<PAGE>   1
 
                            NETWORK APPLIANCE, INC.
                           2770 SAN TOMAS EXPRESSWAY
                             SANTA CLARA, CA 95051
 
Dear Shareholder:
 
     You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Network Appliance, Inc. (the "Company") which will be held
on September 25, 1997, at 1:00 p.m., local time, at the Company's headquarters,
2770 San Tomas Expressway, Santa Clara, California 95051.
 
     At the Annual Meeting, you will be asked to consider and vote upon the
following proposals: (i) to elect six directors of the Company, (ii) to ratify
the appointment of Deloitte and Touche LLP as independent accountants of the
Company for the fiscal year ending April 30, 1998 and (iii) 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.
 
     The enclosed Proxy Statement more fully describes the details of the
business to be conducted at the Annual Meeting. After careful consideration, the
Company's Board of Directors has unanimously approved the proposals and
recommends that you vote FOR each such proposal.
 
     After reading the Proxy Statement, please mark, date, sign and return the
enclosed proxy card in the accompanying reply envelope. If you decide to attend
the Annual Meeting and would prefer to vote in person, please notify the
Secretary of the Company that you wish to vote in person and your proxy will not
be voted. YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN THE
ENCLOSED PROXY OR ATTEND THE ANNUAL MEETING IN PERSON.
 
     A copy of the Company's 1997 Annual Report has been mailed concurrently
herewith to all shareholders entitled to notice of and to vote at the Annual
Meeting.
 
     We look forward to seeing you at the Annual Meeting.
 
                                          Sincerely yours,
 
                                          Daniel J. Warmenhoven
                                          President and Chief Executive Officer
 
Santa Clara, California
August 11, 1997
 
                                   IMPORTANT
 
PLEASE MARK, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT AT YOUR EARLIEST
CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID RETURN ENVELOPE SO THAT IF YOU ARE
UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.

<PAGE>   2
 
                            NETWORK APPLIANCE, INC.
                           2770 SAN TOMAS EXPRESSWAY
                             SANTA CLARA, CA 95051
 

                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
                         TO BE HELD SEPTEMBER 25, 1997
 
TO OUR SHAREHOLDERS:
 
     You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Network Appliance, Inc., a California corporation (the
"Company"), to be held on September 25, 1997 at 1:00 p.m., local time, at the
Company's headquarters, 2770 San Tomas Expressway, Santa Clara, California
95051, for the following purposes:
 
     1. To elect directors to serve for the ensuing year or until their
        respective successors are duly elected and qualified. The nominees are
        Daniel J. Warmenhoven, Donald T. Valentine, Carol A. Bartz, Larry R.
        Carter, Michael R. Hallman and Robert T. Wall.
 
     2. To ratify the appointment of Deloitte and Touche LLP as independent
        accountants of the Company for the fiscal year ending April 30, 1998.
 
     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.
 
     4. To transact such other business as may properly come before the meeting
        or any adjournment thereof.
 
     The foregoing items of business are more fully described in the Proxy
Statement that accompanies this Notice.
 
     Only shareholders of record at the close of business on July 28, 1997 are
entitled to notice of and to vote at the Annual Meeting and at any continuation
or adjournment thereof.
 
     All shareholders are cordially invited and encouraged to attend the Annual
Meeting. In any event, to assure your representation at the meeting, please
carefully read the accompanying Proxy Statement which describes the matters to
be voted on at the Annual Meeting and sign, date and return the enclosed proxy
card in the reply envelope provided. Should you receive more than one proxy
because your shares are registered in different names and addresses, each proxy
should be returned to assure that all your shares will be voted. If you attend
the Annual Meeting and vote by ballot, your proxy will be revoked automatically
and only your vote at the Annual Meeting will be counted. The prompt return of
your proxy card will assist us in preparing for the Annual Meeting.
 
     We look forward to seeing you at the Annual Meeting.
 
                                          BY ORDER OF THE BOARD OF DIRECTORS
 
                                          DANIEL J. WARMENHOVEN
                                          President and Chief Executive Officer
Santa Clara, California
A
ugust 11, 1997
 
     ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN
PERSON. IN ANY EVENT, TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU
ARE URGED TO VOTE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN
THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE.

<PAGE>   3
 
                                PROXY STATEMENT
 
                   FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
                            NETWORK APPLIANCE, INC.
                         TO BE HELD SEPTEMBER 25, 1997
 
GENERAL
 
     This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Network Appliance, Inc., a California corporation (the
"Company" or "Network Appliance"), of proxies to be voted at the Annual Meeting
of Shareholders (the "Annual Meeting") to be held on September 25, 1997, or at
any adjournment or postponement thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders. Shareholders of record on
July 28, 1997 will be entitled to vote at the Annual Meeting. The Annual Meeting
will be held at 1:00 p.m., local time, at the Company's headquarters, 2770 San
Tomas Expressway, Santa Clara, California 95051.
 
     It is anticipated that this Proxy Statement and the enclosed proxy card
will be first mailed to shareholders on or about August 11, 1997.
 
VOTING RIGHTS
 
     The close of business on July 28, 1997 was the record date for shareholders
entitled to notice of and to vote at the Annual Meeting and any adjournments
thereof. At the record date, the Company had approximately 16,724,980 shares of
its Common Stock outstanding and entitled to vote at the Annual Meeting, held by
approximately 373 shareholders. Holders of Common Stock are entitled to one vote
for each share of Common Stock so held. A majority of the shares of Common Stock
entitled to vote will constitute a quorum for the transaction of business at the
Annual Meeting. Abstentions and broker non-votes are counted as present for the
purpose of determining the presence of a quorum.
 
     If any shareholder is unable to attend the Annual Meeting, such shareholder
may vote by proxy. The enclosed proxy is solicited by the Company's Board of
Directors (the "Board of Directors" or the "Board") and when the proxy card is
returned properly completed, it will be voted as directed by the shareholder on
the proxy card. Shareholders are urged to specify their choices on the enclosed
proxy card. If a proxy card is signed and returned without choices specified, in
the absence of contrary instructions, the shares of Common Stock represented by
such proxy will be voted FOR Proposals 1, 2 and 3 and will be voted in the proxy
holders' discretion as to other matters that may properly come before the Annual
Meeting.
 
     The six director nominees receiving the highest number of affirmative votes
will be elected. Votes against a nominee, abstentions and broker non-votes shall
have no effect. Approval of Proposals 2 and 3 requires (i) the affirmative vote
of a majority of those shares present and voting and (ii) the affirmative vote
of the majority of the required quorum. Thus, abstentions and broker non-votes
can have the effect of preventing approval of a proposal where the number of
affirmative votes, through a majority of the votes cast, does not constitute a
majority of the required quorum. All votes will be tabulated by the inspector of
the election appointed for the meeting, who will separately tabulate affirmative
and negative votes, abstentions and broker non-votes.
 
REVOCABILITY OF PROXIES
 
     Any person giving a proxy has the power to revoke it at any time before its
exercise. A proxy may be revoked by filing with the Secretary of the Company an
instrument of revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person.

<PAGE>   4
 
SOLICITATION OF PROXIES
 
     The Company will bear the cost of soliciting proxies. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
to forward to such beneficial owners. The Company may reimburse such persons for
their costs of forwarding the solicitation material to such beneficial owners.
The original solicitation of proxies by mail may be supplemented by solicitation
by telephone, telegram or other means by directors, officers, employees or
agents of the Company. No additional compensation will be paid to these
individuals for any such services. The Company may retain a proxy solicitor to
assist in the solicitations of proxies, for which the Company would expect to
pay an estimated fee of $8,500 plus reimbursement of expenses. Except as
described above, the Company does not intend to solicit proxies other than by
mail.
 
     THE ANNUAL REPORT OF THE COMPANY FOR THE FISCAL YEAR ENDED APRIL 25, 1997
HAS BEEN MAILED CONCURRENTLY WITH THE MAILING OF THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT TO ALL SHAREHOLDERS ENTITLED TO NOTICE OF AND TO VOTE AT THE
ANNUAL MEETING. THE ANNUAL REPORT IS NOT INCORPORATED INTO THIS PROXY STATEMENT
AND IS NOT CONSIDERED PROXY SOLICITING MATERIAL.
 

                                PROPOSAL NO. 1:
 
                             ELECTION OF DIRECTORS
 
     At the Annual Meeting, six directors (constituting the entire board) are to
be elected to serve until the next Annual Meeting of Shareholders and until a
successor for such director is elected and qualified, or until the death,
resignation or removal of such director. It is intended that the proxies will be
voted for the six nominees named below for election to the Company's Board of
Directors unless authority to vote for any such nominee is withheld. There are
six nominees, each of whom is currently a director of the Company. With the
exception of Larry R. Carter, all of the current directors were elected to the
Board by the shareholders at the last Annual Meeting. Each person nominated for
election has agreed to serve if elected, and the Board of Directors has no
reason to believe that any nominee will be unavailable or will decline to serve.
In the event, however, that any nominee is unable or declines to serve as a
director at the time of the Annual Meeting, the proxies will be voted for any
nominee who is designated by the current Board of Directors to fill the vacancy.
Unless otherwise instructed, the proxyholders will vote the proxies received by
them for the nominees named below. The six candidates receiving the highest
number of the affirmative votes of the shares entitled to vote at the Annual
Meeting will be elected directors of the Company. The proxies solicited by this
Proxy Statement may not be voted for more than six nominees.
 
NOMINEES
 
     The directors of the Company, and their ages as of May 31, 1997, are as
follows:
 

<TABLE>
<CAPTION>
                   NAME                  AGE                          POSITION
    ----------------------------------  -----     ------------------------------------------------
    <S>                                 <C>       <C>
    Daniel J. Warmenhoven.............    46      President, Chief Executive Officer and Director
    Donald T. Valentine...............    64      Chairman of the Board, Director
    Carol A. Bartz(1).................    48      Director
    Larry R. Carter(2)................    54      Director
    Michael R. Hallman(2).............    51      Director
    Robert. T. Wall(1)................    51      Director
</TABLE>

 
- - ---------------
 
(1) Member of Compensation Committee.
 
(2) Member of Audit Committee.
 
BUSINESS EXPERIENCE OF NOMINEES FOR ELECTION AS DIRECTORS
 
     DANIEL J. WARMENHOVEN joined the Company in October 1994 as President and
Chief Executive Officer, and has been a member of the Board of Directors since
October 1994. Prior to joining the Company,
 
                                        2

<PAGE>   5
 
Mr. Warmenhoven served in various capacities, including President, Chief
Executive Officer and Chairman of the Board of Directors of Network Equipment
Technologies, Inc., a telecommunications company, from November 1989 to January
1994. Mr. Warmenhoven holds a B.S. degree in electrical engineering from
Princeton University.
 
     DONALD T. VALENTINE has been a director of the Company and Chairman of the
Board of Directors since September 1994. Mr. Valentine has been a general
partner of Sequoia Capital, a venture capital firm, since 1972. He is also
Chairman of the Board of C-Cube Microsystems Inc., a semiconductor video
compression company, and Elantec Semiconductor, Inc., an analog integrated
circuit company, and Vice Chairman of Cisco Systems, Inc.
 
     CAROL A. BARTZ has been a member of the Board of Directors since September
1995. From April 1992 through September 1996, Ms. Bartz served as Chairman of
the Board, President and Chief Executive Officer of Autodesk, Inc., and
presently serves as Chairman of the Board and Chief Executive Officer of
Autodesk, Inc., a PC software company and supplier of design software. Prior to
that, Ms. Bartz was with Sun Microsystems from September 1983 to April 1992,
most recently as Vice President of Worldwide Field Operations. In addition, Ms.
Bartz currently serves on the Board of Directors of Airtouch Communications,
Cadence Design Systems, Inc., Cisco Systems, Inc. and BEA Systems, Inc. Ms.
Bartz received a B.A. degree in computer science from the University of
Wisconsin.
 
     LARRY R. CARTER has been a member of the Board of Directors since April
1997. Since January 1995, Mr. Carter has been Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Cisco Systems, Inc.
From July 1992 to January 1995, he was Vice President and Corporate Controller
for Advanced Micro Devices. Prior to that, he was with V.L.S.I. Technology, Inc.
for four years where he held the position of Vice President, Finance and Chief
Financial Officer. Mr. Carter received a B.S. degree in Business Administration
and Accounting from Arizona State University.
 
     MICHAEL R. HALLMAN has been a member of the Board of Directors since August
1994. Mr. Hallman is the President of The Hallman Group, a management consulting
firm, which he founded in June 1992. Prior to that, he served as President and
Chief Operating Officer of Microsoft Corporation, a microcomputer software
company, from March 1990 to March 1992. He presently serves on the Board of
Directors of Amdahl Corporation, a manufacturer of mainframe computers and
peripherals, InFocus Systems, a computer peripherals company, Intuit, a
microcomputer software company, Keytronics Corporation, an input device company,
and Timeline, a developer of financial reporting software. Mr. Hallman holds
B.B.A. and M.B.A. degrees from the University of Michigan.
 
     ROBERT T. WALL has been a member of the Board of Directors since January
1993. Since June 1997, he has been Chief Executive Officer and a member of the
Board of Directors of Clarity Wireless, Inc., a development-stage wireless
datacommunications company. Mr. Wall has also been the Chairman of the Board,
President and Chief Executive Officer of Theatrix Interactive, Inc., a consumer
educational software publisher, since April 1994. In August 1984, he founded On
Point Developments, Inc., a venture management company, where he has served as
President since its formation. He received an A.B. degree in economics from De
Pauw University and an M.B.A. degree from Harvard Business School.
 
BOARD MEETINGS AND COMMITTEES
 
     The Board of Directors held five (5) meetings during fiscal 1996. All
members of the Board of Directors during fiscal 1997 attended more than
seventy-five percent (75%) of the aggregate of the total number of meetings of
the Board of Directors held during such period for which he or she was a
director. All directors attended all meetings held by all committees of the
Board on which such director served. There are no family relationships among
executive officers or directors of the Company. The Board of Directors has an
Audit Committee and a Compensation Committee.
 
     The Audit Committee of the Board of Directors held four (4) meetings during
fiscal 1997. The Audit Committee is currently comprised of Directors Hallman and
Jaggers. Director Jaggers has decided not to stand for re-election and it is
anticipated that Director Carter will replace him on the Audit Committee. The
 
                                        3

<PAGE>   6
 
Audit Committee reviews, acts on and reports to the Board of Directors with
respect to various auditing and accounting matters, including the selection of
the Company's auditors, the scope of the annual audits, fees to be paid to the
auditors, the performance of the Company's auditors and the accounting practices
of the Company.
 
     The Compensation Committee of the Board of Directors held two (2) meetings
during fiscal 1997. The Compensation Committee, which is comprised of Directors
Bartz and Wall, establishes salaries, incentives and other forms of compensation
for officers and other employees of the Company and administers the incentive
compensation and benefit plans of the Company.
 
DIRECTOR COMPENSATION
 
     Directors of the Company do not receive compensation for services provided
as a director. The Company also does not pay compensation for committee
participation or special assignments of the Board of Directors. However, the
directors are eligible to receive grants of stock options under the Automatic
Option Grant Program in effect under the Company's 1995 Stock Incentive Plan
(the "1995 Plan"), under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
option shares on the grant date.
 
     Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member will receive an option grant for 24,000 shares of
Common Stock on the date he or she joins the Board, provided such individual has
not otherwise been in the prior employ of the Company. In addition, at each
Annual Shareholders Meeting, each individual who is to continue to serve as a
non-employee Board member will receive an option grant to purchase 6,000 shares
of Common Stock, provided such individual has served on the Board for at least
six (6) months.
 
     Accordingly, at the 1996 Annual Shareholders Meeting held on October 23,
1996, each of the following individuals re-elected as a non-employee Board
member received an option grant for 6,000 shares of Common Stock under the
Automatic Option Grant Program with an exercise price of $31.50 per share:
Messrs. Valentine, Hallman, Jaggers and Wall and Ms. Bartz. In addition, Mr.
Carter received an option grant for 24,000 shares under the Automatic Option
Grant Program with an exercise price of $29.125 per share. The grant was made on
April 30, 1997 upon his appointment to the Board.
 
     Each automatic option will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service, and will be
immediately exercisable for all the option shares. However, any shares purchased
upon exercise of the option will be subject to repurchase by the Company, at the
option exercise price paid per share, should the optionee cease service on the
Board prior to vesting in those shares. The initial 24,000 share grant will vest
in a series of four (4) successive equal annual installments over the optionee's
period of Board service measured from the grant date. Each annual 6,000 share
grant will vest upon the optionee's completion of one term of Board service
measured from the grant date and continuing through the day immediately
preceding the next Annual Meeting. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
 
     For further information concerning such automatic option grants, please see
"Proposal No. 3 -- Amendment of the 1995 Stock Incentive Plan -- Automatic
Option Grant Program" to follow.
 
 
    THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR ELECTION OF
ALL OF THE ABOVE NOMINEES FOR ELECTION AS DIRECTORS.
 

                                PROPOSAL NO. 2:
 
                 RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
 
     The Company is asking the shareholders to ratify the selection of Deloitte
and Touche LLP as the Company's independent public accountants for the fiscal
year ending April 30, 1998. The affirmative vote of
 
                                        4

<PAGE>   7
 
the holders of a majority of the shares represented and voting at the Annual
Meeting will be required to ratify the selection of Deloitte and Touche LLP.
 
     In the event the shareholders fail to ratify the appointment, the Audit
Committee of the Board of Directors will consider it as a direction to select
other auditors for the subsequent year. Even if the selection is ratified, the
Board in its discretion may direct the appointment of a different independent
accounting firm at any time during the year if the Board determines that such a
change would be in the best interest of the Company and its shareholders.
 
     A representative of Deloitte and Touche LLP is expected to be present at
the Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so, and will be available to respond to appropriate questions.
 
 
    THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL
TO RATIFY THE SELECTION OF DELOITTE AND TOUCHE LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING APRIL 30, 1998.
 

                                PROPOSAL NO. 3:
 
                   AMENDMENT OF THE 1995 STOCK INCENTIVE PLAN
 
     The Company's shareholders are being asked to approve a series of
amendments to the Company's 1995 Stock Incentive Plan (the "1995 Plan") which
will effect the following changes: (i) increase the maximum number of shares of
Common Stock authorized for issuance over the term of the 1995 Plan from
3,406,262 shares to 5,006,262 shares, (ii) modify the vesting provisions to be
in effect for future option grants made to non-employee Board members under the
Automatic Option Grant Program in effect under the 1995 Plan, (iii) allow the
individuals who administer the 1995 Plan to be included within the group of non-
employee Board members eligible to receive option grants and direct stock
issuances under the Discretionary Option Grant and Stock Issuance Programs in
effect under the 1995 Plan, (iv) allow unvested shares issued under the 1995
Plan and subsequently repurchased by the Company at the option exercise or
direct issue price paid per share to be reissued under the 1995 Plan, (v) remove
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator, (vi) eliminate the stock appreciation right provisions
and loan features of the 1995 Plan and (vii) effect a series of additional
changes to the provisions of the 1995 Plan (including the shareholder approval
requirements and the transferability of non-statutory stock options) in order to
take advantage of the recent amendments to Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, which exempts certain officer and director transactions
under the 1995 Plan from the short-swing liability provisions of the federal
securities laws.
 
     The proposed share increase will assure that a sufficient reserve of Common
Stock is available under the 1995 Plan to attract and retain the services of key
individuals essential to the Company's long-term growth and success. The stock
appreciation right provisions and loan features of the 1995 Plan have never been
utilized and are being eliminated in order to simplify plan administration. The
remaining amendments will provide the Company with more opportunities to make
equity incentives available to non-employee Board members as an inducement for
their continued service and to facilitate plan administration by eliminating a
number of restrictions previously incorporated into the 1995 Plan to comply with
the applicable requirements of SEC Rule 16b-3 prior to its recent amendment.
 
     The 1995 Plan is a successor to the Company's 1993 Stock Option/Stock
Issuance Plan (the "Predecessor Plan"). The 1995 Plan became effective on
November 20, 1995 (the "Effective Date") in connection with initial public
offering of the Company's Common Stock. On July 17, 1997, the Board adopted the
amendments to the 1995 Plan that are the subject of this Proposal.
 
     The following is a summary of the principal features of the 1995 Plan, as
most recently amended. However, the summary does not purport to be a complete
description of all the provisions of the 1995 Plan. Any shareholder of the
Company who wishes to obtain a copy of the actual plan document may do so upon
written request to the Corporate Secretary at the Company's principal offices in
Santa Clara, California.
 
                                        5

<PAGE>   8
 
  Equity Incentive Programs
 
     The 1995 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which individuals in the Company's
service may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock at an exercise price per share not less than the
fair market value on the grant date, (ii) the Stock Issuance Program under which
such individuals may, in the Plan Administrator's discretion, be issued shares
of Common Stock directly, through the purchase of such shares at a price per
share not less than the fair market value at the time of issuance or as a
fully-paid bonus for services rendered the Company or the attainment of
designated performance goals, (iii) the Salary Investment Option Grant Program
under which the Company's executive officers and other highly-compensated
employees may elect to have a portion of their base salary applied each year to
the acquisition of special below-market option grants, and (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
option shares on the grant date.
 
     Options granted under the Discretionary Option Grant Program may be either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the Automatic Option Grant and the Salary
Investment Option Grant Programs will be non-statutory options.
 
  Administration
 
     The 1995 Plan (other than the Automatic Option Grant Program) is
administered by the Compensation Committee of the Board. The Compensation
Committee acting in such administrative capacity (the "Plan Administrator") has
complete discretion (subject to the provisions of the 1995 Plan) to authorize
option grants and direct stock issuances under the 1995 Plan. Pursuant to
provisions in the 1995 Plan, the Board may appoint a secondary committee of one
or more Board members, including employee directors, to authorize option grants
and direct stock issuances to eligible persons other than executive officers and
Board members subject to the short-swing liability provisions of the federal
securities laws. All grants under the Automatic Option Grant Program are to be
made in strict compliance with the provisions of that program, and no
administrative discretion will be exercised by the Plan Administrator with
respect to the grants made under such program. Shareholder approval of this
Proposal will also constitute pre-approval of each option that is granted on or
after the date of the 1997 Annual Meeting pursuant to the provisions of the
Automatic Option Grant Program and the subsequent exercise of each such option
in accordance with those provisions.
 
  Share Reserve
 
     A total of 5,006,262 shares of Common Stock have been authorized for
issuance under the 1995 Plan, assuming shareholder approval of the 1,600,000
share increase that forms part of this Proposal. In no event may any one
participant in the 1995 Plan be granted stock options and direct stock issuances
for more than 500,000 shares in the aggregate per calendar year under the 1995
Plan.
 
     In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to (i) the maximum number and class of securities issuable under the 1995
Plan, (ii) the maximum number and class of securities for which any one
participant may be granted stock options and direct stock issuances per calendar
year, (iii) the number and class of securities for which option grants will
subsequently be made under the Automatic Option Grant Program to each
newly-elected or continuing non-employee Board member, and (iv) the number and
class of securities and the exercise price per share in effect under each
outstanding option in order to prevent dilution or enlargement of benefits
thereunder.
 
     Should an option expire or terminate for any reason prior to exercise in
full or be canceled in accordance with the provisions of the 1995 Plan, the
shares subject to the portion of the option not so exercised or canceled will be
available for subsequent issuance under the 1995 Plan. Unvested shares issued
under the 1995 Plan and subsequently repurchased by the Company at the original
option exercise or direct issue price
 
                                        6

<PAGE>   9
 
paid per share will also be added back to the share reserve and, accordingly,
will be available for subsequent issuance under the 1995 Plan.
 
  Eligibility
 
     Employees of the Company or any parent or subsidiary corporation,
non-employee members of the Board or the board of directors of any parent or
subsidiary corporation, and consultants and other independent advisors in the
service of the Company or its parent or subsidiary corporations will be eligible
to participate in the Discretionary Option Grant and Stock Issuance Programs.
Non-employee members of the Board are also eligible to participate in the
Automatic Option Grant Program. Only the Company's officers and other
highly-compensated employees are eligible to participate in the Salary
Investment Option Grant Program.
 
     As of May 31, 1997, six (6) executive officers, six (6) non-employee Board
members and approximately two-hundred and sixty-three (263) other employees were
eligible to participate in the Discretionary Option Grant and Stock Issuance
Programs. The six (6) non-employee Board members were also eligible to
participate in the Automatic Option Grant Program, and twenty-four (24) officers
and other highly-compensated employees were eligible to participate in the
Salary Investment Option Grant Program.
 
  Valuation
 
     The fair market value per share of Common Stock on any relevant date under
the 1995 Plan will be the closing selling price per share on that date on the
Nasdaq National Market. On May 31, 1997, the closing selling price per share was
$40.562.
 
DISCRETIONARY OPTION GRANT PROGRAM
 
     Options granted under the Discretionary Option Grant Program will have an
exercise price per share not less than the fair market value per share of Common
Stock on the option grant date. No granted option will have a term in excess of
ten (10) years. The options will generally become exercisable in a series of
installments over the optionee's period of service with the Company.
 
     Upon cessation of service, the optionee will have a limited period of time
in which to exercise his or her outstanding options for any shares in which the
optionee is vested at that time. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding options may be exercised and/or to
accelerate the exercisability or vesting of such options in whole or in part.
Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.
 
     The shares of Common Stock acquired upon the exercise of one or more
options may be unvested and subject to repurchase by the Company, at the
original exercise price paid per share, if the optionee ceases service with the
Company prior to vesting in those shares. The Plan Administrator will have
complete discretion to establish the vesting schedule to be in effect for any
such unvested shares and, in certain circumstances, may cancel the Company's
outstanding repurchase rights with respect to those shares and thereby
accelerate the vesting of those shares.
 
     The Plan Administrator will also have the authority to effect the
cancellation of outstanding options under the Discretionary Option Grant Program
(including outstanding options under the Predecessor Plan) and to issue
replacement options with an exercise price based on the market price of Common
Stock at the time of the new grant. To date the Company has neither canceled
outstanding options or issued replacement options.
 
STOCK ISSUANCE PROGRAM
 
     Shares may be sold under the Stock Issuance Program at a price per share
not less than the fair market value on the issuance date. Shares may also be
issued solely as a bonus for past services or upon the attainment of specified
performance goals.
 
                                        7

<PAGE>   10
 
     Share awards under the Stock Issuance Program may be made in the form of
direct stock issuances immediately vested upon issuance or subject to a vesting
schedule tied to the performance of service or the attainment of designated
performance goals or in the form of share rights which entitle the recipient to
receive a specified number of shares upon the attainment of one or more
pre-established performance goals. The Plan Administrator will, however, have
the discretionary authority at any time to accelerate the vesting or issuance of
any and all unvested shares or share awards outstanding under the 1995 Plan.
 
SALARY INVESTMENT OPTION GRANT PROGRAM
 
     The Plan Administrator has complete discretion to select the individuals
who are to participate in the Salary Investment Option Grant Program each
calendar year. As a condition to such participation, each selected individual
must, prior to the start of the calendar year of participation, file with the
Plan Administrator an irrevocable authorization for the Company to reduce his or
her base salary for the upcoming calendar year by an amount not less than
$15,000 and not more than $75,000. Each selected individual who properly files a
salary reduction authorization will automatically be granted an option under the
Salary Investment Option Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.
 
     Each option will be subject to substantially the same terms and conditions
applicable to option grants made under the Discretionary Grant Program, except
for the following differences:
 
     - The exercise price per share will be equal to one-third of the fair
       market value per share of stock on the grant date.
 
     - The number of option shares will be determined by dividing the total
       dollar amount of the approved reduction in the participant's base salary
       by two-thirds of the fair market value per share of stock on the grant
       date. As a result, the total spread on the option (the fair market value
       of the option shares on the grant date less the aggregate exercise price
       payable for those shares) will equal the dollar amount of the reduction
       to the optionee's base salary to be in effect for the calendar year for
       which the grant is made.
 
     - The option will become exercisable in a series of twelve (12) successive
       equal monthly installments upon the optionee's completion of each
       calendar month of service in the calendar year for which the salary
       reduction is in effect.
 
     - Should the optionee cease service for any reason while holding one or
       more options granted under the Salary Investment Option Grant Program,
       then each such option shall remain exercisable for any or all of the
       shares for which the option is exercisable at the time of such cessation
       of service until the expiration of the ten (10) year option term.
 
AUTOMATIC OPTION GRANT PROGRAM
 
     Under the Automatic Option Grant Program, each non-employee Board member
will, on the date of his or her initial election or appointment to the Board,
automatically be granted a non-statutory option to purchase 24,000 shares of
Common Stock, provided such individual has not previously been in the employ of
the Company (or any parent or subsidiary). In addition, on the date of each
Annual Meeting, each individual who is to continue to serve as a non-employee
Board member will automatically be granted a non-statutory option to purchase
6,000 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There will be no limit on
the number of such 6,000 share option grants any one non-employee Board member
may receive over his or her period of Board service, and non-employee Board
members who have previously been in the Company's employ will be eligible to
receive those annual grants.
 
     Each option granted under the Automatic Option Grant Program will have an
exercise price per share equal to one hundred percent (100%) of the fair market
value per share of Common Stock on the option grant date and a maximum term of
ten (10) years measured from such grant date, subject to earlier termination at
the end of the twelve (12) month period measured from the date of the optionee's
cessation of Board service.
 
                                        8

<PAGE>   11
 
Each such option will be immediately exercisable for all the option shares.
However, any shares purchased under the option will be subject to repurchase by
the Company, at the option exercise price paid per share, upon the optionee's
cessation of Board service prior to vesting in those shares. The shares subject
to each initial 24,000 share automatic option grant will vest in a series of
four (4) successive equal annual installments upon the optionee's completion of
each year of Board service over the four (4) year period measured from the grant
date. The shares subject to each annual 6,000 share grant made after July 17,
1997 will vest upon the optionee's continuation in Board service through the day
immediately preceding the next Annual Shareholders Meeting following the option
grant date. For shares subject to annual option grants made under the Automatic
Option Grant Program prior to July 17, 1997, vesting is to occur upon the
optionee's completion of one full year of Board service measured from the grant
date.
 
     The shares subject to each automatic option grant will immediately vest in
full upon (i) the optionee's death or permanent disability while a Board member,
(ii) an acquisition of the Company by merger or asset sale, (iii) the successful
completion of a tender offer for more than fifty percent (50%) of the Company's
outstanding voting stock or (iv) a change in the majority of the Board effected
through one or more proxy contested elections for Board membership.
 
GENERAL PROVISIONS
 
  Acceleration
 
     In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. Any options assumed in connection with such acquisition may, in the
Plan Administrator's discretion, be subject to immediate acceleration, and any
unvested shares which do not vest at the time of such acquisition may be subject
to full and immediate vesting, in the event the individual's service with the
successor entity is subsequently terminated within a specified period (not to
exceed twelve (12) months) following the acquisition. In connection with a
change in control of the Company (whether by successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or a change in the
majority of the Board by one or more contested elections for Board membership),
the Plan Administrator will have the discretionary authority to provide for
automatic acceleration of outstanding options under the Discretionary Option
Grant Program and the automatic vesting of all unvested shares outstanding under
the Discretionary Option Grant and Stock Issuance Programs, with such
acceleration or vesting to occur upon the termination of the individual's
service within a designated period (not to exceed twelve (12) months) after the
change in control. Each option outstanding under the Salary Investment Option
Grant Program will automatically accelerate in full upon an acquisition or other
change in control of the Company.
 
     The acceleration of vesting upon a change in the ownership or control of
the Company may be seen as an anti-takeover provision and may have the effect of
discouraging a merger proposal, a takeover attempt or other efforts to gain
control of the Company.
 
  Option Transferability
 
     Options are generally not assignable or transferable other than by will or
the laws of inheritance and may only be exercised by the optionee during his or
her lifetime. However, the Plan Administrator may allow non-statutory options to
be transferred or assigned during the optionee's lifetime to one or more members
of the optionee's family or to a trust established exclusively for family
members, to the extent such transfer or assignment is in furtherance of the
optionee's estate plan.
 
                                        9

<PAGE>   12
 
  Special Tax Election
 
     The Plan Administrator may provide one or more holders of options or
unvested shares (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to have the Company withhold a
portion of the shares otherwise issuable to such individuals in satisfaction of
the tax liability incurred in connection with the exercise of those options or
the vesting of those shares. Alternatively, the Plan Administrator may allow
such individuals to deliver previously acquired shares of Common Stock in
payment of such tax liability.
 
  Stock Awards
 
     The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated individuals and
groups, the number of shares of Common Stock subject to options granted under
the 1995 Plan between the Plan Effective Date and May 31, 1997, together with
the weighted average exercise price payable per share. The Company has not made
any direct stock issuances to date under the 1995 Plan.
 

<TABLE>
<CAPTION>
                                                              OPTIONS GRANTED       WEIGHTED AVERAGE
                           NAME                              (NUMBER OF SHARES)      EXERCISE PRICE
- - -----------------------------------------------------------  ------------------     ----------------
<S>                                                          <C>                    <C>
Daniel J. Warmenhoven......................................          80,000              $29.13
Thomas F. Mendoza..........................................          22,500              $31.12
M. Helen Bradley...........................................          20,000              $31.12
Charles E. Simmons.........................................         100,000              $22.69
Michael E. Paul............................................              --                  --
All executive officers as a group (Six persons)............         422,500              $31.59
Donald T. Valentine........................................           6,000              $31.50
Carol A. Bartz.............................................           6,000              $31.50
Larry R. Carter............................................          24,000              $29.13
Michael R. Hallman.........................................           6,000              $31.50
Robert T. Wall.............................................           6,000              $31.50
All directors who are not officers (Six persons)...........          54,000              $30.44
All employees, including current officers who are not
  executive officers, as a group...........................       1,636,028              $10.70
</TABLE>

 
     As of May 31, 1997, options covering 2,813,691 shares of Common Stock were
outstanding under the 1995 Plan, 1,870,626 shares remained available for future
option grant and direct stock issuance, assuming shareholder approval of the
1,600,000 share increase which forms part of this Proposal, and 321,945 shares
have been issued under the 1995 Plan in connection with option exercises.
 
     The Company also maintains the Special Non-Officer Stock Option Plan (the
"Special Plan") under which 400,000 shares of Common Stock have been reserved
for issuance to employees of the Company (or any parent or subsidiary
corporation) who are not officers or Board members. As of May 31, 1997, options
covering 98,700 shares of Common Stock were outstanding under the Special Plan,
but no shares had been issued.
 
  Amendment and Termination
 
     The Board may amend or modify the 1995 Plan in any or all respects
whatsoever, subject to any shareholder approval required under applicable law or
regulation. The Board may terminate the 1995 Plan at any time, and the 1995 Plan
will in all events terminate on August 31, 2005.
 
                                       10

<PAGE>   13
 
FEDERAL INCOME TAX CONSEQUENCES
 
  Option Grants
 
     Options granted under the 1995 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
 
     Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of a taxable disposition. For Federal tax purposes, dispositions are
divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the optionee
has held the shares for more than two (2) years after the option grant date and
more than one (1) year after the exercise date. If either of these two (2)
holding periods is not satisfied, then a disqualifying disposition will result.
 
     Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be taxable
as ordinary income to the optionee. Any additional gain or loss recognized upon
the disposition will be recognized as a capital gain or loss by the optionee.
 
     If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
 
     Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
 
     If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
 
     The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
 
  Direct Stock Issuance
 
     The tax principles applicable to direct stock issuances under the 1995 Plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
 
                                       11

<PAGE>   14
 
  Deductibility of Executive Compensation
 
     The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Internal Revenue Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by the Company without
limitation under Internal Revenue Code Section 162(m).
 
ACCOUNTING TREATMENT
 
     Option grants or stock issuances with exercise or issue prices equal to the
fair market value of the shares at the time of issuance or grant will not result
in any charge to the Company's earnings, but the Company must disclose in the
notes to the Company's financial statements the fair value of options granted
under the 1995 Plan and the pro forma impact on the Company's annual net income
and earnings per share as though the computed fair value of such options had
been treated as compensation expense. In addition, the number of outstanding
options may be a factor in determining the Company's earnings per share on a
fully-diluted basis.
 
NEW PLAN BENEFITS
 
     As of May 31, 1997, no options have been granted to date on the basis of
the 1,600,000 share increase to the 1995 Plan which forms part of this Proposal.
 
SHAREHOLDER APPROVAL
 
     The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and voting at the Annual Meeting, together with
the affirmative vote of the majority of the required quorum, is required for
approval of the amendments to the 1995 Plan. Should such shareholder approval
not be obtained, then any options granted on the basis of the 1,600,000 share
increase which forms part of this Proposal will terminate without becoming
exercisable for any of the shares of Common Stock subject to those options, and
no further options will be granted on the basis of such share increase. In
addition, no change will be made to the vesting provisions in effect for future
option grants under the Automatic Option Grant Program, and the non-employee
Board members serving as Plan Administrator will not become eligible to
participate in the Discretionary Option Grant or Stock Issuance Programs.
Finally, unvested shares repurchased by the Company at the option exercise or
direct issue price paid per share will not be added back to the share reserve
for reissuance. The 1995 Plan will, however, continue to remain in effect, and
option grants and direct stock issuances may continue to be made pursuant to the
provisions of the 1995 Plan in effect prior to the amendments summarized in this
Proposal, until the available reserve of Common Stock as last approved by the
shareholders has been issued.
 
 
    THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
AMENDMENTS TO THE 1995 PLAN.
 
                                       12

<PAGE>   15
 

                         SECURITY OWNERSHIP OF CERTAIN
                        BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1997 by (i) each person
who is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors and Named Officers
and (iii) all current executive officers and directors as a group.
 

<TABLE>
<CAPTION>
 
                                                                                 SHARES
                                                                           BENEFICIALLY OWNED(1)
             5% SHAREHOLDERS, NAMED OFFICERS, DIRECTORS AND                ---------------------
               EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP                  NUMBER       PERCENT
- - -------------------------------------------------------------------------  ---------     -------
<S>                                                                        <C>           <C>
Pilgrim Baxter & Associates Ltd..........................................  1,581,000       9.5%
  1255 Drummers Lane, Suite 300
  Wayne, PA 19087
Nicholas Applegate Capital...............................................  1,254,800       7.5%
  600 W. Broadway, 32nd Floor
  San Diego, CA 92101
Daniel J. Warmenhoven(2).................................................    522,000       3.1%
Thomas F. Mendoza(3).....................................................    177,250       1.1%
M. Helen Bradley(4)......................................................    103,047          *
Michael E. Paul..........................................................     68,191          *
Charles E. Simmons(5)....................................................     26,503          *
Donald T. Valentine(6)...................................................    703,370       4.2%
Robert T. Wall(7)........................................................    157,757          *
Michael R. Hallman(8)....................................................    109,478          *
Carol A. Bartz(9)........................................................     87,423          *
Kurt R. Jaggers(10)......................................................     38,315          *
All directors and executive officers as a group (12 persons).............  1,993,334      12.0%
</TABLE>

 
- - ---------------
 
  *  Less than 1%
 
 (1) Except as indicated in the footnotes to this table and pursuant to
     applicable community property laws, the persons named in the table have
     sole voting and investment power with respect to all shares of Common
     Stock.
 
 (2) Includes 419,750 shares held by Daniel J. Warmenhoven & Charmaine A.
     Warmenhoven, trustees to The Warmenhoven 1987 Revocable Trust UTA dated
     12/16/87, as amended, of which Mr. Warmenhoven is a trustee and shares
     voting and investment powers. Excludes 4,825 shares held by Charmaine A.
     Warmenhoven, Mr. Warmenhoven's spouse, as separate property. Also excludes
     150,000 shares held by Richard A. Andre, trustee to The Warmenhoven 1995
     Children's Trust, under trust agreement dated 5/1/95, and 7,350 shares held
     by Richard A. Andre, trustee to the Daniel J. Warmenhoven 1991 Children's
     Trust, as Mr. Warmenhoven disclaims beneficial ownership over the shares
     held by such trusts. Includes 100,000 shares of Common Stock issuable upon
     exercise of stock options granted under the 1993 Plan which are currently
     exercisable or which will become exercisable within 60 days after May 31,
     1997.
 
 (3) Does not include 18,250 shares held by Mr. Mendoza's spouse.
 
 (4) Does not include 522 shares held by Ms. Bradley's spouse. Includes 100,000
     shares of Common Stock issuable upon exercise of options granted under the
     1993 Plan which are currently exercisable or which will become exercisable
     within 60 days after May 31, 1997.
 
 (5) Includes 26,250 shares of Common Stock issuable upon exercise of options
     granted under the 1995 Plan which are currently exercisable or which will
     become exercisable within 60 days after May 31, 1997.
 
 (6) Includes 623,658 shares held by Sequoia Capital Growth Fund, 47,914 shares
     held Sequoia Technology Partners III, 5,504 shares held by Sequoia
     Technology Partners VI, 4,404 shares held by Sequoia XXIV
 
                                       13

<PAGE>   16
 
     and 15,890 shares held in trust by Donald T. Valentine, trustee to the
     Donald T. Valentine Family Trust dated 4/29/67. With exception to the
     shares held by the Donald T. Valentine Family Trust, Mr. Valentine, who is
     the Chairman of the Company's Board of Directors, disclaims beneficial
     ownership of the shares. Mr. Valentine is an affiliate of the Sequoia
     entities and may be deemed to share voting and investment power with
     respect to such shares. Holdings for Mr. Valentine include 6,000 shares of
     Common Stock issuable upon exercise of a currently exercisable stock option
     granted under the 1995 Plan.
 
 (7) Includes 40,000 shares of Common Stock issuable upon exercise of a
     currently exercisable option granted under the 1993 Plan and 6,000 shares
     of Common Stock issuable upon exercise of a currently exercisable option
     granted under the 1995 Plan. In addition, includes 500 shares held as
     custodian for Jennifer C. Wall, 500 shares held as custodian for Kristen E.
     Wall and 1,000 shares held by the Robert T. Wall trust under the will of
     Katherine F. Wall for the benefit of Jennifer C. Wall and Kristen E. Wall.
 
 (8) Includes 50,000 shares of Common Stock issuable upon exercise of options
     granted under the 1993 Plan and 6,000 shares of Common Stock issuable upon
     exercise of options granted under the 1995 Plan which are currently
     exercisable or which will become exercisable within 60 days after May 31,
     1997.
 
 (9) Includes 30,000 shares of Common Stock issuable upon exercise of options
     granted under the 1993 Plan and 6,000 shares of Common Stock issuable upon
     exercise of options granted under the 1995 Plan which are currently
     exercisable or which will become exercisable within 60 days after May 31,
     1997. In addition, includes 51,423 shares held by the Carol Ann Bartz Trust
     UAD 10/14/87.
 
(10) Includes 30,000 shares of Common Stock issuable upon exercise of options
     granted under the 1993 Plan and 6,000 shares of Common Stock issuable upon
     exercise of options granted under the 1995 Plan which are currently
     exercisable or which will become exercisable within 60 days after May 31,
     1997.
 

SECTION 16(a) Beneficial Ownership Reporting Compliance
 
     Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission (the "SEC") initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten percent
(10%) shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
 
     Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that during the fiscal year ended April 25, 1997, its officers,
directors and holders of more than 10% of the Company's common stock complied
with all Section 16(a) filing requirements, except that a late annual statement
reporting the number of SEC Rule 16(b)-3 exempt transactions noted was filed by
each of Messrs. Hallman (1), Jaggers (1), Wall (1), Valentine (1), Warmenhoven
(1), Mendoza (5), Paul (1), Simmons (2) and Ms. Bartz (1), two late statements
reporting three exempt transactions were filed by Ms. Bradley, and initial
reports timely filed by each of Messrs. Allen and Mendoza were amended to
include an inadvertently omitted employee option holding.
 
                                       14

<PAGE>   17
 
 
                EXECUTIVE COMPENSATION AND RELATED INFORMATION
 
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
 
     The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers for the 1997 fiscal year for services rendered in
all capacities to the Company and its subsidiaries for the 1997, 1996 and 1995
fiscal years. The listed individuals shall be hereinafter referred to as the
"Named Officers."
 
     No other executive officer who would have otherwise been includible in such
table on the basis of salary and bonus earned for the 1997 fiscal year has
resigned or terminated employment during that fiscal year.
 

                           SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                                        LONG-TERM
                                                                       COMPENSATION
                                                                          AWARD
                                                                       ------------
                                           ANNUAL COMPENSATION          SECURITIES
                                       ---------------------------      UNDERLYING         ALL OTHER
     NAME AND PRINCIPAL POSITION       YEARS    SALARY     BONUS        OPTIONS(#)      COMPENSATION(2)
- - -------------------------------------  -----   --------   --------     ------------     ---------------
<S>                                    <C>     <C>        <C>          <C>              <C>
Daniel J. Warmenhoven................   1997   $223,077   $150,075             --           $ 1,385
  President and Chief                   1996    190,615    147,000        100,000(1)          1,306
  Executive Officer                     1995     96,230         --        700,000(1)             --
Thomas F. Mendoza....................   1997    124,616    335,985         22,500               700
  Vice President,                       1996    120,000    186,539             --               391
  Worldwide Sales                       1995    117,694     60,077        200,000(1)             --
M. Helen Bradley(3)..................   1997    159,231     75,000         20,000               551
  Vice President,                       1996     86,538     55,000(4)     100,000(1)            353
  Engineering                           1995         --         --             --                --
Charles E. Simmons(5)................   1997    152,000     72,000        100,000               893
  Vice President,                       1996         --         --             --                --
  Marketing                             1995         --         --             --                --
Michael E. Paul......................   1997    120,000     66,060             --             6,815(6)
  Vice President,....................   1996    120,000     43,179             --             1,383
  International Sales                   1995     90,923     26,191        125,000(1)             --
</TABLE>

 
- - ---------------
 
(1) The options listed in the table were granted under the Company's 1993 Stock
    Option/Stock Issuance Plan. The options were incorporated into the Company's
    1995 Stock Incentive Plan at the time of the Company's initial public
    offering, but will continue to be governed by their existing terms.
 
(2) Except as noted in item (6), represents the cost of term life insurance.
 
(3) Ms. Bradley joined the Company in September of 1995.
 
(4) Includes a $10,000 signing bonus.
 
(5) Mr. Simmons joined the Company in May of 1996.
 
(6) Includes $5,496 expatriate housing allowance.
 
                                       15

<PAGE>   18
 
STOCK OPTIONS
 
     The following table contains information concerning the stock option grants
made to each of the Named Officers for the 1997 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
 

<TABLE>
<CAPTION>
                                                       INDIVIDUAL GRANT
                                           ----------------------------------------    POTENTIAL REALIZABLE
                                            PERCENT OF                                VALUE OF ASSUMED ANNUAL
                              NUMBER OF       TOTAL                                       RATES OF STOCK
                              SECURITIES     OPTIONS                                  PRICE APPRECIATION FOR
                              UNDERLYING    GRANTED TO                                    OPTION TERM(1)
                               OPTIONS     EMPLOYEES IN      PRICE       EXPIRATION   -----------------------
            NAME              GRANTED(2)   FISCAL YEAR    ($/SHARE)(3)      DATE          5%          10%
- - ----------------------------  ----------   ------------   ------------   ----------   ----------   ----------
<S>                           <C>          <C>            <C>            <C>          <C>          <C>
Daniel J. Warmenhoven.......        --           --          $   --             --    $       --   $       --
Thomas F. Mendoza...........    22,500         1.3%           31.12        3/31/07       440,352    1,115,938
M. Helen Bradley............    20,000         1.2%           31.12        3/31/07       391,424      991,945
Charles E. Simmons..........    90,000         5.4%           21.75        7/31/06     1,231,061    3,119,751
                                10,000         0.6%           31.12        3/31/07       195,712      495,973
Michael E. Paul.............        --           --              --             --            --           --
</TABLE>

 
- - ---------------
 
(1) There is no assurance provided to the option holder or any other holder of
    the Company's securities that the actual stock price appreciation over the
    10-year option term will be at the 5% and 10% assumed annual rates of
    compounded stock price appreciation.
 
(2) The options were granted under the Company's 1995 Stock Option/Stock
    Issuance Plan on the following dates: Mr. Simmons (90,000 shares) on August
    1, 1996; Mr. Mendoza, Ms. Bradley and Mr. Simmons (10,000 shares) on April
    1, 1997. Each option has a maximum term of 10 years measured from the grant
    date, subject to earlier termination upon the optionee's cessation of
    service with the Company. The options will vest as to twenty-five percent
    (25%) of the shares upon the optionee's completion of one year of service
    measured from the applicable grant date and with respect to the balance of
    the shares in a series of equal monthly installments over the thirty-six
    (36) months of service thereafter.
 
(3) The exercise price may be paid in cash, in shares of Common Stock valued at
    fair market value on the exercise date or through a cashless exercise
    procedure involving a same-day sale of the purchased shares.
 
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
 
     The following table sets forth information concerning option exercises and
option holdings for the 1997 fiscal year by each of the Named Officers. No stock
appreciation rights were exercised during such year or were outstanding at the
end of the year.
 

<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                              NUMBER OF                    UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                               SHARES                         OPTIONS AT FY-END               AT FY-END(2)
                             ACQUIRED ON      VALUE      ---------------------------   ---------------------------
           NAME               EXERCISE     REALIZED(1)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
- - ---------------------------  -----------   -----------   -----------   -------------   -----------   -------------
<S>                          <C>           <C>           <C>           <C>             <C>           <C>
Daniel J. Warmenhoven......      --           $  --        100,000(3)          --      $ 2,040,000           --
Thomas F. Mendoza..........      --              --             --         22,500               --           --
M. Helen Bradley...........      --              --        100,000(3)      20,000        2,130,000           --
Charles E. Simmons.........      --              --             --        100,000               --      607,500
Michael E. Paul............      --              --             --             --               --           --
</TABLE>

 
- - ---------------
 
(1) Based on the fair market value of the purchased option shares at the time of
    exercise less the option exercise price paid for those shares.
 
(2) Based on the fair market value of the shares at the end of the 1997 fiscal
    year ($28.50 per share) less the option exercise price payable for those
    shares.
 
                                       16

<PAGE>   19
 
(3) The options are fully exercisable as of the fiscal year end, but any shares
    purchased thereunder will be subject to repurchase by the Company at the
    original option exercise price paid per share should the optionee leave the
    Company prior to vesting in the shares. As of April 25, 1997, Mr.
    Warmenhoven is vested in 14,165 shares and Ms. Bradley is vested in 39,583
    shares.
 
 
        REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
                           ON EXECUTIVE COMPENSATION
 
     The Compensation Committee of the Board of Directors (the "Committee") is
currently comprised of two non-employee directors, Carol A. Bartz and Robert T.
Wall, and was formed in November of 1995, in anticipation of the initial public
offering of the Company's Common Stock.
 
     For the 1997 fiscal year, all compensation decisions with respect to base
salaries and bonuses for the Company's executive officers were made by the
Compensation Committee. The Committee made its decisions primarily on the basis
of the Committee's understanding of the compensation practices of similarly-
sized companies in the industry and fixed the compensation package of each
executive officer at a level which was competitive with those practices.
 
     The Committee administers the Company's compensation policies and programs
and has primary responsibility for executive compensation matters, including the
establishment of the base salaries of the Company's executive officers, the
approval of individual bonuses and bonus programs for executive officers and the
administration of certain employee benefit programs. In addition, the Committee
has exclusive responsibility for administering the Company's 1995 Stock
Incentive Plan, under which stock option grants and direct stock issuances may
be made to executive officers and other employees. The following is a summary of
policies which the Committee applies in setting the compensation levels for the
Company's executive officers.
 
     GENERAL COMPENSATION POLICY. The overall policy of the Committee is to
offer the Company's executive officers competitive compensation opportunities
based upon their personal performance, the financial performance of the Company
and their contribution to that performance. One of the primary objectives is to
have a substantial portion of each executive officer's compensation contingent
upon the Company's financial success as well as upon such executive officer's
own level of performance. Each executive officer's compensation package is
comprised of three elements: (i) base salary, which will be determined on the
basis of the individual's position and responsibilities with the Company, the
level of his or her performance and competitive salary levels, (ii) incentive
performance awards payable in cash and based upon a formula which takes into
account Company and individual performance and (iii) long-term stock-based
incentive awards designed to strengthen the mutuality of interests between the
executive officers and the Company's shareholders. Generally, as an executive
officer's level of responsibility increases, a greater portion of that
individual's total compensation will be dependent upon the Company's performance
and stock price appreciation rather than base salary.
 
     FACTORS. The primary factors taken into consideration in establishing the
components of each executive officer's compensation package for the 1997 fiscal
year are summarized below. However, the Committee may, in its discretion, apply
entirely different factors, such as different measures of financial performance,
for future fiscal years.
 
     BASE SALARY. In setting the base salary for each executive officer, the
Committee reviews published compensation survey data for its industry. The base
salary for each officer is designed to be competitive with the salary levels for
comparable positions in the published surveys as well as to reflect the
individual's personal performance and internal alignment considerations. The
relative weight given to each factor will vary with each individual in the sole
discretion of the Committee. For the 1997 fiscal year, the base salary of the
Company's executive officers ranged from the fiftieth percentile to the
seventy-fifth percentile of the base salary levels in effect for comparable
positions in the surveyed compensation data.
 
     INCENTIVE COMPENSATION. For the 1997 fiscal year, an incentive compensation
program was established pursuant to which each executive officer earned a bonus
on the basis of the Company's achievement of certain
 
                                       17

<PAGE>   20
 
operating income objectives and his or her individual performance. The bonus
amount was tied to a percentage of each executive officer's base salary on the
basis of the Company's actual financial performance in comparison to the
Company's business plan as measured in terms of operating income, with
additional consideration given to the attainment of individual goals. No bonus
would have been paid if the Company's actual operating income had been less than
80% of the plan. The Company's financial performance exceeded the plan and,
accordingly, the executive officers were awarded the bonuses indicated for them
in the Summary Compensation Table which appears earlier in this Proxy Statement.
 
     LONG-TERM STOCK-BASED INCENTIVE COMPENSATION. From time to time, the
Committee will make option grants to the Company's executive officers under the
1995 Plan. The grants will be designed to align the interests of each executive
officer with those of the shareholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant will allow the officer to
acquire shares of the Company's Common Stock at a fixed price per share (the
market price on the grant date) over a specified period of time (up to ten (10)
years), thus providing a return to the executive officer only if the market
price of the shares appreciates over the option term and the officer continues
in the Company's employ. The size of the option grant to each executive officer
will be designed to create a meaningful opportunity for stock ownership and will
be based upon the executive officer's current position with the Company,
internal comparability with option grants made to other Company executives, the
executive officer's current level of performance and the executive officer's
potential for future responsibility and promotion over the option term. The
Committee will also take into account the number of vested and unvested options
held by the executive officer in order to maintain an appropriate level of
equity incentive for that individual. However, the Committee does not intend to
adhere to any specific guidelines as to the relative option holdings of the
Company's executive officers.
 
     CEO COMPENSATION. The compensation payable to Mr. Warmenhoven, the
Company's Chief Executive Officer during fiscal year 1997, was determined by the
Compensation Committee. His base salary was set at a level which the Committee
felt would be competitive with the base salary levels in effect for chief
executive officers at similarly-sized companies within the industry and was at
approximately the fiftieth percentile of the published surveys. Based upon the
Committee's evaluation of the Company's achievement of certain performance goals
tied to operating income and Mr. Warmenhoven's individual performance, the
Committee awarded Mr. Warmenhoven a bonus of $150,075 for the 1997 fiscal year.
 
     COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to
publicly-held companies for compensation paid to certain executive officers, to
the extent that compensation exceeds $1 million per officer in any year. The
compensation paid to the Company's executive officers for the 1997 fiscal year
did not exceed the $1 million limit per officer, and it is not expected the
compensation to be paid to the Company's executive officers for the 1998 fiscal
year will exceed that limit. In addition, the Company's 1995 Stock Incentive
Plan is structured so that any compensation deemed paid to an executive officer
in connection with the exercise of his or her outstanding options under the 1995
Plan will qualify as performance-based compensation which will not be subject to
the $1 million limitation. Because it is very unlikely that the cash
compensation payable to any of the Company's executive officers in the
foreseeable future will approach the $1 million limit, the Committee has decided
at this time not to take any other action to limit or restructure the elements
of cash compensation payable to the Company's executive officers. The Committee
will reconsider this decision should the individual compensation of any
executive officer ever approach the $1 million level.
 
                               Submitted by the Compensation Committee of the
                            Board of Directors:
 
                               Carol A. Bartz, Board and Compensation Committee
                            Member
 
                               Robert T. Wall, Board and Compensation Committee
                            Member
 
                                       18

<PAGE>   21
 
          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee of the Company's Board of Directors is comprised
of Ms. Bartz and Mr. Wall. Neither of these individuals was at any time during
the 1997 fiscal year, or at any other time, an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
 
                EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
                        AND CHANGE-IN-CONTROL AGREEMENTS
 
     The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the other executive officers named in the
Summary Compensation Table.
 
     The options granted in the last fiscal year to Jeffry R. Allen, Chief
Financial Officer and Vice President of Finance and Operations, under the 1995
Plan will immediately vest in full in the event of his termination in connection
with an acquisition of the Company by merger or asset sale. In addition, each
outstanding option held by the Chief Executive Officer, the other executive
officers and employees of the Company under the 1995 Plan will automatically
accelerate in full and all unvested shares of Common Stock held by such
individuals under either the Predecessor Plan or the 1995 Plan will immediately
vest in full upon an acquisition of the Company by merger or asset sale, except
to the extent such options are to be assumed by, and the Company's repurchase
rights with respect to these shares are to be assigned to, the successor
corporation. In addition, the Compensation Committee as Plan Administrator of
the 1995 Plan will have the authority to provide for the accelerated vesting of
the shares of Common Stock subject to outstanding options held by the Chief
Executive Officer or any other executive officer and the shares of Common Stock
subject to direct issuances held by such individual, in connection with the
termination of the officer's employment following (i) a merger or asset sale in
which these options are assumed and the Company's repurchase rights with respect
to unvested shares are assigned, or (ii) certain other changes in control or
ownership of the Company.
 
                                       19

<PAGE>   22
 
                               PERFORMANCE GRAPH
 
     The following graph compares the cumulative total shareholder return on the
Common Stock of the Company with that of the Nasdaq Stock Market US Index, a
broad market index published by the National Association of Securities Dealers,
Inc., and the Hambrecht & Quist Technology Index compiled by Hambrecht & Quist
LLC. The comparison for each of the periods assumes that $100 was invested on
November 21, 1995 (the date of the Company's initial public offering) in the
Company's Common Stock, the stocks included in the Nasdaq Stock Market US Index
and the stocks included in the Hambrecht & Quist Technology Index. These
indices, which reflect formulas for dividend reinvestment and weighing of
individual stocks, do not necessarily reflect returns that could be achieved by
individual investors.
 

<TABLE>
<CAPTION>
        Measurement Period                Network          Nasdaq Stock      Hambrecht & Quist
      (Fiscal Year Covered)           Appliance, Inc.      Market (U.S.)        Technology
<S>                                  <C>                 <C>                 <C>
11/21/95                                           100                 100                 100
1/96                                               226                 103                 100
4/96                                               237                 117                 114
7/96                                               178                 106                  97
10/96                                              259                 119                 113
1/97                                               380                 136                 136
4/97                                               216                 123                 121
</TABLE>

 
     Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Proxy Statement, in
whole or in part, the preceding Compensation Committee Report on Executive
Compensation and the preceding performance graph shall not be incorporated by
reference into any such filings; nor shall such Report or graph be incorporated
by reference into any future filings.
 
                                 OTHER BUSINESS
 
     The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If other matters are properly brought
before the Annual Meeting, however, it is the intention of the persons named in
the accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.
 
                                       20

<PAGE>   23
 
                             SHAREHOLDER PROPOSALS
 
     Proposals of shareholders that are intended to be presented at the
Company's Annual Meeting of Shareholders to be held in 1998 must be received by
April 10, 1998 in order to be included in the Proxy Statement and proxy relating
to that meeting.
 
                                          BY ORDER OF THE BOARD OF DIRECTORS
 
                                          DANIEL J. WARMENHOVEN
                                          President and Chief Executive Officer
 
August 11, 1997
 
                                       21

<PAGE>   24
PROXY                                                                     PROXY


                            NETWORK APPLIANCE, INC.

          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

        Daniel J. Warmenhoven and Jeffry R. Allen or either of them, are hereby
appointed as the lawful agents and proxies of the undersigned (with all powers
the undersigned would possess if personally present, including full power of
substitution) to represent and to vote all shares of capital stock of Network
Appliance, Inc. (the "Company") which the undersigned is entitled to vote at
the Company's Annual Meeting of Shareholders on September 25, 1997, and at any
adjournments or postponements thereof as follows:

          PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY,
                          USING THE ENCLOSED ENVELOPE.

               (Continued and to be signed on the reverse side.)

<PAGE>   25
        
<TABLE>
<S>                                         <C>                      <C>                                       <C> 
1.  ELECTION OF DIRECTORS:                  For  Withhold  For All   3.  Approve a series of amendments to     For  Against  Abstain
    Nominees: Daniel J. Warmenhoven,        All     All     Except       the Company's 1995 Stock Incentive    [ ]    [ ]      [ ]
    Donald T. Valer??ne, Carol A. Barz,     [ ]     [ ]      [ ]         Plan, including a 1,600,000 share
    Larry R. Cemer, Michael R. Hallman                                   increase in the maximum number of
    and Robert T. Wall                                                   shares of common stock authorized 
                                                                         for issuance under the plan.
    (INSTRUCTION: To withhold authority     For   Against  Abstain   
    to vote for any individual nominee,     [ ]     [ ]      [ ]     4.  Transaction of any other business
    write such name or names in the space                                which may properly come before the
    provided below.)                                                     meeting and any adjournment or
                                                                         postponement thereof.
    ______________________________________
2.  Proposal to ratify the appointment of                                The Board of Directors recommends a vote FOR each of the
    Deloitte and Touche LLP as independent                               above proposals. This Proxy will be voted as directed,
    accountants of the Company for the                                   or, if no direction is indicated, will be voted FOR each
    fiscal year ending April 30, 1998.                                   of the above proposals and, at the discretion of the
                                                                         persons named as proxies, upon such other matters as may
                                                                         properly come before the meeting. This proxy may be
                                                                         revoked at any time before it is voted.


                                                                                        Dated: _______________________________, 1997


                                                                         Signature ________________________________________________


                                                                         Signature if held jointly ________________________________

                                                                         (Please sign exactly as shown on your stock certificate
                                                                         and on this proxy form. When signing as partner, corporate
                                                                         officer, attorney, exerciser, administrator, trustee,
                                                                         guardian or in any other representative capacity, give
                                                                         full title as such and sign your name as well, if stock is
                                                                         held jointly, each join owner should sign.)

                                                        FOLD AND DETACH HERE


                                                        YOUR VOTE IS IMPORTANT!      

                      PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.
</TABLE>


<PAGE>   26
                             NETWORK APPLIANCE, INC.
                            1995 STOCK INCENTIVE PLAN

                   (AMENDED AND RESTATED AS OF JULY 17, 1997)

                                   ARTICLE ONE

                               GENERAL PROVISIONS


      I.    PURPOSE OF THE PLAN

            This 1995 Stock Incentive Plan is intended to promote the interests
of Network Appliance, Inc., a California corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

            Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

      II.   STRUCTURE OF THE PLAN

            A.    The Plan shall be divided into four separate equity programs:

                  (i) the Discretionary Option Grant Program under which
      eligible persons may, at the discretion of the Plan Administrator, be
      granted options to purchase shares of Common Stock,

                  (ii) the Salary Investment Option Grant Program under which
      the Corporation's officers and other highly-compensated employees may
      elect to have a portion of their base salary reduced each year in return
      for options to purchase shares of Common Stock,

                  (iii) the Stock Issuance Program under which eligible persons
      may, at the discretion of the Plan Administrator, be issued shares of
      Common Stock directly, either through the immediate purchase of such
      shares or as a bonus for services rendered the Corporation (or any Parent
      or Subsidiary), and

                  (iv) the Automatic Option Grant Program under which Eligible
      Directors shall automatically receive option grants at periodic intervals
      to purchase shares of Common Stock.



<PAGE>   27

            B. The provisions of Articles One and Six shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

      III.  ADMINISTRATION OF THE PLAN

            A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The Primary
Committee shall also have the sole and exclusive authority to administer the
Salary Investment Option Grant Program and to select the eligible individuals
who are to participate in that program for one or more calendar years.

            B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

            C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any stock option or stock issuance thereunder.

            D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

            E. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants made thereunder.


                                       2

<PAGE>   28
      IV. ELIGIBILITY

            A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

                  (i) Employees,

                  (ii) non-employee members of the Board or the board of
      directors of any Parent or Subsidiary, and

                  (iii) consultants and other independent advisors who provide
      services to the Corporation (or any Parent or Subsidiary).

            B. Only the Corporation's officers and other highly-compensated
Employees shall be eligible to participate in the Salary Investment Option Grant
Program.

            C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding and (ii) with respect to stock issuances under the Stock
Issuance Program, which eligible persons are to receive stock issuances, the
time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid for such shares. The Primary
Committee shall have sole and exclusive authority to select the individuals
eligible to participate in the Salary Investment Option Grant Program, but all
options granted under such program shall be made solely in accordance with the
express terms and conditions of Article Three of the Plan.

            D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

            E. The individuals eligible to participate in the Automatic Option
Grant Program shall be limited to (i) those individuals who first become
non-employee Board members on or after the Plan Effective Date, whether through
appointment by the Board or election by the Corporation's stockholders, and (ii)
those individuals who are re-elected as non-employee Board members at one or
more Annual Stockholders Meetings held after the Plan Effective Date, including
those individuals serving as non-employee Board members on the Plan Effective
Date. A non-employee Board member who has previously


                                       3

<PAGE>   29
been in the employ of the Corporation (or any Parent or Subsidiary) shall not be
eligible to receive an initial option grant under the Automatic Option Grant
Program on the Plan Effective Date or (if later) at the time he or she first
becomes a non-employee Board member, but such individual shall be eligible to
receive periodic option grants under the Automatic Option Grant Program upon his
or her re-election as a non-employee Board member at one or more Annual
Stockholders Meetings.

      V.    STOCK SUBJECT TO THE PLAN

            A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 5,006,262 shares.
Such authorized share reserve includes the additional increase of 1,600,000
shares authorized by the Board on July 17, 1997, subject to stockholder approval
at the 1997 Annual Meeting.

            B. No one person participating in the Plan may receive options and
direct stock issuances for more than 500,000 shares of Common Stock in the
aggregate per calendar year, beginning with the 1995 calendar year.

            C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
(including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
In addition, any unvested shares issued under the Plan and subsequently
repurchased by the Corporation, at the option exercise or direct issue price
paid per share, pursuant to the Corporation's repurchase rights under the Plan
shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under the
Plan. Should the exercise price of an option under the Plan (including any
option incorporated from the Predecessor Plan) be paid with shares of Common
Stock or should shares of Common Stock otherwise issuable under the Plan be
withheld by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance.

            D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the maximum number and/or class


                                       4


<PAGE>   30
of securities for which any one person may be granted options and direct stock
issuances per calendar year, (iii) the number and/or class of securities for
which automatic option grants are to be made subsequently per Eligible Director
under the Automatic Option Grant Program and (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option (including any option incorporated from the Predecessor Plan) in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.


                                       5

<PAGE>   31
                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM


      I.    OPTION TERMS

            Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

            A.    Exercise Price.

                  1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

                  2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the forms
specified below:

                  (i) cash or check made payable to the Corporation,

                  (ii) shares of Common Stock held for the requisite period
      necessary to avoid a charge to the Corporation's earnings for financial
      reporting purposes and valued at Fair Market Value on the Exercise Date,
      or

                  (iii) to the extent the option is exercised for vested shares,
      through a special sale and remittance procedure pursuant to which the
      Optionee shall concurrently provide irrevocable instructions to (a) a
      Corporation-designated brokerage firm to effect the immediate sale of the
      purchased shares and remit to the Corporation, out of the sale proceeds
      available on the settlement date, sufficient funds to cover the aggregate
      exercise price payable for the purchased shares plus all applicable
      Federal, state and local income and employment taxes required to be
      withheld by the Corporation by reason of such exercise and (b) the
      Corporation to deliver the certificates for the purchased shares directly
      to such brokerage firm in order to complete the sale transaction.

            Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.


                                       6

<PAGE>   32
            B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

            C. Effect of Termination of Service.

                  1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                  (i) Any option outstanding at the time of the Optionee's
      cessation of Service for any reason shall remain exercisable for such
      period of time thereafter as shall be determined by the Plan Administrator
      and set forth in the documents evidencing the option, but no such option
      shall be exercisable after the expiration of the option term.

                  (ii) Any option exercisable in whole or in part by the
      Optionee at the time of death may be exercised subsequently by the
      personal representative of the Optionee's estate or by the person or
      persons to whom the option is transferred pursuant to the Optionee's will
      or in accordance with the laws of descent and distribution.

                  (iii) During the applicable post-Service exercise period, the
      option may not be exercised in the aggregate for more than the number of
      vested shares for which the option is exercisable on the date of the
      Optionee's cessation of Service. Upon the expiration of the applicable
      exercise period or (if earlier) upon the expiration of the option term,
      the option shall terminate and cease to be outstanding for any vested
      shares for which the option has not been exercised. However, the option
      shall, immediately upon the Optionee's cessation of Service, terminate and
      cease to be outstanding to the extent the option is not otherwise at that
      time exercisable for vested shares.

                  (iv) Should the Optionee's Service be terminated for
      Misconduct, then all outstanding options held by the Optionee shall
      terminate immediately and cease to be outstanding.

                  2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                  (i) extend the period of time for which the option is to
      remain exercisable following the Optionee's cessation of Service from the
      period otherwise in effect for that option to such greater period of time
      as the


                                       7

<PAGE>   33
      Plan Administrator shall deem appropriate, but in no event beyond the
      expiration of the option term, and/or

                  (ii) permit the option to be exercised, during the applicable
      post-Service exercise period, not only with respect to the number of
      vested shares of Common Stock for which such option is exercisable at the
      time of the Optionee's cessation of Service but also with respect to one
      or more additional installments in which the Optionee would have vested
      under the option had the Optionee continued in Service.

            D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

            E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

            F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, Non-Statutory Options
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

      II.   INCENTIVE OPTIONS

            The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.


                                       8

<PAGE>   34
            A. Eligibility. Incentive Options may only be granted to Employees.

            B. Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

            C. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

            D. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.


                                       9

<PAGE>   35
            B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

            C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options and
direct stock issuances under the Plan per calendar year.

            E. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in whole or in part in the event the Optionee's Service
subsequently terminates by reason of an Involuntary Termination within a
designated period (not to exceed twelve (12) months) following the effective
date of any Corporate Transaction in which those options are assumed or replaced
and do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to shares held by the Optionee at the time of
such Involuntary Termination shall immediately terminate in whole or in part,
and the shares subject to those terminated rights shall accordingly vest.

            F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in whole or in part in the event the Optionee's Service
subsequently terminates by reason of an Involuntary Termination within a
designated period (not to exceed twelve (12) months) following the effective
date of any Change in Control. Each option so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may provide that


                                       10

<PAGE>   36
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate in whole or in part, and the shares subject to those
terminated rights shall accordingly vest.

            G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Qualified
Option under the Federal tax laws.

            H. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

      IV.   CANCELLATION AND REGRANT OF OPTIONS

            The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.


                                       11

<PAGE>   37
                                  ARTICLE THREE

                     SALARY INVESTMENT OPTION GRANT PROGRAM

      I.    OPTION GRANTS

            The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Corporation's officers
and other highly compensated Employees who are to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Primary Committee (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her salary for that calendar year.
The minimum amount of authorized salary reduction shall not be less than Fifteen
Thousand Dollars ($15,000), and the maximum salary reduction amount authorized
by any individual shall not exceed Seventy Five Thousand Dollars ($75,000). Each
selected individual who files a proper salary reduction authorization shall
automatically be granted an option under this Salary Investment Option Grant
Program on the first trading day in January of the calendar year for which that
salary reduction is to be in effect.

      II.   OPTION TERMS

            Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Primary Committee; provided, however, that
each such document shall comply with the terms specified below.

            A. Exercise Price.

                  1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

                  2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.


                                       12

<PAGE>   38
            B. Number of Option Shares. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

                  X = A / (B x 66-2/3%), where

                  X is the number of option shares,

                  A is the dollar amount by which the Optionee's base salary is
                  to be reduced for the calendar year, and

                  B is the Fair Market Value per share of Common Stock on the
                  option grant date.

            C. Exercise and Term of Options. The option shall become exercisable
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

            D. Effect of Termination of Service. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the expiration of the ten (10)-year option term. Should the
Optionee die while holding one or more options under this Article Three, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Service (less
any shares subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. Such right of exercise shall lapse, and the
option shall terminate, upon the expiration of the ten (10)-year option term.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. Should any Corporate Transaction be effected while the Optionee
remains in Service, then each outstanding option held by such Optionee under the
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor


                                       13

<PAGE>   39
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the expiration of the ten
(10)-year option term.

            B. Should any Change in Control occur while the Optionee remains in
Service, then each outstanding option held by such Optionee under the Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. The option shall remain so
exercisable until the expiration of the ten (10)-year option term.

            C. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.


                                       14

<PAGE>   40
                                  ARTICLE FOUR

                             STOCK ISSUANCE PROGRAM


      I.    STOCK ISSUANCE TERMS

            Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below. Shares of Common Stock
may also be issued under the Stock Issuance Program pursuant to share right
awards which entitle the recipients to receive those shares upon the attainment
of designated performance goals.

            A. Purchase Price.

                  1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator, but shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the issuance date.

                  2. Shares of Common Stock may be issued under the Stock
Issuance Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:

                  (i) cash or check made payable to the Corporation, or

                  (ii) past services rendered to the Corporation (or any Parent
      or Subsidiary).

            B. Vesting/Issuance Provisions.

                  1. The Plan Administrator may issue shares of Common Stock
under the Stock Issuance Program which are fully and immediately vested upon
issuance or which are to vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives. The
elements of the vesting schedule applicable to any unvested shares of Common
Stock issued under the Stock Issuance Program, namely:

                  (i) the Service period to be completed by the Participant or
      the performance objectives to be attained,

                  (ii) the number of installments in which the shares are to
      vest,


                                       15

<PAGE>   41
                  (iii) the interval or intervals (if any) which are to lapse
      between installments, and

                  (iv) the effect which death, Permanent Disability or other
      event designated by the Plan Administrator is to have upon the vesting
      schedule,

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement. Alternatively, the Plan Administrator may issue share right
awards under the Stock Issuance Program which shall entitle the recipient to
receive a specified number of shares of Common Stock upon the attainment of one
or more performance goals established by the Plan Administrator. Upon the
attainment of such performance goals, fully-vested shares of Common Stock shall
be issued in satisfaction of those share right awards.

                  2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

                  3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

                  4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for cash consideration, the Corporation shall repay that
consideration to the Participant at the time the shares are surrendered.

                  5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares


                                       16

<PAGE>   42
of Common Stock as to which the waiver applies. Such waiver may be effected at
any time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

                  6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock in
satisfaction of one or more outstanding share right awards as to which the
designated performance goals are not attained.

      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

            B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within twelve (12) months
following the effective date of any Corporate Transaction in which those
repurchase rights are assigned to the successor corporation (or parent thereof).

            C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within twelve (12) months
following the effective date of any Change in Control.

      III.  SHARE ESCROW/LEGENDS

            Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.


                                       17

<PAGE>   43
                                  ARTICLE FIVE

                         AUTOMATIC OPTION GRANT PROGRAM


      I.    OPTION TERMS

            A. GRANT DATES. Option grants shall be made on the dates specified
below:

                  1. Each individual who is first elected or appointed as a non-
employee Board member on or after the Plan Effective Date shall automatically be
granted, on the date of such initial election or appointment, a Non-Statutory
Option to purchase 24,000 shares of Common Stock, provided such individual has
not previously been in the employ of the Corporation (or any Parent or
Subsidiary).

                  2. On the date of each Annual Stockholders Meeting held after
the Plan Effective Date, each individual who is to continue to serve as an
Eligible Director shall automatically be granted a Non-Statutory Option to
purchase 6,000 shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There shall be no limit
on the number of such 6,000-share option grants any one Eligible Director may
receive over his or her period of Board service.

            B. EXERCISE PRICE.

                  1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

                  2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

            C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

            D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 24,000-share grant shall vest,
and the Corporation's repurchase right shall lapse, in a series of four (4)
successive equal annual installments over the Optionee's period of


                                       18

<PAGE>   44
continued service as a Board member, with the first such installment to vest
upon the Optionee's completion of one (1) year of Board service measured from
the option grant date. Each annual 6,000-share grant made on or after July 17,
1997 shall vest, and the Corporation's repurchase right shall lapse, upon the
Optionee's continuation in Board service through the day immediately preceding
the next Annual Stockholders Meeting following the option grant date.

            E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

                  (i) The Optionee (or, in the event of Optionee's death, the
      personal representative of the Optionee's estate or the person or persons
      to whom the option is transferred pursuant to the Optionee's will or in
      accordance with the laws of descent and distribution) shall have a twelve
      (12)-month period following the date of such cessation of Board service
      in which to exercise each such option.

                  (ii) During the twelve (12)-month exercise period, the option
      may not be exercised in the aggregate for more than the number of vested
      shares of Common Stock for which the option is exercisable at the time of
      the Optionee's cessation of Board service.

                  (iii) Should the Optionee cease to serve as a Board member by
      reason of death or Permanent Disability, then all shares at the time
      subject to the option shall immediately vest so that such option may,
      during the twelve (12)-month exercise period following such cessation of
      Board service, be exercised for all or any portion of those shares as
      fully-vested shares of Common Stock.

                  (iv) In no event shall the option remain exercisable after the
      expiration of the option term. Upon the expiration of the twelve
      (12)-month exercise period or (if earlier) upon the expiration of the
      option term, the option shall terminate and cease to be outstanding for
      any vested shares for which the option has not been exercised. However,
      the option shall, immediately upon the Optionee's cessation of Board
      service for any reason other than death or Permanent Disability, terminate
      and cease to be outstanding to the extent the option is not otherwise at
      that time exercisable for vested shares.


                                       19

<PAGE>   45
      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. The shares of Common Stock subject to each outstanding option at
the time of a Corporate Transaction but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of that Corporate Transaction, become fully exercisable for all of the
shares of Common Stock at the time subject to such option and may be exercised
for all or any portion of those shares as fully-vested shares of Common Stock.
Immediately following the consummation of the Corporate Transaction, each
automatic option grant shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).

            B. The shares of Common Stock subject to each outstanding option at
the time of a Change in Control but not otherwise vested shall automatically
vest in full so that each such option shall, immediately prior to the effective
date of that Change in Control, become fully exercisable for all of the shares
of Common Stock at the time subject to such option and may be exercised for all
or any portion of those shares as fully-vested shares of Common Stock. Each such
option shall remain exercisable for such fully-vested option shares until the
expiration or sooner termination of the option term.

            C. All repurchase rights of the Corporation outstanding under the
Automatic Option Grant Program at the time of a Corporate Transaction or Change
in Control shall automatically terminate at that time, and the shares of Common
Stock subject to those terminated rights shall immediately vest.

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

            E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.


                                       20

<PAGE>   46
                                   ARTICLE SIX

                                  MISCELLANEOUS


      I.    TAX WITHHOLDING

            A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of stock options or the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.

            B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

                  (i) Stock Withholding: The election to have the Corporation
      withhold, from the shares of Common Stock otherwise issuable upon the
      exercise of such Non-Statutory Option or the vesting of such shares, a
      portion of those shares with an aggregate Fair Market Value equal to the
      percentage of the Taxes (not to exceed one hundred percent (100%))
      designated by the holder.

                  (ii) Stock Delivery: The election to deliver to the
      Corporation, at the time the Non-Statutory Option is exercised or the
      shares vest, one or more shares of Common Stock previously acquired by
      such holder (other than in connection with the option exercise or share
      vesting triggering the Taxes) with an aggregate Fair Market Value equal to
      the percentage of the Taxes (not to exceed one hundred percent (100%))
      designated by the holder.

      II.   EFFECTIVE DATE AND TERM OF THE PLAN

            A. The Plan became effective on the Plan Effective Date and serves
as the successor to the Predecessor Plan, and no further option grants or direct
stock issuances are to be made under the Predecessor Plan after the Plan
Effective Date. All options outstanding under the Predecessor Plan as of such
date have been incorporated into the Plan and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise


                                       21

<PAGE>   47
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.

            B. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

            C. The Plan shall terminate upon the earliest of (i) August 31,
2005, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares pursuant to option exercises or
direct stock issuances under the Plan or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such Plan
termination, all outstanding stock options and unvested stock issuances shall
continue to have force and effect in accordance with the provisions of the
documents evidencing such options or issuances.

      III.  AMENDMENT OF THE PLAN

            A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect any rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

            B. The Plan was amended and restated by the Board on July 17, 1997
(the "1997 Restatement") to effect the following changes: (i) increase the
maximum number of shares of Common Stock authorized for issuance over the term
of the Plan from 3,406,262 shares to 5,006,262 shares, (ii) modify the vesting
provisions to be in effect for future option grants made to non-employee Board
members under the Automatic Option Grant Program, (iii) render the non-employee
Board members who are serving as Plan Administrator eligible to receive option
grants and direct stock issuances under the Discretionary Option Grant and Stock
Issuance Programs, (iv) allow unvested shares issued under the Plan and
subsequently repurchased by the Corporation at the option exercise price or
direct issue price paid per share to be reissued under the Plan, (v) remove
certain restrictions on the eligibility of non-employee Board members to serve
as Plan Administrator, (vi) eliminate the stock appreciation right provisions
and loan features of the Plan and (vii) effect a series of additional changes to
the provisions of the Plan (including the stockholder approval requirements and
the transferability of Non-Statutory Options) in order to take advantage of the
recent amendments to Rule 16b-3 of the Securities and Exchange Commission which
exempts certain officer and director transactions under the Plan from the
short-swing liability provisions of the federal securities laws. The 1997
Restatement is subject to stockholder approval at the 1997 Annual Meeting, and
no option grants made on the basis


                                       22

<PAGE>   48
of the 1,600,000-share increase shall become exercisable in whole or in part
unless and until the 1997 Restatement is approved by the stockholders. Should
such stockholder approval not be obtained, then any options granted on the basis
of the 1,600,000-share increase shall terminate without ever becoming
exercisable for those shares, and no further option grants or direct stock
issuances shall be made on the basis of such share increase. In addition, none
of the other changes effected by 1997 Restatement shall be implemented, except
to the extent the Plan Administrator otherwise deems it advisable to do so.
However, in the absence of such stockholder approval, option grants and direct
stock issuances may continue to be made pursuant to the provisions of the Plan
as in effect immediately prior to the 1997 Restatement. All option grants and
direct stock issuances made prior to the 1997 Restatement shall remain
outstanding in accordance with the terms and conditions of the respective
instruments evidencing those options or issuances, and nothing in the 1997
Restatement shall be deemed to modify or in any way affect those outstanding
options or issuances. Subject to the foregoing limitations, the Plan
Administrator may make option grants and direct stock issuances under the Plan
at any time before the date fixed herein for the termination of the Plan.

            C. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
are held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess grants or issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.

      IV.   REGULATORY APPROVALS

            A. The implementation of the Plan, the granting of any option under
the Plan and the issuance of any shares of Common Stock either upon the exercise
of any option or under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.

            B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of


                                       23

<PAGE>   49
the Form S-8 registration statement for the shares of Common Stock issuable
under the Plan, and all applicable listing requirements of any stock exchange
(or the Nasdaq National Market, if applicable) on which Common Stock is then
listed for trading.

      V.    USE OF PROCEEDS

            Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

      VI.   NO EMPLOYMENT/SERVICE RIGHTS

            Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.


                                       24

<PAGE>   50
                                    APPENDIX


            The   following definitions shall be in effect under the Plan:

      A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.

      B. BOARD shall mean the Corporation's Board of Directors.

      C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

                  (i) the acquisition, directly or indirectly, by any person or
      related group of persons (other than the Corporation or a person that
      directly or indirectly controls, is controlled by, or is under common
      control with, the Corporation), of beneficial ownership (within the
      meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
      fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities pursuant to a tender or exchange
      offer made directly to the Corporation's stockholders, or

                  (ii) a change in the composition of the Board over a period of
      thirty-six (36) consecutive months or less such that a majority of the
      Board members ceases, by reason of one or more contested elections for
      Board membership, to be comprised of individuals who either (A) have been
      Board members continuously since the beginning of such period or (B) have
      been elected or nominated for election as Board members during such period
      by at least a majority of the Board members described in clause (A) who
      were still in office at the time the Board approved such election or
      nomination.

      D. CODE shall mean the Internal Revenue Code of 1986, as amended.

      E. COMMON STOCK shall mean the Corporation's common stock.

      F. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
      more than fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities are transferred to a person or
      persons different from the persons holding those securities immediately
      prior to such transaction; or


                                      A-1.

<PAGE>   51
                  (ii) the sale, transfer or other disposition of all or
      substantially all of the Corporation's assets in complete liquidation or
      dissolution of the Corporation.

      G. CORPORATION shall mean Network Appliance, Inc., a California
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Network Appliance, Inc. which shall by appropriate
action adopt the Plan.

      H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.

      I. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

      J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

      K. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

      L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
      National Market, then the Fair Market Value shall be the closing selling
      price per share of Common Stock on the date in question, as such price is
      reported by the National Association of Securities Dealers on the Nasdaq
      National Market or any successor system. If there is no closing selling
      price for the Common Stock on the date in question, then the Fair Market
      Value shall be the closing selling price on the last preceding date for
      which such quotation exists.

                  (ii) If the Common Stock is at the time listed on any Stock
      Exchange, then the Fair Market Value shall be the closing selling price
      per share of Common Stock on the date in question on the Stock Exchange
      determined by the Plan Administrator to be the primary market for the
      Common Stock, as such price is officially quoted in the composite tape of
      transactions on such exchange. If there is no closing selling price for
      the Common Stock on the date in question, then the Fair Market Value shall
      be the closing selling price on the last preceding date for which such
      quotation exists.


                                      A-2.

<PAGE>   52
      M. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.

      N. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:

                  (i) such individual's involuntary dismissal or discharge by
      the Corporation for reasons other than Misconduct, or

                  (ii) such individual's voluntary resignation following (A) a
      change in his or her position with the Corporation which materially
      reduces his or her level of responsibility, (B) a reduction in his or her
      level of compensation (including base salary, fringe benefits and
      participation in corporate-performance based bonus or incentive programs)
      by more than fifteen percent (15%) or (C) a relocation of such
      individual's place of employment by more than fifty (50) miles, provided
      and only if such change, reduction or relocation is effected by the
      Corporation without the individual's consent.

      O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).

      P. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

      Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

      R. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant or Automatic Option
Grant Programs.

      S. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.


                                      A-3.

<PAGE>   53
      T. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

      U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for the purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.

      V. PLAN shall mean the Corporation's 1995 Stock Incentive Plan, as set
forth in this document.

      W. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

      X. PLAN EFFECTIVE DATE shall mean November 20, 1995, the date on which the
Underwriting Agreement was executed and the initial public offering price of the
Common Stock was established.

      Y. PREDECESSOR PLAN shall mean the Corporation's 1993 Stock Option/Stock
Issuance Plan.

      Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.

      AA. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the special equity
incentive program in effect under the Plan pursuant to which selected
individuals may apply a portion of their base salary to the acquisition of
below-market option grants.

      AB. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

      AC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.


                                      A-4.

<PAGE>   54
      AD. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

      AE. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.

      AF. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

      AG. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.

      AH. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      AI. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

      AJ. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

      AK. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters who managed the initial public
offering of the Common Stock.


                                      A-5.