Tenant.  Tenant shall not park or permit any
inoperative vehicle or equipment to be parked on any portion of the Common
Area.

                 Landlord shall operate, manage and maintain the Common Area.
The manner in which the Common Area shall be operated, managed and maintained
and the expenditures for such operation, management and maintenance shall be at
the sole discretion of Landlord.  Subject to the express limitations of
paragraph 5(b) hereof, the cost of such maintenance, operation and management
of the Common Area, together with the costs of security and exterminator
services and salaries and employee benefits (including union benefits) of
on-site and accounting personnel engaged in such maintenance and operations
management, shall be a direct expense





                                       17

<PAGE>   22

and Tenant shall pay to Landlord its percentage share of such costs as provided
in paragraphs 4 and 5.

         16.     DAMAGE BY FIRE; CASUALTY

                 In the event the Premises are damaged by any casualty which is
covered under an insurance policy required to be maintained by Landlord
pursuant to paragraph 11, Landlord shall be entitled to the use of all
insurance proceeds and shall repair such damage as soon as reasonably possible
and this lease shall continue in full force and effect.

                 In the event the Premises are damaged by any casualty not
covered under an insurance policy required to be maintained pursuant to
paragraph 11, Landlord may, at Landlord's option, either (i) repair such
damage, at Landlord's expense, as soon as reasonably possible, in which event
this lease shall continue in full force and effect, or (ii) give written notice
to Tenant within thirty (30) days after the date of the occurrence of such
damages of Landlord's intention to cancel and terminate this lease as of the
date of the occurrence of the damages; provided, however, that if such damage
is caused by an act or omission of Tenant or its agent, servants or employees
and the cost thereof is not covered by insurance maintained by Landlord, then
Tenant shall repair such damage promptly at its sole cost and expense.  In the
event Landlord elects to terminate this lease pursuant hereto, Tenant shall
have the right within ten (10) days after receipt of the required notice to
notify Landlord in writing of Tenant's intention to repair such damage at
Tenant's expense, without reimbursement from Landlord, in which event this
lease shall continue in full force and effect and Tenant shall proceed to make
such repairs as soon as reasonably possible.  If Tenant does not give such
notice within the ten (10) day period, this lease shall be cancelled and
terminated as of the date of the occurrence of such damage.  Under no
circumstances shall Landlord be required to repair any injury or damage to (by
fire or other cause), or to make any restoration or replacement of, any of
Tenant's personal property, trade fixtures or property leased from third
parties, whether or not the same is attached to the Premises.

                 Notwithstanding any provision to the contrary above, if thirty
percent (30%) or more of the Premises are damaged or destroyed during the term
from any cause (including any destruction required by any authorized public
authority) , whether or not covered by the insurance required under paragraph
11, if in Landlord's reasonable business judgment the Premises cannot reasonably
and lawfully be repaired or restored within nine (9) months of the date of
destruction to substantially the condition existing prior to such damage or
destruction, then either Landlord or Tenant may elect within thirty (30) days
after the date of such determination to terminate this lease effective as of the
date of such damage or destruction. If the Premises are totally destroyed during
the last twelve (12) months of the term, either Landlord or 






                                       18


<PAGE>   23
Tenant may at its option cancel and terminate this lease as of the date of
occurrence of such damage by giving written notice to the other of its election
to do so within thirty (30) days after the occurrence of such damage.

                 If the Premises are partially or totally destroyed or damaged
and Landlord or Tenant repair them pursuant to this lease, the rent payable
hereunder for the period during which such damage and repair continues shall be
abated only to the extent that Landlord received proceeds from any policy of
rental income insurance.  Tenant shall have no claim against Landlord for any
damage, loss or expense suffered by reason of any such damage, destruction,
repair or restoration. The parties waive the provisions of California Civil
Code Sections 1932(2) and 1933(4) (which provisions permit the termination of a
lease upon destruction of the leased premises), and hereby agree that the
provisions of this paragraph 16 shall govern in the event of such destruction.

         17.     INDEMNIFICATION

                 Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Project by
or from any cause whatsoever except (i) the failure of Landlord to perform its
obligations under this lease where such failure has persisted for an
unreasonable period of time after notice of such failure or (ii) the negligence
or willful misconduct of Landlord or Landlord's agents, employees or
contractors.  Without limiting the foregoing, Landlord shall not be liable to
Tenant for any injury to or death of any person or damages to or destruction of
property by reason of, or arising from, any latent defect in the Premises or
Project or the act or negligence of any other tenant of the Project.  Tenant
shall immediately notify Landlord of any defect in the Premises or Project
actually known by Tenant.

                 Except as to injury to persons or damage to property the
principal cause of which is (i) the failure by Landlord to observe any of the
terms and conditions of this lease or (ii) the negligence or willful misconduct
of Landlord or Landlord's agents, employees or contractors, Tenant shall hold
Landlord harmless from and indemnify and defend Landlord against any claim,
liability, loss, damage or expense (including attorney fees) arising out of any
injury to or death of any person or damage to or destruction of property
occurring in, on or about the Premises from any cause whatsoever or on account
of the use, condition, occupational safety or occupancy of the Premises.
Tenant shall further hold Landlord harmless from and indemnify and defend
Landlord against any claim, liability, loss, damage or expense (including
attorney fees) arising (i) from Tenant's use of the Premises or from the
conduct of its business or from any activity or work done, permitted or
Suffered by Tenant or its agents or employees in or about the





                                       19

<PAGE>   24

Premises or Project, (ii) out of the failure of Tenant to observe or comply
with Tenant's obligation to observe and comply with laws or other requirements
as set forth in paragraph 7, (iii) by reason of Tenant's use, handling,
storage, or disposal of toxic or hazardous materials or waste, (iv) by reason
of any labor or service performed for, or materials used by or furnished to,
Tenant or any contractor engaged by Tenant with respect to the Premises, or (v)
from any other act, neglect, or fault of Tenant or its agents, contractors or
employees.

                 The provisions of this paragraph 17 shall survive the
expiration or earlier termination of this lease.

         18.     ASSIGNMENT AND SUBLETTING

                 Tenant shall not voluntarily assign, encumber or otherwise
transfer its interest in this lease or in the Premises, or sublease all or any
part of the Premises, or allow any other person or entity to occupy or use all
or any part of the Premises, without first obtaining Landlord's written
consent, which consent shall not be unreasonably withheld or delayed, and
otherwise complying with the requirements of this paragraph 18.  Any
assignment, encumbrance or sublease without Landlord's consent, shall
constitute a default.

                 If Tenant desires to sublet or assign all or any portion of
the Premises, Tenant shall give Landlord written notice thereof, specifying the
projected commencement date of the proposed sublet or assignment (which date
shall be not less than thirty (30) days or more than one hundred eighty (180)
days after the date of Landlord's receipt of such notice), the portions of the
Premises proposed to be sublet or assigned, the terms and conditions of the
proposed assignment or sublease (including the rent to be paid by the proposed
assignee or subtenant) and the name, address and telephone number of the
proposed assignee or subtenant.  Tenant shall further provide Landlord with
such other information concerning the proposed assignee or subtenant as
requested by Landlord.  Except for an assignment or sublet to a Tenant
Affiliate (as defined below) or an assignment or sublet that terminates on or
before May 31, 2000, for a period of thirty (30) days after Landlord's receipt
of Tenant's written notice, Landlord shall have the option, exercisable by
delivering written notice to Tenant, to terminate this lease as of the date
specified in Landlord's written notice to Tenant, which date shall not be less
than thirty (30) days nor more than ninety (90) days after the date of
Landlord's written notice to Tenant.  If Landlord exercises its option to
terminate this lease as provided in the foregoing sentence, Landlord may, if it
so elects, enter into a new lease for the Premises or any portion thereof with
the proposed assignee or subtenant or any other third party on such terms as
Landlord and such proposed assignee or subtenant or other third party may
agree; in such event, Tenant shall not be entitled to any portion of the





                                       20

<PAGE>   25
profit, if any, which Landlord may realize on account of such termination and
reletting.

                 If Landlord does not elect to terminate this lease as provided
hereinabove in this paragraph 18 and if Landlord consents in writing to the
proposed assignment or sublet, Tenant shall be free to assign or sublet all or
a portion of the Premises subject to the following conditions: (i) any sublease
shall be on the same terms set forth in the notice given to Landlord; (ii) no
sublease shall be valid and no subtenant shall take possession of the sublet
premises until an executed counterpart of such sublease has been delivered to
Landlord; (iii) no subtenant shall have a further right to sublet; (iv) any
sums or other economic consideration received by Tenant as a result of such
assignment or sublet (except rental or other payments received which are
attributable to the amortization over the term of this lease of the cost of
leasehold improvements constructed for such assignees or subtenant, and
brokerage fees) whether denominated rentals or otherwise, which exceed, in the
aggregate, the total sums which Tenant is obligated to pay Landlord under this
lease (prorated to reflect obligations allocable to that portion of the
Premises subject to such sublease), shall be payable to Landlord as additional
rent under this lease without affecting or reducing any other obligation of
Tenant hereunder; (v) no sublet or assignment shall release Tenant of Tenant's
obligation or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder; and (vi) any
assignee or subtenant must expressly agree to assume and perform all of the
covenants and conditions of Tenant under this lease.  Tenant shall pay to
Landlord promptly upon demand as additional rent, Landlord's reasonable
attorneys, fees and other costs incurred for reviewing, processing or
documenting any requested assignment or sublease, whether or not Landlord's
consent is granted.  Tenant shall not be entitled to assign this lease or
sublease all or any part of the Premises (and any attempt to do so shall be
voidable by Landlord) during any period in which Tenant is in default under
this lease.

                 If Tenant is a partnership, a withdrawal or change, voluntary
or involuntary or by operation of law, of any general partner or the
dissolution of the partnership shall be deemed an assignment of this lease
subject to all the conditions of this paragraph 18.  If Tenant is a
corporation any dissolution, merger, consolidation or other reorganization of
Tenant or the sale or other transfer of a controlling percentage of the capital
stock of Tenant or the sale of more than fifty percent (50%) of the value of
Tenant's assets shall be an assignment of this lease subject to all the
conditions of this paragraph 18.  The term "controlling percentage" means the
ownership of, and the right to vote, stock possessing more than 50% of the
total combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote.  This paragraph shall not apply if Tenant is
a corporation the stock of which is traded through an exchange.





                                       21

<PAGE>   26
                 The acceptance of rent by Landlord from any other person shall
not be deemed to be a waiver by Landlord of any provision hereof.  Consent to
one assignment or sublet shall not be deemed consent to any subsequent
assignment or sublet.  In the event of default by any assignee of Tenant or any
successor of Tenant in the performance of any of the terms hereof, Landlord may
proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor.  Landlord may consent to subsequent
assignments or sublets of this lease or amendments or modifications to this
lease with assignees of Tenant, without notifying Tenant, or any successor of
Tenant, and without obtaining its or their consent thereto and such action
shall not relieve Tenant of liability under this lease.

                 No interest of Tenant in this lease shall be assignable by
operation of law (including, without limitation, the transfer of this lease by
testacy or intestacy).  Each of the following acts shall be considered an
involuntary assignment: (i) if Tenant is or becomes bankrupt or insolvent,
makes an assignment for the benefit of creditors or institutes a proceeding
under the Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a
partnership or consists of more than one person or entity, if any partner of
the partnership or other person or entity is or becomes bankrupt or insolvent,
or makes an assignment for the benefit of creditors; (ii) if a writ of
attachment or execution is levied on this lease; or (iii) if , in any
proceeding or action to which Tenant is a party, a receiver is appointed with
authority to take possession of the Premises.  An involuntary assignment shall
constitute a default by Tenant and Landlord shall have the right to elect to
terminate this lease, in which case this lease shall not be treated as an asset
of Tenant.

                 Tenant immediately and irrevocably assigns to Landlord, as
security for Tenant's obligations under this lease, all rent from any
subletting of all or a part of the Premises as permitted by this lease, and
Landlord, as assignee of Tenant, or a receiver of Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this lease; except that, until the occurrence of an act or
default by Tenant, Tenant shall have the right to collect such rent, subject to
promptly forwarding to Landlord any portion thereof to which Landlord is
entitled pursuant to this paragraph 18.

                 Notwithstanding the above, Tenant may assign this Lease or
sublet any portion of the Premises without Landlord's consent to any of the
following (i) any corporation which controls, is controlled by or under common
control with Tenant; (ii) any corporation resulting from the merger or
consolidation of Tenant and (iii) any person or entity which acquires all of
the assets of Tenant as a going concern of the business that is being conducted
on the Premises, including this lease (collectively, "Tenant Affiliate"),
provided that (a) such Tenant Affiliate assumes in full the obligations of
Tenant under this lease; (b) the Tenant





                                       22

<PAGE>   27

Affiliate's financial condition is adequate in Landlord's reasonable discretion
to support the lease obligations of the Tenant Affiliate under the assignment
or sublease, and, in the case of a merger, consolidation or acquisition, the
Tenant Affiliate, or in all other cases, the Tenant and the Tenant Affiliate
together, shall have a net worth, computed in accordance with generally
accepted accounting principles, which is equal to or greater than the net worth
of Tenant herein named immediately prior to such transfer, (c) proof
satisfactory to Landlord of such net worth shall have been delivered to
Landlord at least ten (10) days prior to the effective date of any such
transaction, (d) Tenant shall give written notice to Landlord of such
assignment and otherwise comply with the terms of this paragraph 18 (excluding
only the requirement to obtain Landlord's prior written consent), and (e)
Tenant (if a separate entity) shall continue to be jointly and severally liable
under this lease.

         19.     DEFAULT

                 The occurrence of any of the following shall constitute a
default by Tenant: (i) failure of Tenant to pay any rent or other sum payable
hereunder within five (5) days after the date that such payment becomes due;
(ii) abandonment of the Premises (Tenant's failure to occupy and conduct
business in the Premises for fourteen (14) consecutive days shall be deemed an
abandonment); (iii) failure of Tenant to deliver to Landlord any instrument,
assurance, financial statement, subordination agreement or certificate of
estoppel required under this Lease within the time period specified for such
performance if the failure continues for five (5) business days after written
notice of the failure from Landlord to Tenant; or (iv) failure of Tenant to
perform any other obligation under this lease if the failure to perform is not
cured within thirty (30) days after written notice thereof has been given to
Tenant (provided that if such default cannot reasonably be cured within thirty
(30) days, Tenant shall not be in default if Tenant commences to cure such
failure to perform within the thirty (30) day period and diligently and in good
faith continues to cure the failure to perform), except in the case of an
emergency or dangerous condition, in which case Tenant's time to perform shall
be that time period which is reasonable under the circumstances.  The notice
referred to in clauses (iii) and (iv) above shall specify the failure to perform
and the applicable lease provision and shall demand that Tenant perform the
provisions of this lease within the applicable period of time.  No notice shall
be deemed a forfeiture or termination of this lease unless Landlord so elects in
the notice.  No notice shall be required in the event of abandonment or vacation
of the Premises.

                 In addition to the above, the occurrence of any of the
following events shall also constitute a default by Tenant: (i) Tenant fails to
pay its debts as they become due or admits in writing its inability to pay its
debts, or makes a general assignment for the benefit of creditors; (ii) Tenant
fails to





                                       23

<PAGE>   28

furnish to Landlord a schedule of Tenant's aged accounts payable within ten
(10) days after Landlord's written request; or (iii) any financial statements
given to Landlord by Tenant, any assignee of Tenant, subtenant of Tenant, any
guarantor of Tenant, or successor in interest of Tenant (including, without
limitation, any schedule of Tenant's aged accounts payable) are materially
false.  At any time during the term of this lease Landlord, at Landlord's
option, shall have the right to receive from Tenant, upon Landlord's request, a
current annual balance sheet for Landlord's review.  If the balance sheet shows
a negative net worth, Landlord may terminate this lease by giving Tenant sixty
(60) days prior written notice.

                 In the event of a default by Tenant, then Landlord, in
addition to any other rights and remedies of Landlord at law or in equity,
shall have the right either to terminate Tenant's right to possession of the
Premises (and thereby terminate this lease) or, from time to time and without
termination of this lease to relet the Premises or any part thereof for such
term and on such terms and conditions as Landlord in its sole discretion may
deem advisable, with the right to make alterations and repairs to the Premises
and such reletting shall not be deemed a termination of this lease.

                 Should Landlord elect to keep this lease in full force and
effect, Landlord shall have the right to enforce all of Landlord's rights and
remedies under this lease, including but not limited to the right to recover
and to relet the Premises and such other rights and remedies as Landlord may
have under California Civil Code Section 1951.4 (or successor Code section) or
any other California statute.  If Landlord relets the Premises, then Tenant
shall pay to Landlord, as soon as ascertained, the costs and expenses incurred
by Landlord in such reletting and in making alterations and repairs.  Rentals
received by Landlord from such reletting shall be applied (i) to the payment of
any indebtedness due hereunder, other than basic rent and direct expenses, from
Tenant to Landlord, (ii) to the payment of the cost of any repairs necessary to
return the Premises to good condition normal wear and tear excepted, including
the cost of alterations and the cost of storing any of Tenant's property left
on the Premises at the time of reletting, and (iii) to the payment of basic
rent or direct expenses due and unpaid hereunder.  The residue, if any, shall
be held by Landlord and applied in payment of future rent or damages in the
event of termination as the same may become due and payable hereunder and the
balance, if any at the end of the term of this lease, shall be paid to Tenant.
Should the basic rent and direct expenses received from time to time from such
reletting during any month be less than that agreed to be paid during that
month by Tenant hereunder, Tenant shall pay such deficiency to Landlord.  Such
deficiency shall be calculated and paid monthly.  No such reletting of the
Premises by Landlord shall be construed as election on its part to terminate
this lease unless a notice of such intention if given to Tenant or unless the
termination hereof





                                       24

<PAGE>   29


is decreed by a court of competent jurisdiction.  Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect to
terminate this lease for such previous breach, provided it has not been cured.

                 Should Landlord at any time terminate this lease for any
breach, in addition to any other remedy it may have, it shall have the
immediate right of entry and may remove all persons and property from the
Premises and shall have all the rights and remedies of a landlord provided by
California Civil Code Section 1951.2 or any successor code section.  Upon such
termination, in addition to all its other rights and remedies, Landlord shall
be entitled to recover from Tenant all damages it may incur by reason of such
breach, including the cost of recovering the Premises and including (i) the
worth at the time of award of the unpaid rent which had been earned at the time
of termination, (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided, (iii) the worth at the time of the award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided, (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this lease or which in the ordinary course of events would be likely to
result therefrom.  The "worth at the time of award" of the amounts referred to
in (i) and (ii) above is computed by allowing interest at the lesser of the
rate of ten percent (10%) per annum or the maximum rate permitted by law.  The
"worth at the time of award" of the amount referred to in (iii) above shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).  Tenant
waives the provisions of Section 1179 of the California Code of Civil Procedure
(which Section allows Tenant to petition a court of competent jurisdiction for
relief against forfeiture of this lease).  Property removed from the Premises
may be stored in a public or private warehouse or elsewhere at the sole cost
and expense of Tenant.  In the event that Tenant shall not immediately pay the
cost of storage of such property after the same has been stored for a period of
thirty (30) days or more, Landlord may sell any or all thereof at a public or
private sale in such manner and at such times and places that Landlord, in its
sole discretion, may deem proper, without notice to or demand upon Tenant.

         20.     LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT

                 Landlord, at any time after Tenant commits a default (as
specified in paragraph 19 above), may, but shall not be obligated to, cure the
default at Tenant's cost.  If Landlord at any time, by reason of Tenant's
default, pays any sum or does any act that requires the payment of any sum, the
sum paid by Landlord shall be





                                       25

<PAGE>   30

due immediately from Tenant to Landlord and shall bear interest at the rate of
ten percent (10%) per annum or the maximum rate permitted by law, whichever is
less, from the date the sum is paid by Landlord until Landlord is reimbursed by
Tenant.  Amounts due Landlord hereunder shall be additional rent.

         21.     EMINENT DOMAIN

                 If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the condemnor,
and Landlord shall be entitled to any and all payments, income, rent, award or
any interest therein whatsoever which may be paid or made in connection with
such taking or conveyance.  Tenant shall have no claim against Landlord or
otherwise for the value of any unexpired term of this lease.  Notwithstanding
the foregoing, Tenant shall be entitled to any compensation for depreciation to
and cost of removal of Tenant's equipment and fixtures and any compensation for
its relocation expenses necessitated by such taking, but in each case only to
the extent the condemning authority makes a separate award therefor or
specifically identifies a portion of the award as being therefor.  Each party
waives the provisions of Section 1265.130 of the California Code of Civil
Procedure (which section allows either party to petition the Superior Court to
terminate this lease in the event of a partial taking of the Premises).

                 If any action or proceeding is commenced for such taking of
the Premises or any portion thereof or of any other space in the Project, or if
Landlord is advised in writing by any entity or body having the right or power
of condemnation of its intention to condemn the premises or any portion thereof
or of any other space in the Project, and Landlord shall decide to discontinue
the use and operation of the Project or decide to demolish, alter or rebuild
the Project, then Landlord shall have the right to terminate this lease by
giving Tenant written notice thereof within sixty (60) days of the earlier of
the date of Landlord's receipt of such notice of intention to condemn or the
commencement of said action or proceeding.  Such termination shall be effective
as of the last day of the calendar month next following the month in which
such notice is given or the date on which title shall vest in the condemnor,
whichever occurs first.

                 In the event of a partial taking, or conveyance in lieu
thereof, of the Premises and fifty percent (50%) or more of the number of
square feet in the Premises are taken then Tenant may terminate this lease.
Any election by Tenant to so terminate shall be by written notice given  to
Landlord within sixty (60) days from the date of such taking or conveyance and
shall be effective on the last day of the calendar month next following the
month in which such notice is given or the date on which title shall vest in
the condemnor, whichever occurs first.





                                       26

<PAGE>   31
                 If a portion of the Premises is taken by power of eminent
domain or conveyance in lieu thereof and neither Landlord nor Tenant terminates
this lease as provided above, then this lease shall continue in full force and
effect as to the part of the Premises not so taken or conveyed and all payments
of rent shall be apportioned as of the date of such taking or conveyance so
that thereafter the amounts to be paid by Tenant shall be in the ratio that the
area of the portion of the Premises not so taken bears to the total area of the
Premises prior to such taking.

         22.     NOTICE AND COVENANT TO SURRENDER

                 On the last day of the term or on the effective date of any
earlier termination, Tenant shall surrender to Landlord the Premises in its
condition existing as of the commencement of the term, normal wear and tear and
damage due to casualty or the failure of Landlord to fulfill Landlord's
obligations to maintain and repair the Premises as provided for herein
excepted, and, except as otherwise provided by Landlord pursuant to the terms
of paragraph 8 of this lease, all of the improvements and alterations made to
the Premises in their condition existing as of the date of completion of
construction and/or installation (normal wear and tear excepted), interior
vinyl covered walls cleaned and repaired or replaced if marked or damaged, to
the reasonable satisfaction of Landlord.  On or prior to the last day of the
term or the effective date of any earlier termination, Tenant shall remove all
of Tenant's personal property and trade fixtures, together with improvements or
alterations that Tenant is obligated to remove pursuant to the provisions of
paragraph 8 of this lease, from the Premises, and all such property not removed
shall be deemed abandoned.  In addition, on or prior to the expiration or
earlier termination of this lease, Tenant shall remove, at Tenant's sole cost
and expense, all telephone, other communication, computer and any other cabling
and wiring or any sort installed in the space above the suspended ceiling of
the Premises or anywhere else in the Premises and shall promptly repair any
damage to the suspended ceiling, lights, light fixtures, walls and any other
part of the Premises resulting from such removal.

                 If the Premises are not surrendered as required in this
paragraph 22, Tenant shall indemnify Landlord against all loss, liability and
expense (including, but not limited to, reasonable attorney fees) resulting
from the failure by Tenant in so surrendering the Premises, including, without
limitation, any claims made by any succeeding tenants.  It is agreed between
Landlord and Tenant that the provisions of this paragraph 22 shall survive
termination of this lease.

         23.     TENANT'S QUITCLAIM

                 At the expiration or earlier termination of this lease, tenant
shall execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any





                                       27

<PAGE>   32

quitclaim deed or other document required to remove the cloud or encumbrance
created by this lease from the real property of which the Premises are a part.
This obligation shall survive said expiration or termination.

         24.     HOLDING OVER

                 Any holding over after the expiration or termination of this
lease with the written consent of Landlord shall be construed to be a tenancy
from month-to-month at the monthly rent then agreed upon by Landlord and
Tenant, but in no event less than the monthly rent payable under this lease for
the last lease month before the date of such expiration or termination.  All
provisions of this lease, except (i) as modified by the preceding sentence and
(ii) those provisions pertaining to the term, expansion rights and any option
to extend, shall apply to the month-to-month tenancy.

                 If Tenant shall retain possession of the Premises or any part
thereof without Landlord's written consent following the expiration or sooner
termination of this lease for any reason, then Tenant shall pay to Landlord for
each day of such retention during the first thirty (30) days of this holdover
period one hundred fifty percent (150%) of the amount of the daily rental in
effect during the last lease month prior to the date of such expiration or
termination, and for each day of such retention after the first thirty (30)
days of such holdover two hundred percent (200%) of the amount of the daily
rental in effect during the last lease month prior to the date of such
expiration or termination.  The term "daily rental" as used in the preceding
sentence shall mean the monthly rental divided by thirty.  Acceptance of rent
by Landlord following expiration or termination shall not constitute a renewal
of this lease, and nothing contained in this paragraph shall waive Landlord's
right of re-entry or any other right.  Tenant shall be only a Tenant at
sufferance, whether or not Landlord accepts any rent from tenant, while Tenant
is holding over without Landlord's written consent.

                 The provisions of this paragraph 24 are in addition to, and do
not affect, Landlord's right of re-entry or other rights hereunder or provided
by law.  Nothing in this paragraph 24 shall be construed as implied consent by
Landlord to any holding over by Tenant.  Landlord expressly reserves the right
to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease on expiration or other termination of this Lease.  The
provisions of this paragraph 24 shall not be considered to limit or constitute
a waiver of any other rights or remedies of Landlord provided in this Lease or
at law.  The provisions of this paragraph 25 shall survive the expiration or
early termination of this lease.

         25.     SUBORDINATION

                 In the event Landlord's title or leasehold interest is now or
hereafter encumbered in order to secure a loan to Landlord,





                                       28

<PAGE>   33

Tenant shall, at the request of Landlord or the lender, execute in writing an
agreement subordinating its rights under this lease to the lien of such
encumbrance, or, if so requested, agreeing that the lien of lender's
encumbrance shall be or remain subject and subordinate to the rights of Tenant
under this lease.  Notwithstanding any such subordination, Tenant's possession
under this lease shall not be disturbed if Tenant is not in default and so long
as Tenant shall pay all amounts due hereunder and otherwise observe and perform
all provisions of this lease.  In addition, if in connection with any such loan
the lender shall request reasonable modifications in this lease as a condition
to such financing, Tenant will not unreasonably withhold, delay or defer its
consent thereof, provided that such modifications do not increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created or Tenant's rights hereunder.

         26.     CERTIFICATE OF ESTOPPEL

                 Each party shall, within ten (10) calendar days after request
therefor, execute and deliver to the other party, in recordable form, a
certificate stating that the lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications.  The
certificate shall also state the amount of the monthly rent, the date to which
monthly rent has been paid in advance, the amount of the security deposit
and/or prepaid monthly rent, and, if the request is made by Landlord, shall
include such other items as Landlord or Landlord's lender may reasonably
request.  Failure to deliver such certificate within such time shall constitute
a conclusive acknowledgment by the party failing to deliver the certificate
that the lease is in full force and effect and has not been modified except as
may be represented by the party requesting the certificate.  Any such
certificate requested by Landlord may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises or Project.  Further,
within ten (10) calendar days following written request made from time to time
by Landlord, Tenant shall furnish to Landlord current financial statements of
Tenant.

         27.     SALE BY LANDLORD

                 In the event the original Landlord hereunder, or any successor
owner of the Project or Premises, shall sell or convey the Project or Premises,
all liabilities and obligations on the part of the original Landlord, or such
successor owner, under this lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
owner.  Tenant agrees to attorn to such new owner and to look solely to such
new owner for performance of any and all such liabilities and obligations.





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<PAGE>   34
         28.     ATTORNMENT TO LENDER OR THIRD PARTY

                 In the event the interest of Landlord in the land and
buildings in which the Premises are located (whether such interest of Landlord
is a fee title interest or a leasehold interest) is encumbered by deed of
trust, and such interest is acquired by a lender or any other third party
through judicial foreclosure or by exercise of a power of sale at private
trustee's foreclosure sale, Tenant hereby agrees to release Landlord of any
obligation arising on or after any such foreclosure sale and to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this lease.

         29.     DEFAULT BY LANDLORD

                 Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period
and thereafter diligently prosecutes the same to completion.

                 If Landlord is in default of this lease, Tenant's sole remedy
shall be to institute suit against Landlord in a court of competent
jurisdiction, and Tenant shall have no right to offset any sums expended by
Tenant as a result of Landlord's default against future rent and other sums due
and payable pursuant to this lease.  If Landlord is in default of this lease,
and as a consequence Tenant recovers a money judgment against Landlord, the
judgment shall be satisfied only out of the proceeds of sale received on
execution of the judgment and levy against the right, title and interest of
Landlord in the Project of which the Premises are a part, and out of insurance
proceeds applicable to the Project or rent or other income from such real
property receivable by Landlord or out of the consideration received by
Landlord from the sale or other disposition of all or any part of Landlord's
right, title and interest in the Project of which the Premises are a part.
Neither Landlord nor any of the partners comprising the partnership designated
as Landlord shall be personally liable for any deficiency.

         30.     CONSTRUCTION CHANGES

                 It is understood that the description of the Premises and the
location of ductwork, plumbing and other facilities therein are subject to such
changes as Landlord or Landlord's architect determines to be desirable in the
course of construction of the Premises and/or the improvements constructed or
being constructed





                                       30

<PAGE>   35

therein, and no such changes or any changes in plans for any other portions of
the Project, shall affect this lease or entitle Tenant to any reduction of rent
hereunder or result in any liability of Landlord to Tenant.

         31.     MEASUREMENT OF PREMISES

                 Tenant understands and agrees that any reference to square
footage of the Premises is approximate only and includes all interior
partitions and columns, one-half of exterior walls, and one-half of the
partitions separating the Premises from the rest of the Project.  Tenant waives
any claim against Landlord regarding the accuracy of any such measurement and
agrees that there shall not be any adjustment in basic rent or direct expenses
or other amounts payable hereunder by reason of inaccuracies in such
measurement.

         32.     ATTORNEY FEES

                 If either party commences an action against the other party
arising out of or in connection with this lease, the prevailing party shall be
entitled to have and recover from the losing party all expenses of litigation,
including, without limitation, travel expenses, attorney fees, expert witness
fees, trial and appellate court costs, and deposition and transcript expenses.
If either party becomes a party to any litigation concerning this lease or
concerning the Premises or the Project by reason of any act or omission of the
other party or its authorized representatives, the party that causes the other
party to become involved in the litigation shall be liable to the other party
for all expenses of litigation, including, without limitation, travel expenses,
attorney fees, expert witness fees, trail and appellate court costs, and
deposition and transcript expenses.

         33.     SURRENDER

                 The voluntary or other surrender of this lease or the Premises
by Tenant, or a mutual cancellation of this lease, shall not work a merger, and
at the option of Landlord shall either terminate all or any existing subleases
or subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.

         34.     WAIVER

                 No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver.  The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial





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<PAGE>   36

payments shall not be construed as a waiver of the balance of such payment due.
No act or conduct of Landlord, including, without limitation, the acceptance of
keys to the Premises, shall constitute an acceptance of the surrender of the
Premises by Tenant before the expiration of the term.  Only a written notice
from Landlord to Tenant shall constitute acceptance of the surrender of the
Premises and accomplish a termination of this lease.  Landlord's consent to or
approval of any act by Tenant requiring Landlord's consent or approval shall
not be deemed to waive or render unnecessary Landlord's consent to or approval
of any subsequent act by Tenant.  Any waiver by Landlord of any default must be
in writing and shall not be a waiver of any other default concerning the same
or any other provision of this lease.

         35.     EASEMENTS; AIRSPACE RIGHTS

                 Landlord reserves the right to alter the boundaries of the
Project and grant easements and dedicate for public use portions of the Project
without Tenant's consent, provided that no such grant or dedication shall
interfere with Tenant's use of the Premises or otherwise cause Tenant to incur
cost or expense.  From time to time, and upon Landlord's demand, Tenant shall
execute, acknowledge and deliver to Landlord, in accordance with Landlord's
instructions, any and all documents, instruments, maps or plats necessary to
effectuate Tenant's covenants hereunder.

                 This lease confers no rights either with regard to the
subsurface of or airspace above the land on which the Project is located or
with regard to airspace above the building of which the Premises are a part.
Tenant agrees that no diminution or shutting of f of light or view by a
structure which is or may be erected (whether or not by Landlord) on property
adjacent to the building of which the Premises are a part or to property
adjacent thereto, shall in any way affect this lease, or entitle Tenant to any
reduction of rent, or result in any liability of Landlord to Tenant.

         36.     RULES AND REGULATIONS

                 Landlord  shall have the right from time to time to promulgate
rules and regulations for the safety, care and cleanliness of the Premises, the
Project and the Common Area, or for the preservation of good order.  On
delivery of a copy of such rules and regulations to Tenant ' Tenant shall
comply with the rules and regulations, and a violation of any of them shall
constitute a default by Tenant under this lease.  If there is a conflict
between the rules and regulations and any of the provisions of this lease, the
provisions of this lease shall prevail.  Such rules and regulations may be
amended by Landlord from time to time with or without advance notice.

         37.     NOTICES





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<PAGE>   37
                 Except for legal process which may also be served as provided
by law or as provided herein, all notices, demands, requests, consents and
other communications ("Notices") which may be given or are required to be given
by either party to the other shall be in writing and shall be deemed given to
and received by the party intended to receive such Notice (i) when hand
delivered, (ii) three (3) days after such Notice shall have been deposited,
postage prepaid, to the United States Mail, certified return receipt requested,
properly addressed to the address specified herein, or (iii) date of delivery
if sent to the address specified herein by reputable overnight courier (e.g.
Federal Express or other comparable service), as evidenced by such courier's
records.

                 All such Notices from Landlord to Tenant shall be served or
addressed to Tenant at 2770 San Tomas Expressway, Santa Clara, California
95051.

                 All such Notices by Tenant to Landlord shall be sent to
Landlord at its offices at 3945 Freedom Circle, Suite 640, Santa Clara,
California 95054.

                 Either party may change its address by notifying the other of
such change.

         38.     NAME

                 Tenant shall not use the name of the Project for any purpose
other than as the address of the business conducted by Tenant in the Premises
without the prior written consent of Landlord.

         39.     GOVERNING LAW; SEVERABILITY

                 This lease shall in all respects be governed by and construed
in accordance with the laws of the State of California.  If any provision of
this lease shall be held or rendered invalid, unenforceable or ineffective for
any reason whatsoever, all other provisions hereof shall be and remain in full
force and effect.

         40.     DEFINITIONS

                 As used in this lease, the following words and phrases shall
have the following meanings:

                 Authorized Representative: any officer, agent, employee or
independent contractor retained or employed by either party, acting within
authority given him by that party.

                 Encumbrance:     any deed of trust, mortgage or other written
security device or agreement affecting the Premises or the Project that
constitutes security for the payment of a debt or performance of an obligation,
and the note or obligation secured by





                                       33

<PAGE>   38

such deed of trust, mortgage or other written security device or agreement.

                 Lease month: the period of time determined by reference to the
day of the month in which the term commences and continuing to one day short of
the same numbered day in the next succeeding month; e.g., the tenth day of one
month to and including the ninth day in the next succeeding month.

                 Leader: the beneficiary, mortgagee or other holder of an
encumbrance, as defined above.

                 Lien: a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security f or the performance of an
act.  Most of the liens referred to in this lease are mechanic's liens.

                 Maintenance: repairs, replacement, repainting and cleaning.

                 Monthly Rent: the sum of the monthly payments of basic rent
and direct expenses.

                 Person:  one or more human beings, or legal entities or other
artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human being and legal
entities.

                 Provision: any term, agreement, covenant, condition, clause,
qualification, restriction, reservation or other stipulation in the lease that
defines or otherwise controls, establishes or limits the performance required
or permitted by either party.

                 Rent: basic rent, direct expenses, additional rent and all
other amounts payable by Tenant to Landlord required by this lease or arising
by subsequent actions of the parties made pursuant to this lease.

         Words used in any gender include other genders.  If there be more than
one Tenant, the obligations of Tenant hereunder are joint and several.  All
provisions whether covenants or conditions, on the part of Tenant shall be
deemed to be both covenants and conditions.  The paragraph headings are for
convenience of reference only and shall have no effect upon the construction or
interpretation of any provision hereof.

         41.     TIME

                 Time is of the essence of this lease and of each and all of
its provisions.





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<PAGE>   39
         42.     INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE

                 Any amount due from Tenant to Landlord hereunder which is not
paid when due shall bear interest at the rate of ten percent (10%) per annum
from when due until paid, unless otherwise specifically provided herein, but
the payment of such interest shall not excuse or cure any default by Tenant
under this lease.  In addition, Tenant acknowledges that late payment by Tenant
to Landlord of basic rent or direct expenses or of any other amount due
Landlord from Tenant, will cause Landlord to incur costs not contemplated by
this lease, the exact amount of such costs being extremely difficult and
impractical to fix.  Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord, e.g., by
the terms of any encumbrance and note secured by any encumbrance covering the
Premises.  Therefore, if any such payment due from Tenant is not received by
Landlord within three (3) business days of when due, Tenant shall pay to
Landlord an additional sum of five percent (5%) of the overdue payment as a
late charge.  The parties agree that this late charge represents a fair and
reasonably estimate of the costs that Landlord will incur by reason of late
payment by Tenant.  Acceptance of any late charge shall not constitute a waiver
of Tenant's default with respect to the overdue amount, nor prevent Landlord
from exercising any of the other rights and remedies available to Landlord.  No
notice to Tenant of failure to pay shall be required prior to the imposition of
such interest and/or late charge, and any notice period provided for in
paragraph 19 shall not affect the imposition of such interest and/or late
charge.  Any interest and late charge imposed pursuant to this paragraph shall
be and constitute additional rent payable by Tenant to Landlord.

         43.     ENTIRE AGREEMENT

                 This lease, including any exhibits and attachments,
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this lease and the exhibits and attachments may be altered,
amended or revoked only by an instrument in writing signed by both Landlord and
Tenant.  Landlord and Tenant agree hereby that all prior or contemporaneous
oral agreements between and among themselves or their agents or representatives
relative to the leasing of the Premises are merged in or revoked by this
lease.

         44.     CORPORATE AUTHORITY

                 Each individual executing this lease on behalf of the
corporation represents and warrants that he is duly authorized to execute and
deliver this lease on behalf of the corporation and that this lease is binding
upon said corporation in accordance with its terms.





                                       35

<PAGE>   40
         45.     RECORDING

                 Neither Landlord nor Tenant shall record this lease or a short
form memorandum hereof without the consent of the other.

         46.     EXHIBITS AND ATTACHMENTS

                 All exhibits and attachments to this lease are a part hereof.

         47.     REAL ESTATE BROKERS

                 Each party represents and warrants to the other party that it
has not had dealings in any manner with any real estate broker, finder or other
person with respect to the Premises and the negotiation and execution of this
lease except McCandless Management Corporation and Cornish & Carey.  Except for
the commissions and fees to be paid to McCandless Management Corporation and
Cornish & Carey as provided in this paragraph, each party shall indemnify and
hold harmless the other party from all damage, loss, liability and expense
(including attorneys' fees and related costs) arising out of or resulting from
any claims for commissions or fees that have been or may be asserted against
the other party by any broker, finder or other person with whom Tenant or
Landlord, respectively, has dealt, or purportedly has dealt, in connection with
the Premises and the negotiation and execution of this lease; provided,
however, Tenant shall have no obligation to indemnify Landlord for any claims
made by McCandless Management Corporation.  Landlord shall pay broker leasing
commissions to McCandless Management Corporation and Cornish & Carey in
connection with the Premises and the negotiation and execution of this lease,
to the extent agreed to between Landlord and McCandless Management Corporation
and Cornish & Carey.  Landlord and Tenant agree that Landlord shall not be
obligated to pay any broker leasing commissions, consulting fees, finder fees
or any other fees or commissions arising out of or relating to any extended
term of this lease or to any expansion or relocation of the Premises at any
time.

         48.     ENVIRONMENTAL MATTERS

                 A.       Tenant's Covenants Regarding Hazardous Materials.

                          (1)     Hazardous Materials Handling. Tenant, its
agents, invitees, employees, contractors, sublessees, assigns and/or successors
shall not use, store, dispose, release or otherwise cause to be present or
permit the use, storage, disposal, release or presence of Hazardous Materials
(as defined below) on or about the Premises or Project, except for customary
amounts of office and janitorial supplies used in compliance with applicable
laws.  As used herein "Hazardous Materials" shall mean any petroleum or
petroleum by-products, flammable explosives, asbestos, urea formaldehyde,
radioactive materials or waste and any





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<PAGE>   41

"hazardous substance", "hazardous waste", "hazardous materials", "toxic
substance" or "toxic waste" as those terms are defined under the provisions of
the California Health and Safety Code and/or the provisions of the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), as amended by the Superfund Amendments and
Reauthorization Act of 1986 (42 U.S.C. Section 9601 et seq.), or any other
hazardous or toxic substance, material or waste which is or becomes regulated
by any local governmental authority, the State of California or any agency
thereof, or the United States Government or any agency thereof.

                          (2)     Notices.  Upon gaining actual knowledge
thereof, Tenant shall immediately notify Landlord in writing of: (i) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any law, regulation or
ordinance relating to the industrial hygiene, environmental protection or the
use, analysis, generation, manufacture, storage, presence, disposal or
transportation of any Hazardous Materials (collectively "Hazardous Materials
Laws"); (ii) any claim made or threatened by any person against Tenant, the
Premises, Project or buildings within the Project relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials; and (iii) any reports made to
any environmental agency arising out of or in connection with any Hazardous
Materials in, on or removed from the Premises, Project or buildings within the
Project, including any complaints, notices, warnings, reports or asserted
violations in connection therewith.  Tenant shall also supply to Landlord as
promptly as possible, and in any event within five (5) business days after
Tenant first receives or sends the same, with copies of all claims, reports,
complaints, notices, warnings or asserted violations relating in any way to the
Premises, Project or buildings within the Project or Tenant's use thereof.
Tenant shall promptly deliver to Landlord copies of hazardous waste manifests
in Tenant's possession and such documents or other evidence as reasonably
necessary to show the legal and proper disposal of all Hazardous Materials
removed from the Premises in accordance with applicable law.

                 B.       Imdemnification of Landlord. Tenant shall indemnify,
defend (by counsel reasonably acceptable to Landlord), protect, and hold
Landlord, and each of Landlord's partners, employees, agents, attorneys,
successors and assigns, free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses or expenses (including reasonable
attorneys' fees) for death of or injury to any person or damage to any property
whatsoever (including water tables and atmosphere), arising from or caused in
whole or in part, directly or indirectly, by (i) Tenant's use, analysis,
storage, transportation, disposal, release, threatened release, discharge or
generation of Hazardous Materials to, in, on, under, about or from the
Premises, Project or buildings within the Project, or (ii) Tenant's failure to
comply with any Hazardous Materials Laws whether knowingly, unknowingly,
intentionally or





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<PAGE>   42

unintentionally.  Tenant I s obligations hereunder shall include, without
limitation, and whether foreseeable or unforeseeable, all costs of any required
or necessary repair, cleanup or detoxification or decontamination of the
Premises, Project or buildings within the Project, and the preparation and
implementation of any closure, remedial action or other required plans in
connection therewith.  In addition, Tenant shall reimburse Landlord for (i)
losses in or reductions to rental income resulting from Tenant's use, storage
or disposal of Hazardous Materials, (ii) all costs of refitting or other
alterations to the Premises, Project or buildings within the Project required
as a result of Tenant's use, storage, or disposal of Hazardous Materials
including, without limitation, alterations required to accommodate an alternate
use of the Premises, Project or buildings within the Project, and (iii) any
diminution in the fair market value of the Premises, Project or buildings
within the Project caused by Tenant's use, storage, or disposal of Hazardous
Materials.  For purposes of this paragraph 48, any acts or omissions of Tenant,
or by employees, agents, assignees, contractors or subcontractors of Tenant or
others acting for or on behalf of Tenant (whether or not they are negligent,
intentional, willful or unlawful) shall be strictly attributable to Tenant.

                 C.       Survival. The provisions of this paragraph 48 shall
survive the expiration or earlier termination of the term of this lease.

         49.     SIGNAGE

                 Tenant shall not, without obtaining the prior written consent
of Landlord, install or attach any sign or advertising material on any part of
the outside of the Premises, or on any part of the inside of the Premises which
is visible from the outside of the Premises, or in the halls, lobbies, windows
or elevators of the building in which the Premises are located or on or about
any other portion of the Common Area or Project.  If Landlord consents to the
installation of any sign or other advertising material, the location, size,
design, color and other physical aspects thereof shall be subject to Landlord's
prior written approval and shall be in accordance with any sign program
applicable to the Project.  In addition to any other requirements of -this
paragraph 49, the installation of any sign or other advertising material by or
for Tenant must comply with all applicable laws, statutes, requirements, rules,
ordinances and any C.C. & R.'s or other similar requirements.  With respect to
any permitted sign installed by or for Tenant, Tenant shall maintain such sign
or other advertising material in good condition and repair and shall remove
such sign or other advertising material on the expiration or earlier
termination of the term of this lease.  The cost of any permitted sign or
advertising material and all costs associated with the installation,
maintenance and removal thereof shall be paid for solely by Tenant.  If Tenant
fails to properly maintain or remove any permitted sign or other advertising
material, Landlord





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<PAGE>   43

may do so at Tenant's expense.  Any cost incurred by Landlord in connection
with such maintenance or removal shall be deemed additional rent and shall be
paid by Tenant to Landlord within ten (10) days following notice from Landlord.
Landlord may remove any unpermitted sign or advertising material without notice
to Tenant and the cost of such removal shall be additional rent and shall be
paid by Tenant within ten (10) days following notice from Landlord.  Landlord
shall not be liable to Tenant for any damage, loss or expense resulting from
Landlord's removal of any sign or advertising material in accordance with this
paragraph 49.  The provisions of this paragraph 49 shall survive the expiration
or earlier termination of this lease.

         50.     SUBMISSION OF LEASE

                 The submission of this lease to Tenant for examination or
signature by Tenant is not an offer to lease the Premises to Tenant nor an
agreement by Landlord to reserve the Premises for Tenant.  Landlord will not be
bound to Tenant until this lease has been duly executed and delivered by both
Landlord and Tenant.

         51.     PREMISES TAKEN "AS IS"

                 Except as otherwise provided in paragraph 9 hereof, Tenant is
leasing the Premises from Landlord "as is" in their condition existing as of
the date hereof.  Landlord shall have no obligation to alter or improve the
Premises.

         52.     ADDITIONAL RENT

                 All costs, charges, fees, penalties, interest and any other
payments (including Tenant's reimbursement to Landlord of costs incurred by
Landlord) which Tenant is required to make to Landlord pursuant to the terms
and conditions of this lease and any amendments to this lease shall be and
constitute additional rent payable by Tenant to Landlord when due as specified
in this lease and any amendments to this lease.

         53.     [INTENTIONALLY OMITTED]

         54.     TENANT IMPROVEMENT ALLOWANCE

                 Landlord hereby grants to Tenant a tenant improvement allowance
of up to Ninety Thousand Six Hundred Sixteen Dollars ($90,616) ("Allowance") to
reimburse Tenant for the cost of tenant improvements ("Tenant Improvements") to
be installed in the Premises by Tenant during the first one hundred eighty (180)
days of the term of this lease, subject to the following terms and conditions:

                 (a)      The Tenant Improvements shall be deemed alterations
to the Premises subject to Landlord's prior written consent and shall be
subject to all the terms and conditions of paragraph 8 of





                                       39

<PAGE>   44

this lease, except that Tenant shall not be required to remove the Tenant
Improvements at the end of the lease term if so specified on Exhibit C hereto.
Tenant shall use contractors designated by Landlord for all mechanical and
electrical work in connection with construction of the Tenant Improvements.

                 (b)      The Tenant Improvements for which Tenant may seek
reimbursement shall be completed within one hundred eighty (180) days after the
lease commencement date.

                 (c)      All outstanding claims for labor, materials and
fixtures relating to the Tenant Improvements shall have been paid in full by
Tenant (with evidence of payment to be provided to Landlord) and Tenant shall
have obtained lien releases from all contractors and materialmen (copies of
lien releases to be provided to Landlord), satisfactory to Landlord.

                 (d)      The Tenant Improvements shall have been constructed
in accordance with all applicable local, state and federal laws, statutes,
codes, rules and regulations.

                 (e)      Tenant shall not be in default under this lease and
no event shall have occurred which with the passage of time or the giving of
notice or both would constitute a default.

                 (f)      Subject to the terms of paragraph 14 hereof, Landlord
shall have the right to enter the Premises at all times during construction of
the Tenant Improvements to inspect and monitor such construction, but shall
have no obligation to do so and assumes no liability or responsibility for such
construction and/or compliance with laws applicable thereto, which is and shall
be Tenant's sole responsibility.

                 (g)      Tenant shall not be entitled to any portion of the
Allowance which exceeds the actual cost incurred and paid by Tenant for
construction of the Tenant Improvements and Tenant shall not be entitled to any
credit against rent or any other payment due Landlord under the Lease for any
unused portion of the Allowance.  Tenant shall not be entitled to any
reimbursement hereunder and no disbursement of any part of the Allowance shall
be required until all of the conditions specified in this paragraph 54 have been
fully satisfied.

         55.     EARLY ACCESS

                 Subject to the following provisions, upon surrender of the
Premises by the current tenant and termination of the current tenant's lease
(which is scheduled to expire on October 9, 1997), Landlord shall provide
Tenant with limited access to the Premises for purposes of commencing
installation of Tenant's trade fixtures, equipment, personal property and
telecommunications equipment and wiring.  Tenant's access to the Premises
pursuant to this paragraph shall be subject to all the terms and conditions of
this lease,





                                       40

<PAGE>   45

including the insurance obligations specified in paragraph 11, and as a
condition precedent to Tenant's right to such access to the Premises, Tenant
shall provide Landlord with proof that Tenant has satisfied said insurance
requirements.  Such limited access to the Premises shall not accelerate the
commencement or termination dates of this lease specified in paragraph 2 hereof
and Tenant shall not be obligated to pay basic rent or direct expenses until
the commencement of the term; provided, however, if Tenant or any of Tenant's
operating personnel commences operation of business in the Premises, such
operations shall accelerate the lease commencement date and the lease term
shall commence on the date that such business operations are commenced.

         56.     CAPITAL IMPROVEMENTS

                 Notwithstanding any provision to the contrary in paragraph 8
of this lease, if (i) the cost of a particular capital improvement is
includable in direct expenses under paragraph 8 of this lease, (ii) the capital
improvement has a useful life of more than one (1) year, and (iii) the cost of
such capital improvement exceeds Fifty Thousand Dollars ($50,000), then the
cost of such capital improvement shall be amortized over its useful life
(including interest at a rate of two percent (2%) over the then current Prime
Rate as published by the Wall Street Journal on the date nearest to the date
that such cost is incurred) and the monthly amortized cost thereof so
determined shall be included within direct expenses and Tenant shall pay its
percentage share thereof as provided in paragraph 5(b) of this lease throughout
the remaining term of this lease and any extensions thereof.  Any determination
of what constitutes a capital improvement and the useful life of such capital
improvement, shall be made by Landlord in accordance with generally accepted
accounting principles.



                           [Signatures on Next Page]


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     IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
lease on the date first above written.


Landlord:                               Tenant:
- --------                                ------

SAM TOMAS NO. 2, a California           NETWORK APPLIANCE, INC.,
general partnership                     a California corporation

By:  Connecticut General Life
     Insurance Company, a
     Connecticut corporation,
     General Partner                    By: /s/ DANIEL J. WARMENHOVEN
                                            -------------------------

     By: Cigna Investments,             Name: Daniel J. Warmenhoven
         Inc., a Delaware                     -----------------------
         corporation, its               Title:  President
         Authorized Agent                       -----------------------
 
         By: /s/ JAMES H. ROGERS        Date: 8/18/97
             -------------------              -----------------------

         Name: James H. Rogers          By: /s/ JEFFREY R. ALLEN 
               -----------------            -------------------------
         Its: Managing Inspector        Name: Jeffrey R. Allen
              ------------------             -----------------------
         Date: 9/5/97                   Title: Secretary
              ------------------             ------------------------
                                        Date: 8/18/97
                                             ------------------------

By:  McCandless Group ST 2,
     a California limited
     partnership, a General
     Partner
    
     By: /s/ BIRK S. MCCANDLESS
         ----------------------
         Birk S. McCandless, as
         Trustee under the Birk
         S. McCandless and Mary
         McCandless Inter Vivos
         Trust Agreement dated
         February 17, 1982, a
         General Partner


                                       42

<PAGE>   47






                                   EXHIBIT A


                           Drawing of Leased Premises

<PAGE>   48



                                   EXHIBIT B


                         Drawing of McCandless Project

<PAGE>   49
                                  "EXHIBIT D"

                             CONSENT TO ALTERATIONS

McCandless-San Tomas, No. 2, herein referred to as "Landlord" hereby consents to
the alterations to 2730 San Tomas Expressway, Suite 100, Santa Clara,
California, as shown on the attached "Exhibit C" ("the alterations"), as
follows:

1.      The work shall be performed and completed in a good and workman like
        manner and in accordance with the attached plans and specifications. No
        work shall be done which is not described in such plans and
        specifications without the prior written consent of Landlord. Prior to
        commencing any work, or receiving any materials in connection therewith,
        Network Appliance, Inc., herein after referred to as "Tenant", shall
        give Landlord not less than ten (10) days notice to enable Landlord to
        post a notice of nonresponsibility.

2.      The scope of work is to remodel the space per "Exhibit C". The work
        shall be performed by McCandless Construction Corporation, or such
        contractors as may be approved in writing by Landlord.

3.      All work shall be done pursuant to appropriate building permits and in
        accordance with applicable governmental laws and regulations, and Tenant
        shall be solely responsible for obtaining and satisfying such permits,
        laws and regulations.

4.      All costs and expenses incurred in connection with the work shall be at
        the sole expense of Tenant.

5.      Tenant shall indemnify and hold harmless Landlord and their respective
        lenders, partners, agents, officers and directors, from all costs,
        expenses, claims, damages, and liability (including but not limited to
        reasonable attorneys' fees) arising from (i) the act of or omissions of
        tenant or its Contractors or subcontractors in performing the work, (ii)
        the failure of the Tenant to abide by one or more of the conditions of
        the consent, (iii) the design specifications, or material utilized in
        the work, or (iv) any damages to the premises or to the building in
        which the premises are located (including roof) arising from the work.
        The obligation of Tenant hereunder shall survive the completion of the
        work. Landlord, and their respective lenders, partners, agents, officers
        and directors, shall be named as an additional Insured on Tenant's
        Certificate of Liability and certificate of Workman's Compensation
        Insurance.


<PAGE>   50
                                                         Network Appliance, Inc.
                                                                  August 6, 1997
                                                                        Page Two
- --------------------------------------------------------------------------------

6.   Any roof penetration must be permanently sealed. Permanently sealed means
     either hot mopping with hot asphalt (roof tar) and patching with the same
     roofing system as the original roof, or some other commonly accepted
     roofing process approved by the National Roofing Contractors Association.
     Where applicable.

     Cold process and roof mastic shall not be considered a permanent sealing.
     All roof penetrations sealing shall be inspected by McCandless Management
     Corporation personnel upon completion, and final acceptance of the
     alteration will not be made until McCandless Property Management is
     satisfied with the work.

7.   McCandless Management will not require restoration to be done to this scope
     of work on "Exhibit C" only.

8.   This Consent shall not be deemed or considered as a waiver of the right of
     Landlord to require consent to any subsequent work, or to any change to the
     plans or specifications referred to above, nor shall this consent be
     deemed or considered as a waiver of any provision of the Lease Agreement
     covering the premises.

The review by Landlord of the above plans and specification has been for the
purpose of giving consent only, and does not constitute an endorsement or
approval of such plans and specifications for any purpose.



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