Edgar Filing: NETWORK PERIPHERALS INC

As filed with the Securities and Exchange Commission on July 19, 2001.

Registration No. 333-60780

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 3

TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

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NETWORK PERIPHERALS INC.
(Exact name of Registrant as specified in its charter)

Delaware 3577 77-0216135
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)

2859 Bayview Drive
Fremont, California 94538
Telephone: (510) 897-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

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James Regel
Chief Executive Officer
Network Peripherals Inc.
2859 Bayview Drive
Fremont, California 94538
Telephone: (510) 897-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

COPIES TO:

Scott M. Stanton, Esq. Steven Wolosky, Esq.
Gray Cary Ware & Freidenrich LLP Olshan Grundman Frome Rosenzweig & Wolosky LLP
4365 Executive Drive, Suite 1600 505 Park Avenue
San Diego, California 92121-2189 New York, New York 10022-1170
(858) 677-1400 (212) 755-1467

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and prior to
the effective time of the proposed merger described in this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering. [_]

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

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Subject to completion, dated July 19, 2001.

TO THE STOCKHOLDERS OF NETWORK PERIPHERALS INC. AND FALCONSTOR, INC.

A MERGER PROPOSAL--YOUR VOTE IS VERY IMPORTANT!

Network Peripherals Inc. ("NPI") and FalconStor, Inc. ("FalconStor") have
entered into a merger agreement. In the merger, holders of FalconStor capital
stock will receive shares of NPI common stock in exchange for the shares of
FalconStor capital stock they own. Upon completion of the merger, the former
stockholders of FalconStor capital stock will own more than a majority of the
combined company's outstanding common stock, and the name of the combined
company will be changed to FalconStor Software, Inc. NPI common stock is listed
on The Nasdaq National Market under the trading symbol "NPIX," and the NPI
common stock closed at $9.89 per share on July 11, 2001. Until recently, NPI
designed and sold Ethernet switching solutions designed for local area
networks; however, NPI is currently in the process of winding down its business
and laying off its employees. FalconStor is a non-reporting, development stage
company. After completion of the merger, the common stock of the combined
company will trade under the symbol "FALC."

NPI is requesting that its stockholders approve the adoption of the merger
agreement, the approval of the merger, and the issuance of shares of NPI common
stock in the merger. NPI is also asking its stockholders to approve the
amendment to NPI's restated certificate of incorporation to increase the
authorized number of shares of NPI common stock from 60,000,000 to 100,000,000
and to change NPI's name to FalconStor Software, Inc. The exact number of
shares to be issued in the merger is calculated pursuant to an exchange ratio.
The precise exchange ratio will be determined at the closing of the merger and
will depend, in part, on the amount of cash, cash equivalents and short-term
investments of NPI minus any cash payments due under certain agreements with
NPI's management. Assuming that these assets are equal to $80,000,000, and that
13,280,181 shares of NPI's common stock remain outstanding, the aggregate
number of shares of NPI common stock to be issued to the FalconStor
stockholders in the merger would be approximately 29,732,912. This number of
shares would result in FalconStor stockholders owning 69% of NPI's common
stock. Based on an approximate exchange ratio of 0.686202, as described more
fully on page 57, and a price per share of NPI common stock of $9.89, each
existing share of FalconStor common stock would be worth approximately $6.79.

In addition, in the event the merger is not completed, NPI is requesting
that its stockholders (i) elect two Class I Directors to serve for three-year
terms and (ii) ratify the selection of PricewaterhouseCoopers LLP as NPI's
independent accountants.

FalconStor is requesting that its stockholders vote to adopt the merger
agreement and approve the merger with NPI.

This joint proxy statement/prospectus provides you with detailed information
about the proposed merger, a description of which begins on page 32. You should
also carefully read the section entitled "Risk Factors" beginning on page 17
for a discussion of specific risks that you should consider in determining how
to vote on the proposed merger.

Neither the Securities and Exchange Commission nor any state securities
regulator has approved the securities to be issued under this joint proxy
statement/prospectus or determined if this joint proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated , 2001 and is
first being mailed to stockholders of NPI and FalconStor on or about
, 2001.

Your vote is very important, regardless of the number of shares you own.
Whether or not you plan to attend either meeting, please vote as soon as
possible to make sure that your shares are represented at the meeting.

We strongly support the proposed transactions and join with our boards of
directors in enthusiastically recommending that you vote in favor of the
proposals presented to you for approval.

James Regel ReiJane Huai
Chief Executive Officer Chief Executive Officer
Network Peripherals Inc. FalconStor, Inc.

[NETWORK PERIPHERALS LOGO]

NETWORK PERIPHERALS INC.
Notice of Annual Meeting of Stockholders
to be held , 2001

The Annual Meeting of Stockholders of Network Peripherals Inc. ("NPI") will
be held at the Marriott Hotel, located at 46100 Landing Parkway, Fremont,
California on , , 2001, at a.m., local time, for the
following purposes:

1. To approve the adoption of the Agreement and Plan of Merger and
Reorganization, dated as of May 4, 2001, by and among FalconStor, Inc.
("FalconStor"), NPI and Empire Acquisition Corp., a wholly-owned subsidiary of
NPI ("Merger Sub"), pursuant to which Merger Sub will merge with and into
FalconStor with FalconStor as the surviving corporation. The approval of the
adoption of the merger agreement will also constitute approval of the merger
and the other transactions contemplated by the merger agreement, including the
issuance of shares in the merger.

2. If Proposal 1 above is approved, to approve the amendment to NPI's
restated certificate of incorporation to increase the number of authorized
shares of common stock from 60,000,000 to 100,000,000 and to change NPI's name
to FalconStor Software, Inc. Even if Proposal 2 is approved, the amendment to
the restated certificate of incorporation will only take effect if the merger
is completed.

3. If the merger is not completed, to elect Michael Gardner and James Regel
to the Board of Directors of NPI as Class I Directors to serve for the ensuing
three-year term and until their successors are duly elected.

4. If the merger is not completed, to ratify the appointment of
PricewaterhouseCoopers LLP as independent accountants for NPI for the fiscal
year ending December 31, 2001.

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

The foregoing items of business are more fully described in the joint proxy
statement/prospectus that accompanies this notice.

The board of directors has fixed the close of business on June 29, 2001 as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.

By Order of the Board of Directors
of Network Peripherals Inc.

James Regel
Chief Executive Officer

Fremont, California
July , 2001

All stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign,
and return the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.

[LOGO OF FALCONSTOR, INC.]

Notice of Special Meeting of Stockholders
to be held , 2001

The Special Meeting of Stockholders of FalconStor, Inc. ("FalconStor") will
be held at the offices of FalconStor, Inc., located at 125 Baylis Road, Suite
140, Melville, New York 11747 on , , 2001,
at p.m., local time, for the following purposes:

1. To approve the adoption of the Agreement and Plan of Merger and
Reorganization, dated as of May 4, 2001, by and among FalconStor, Network
Peripherals Inc. ("NPI") and Empire Acquisition Corp., a wholly-owned
subsidiary of NPI ("Merger Sub"), pursuant to which Merger Sub will merge with
and into FalconStor, with FalconStor as the surviving corporation. In the
merger, your shares of FalconStor common stock will be exchanged for shares of
NPI common stock. Adoption of the merger agreement will also constitute
approval of the merger and the other transactions contemplated by the merger
agreement, including the conversion of all outstanding shares of FalconStor
preferred stock to common stock.

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

The foregoing items of business are more fully described in the joint proxy
statement/prospectus that accompanies this notice.

The board of directors has fixed the close of business on July 12, 2001 as
the record date for the determination of stockholders entitled to notice of and
to vote at this Special Meeting and at any adjournment or postponement thereof.

By Order of the Board of Directors
of FalconStor, Inc.

ReiJane Huai
Chief Executive Officer

Melville, New York
July , 2001

TABLE OF CONTENTS

Page
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QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS........................... 5
The companies........................................................... 5
Structure of the merger................................................. 5
The terms of the merger agreement....................................... 5
NPI's financial advisor believes that the merger is fair to NPI......... 6
Treatment of NPI stock options.......................................... 6
Treatment of FalconStor stock options................................... 7
The reasons the boards of directors of NPI and FalconStor approved the
merger................................................................. 7
Interests of certain persons in the merger.............................. 7
Board composition following the merger.................................. 8
Relative percentages of ownership....................................... 8
The recommendations of the boards of NPI and FalconStor................. 9
Risk factors related to the merger...................................... 9
The stockholders' meetings.............................................. 9
Accounting treatment.................................................... 9
Governmental approval of the merger..................................... 10
Appraisal rights for NPI stockholders and for FalconStor stockholders... 10
NPI Selected Historical Financial Information........................... 11
FalconStor Selected Historical Financial Information.................... 13
Selected Unaudited Pro Forma Condensed Combined Financial Information... 14
Comparative Per Share Data.............................................. 15
Price Range of Common Stock and Dividend Information.................... 16
RISK FACTORS.............................................................. 17
Risks Related to the Merger............................................. 17
The merger will result in substantial dilution of the ownership
interests of current NPI stockholders................................ 17
The volatility of the market price of NPI common stock may reduce the
value of the NPI shares received in the merger by FalconStor
stockholders......................................................... 17
Future sales of the combined company's common stock may depress its
stock price.......................................................... 17
A liquidation of NPI, instead of the proposed merger with FalconStor,
might result in increased returns for NPI's stockholders............. 18
The rights of holders of FalconStor common stock will change as a
result of the merger................................................. 18
Officers and directors of FalconStor will receive benefits that may
have influenced them to support or approve the merger................ 18
Officers of NPI have certain conflicts of interest that may influence
them to support or approve the merger................................ 19
Failure to complete the merger could cause NPI's stock price to
decline and could harm NPI's and FalconStor's business and operating
results.............................................................. 19
Failure to consummate the merger could adversely affect NPI's cash
position and attractiveness to acquirors............................. 19
The announcement of the merger may adversely affect NPI and
FalconStor........................................................... 20
NPI may have liabilities and ongoing obligations to certain customers
and suppliers as a result of the winding down of its business........ 20
Risks Related to the Combined Company's Business Following the Merger... 20
Failure of the merger to achieve potential benefits could harm the
business and operating results of the combined company............... 20
FalconStor has had limited revenues and a history of losses, and the
combined company may not achieve or maintain profitability........... 20

Page
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The market for IP-based storage solutions is new and uncertain, and
FalconStor's business will suffer if it does not develop as
FalconStor expects................................................... 21
If FalconStor is unable to develop and manufacture new products that
address additional storage networking infrastructure software market
segments, its operating results may suffer........................... 21
FalconStor's complex products may have errors or defects that could
result in reduced demand for its products or costly litigation
against the combined company......................................... 21
Through March 31, 2001, FalconStor received 64% of its revenues from a
one-time consulting fee and future revenues will be derived from OEMs
and resellers........................................................ 21
The combined company's quarterly results may fluctuate significantly
which could cause its stock price to decline......................... 22
The storage networking infrastructure software market is highly
competitive and intense competition could negatively impact
FalconStor's business................................................ 22
The loss of any of FalconStor's key personnel could harm the combined
company's business................................................... 22
The board of directors may selectively release shares of NPI common
stock received by the former FalconStor stockholders from lock-up
restrictions......................................................... 23
If FalconStor is unable to protect its intellectual property, its
business will suffer................................................. 23
FalconStor's technology may be subject to infringement claims that
could harm its business.............................................. 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... 24
THE NPI ANNUAL MEETING.................................................... 25
Voting Rights and Solicitation of Proxies; Expenses..................... 25
Purpose of the NPI Annual Meeting....................................... 25
Record Date and Outstanding Shares...................................... 25
Stock Ownership of Management and Certain Stockholders.................. 26
Vote Required........................................................... 26
Quorum; Abstentions; Broker Non-Votes................................... 26
Voting of Proxies; Revocation of Proxies................................ 26
THE FALCONSTOR SPECIAL MEETING............................................ 28
General................................................................. 28
Record Date; Outstanding Shares......................................... 28
Revocability of Proxies................................................. 28
Voting and Solicitation................................................. 28
Vote Required........................................................... 28
Quorum; Abstentions .................................................... 28
Rights of Dissenting Stockholders....................................... 29
Appraisal Rights Procedures............................................. 29
NPI AND FALCONSTOR PROPOSAL NO. 1: APPROVAL OF ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER CONTEMPLATED THEREUNDER......................... 32
THE MERGER.............................................................. 32
Background of the Merger.............................................. 32
Reasons for the Merger................................................ 35
RECOMMENDATIONS OF THE NPI AND THE FALCONSTOR BOARDS OF DIRECTORS....... 38
Recommendation of the NPI Board....................................... 38
Recommendation of the FalconStor Board................................ 38
Vote Required......................................................... 38
Opinion of NPI's Financial Advisor.................................... 38
Comparable Company Analysis (as of 3/29/01)........................... 41
Comparable Public Transaction Analysis................................ 42
Comparable Private Transaction Analysis............................... 42
Discounted Cash Flow Analysis......................................... 43
Existing Business Relationships between NPI and FalconStor............ 44

Page
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Interests of Certain NPI Persons in the Merger........................ 44
Interests of Certain FalconStor Persons in the Merger................. 45
Treatment of NPI Stock Options........................................ 45
Treatment of FalconStor Stock Options................................. 45
Board Composition..................................................... 46
Employee Matters...................................................... 46
Structure of the Merger............................................... 46
Material Federal Income Tax Consequences of the Merger................ 46
Anticipated Accounting Treatment of the Merger........................ 48
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............. 49
Regulatory Filings and Approvals Required to Complete the Merger...... 54
Registration and Listing of NPI Common Stock.......................... 54
Restrictions on Resale of NPI Common Stock............................ 54
THE MERGER AGREEMENT.................................................... 56
The Merger............................................................ 56
Option Agreement...................................................... 56
Date of Closing....................................................... 56
Certificate of Incorporation and Bylaws of NPI........................ 56
Management of NPI Following the Merger................................ 56
Conversion of Securities; Adjustment of Exchange Ratio................ 57
Exchange of Certificates.............................................. 57
Representations and Warranties........................................ 58
Conduct of Business Before Completion of the Merger................... 59
No Solicitation....................................................... 60
Meetings of Stockholders.............................................. 62
Employee Benefit Plans................................................ 63
Conditions............................................................ 63
Termination........................................................... 64
Termination Fees and Expenses......................................... 64
Amendment and Waiver.................................................. 65
Voting Agreements..................................................... 65
COMPARISON OF RIGHTS OF HOLDERS OF NPI COMMON STOCK AND FALCONSTOR
CAPITAL STOCK.......................................................... 67
Size of the Board..................................................... 67
Classification........................................................ 67
Removal of Directors.................................................. 67
Vacancies............................................................. 67
Limitation on Director Liability...................................... 67
Indemnification of Directors and Officers............................. 68
Amendments to Certificate of Incorporation............................ 68
Amendments to Bylaws.................................................. 68
Authorized Capital Stock.............................................. 68
Dividends............................................................. 69
Stock Repurchases, Redemptions and Conversions........................ 69
Election of Directors................................................. 69
Appraisal or Dissenters' Rights....................................... 69
Action by Written Consent............................................. 70
Annual Meeting of Stockholders........................................ 70
Special Meeting of Stockholders....................................... 70
Advance Notice Requirements of Stockholder Nominations................ 70

iii

Page
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Advance Notice Requirements of Stockholder Business................... 71
Rights of Inspection.................................................. 71
Transactions Between the Corporation and its Directors and Officers... 71
Stockholders' Rights Plan............................................. 71
BUSINESS OF NPI......................................................... 72
NPI'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 73
Overview.............................................................. 73
Results of Operations for the Three Months Ended March 31, 2001 and
2000................................................................. 74
Results of Operations for the Years Ended December 31, 2000, 1999 and
1998 ................................................................ 75
Liquidity and Capital Resources....................................... 78
Recent Accounting Pronouncement....................................... 79
Quantitative and Qualitative Disclosures about Market Risk............ 79
BUSINESS OF FALCONSTOR.................................................. 80
Overview.............................................................. 80
Industry Background................................................... 80
FalconStor's Solution................................................. 83
Business Strategy..................................................... 85
FalconStor's Products................................................. 86
Research and Development.............................................. 86
Sales, Marketing and Customer Service................................. 86
Competition........................................................... 87
Intellectual Property................................................. 87
Properties............................................................ 88
Legal Proceedings..................................................... 88
Employees............................................................. 88
FALCONSTOR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................. 89
Overview.............................................................. 89
Results of Operations for the Three Months Ended March 31, 2001....... 89
Results of Operations for the Period From Inception (February 10,
2000) Through December 31, 2000...................................... 90
Recent Accounting Pronouncement....................................... 91
Liquidity and Capital Resources....................................... 92
FALCONSTOR SOFTWARE'S MANAGEMENT AFTER THE MERGER....................... 93
NPI AND FALCONSTOR FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......... 96
NPI PROPOSAL NO. 2: AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION.... 131
Vote Required and Board of Directors' Recommendation.................... 132
ADDITIONAL ANNUAL MEETING MATTERS FOR NPI:
NPI PROPOSAL NO. 3: THE ELECTION OF DIRECTORS............................. 133
Nominees for Election as Class I Directors Serving for Three-Year Terms
Expiring in 2004....................................................... 133
Incumbent Directors Not Standing for Re-election at the 2001 Annual
Meeting................................................................ 133
Vote Required and Board of Directors' Recommendation.................... 134
NPI PROPOSAL NO. 4: RATIFICATION OF APPOINTMENT OF ACCOUNTANTS............ 135
Vote Required and Board of Directors' Recommendation.................... 135
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES............................... 136
EXECUTIVE COMPENSATION AND OTHER MATTERS.................................. 137
Summary Compensation Table.............................................. 137
Option Grants in Last Fiscal Year....................................... 138
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values.......................................................... 138
Employment Contracts, Termination of Employment and Change in Control
Arrangements........................................................... 139

Page
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Compensation of Directors............................................... 140
Compensation Committee Interlocks and Insider Participation............. 140
Certain Relationships and Related Transactions.......................... 140
Section 16(a) Beneficial Ownership Reporting Compliance................. 140
Report of the Compensation Committee of the Board of Directors on
Executive Compensation................................................. 141
Report of the Audit Committee........................................... 142
COMPARISON OF STOCKHOLDER RETURN.......................................... 143
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 144
EXPERTS................................................................... 145
LEGAL MATTERS............................................................. 145
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT NPI ANNUAL MEETING.......... 145
WHERE YOU CAN FIND MORE INFORMATION....................................... 145
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 146
TRANSACTION OF OTHER BUSINESS............................................. 147
APPENDICES
Annex A--Agreement and Plan of Merger and Reorganization................ A-1
Annex B--Opinion of Lehman Brothers Inc................................. B-1
Annex C--Section 262 of the Delaware General Corporation Law............ C-1
Annex D--Voting Agreements.............................................. D-1
Annex E--NPI Charter of the Audit Committee of the Board of Directors... E-1
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS........................... II-1
SIGNATURES................................................................ II-4

ADDITIONAL INFORMATION

This joint proxy statement/prospectus incorporates important business and
financial information about NPI from other documents that are not included in
or delivered with the joint proxy statement/prospectus. This information is
available to you without charge upon your written or oral request. You can
obtain the documents incorporated by reference in this joint proxy
statement/prospectus by requesting them in writing or by telephone or over the
Internet from NPI at the following address:

Network Peripherals Inc.
Attn.: James Williams
2859 Bayview Drive
Fremont, California 94538
Phone: (510) 897-5000
Web Address: www.npix.com

If you would like to request any documents, please do so by ,
2001 in order to receive them before the stockholders' meetings. See "Where You
Can Find More Information" that begins on page 145.

Network Peripherals Inc. and the Network Peripherals Inc. logo are
registered trademarks of Network Peripherals Inc. FalconStor, Inc., the
FalconStor logo and IPStor are trademarks of FalconStor, Inc. Other product and
brand names are trademarks or registered trademarks of their respective
holders.

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q1: What is the merger transaction?

A: In general terms, the merger transaction involves the merger of Empire
Acquisition Corp., a wholly-owned subsidiary of NPI, into FalconStor, Inc. with
FalconStor as the surviving corporation. Holders of FalconStor common stock
will receive shares of NPI common stock in exchange for the shares of
FalconStor common stock they own, including common stock issued upon conversion
of FalconStor preferred stock immediately prior to the merger. As a result of
the merger, the former stockholders of FalconStor will own more than a majority
of NPI's common stock immediately after the merger. Following the merger,
FalconStor's management will be the management of the combined company.

Q2: What will I receive in the merger?

A: NPI stockholders will not receive any consideration in the merger, and the
number of shares of NPI common stock that they hold will be unaffected.
However, NPI will be issuing approximately 29,732,912 shares of common stock to
FalconStor stockholders in connection with the merger, which will dilute the
percentage ownership of NPI stockholders by approximately 69%.

Immediately prior to the merger, each outstanding share of FalconStor
preferred stock will be converted into FalconStor common stock. FalconStor
stockholders will receive shares of NPI common stock for the shares of
FalconStor common stock they hold. The exact number of shares of NPI common
stock that FalconStor stockholders will receive for their shares of FalconStor
common stock will be determined by an exchange ratio set forth in more detail
on page 57. The exchange ratio will fluctuate as a result of fluctuations in
the price of NPI common stock. Assuming that NPI's cash, cash equivalents and
short-term investments are at $80,000,000, and that the trading price of NPI
common stock remains at $9.89, the closing price on July 11, 2001, each share
of FalconStor common stock will convert into the right to receive approximately
0.686202 shares of the common stock of the combined entity. Based on this
exchange ratio, each share of common stock of the combined entity would be
worth approximately $6.79. In the aggregate, FalconStor stockholders will own
approximately 69% of the surviving corporation following the merger. However,
because the price of NPI common stock fluctuates, the closing price as of any
date in the past provides no assurance as to the value of NPI common stock that
FalconStor stockholders will receive upon completion of the merger.

The following table demonstrates how the exchange ratio will change based
upon fluctuations in NPI's stock price, assuming NPI has $80,000,000 in cash at
the closing of the merger (as adjusted for cash payments due to certain members
of NPI's management team resulting from the merger):

NPI
Price Value
Per Exchange Per
Share Ratio Share
----- -------- -----

$12.00 .698727 $8.38
$10.00 .704344 $7.04
$ 8.00 .709143 $5.67

The following table demonstrates how the exchange ratio will change based
upon fluctuations in NPI's stock price, assuming NPI has $75,000,000 in cash at
the closing of the merger (as adjusted for cash payments due to certain members
of NPI's management team resulting from the merger):

NPI
Price Value
Per Exchange Per
Share Ratio Share
----- -------- -----

$12.00 .733107 $8.80
$10.00 .738723 $7.38
$ 8.00 .743522 $5.95

Q3: What restrictions will apply to the shares of NPI common stock that I will
receive in the merger?

A: All shares of NPI common stock received by the stockholders of FalconStor in
the merger will be subject to transfer restrictions pursuant to lock-up
agreements for a period of 365 days following the effective date of the merger.
Following the merger, the board of directors of the combined company may, in
its sole discretion, release any or all of the shares from the lock-up
restrictions at any time with or without notice.

Q4: What are the tax consequences of the merger?

A: Subject to the discussion in "Tax Consequences" below, NPI and FalconStor
have structured the merger so that, for federal income tax purposes, FalconStor
stockholders will generally not recognize a gain or a loss upon the receipt of
NPI common stock in the merger, except with respect to cash received in lieu of
fractional shares or in connection with the exercise of appraisal rights. NPI
stockholders will not recognize taxable gains or losses as a result of the
merger. NPI and FalconStor have conditioned the merger on receipt of legal
opinions regarding the tax consequences of the merger.

Q5: What am I being asked to vote upon?

A: NPI stockholders are being asked to approve the adoption of the merger
agreement and approval of the merger. Approval of the adoption of the merger
agreement will include approval of all transactions contemplated thereby,
including, without limitation:

. the issuance of approximately 29,732,912 shares of NPI common stock in
the merger;

. the amendment to NPI's restated certificate of incorporation to increase
the authorized number of shares of common stock to 100,000,000 and to
change NPI's name to FalconStor Software, Inc.

The amendment to the restated certificate of incorporation will take effect
only if the merger is completed.

In addition, NPI stockholders are being asked to approve two further
proposals in the event the merger is not completed:

. the election of Michael Gardner and James Regel as Class I Directors to
serve for three-year terms; and

. the ratification of the selection of PricewaterhouseCoopers LLP as NPI's
independent accountants.

FalconStor stockholders are being asked to approve the adoption of the
merger agreement and approval of the merger. Approval of the adoption of the
merger agreement will include approval of all transactions contemplated
thereby, including, without limitation, the conversion of all of the
outstanding shares of each series of preferred stock immediately prior to the
merger.

Q6: Why are NPI stockholders being asked to approve an amendment to NPI's
restated certificate of incorporation to increase the number of authorized
shares of common stock to 100,000,000?

A: If Proposal 2 and the merger are approved, NPI's restated certificate of
incorporation will be amended to increase the authorized number of shares of
its common stock to 100,000,000. NPI will be issuing approximately 29,732,912
shares of common stock in connection with the merger. NPI currently has
approximately 45,000,000 shares available for issuance. The increase in the
authorized number of shares by 40,000,000 will assure that an adequate number
of shares of common stock will be available for future issuances under the
combined company's equity compensation plans, and in the event the combined
company's board of directors determines that it is necessary or appropriate to
issue additional shares in connection with a stock dividend, the raising of
additional capital, the acquisition of other businesses, the establishment of
strategic relationships with corporate partners, or for other corporate
purposes. FalconStor's management is not currently contemplating any of these
transactions, other than issuances pursuant to its or NPI's stock option plans.
The name of the combined company will be changed to FalconStor Software, Inc.
to reflect the combined company's new business focus.

This amendment to NPI's restated certificate of incorporation will take
effect only if the merger is completed.

Q7: What vote is required to approve the proposals?

A: NPI stockholders: Assuming a quorum is present, the proposal regarding the
merger and the proposal regarding the amendment to the restated certificate of
incorporation will require the affirmative vote of a majority of all
outstanding votes entitled to be cast at the NPI annual meeting. If you abstain
or

do not instruct your broker how to vote, your abstention or broker non-vote
will have the same effect as a vote against each of these proposals.

Assuming a quorum is present, the directors shall be elected by a plurality
of votes cast. Abstentions and broker non-votes will have no effect on the
election of directors.

Assuming a quorum is present, ratification of NPI's selection of
PricewaterhouseCoopers LLP as its independent accountants will require the
affirmative vote of a majority of votes actually cast at the NPI annual
meeting. Abstentions and broker non-votes will have no effect on the
ratification of NPI's selection of its independent accountants.

Certain officers and directors of NPI holding an aggregate of 10.3% of the
outstanding common stock of NPI (assuming exercise of the outstanding options
held by such officers and directors) have entered into voting agreements and
agreed to vote all shares of NPI common stock held by them.

FalconStor stockholders: Assuming a quorum is present, the proposal requires
the affirmative vote of holders of a majority of the outstanding voting power
of the common stock and the preferred stock voting together as a single class,
and a majority of the outstanding shares of Series A preferred stock,
two-thirds of the outstanding shares of Series B preferred stock, and a
majority of the outstanding shares of Series C preferred stock, each series
voting separately. If you abstain or do not vote, your abstention or non-vote
will have the same effect as a vote against the merger proposal.

The holders of the requisite number of shares of FalconStor common stock,
Series A preferred stock, Series B preferred stock and Series C preferred stock
to approve the merger have entered into voting agreements whereby these holders
have agreed to vote their shares in favor of the merger. Therefore, provided
these holders comply with the provisions of the voting agreements, FalconStor
stockholders will approve the merger.

Q8: What constitutes a quorum at the stockholders' meetings?

A: A quorum is a majority of the outstanding shares entitled to vote which are
present or represented by proxy at the stockholders' meetings. A quorum must
exist for the transaction of business at the stockholders' meetings. If you
submit a properly executed proxy card, even if you abstain from voting, your
shares will be considered part of the quorum. Broker non-votes, which are
shares held by a broker or nominee that are represented at the stockholders'
meeting, but with respect to which the broker or nominee is not empowered to
vote on a proposal, are also included in determining the presence of a quorum.

Q9: What do I need to do now?

A: After you read and consider the information in this document, mail your
signed proxy card in the enclosed return envelope as soon as possible, so that
your shares may be represented at the appropriate stockholders' meeting. You
should return your proxy card whether or not you plan to attend your
stockholders' meetings. If you attend your stockholders' meeting, you may
revoke your proxy at any time before it is voted and vote in person if you
wish.

Q10: If my shares of NPI common stock are held in "street name" by my broker,
will my broker vote my shares for me?

A: Your broker will vote your shares only if you provide instructions on how to
vote. If you do not provide your broker with instructions on how to vote, your
broker's non-votes will have the same effect as votes against approval of the
merger and approval of the amendment to the restated certificate of
incorporation. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Abstentions and
broker non-votes will have no effect on the election of directors or on the
ratification of NPI's selection of its independent accountants.

Q11: What do I do if I want to change my vote after I have sent in my proxy
card?

A: You can change your vote at any time before your proxy is voted at the
appropriate stockholders' meeting. You can do this in one of three ways. First,
you can send a written notice stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card at a later date. If you

choose either of these methods, you must submit your notice of revocation or
your new proxy card to NPI or FalconStor, as the case may be, before your
stockholders' meeting. Finally, you can attend your stockholders' meeting and
vote in person. Simply attending your stockholders' meeting, however, will not
revoke your proxy. If you have instructed a broker to vote your shares, you
must follow directions received from your broker to change your vote.

Q12: If I am a holder of FalconStor capital stock, how should I send in my
stock certificates for exchange?

A: Do not send in your stock certificates with your proxy card. You must keep
your stock certificates until after the merger has been completed, after which
you will receive a letter of transmittal describing how you may exchange your
FalconStor stock certificates for certificates representing shares of NPI
common stock. At that time, you will have to submit your FalconStor stock
certificates to the exchange agent with your completed letter of transmittal.

Q13: Who can I call with questions?

A: If you have any questions regarding the proposals or how to submit your
proxy, or if you need additional copies of this joint proxy
statement/prospectus or the enclosed proxy card or voting instructions, you
should contact the individuals listed below:

If you are an NPI stockholder and you have questions regarding the
proposals, you should contact:

Network Peripherals Inc.
2859 Bayview Drive
Fremont, California 94538
Attention: James Williams
Phone Number: (510) 897-5000

If you are an NPI stockholder and you have questions regarding the
solicitation of your proxy, you should contact:

MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Attention: Daniel Burch
Phone number: (212) 929-5500

If you are a FalconStor stockholder and you have questions regarding either
the merger or the solicitation of your proxy, you should contact:

FalconStor, Inc.
125 Baylis Road
Melville, New York 11747
Attention: Jacob Ferng
Phone Number: (631) 777-5188

SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS

This summary highlights selected information from this document and may not
contain all of the information that is important to you. Even though we have
highlighted what we believe is the most important information, we encourage you
to read the entire joint proxy statement/prospectus for a complete
understanding of the proposed merger of a wholly-owned subsidiary of NPI into
FalconStor. You should also review the other available information referred to
in "Where You Can Find More Information" on page 145.

The companies

Network Peripherals Inc.

NPI was incorporated in California in 1989 and reincorporated in Delaware in
1994. Until recently, NPI designed and sold Ethernet switching solutions
designed for local area networks, or LANs. In response to unfavorable market
conditions and in order to take best advantage of the opportunity presented by
FalconStor's technology and market opportunity, NPI is currently in the process
of winding down its business and laying off its employees. NPI expects to have
substantially discontinued its historical operating business by August 31,
2001.

NPI's principal executive offices are located at 2859 Bayview Drive,
Fremont, California 94538. NPI's telephone number is (510) 897-5000.

FalconStor, Inc.

FalconStor was incorporated in Delaware in February 2000. FalconStor is a
non-reporting, development stage company and provides storage networking
infrastructure software. Through May 31, 2001, FalconStor has only generated
limited services revenue.

FalconStor's principal executive offices are located at 125 Baylis Road,
Suite 140, Melville, New York 11747. FalconStor's telephone number is (631)
777-5188.

Structure of the merger (page 46)

At the closing of the merger, a wholly-owned subsidiary of NPI will merge
into FalconStor and FalconStor will be the surviving corporation. Immediately
prior to the merger, each share of FalconStor preferred stock shall be
converted into that number of shares of common stock for which each share of
preferred stock is then convertible. Each share of FalconStor common stock then
will be converted into the right to receive shares of NPI common stock. The
merger has been structured so that, for federal income tax purposes,
stockholders will generally not recognize a gain or a loss upon the receipt of
NPI common stock in the merger, except with respect to cash received in lieu of
fractional shares or in connection with the exercise of appraisal rights.

In exchange for an exclusive irrevocable option to enter into the merger
with FalconStor, on April 2, 2001, NPI purchased 9,792,401 shares of FalconStor
Series C preferred stock for $25,000,000. Prior to the merger, all shares of
FalconStor Series C preferred stock issued to NPI will be canceled, and the
proceeds received by FalconStor from that sale of stock will remain in
FalconStor for use in ongoing operations after the merger. The $25,000,000 will
be added to NPI's cash balance for the purposes of determining NPI's closing
cash, which is an element of the exchange ratio.

The terms of the merger agreement

The merger agreement is attached as Annex A to this joint proxy
statement/prospectus. We encourage you to read the merger agreement, as it is
the legal document that governs the merger.

Conversion of securities; adjustment of exchange ratio (page 57). In the
merger, each share of FalconStor common stock will be converted into the right
to receive 0.686202 of one share of NPI common stock based on an exchange ratio
set forth in more detail on page 57. In addition, FalconStor stockholders will
receive cash in lieu of any fractional shares they would have the right to
receive following the conversion. In the aggregate, the FalconStor stockholders
will own approximately 69% of the surviving corporation following the merger.
This number will fluctuate as a result of fluctuations in the price of NPI
common stock.

NPI common stock (page 54). The NPI common stock that holders of FalconStor
common stock will receive as a result of the merger is traded and quoted on The
Nasdaq National Market under the market symbol "NPIX." Following the completion
of the merger, the name of the company will be changed to FalconStor Software,
Inc. and the common stock of the combined company will trade under the symbol
"FALC."

Conditions to the merger (page 63). The completion of the merger depends
upon the satisfaction of a number of conditions, including:

. approval of the merger agreement and the transactions it contemplates by
the stockholders of NPI and FalconStor;

. approval for quotation on The Nasdaq National Market of the shares of NPI
common stock to be issued in the merger;

. NPI must have closing cash of at least $80,000,000, where closing cash is
defined as cash, cash equivalents and short-term investments, plus
$25,000,000, minus cash payments due under executive retention bonus
agreements, plus transaction expenses related to the merger; and

. receipt by each of NPI and FalconStor of an opinion of counsel to the
effect that the merger will be treated as a tax-free reorganization under
the Internal Revenue Code of 1986, as amended.

No solicitation (page 60). Subject to certain exceptions, neither NPI nor
FalconStor may solicit or support any proposal for a merger or similar
transaction involving any third party, participate in negotiations or
discussions concerning any proposed acquisition by a third party, provide any
non-public information to any third party relating to any proposed acquisition,
or approve or recommend any proposed acquisition by a third party.

Termination (page 64). Subject to certain exceptions, either NPI or
FalconStor may terminate the merger agreement if the merger is not completed by
September 30, 2001, and in various other circumstances.

Termination fees and expenses (page 64). In general, all fees and expenses
incurred in connection with the merger agreement and the transactions it
contemplates shall be paid by the party incurring such expenses, whether or not
the merger is completed.

NPI and FalconStor have agreed that if the merger agreement is terminated by
NPI or FalconStor and if the termination is not a result of any breach by
FalconStor, NPI will pay FalconStor $3,000,000.

NPI's financial advisor believes that the merger is fair to NPI

Opinion of NPI's financial advisor (pages 38 through 43). In deciding to
approve the merger, the NPI board of directors considered the opinion of its
financial advisor, Lehman Brothers Inc., that, as of March 30, 2001, the date
of its opinion, and subject to the considerations and limitations set forth in
its opinion, the aggregate consideration to be paid by NPI in the merger is
fair, from a financial point of view, to NPI. On May 3, 2001, representatives
from Lehman Brothers orally reconfirmed this opinion. Lehman Brothers will
receive a total fee of $2,500,000 for its services. Of this total fee, $50,000
was paid as a retainer fee, $750,000 was paid to Lehman Brothers for rendering
its fairness opinion, and the remaining $1,700,000 is contingent upon the
completion of the merger. The full text of this opinion is attached as Annex B
to this joint proxy statement/prospectus. NPI urges its stockholders to read
the opinion of Lehman Brothers carefully and in its entirety. Lehman Brothers
has no obligation to update its opinion prior to consummation of the merger.

Treatment of NPI stock options (page 45)

NPI's equity plans include its 1993, 1996, 1997 and 1999 Stock Plans and its
1994 Outside Directors Stock Option Plan, each as amended. The merger
constitutes a "change of control" or "transfer of control" of NPI under its
employee stock plans. The following is a description of the effect of the
merger on those plans.

. All options held by employees, directors or consultants under the various
stock option plans will remain outstanding, and the vesting of certain
options will accelerate as a

result of the transfer of control. See "Interests of Certain NPI Persons
in the Merger."

. The 1994 Outside Directors Stock Option Plan provides that, in the event
of a transfer of control, any unexercisable or unvested portion of the
outstanding options shall be immediately exercisable and vested in full
as of the date 10 days prior to the date of the transfer of control.

Treatment of FalconStor stock options (page 45)

Under the terms of the merger agreement, NPI has agreed to assume all
FalconStor options, whether vested or unvested.

All outstanding FalconStor options shall remain subject to the terms and
conditions of the existing FalconStor stock option plan, including any
restrictions on the exercisability of each option and the term, exercisability
and vesting schedule, except that:

. each option will be exercisable for that number of shares of NPI common
stock equal to the product of the number of shares of FalconStor common
stock that would be issuable upon exercise of the option immediately
prior to the effective time of the merger multiplied by the exchange
ratio;

. the per share exercise price for the shares of NPI common stock issuable
upon exercise of each option will be equal to the quotient determined by
dividing the exercise price per share of FalconStor common stock at which
the option is exercisable immediately prior to the effective time of the
merger by the exchange ratio; and

. further adjustments may be made in the case of incentive stock options,
if required under U.S. federal tax laws.

The reasons the boards of directors of NPI and FalconStor approved the merger
(page 35)

The NPI and the FalconStor boards of directors approved the merger based on
a number of factors, including, among other things, their belief that the
combination of NPI and FalconStor will create a stronger, more successful
company, with enhanced prospects for continued viability, by:

. combining FalconStor's position as a provider of storage networking
infrastructure software with NPI's position as a well-capitalized,
publicly-traded company; and

. providing the stockholders of both companies with the potential for more
financial success than either company has on its own.

The two boards of directors also considered separate reasons for the merger,
including:

. NPI's board considered the fact that NPI's prospects as a stand-alone
company have diminished; and

. FalconStor's board considered the fact that as a result of the merger,
FalconStor stockholders would own approximately 69% of the outstanding
common stock of NPI.

Interests of certain persons in the merger (page 44)

Interests of certain NPI persons in the merger

In addition, certain officers have offer letters, salary continuation
agreements, separation and release agreements or employment agreements pursuant
to which the merger constitutes a change of

control and according to which, upon the closing of the merger, a specified
percentage of the executive officers' stock options will become vested. In
addition, if the combined company terminates the employment of any of these
executive officers, pursuant to the terms of their respective agreements,
following the closing of the merger such officers are entitled to a combination
of severance pay and benefits.

On October 18, 2000, Glenn Penisten, chairman of the board of directors of
NPI and an NPI employee, purchased 17,500 shares of FalconStor Series B
preferred stock at a purchase price of $25,000.

As a result of these interests, the officers and directors of NPI who are
parties to these agreements or who own stock of FalconStor may be more likely
to vote to approve the merger agreement than if they did not hold these
interests. NPI's stockholders should consider whether these interests may have
influenced these directors and officers to support or recommend the merger.

Interests of certain FalconStor persons in the merger

Under the merger agreement, NPI has agreed to honor any indemnification
provisions of FalconStor's certificate of incorporation and bylaws for a period
of six years from the completion of the merger. NPI has also agreed to provide
for indemnification provisions in the certificate of incorporation and bylaws
of the surviving corporation. In addition, NPI has agreed to provide director
and officer liability insurance for any claims arising in connection with the
merger agreement for a period of not less than six years following the
completion of the merger.

Barry Rubenstein, the chairman of the board of directors of FalconStor, is a
member of a "group," as defined by the Securities Exchange Act of 1934, that
beneficially owned approximately 7.1% of NPI common stock at the time the
merger agreement was approved by the FalconStor board. Pursuant to an amended
Schedule 13D filed June 11, 2001, such "group" is no longer the beneficial
owner of more than 5% of NPI common stock. Mr. Rubenstein will resign from the
FalconStor board of directors immediately prior to the consummation of the
merger and will not serve as a board member of the combined company.

As a result of these interests, the directors and officers of FalconStor may
be more likely to vote to approve the merger agreement than if they did not
hold these interests. FalconStor stockholders should consider whether these
interests may have influenced these directors and officers to support or
recommend the merger.

Board composition following the merger (page 46)

NPI's board of directors currently consists of five directors. Upon the
closing of the merger:

. the combined company's board of directors will continue to have five
directors;

. four existing NPI directors, James Regel, Thomas Brown, Michael Gardner
and Charles Hart, will resign;

. one existing NPI director, Glenn Penisten, will remain on the combined
company's board; and

. ReiJane Huai, Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer
will be appointed to the combined company's board.

At the closing, the combined company's board will be Glenn Penisten, ReiJane
Huai, Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer. The term of
Steven R. Fischer shall expire at the annual meeting of stockholders to be held
in 2002. The terms of Steven H. Owings and Glenn Penisten shall expire at the
annual meeting of stockholders to be held in 2003, and the terms of ReiJane
Huai and Lawrence S. Dolin shall expire at the annual meeting of stockholders
to be held in 2004.

Relative percentages of ownership

The final exchange ratio shall be determined using the number of shares of
NPI and FalconStor capital stock outstanding two days prior to the date of the
stockholders' meetings. Consequently, the exact percentage ownership
immediately following

the merger cannot be determined as of the date of this joint proxy
statement/prospectus. Based on the number of shares outstanding on July 11,
2001 for each of NPI and FalconStor, immediately after the closing of the
merger, the holders of FalconStor common stock would hold approximately 69% of
the outstanding common stock of NPI. The holders of NPI common stock would hold
approximately 31% of the outstanding NPI common stock immediately after the
closing.

The recommendations of the boards of NPI and FalconStor

NPI (page 38): The NPI board of directors believes that the proposed merger
is fair to, advisable for, and in the best interests of NPI and its
stockholders, has unanimously voted to approve the terms and provisions of the
merger agreement, and unanimously recommends that you vote FOR the adoption of
the merger agreement and approval of the merger, including all transactions
contemplated thereby.

Additionally, the NPI board of directors believes that the amendment to the
restated certificate of incorporation is in the best interests of NPI and its
stockholders, has unanimously voted to approve the amendment to the restated
certificate of incorporation and unanimously recommends that you vote FOR the
approval of the amendment to the restated certificate of incorporation.

The board of directors of NPI further believes that the election of Michael
Gardner and James Regel to the board in the event the merger is not consummated
is in the best interests of NPI and its stockholders, has unanimously voted to
approve the election of those directors in the event the merger is not
consummated and unanimously recommends that you vote FOR the election of those
directors in the event the merger is not consummated.

The board of directors of NPI believes that the ratification of the board of
directors' selection of PricewaterhouseCoopers LLP as NPI's independent
accountants in the event the merger is not consummated is in the best interests
of NPI and its stockholders, has unanimously voted to approve the ratification
in the event the merger is not consummated and unanimously recommends that you
vote FOR the ratification in the event the merger is not consummated.

FalconStor (page 38): The FalconStor board of directors believes that the
merger is fair to, advisable for, and in the best interests of FalconStor and
its stockholders, has unanimously voted to approve the merger agreement, and
unanimously recommends that you vote FOR the adoption of the merger agreement
and approval of the merger, including all transactions contemplated thereby.

Risk factors related to the merger

The "Risk Factors" beginning on page 17 should be considered carefully by
both NPI and FalconStor stockholders in evaluating whether to approve the
adoption of the merger agreement and approval of the merger. These risk factors
should be considered along with any additional risk factors in documents
incorporated by reference in this joint proxy statement/prospectus and any
other information included or incorporated by reference herein, including in
conjunction with forward-looking statements made herein.

The stockholders' meetings (pages 25 and 28)

The Annual Meeting of the Stockholders of NPI will be held on ,
, 2001, at a.m., local time, at the Marriott Hotel, 46100
Landing Parkway, Fremont, California.

The Special Meeting of the Stockholders of FalconStor will simultaneously be
held on , , 2001, at p.m., local time, at the
offices of FalconStor, 125 Baylis Road, Suite 140, Melville, New York 11747.

Accounting treatment

Although NPI will be acquiring FalconStor, after the transaction, FalconStor
stockholders will hold a majority of the voting interests in the combined
enterprise. Accordingly, for accounting purposes, the acquisition will be a
"reverse acquisition" and FalconStor will be the "accounting acquiror."
Further, as a result of NPI's decision to

discontinue its NuWave and legacy businesses, NPI will be a non-operating
public shell with no continuing operations. The combined company's name will be
changed to FalconStor Software, Inc., and no intangible assets associated with
NPI will be purchased by FalconStor. Accordingly, the transaction will be
accounted for as a recapitalization of FalconStor and recorded based on the
fair value of NPI's net tangible assets acquired by FalconStor, with no
goodwill or other intangible assets being recognized. Costs incurred by
FalconStor directly related to the transaction will be charged to stockholders'
equity.

Governmental approval of the merger (page 54)

The merger is subject to the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, or the HSR Act. The Federal Trade Commission has
granted early termination of the waiting period under the HSR Act.

Appraisal rights for NPI stockholders and for FalconStor stockholders (page 29)

Under Delaware law, the holders of common stock (including the common stock
issued upon conversion of FalconStor preferred stock immediately prior to the
merger) of FalconStor will have appraisal rights and may be entitled to receive
cash equal to the fair market value of their FalconStor common stock. To do so,
they must follow the procedures set forth under Section 262 of the Delaware
General Corporation Law. Section 262 is attached as Annex C to this joint proxy
statement/prospectus.

Under Delaware law, NPI stockholders do not have appraisal rights in
connection with this transaction.

NPI SELECTED HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share data)

The following table should be read in conjunction with NPI's consolidated
financial statements and related notes and NPI's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
joint proxy statement/prospectus, and contained in NPI's annual reports,
quarterly reports and other information on file with the Securities and
Exchange Commission. Historical results are not necessarily indicative of the
results to be expected in the future.

Set forth below is a summary of certain consolidated financial information
with respect to NPI as of the dates and for the periods indicated. The
consolidated statement of operations data set forth below for the years ended
December 31, 2000, 1999 and 1998 and the consolidated balance sheet data as of
December 31, 2000 and 1999 have been derived from NPI's audited consolidated
financial statements which are included elsewhere in this joint proxy
statement/prospectus. The consolidated statement of operations data for the
years ended December 31, 1997 and 1996 and the consolidated balance sheet data
as of December 31, 1998, 1997 and 1996 have been derived from NPI's audited
consolidated financial statements which are not included in this joint proxy
statement/prospectus. The selected consolidated financial data as of March 31,
2001 and for the three months ended March 31, 2001 and 2000 have been derived
from NPI's unaudited interim financial statements which are included in this
joint proxy statement/prospectus and include, in the opinion of NPI's
management, all adjustments, consisting of normal recurring adjustments, which
NPI's management considers necessary to present fairly the results of
operations and financial position as of and for such interim periods.

NPI SELECTED HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share data)

Three Months Ended
March 31, Year Ended December 31,
------------------- -----------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----------- ------- -------- -------- ------- -------- --------
(unaudited)

Consolidated Statement
of Operations Data:
Net sales............... $ 2,012 $ 3,305 $ 7,514 $ 10,231 $28,585 $ 34,798 $ 53,080
Cost of sales........... 6,408 2,518 9,144 9,410 17,250 25,341 28,590
-------- ------- -------- -------- ------- -------- --------
Gross profit (loss)... (4,396) 787 (1,630) 821 11,335 9,457 24,490
-------- ------- -------- -------- ------- -------- --------
Operating expenses:
Research and
development........... 3,776 2,414 11,233 7,803 11,485 9,757 8,570
Marketing and selling.. 3,091 1,997 10,672 6,437 6,010 13,242 11,849
General and
administrative........ 1,283 1,038 4,749 3,503 3,234 3,982 3,378
Merger related
expenses.............. 1,135 -- -- -- -- -- --
Restructuring expense.. -- -- 600 -- -- 3,662 --
Loss (gain) on sale of
assets................ -- -- 620 (1,055) -- -- --
Acquired research and
development in
process............... -- -- -- -- -- 6,462 13,732
-------- ------- -------- -------- ------- -------- --------
Total operating
expenses............. 9,285 5,449 27,874 16,688 20,729 37,105 37,529
-------- ------- -------- -------- ------- -------- --------
Loss from operations.... (13,681) (4,662) (29,504) (15,867) (9,394) (27,648) (13,039)
Interest income......... 1,392 779 7,262 908 1,505 1,680 1,745
-------- ------- -------- -------- ------- -------- --------
Loss before income
taxes.................. (12,289) (3,883) (22,242) (14,959) (7,889) (25,968) (11,294)
Provision for (benefit
from) income taxes..... -- -- -- -- -- (3,526) 608
-------- ------- -------- -------- ------- -------- --------
Net loss................ $(12,289) $(3,883) $(22,242) $(14,959) $(7,889) $(22,442) $(11,902)
======== ======= ======== ======== ======= ======== ========
Net loss per share:
Basic and diluted...... $ (0.96) $ (0.28) $ (1.56) $ (1.19) $ (0.64) $ (1.85) $ (1.01)
======== ======= ======== ======== ======= ======== ========
Weighted average common
shares:
Basic and diluted...... 12,834 13,682 14,224 12,584 12,281 12,154 11,760
======== ======= ======== ======== ======= ======== ========

December 31,
March 31, -----------------------------------------------
2001 2000 1999 1998 1997 1996
----------- -------- -------- ------- -------- --------
(unaudited)

Consolidated Balance
Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 87,626 $ 96,001 $ 9,715 $23,351 $ 30,465 $ 45,873
Working capital......... 92,500 105,072 12,565 26,070 34,439 54,997
Total assets............ 101,806 115,714 20,852 35,549 45,889 71,434
Stockholders' equity.... 98,224 110,904 17,909 30,972 38,679 59,857

FALCONSTOR SELECTED HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share data)

The following selected historical financial information should be read in
conjunction with FalconStor's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and FalconStor's consolidated
financial statements and related notes and other financial information included
elsewhere in this joint proxy statement/prospectus. The consolidated statement
of operations data for the period from February 10, 2000 (inception) to
December 31, 2000 and the consolidated balance sheet data as of December 31,
2000 have been derived from the audited financial statements of FalconStor
included in this joint proxy statement/prospectus. The statement of operations
data for the three months ended March 31, 2001 and the periods from inception
(February 10, 2000) through March 31, 2000 and March 31, 2001 and the balance
sheet data at March 31, 2001 are derived from unaudited interim financial
statements of FalconStor included elsewhere in this joint proxy
statement/prospectus. Historical results are not necessarily indicative of the
results to be expected in the future.

February 10, February 10, February 10,
2000 2000 2000
(inception) (inception) (inception)
Three Months through through through
Ended March 31, December 31, March 31,
March 31, 2001 2000 2000 2001
-------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited)

Consolidated Statement
of Operations Data:
Services revenues....... $ -- $ -- $ 143 $ 143
Cost of revenues........ -- -- 223 223
------- ------ ------- -------
Gross loss.............. -- -- (80) (80)
------- ------ ------- -------

Operating expenses:
Software development
costs................ 962 46 1,379 2,341
Selling and
marketing............ 1,144 -- 327 1,471
General and
administrative....... 885 5 535 1,420
------- ------ ------- -------
Total operating
expenses............... 2,991 51 2,241 5,232
------- ------ ------- -------
Operating loss.......... (2,991) (51) (2,321) (5,312)
Interest income......... 79 -- 225 304
------- ------ ------- -------
Loss before income
taxes.................. (2,912) (51) (2,096) (5,008)
Provision for income
taxes.................. -- -- -- --
------- ------ ------- -------
Net loss................ $(2,912) $ (51) $(2,096) $(5,008)
======= ====== ======= =======
Basic and diluted net
loss per share......... $ (0.19) $(0.00) $ (0.14) $ (0.33)
======= ====== ======= =======
Weighted average basic
and diluted common
shares outstanding
(1).................... 15,100 15,000 15,019 15,036
======= ====== ======= =======

March 31, December 31,
2001 2000
----------- ------------
(unaudited)

Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $5,484 $ 7,727
Working capital........................................ 4,485 7,254
Total assets........................................... 6,693 8,594
Total stockholders' equity............................. 5,387 8,057

--------
(1) Weighted average shares do not include any common stock equivalents because
inclusion of common stock equivalents would have been anti-dilutive.

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands, except per share data)

The selected unaudited pro forma condensed combined financial data set forth
below gives effect to FalconStor's proposed acquisition of NPI as if the
acquisition had been completed on January 1, 2000 for statement of operations
purposes, and as of March 31, 2001 for balance sheet purposes, and is derived
from the unaudited pro forma condensed combined financial statements included
elsewhere in this joint proxy statement/prospectus. This pro forma financial
information should be read in conjunction with the unaudited pro forma
condensed combined financial statements and related notes, which are included
elsewhere in this joint proxy statement/prospectus, and the separate historical
financial statements and related notes of FalconStor and NPI which are also
included in this joint proxy statement/prospectus.

The pro forma financial information includes adjustments to reflect NPI as a
discontinued operation and to reflect the merger as a recapitalization of
FalconStor. Accordingly, NPI's net tangible assets acquired by FalconStor will
be recorded at their fair value, with no goodwill or other intangible assets
being recognized. Costs incurred by FalconStor directly related to the
transaction will be charged to stockholders' equity.

The selected unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and does not purport to represent what
the actual consolidated results of operation or the consolidated financial
position of FalconStor would have been had the merger occurred on the dates
assumed, nor are they necessarily indicative of future consolidated results of
operations or financial position.

Three Months
Ended Year Ended
March 31, December 31,
2001 2000
------------ ------------

Pro forma statement of operations data:
Revenues............................................. $ -- $ 143
Gross loss........................................... -- (80)
Loss from operations................................. (2,991) (2,321)
Loss from continuing operations...................... (2,912) (2,096)
Net loss from continuing operations per share:
Basic and diluted................................... (0.07) (0.05)
Shares used in per share calculation................ 42,914 43,871

March 31,
2001
------------

Pro forma balance sheet data:
Cash, cash equivalents and short-term investments.... $ 93,109
Working capital...................................... 94,709
Total assets......................................... 104,917
Total stockholders' equity........................... 95,612

COMPARATIVE PER SHARE DATA

The following table sets forth certain historical per share data of NPI and
FalconStor and combined per share data on an unaudited pro forma basis after
giving effect to the proposed merger, assuming that 0.686202 of one share of
NPI common stock will be issued in exchange for each share of FalconStor common
stock in the merger. This data should be read in conjunction with the selected
consolidated historical financial information, the Unaudited Pro Forma Combined
Condensed Financial Information, and the separate consolidated historical
financial statements of NPI and FalconStor and notes thereto (which are
included elsewhere in this joint proxy statement/prospectus). The Unaudited Pro
Forma Combined Condensed Financial data are not necessarily indicative of the
operating results that would have been achieved had the merger been consummated
as of the beginning of the periods presented and should not be construed as
representative of future operating results or financial condition.

For the Three Year Ended
Months Ended December 31,
March 31, 2001 2000
-------------- -------------

NPI
Historical net loss per share--basic and diluted.. $(0.96) $(1.56)
Historical book value per share(1)................ $ 7.65 $ 8.59
Unaudited pro forma combined net loss from
continuing operations per share-- basic and
diluted(2)....................................... $(0.07) $(0.05)

As of
March 31, 2001
--------------

Unaudited pro forma combined book value per
share--basic and diluted(3)...................... $ 2.28

Period from
Inception
(February 10,
For the Three 2000) Through
Months Ended December 31,
March 31, 2001 2000
-------------- -------------

FalconStor
Historical net loss per share--basic and diluted.. $(0.19) $(0.14)
Historical book value per share(1)................ $ 0.36 $ 0.53
Unaudited pro forma combined net loss from
continuing operations per share-- basic and
diluted(4)....................................... $(0.05) $(0.03)

As of
March 31, 2001
--------------

Unaudited pro forma combined book value per
equivalent share(4).............................. $ 1.57

--------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding.
(2) The pro forma combined net loss per share for the year ended December 31,
2000 and the three months ended March 31, 2001 is computed by dividing pro
forma net loss for the year ended December 31, 2000 and the three months
ended March 31, 2001 by the pro forma number of weighted average NPI shares
outstanding at December 31, 2000 and March 31, 2001, assuming that the
proposed merger had occurred on January 1, 2000.
(3) The pro forma combined net book value per share as of March 31, 2001 is
computed by dividing pro forma stockholders' equity by the pro forma number
of shares outstanding as of March 31, 2001.
(4) The FalconStor equivalent pro forma combined amounts are computed by
multiplying the NPI pro forma amounts by the exchange ratio of 0.686202.

PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION

NPI common stock has been trading on The Nasdaq National Market under the
symbol "NPIX" since June 1994. FalconStor capital stock is not traded in any
established market. This table sets forth, for the calendar quarters indicated,
the range of high and low per share sales prices for NPI common stock as
reported by Nasdaq. These quotations reflect the inter-dealer prices, without
retail markup, markdown or commission and may not necessarily represent actual
transactions. No equivalent market price data is available for FalconStor.

High Low
------ ------

2001
Second Quarter (through July 11, 2001)....................... $13.95 $ 5.88
First Quarter................................................ 9.25 6.19

2000
Fourth Quarter............................................... $16.44 $ 6.00
Third Quarter................................................ 19.63 11.56
Second Quarter............................................... 30.76 14.06
First Quarter................................................ 78.50 35.50

1999
Fourth Quarter............................................... $47.75 $18.88
Third Quarter................................................ 19.94 16.00
Second Quarter............................................... 19.38 5.75
First Quarter................................................ 7.25 3.69

On June 29, 2001, there were approximately 117 holders of record of NPI
common stock.

On July 11, 2001, the latest practicable date before the mailing of this
joint proxy statement/prospectus, the last sale price of NPI common stock as
reported on The Nasdaq National Market was $9.89 per share. On May 4, 2001, the
last business day prior to public announcement of the merger, the last sale
price of NPI common stock as reported on The Nasdaq National Market was $7.76
per share.

Following the merger, the common stock of NPI will be quoted on The Nasdaq
National Market under the symbol "FALC."

Neither NPI nor FalconStor has paid cash dividends on its capital stock
during the period indicated in the stock price table set forth above. The
holders of NPI common stock and the holders of FalconStor capital stock are
each entitled to receive dividends when and if declared by the respective board
of directors out of funds legally available therefor. NPI and FalconStor
currently intend to retain any future earnings of the combined company, to fund
the development and growth of the business, and therefore do not anticipate
paying any cash dividends in the foreseeable future.

RISK FACTORS

You should carefully consider the risks described below regarding the
merger, together with all of the other information included in this joint proxy
statement/prospectus, before making a decision about voting on the proposals
submitted for your consideration.

Risks Related To The Merger

The merger will result in substantial dilution of the ownership interests of
current NPI stockholders.

Upon completion of the merger, each share of FalconStor common stock will be
exchanged for approximately 0.686202 shares of NPI common stock, resulting in
the issuance of an aggregate of approximately 29,732,912 shares of NPI common
stock. As a result, the current stockholders of NPI will own approximately 31%
of the outstanding common stock of the combined company. This represents
substantial dilution of the ownership interests of the current NPI
stockholders. The exact number of shares of NPI common stock that each
FalconStor stockholder will receive will be determined by an exchange ratio.
The precise exchange ratio will be determined at the closing of the merger and
will depend, in part, on the amount of cash, cash equivalents and short-term
investments of NPI minus any cash payments due under certain executive
retention bonus agreements plus $25,000,000. This figure will be calculated as
of the end of the calendar month prior to the effective time of the merger
without giving effect to expenses NPI incurs in connection with the merger. To
the extent this amount is less than $80,000,000, the number of merger shares
shall be increased by an equivalent percentage. Any adjustment to the
calculation of the exchange ratio will cause further dilution to NPI
stockholders.

The volatility of the market price of NPI common stock may reduce the value of
the NPI shares received in the merger by FalconStor stockholders.

The market price of NPI common stock has experienced significant volatility.
NPI expects this volatility to continue. This fluctuation is, or in the future
may be, caused by many factors including:

. fluctuations in operating results caused by inconsistencies in product
performance;

. changes in stock market analysts' predictions as to NPI's future economic
success;

. the presence or absence of short-selling of its common stock; and

. events affecting other companies that the market deems comparable to NPI.

Accordingly, you should obtain recent market quotations for NPI common stock
in order to assess the market value of the NPI shares that will be issued in
exchange for the FalconStor shares.

NPI cannot predict or assure FalconStor stockholders as to the market price
of NPI common stock before the closing of the merger. If the market price of
NPI common stock declines prior to the closing of the merger, the value of the
NPI common stock to be received by holders of FalconStor common stock in the
merger will be reduced.

Future sales of the combined company's common stock may depress its stock
price.

The shares of NPI common stock issued to FalconStor's former stockholders
will become freely tradable in the public market no later than one year after
the merger, subject in the case of affiliates to the restrictions of Rule 144
of the Securities Act of 1933, as amended. The market price of the combined
company's common stock could fall in response to sales of a large number of
shares of its common stock in the market after the merger or in response to the
perception that sales of a large number of shares could occur. In addition,
these sales could create the perception by the public of difficulties or
problems with the combined company's products and services. As a result, these
sales also might make it more difficult for the combined company to sell equity
or equity-related securities in the future at a time and price that its board
of directors deems appropriate.

A liquidation of NPI, instead of the proposed merger with FalconStor, might
result in increased returns for NPI's stockholders.

As of June 30, 2001, NPI had a net worth of approximately $76,000,000, or
$5.72 per share, including the value of the shares of FalconStor Series C
preferred stock held by NPI. If NPI is liquidated instead of proceeding with
the merger, NPI stockholders would receive this amount per share minus the
costs of such liquidation. While NPI's board has determined that it is in the
best interests of NPI and its stockholders to enter into the merger, it is
possible that, if the merger is completed, the holders of NPI common stock
immediately prior to the merger may hold shares of the combined company's
common stock worth less than the dollar amount they would have received if
NPI's assets had been distributed among NPI's stockholders.

The rights of holders of FalconStor common stock will change as a result of
the merger.

Following the merger, holders of FalconStor common and preferred stock
outstanding immediately prior to the merger will become holders of NPI common
stock. There are differences between the rights of NPI stockholders under NPI's
restated certificate of incorporation and bylaws and the rights of FalconStor
stockholders under FalconStor's certificate of incorporation and bylaws. As a
result of these differences, the holders of FalconStor common and preferred
stock may have less control over corporate actions proposed to be taken by NPI
than those holders had over corporate actions proposed to be taken by
FalconStor. The following is a description of some of these differences:

. NPI's certificate of incorporation provides for a classified board of
directors where only a portion of all of the members of the board of
directors are elected at each annual meeting of stockholders;

. NPI's certificate of incorporation provides that the holders of at least
two-thirds of the shares of NPI common stock must approve changes to some
of the provisions contained in NPI's certificate of incorporation;

. NPI's bylaws may only be amended with the approval of a majority of the
total number of authorized directors or the approval of the holders of at
least two-thirds of the shares of NPI common stock;

. NPI's certificate of incorporation does not permit holders of NPI common
stock to cumulate their votes in electing members of NPI's board of
directors; and

. The holders of NPI common stock may not approve any action by written
consent; all actions must be approved at a stockholder meeting.

For more information, see "Comparison of Rights of Holders of NPI Common
Stock and FalconStor Common Stock," beginning on page 67.

Officers and directors of FalconStor will receive benefits that may have
influenced them to support or approve the merger.

Some of the directors and officers of FalconStor have continuing
indemnification against liabilities that give them interests in the merger that
are different from the interests of the stockholders of FalconStor, including
the following:

. NPI has agreed to honor any indemnification provision of FalconStor's
certificate of incorporation, as amended, and bylaws for a period of six
years from the completion of the merger;

. NPI and FalconStor have agreed that ReiJane Huai, who currently serves on
the board of FalconStor, will be appointed to serve on the combined
company's board of directors following the merger.

Barry Rubenstein, the chairman of the board of directors of FalconStor, is
a member of a "group," as defined by the Securities Exchange Act of 1934, that
beneficially owned approximately 7.1% of NPI common stock at the time the
merger agreement was approved by the FalconStor board. Pursuant to an amended
Schedule 13D filed June 11, 2001, such "group" is no longer the beneficial
owner of more than 5% of NPI common stock. Mr. Rubenstein will resign from the
FalconStor board of directors immediately prior to the consummation of the
merger and will not serve as a board member of the combined company.

For the above reasons, the directors and officers of FalconStor could be
more likely to vote to approve the terms of the merger than if they did not
have these interests. FalconStor stockholders should consider whether these
interests may have influenced these directors and officers to support or
recommend the merger. See "Interests of Certain FalconStor Persons in the
Merger," beginning on page 45.

Officers of NPI have certain conflicts of interest that may influence them to
support or approve the merger.

Some officers of NPI participate in arrangements that give them interests
in the merger that are different from the interests of the stockholders of
NPI. Certain NPI officers, who hold approximately 10.3% of the outstanding NPI
common stock (assuming exercise of outstanding options held by these
officers), are parties to an executive retention plan pursuant to which the
merger constitutes a change of control and according to which such officers
are, upon the closing of the merger, entitled to a minimum bonus that is a
combination of cash and vested stock options. The total aggregate amount that
will be due to the officers is approximately $3,000,000. In addition, certain
officers of NPI are entitled to severance benefits if they are terminated by
NPI as a result of the merger. Furthermore, Glenn Penisten, the chairman of
the board and an employee of NPI, owns 17,500 shares of FalconStor's Series B
preferred stock. For the foregoing reasons, some of the officers of NPI could
be more likely to vote to approve the terms of the merger than if they did not
have these interests. NPI stockholders should consider whether these interests
may have influenced these officers to support or recommend the merger. See
"Interests of Certain NPI Persons in the Merger," on page 44.

Failure to complete the merger could cause NPI's stock price to decline and
could harm NPI's and FalconStor's business and operating results.

The merger agreement contains conditions which NPI and/or FalconStor must
meet in order to consummate the merger. In addition, the merger agreement may
be terminated by either NPI or FalconStor under certain circumstances. If the
merger is not completed for any reason, NPI and FalconStor may be subject to a
number of risks, including the following:

. since NPI has ceased substantially all of its business activities, NPI
will have no revenue on a going forward basis;

. depending on the reasons for termination, NPI may be required to pay
$3,000,000 to FalconStor;

. the market price of NPI common stock may decline to the extent that the
relevant current market price reflects a market assumption that the
merger will be completed;

. many costs related to the merger, such as legal, accounting, financial
advisor and financial printing fees, must be paid regardless of whether
the merger is completed; and

. there may be substantial disruption to the business of FalconStor and
distraction of its workforce and management team.

Failure to consummate the merger could adversely affect NPI's cash position
and attractiveness to acquirors.

On April 2, 2001, NPI purchased $25,000,000 of FalconStor's Series C
preferred stock. If this merger is not consummated, NPI will hold $25,000,000
of unregistered, illiquid preferred stock of a privately-held company with
limited resale opportunities. This will reduce its operating cash and may
reduce its attractiveness to potential acquirors.

The announcement of the merger may adversely affect NPI and FalconStor.

In response to the announcement of the merger, customers or suppliers of
NPI and/or FalconStor may delay, defer or cancel product purchase or other
decisions. Any delay, deferral or cancellation in product purchase or other
decisions by customers or suppliers could harm the business of the relevant
company, regardless of whether the merger is completed. Similarly, current and
prospective NPI and/or FalconStor employees may experience uncertainty about
their future roles with NPI or FalconStor until the merger is completed. As a
result, the ability of NPI and/or FalconStor to attract and retain key
management, sales, marketing and technical personnel could suffer.

NPI may have liabilities and ongoing obligations to certain customers and
suppliers as a result of the winding down of its business.

NPI has existing agreements with certain suppliers and customers which NPI
is in the process of terminating in connection with the winding down of its
business. NPI may have liability to certain existing customers and suppliers
as a result of the termination of these agreements. While NPI is taking steps
to minimize any such potential liability, NPI cannot be sure that its efforts
to remove all such liability will be successful.

Risks Related to the Combined Company's Business Following the Merger

In addition to the risk factors related to the merger set forth above,
after the merger, the combined company will be subject to the following risks:

Failure of the merger to achieve potential benefits could harm the business
and operating results of the combined company.

NPI and FalconStor expect that the combination of NPI and FalconStor will
result in potential benefits for the combined company. Achieving these
potential benefits will depend on a number of factors, some of which include:

. retention of key management, marketing and technical personnel after the
merger;

. the ability of the combined company to increase its customer base and to
increase the sales of FalconStor products; and

. competitive conditions in the storage networking infrastructure software
market.

Neither NPI nor FalconStor can assure you that the anticipated benefits
will be achieved. The failure to achieve anticipated benefits could harm the
business, financial condition and operating results of the combined company.

FalconStor has had limited revenues and a history of losses, and the combined
company may not achieve or maintain profitability.

FalconStor was incorporated on February 10, 2000. Due to the early stage of
FalconStor and its product, FalconStor has had limited revenues and a history
of losses. For the period from inception through March 31, 2001, FalconStor
had a gross loss of $65,759 and a net loss of $4,792,160. FalconStor currently
has signed contracts with resellers and original equipment manufacturers, or
OEMs, to begin shipping products and expects that as a result of their
contracts, its revenues will increase in the future. FalconStor's business
model depends upon signing additional OEM customers, developing a reseller
sales channel, and expanding FalconStor's direct sales force. Any difficulty
in obtaining these OEM and reseller customers or in attracting qualified sales
personnel will negatively impact FalconStor's financial performance.

The market for IP-based storage solutions is new and uncertain, and
FalconStor's business will suffer if it does not develop as FalconStor
expects.

The rapid adoption of internet protocol (IP)-based storage solutions is
critical to FalconStor's future success. The market for IP-based solutions is
still unproven, making it difficult to predict its potential size or future
growth rate, and there are currently only a handful of companies with IP-based
storage products that are commercially available. Most potential customers
have made substantial investments in their current storage networking
infrastructure, and they may elect to remain with current network
architectures or to adopt new architectures in limited stages or over extended
periods of time. FalconStor will need to convince these potential customers of
the benefits of FalconStor's IP-based storage products for future storage
network infrastructure upgrades or expansions. FalconStor cannot be certain
that a viable market for its products will develop or be sustainable. If this
market does not develop, or develops more slowly than FalconStor expects,
FalconStor's business, financial condition and results of operations would be
seriously harmed.

If FalconStor is unable to develop and manufacture new products that address
additional storage networking infrastructure software market segments, its
operating results may suffer.

Although FalconStor's current products are designed for one of the most
significant segments of the storage networking infrastructure software market,
demand may shift to other market segments. Accordingly, the combined company
may need to develop and manufacture new products that address additional
storage networking infrastructure software market segments and emerging
technologies to remain competitive in the data storage software industry.
Neither NPI nor FalconStor can assure you that the combined company will
successfully qualify new storage networking infrastructure software products
with its customers by meeting customer performance and quality specifications
or quickly achieve high volume production of storage networking infrastructure
software products.

Any failure of the combined company to address additional market segments
could harm its business, financial condition and operating results.

FalconStor's complex products may have errors or defects that could result in
reduced demand for its products or costly litigation against the combined
company.

FalconStor's IPStor platform is complex and designed to be deployed in
large and complex networks. Many of the combined company's customers will
require that its products be designed to interface with customers' existing
networks, each of which may have different specifications and utilize multiple
protocol standards. Because FalconStor's products are critical to the networks
of its customers, any significant interruption in their service as a result of
defects in the combined company's product within its customers' networks could
result in lost profits or damage to its customers. These problems could cause
the combined company to incur significant service and warranty costs, divert
engineering personnel from product development efforts and significantly
impair the combined company's ability to maintain existing customer
relationships and attract new customers. In addition, a product liability
claim, whether successful or not, would likely be time consuming and expensive
to resolve and would divert management time and attention. Further, if
FalconStor is unable to fix the errors or other problems that may be
identified in full deployment, it would likely experience loss of or delay in
revenues and loss of market share and its business and prospects would suffer.

Through March 31, 2001, FalconStor received 64% of its revenues from a one-
time consulting fee and future revenues will be derived from OEMs and
resellers.

From inception through March 31, 2001, one customer, Depository Trust
Company, accounted for 64% of FalconStor's revenues. Such revenues related to
a one-time consulting fee, and FalconStor does not expect that the combined
company will realize significant future revenues from this customer or from
consulting services. FalconStor's management expects that the expansion of the
end user base through OEMs and resellers will

account for a significant portion of the combined company's revenue. FalconStor
presently has approximately 25 signed contracts with OEMs and resellers. These
contracts are generally terminable upon 30 to 60 days notice and OEMs and
resellers have a wide variety of suppliers to choose from and therefore could
make substantial demands on the combined company. If the combined company loses
a key customer or if any of its key customers reduce their orders of the
combined company's products or require it to reduce its prices before it is
able to reduce costs, the combined company's business, financial condition and
operating results would suffer.

The combined company's quarterly results may fluctuate significantly which
could cause its stock price to decline.

The combined company's future performance will depend on many factors,
including:

. the average unit selling price of its products;

. existing or new competitors introducing better products at competitive
prices before it does;

. its ability to manage successfully the complex and difficult process of
qualifying its products with its customers;

. its customers canceling, rescheduling or deferring significant orders for
the combined company's products, particularly in anticipation of new
products or enhancements from it or its competitors;

. import or export restrictions on its proprietary technology; and

. personnel changes.

Many of FalconStor's expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of the combined company's operating
expenses will magnify any adverse effect of a decrease in revenue on its
operating results.

The storage networking infrastructure software market is highly competitive
and intense competition could negatively impact FalconStor's business.

The storage networking infrastructure software market is intensely
competitive even during periods when demand is stable. FalconStor's management
believes that it competes primarily with DataCore and StorageApps. Those
competitors and other potential competitors may be able to establish rapidly or
expand storage networking infrastructure software offerings more quickly, adapt
to new technologies and customer requirements faster and take advantage of
acquisition and other opportunities more readily.

FalconStor's competitors also may:

. consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against it; or

. bundle their products with other products to increase demand for their
products.

In addition, some OEMs with whom FalconStor does business, or hopes to do
business, may enter the market directly and rapidly capture market share. If
the combined company fails to compete successfully against current or future
competitors, its business financial condition and operating results may suffer.
See "Business of FalconStor--Competition" on page 87.

The loss of any of FalconStor's key personnel could harm the combined
company's business.

The combined company's success depends upon the continued contributions of
FalconStor's key employees, many of whom would be extremely difficult to
replace. FalconStor does not have key person life insurance on any of its
personnel. Many of FalconStor's senior management and a significant number of
its

other employees have been with FalconStor for a short period of time. Worldwide
competition for skilled employees in the storage networking infrastructure
software industry is extremely intense. FalconStor currently has 98 employees
and estimates that by December 31, 2001, the combined company will need
approximately 110 employees to expand operations in accordance with its
business plan. If the combined company is unable to retain existing employees
of FalconStor or to hire and integrate new employees, the combined company's
business, financial condition and operating results could suffer. In addition,
companies whose employees accept positions with competitors often claim that
the competitors have engaged in unfair hiring practices. The combined company
may be the subject of such claims in the future as it seeks to hire qualified
personnel and could incur substantial costs defending itself against those
claims.

The board of directors may selectively release shares of NPI common stock
received by the former FalconStor stockholders from lock-up restrictions.

The board of directors of the combined company may, in its sole discretion,
release any or all of the shares of NPI common stock received by the former
FalconStor stockholders from lock-up restrictions at any time with or without
notice. Any release of such shares from lock-up restrictions may be applied to
FalconStor's former stockholders on a proportionate or selective basis. If the
release is selectively applied, the stockholders whose shares are not released
will be forced to hold such shares while other stockholders may sell

If FalconStor is unable to protect its intellectual property, its business
will suffer.

FalconStor's success is dependent upon its proprietary technology.
Currently, the IPStor software suite is the core of its proprietary technology.
FalconStor has three pending patent applications and pending trademark
applications related to its IPStor product. Neither NPI nor FalconStor can
predict whether the combined company will receive patents for its pending or
future patent applications, and any patents that the combined company owns or
that are issued to it may be invalidated, circumvented or challenged. In
addition, the laws of certain countries in which the combined company sells and
manufactures its products, including various countries in Asia, may not protect
the combined company's products and intellectual property rights to the same
extent as the laws of the United States.

FalconStor also relies on trade secret, copyright and trademark laws, as
well as the confidentiality and other restrictions contained in their
respective sales contracts and confidentiality agreements to protect their
proprietary rights. These legal protections afford only limited protection.

FalconStor's technology may be subject to infringement claims that could harm
its business.

The combined company may become subject to litigation regarding infringement
claims alleged by third parties. FalconStor has received correspondence from a
third party claiming that some of FalconStor's employees formerly employed by
that third party may have disclosed proprietary information of the third party
in violation of certain agreements or other obligations to that third party.
This third party has also asserted that FalconStor's intellectual property may
be based on or utilizes its intellectual property. As of the date of this joint
proxy statement/prospectus, no formal action has been taken by the third party.
FalconStor believes these claims are without merit. However, if an action is
commenced against FalconStor, its management may have to devote substantial
attention and resources to defend these claims. An unfavorable result for
FalconStor could have a material adverse effect on the combined company's
business, financial condition and operating results and could limit its ability
to use its intellectual property.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information in this joint proxy statement/prospectus and in the
documents that are incorporated herein by reference, including the risk factors
in this section, contains forward-looking statements that involve risks and
uncertainties. These statements relate to, among other things, consummation of
the merger, future financial and operating results of the combined company and
benefits of the pending merger. In many cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue,"
or the negative of these terms and other comparable terminology. These
statements are only predictions. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of a number
of factors, including the risks factors described below, elsewhere in this
joint proxy statement/prospectus and in NPI's periodic filings with the
Securities and Exchange Commission, or SEC, incorporated herein by reference.
Before making a decision regarding the merger, you should be aware that the
occurrence of the events described in these risk factors could harm NPI's
business, operating results, and financial condition.

THE NPI ANNUAL MEETING

The accompanying proxy is solicited by the board of directors of NPI for use
at the annual meeting of stockholders to be held on , 2001, at
a.m., local time, or at any adjournment thereof. The meeting will be held
at Marriott Hotel, located at 46100 Landing Parkway, Fremont, California. NPI's
telephone number is (510) 897-5000.

These proxy solicitation materials were mailed on or about ,
2001 to all stockholders entitled to vote at the meeting.

Voting Rights and Solicitation of Proxies; Expenses

This solicitation of proxies is made on behalf of the board of directors of
NPI and the cost thereof will be borne by NPI. NPI has retained the services of
MacKenzie Partners, Inc. to aid in the solicitation of proxies. NPI estimates
that it will pay this solicitor a fee not to exceed $10,000 for its services
and will reimburse the solicitor for reasonable out-of-pocket expenses. The
board of directors may use the services of NPI's directors, officers, and
others to solicit proxies, personally or by telephone and may arrange with
brokerage houses and other custodians, nominees, and fiduciaries to forward
solicitation materials to the beneficial owners of the stock held of record by
such persons and NPI may reimburse them for the fees and reasonable out-of-
pocket expenses incurred in doing so.

On June 29, 2001, NPI had outstanding 13,275,851 shares of common stock, all
of which are entitled to vote as a single class with respect to the proposals
presented in this joint proxy statement/prospectus. Each stockholder of record
at the close of business on June 29, 2001, is entitled to one vote for each
share held. NPI's bylaws provide that a majority of all shares entitled to
vote, whether present in person or by proxy, will constitute a quorum for the
transaction of business at the meeting. Certain officers and directors of NPI
holding an aggregate of 10.3% of the outstanding common stock of NPI (assuming
exercise of outstanding options held by such officers and directors) have
signed voting agreements in which they have agreed to vote the shares held by
them in favor of the merger.

Purpose of the NPI Annual Meeting

The purpose of the NPI annual meeting is to vote upon proposals for:

. the approval of the merger agreement and the transactions contemplated by
the merger agreement, including the issuance of shares of NPI common
stock in the merger;

. the amendment of NPI's restated certificate of incorporation to increase
the authorized number of shares of NPI common stock from 60,000,000 to
100,000,000 and to change its corporate name to FalconStor Software,
Inc.;

. if the merger is not completed, the election of Michael Gardner and James
Regel as Class I Directors to serve for three-year terms; and

. if the merger is not completed, the ratification of the selection of
PricewaterhouseCoopers LLP as NPI's independent accountants.

The amendment to NPI's restated certificate of incorporation to increase the
authorized number of shares of NPI common stock and to change its corporate
name to FalconStor Software, Inc. would take effect only if the merger is
approved and completed.

Record Date and Outstanding Shares

The close of business on June 29, 2001 has been fixed by the NPI board of
directors as the record date for determination of the stockholders of NPI
entitled to notice of, and to vote at, the NPI annual meeting or any

postponement or adjournment of the NPI annual meeting. Holders of record of NPI
common stock at the close of business on the record date are entitled to notice
of, and to vote at, the NPI annual meeting. As of the record date, there were
approximately 117 stockholders of record holding an aggregate of 13,275,851
shares of NPI common stock. See "Stock Ownership of Management and Certain
Stockholders" below.

Stock Ownership of Management and Certain Stockholders

As of the record date, the directors and executive officers of NPI
collectively owned approximately 11.7% of the outstanding shares (assuming the
exercise of their outstanding options). As of the record date, the directors
and executive officers of FalconStor collectively owned beneficially
approximately 51.72% of the outstanding shares.

Vote Required

Each stockholder of record of NPI common stock on the record date is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
stockholders of NPI at the NPI annual meeting.

Proposal 1 regarding the merger and Proposal 2 regarding the amendment to
the restated certificate of incorporation each require the affirmative vote of
holders of at least a majority of all outstanding votes entitled to be cast at
the annual meeting of stockholders. Pursuant to voting agreements, certain
officers and all of the directors have agreed to vote all of his or her shares
in favor of NPI's merger proposal.

In order to comply with the rules of The Nasdaq Stock Market pertaining to
the issuance of new shares, approval for issuances of 20% or more of NPI's
outstanding stock is required by the stockholders of NPI. By approving Proposal
1, the stockholders are approving the issuance of more than 20% of the
outstanding shares of NPI's common stock upon the closing of the merger.

Proposal 3 to elect the two nominees as Class I Directors, if the merger is
not completed, requires a plurality of the votes cast at the annual meeting of
stockholders.

Proposal 4 to ratify the appointment of PricewaterhouseCoopers LLP as the
independent accountants for NPI, if the merger is not completed, requires a
majority of the votes cast at the annual meeting of stockholders.

Quorum; Abstentions; Broker Non-Votes

The presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding voting shares of NPI common stock will constitute a
quorum for the transaction of business at the annual meeting and any
continuation or adjournment thereof. Broker non-votes (i.e. shares held by
brokers or nominees which are represented at the meeting, but that such broker
or nominee is not empowered to vote on a particular proposal) and abstentions
will be counted in determining whether a quorum is present at the annual
meeting.

Abstentions and broker non-votes will have the same effect as a negative
vote on the proposal relating to the merger and the proposal relating to the
amendment of the restated certificate of incorporation. Abstentions and broker
non-votes will have no effect on the election of directors or on the
ratification of NPI's selection of its independent accountants.

Voting of Proxies; Revocation of Proxies

The proxy accompanying this joint proxy statement/prospectus is solicited on
behalf of the NPI board of directors for use at the meeting. Please complete,
date, and sign the accompanying proxy and promptly return it in the enclosed
envelope or otherwise mail it to NPI or its solicitor. All properly signed
proxies that NPI

receives prior to the vote at the meeting and that are not revoked will be
voted at the meeting according to the instructions indicated on the proxies or,
if no direction is indicated, will be voted FOR the approval of the merger
agreement, the issuance of shares in the merger, the amendment to NPI's
restated certificate of incorporation, the election of NPI's nominees for
directors and the ratification of PricewaterhouseCoopers LLP as NPI's
independent accountants for the fiscal year ending December 31, 2001.

You may revoke your proxy at any time before it is exercised at the meeting
by taking any of the following actions:

. delivering a written notice to the secretary of NPI by any means,
including facsimile, bearing a date later than the date of the proxy,
stating that the proxy is revoked;

. signing and delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the meeting; or

. attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy. Please note, however, that
if your shares are held of record by a broker, bank, or other nominee and
you wish to vote at the meeting, you must bring to the meeting a letter
from the broker, bank, or other nominee confirming your beneficial
ownership of the shares.

NPI's board of directors does not know of any matter that is not referred to
in this joint proxy statement/prospectus to be presented for action at the
meeting. If any other matters are properly brought before the meeting, the
persons named in the proxies will have discretion to vote on such matters in
accordance with their best judgment.

THE FALCONSTOR SPECIAL MEETING

General

The accompanying proxy is solicited by the board of directors of FalconStor
for use at the special meeting of stockholders to be held ,
, 2001, at p.m., local time, or at any adjournment thereof,
for the purposes set forth herein and in the accompanying Notice of Special
Meeting of Stockholders. The special meeting will be held at FalconStor's
offices located at 125 Baylis Road, Suite 140, Melville, New York 11747.
FalconStor's telephone number is (631) 777-5188.

These proxy solicitation materials were mailed on or about ,
2001 to all stockholders entitled to vote at the meeting.

Record Date; Outstanding Shares

Stockholders of record at the close of business on July 12, 2001 are
entitled to notice of and to vote at the special meeting. As of July 11, 2001,
15,336,000 shares of FalconStor common stock were issued and outstanding and
3,000,000 shares of FalconStor Series A preferred stock, 4,900,000 shares of
Series B preferred stock and 12,986,079 shares of Series C preferred stock were
issued and outstanding.

Revocability of Proxies

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

Voting and Solicitation

When voting together as a single class, each share of FalconStor common
stock has one vote and each share of Series A preferred stock has five votes,
each share of Series B preferred stock has two votes and each share of Series C
preferred stock has one vote, calculated as provided in FalconStor's
certificate of incorporation, as amended.

The cost of soliciting proxies will be borne by FalconStor. Proxies may be
solicited by certain of FalconStor's directors, officers and regular employees,
without additional compensation, personally or by telephone, telegram, telefax,
email or otherwise.

Vote Required

Approval of Proposal No. 1 seeking authorization to adopt the merger
agreement and approve the merger requires the affirmative vote of holders of at
least a majority of the outstanding voting power of the common stock and the
preferred stock voting together as a single class, and a majority of the
outstanding shares of Series A preferred stock, two-thirds of the outstanding
shares of Series B preferred stock, and a majority of the outstanding shares of
Series C preferred stock, each series voting separately. The holders of the
requisite number of shares of FalconStor common stock, Series A preferred
stock, Series B preferred stock and Series C preferred stock to approve the
merger have entered into voting agreements whereby these holders have agreed to
vote their shares in favor of the merger. Therefore, provided these holders
comply with the provisions of the voting agreements, FalconStor stockholders
will approve the merger.

Quorum; Abstentions

The required quorum for the transaction of business at the special meeting
is a majority of the votes eligible to be cast by holders of shares of common
and preferred stock issued and outstanding on the record date. Shares that are
voted "FOR," "AGAINST" or "ABSTAIN" on a matter are treated as being present at

the meeting for purposes of establishing a quorum and are also treated as
shares entitled to vote at the special meeting with respect to such matter.

Rights of Dissenting Stockholders

The Delaware General Corporation Law grants appraisal rights in the merger
to the holders of FalconStor's common stock and preferred stock. Under the
Delaware General Corporation Law, FalconStor stockholders may object to the
merger and demand in writing that FalconStor pay the fair value of their
shares. Fair value takes into account all relevant factors but excludes any
appreciation or depreciation in anticipation of the applicable merger.
Stockholders who elect to exercise appraisal rights must comply with all of the
procedures to preserve those rights. We have attached a copy of Section 262 of
the Delaware General Corporation Law (which sets forth the appraisal rights) as
Annex C to this joint proxy statement/prospectus.

Section 262 sets forth the required procedure a stockholder requesting
appraisal rights must follow. Making sure that you actually perfect your
appraisal rights can be complicated. The procedural rules are specific and must
be followed completely. Failure to comply with the procedure may cause a
termination of your appraisal rights. We are providing you only a summary of
your rights and the procedure. The following information is qualified in its
entirety by the provisions of Section 262. Please review Section 262 for the
complete procedure. Neither NPI nor FalconStor will give you any notice other
than as described in this joint proxy statement/prospectus and as required by
the Delaware General Corporation Law.

Appraisal Rights Procedures

If you are a FalconStor stockholder and you wish to exercise your appraisal
rights, you must satisfy the provisions of Section 262 of the Delaware General
Corporation Law. Section 262 requires, in part, the following:

. Your written demand for appraisal: You must deliver a written demand for
appraisal to FalconStor before the vote is taken at the special meeting
of stockholders. The written demand must be separate and apart from any
vote against the merger.

. You refrain from voting for approval of the merger: You must not vote for
approval of the merger agreement. If you vote in favor of the merger
agreement, your right to appraisal will terminate, even if you previously
filed a written demand for appraisal.

. You continuously hold your FalconStor shares: You must continuously hold
your shares of FalconStor stock from the date you make the demand for
appraisal through the closing of the merger. You should read the
paragraphs below for more details on making a demand for appraisal.

. A written demand for appraisal of FalconStor stock is only effective if
it is signed by, or for, the stockholder of record who owns such shares
at the time the demand is made. The demand must be signed as the
stockholder's name appears on its stock certificate(s). If you are the
beneficial owner of FalconStor stock but not the stockholder of record,
you must have the stockholder of record sign a demand for appraisal.

. If you own FalconStor stock in a fiduciary capacity, such as a trustee,
guardian, or custodian, you must disclose the fact that you are signing
the demand for appraisal in that capacity.

. If you own FalconStor stock with more than one person, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed
for them, the demand for appraisal. An authorized agent, which could
include one or more of the joint owners, may sign the demand for
appraisal for a stock holder of record; however, the agent must expressly
disclose who the stockholder of record is and that he is signing the
demand as that stockholder's agent.

. If you are a record owner, such as a broker, who holds FalconStor stock
as a nominee for others, you may exercise a right of appraisal with
respect to the shares held for one or more beneficial owners,

while not exercising such right for other beneficial owners. In such a
case, you should specify in the written demand the number of shares as to
which you wish to demand appraisal. If you do not expressly specify the
number of shares, we will assume that your written demand covers all the
shares of FalconStor stock that are in your name.

. If you are a FalconStor stockholder, you should address the written
demand to FalconStor, Inc., 125 Baylis Road, Suite 140, Melville, New
York 11747, Attention: Jacob Ferng. It is important that FalconStor
receive all written demands before the vote concerning the merger
agreement is taken. As explained above, this written demand should be
signed by, or on behalf of, the stockholder of record. The written demand
for appraisal should specify the stockholder's name and mailing address,
the number of shares of stock owned, and that the stockholder is thereby
demanding appraisal of such stockholder's shares.

. If you fail to comply with any of these conditions and the merger becomes
effective, you will only be entitled to receive the merger consideration
provided in the merger agreement.

. Written Notice: Within ten days after the closing of the merger,
FalconStor must give written notice that the merger has become effective
to each stockholder who has fully complied with the conditions of Section
262.

. Petition with the Chancery Court: Within 120 days after the closing of
the merger, either FalconStor or any stockholder who has complied with
the conditions of Section 262, may file a petition in the Delaware Court
of Chancery. This petition should request that the chancery court
determine the value of the shares of FalconStor stock held by all of the
stockholders who are entitled to appraisal rights. If you intend to
exercise your rights of appraisal, you should file such a petition in the
chancery court. FalconStor has no intention at this time to file such a
petition. Because FalconStor has no obligations to file such a petition,
if you do not file such a petition within 120 days after the closing, you
will lose your rights of appraisal.

. Withdrawal of Demand: If you change your mind and decide you no longer
want appraisal rights, you may withdraw your demand for appraisal rights
at any time within 60 days after the closing of the merger. You may also
withdraw your demand for appraisal rights after 60 days after the closing
of the merger, but only with the written consent of FalconStor. If you
withdraw your demand for appraisal rights, you will receive the merger
consideration provided in the merger agreement.

. Request for Appraisal Rights Statement: If you have complied with the
conditions of Section 262, you are entitled to receive a statement from
FalconStor. This statement will set forth the number of shares that have
demanded appraisal rights, and the number of stockholders who own those
shares. In order to receive this statement, you must send a written
request to FalconStor with 120 days after the closing of the merger.
After the merger, FalconStor has ten days after receiving a request to
mail the statement to the stockholder.

. Chancery Court Procedures: If you properly file a petition for appraisal
in the chancery court and deliver a copy to FalconStor, FalconStor will
then have 20 days to provide the chancery court with a list of the names
and addresses of all stockholders who have demanded appraisal rights and
have not reached an agreement with FalconStor as to the value of their
shares. The chancery court will then send notice of the time and place
fixed for the hearing of the petition to all of the stockholders who have
demanded appraisal rights. If the chancery court decides it is
appropriate, it has the power to conduct a hearing to determine whether
the stockholders have fully complied with Section 262 of the Delaware
General Corporation Law and whether they are entitled to appraisal rights
under that section. The chancery court may also require you to submit
your stock certificates to the Registry in Chancery so that it can note
on the certificates than an appraisal proceeding is pending. If you do
not follow the chancery court's directions, you may be dismissed from the
proceeding.

. Appraisal of Chancery Shares: After the chancery court determines which
stockholders are entitled to appraisal rights, the chancery court will
appraise the shares of stock. To determine the fair value of the

shares, the chancery court will consider all relevant factors except for
any appreciation or depreciation due to the anticipation or accomplishment
of the merger. After the chancery court determines the fair value of the
shares, it will direct FalconStor to pay that value to the stockholders
who are entitled to appraisal rights. The chancery court can also direct
FalconStor to pay interest, simple or compound, on that value if the
chancery court determines that interest is appropriate. In order to
receive the fair value for your shares, you must surrender your stock
certificates to FalconStor.

. The chancery court could determine that the fair value of shares of
FalconStor stock is more than, the same as, or less than the merger
consideration. In other words, if you demand appraisal rights, you could
receive less consideration than you would under the merger agreement.

. Costs and Expenses of Appraisal Proceeding: The costs and expenses of the
appraisal proceeding may be assessed against FalconStor and the
stockholders participating in the appraisal proceeding, as the chancery
court deems equitable under the circumstances. You can request that the
chancery court determine the amount of interest, if any, FalconStor
should pay on the value of stock owned by stockholders entitled to the
payment of interest. You may also request that the chancery court
allocate the expense of the appraisal action incurred by any stockholder
pro rata against the value of all of the shares entitled to appraisal.

. Loss of Stockholders' Rights: If you demand appraisal rights, after the
closing of the merger you will not be entitled to:

. vote your shares of stock, for any purpose, for which you have demanded
appraisal rights;

. receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the effective
time of merger; or

. receive the payment of the consideration provided for in the merger
agreement.

. However, you can regain these rights if no petition for an appraisal is
filed with 120 days after the closing of the merger, or if you deliver
to FalconStor a written withdrawal of your demand for an appraisal and
your acceptance of the merger, either within 60 days after the closing
of the merger or with the written consent of FalconStor. As explained
above, these actions will also terminate your appraisal rights.
However, an appraisal proceeding in the chancery court cannot be
dismissed unless the chancery court approves. The chancery court may
condition its approval upon any terms that it deems just.

. If you fail to comply strictly with these procedures you will lose your
appraisal rights. Consequently, if you wish to exercise your appraisal
rights, we strongly urge you to consult a legal advisor before attempting
to exercise your appraisal rights.

NPI AND FALCONSTOR
PROPOSAL NO. 1

APPROVAL OF ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER CONTEMPLATED THEREUNDER

THE MERGER

This section of the joint proxy statement/prospectus describes the proposed
merger. While NPI and FalconStor believe that the description in this section
covers the material terms of the merger and the related transactions, this
summary may not contain all of the information that is important to you. You
should carefully read this entire document and the other documents NPI and
FalconStor have referred to in this joint proxy statement/prospectus for a more
complete understanding of the merger.

Background of the Merger

In December 1999, pursuant to an engagement letter that had a term running
through December 2000, NPI engaged Lehman Brothers Inc. to identify potential
strategic merger opportunities for NPI. During the first half of 2000, NPI and
Lehman Brothers held preliminary discussions with a number of companies in the
networking equipment industry regarding potential combinations, but none of the
discussions proceeded beyond preliminary information exchanges.

In the second quarter of 2000, as part of their independent partnering
strategies, NPI and FalconStor began working together to evaluate each other's
technology. In September 2000, James Regel, NPI's current chief executive
officer, took responsibility for managing NPI's relationship with FalconStor.
Subsequently, NPI and FalconStor held a number of meetings and discussions
about integration of FalconStor's software with NPI's switching technology. As
a result of his favorable impression of FalconStor's technology and market
opportunity gained in the course of these discussions, Mr. Regel consulted with
Glenn Penisten, NPI's chairman of the board of directors, about the possibility
of merging with FalconStor. Mr. Penisten contacted Barry Rubenstein,
FalconStor's chairman of the board of directors, in November 2000 to inquire
about FalconStor's interest in a merger with NPI. Mr. Rubenstein indicated that
FalconStor would consider a merger with NPI in which FalconStor stockholders
obtained a substantial majority of the equity in the combined company, but that
FalconStor was currently focused on raising capital in a private financing. Mr.
Penisten instructed Mr. Regel to continue working with FalconStor to evaluate
the advisability of a merger. In December 2000, NPI began development of a
switch platform for FalconStor's storage networking infrastructure software,
and NPI's management began to focus attention on means to enter the growing
storage networking market.

In January 2001, NPI's management commissioned an independent consulting
firm to evaluate NPI's opportunities in the Ethernet switching and storage
networking markets. Mr. Regel communicated the preliminary results of that
evaluation to Mr. Penisten in early February. The report concluded that NPI's
current and planned technology lacked features and pricing that would make it
competitive. The study also concluded that, although the storage networking
market was a rapidly growing market with a number of compelling opportunities,
NPI as a stand-alone company lacked the resources and reputation to exploit
those opportunities.

In early February, Mr. Penisten contacted Mr. Rubenstein to discuss the
terms of a merger of NPI and FalconStor. Mr. Penisten and Mr. Rubenstein had
several telephone conversations during February about the proposed terms.
During the same period and continuing through February, Mr. Regel had several
meetings and discussions with ReiJane Huai, FalconStor's chief executive
officer, and other members of the FalconStor management team, at which they
discussed potential benefits of the proposed merger transaction. As a result of
progress made in these discussions, NPI requested that its outside counsel,
Gray Cary Ware & Freidenrich LLP, prepare a preliminary term sheet. The initial
draft of the term sheet was delivered to FalconStor during the week of February
11, 2001.

Over the following two weeks, Mr. Penisten and Mr. Rubenstein had several
telephone conversations during which they discussed the proposed terms. In the
course of these conversations, Mr. Rubenstein indicated

that FalconStor was in discussions with various investors to raise additional
capital to facilitate the implementation of its business plan. Mr. Rubenstein
told Mr. Regel that FalconStor had received indications of interest from
certain venture capital sources and at least one term sheet from a proposed
venture capital investor for a convertible preferred stock financing on terms
similar to those that were negotiated by FalconStor and NPI. Mr. Rubenstein
suggested that NPI consider an equity investment in FalconStor at the same time
that NPI continued to evaluate whether a merger of the two companies would be
in the best interests of NPI's stockholders. Mr. Rubenstein and Mr. Regel
continued these discussions, and NPI agreed to a $25,000,000 equity investment
by NPI in FalconStor. As a result of these discussions, NPI requested that Gray
Cary prepare a revised term sheet reflecting the proposed investment.

On February 27, 2001, the NPI board of directors held a telephonic meeting
attended by all of the NPI directors, as well as James Williams, NPI's chief
financial officer, and a representative of Gray Cary. Mr. Penisten informed the
other directors about the substance of the discussions held with FalconStor
over the preceding months and described the terms of the proposed transaction.
Both Mr. Penisten and Mr. Regel expressed their views that, based in part on
the challenges facing NPI in executing its current business plan, the merger
transaction would be beneficial to NPI's stockholders. The other members of the
NPI board asked a number of questions about the proposed terms, and Scott
Stanton of Gray Cary led a discussion concerning the fiduciary duties of the
board in considering a strategic combination. At the conclusion of the meeting,
the board authorized management to complete negotiation of the term sheet and
to prepare and negotiate definitive transaction documents reflecting those
terms, subject to further approval of the NPI board.

Between February 27 and March 8, 2001, NPI management, FalconStor management
and their respective legal advisors continued to negotiate the specific terms
of the preliminary term sheet. On March 8, 2001, NPI and FalconStor executed
and delivered a letter agreement pursuant to which both parties agreed to
negotiate exclusively with each other for 30 days in good faith to enter into
definitive legal agreements on substantially the terms outlined in the
preliminary term sheet. The parties concurrently entered into a mutual non-
disclosure agreement.

Beginning in the week of March 12, 2001, legal advisors for NPI and
FalconStor began their respective due diligence investigations. On March 14,
2001, Gray Cary delivered the initial draft of an option agreement to Olshan
Grundman Frome Rosenzweig & Wolosky LLP, FalconStor's outside counsel, pursuant
to which NPI would have the exclusive right to require FalconStor to merge with
NPI pursuant to the terms of the merger agreement to be negotiated between the
parties. On March 15, 2001, Olshan Grundman delivered the initial drafts of the
agreements governing NPI's purchase of $25,000,000 of FalconStor Series C
preferred stock. Also on March 15, 2001, Mr. Regel and Mr. Williams met with
representatives of Lehman Brothers to inform them of the proposed transaction
and to begin negotiations regarding a formal extension of Lehman Brothers'
engagement as NPI's financial advisor in the transaction. On March 19, 2001,
NPI and Lehman Brothers executed an engagement letter extending the term of the
December 1999 engagement letter pursuant to which Lehman Brothers agreed to act
as NPI's financial advisor with respect to the transaction.

On March 19 and 20, 2001, representatives of NPI, FalconStor, Lehman
Brothers, Credit Suisse First Boston, Gray Cary, Olshan Grundman and
PricewaterhouseCoopers LLP, NPI's accounting advisor, met at Lehman Brothers'
offices in Menlo Park, California, to conduct financial, technical and market
due diligence investigations.

Also on March 19 and 20, 2001, legal advisors for NPI and FalconStor
negotiated the terms of a waiver letter pursuant to which FalconStor agreed
that NPI would not violate the terms of the exclusive negotiation agreement if
it solicited offers to purchase its Ethernet switching business. This waiver
letter was signed on March 21, 2001.

On March 20, 2001, the NPI board held a telephonic meeting attended by a
majority of the NPI directors, Mr. Williams and representatives of Gray Cary
and Lehman Brothers. The board was provided with a status report on the results
of the negotiations and due diligence investigations conducted since the last
NPI board

meeting on February 27, 2001. The Lehman Brothers representatives updated the
board on their strategy to find a purchaser for NPI's Ethernet switching
business. Also on March 20, 2001, Gray Cary delivered to Olshan Grundman the
initial draft of the merger agreement to be attached to the option agreement.

During the period from March 20 through March 30, 2001, representatives of
both parties continued negotiating the terms of the option agreement, the
related voting agreements, the Series C preferred stock financing documents and
the merger agreement. On March 28, 2001, Gray Cary distributed to each member
of the NPI board a package containing drafts of all the transaction documents
along with explanatory material. On March 29, 2001, the parties exchanged draft
disclosure schedules to the merger agreement.

On March 29, 2001, the FalconStor board held a telephonic meeting, at which
representatives of Olshan Grundman and Credit Suisse First Boston also
attended. The board was provided with a status on the results of the
negotiations and due diligence investigation of NPI. The board of directors
analyzed the principal terms of the private placement and merger agreement and
various alternatives FalconStor could adopt. During this meeting, Steven
Wolosky of Olshan Grundman made a detailed presentation to the FalconStor board
concerning its fiduciary duties in considering the private placement and the
merger. The FalconStor board held a full discussion of the merits of the
private placement and the option agreement and proposed merger agreement. The
FalconStor board unanimously approved the option agreement, unanimously found
the merger to be fair to, advisable for, and in the best interests of,
FalconStor and its stockholders, unanimously approved the terms of the merger
and the merger agreement and resolved to recommend that the stockholders of
FalconStor adopt and approve the merger agreement and the merger in the event
that NPI exercised the option.

On March 30, 2001, the NPI board held a meeting at NPI's offices in Fremont,
California, together with Mr. Williams and Mr. Stanton of Gray Cary, to review
the principal terms of the proposed transaction, including the status and
timing of the transaction. Mr. Stanton made a detailed presentation to the NPI
board concerning its fiduciary duties in considering the investment in
FalconStor and the merger. Mr. Stanton also reported to the NPI board on the
results of the legal due diligence investigation of FalconStor. Representatives
of PricewaterhouseCoopers joined the meeting by telephone and made a
presentation to the NPI board concerning the results of their due diligence
investigation of FalconStor. Representatives of Lehman Brothers then joined the
meeting and reviewed with the NPI board Lehman Brothers' financial analysis of
the exchange ratio and delivered an oral opinion on behalf of Lehman Brothers,
confirmed by delivery of a written opinion dated as of March 30, 2001, the
effective date of the option agreement, to the effect that, as of the date of
the opinion and based on and subject to the matters described in the opinion,
the aggregate consideration to be paid by NPI pursuant to the terms of the
merger agreement attached to the option agreement to acquire all the capital
stock of FalconStor, was fair, from a financial point of view, to NPI. After
excusing the Lehman Brothers representatives, the NPI board held a full
discussion of the merits of the proposed investment, the merger, the merger
agreement and the option agreement. The directors then unanimously concluded
that it was in the best interests of NPI to approve the investment and the
option agreement. Following the meeting, members of NPI and FalconStor
management and their respective legal and financial advisors concluded final
negotiations of the transaction documents and the parties executed the Series C
investment documents and the option agreement.

On April 2, 2001, the parties announced the investment and the option
agreement, and NPI transferred $25,000,000 to FalconStor as payment of the
purchase price for the shares of FalconStor Series C preferred stock.

Prior to NPI's exercise of the option, FalconStor continued to discuss its
private placement with potential investors. On May 3, 2001, FalconStor closed
its private placement, which raised approximately $8,150,000 for FalconStor in
addition to the $25,000,000 previously received from NPI. Additional investors
in the private placement included Accton Technology Corporation, Accura
Ventures, Odeon Capital Partners, Systex Corporation, Taiwan-Sok Shin Kong
Security Co., Ltd. and Taiwan Special Opportunities Fund III.

On May 3, 2001, the NPI board held a meeting at NPI's offices in Fremont,
California, together with Mr. Williams and Mr. Stanton to consider the
advisability of exercising the option and approving the merger

agreement. Mr. Stanton again reviewed for the board its fiduciary duties in
considering the proposed merger as well as the specific terms of the option
agreement and merger agreement. Representatives of Lehman Brothers joined the
meeting and orally reconfirmed their opinion delivered at the March 30, 2001
board meeting that, as of the date of the opinion and based on and subject to
the matters described in the opinion, the aggregate consideration to be paid by
NPI pursuant to the terms of the merger agreement to acquire all the capital
stock of FalconStor, was fair, from a financial point of view, to NPI. After a
full discussion, the NPI directors unanimously concluded that the merger was in
the best interests of NPI and its stockholders and declared the merger
advisable, and unanimously approved the exercise of the option, the terms of
the merger and the merger agreement and resolved to recommend that the NPI
stockholders vote to adopt the merger agreement and approve the merger. On May
4, 2001, NPI exercised the option, and the parties executed and delivered the
merger agreement.

Reasons for the Merger

General

The board of directors of NPI, at a meeting held on May 3, 2001, unanimously
approved the merger agreement, unanimously found the merger to be fair to,
advisable for, and in the best interests of, NPI and its stockholders, and
unanimously resolved to recommend that the stockholders of NPI adopt and
approve the merger agreement and the merger and the transactions related to the
consummation of the merger. The board of directors of FalconStor, at a meeting
held on March 29, 2001, unanimously approved the option agreement granting NPI
the right to cause the merger to occur pursuant to the merger agreement,
unanimously found the merger to be fair to, advisable for, and in the best
interests of, FalconStor and its stockholders, and unanimously resolved to
recommend that the stockholders of FalconStor adopt and approve the merger
agreement and the merger in the event that NPI exercised the option.

In reaching its separate decision, each board consulted with its senior
management, and financial and legal advisors, and considered a number of
factors. In view of the complexity and wide variety of information and factors,
both positive and negative, considered by each board, neither board found it
practical to qualify, rank or otherwise assign any relative or specific weights
to the factors it considered. In addition, neither board reached any specific
conclusion with respect to each of the factors it considered, or any aspect of
any particular factor. Instead, each board conducted an overall analysis of the
factors it considered. In considering those factors, individual members of each
board may have given weight to different factors. Each board considered all of
those factors as a whole and believed that those factors supported its
decision.

The factors considered by each board were not identical to the factors
considered by the other board. However, both boards identified certain material
benefits, common to both companies and their respective stockholders, that both
boards expect will result from the merger, as well as certain risks affecting
both companies in connection with the merger and certain other considerations
common to both companies. These benefits, risks and other considerations are
described immediately below. Following the discussion of those matters, the
separate factors, both positive and negative, that each board separately
considered are described. This section, read as a whole, includes the material
factors considered by each board in approving the merger.

Joint Reasons for the Merger

Both boards believe that the combination of NPI and FalconStor will create a
stronger, more fully developed industry participant, with enhanced prospects
for continued viability, by:

. allowing the combined company to leverage the financial resources of NPI
and the products, partners, technology and business plan of FalconStor;
and

. providing FalconStor with access to public equity markets to enhance
stockholder liquidity and the combined company's ability to use equity
compensation to attract and retain talented technical and management
personnel to build FalconStor's market presence.

Both boards also recognize the risks inherent in the transaction, including:

. the risk that the combined company may not be able to realize, fully or
at all, the potential benefits of the combination;

. the possibility that even if the merger is approved by the stockholders
of both companies, it may not be completed;

. the possibility that potential disruption to existing and prospective
relationships could result from the announcement or completion of the
merger;

. the significant adverse impact to the potential future net income of the
combined company that will arise due to the non-cash charges for the
amortization of goodwill and other intangibles resulting from the impact
of purchase accounting on the merger;

. the substantial charges to be incurred in connection with the merger,
including transaction expenses, and employee retention and severance
costs; and

. the other risks described under "Risk Factors Related to the Merger"
beginning on page 17.

Both boards determined that the potential benefits of the merger outweigh
the potential risks. In the course of their separate deliberations, each board
also considered the following factors:

. historical information concerning the businesses, operations, financial
condition, results of operations, technology, management, competitive
positions, and prospects of NPI and FalconStor as stand-alone businesses,
including results of operations during their most recent fiscal periods;

. the current and historical economic and market conditions and industry
environment in the business of each company, including market prices,
volatility and trading data for NPI common stock;

. the analyses presented by their respective financial advisors; and

. the results of their respective due diligence process.

Each board also determined that the provisions of the merger agreement,
including the exchange ratio, the parties' representations, warranties and
covenants, and the conditions to their respective obligations, were the
reasonable product of vigorous arms-length negotiations. Each board also
considered the provisions of the merger agreement that prohibit solicitation of
third-party bids and the acceptance, approval or recommendation of any
unsolicited third-party bid, and the provisions which require NPI to pay
FalconStor $3,000,000 upon certain termination events. Each board concluded
that the provisions of the relevant documents reasonably protected the
interests of the applicable company's stockholders and did not present any
significant impediments to proceeding with the merger considering all of the
circumstances.

Reasons of the NPI Board

In the course of its deliberations, NPI's board of directors took the
following additional actions:

. the board evaluated the significantly diminished prospects for NPI on a
stand-alone basis in light of:

. the overall decline in spending on information technology
infrastructure products;

. increasing competition from larger companies;

. NPI's continuously declining operating results; and

. the substantial investment of time and financial resources that would
be required for NPI to develop and market next generation switching
products that would enable NPI to gain market share and reach
profitability;

. the board evaluated NPI's ability to maintain a sufficient amount of
assets to satisfy the closing conditions in the merger agreement and
determined that discontinuation of NPI's existing Ethernet switching
business, either through a divestiture or closure, would be required;

. the board evaluated the value NPI stockholders would receive if NPI's
business was wound up and dissolved and its liquid assets distributed to
stockholders; and

. the board took into account that, as a result of the exchange ratio, the
former stockholders of FalconStor would, immediately following the
completion of the merger, collectively own more than a majority of NPI's
outstanding shares. However, the board of directors considered that this
was acceptable because:

. the merger would provide NPI's existing stockholders with a significant
potential for increased share value; and

. the board received and adopted the written opinion of Lehman Brothers
dated as of March 30, 2001, and updated as of May 3, 2001, that as of
May 3, 2001 and based upon and subject to the assumptions,
qualifications and limitations stated in that opinion, the aggregate
consideration to be paid by NPI for the FalconStor equity was fair to
NPI from a financial point of view. See "Opinion of NPI's Financial
Advisor" beginning on page 38.

Reasons of the FalconStor Board

In the course of its deliberations, FalconStor's board of directors
considered the following additional factors:

. that the merger is expected to be tax-free to FalconStor and its
stockholders;

. the cash on hand that NPI would provide to FalconStor to continue
executing its business plan;

. the increased value to holders of FalconStor capital stock that was
likely to result from allowing the combined company to leverage NPI's
financial resources to fund the development of FalconStor's business; and

. the potential benefits of public ownership at a time when access to the
public equity markets is more difficult.

The board also considered the following potentially negative factors in its
deliberations concerning the merger:

. the risk that the merger might not be consummated;

. the risk associated with fluctuations in NPI's stock price prior to the
closing of the merger that the per share value of the consideration to be
received by holders of FalconStor capital stock might be significantly
less than the price per share implied by the exchange ratio immediately
prior to the announcement of the merger because the exchange ratio will
not be adjusted as a result of changes in the market price of NPI common
stock;

. the risk that the transaction would not be viewed by the Internal Revenue
Service as meeting all requirements to qualify as non-taxable to
FalconStor and its stockholders; and

. other applicable risks described in this joint proxy statement/prospectus
statement under "Risk Factors" beginning on page 17.

The board concluded that the potential benefits of the merger to
FalconStor's stockholders outweighed these factors.

RECOMMENDATIONS OF THE NPI AND THE FALCONSTOR BOARDS OF DIRECTORS

Recommendation of the NPI Board

The NPI board of directors has unanimously determined that the terms of the
merger are fair to, advisable for, and in the best interests of NPI and the NPI
stockholders. Accordingly, the NPI board of directors recommends that NPI
stockholders vote FOR the proposal to adopt the merger agreement and approve
the merger. Approval of the proposal to adopt the merger agreement will
constitute approval of all transactions contemplated by the merger agreement.

Recommendation of the FalconStor Board

The FalconStor board of directors has unanimously determined that the terms
of the merger agreement and the merger are fair to, advisable for, and in the
best interests of FalconStor and the FalconStor stockholders. The FalconStor
board of directors recommends that FalconStor stockholders vote FOR the
proposal to adopt the merger agreement and approve the merger. Approval of the
proposal to adopt the merger agreement will constitute approval of all
transactions contemplated by the merger agreement, including, without
limitation, the conversion of all outstanding shares of FalconStor preferred
stock to FalconStor common stock immediately prior to the merger.

Vote Required

The affirmative vote of a majority of all outstanding votes entitled to be
cast at the annual meeting of NPI is required for approval of this proposal.
Certain officers and directors of NPI holding an aggregate of 10.3% of the
outstanding common stock of NPI (assuming exercise of outstanding options held
by such officers and directors) have signed voting agreements in which they
have agreed to vote the shares held by them in favor of the merger.

The affirmative vote of at least a majority of the outstanding voting power
of the common stock and the preferred stock of FalconStor voting together as a
single class, and a majority of the outstanding shares of Series A preferred
stock, two-thirds of the outstanding shares of Series B preferred stock, and a
majority of the outstanding shares of Series C preferred stock, each series
voting separately, is required for approval of this proposal. The holders of
the requisite number of shares of FalconStor common stock, Series A preferred
stock, Series B preferred stock and Series C preferred stock to approve the
merger have entered into voting agreements whereby these holders have agreed to
vote their shares in favor of the merger. Therefore, provided these holders
comply with the provisions of the voting agreements, FalconStor stockholders
will approve the merger.

Abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of quorum. Abstentions and broker non-
votes will each have the same effect as a negative vote on this proposal.

Opinion of NPI's Financial Advisor

General. Lehman Brothers Inc. has acted as financial advisor to NPI in
connection with the merger. On March 30, 2001, Lehman Brothers rendered its
opinion to the NPI board of directors that as of such date, and based upon and
subject to certain matters stated therein, from a financial point of view, the
aggregate consideration to be paid by NPI for the FalconStor common stock in
the merger is fair to NPI. On May 3, 2001, representatives from Lehman Brothers
orally reconfirmed this opinion. Lehman Brothers is not obligated to update its
opinion.

At the time Lehman Brothers delivered its opinion, it understood that all of
the issued and outstanding shares of capital stock of FalconStor and all
outstanding, unexpired and unexercised options, warrants, convertible notes,
and other rights to acquire or receive shares of FalconStor common stock
(collectively, the "FalconStor Equity") would be converted into the right to
receive, in the aggregate, between 68.9% and 71.5%

of the shares of common stock of NPI on a fully-diluted basis (the "Aggregate
Consideration"). Lehman Brothers further understood that the exact percentage
of shares to be paid by NPI would vary depending on (1) the amount of cash,
cash equivalents and short terms investments held by NPI at the time of the
Proposed Transaction and (2) the amount of proceeds received by FalconStor from
the sale of its Series C preferred stock to investors other than NPI.

The full text of Lehman Brothers' written opinion dated March 30, 2001 is
included as Annex B to this joint proxy statement/prospectus. Stockholders may
read such opinion for a discussion of the assumptions made, procedures
followed, factors considered and limitations upon the review undertaken by
Lehman Brothers in rendering its opinion. The following is a summary of Lehman
Brothers' opinion and the methodology that Lehman Brothers used to render its
opinion.

Lehman Brothers' advisory services and opinion were provided for the
information and assistance of the NPI board of directors in connection with its
consideration of the merger. Lehman Brothers' opinion is not intended to be and
does not constitute a recommendation to any stockholder of NPI as to how such
stockholder should vote with respect to the merger. Lehman Brothers was not
requested to opine as to, and Lehman Brothers' opinion does not address, NPI's
underlying business decision to proceed with or effect the merger.

In arriving at its opinion, Lehman Brothers reviewed and analyzed:

. the merger agreement and the specific terms of the merger;

. publicly available information concerning NPI that Lehman Brothers
believed to be relevant to its analysis, including NPI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 and NPI's Quarterly
Reports on Form 10-Q for the quarters ended March 31, June 30, and
September 30, 2000 and NPI's earnings release for the quarter and fiscal
year ended December 31, 2000;

. financial and operating information with respect to the business,
operations and prospects of NPI furnished to Lehman Brothers by NPI,
including projections for the next five years prepared by the management
of NPI (the "Company Projections");

. a trading history of NPI's common stock over the past one year and five
years, and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant;

. financial and operating information with respect to the business,
operations and prospects of FalconStor furnished to Lehman Brothers by
NPI and FalconStor, including projections for the next three years
prepared by the management of FalconStor (the "FalconStor Projections");

. a comparison of the historical financial results and present financial
condition of NPI and FalconStor with those of other companies that Lehman
Brothers deemed relevant;

. a comparison of the financial terms of the merger with the financial
terms of certain other transactions that Lehman Brothers deemed relevant;

. a possible liquidation of NPI, including the cash that would be
distributed to NPI's stockholders in connection with such liquidation;
and

. the results of Lehman Brothers' efforts to solicit indications of
interest from third parties with respect to a purchase of NPI or its
operating business.

In addition, Lehman Brothers had discussions with the managements of
FalconStor and NPI concerning the business, operations, assets, financial
condition and prospects of FalconStor (including the FalconStor Projections)
and discussions with the management of NPI concerning its business, operation,
assets, financial condition and prospects, and undertook such other studies,
analyses and investigations as Lehman Brothers deemed appropriate.

In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers also relied upon the assurances of the managements
of NPI and FalconStor that they were not aware of any facts or circumstances
that would make the information relied upon by Lehman Brothers inaccurate or
misleading. With respect to the Company Projections, upon advice of NPI, Lehman
Brothers assumed that such projections were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of NPI as to the future financial performance of NPI and that NPI
would perform substantially in accordance with the Company Projections. With
respect to the FalconStor Projections, upon advice of FalconStor and NPI,
Lehman Brothers assumed that such projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of FalconStor as to the future financial performance of FalconStor
and that FalconStor would perform substantially in accordance with the
FalconStor Projections. In arriving at its opinion, Lehman Brothers did not
conduct a physical inspection of the properties and facilities of NPI or
FalconStor. Lehman Brothers also did not make or obtain any evaluations or
appraisals of the assets or liabilities of NPI or FalconStor. Lehman Brothers'
opinion was necessarily based upon market, economic and other conditions as
they existed on, and could be evaluated as of, the date of such opinion.

In arriving at its opinion, Lehman Brothers did not ascribe a specific range
of values to NPI or FalconStor, but rather made its determination as to the
fairness, from a financial point of view, to NPI of the aggregate consideration
to be paid by NPI for the FalconStor Equity in the merger on the basis of the
financial and comparative analyses described below. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial and comparative analysis and the application of
those methods to the particular circumstances, and therefore, such an opinion
is not readily susceptible to summary description. Furthermore, in arriving at
its opinion, Lehman Brothers did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as
to the significance and relevance of each analysis and factor. Accordingly,
Lehman Brothers believes that its analyses must be considered as a whole and
that considering any portion of such analyses and factors, without considering
all analyses and factors as a whole, could create a misleading or incomplete
view of the process underlying its opinion. In its analyses, Lehman Brothers
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of NPI and FalconStor. None of NPI, FalconStor, Lehman Brothers or
any other person assumes responsibility if future results are materially
different from those discussed. Any estimates contained in Lehman Brothers'
analyses were not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than as set forth in the analyses. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.

The following is a summary of the material financial analyses used by Lehman
Brothers in connection with rendering its opinion to the NPI board of
directors. Some of the summaries of the financial and comparative analyses
include information presented in tabular format. In order to fully understand
the methodologies used by Lehman Brothers and the results of its financial and
comparative analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial and comparative analyses. Accordingly, the information presented in
the tables and described below must be considered as a whole. Considering any
portion of such analyses and of the factors considered, without considering all
analyses and factors as a whole, could create a misleading or incomplete view
of the process underlying Lehman Brothers' opinion.

In order to calculate the transaction multiples for the merger, Lehman
Brothers estimated the implied enterprise value of FalconStor based on NPI's
closing price of $6.97 as of March 29, 2001 and based on the amount of cash
contributed by NPI to the combined company. Under these two scenarios, Lehman
Brothers used the mean of FalconStor's pro forma ownership percentage
calculated based on the minimum and maximum Series C preferred stock investment
of $0 and $20,000,000 and the minimum and maximum NPI closing cash balances of
$80,000,000 and $90,000,000 and estimating the number of outstanding, in-the-
money options for both NPI and FalconStor to calculate the transaction
multiples.

Lehman Brothers used two projections cases in the analyses below, namely the
Base Case and the Conservative Case. The Base Case was computed using the
FalconStor Projections through 2003 and Lehman Brothers estimates thereafter.
The Conservative Case was computed by Lehman Brothers after considering certain
somewhat more conservative assumptions and estimates, which resulted in certain
adjustments to the FalconStor Projections.

Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of FalconStor with similar data of
selected companies engaged in businesses considered by Lehman Brothers to be
comparable to that of FalconStor. Specifically, Lehman Brothers included in its
review the following storage companies: VERITAS Software Corp.; BMC Software,
Inc.; Computer Associates, Inc.; Compuware Corp.; Legato Systems, Inc.; OTG
Software, Inc.; and Gadzoox Networks, Inc.

For each of the selected companies, Lehman Brothers calculated the ratio of
the enterprise value to the mean revenue estimates for the calendar year 2002
reported by First Call Corporation. The enterprise value of each company was
obtained by adding its short and long term debt to the sum of the market value
of its common equity, the value of any preferred stock and the book value of
any minority interest, and subtracting its cash and cash equivalents. Lehman
Brothers also calculated the ratio of the revenue multiple to the estimated
five-year revenue growth rate. Lehman Brothers then calculated the implied
enterprise values of FalconStor based on a range of growth-adjusted enterprise
value to calendar year 2002 revenue multiples and based on a range of ratios of
the calendar year 2002 revenue multiple to estimated five-year revenue growth
rates. The following table presents the implied enterprise values:

Comparable Company Analysis (as of 3/29/01):
($ in millions)

Growth-
Adjusted
Enterprise
Value/CY
2002E Revenue
Multiples
-------------
6.0x 8.0x
------ ------

Base Case.................................................... $192.0 $256.0
Conservative Case............................................ $153.0 $204.0

Mean of Selected Comparable Storage Companies................ 2.8x
Median of Selected Comparable Storage Companies.............. 2.6x

FalconStor / NPI Merger (Based on Cash Contributed).......... $199.5
FalconStor / NPI Merger (Based on NPI 3/29/01 Closing
Price)...................................................... $224.8

CY 2002E
Revenue
Multiple/5-
Year Revenue
Growth Rate
-------------
0.15x 0.25x
------ ------

Base Case (25% Estimated 5-Year Revenue Growth).............. $120.0 $200.0
Base Case (45% Estimated 5-Year Revenue Growth).............. $216.0 $360.0

Mean of Selected Comparable Storage Companies................ 0.19x
Median of Selected Comparable Storage Companies.............. 0.15x

FalconStor / NPI Merger (Based on Cash Contributed).......... $199.5
FalconStor / NPI Merger (Based on NPI 3/29/01 Closing
Price)...................................................... $224.8

Because of the inherent differences between the businesses, operations,
financial conditions and prospects of FalconStor and the businesses,
operations, financial conditions and prospects of the companies included in its
comparable company groups, Lehman Brothers believed that it was inappropriate
to rely solely on the quantitative results of the analysis, and accordingly,
also made qualitative judgments concerning differences between the financial
and operating characteristics of FalconStor and the companies in its comparable
company

group that would affect the public trading value of FalconStor and the
comparable companies. In particular, Lehman Brothers considered markets served,
rates of growth and profitability of FalconStor and each of the companies in
the comparable company group. Lehman Brothers concluded that such analysis was
supportive of its opinion because the values based on the cash contributed and
based on NPI's closing price on 3/29/01 of $199.5 and $224.8, respectively,
were within the ranges of $153.0-$256.0 and $120.0-$360.0 calculated above.

Comparable Transaction Analysis. The comparable transaction analysis
provides a market benchmark based on the consideration paid in selected
comparable transactions. For this analysis, Lehman Brothers reviewed publicly
available information to determine the purchase prices and multiples paid in 11
acquisitions of public and private storage companies since January 1, 1996.

For public transactions, Lehman Brothers divided the enterprise value of the
acquired company in the relevant transaction by the total revenue for the
following four consecutive quarters, or Forward 4Q. Lehman Brothers then
subtracted a 40% control premium from each of the multiples. For private
transactions, Lehman Brothers calculated the ratio of the enterprise value to
the number of employees of the acquired company. Lehman Brothers then
calculated the implied enterprise values of FalconStor based on a range of
enterprise value to Forward 4Q revenue multiples and based on a range
enterprise value to employee multiples. The following table presents the
implied enterprise values:

Comparable Public Transaction Analysis:
($ in millions)

Enterprise
Value / Forward
4Q
Revenue Multiples
-----------------
10.0x 15.0x
-------- --------

Base Case................................................ $ 129.4 $ 194.1
Conservative Case........................................ $ 103.6 $ 155.4

Mean of Selected Comparable Public Storage Transactions.. 12.3x
Median of Selected Comparable Public Storage
Transactions............................................ 13.2x

FalconStor / NPI Merger (Based on Cash Contributed)...... $199.5
FalconStor / NPI Merger (Based on NPI 3/29/01 Closing
Price).................................................. $224.8

Comparable Private Transaction Analysis:
($ in millions)

Enterprise Value /
Employee
-------------------
5.0x 6.0x
--------- ---------

Implied Enterprise Value............................... $ 325.0 $ 390.0

Mean of Selected Comparable Private Storage
Transactions.......................................... 5.4x
Median of Selected Comparable Private Storage
Transactions.......................................... 5.5x

FalconStor / NPI Merger (Based on Cash Contributed).... $199.5
FalconStor / NPI Merger (Based on NPI 3/29/01 Closing
Price)................................................ $224.8

The values based on the cash contributed and based on NPI's closing price on
3/29/01 of $199.5 and $224.8, respectively, were above the range of $103.6-
$194.1 and below the range of $325.0-$390.0 calculated above. Because the
reasons for and the circumstances surrounding each of the transactions analyzed
were so diverse and because of the inherent differences in the businesses,
operations, financial conditions and prospects of FalconStor and the
businesses, operations, and financial conditions of the companies included in
the comparable transactions group, Lehman Brothers believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the merger. Lehman Brothers believed that the
appropriate use of a comparable transaction analysis in this instance would
involve qualitative judgments concerning the differences between the
characteristics of these transactions and the merger which would affect

the acquisition values of the acquired companies and FalconStor. In particular,
Lehman Brothers considered markets served, rates of growth, and profitability
of FalconStor, and each of the acquired companies, as well as business and
market conditions existing at the time of the merger as compared to those
existing when these transactions were executed.

Discounted Cash Flow Analysis. As part of its analysis, Lehman Brothers
prepared a discounted after-tax cash flow model that was based upon financial
projections prepared by the management of FalconStor to calculate the implied
enterprise value of FalconStor. Lehman Brothers used an after tax discount rate
of 30% and a terminal value based on a range of forward revenue multiples of
3.0x to 4.0x. Lehman Brothers concluded that such analysis was supportive of
its opinion because the values based on the cash contributed and based on NPI's
closing price on 3/29/01 of $199.5 and $224.8, respectively, were below the
range of $268.1-$349.2 and within the range of $198.0-$262.4 calculated below.
The following table presents the implied enterprise values:

Discounted Cash Flow Analysis:
($ in millions)

Forward
Revenue
Terminal
Multiples
-------------
3.0x 4.0x
------ ------

Base Case.................................................... $268.1 $349.2
Conservative Case............................................ $198.0 $262.8

FalconStor / NPI Merger (Based on Cash Contributed).......... $199.5
FalconStor / NPI Merger (Based on NPI 3/29/01 Closing
Price)...................................................... $224.8

Liquidation Analysis. Based on analyses prepared by the management of NPI of
the costs that would be incurred in a liquidation and the balance sheet as of
March 31, 2001, Lehman Brothers calculated NPI's liquidation value to be $5.56
per share. Lehman Brothers concluded that such analysis was supportive of its
opinion because the liquidation value of $5.56 per share was lower than the
implied value for NPI stockholders in the proposed transaction of $6.01 to
$9.59 per share.

Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The NPI board selected Lehman
Brothers because of its expertise, reputation and familiarity with NPI and the
communications equipment industry generally and because its investment banking
professionals have substantial experience in transactions comparable to the
merger.

As compensation for its services, NPI has agreed to pay Lehman Brothers a
fee of $2,500,000 pursuant to an engagement letter between Lehman Brothers and
NPI. This included a retainer fee of $50,000 which was payable upon the
execution of the engagement letter and a fee of $750,000 which was payable upon
the delivery of the fairness opinion. Both the retainer fee and the fairness
opinion fee are creditable against the total transaction fee. The remaining
$1,700,000 is contingent upon the completion of the merger. In addition, NPI
has agreed to reimburse Lehman Brothers for reasonable out-of-pocket expenses
incurred in connection with the merger and to indemnify Lehman Brothers for
certain liabilities that may arise out of its engagement by NPI and the
rendering of Lehman Brothers' opinion. Lehman Brothers has previously rendered
investment banking services to NPI and received customary fees for such
services. These services included being lead manager on NPI's initial public
offering in June 1994, a follow-on offering in November 1994, and a follow-on
offering in February 2000. Excluding fees from this transaction, Lehman
Brothers has received approximately $4,600,000 for its services during the past
two years.

In the ordinary course of its business, Lehman Brothers may actively trade
in the debt or equity securities of NPI for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.

Existing Business Relationships between NPI and FalconStor

On October 12, 2000, NPI and FalconStor entered into a Distribution and
License Agreement. Under the terms of this agreement, the parties have entered
into a joint promotion program for products and services. FalconStor also
granted NPI a license to install its software on NPI's hardware. NPI agreed to
pay FalconStor royalties in an amount equal to that mutually agreed to by the
parties on an order-by-order basis for NPI products with FalconStor technology.

On April 2, 2001, NPI purchased 9,792,401 shares of FalconStor Series C
preferred stock pursuant to the terms of a stock purchase agreement among
FalconStor, NPI and certain other investors. In connection with this
investment, FalconStor and NPI entered into a second amended and restated
registration rights agreement which granted NPI registration rights similar to
those granted to FalconStor's other holders of preferred stock.

In exchange for NPI's investment, FalconStor also issued an irrevocable
option to enter into the merger with NPI in connection with NPI's investment.
On May 4, 2001, NPI exercised the option and the merger agreement was signed.
The $25,000,000 paid by NPI for the shares of FalconStor Series C preferred
stock will be credited to the amount of cash NPI is calculated to have at
closing of the merger. NPI's closing cash is one component of the exchange
ratio. All shares of FalconStor Series C preferred stock issued to NPI prior to
the merger will be canceled, and the proceeds received by FalconStor from the
sale of the shares of Series C preferred stock to NPI will remain in the
combined company for use in ongoing operations after the merger.

Interests of Certain NPI Persons in the Merger

Certain NPI officers, who hold approximately 10.3% of the outstanding NPI
common stock (assuming exercise of outstanding options held by these officers),
are parties to an executive retention plan pursuant to which the merger
constitutes a change of control and according to which such officers are, upon
the closing of the merger, entitled to a minimum bonus that is a combination of
cash and vested stock options. The total aggregate amount that will be due to
the officers is approximately $3,000,000. The ratio of cash to vested stock is
determined by subtracting the amount of an officer's in-the-money stock from
the total minimum bonus payable to the officer under the executive retention
plan, and, as a result, the cash payments to NPI executive officers will likely
be substantially less than the aggregate amount due under the retention bonus
plan. The executive retention plan entitles such officers to a minimum bonus
ranging from $250,000 to $1,000,000. The executive retention plan is creditable
against all other compensation payable to an officer upon a change of control
of NPI. However, the executive retention plan operates independently from any
compensation payable to an officer upon termination after a change of control.

In addition, certain officers have offer letters, salary continuation
agreements, separation and release agreements or employment agreements pursuant
to which the merger constitutes a change of control and according to which,
upon the closing of the merger, a specified percentage of the executive
officers' stock options, ranging from 50% to 100%, will become vested.

In addition, following the closing of the merger, if the combined company
terminates the employment of any of these executive officers pursuant to the
terms of their respective agreements, certain officers are entitled to
severance pay and benefits for a specified period. In general, each executive
officer's severance pay is for a period of six months at the officer's then
current base salary. Certain officers are entitled to continued employment with
NPI as non-officers for a severance period, generally one year, and are
entitled to continued medical coverage under NPI's standard employee medical
insurance coverage and continued benefits under NPI's vacation, holiday and
business expense reimbursement policies for their respective severance periods.

Glenn Penisten, chairman of the board of directors of NPI and an employee of
NPI, owns 17,500 shares of FalconStor Series B preferred stock.

Interests of Certain FalconStor Persons in the Merger

Under the merger agreement, NPI has agreed to honor any indemnification
provisions of FalconStor's certificate of incorporation and bylaws for a period
of six years from the completion of the merger. NPI has also agreed to provide
for indemnification provisions in the certificate of incorporation and bylaws
of the surviving corporation. In addition, NPI has agreed to provide director
and officer liability insurance for any claims arising under the merger
agreement for a period of not less than six years following the completion of
the merger.

Barry Rubenstein, the chairman of the board of directors of FalconStor, is a
member of a "group," as defined by the Securities Exchange Act of 1934, that
beneficially owned 7.1% of NPI common stock at the time the merger agreement
was approved by the FalconStor board. Pursuant to an amended Schedule 13D filed
June 11, 2001, such "group" is no longer the beneficial owner of more than 5%
of NPI common stock. Mr. Rubenstein will resign from the FalconStor board of
directors immediately prior to the consummation of the merger and will not
serve as a board member of the combined company.

Treatment of NPI Stock Options

NPI's equity plans include the 1994 Outside Directors Stock Option Plan, as
amended, the 1993 Stock Option Plan, as amended, the 1996 Nonstatutory Stock
Option Plan, the 1997 Stock Plan, as amended, and the 1999 Stock Plan, as
amended. The merger qualifies as a "change of control" or "transfer of control"
of NPI under certain of its employee stock plans. The following is a
description of the potential effect of the merger on those plans:

. All options held by employees, directors or consultants under the various
stock option plans will remain outstanding but the vesting of certain
options will accelerate as a result of the transfer of control.

. 1994 Outside Directors Stock Option Plan provides that, in the event of a
transfer of control, any unexercisable or unvested portion of the
outstanding options shall be immediately exercisable and vested in full
as of the date 10 days prior to the date of the transfer of control.

. The NPI board of directors has adopted resolutions that extend the
exercise period of directors' options to one year following termination.

. See "Interests of Certain NPI Persons in the Merger" on page 44.

Treatment of FalconStor Stock Options

All outstanding options shall remain subject to the terms and conditions of
the existing FalconStor stock option plan, including any restrictions on the
exercisability of each option will continue in full force and effect, and the
term, exercisability, vesting schedule and other provisions of each option will
remain unchanged, except that:

. each option will be exercisable for that number of whole shares of NPI
common stock equal to the product of the number of shares of FalconStor
common stock that would be issuable upon exercise of the option
immediately prior to the effective time of the merger multiplied by the
exchange ratio;

. adjustments to incentive stock options may be required pursuant to U.S.
federal tax laws.

Under the terms of the merger agreement, NPI has agreed to assume all
FalconStor options, whether vested or unvested.

Board Composition

Upon the closing of the merger:

. the combined company's board of directors will consist of five directors;

. four of NPI's existing directors, James Regel, Thomas Brown, Michael
Gardner and Charles Hart, will resign; and

. ReiJane Huai, Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer
will be appointed to the combined company's board.

At the closing, the combined company's board will be Glenn Penisten, ReiJane
Huai, Lawrence S. Dolin, Steven H. Owings and Steven R. Fischer.

Employee Matters

Pursuant to the merger agreement, NPI has agreed to honor FalconStor's
obligations under all employee benefit plans and employment arrangements that
are disclosed to NPI in connection with the merger. However, the combined
company will maintain the right to amend any such plans in accordance with the
terms thereof. After the effective time, FalconStor employees may become
employees of the combined company at its sole discretion. Each employee's
service with FalconStor prior to the merger may be counted for purposes of
determining periods of eligibility to participate or to vest in the benefit
plans offered by the combined company. In addition, NPI has agreed that the
merger will constitute a change of control with respect to any NPI management
agreements and all payments due thereunder shall be paid after the expiration
of the payee's lock-up agreement. See "Interests of Certain NPI Persons in the
Merger" on page 44.

Structure of the Merger

Each share of FalconStor preferred stock outstanding immediately prior to
the closing, other than preferred stock held by NPI in FalconStor, will be
converted immediately prior to the closing into FalconStor common stock. At the
closing of the merger, Empire Acquisition Corp., a direct wholly-owned
subsidiary of NPI, will merge with and into FalconStor and the separate
corporate existence of Empire Acquisition Corp. will cease to exist and
FalconStor will be the surviving corporation. Thus, as a result of the merger,
FalconStor will be a wholly-owned subsidiary of NPI. Each share of FalconStor
common stock will be converted into the right to receive shares of NPI common
stock based on an agreed upon exchange ratio.

Material Federal Income Tax Consequences of the Merger

The following is a discussion of the material federal income tax
considerations relevant to the exchange of shares of FalconStor common stock
for NPI common stock pursuant to the merger that are generally applicable to
you. This discussion assumes that you hold your shares as capital assets for
investment. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the existing and
proposed Treasury Regulations promulgated under the Code, current
administrative rulings and court decisions, all of which are subject to change.
Any change, which may or may not be retroactive, could materially affect the
conclusions discussed below. You should also be aware that the following
discussion does not deal with all U.S. federal income tax consequences that may
result from the merger and does not deal with all U.S. federal income tax
considerations that may be relevant to particular stockholders in light of
their particular circumstances, such as stockholders, if any, who are dealers
in securities, banks, insurance companies, tax-exempt organizations, or are
foreign persons, stockholders who acquired their stock through stock option or
stock purchase plans or in other compensatory transactions, or who hold their
stock as part of an integrated investment (including a "straddle") comprised of
shares of stock and one or more other positions, or stockholders who have
entered into a constructive sale of their stock under the constructive sale
provisions of the Code.

The following discussion does not address the tax consequences of
transactions effectuated prior to, at the time of, or after the merger (whether
or not the transactions are in connection with the merger), including the
exercise of options, warrants or similar rights to purchase stock, or the
exchange, assumption or substitution of options, warrants or similar rights to
purchase FalconStor stock for rights to purchase NPI common stock. The
discussion below assumes that the amount received in the merger with respect to
each share of FalconStor common stock is approximately equal to its fair market
value. No ruling from the Internal Revenue Service ("IRS") will be requested
concerning the federal income tax consequences of the merger. Accordingly, you
are urged and expected to consult your own tax advisor as to the specific tax
consequences to you of the merger, including the applicable federal, state,
local and foreign tax consequences and applicable tax return reporting
requirements.

Federal Income Tax Consequences of the Merger to FalconStor Stockholders

The tax discussion set forth below is not intended to be, nor should it be
construed to be, legal or tax advice to any particular stockholder. The merger
is intended to constitute a tax-free "reorganization" within the meaning of
Section 368(a) of the Code, with the following federal income tax consequences:

(a) You will recognize no gain or loss based solely upon your receipt of
NPI common stock in exchange for FalconStor common stock in the merger
(except to the extent of cash received in lieu of a fractional share of NPI
common stock).

(b) A holder of FalconStor common stock who receives cash in lieu of a
fractional share of NPI common stock will be treated as if the fractional
share had been issued in the merger and then had been redeemed for cash. If
you receive cash in lieu of a fractional share, you will recognize gain or
loss measured by the difference (if any) between the amount of cash
received and your tax basis in the fractional share.

(c) The aggregate tax basis of the NPI common stock you receive in the
merger will be the same as the aggregate tax basis of your FalconStor
common stock surrendered in the exchange, reduced by any amount allocable
to a fractional share of NPI common stock for which cash is received.

(d) The holding period of the NPI common stock you receive in the merger
will include the period during which the FalconStor common stock
surrendered in the exchange for the NPI common stock was considered to be
held.

(e) If you exercise your appraisal or dissenters' rights with respect to
FalconStor common stock and receive a cash payment payment, you will
recognize capital gain or loss measured by the difference between the
amount of cash received and your adjusted tax basis, provided the payment
is neither essentially equivalent to a dividend within the meaning of
Section 302 of the Code nor has the effect of a distribution of a dividend
within the meaning of Section 356(a)(2) of the Code (collectively, a
"Dividend Equivalent Transaction"). A sale of your FalconStor shares
incident to an exercise of appraisal rights will generally not be a
Dividend Equivalent Transaction if, as a result of exercise, you own no
shares of NPI common stock (either actually or constructively within the
meaning of Section 318 of the Code).

The parties are not requesting and will not be requesting a ruling from the
IRS in connection with the merger. The obligations of the parties to the merger
agreement are conditioned on the receipt by FalconStor of an opinion from its
counsel, Olshan Grundman Frome Rosenzweig & Wolosky LLP, and on the receipt by
NPI of an opinion from its counsel, Gray Cary Ware & Freidenrich LLP, to the
effect that the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. The opinions of Olshan Grundman Frome Rosenzweig &
Wolosky LLP and Gray Cary Ware & Freidenrich LLP will be subject to limitations
and qualifications and will be based on representations made by FalconStor and
NPI. None of the opinions, nor the tax consequences set forth in this
discussion, are binding on the IRS or the courts and no assurance can be given
that contrary positions will not be successfully asserted by the IRS or adopted
by a court.

A successful IRS challenge to the tax-free reorganization status of the
merger would result in FalconStor stockholders recognizing taxable gain or loss
with respect to each share of common stock of FalconStor

surrendered. This gain or loss would be measured by the difference between (i)
the sum of the value of the NPI common stock received by FalconStor
stockholders and any cash received in lieu of a fractional share of NPI common
stock, and (ii) the adjusted tax basis in the shares of FalconStor common stock
surrendered. In this case, the aggregate tax basis in the NPI common stock
received by the FalconStor stockholders would equal its fair market value and
the holding period would begin on the day following the merger.

Federal Income Tax Consequences of the Merger to NPI Stockholders

NPI stockholders will not recognize any gain or loss as a result of the
merger.

Federal Income Tax Consequences of the Merger to the Companies

The merger will not result in taxable income for FalconStor, NPI or Empire
Acquisition Corp.

The preceding discussion does not purport to be a complete analysis or
discussion of all potential tax effects relevant to the merger. Again, you are
urged to consult your own tax advisor as to the specific consequences of the
merger to you, including tax return reporting requirements, the applicability
and effect of federal, state, local, and other tax laws, including the effects
of any proposed changes in the tax laws, and your obligation to retain
information regarding the transaction.

Anticipated Accounting Treatment of the Merger

Although NPI will be acquiring FalconStor, after the transaction, FalconStor
stockholders will hold a majority of the voting interests in the combined
company. Accordingly, for accounting purposes, the acquisition will be a
"reverse acquisition" and FalconStor will be the "accounting acquiror."
Further, as a result of NPI's decision to discontinue its NuWave and legacy
businesses, NPI will be a non-operating, public shell with no continuing
operations. The combined company's name will be changed to FalconStor Software,
Inc., and no intangible assets associated with NPI will be purchased by
FalconStor. Accordingly, the transaction will be accounted for as a
recapitalization of FalconStor, and recorded based on the fair value of NPI's
net tangible assets acquired by FalconStor, with no goodwill or other
intangible assets being recognized. Costs incurred by FalconStor directly
related to the transaction will be charged to stockholders' equity.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements
are presented to illustrate the effects of the merger on the historical
financial position and operating results of FalconStor and NPI. The pro forma
statements were prepared as if the merger had been completed as of January 1,
2000 for statement of operations purposes and as of March 31, 2001 for balance
sheet purposes. The pro forma statements have been derived from, and should be
read in conjunction with, the historical financial statements, including the
notes thereto, of each of FalconStor and NPI included in this joint proxy
statement/prospectus. For NPI, those financial statements are also included in
NPI's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, and
its Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

In connection with the merger, NPI has implemented a plan to wind-down its
NuWave and legacy businesses. After efforts to find a buyer for these
businesses, on June 1, 2001, the last party that had expressed interest in
buying NPI's NuWave and legacy business assets informed NPI management that it
was no longer interested in doing so. As a result, NPI determined that the only
method of disposal of these assets available to them would be to wind-down the
businesses. The wind-down will include finding potential buyers or liquidators
of any remaining inventories and property and equipment used in the manufacture
and research and development of these products. It is expected that this wind-
down will be substantially concluded by the end of August 2001.

Although NPI intends to complete the wind-down of these businesses prior to
the closing of the merger, there is no assurance that this will be
accomplished, and the final disposal may occur subsequent to the closing of the
merger. Should the disposal of these assets result in the receipt of cash
proceeds to NPI, such cash proceeds will be retained by NPI and not distributed
to the stockholders of NPI.

NPI expects to incur a net loss from discontinued operations for the period
from April 1, 2001 to June 1, 2001 (measurement date) of approximately $4.9
million. Further, NPI expects to incur a loss on the disposal of discontinued
operations of approximately $19.6 million, which includes a provision of $4.0
million for operating losses during the wind-down period.

As a result of the decision to discontinue NPI's NuWave and legacy
businesses, NPI will be a non-operating public shell with no continuing
operations. The following unaudited pro forma condensed combined financial
statements include adjustments to present NPI as a discontinued operation.
Further, because FalconStor will not be purchasing any assets of NPI other than
cash, cash equivalents and short-term investments, the merger will be accounted
for as a recapitalization of FalconStor, and the transaction will be recorded
based on the fair value of NPI's net tangible assets acquired by FalconStor,
with no goodwill or other intangible assets being recognized. Costs incurred by
FalconStor directly related to the transaction will be charged to stockholders'
equity.

During April 2001, as a result of general business conditions and also due
to the pending merger with FalconStor, NPI cancelled substantially all of its
outstanding purchase orders with Solectron, its contract manufacturer.
According to the contract between NPI and Solectron, NPI may be liable for
certain cancellation charges, and such charges could be significant. NPI has
begun discussions with Solectron to resolve this matter; however, NPI cannot
reasonably estimate its liability at this time. Accordingly, the unaudited pro
forma condensed combined financial statements do not include any adjustments to
reflect this contingent liability.

The pro forma statements are provided for illustrative purposes only and do
not purport to represent what the actual consolidated results of operations or
the consolidated financial position of FalconStor would have been had the
merger occurred on the dates assumed, nor are they necessarily indicative of
future consolidated results of operations or financial position.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2001
(In thousands)

Pro Forma
Historical Adjustments Pro
------------------- ----------------- Forma
FalconStor NPI Debit Credit Combined
---------- -------- -------- -------- --------

ASSETS
Current assets:
Cash, cash equivalents and
short-term investments... $ 5,483 $ 87,626 $ -- $ -- $ 93,109
Accounts receivable, net.. 147 1,359 -- -- 1,506
Inventories, net.......... -- 5,683 -- 5,683 A --
Prepaid expenses and other
current assets........... 160 1,414 -- 1,414 A 160
Net assets of discontinued
operations............... -- -- 9,239 -- A 9,239
------- -------- -------- -------- --------
Total current assets..... 5,790 96,082 9,239 7,097 104,014
Property and equipment,
net....................... 683 5,423 -- 5,423 A 683
Other assets............... 220 301 -- 301 A 220
------- -------- -------- -------- --------
$ 6,693 $101,806 $ 9,239 $ 12,821 $104,917
======= ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $ 500 $ 1,094 $ 1,094 $ 8,000 AB $ 8,500
Accrued liabilities....... 405 2,488 2,488 -- A 405
Deferred revenue.......... 400 -- -- -- 400
------- -------- -------- -------- --------
Total current
liabilities............. 1,305 3,582 3,582 8,000 9,305
------- -------- -------- -------- --------
Stockholders' equity:
Preferred stock........... 8 -- 8 -- --
Common stock.............. 15 16 16 28 C 43
Additional paid-in
capital.................. 11,797 235,032 235,032 98,204 C 102,001
8,000 -- B
Accumulated deficit....... (5,008) (82,590) -- 82,590 C (5,008)
Deferred compensation..... (1,408) -- -- -- (1,408)
Accumulated other
comprehensive income..... (16) 225 225 -- C (16)
Treasury stock............ -- (54,459) -- 54,459 C --
------- -------- -------- -------- --------
Total stockholders'
equity.................. 5,388 98,224 243,281 235,281 95,612
------- -------- -------- -------- --------
$ 6,693 $101,806 $246,863 $243,281 $104,917
======= ======== ======== ======== ========

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(In thousands, except per share data)

Pro Forma
Historical Adjustments Pro
------------------- -------------- Forma
FalconStor NPI Debit Credit Combined
---------- -------- ------ ------- --------

Revenues....................... $ -- $ 2,012 $2,012 $ -- A $ --
Cost of revenues............... -- 6,408 -- 6,408 A --
------- -------- ------ ------- -------
Gross loss.................... -- (4,396) 2,012 6,408 --
------- -------- ------ ------- -------
Operating expenses:
Research and development...... 962 3,776 -- 3,776 A 962
Sales and marketing........... 1,144 3,091 -- 3,091 A 1,144
General and administrative.... 885 1,283 -- 1,283 A 885
Merger related expenses....... -- 1,135 -- 1,135 A --
------- -------- ------ ------- -------
Total operating expenses..... 2,991 9,285 -- 9,285 2,991
------- -------- ------ ------- -------
Loss from operations........... (2,991) (13,681) 2,012 15,693 A (2,991)
Interest income................ 79 1,392 1,392 -- 79
------- -------- ------ ------- -------
Loss before income taxes....... (2,912) (12,289) 3,404 15,693 (2,912)
Income taxes................... -- -- -- -- --
------- -------- ------ ------- -------
Loss from continuing
operations.................... $(2,912) $(12,289) $3,404 $15,693 $(2,912)
======= ======== ====== ======= =======
Net loss per share--basic and
diluted:
Net loss from continuing
operations per share......... $ (0.96) $ (0.07)
======== =======
Shares used in per share
calculations.................. 12,834 42,914 D
======== =======

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(In thousands, except per share data)

Historical
--------------------------
FalconStor
Period from
inception NPI
(February 10, For the year Pro forma
2000) to ended Adjustments Pro
December 31, December 31, --------------- Forma
2000 2000 Debit Credit Combined
------------- ------------ ------- ------- --------

Revenues................ $ 143 $ 7,514 $ 7,514 $ -- A $ 143
Cost of revenues........ 223 9,144 -- 9,144 A 223
------- -------- ------- ------- -------
Gross loss............. (80) (1,630) 7,514 9,144 (80)
------- -------- ------- ------- -------
Operating expenses:
Research and
development........... 1,379 11,233 -- 11,233 A 1,379
Sales and marketing.... 327 10,672 -- 10,672 A 327
General and
administrative........ 535 4,749 -- 4,749 A 535
Restructuring expense.. -- 600 -- 600 A --
Loss on sale of assets,
net................... -- 620 -- 620 A --
------- -------- ------- ------- -------
Total operating
expenses............. 2,241 27,874 -- 27,874 2,241
------- -------- ------- ------- -------
Loss from operations.... (2,321) (29,504) 7,514 37,018 A (2,321)
Interest income......... 225 7,262 7,262 -- 225
------- -------- ------- ------- -------
Loss before income
taxes.................. (2,096) (22,242) 14,776 37,018 (2,096)
Income taxes............ -- -- -- -- --
------- -------- ------- ------- -------
Loss from continuing
operations............. $(2,096) $(22,242) $14,776 $37,018 $(2,096)
======= ======== ======= ======= =======
Net loss per share--
basic and diluted:
Net loss from
continuing operations
per share............. $ (1.73) $ (0.05)
======== =======
Shares used in per share
calculations........... 14,224 43,871 D
======== =======

See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRO FORMA PRESENTATION

On May 7, 2001, NPI announced its agreement to merge with FalconStor. Under
the terms of the merger, the number of shares of NPI common stock to be
exchanged for each share of outstanding FalconStor capital stock at the closing
date of the merger will be determined two days prior to the NPI Annual Meeting,
as defined. In addition, NPI assumed all outstanding FalconStor options.
Although NPI will be acquiring FalconStor, after the transaction, FalconStor
stockholders will hold a majority of the voting interests in the combined
company. Accordingly, for accounting purposes, the acquisition will be a
"reverse acquisition" and FalconStor will be the accounting acquiror. Further,
as a result of NPI's decision to discontinue its NuWave and legacy businesses,
NPI will be a non-operating public shell with no continuing operations. The
combined company's name will be changed to FalconStor Software, Inc., and no
intangible assets associated with NPI will be purchased by FalconStor.
Accordingly, the transaction will be accounted for as a recapitalization of
FalconStor, and recorded based on the fair value of NPI's net tangible assets
acquired by FalconStor, with no goodwill or other intangible assets being
recognized. Costs directly related to the transaction will be charged to
stockholders' equity.

2. PRO FORMA ADJUSTMENTS

The pro forma financial information includes adjustment to reflect NPI as a
discontinued operation, and the merger as a recapitalization of FalconStor.
Accordingly, the net tangible assets acquired by FalconStor will be recorded at
their fair value, with no goodwill being recognized. Costs directly related to
the transaction will be charged directly to stockholders' equity. The following
pro forma adjustments are reflected in the unaudited pro forma condensed
consolidated financial statements:

(A) To segregate the net assets and liabilities associated with NPI's
discontinued operations, and to eliminate the results of operations of
NPI as a discontinued operation, as required by Article 11 of
Regulation S-X.

(B) To record merger related expenses of $8,000,000 as a charge directly to
stockholders' equity. Merger related expenses include the following
charges (in thousands):

Severance and retention bonus for NPI's executive officers....... $3,700
Financial advisor fees........................................... 2,500
Legal and accounting fees........................................ 1,200
Printing costs, filing fees and other............................ 600
------
$8,000
======

(C) To eliminate NPI's historical stockholders' equity accounts, and record
in stockholders' equity the fair value of the tangible net assets of
NPI acquired by FalconStor.

(D) The pro forma number of weighted average shares of common stock
outstanding is computed as follows (in thousands):

March 31, December 31,
2001 2000
--------- ------------

NPI shares of common stock outstanding at June
19, 2001 and December 31, 2000................. 13,267 14,224
NPI shares of common stock to be issued to
FalconStor stockholders in the merger.......... 29,647 29,647
------ ------
42,914 43,871
====== ======

The number of NPI shares of common stock to be issued to FalconStor
stockholders in the merger is computed in accordance with the merger agreement
provisions.

Regulatory Filings and Approvals Required to Complete the Merger

The merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, which prevents specified transactions from being
completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade
Commission and specified waiting periods are terminated or expire. The Federal
Trade Commission has granted early termination of the waiting period.

The Federal Trade Commission may challenge the merger on antitrust grounds
after expiration of the waiting period. Additionally, at any time before or
after the completion of the merger, any state could take action under the
antitrust laws as it deems necessary or desirable in the public interest, or
other persons could take action under the antitrust laws, including seeking to
enjoin the merger. We cannot assure you that a challenge to the merger will not
be made or that, if a challenge is made, we will prevail.

NPI and FalconStor conduct operations in a number of foreign countries, some
of which have voluntary or mandatory pre-merger or post-merger notification
systems for transactions that satisfy certain thresholds. FalconStor intends to
provide the requisite notification in all foreign jurisdictions in which a
failure to do so would likely have a material effect on the merger or on the
combined company following the merger, or where the filing would otherwise be
in the best interests of the combined company following the merger.

Registration and Listing of NPI Common Stock

NPI common stock is currently listed on The Nasdaq National Market under the
symbol, "NPIX." This joint proxy statement/prospectus is part of a NPI
registration statement on Form S-4 to register under the Securities Act the
shares of NPI common stock to be issued as consideration in the merger. NPI has
agreed to list the shares of NPI common stock to be issued in connection with
the merger on The Nasdaq National Market prior to the closing date of the
merger. After the merger, NPI's name be will changed to FalconStor Software,
Inc. and will change the symbol under which its common stock is traded to
"FALC."

Restrictions on Resale of NPI Common Stock

The shares of NPI common stock to be issued to FalconStor stockholders in
the merger will be registered under the Securities Act. All shares of NPI
common stock received by the officers, directors and stockholders of FalconStor
in the merger will be subject to certain restrictions pursuant to a voting
agreement each such individual has entered into with NPI. A form of the voting
agreement is attached to this joint proxy statement/prospectus as Annex D.
Under the voting agreements, these parties agree not to sell, transfer or
otherwise dispose of the shares of NPI common stock they receive in the merger
for a period of one year following the effective date of the merger. Following
the merger, the board of directors of the combined company may, in its sole
discretion, release any or all of the shares from the lock-up restrictions at
any time with or without notice. The merger agreement requires FalconStor to
cause each officer and director of FalconStor to execute such a voting
agreement prior to the effective date of the merger.

All shares of NPI common stock held by any officer, director or employee
stockholder of more than 30,000 shares of NPI common stock are subject to
certain restrictions pursuant to a voting agreement each such party has entered
into with FalconStor. A form of the voting agreement is attached to this joint
proxy statement/prospectus as Annex D. Under the voting agreements, such
parties agree not to sell, transfer or otherwise dispose of the shares of NPI
common stock they hold for a period of 365 days following the effective date of
the merger. Following the merger, the board of directors of NPI may, in its
sole discretion, release any or all of the shares from the lock-up
restrictions. Additionally, if such party's employment is terminated without
cause or such party voluntarily resigns for good reason after signing the
voting agreement, then the shares of NPI common stock held by such individual
shall be released from the lock-up restrictions. The merger agreement requires
NPI to cause each officer, director and stockholder who holds more than
30,000 shares of NPI common stock to execute such a voting agreement prior to
the effective date of the

merger. Currently the only employees of NPI who hold more than 30,000 shares of
NPI common stock are also officers of NPI.

Shares of NPI common stock issued to any person who is or becomes an
affiliate of NPI will also be subject to restrictions on transfer. Persons who
may be deemed to be affiliates include individuals or entities that control,
are controlled by, or are under common control with the combined company and
may include some of their respective officers and directors, as well as their
respective principal stockholders. Affiliates may not sell their shares of NPI
common stock acquired in the merger except pursuant to (1) an effective
registration statement under the Securities Act covering the resale of those
shares, (2) an exemption under paragraph (d) of Rule 145 under the Securities
Act, or (3) any other applicable exemption under the Securities Act.

THE MERGER AGREEMENT

The following is a summary of the material provisions of the merger
agreement between NPI, Empire Acquisition Corp. and FalconStor dated as of May
4, 2001. This summary may not contain all of the information that is important
to the stockholders of NPI and FalconStor and thus this description is
qualified in its entirety by reference to the merger agreement attached as
Annex A hereto, which you are urged to read carefully and in its entirety.

The Merger

At the closing of the merger, Empire Acquisition Corp., a wholly-owned
subsidiary of NPI, will merge with and into FalconStor. FalconStor will be the
surviving corporation and shall continue to be governed by its certificate of
incorporation and bylaws that are currently in effect and, as a result of the
merger, will become a wholly-owned subsidiary of NPI.

Option Agreement

In exchange for an exclusive irrevocable option to enter into the merger
with FalconStor, on April 2, 2001, NPI purchased 9,792,401 shares of FalconStor
Series C preferred stock for $25,000,000. All shares of FalconStor Series C
preferred stock issued to NPI prior to the merger will be canceled, and the
proceeds received by FalconStor from that sale of shares of Series C preferred
stock will remain in FalconStor for use in ongoing operations after the merger.

Date of Closing

The merger agreement provides that the merger will close no later than the
third business day following the satisfaction or waiver of each of the
conditions to the merger, including the approval and adoption of the merger
agreement and the approval of the merger by the stockholders of FalconStor and
NPI and the approval of the share issuance in the merger and the amendment to
NPI's restated certificate of incorporation by the stockholders of NPI.

Certificate of Incorporation and Bylaws of NPI

Upon the closing of the merger, the amended and restated certificate of
incorporation of NPI and the bylaws of NPI will remain in full force and
effect; however, Article FIRST of the certificate of incorporation shall be
amended to state that the name of the corporation will be FalconStor Software,
Inc. and Article FOURTH shall be amended to increase the number of authorized
shares of common stock to 100,000,000.

Management of NPI Following the Merger

The merger agreement provides that, upon the closing of the merger, NPI's
board of directors shall consist of one director to be designated by NPI and
four directors to be designated by FalconStor. The officers of the combined
company will be:

Name Positions
---- ---------

ReiJane Huai....................... President and Chief Executive Officer
Jacob Ferng, CPA................... Chief Financial Officer
Wai Lam............................ Vice President, Engineering
Wayne Lam.......................... Vice President, Marketing
Wendy Petty........................ Vice President, Sales, North America
Bernard Wu......................... Vice President, Business Development
Eric Chen.......................... Vice President, GM Asia

Conversion of Securities; Adjustment of Exchange Ratio

Upon completion of the merger, each share of FalconStor common stock will be
converted into the right to receive the number of shares of NPI common stock
equal to the exchange ratio set forth below.

E = 2(X + 0) + B-CB [2(X + 0)]
---------------------
Y + V
where E = the exchange ratio

X = all shares of NPI common stock issued and outstanding as of two
days prior to the NPI stockholders meeting

O = all shares of NPI common stock issuable under outstanding, vested,
in-the-money options to purchase such stock as of two days prior to
the NPI stockholders meeting

C = NPI's cash, cash equivalents and short-term investments calculated
in accordance with GAAP minus any estimated cash payments due under
agreements with certain members of NPI's management resulting from
the merger plus $25,000,000, calculated as of the end of the
calendar month immediately prior to the effective time of the
merger, without giving effect to reductions in cash for payment of
transaction expenses related to the merger by NPI prior to the
effective time; provided that for purposes of this formula, this
amount shall not exceed $90,000,000. For purposes of this
paragraph, estimated cash payments due under the management
agreements mentioned immediately above shall be determined (a)
using the closing sales price of one share of NPI common stock on
Nasdaq two days prior to the NPI stockholders' meeting and (b) by
giving effect to any acceleration of vesting of options caused by
the closing of the merger

B = $90,000,000

Y = all outstanding shares of FalconStor common stock (assuming
conversion of all outstanding shares of FalconStor preferred stock
into shares of FalconStor common stock) minus shares of FalconStor
common stock or FalconStor preferred stock owned by NPI or
FalconStor, calculated two days prior to the NPI stockholders'
meeting

V = all shares of FalconStor common stock issuable under outstanding,
vested, in-the-money options or warrants to purchase such stock or
other securities convertible or exchangeable for shares of
FalconStor common stock, calculated two days prior to the NPI
stockholders' meeting

NPI will not issue any fractional shares. Instead of receiving a fractional
share, a FalconStor common stockholder will receive cash equal to the product
of (a) such fractional share multiplied by (b) the reported closing sale price
of NPI common stock at the effective time of the merger.

Assuming that NPI's cash, cash equivalents and short-term investments are at
$80,000,000, and that the trading price of NPI common stock remains at $9.89,
the closing price on July 11, 2001, the aggregate number of shares of NPI
common stock to be issued to the FalconStor stockholders in the merger would be
29,732,912. This number of shares would result in FalconStor stockholders
owning 69% of NPI's outstanding common stock.

Exchange of Certificates

Promptly after the completion of the merger, an exchange agent will mail a
letter of transmittal and exchange instructions to each holder of record of
FalconStor common stock to be used to surrender and exchange certificates
evidencing shares of FalconStor common stock for certificates evidencing the
shares of NPI common stock (and cash in lieu of any fractional share) to which
such holder has become entitled. After

receipt of such transmittal forms, each holder of certificates formerly
representing FalconStor common or preferred stock will be able to surrender
their certificates to the exchange agent, and each such holder will receive in
exchange therefor:

. a certificate or certificates evidencing the number of whole shares of
NPI common stock to which such holder is entitled; and

. any cash which may be payable in lieu of a fractional share of NPI common
stock.

Such transmittal forms will be accompanied by instructions specifying other
details of the exchange.

FalconStor stockholders should not send in their certificates until they
receive a letter of transmittal and other transmittal forms.

After the completion of the merger, each certificate evidencing FalconStor
common stock, until so surrendered and exchanged, will be deemed, for all
purposes, to evidence only the right to receive:

. the number of whole shares of NPI common stock which the holder of such
certificate is entitled to receive; and

. any cash payment in lieu of a fractional share of NPI common stock.

The holder of such unexchanged certificate will not be entitled to receive
any dividends or other distributions payable by the combined company until the
certificate has been exchanged. Subject to applicable laws, such dividends and
distributions, together with any cash payment in lieu of a fractional share of
NPI common stock, will be paid without interest.

Representations and Warranties

NPI, FalconStor and Empire Acquisition Corp. made a number of mutual,
customary representations and warranties in the merger agreement regarding
aspects of their respective businesses, financial condition, structure and
other facts pertinent to the merger. The representations of NPI and Empire
Acquisition Corp. to FalconStor and of FalconStor to NPI and Empire Acquisition
Corp. cover the following topics, among others, as they relate to each company
and its subsidiaries:

. corporate organization and its qualification to do business;

. certificate of incorporation and bylaws;

. capitalization;

. subsidiaries;

. authority to enter into the merger agreement;

. the absence of conflicts under the company's charter documents,
applicable laws or material obligations to third parties;

. required consents or approvals and violations of any instruments or law;

. financial statements and filings and reports with the SEC;

. the absence of material changes or events in business between December
31, 2000 and the closing date of the merger;

. taxes and tax returns;

. intellectual property owned or used by the company;

. compliance with laws and governmental permit requirements, and the
absence of any restrictions impairing any business practice;

. the absence of material litigation;

. brokers' and finders' fees;

. employee benefit plans and employment agreements;

. the absence of liens;

. environmental laws, claims and other obligations that apply to the
company;

. labor matters;

. material contracts and commitments;

. insurance;

. information supplied by this joint proxy statement/prospectus and the
related registration statement filed by NPI;

. board of directors approval; and

. the opinion of NPI's financial advisor.

Conduct of Business Before Completion of the Merger

The parties agreed that until the earlier of the completion of the merger or
the termination of the merger agreement or unless the other party consents in
writing, each party and its subsidiaries will:

. carry on its business diligently in the ordinary course in compliance
with applicable laws;

. pay its debts when due;

. pay or perform other material obligations when due;

. keep in force all insurance policies relating to their respective
businesses; and

. use commercially reasonable efforts to preserve intact its present
business organization, keep available the services of present officers
and employees and preserve its customer, supplier and other business
relationships.

The parties also agreed that until the earlier of the completion of the
merger or the termination of the merger agreement or unless the other party
consents in writing, neither party and its subsidiaries would:

. waive any stock repurchase rights, or accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice
options, granted under any stock plan or authorize cash payments in
exchange for any options granted under any stock plan except as required
pursuant to such plans or applicable law;

. adopt any new severance plan or modify any existing severance plan, or
grant any severance pay to a director, officer or employee except
pursuant to any existing agreement or policy;

. sell or dispose of any rights to its intellectual property;

. declare or pay any dividends on or make other distributions in respect of
any of its capital stock, or effect certain other changes in its
capitalization;

. purchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock except for the repurchase of unvested shares in
connection with the termination of service;

. issue, or authorize or propose the issuance of, any shares of its capital
stock or securities convertible into shares of its capital stock, or any
subscriptions, rights, warrants, or options to acquire, or other
agreements obligating it to issue any such shares or other convertible
securities, subject to various exceptions including the grant of options
granted in the ordinary course of business, consistent with past practice
and shares issuable under the parties' employee stock purchase plan;

. engage in material acquisitions, other than in the ordinary course of
business consistent with past practice;

. adopt a plan of liquidation, dissolution, re-capitalization or other
reorganization;

. incur or guarantee any indebtedness, issue or sell any debt securities or
make any loans or investments in any other person, other than in
connection with ordinary course consistent with past practice or pursuant
to existing credit facilities in the ordinary course of business;

. adopt or amend any employee benefit, stock purchase or stock option plan
other than as may be required by law or under the terms of the agreement
or enter into any employment contract or collective bargaining agreement
or pay any special remuneration;

. fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years;

. engage in any action that could reasonably be expected to cause the
merger to fail to qualify as a reorganization under the Internal Revenue
Code;

. sell, license, mortgage or otherwise encumber, any of the assets of its
business except for the sale of inventory in the ordinary course of
business;

. change accounting methods relating to its business or the assets or
liabilities of that business;

. settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated by the merger agreement; or

. take, propose to take, or agree to take any of the actions listed in this
paragraph or that would make any of the representations and warranties
made in the merger agreement untrue, incomplete or incorrect.

No Solicitation

The merger agreement provides that NPI will not, directly or indirectly,
through any officer, director, employee, representative or agent:

. solicit, initiate, encourage or induce any offer or proposal relating to:

. an acquisition of or tender offer for 20% or more of the voting
securities of NPI;

. any merger, consolidation, share exchange, or similar transaction
involving NPI;

. any sale of shares of capital stock of NPI after which NPI stockholders
immediately prior to such sale would hold less than a majority of the
outstanding capital stock of NPI;

. any sale, lease, mortgage, pledge or disposition of all or
substantially all of the assets of NPI, except for assets of NPI
related directly to NPI's Ethernet switching business;

. make any public announcement of a proposal, plan or intention to do any
of the foregoing or any agreement to engage in any of the foregoing (any
of the foregoing offers or proposals is referred to as an NPI acquisition
proposal);

. participate or engage in negotiations or discussions regarding, furnish
any nonpublic information relating to, or take any other action to
facilitate, the making of any NPI acquisition proposal;

. approve, endorse or recommend any NPI acquisition proposal; or

. enter into any letter of intent or other commitment contemplating or
relating to any alternative acquisition transaction that would satisfy
one the thresholds set forth above.

However, nothing contained in the merger agreement shall prevent NPI or its
board of directors from providing non-public information to, or entering into
discussions or negotiations with, any person or entity in

connection with an unsolicited bona fide written acquisition offer to purchase
all of the outstanding NPI common stock that the board of directors of NPI
reasonably determines to be more financially favorable to NPI's stockholders
than the merger, if and only to the extent that:

. neither NPI nor any of its representatives has violated the non-
solicitation provisions of the merger agreement;

. NPI's board of directors concludes in good faith, after consultation with
its legal counsel, that such action is necessary in order for the board
of directors to comply with its fiduciary duties to NPI's stockholders;

. NPI gives at least two business days' notice to FalconStor prior to
providing any nonpublic information to, or entering into discussions or
negotiations with such person or entity, and NPI receives a customary
confidentiality and nondisclosure agreement from such entity; and

. at least two business days prior to NPI providing any nonpublic
information to such person or entity, NPI provides such nonpublic
information to FalconStor.

The merger agreement provides that FalconStor will not, directly or
indirectly, through any officer, director, employee, representative or agent:

. solicit, initiate, encourage or induce any offer or proposal relating to:

. an acquisition of or tender offer for 20% or more in interest of the
total outstanding shares of FalconStor common stock;

. any merger, consolidation, share exchange or similar transaction
involving FalconStor;

. any sale of shares of capital stock of NPI after which FalconStor
stockholders, immediately prior to such sale, would hold less than a
majority of the outstanding capital stock of FalconStor;

. any sale, lease, mortgage, pledge or disposition of all or
substantially all of the assets of FalconStor;

. participate or engage in negotiations or discussions regarding, furnish
any nonpublic information relating to, or take any other action to
facilitate the making of any FalconStor acquisition proposal;

. approve, endorse or recommend any FalconStor acquisition proposal; or

. enter into any letter of intent or other commitment contemplating or
relating to any alternative acquisition transaction that would satisfy
one of the thresholds set forth above.

However, nothing contained in the merger agreement shall prevent FalconStor
or its board of directors from providing non-public information to, or entering
into discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide written acquisition offer to purchase all of the
outstanding FalconStor common stock that the board of directors of FalconStor
reasonably determines to be more financially favorable to FalconStor's
stockholders than the merger, if and only to the extent that:

. neither FalconStor nor any of its representatives has violated the non-
solicitation provisions of the merger agreement;

. FalconStor's board of directors concludes in good faith, after
consultation with its legal counsel, that such action is necessary in
order for the board of directors to comply with its fiduciary duties to
FalconStor's stockholders;

. FalconStor gives at least two business days' notice to NPI prior to
providing any nonpublic information to, or entering into discussions or
negotiations with such person or entity, and FalconStor receives a
customary confidentiality and nondisclosure agreement from such entity;
and

. at least two business days' prior to FalconStor providing any nonpublic
information to such person or entity, FalconStor provides such nonpublic
information to NPI.

Further, nothing in the merger agreement will prevent the board of directors
of either party from withdrawing or modifying its recommendation in favor of
the merger if such party receives an acquisition offer that its board of
directors determines in its reasonable judgment to be more favorable from a
financial point of view to that company's stockholders than the terms of the
merger, and such board of directors determines in good faith after consultation
with legal counsel that in light of this superior offer the board must withdraw
or modify its recommendation in favor of the merger in order to comply with its
fiduciary obligations to the company's stockholders.

Meetings of Stockholders

NPI and FalconStor agreed to take all action necessary in accordance with
Delaware law and their respective charter documents to convene meetings of
their respective stockholders, to be held as promptly as practicable after the
registration statement of which this joint proxy statement/prospectus is a part
is declared effective, for the purpose of voting on a proposal to approve the
merger and merger agreement, and, in the case of NPI, other specified matters
relating to the consummation of the merger. Subject to the limitations set
forth below, NPI and FalconStor agreed to use commercially reasonable efforts
to solicit from their respective stockholders proxies in favor of their
respective merger proposals and to take all other action necessary or advisable
to secure the vote required to approve such proposals.

Subject to the limitations set forth below, NPI's board of directors must
recommend that NPI stockholders vote in favor of the merger proposals, NPI must
include a statement to this effect in this joint proxy statement/prospectus and
NPI's board of directors must not withdraw or modify its recommendation.
However, nothing shall prevent NPI's board of directors from withholding,
withdrawing or modifying its recommendation in favor of the merger proposals
if:

. NPI receives an unsolicited, bona fide written offer to purchase all of
NPI's outstanding common stock; provided, however, if financing is
required for such offer, such financing must already be committed or must
be reasonably capable of being obtained by the third party making the
offer, and such offer is not withdrawn;

. neither NPI nor any of its representatives has violated the non-
solicitation provisions of the merger agreement; and

None of these limitations will limit NPI's obligation to convene and hold
the meeting of NPI stockholders for the purpose of voting on the merger
proposals, regardless of whether the recommendation of NPI's board of directors
has been withdrawn or modified.

Subject to the limitations set forth below, FalconStor's board of directors
must recommend that FalconStor stockholders vote in favor of the merger
proposals, FalconStor must include a statement to this effect in this proxy
statement and FalconStor's board of directors must not withdraw or modify its
recommendation. However, nothing shall prevent FalconStor's board of directors
from withholding, withdrawing or modifying its recommendation in favor of the
merger proposals if:

. FalconStor receives an unsolicited, bona fide written offer to purchase
all of the outstanding common stock of FalconStor; provided, however, if
financings is required for such offer, such financing must already be
committed or must be reasonably capable of being obtained by the third
party making the offer, and such offer is not withdrawn;

. neither FalconStor nor any of its representatives has violated the non-
solicitation provisions of the merger agreement; and

None of these limitations will limit FalconStor's obligation to convene and
hold the meeting of FalconStor stockholders for the purpose of voting on the
merger proposals, regardless of whether the recommendation of FalconStor's
board of directors has been withdrawn or modified.

Employee Benefit Plans

At the effective time of the merger, all outstanding options to purchase
FalconStor common stock will be assumed by NPI and converted into options to
purchase NPI common stock based on the exchange ratio. All restrictions of the
exercisability of FalconStor stock options shall continue in full force and
effect and the term, exercisability, vesting schedule and other provisions of
the stock option will remain unchanged.

The combined company will file a registration statement on Form S-8 for the
shares of NPI common stock issuable with respect to options assumed in the
merger.

Conditions

The respective obligations of NPI and FalconStor to effect the merger are
subject to a number of conditions including the following:

. the merger agreement and the transactions it contemplates shall have been
approved and adopted by the stockholders of each of NPI and FalconStor;

. the registration statement filed with the SEC for the shares to be issued
in the merger by NPI shall have become effective and neither the
registration statement nor this joint proxy statement/prospectus shall be
the subject of a stop order or proceedings seeking a stop order;

. all governmental approvals, consents and waivers required in connection
with the merger agreement and the transactions contemplated thereby,
shall have been obtained;

. all waiting periods under the HSR Act shall have expired or been
terminated and clearance shall have been obtained under any applicable
comparable laws of foreign countries;

. NPI shall have received a written opinion from Gray Cary Ware &
Freidenrich LLP, counsel to NPI, and FalconStor shall have received an
opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to
FalconStor, both to the effect that the merger will be treated for U.S.
federal income tax purposes as tax-free reorganization within the meaning
of section 368(a) of the Internal Revenue Code;

. the shares of NPI common stock to be issued in the merger shall have been
approved for quotation on The Nasdaq National Market subject only to an
official notice of issuance;

. no decree, judgment or other order issued by any governmental authority
which has the effect of preventing or restricting the completion of any
transaction contemplated by the merger shall be in effect, nor shall any
person have initiated an action seeking such a decree, judgment or other
order;

. subject to certain exceptions, the accuracy of the representations and
warranties of the other party set forth in the merger agreement; and

. subject to certain exceptions, the performance of all obligations of the
other party required to be performed under the merger agreement.

Any of the conditions in the merger agreement may be waived by the party
benefited thereby, except those conditions imposed by law.

Termination

The merger agreement may be terminated at any time prior to the completion
of the merger, whether before or after approval by the stockholders of NPI or
FalconStor of the matters presented in connection with the merger; provided,
however, neither party may terminate the merger agreement for any of the
reasons set forth below if the stockholders of the party have breached their
obligations under the voting agreement:

. by the mutual written consent of NPI and FalconStor duly authorized by
the boards of directors of each company;

. by either NPI or FalconStor if the merger shall not have been consummated
by September 30, 2001, provided that if any closing condition has not
been satisfied or waived prior to September 30, 2001 and remains
reasonably capable of satisfaction, the termination date will be extended
to December 31, 2001;

. by either NPI or FalconStor if a court of competent jurisdiction or other
governmental entities, shall have issued a nonappealable final order,
decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
merger, which order, decree or ruling is final and nonappealable;

. by NPI, if at the FalconStor stockholders' meeting, the requisite vote of
FalconStor's stockholders in favor of the merger agreement and the merger
is not obtained, or by FalconStor, if at the NPI stockholder's meeting,
the requisite vote of NPI's stockholders in favor of the merger agreement
and the merger is not obtained;

. by either NPI or FalconStor if the other party's breach of a
representation, warranty, covenant or agreement is not cured within 10
business days' notice of such breach;

. by NPI if:

. FalconStor's board of directors has withdrawn or modified its
recommendation of the merger agreement or the merger in a manner
adverse to NPI or has resolved to do so; or

. since the execution of the merger agreement a material adverse effect
has occurred to FalconStor.

. by FalconStor if:

. NPI's board of directors has withdrawn or modified its recommendation
of the merger agreement or the merger in a manner adverse to NPI or has
resolved to do so; or

. since the execution of the merger agreement a material adverse effect
has occurred to NPI.

The merger agreement does not include any provision for termination based on
fluctuations in the price of NPI common stock.

Termination Fees and Expenses

Except as described below, whether or not the merger is consummated, all
fees, costs and expenses incurred in connection with the merger agreement and
the transactions contemplated thereby shall be paid by the party incurring such
expenses, except that all fees and expenses, other than attorneys' fees,
incurred in connection with the printing of this joint proxy
statement/prospectus shall be paid by NPI.

If the merger agreement is terminated by FalconStor for any reason, then NPI
shall pay a termination fee of $3,000,000 in cash in immediately available
funds to FalconStor; provided, however, NPI will not be required to pay the
termination fee if FalconStor is in material breach of any of its obligations
under the merger agreement.

If the merger agreement is terminated by NPI for any reason other than:

. any representation or warranty of FalconStor is inaccurate at the time of
the merger agreement or becomes inaccurate after the date of the merger
agreement and is not cured within 10 business days' notice of the breach;

. any of FalconStor's covenants set forth in the merger agreement are
breached;

. FalconStor's board of directors has withdrawn or modified its
recommendation in favor of the merger; or

. since the date of the merger agreement there has been a material adverse
effect on FalconStor;

NPI shall be required to pay FalconStor a termination fee of $3,000,000;
provided, however, NPI will not be required to pay the termination fee if
FalconStor is in material breach of any of its obligations under the merger
agreement.

Amendment and Waiver

The merger agreement may be amended at any time by action taken or
authorized by the respective boards of directors of NPI and FalconStor, but
after approval by the stockholders of FalconStor of the matters presented in
connection with the merger to them, no amendment shall be made which changes
the amount or form of the merger consideration or which by law requires further
approval by such stockholders, without such further approval. NPI and
FalconStor by action taken or authorized by their respective boards of
directors, may extend the time for performance of the obligations or other acts
of the other parties to the merger agreement, may waive inaccuracies in the
representations or warranties contained in the merger agreement or may waive
compliance with any agreements or conditions for the benefit of each party
contained in the merger agreement.

Voting Agreements

Certain officers and directors of NPI holding an aggregate of 10.3% of the
outstanding common stock of NPI (assuming exercise of outstanding options held
by such officers and directors) have agreed to vote in favor of the merger as
more fully set forth below. In addition, the holders of the requisite number of
shares of FalconStor common stock, Series A preferred stock, Series B preferred
stock and Series C preferred stock to approve the merger have entered into
voting agreements whereby these holders have agreed to vote their shares in
favor of the merger. Therefore, provided these holders comply with the
provisions of the voting agreements, FalconStor stockholders will approve the
merger. The voting agreements were entered into to induce FalconStor and NPI to
enter into the merger agreement. A form of each of the voting agreements is
attached to this joint proxy statement/prospectus as Annex D.

Voting of Shares

From the date of the voting agreement through the earlier of the date when
the merger agreement is terminated or the merger becomes effective, the parties
to the voting agreements each agree that, at every meeting of stockholders and
on every action or approval by written consent of the stockholders:

. it will cause all securities owned by it to be voted in favor of the
adoption of the merger agreement and the other transactions contemplated
by the merger agreement;

. it will cause all securities owned by it to be voted against any proposal
for any merger, consolidation, sale of assets, recapitalization, or other
business combination involving the other party (other than the merger) or
any other action or agreement that would result in a breach of any
covenant, representation, or warranty or any other obligation or
agreement of the other party under the merger agreement or which would
result in any of the conditions to the other party's obligations under
the merger agreement not being fulfilled; and

. it will cause all securities owned by it to be voted in favor of any
other matter relating to the consummation of the transactions
contemplated by the merger agreement.

Proxy and Waiver

To carry out the intention of the voting agreements, certain officers and
all of the directors of NPI have delivered to FalconStor and the holders of the
requisite number of shares of FalconStor common stock, Series A preferred
stock, Series B preferred stock and Series C preferred stock to approve the
merger have delivered to NPI an irrevocable proxy with respect to the
securities owned by such person in respect of the matters described above.
Furthermore, each party has given any consent or waiver that is reasonably
required for the approval of the merger under the terms of any agreements to
which such individual is a party.

Restrictions on Transfer of Securities and Voting Rights

Each of the persons that has executed a voting agreement has also agreed
that during the same period, he, she or it will not:

. tender any of his, her or its securities or any securities convertible
into or exchangeable or exercisable for such securities to any person;

. sell, transfer, distribute, pledge, encumber, assign or otherwise dispose
of (or enter into any transaction or device that is designed to, or could
reasonably be expected to, result in the disposition by any person at any
time in the future of) any of his, her or its securities or any
securities convertible into or exchangeable or exercisable for such
securities;

. enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of any of the their securities;

. enforce or permit the execution of the provisions of any redemption,
share purchase or sale, recapitalization or other agreement with the
other party (except with respect to the approval of the merger
agreement);

. deposit any of his, her or its securities into a voting trust or
depositary facility or enter into a voting agreement or arrangement with
respect to any securities or grant any proxy with respect thereto; or

. enter into any contract, option or other arrangement or understanding
with respect to or consent to the offer for sale, sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the his, her or
its securities, any securities convertible into or exchangeable or
exercisable for shares of the other party or any interest in any of the
foregoing with any person.

However, each party is allowed to take any of the above actions if NPI or
FalconStor, as the case may be, approves such action or if the proposed
transferee executes a counterpart of the voting agreement and agrees to hold
the securities subject to all of the terms of the voting agreement.

No Solicitation

Each party agrees that from the date of the voting agreement through the
earlier of the date on which the merger agreement is terminated or the merger
becomes effective, it will not, directly or indirectly, solicit, initiate, or
knowingly encourage any inquiry, proposal, or offer from any third person or
negotiate with any third party regarding any acquisition or purchase of NPI or
FalconStor, as the case may be, by a third party and it will cease all existing
discussions and negotiations. Each party further agrees to notify either NPI or
FalconStor, as the case may be, immediately upon receipt of any proposal for,
or inquiry regarding, the purchase of NPI or FalconStor.

Termination

The voting agreements and the accompanying proxies, and all obligations of
the parties thereunder, shall terminate immediately, without any further action
being required, upon the earlier of the date which the merger agreement is
terminated or the merger becomes effective.

COMPARISON OF RIGHTS OF HOLDERS OF NPI COMMON STOCK AND FALCONSTOR CAPITAL
STOCK

This section of the joint proxy statement/prospectus describes material
differences between the rights of stockholders of NPI common stock and the
rights of stockholders of the FalconStor capital stock. The rights compared
are those found in the respective companies' charter documents and corporate
law provisions for Delaware, which is the state in which both companies are
incorporated. While NPI believes that these descriptions address the material
differences, this summary may not contain all of the information that is
important to stockholders of NPI and FalconStor. NPI and FalconStor
stockholders should read this entire document and the documents referred to in
this summary carefully for a more complete understanding of the differences
between the rights of NPI stockholders, on the one hand, and FalconStor
stockholders, on the other.

Size of the Board

The size of the NPI board is fixed from time to time by resolution of the
board of directors. Currently, there are five directors. See "Board
Composition" commencing on page 46.

The size of the FalconStor board is fixed from time to time by resolution
of the board of directors. Currently, there are three directors.

Classification

The NPI board is divided into three classes, with each class serving a
staggered three-year term.

The FalconStor board of directors is not classified. Each director is up
for election every year.

Removal of Directors

The NPI certificate of incorporation provides that directors may be removed
with or without cause by the majority vote of all the outstanding shares
entitled to vote in an election of directors.

Any FalconStor director or the entire board may be removed, with or without
cause, by holders of the majority of the capital stock entitled to vote in any
election of directors, voting together as a single class, subject to the
rights of the holders of any class or series of preferred stock.

Vacancies

The NPI bylaws provide that vacancies may be filled either by a majority of
directors in office or at a special meeting of stockholders held for that
purpose.

The FalconStor bylaws provide that vacancies may only be filled by a
majority of the remaining directors.

Limitation on Director Liability

The NPI certificate of incorporation precludes a director's liability for
monetary damages unless the director:

. breaches the duty of loyalty to the corporation or its stockholders;

. commits acts that are not in good faith or which involve intentional
misconduct or a knowing violation of the law;

. pays an illegal dividend or makes an illegal stock purchase; or

. receives an improper personal benefit from a transaction.

The FalconStor certificate of incorporation eliminates a director's personal
liability for breach of fiduciary duty as a director to the fullest extent
allowed under Delaware law.

Indemnification of Directors and Officers

Both NPI and FalconStor indemnify their directors and officers to the
fullest extent allowed under Delaware law.

Amendments to Certificate of Incorporation

The NPI certificate of incorporation requires the affirmative vote of at
least two-thirds of the then outstanding shares in order to amend or repeal
certain provisions of the certificate of incorporation, including those
relating to:

. the conduct of the business and the affairs of NPI;

. the number and election of directors;

. the amendment of NPI's bylaws and certificate of incorporation; and

. the limitations on personal liability for the directors.

The FalconStor certificate of incorporation requires the affirmative vote of
at least a majority of the outstanding voting power of the common stock and
preferred stock, voting together as a single class, in order to amend or repeal
any provision of the certificate of incorporation and a majority of the
outstanding shares of Series A preferred stock, two-thirds of the outstanding
shares of Series B preferred stock, or a majority of the outstanding shares of
Series C preferred stock in order to amend certain provisions of the
certificate of incorporation, including any amendment that adversely affects
the relevant series of preferred stock.

Amendments to Bylaws

The NPI board of directors has authority to amend the bylaws. NPI
stockholders may also amend the bylaws, but only by a two-thirds vote of the
then outstanding shares voting together as a single class.

The FalconStor board of directors has authority to amend the bylaws by a
majority vote. Stockholders may also amend the bylaws upon the affirmative vote
of at least a majority of the outstanding shares of Series A preferred stock,
two-thirds of the outstanding shares of Series B preferred stock, or a majority
of the outstanding shares of Series C preferred stock, if any amendment
adversely affects the relevant series of preferred stock.

Authorized Capital Stock

The NPI certificate of incorporation authorizes the issuance of up to
60,000,000 shares of common stock, par value $0.001 per share, and 2,000,000
shares of preferred stock, par value $0.001 per share. The NPI board of
directors is authorized, without further action by the stockholders, and
subject to any limitations prescribed by law, to determine, alter or eliminate
any or all of the rights, preferences, privileges and restrictions granted to
or imposed upon any wholly unissued series of preferred shares, and to fix,
increase or decrease the number of shares comprising any such series and the
designation thereof, or any of them, and to provide for the rights and terms of
redemption or conversion of the shares of any such series.

As of July 11, 2001, 13,280,181 shares of NPI common stock, and no shares of
NPI preferred stock, were issued and outstanding.

Proposal No. 2 to this joint proxy statement/prospectus asks the NPI
stockholders to approve an amendment to NPI's restated certificate of
incorporation to authorize the issuance of an additional 40,000,000

shares of common stock. The total number of shares of NPI common stock that
would be authorized after this amendment would be 100,000,000.

The FalconStor certificate of incorporation authorizes the issuance of up to
100,000,000 shares of common stock, par value $0.001 per share, as well as up
to 30,000,000 shares of preferred stock, par value $0.001 per share. The
FalconStor board of directors is authorized, without further action by the
stockholders, and subject to any limitations prescribed by law, to designate
and issue the preferred stock in one or more series, and can fix the rights,
preferences, and privileges of the shares of each series and any
qualifications, limitations, or restrictions on these shares. The FalconStor
board of directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of FalconStor's common stock.

As of July 11, 2001, 15,336,000 shares of FalconStor common stock and
20,886,079 shares of FalconStor preferred stock (comprised of 3,000,000 shares
of Series A preferred stock, 4,900,000 shares of Series B preferred stock and
12,986,079 shares of Series C preferred stock) were issued and outstanding.

Dividends

Delaware law provides that the directors of a corporation may declare and
pay dividends on capital stock. Dividends may only be paid out of surplus,
which is the excess of net assets of the corporation over capital, or, if the
corporation does not have adequate surplus, out of net profits for the current
or immediately preceding fiscal year, unless the net assets are less than the
capital of any outstanding preferred stock.

The NPI certificate of incorporation and the FalconStor certificate of
incorporation place no additional restrictions on its board's ability to
declare dividends.

Stock Repurchases, Redemptions and Conversions

In general, a corporation may not purchase or redeem its own shares if its
capital is impaired or if the purchase or redemption would cause its capital to
be impaired. A company may, however, purchase or redeem preferred shares out of
capital if the shares will then be retired, thereby reducing the capital of the
corporation.

The NPI certificate of incorporation provides that NPI's common stock is not
redeemable.

The FalconStor certificate of incorporation provides that FalconStor may not
redeem or repurchase shares of its common stock or of any other capital stock
of FalconStor ranking junior to any series of preferred stock then outstanding
of FalconStor as to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, unless all declared and unpaid
dividends on such series of preferred stock of FalconStor have been paid.
Holders of a majority of the Series A preferred stock and Series C preferred
stock, and holders of two-thirds of the Series B preferred stock of FalconStor,
when applicable, must consent to the purchase, redemption or acquisition of any
shares of FalconStor's common stock, or of any other capital stock of
FalconStor ranking junior to such series of preferred stock as to the payment
of dividends or the distribution of assets upon liquidation, dissolution or
winding up.

Election of Directors

NPI stockholders and FalconStor stockholders do not have cumulative voting
rights.

Appraisal or Dissenters' Rights

Under the Delaware General Corporation Law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal (or dissenters') rights pursuant to
which such shareholder may receive cash in the amount of the fair market value
of his or her shares

in lieu of consideration he or she would otherwise receive in the transaction.
Such rights are not available (a) with respect to the sale, lease or exchange
of all or substantially all of the assets of a corporation, (b) with respect to
a merger or consolidation by a corporation, the shares of which are either
listed on a national securities exchange, such as Nasdaq, or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or are held of record by more
than 2,000 holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders, plus cash in lieu
of fractional shares, or (c) to stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because the merger agreement does not amend the existing
certificate of incorporation, each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury share
after the merger, and the number of shares to be issued in the merger does not
exceed 20% of the shares of the surviving corporation outstanding immediately
prior to the merger and if certain other conditions are met. Because NPI's
stock is listed on a national exchange, NPI stockholders are not entitled to
appraisal rights in this merger. FalconStor stockholders, however, do have
appraisal and dissenters' rights. See "Appraisal or Dissenters' Rights."

Action by Written Consent

The NPI certificate of incorporation prohibits the stockholders from acting
by written consent. All stockholder actions must be taken at a duly called
annual or special meeting.

FalconStor stockholders may act by written consent, provided the written
consent is signed by holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.

Annual Meeting of Stockholders

The annual meetings for both NPI and FalconStor are held on the date and at
the place fixed by their respective boards of directors.

Special Meeting of Stockholders

The NPI bylaws provide that special meetings of the stockholders may only be
called by the board of directors or by the holders of not less than 10% of all
shares entitled to cast voted at the meeting, voting together as a single
class. The meeting shall be held at the time and place designated by the
persons calling the meeting and the business transacted at the special meeting
shall be confined to the purpose or purposes stated in the notice of the
meeting.

The FalconStor bylaws provide that special meetings of FalconStor
stockholders may be called by two or more directors or the chairman of the
board, or by one or more stockholders entitled to cast a majority of the shares
of stock that would be entitled to vote on the proposed matter at the special
meeting. The place of the special meeting shall be fixed by the body or person
calling the special meeting.

Advance Notice Requirements of Stockholder Nominations

In order to nominate an individual for election to the board of directors,
NPI bylaws require a stockholder to provide written notice of the nomination to
the corporation secretary at least 120 days before the first anniversary of the
date written notice of the previous year's meeting was given.

FalconStor's bylaws do not contain any similar provision.

Advance Notice Requirements of Stockholder Business

In order to raise business before the annual meeting, a NPI stockholder must
provide written notice of such intent and a brief description of:

. the issue and why it is to be brought before the meeting;

. the name and address, as they appear on the corporation's books, of the
stockholder proposing such business;

. the number of shares of NPI common stock the stockholder owns; and

. and any material interest the stockholder may have in the matter. The
information must be delivered to NPI's corporate secretary at least 120
days before the first anniversary of the day written notice of the
previous year's meeting was given.

FalconStor's charter documents do not contain comparable provisions.

Rights of Inspection

The certificate of incorporation and the bylaws of NPI do not provide for
inspection rights.

Stockholders of FalconStor may inspect its books and records during normal
business hours as long as such inspection is for a proper purpose, and as long
as the stockholder has made proper written demand stating the purpose of the
inspection. A proper purpose is any purpose reasonably related to the interests
of the inspecting person as a stockholder.

Transactions Between the Corporation and its Directors and Officers

Delaware law provides that a transaction between a corporation and one of
its directors or officers or between the corporation and an entity with which a
director or officer is affiliated shall be valid if:

. the director/officer discloses the material facts to the board of
directors and the transaction is approved by a majority of disinterested
directors; or

. the director/officer discloses the material facts to the shareholders and
the shareholders approve the transaction; or

. the transaction is fundamentally fair to the corporation as of the time
it is authorized, approved, or ratified by the directors or the
shareholders.

The NPI certificate of incorporation and the FalconStor certificate of
incorporation generally track Delaware law.

Stockholders' Rights Plan

Neither NPI nor FalconStor has a stockholders' rights plan.

BUSINESS OF NPI

Until recently, NPI designed and sold Ethernet switching solutions designed
for local area networks, or LANs. In response to unfavorable market conditions
and in order to take advantage of the opportunity presented by FalconStor's
technology and market opportunity, NPI is currently in the process of winding
down its business and laying off its employees. NPI expects to have
substantially discontinued its historical operating business by August 31,
2001. Information regarding NPI's historical business is located in NPI's
annual report on Form 10-K for the fiscal year ended December 31, 2000, which
is incorporated by reference into this joint proxy statement/prospectus.

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

The following section should be read in conjunction with NPI's consolidated
financial statements and related notes and other financial information included
elsewhere in this joint proxy statement/prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. NPI's actual
results could differ materially from the results contemplated by these forward-
looking statements as a result of certain factors, including those discussed
below and elsewhere in this joint proxy statement/prospectus, particularly
under the heading, "Risk Factors."

Overview

We were incorporated in California in March 1989 and were reincorporated in
Delaware in 1994. Our initial business focus was on networking products based
on fiber distributed data interface, or FDDI, technology, and we obtained a
significant share of the market for FDDI adapter products in the early 1990s.
Because the market for FDDI-based products declined significantly beginning in
1995, we developed a new line of Layer 2 Fast Ethernet switching products that
we first shipped in early 1996. By 1998, the market for our FDDI-based products
and our Layer 2 Fast Ethernet products (together, our legacy products) declined
substantially, and we committed nearly all of our resources to the development
of a new line of Layer 3 Gigabit Ethernet switches (together, our NuWave
products) founded on our NuWaveArchitecture, which combines our advanced design
and our proprietary application-specific integrated circuits, or ASICs. We
commenced limited commercial shipments of our first NuWave product in December
1999 and volume shipments of all NuWave products in 2000.

Cost of revenue is comprised principally of payments to our materials
suppliers and contract manufacturers, final assembly costs, costs associated
with manufacturing and quality functions, inventory management costs and
certain other product costs. Our gross profit has been affected by many
factors, including:

. declines in the average selling price of our products;

. fluctuations in demand for our products;

. the volume of products sold;

. the mix of products sold;

. the mix of sales channels through which our products are sold;

. new product introductions both by us and our competitors; and

. provision for inventory reserves for potential excess inventories.

Generally, we realize higher margins on sales to the reseller channel than
on sales to OEMs. Any change in the mix between the channels or the loss of a
major customer could adversely affect our gross margin, operating results and
financial condition. We experienced significant erosion in the average selling
prices of our legacy products, and the average selling prices of our NuWave
products have also decreased from their levels at introduction.

In transitioning from our legacy business to our NuWave business, we
incurred significant losses in the past four years primarily reflecting
declining revenues of legacy products in conjunction with substantial
investments in research and development to bring NuWave products to market. The
losses continued through the first quarter of 2001 due to a recent slowdown in
the economy, the failure of our NuWave products to achieve significant market
penetration and continuing high levels of research and development expenses.

For the years ended December 31, 2000, 1999 and 1998, sales to Sun
Microsystems accounted for 32%, 36% and 35%, respectively, of NPI's
consolidated net sales. Sun Microsystems was the largest OEM customer

for FDDI-based products. As part of the plan to transition to Layer 3 Gigabit
Ethernet products, in May 2000, NPI informed Sun Microsystems of its decision
to discontinue all FDDI-based products, and Sun Microsystems subsequently
placed a final purchase order of such products of which the shipment occurred
during the first quarter of 2001. For the three months ended March 31, 2001 and
2000, sales to Sun Microsystems represented 18% and 35%, respectively, of
consolidated net sales.

For the three months ended March 31, 2001 and for the year ended December
31, 2000, sales to Minnesota Mining and Manufacturing Company ("3M") accounted
for 17% and 11%, respectively, of NPI's consolidated net sales. No sales were
made to 3M during the three months ended March 31, 2000. 3M is currently the
largest OEM customer for Layer 3 Gigabit Ethernet products. Loss of 3M as an
OEM customer would have a material adverse effect on NPI's consolidated net
sales.

On March 30, 2001, we entered into a series of related agreements with
FalconStor, pursuant to which we purchased 9,792,401 shares of FalconStor's
Series C preferred stock for an aggregate price of $25,000,000, and obtained an
exclusive option to merge with FalconStor. On May 4, 2001, we exercised the
option to merge with FalconStor and entered into a merger agreement with
FalconStor. See more details of this transaction in Notes to Consolidated
Financial Statements. In connection with the merger, our board of directors
implemented a plan to discontinue our NuWave and legacy businesses. After
efforts to find a buyer for these businesses, on June 1, 2001, the last party
that had expressed interest in buying the NuWave and legacy business assets
informed us that it was no longer interested in doing so. As a result, we
determined that the only method of disposal of these assets available to us
would be to wind-down the businesses. The wind-down will include finding
potential buyers or liquidators of any remaining inventories and property and
equipment used in the manufacture and research and development of these
products. It is expected that this wind-down will be substantially concluded by
the end of August 2001. As a result of the decision to discontinue these
businesses, NPI will be a non-operating public shell with no continuing
operations. We expect to present the NuWave and legacy businesses as
discontinued operations in the quarter ending June 30, 2001, with a measurement
date for the purpose of determining the gain or loss on disposal of June 1,
2001.

Results of Operations for the Three Months Ended March 31, 2001 and 2000

Net Sales

Net sales for the three months ended March 31, 2001 (the quarter) were $2
million, compared to $3.3 million for the three months ended March 31, 2000
(the comparable quarter). The decrease in net sales was primarily attributed to
an overall slowdown in the economy, resulting in delayed spending on
communication infrastructure by most enterprises and a significant build-up of
capital equipment inventories in the marketplace and, consequently, causing our
OEM and reseller customers to postpone their purchases of the NuWave products.
In addition, the decrease in net sales was partially due to the winding down of
the legacy business. Sales of legacy products for the quarter totaled $443,000,
compared to $2.1 million for the comparable quarter.

Net sales to OEM customers were $1.2 million for the quarter, which
decreased from $1.8 million for the comparable quarter. Net sales to the
reseller channel decreased to $779,000 for the quarter from $1.5 million for
the comparable quarter. Following a similar downward trend, net sales to North
America and international customers were $1.4 million and $601,000 for the
quarter, compared to $2.2 million and $1.1 million for the comparable quarter,
respectively.

Gross Profit (Loss)

We had a negative gross margin for the quarter, compared to a 24% gross
margin for the comparable quarter. The negative gross margin for the quarter
was primarily attributed to a charge of $4.5 million to provide additional
reserves for potential excess inventories as a result of adverse business
conditions described above.

Research and Development

Research and development expenses were $3.8 million for the quarter,
compared to $2.4 million for the comparable quarter. The increase in research
and development expenses was primarily attributed to the hiring of additional
engineers throughout 2000 and increased spending in professional fees related
to enhancing existing NuWave products and developing new ASICs and products.
Compensation costs increased by $818,000, and professional fees increased by
$539,000.

Marketing and Selling

Marketing and selling expenses were $3.1 million for the quarter, compared
to $2.0 million for the comparable quarter. The increase in marketing and
selling expenses was primarily attributed to the hiring of additional sales
personnel across the U.S. and increased spending in advertising, trade shows
and other marketing activities, in an effort to penetrate the reseller channel
and seek additional OEM customers. Compensation costs increased by $448,000,
and advertising, trade shows and other marketing related expenses increased by
$280,000 in total.

General and Administrative

General and administrative expenses were $1.3 million for the quarter,
compared to $1.0 million for the comparable quarter. The increase in general
and administrative expenses was primarily attributed to increased spending of
$120,000 in investor relations, recruiting activities and information
technology related services. In addition, insurance expenses increased by
$160,000 as a result of an overall tightening of the liability insurance
market.

Merger Related Expenses

In connection with the investment in and the proposed merger with
FalconStor, we incurred $1.1 million of merger related expenses, primarily
related to legal, accounting and investment banking services specifically
provided for this transaction during the quarter.

Interest Income

Interest income for the quarter was $1.4 million, compared to $779,000 for
the comparable quarter. Such increase in interest income was due to a higher
average balance of cash, cash equivalents and short-term investments throughout
the quarter, compared to the comparable quarter during which the net proceeds
of $165 million from the follow-on public offering were received in early March
2000.

Income Taxes

We did not record a tax benefit associated with the net loss incurred, as
the realization of deferred tax assets is deemed uncertain based on evidence
currently available. Accordingly, a full valuation allowance against deferred
tax assets has been provided.

Results of Operations for the Years Ended December 31, 2000, 1999 and 1998

Net Sales

Net sales were $7.5, $10.2 and $28.6 million in 2000, 1999 and 1998,
respectively. The decrease in net sales was primarily attributed to the winding
down of the legacy business throughout 1999 and 2000, as the demand for our
legacy products experienced rapid decline. Net sales of legacy products totaled
$4.2 million in 2000, compared to $10.1 million in 1999 and $28.6 million in
1998. In 2000, the decrease in net sales of legacy products was partially
offset by sales of NuWave products of which volume shipments started in early
2000. Net sales of NuWave products totaled $3.3 million in 2000. Comparing net
sales of legacy products in

1999 and 1998, total unit shipment decreased more than 50% while the average
selling price per unit fell more 10%.

During the second quarter of 2000, the software used in our NuWave products
displayed instability in certain network environments. This software
instability problem caused delay in shipments and product acceptance testing,
reduced orders from customers in the second quarter and negatively impacted our
customer demand in the third quarter and, to a lesser extent, the fourth
quarter of 2000. Consequently, total net sales in 2000 were substantially lower
than originally estimated.

We believe that the software instability issue we experienced during the
second quarter of 2000 has been resolved. However, software and hardware errors
may occur from time to time in new or enhanced products after commencement of
commercial shipments. These potential problems may adversely affect our future
operating results by causing delays in recognition of revenue and causing us to
incur significant warranty and repair costs, diverting the attention of our
engineering personnel from our product development efforts and causing delay or
loss of market acceptance of our products.

Net sales to OEM customers decreased to $4.8 million in 2000 from $5.2 and
$19.4 million in 1999 and 1998, respectively. Net sales to the reseller
channel, following the same trend, decreased to $2.7 million in 2000 from $5.0
and $9.2 million in 1999 and 1998, respectively. Net sales to customers in
North America were $5.6, $5.7 and $19.7 million in 2000, 1999 and 1998,
respectively. The balance of net sales of $1.9, $4.5 and $8.9 million in 2000,
1999 and 1998, respectively, were to Asia and Europe.

Gross Profit/Margin

We had a negative gross margin in 2000, compared to 8% and 40% in 1999 and
1998, respectively. The negative gross margin in 2000 was primarily attributed
to the lower than expected sales volume and a one-time charge of $1.5 million
to provide reserves for potential excess inventory. We expect our gross margin
in the future periods to improve from the current level to the extent sales
volume increases. The decrease in gross margin in 1999 compared to 1998
primarily reflected the competitive pricing pressures on the Fast Ethernet
products as this market reached the commodity stage. In addition, the decline
in production volume of all legacy products resulted in under-utilization of
our manufacturing facilities and excess overhead charges.

Research and Development

Research and development expenses were $11.2, $7.8 and $11.5 million in
2000, 1999 and 1998, respectively. The increase in research and development
expenses in 2000 compared to 1999 was primarily due to the hiring of additional
engineers and increased spending in professional fees and prototype expenses
related to enhancing existing products based on the NuWaveArchitecture and
developing new products and technologies. Compensation costs increased by $1.7
million, and professional fees and prototype expenses increased by $1.2 million
in total. The decrease in research and development expenses in 1999 from 1998
primarily reflected reduction in compensation, overhead costs and project costs
associated with the termination of legacy product development, including the
divestiture of our research and development office in Taiwan in June 1999.

Marketing and Selling

Marketing and selling expenses were $10.7, $6.4 and $6.0 million in 2000,
1999 and 1998, respectively. The increase in marketing and selling expenses in
2000 compared to 1999 was primarily due to increased spending of $1.9 million
in advertising, trade shows and other marketing activities in conjunction with
the launch of NuWave products. In addition, during the second half of 2000, we
rapidly expanded our sales organization by adding sales personnel across the
U.S., in order to effectively penetrate the reseller channel and seek
additional OEM customers, resulting in an increase in compensation costs of
$1.1 million. Beginning in the latter part of 1998 and continuing throughout
1999, we added staff to the sales and marketing group,

including technicians and senior management, and launched advertising campaigns
to draw OEM interest, which was reflected in the increased spending in 1999
compared to 1998.

General and Administrative

General and administrative expenses were $4.7, $3.5 and $3.2 million in
2000, 1999 and 1998, respectively. The increase in general and administrative
expenses in 2000 compared to 1999 was primarily attributed to an increase in
professional fees of $480,000 incurred for recruiting activities, investor
relations and information technology related services. In addition, we incurred
higher insurance expenses starting the fourth quarter of 2000 as a result of an
overall tightening of the liability insurance market. Insurance expenses
increased by $200,000 in 2000 compared to 1999. In 1999, we incurred higher
professional fees, which was the primary factor resulting in increased expenses
in 1999 compared to 1998. These professional fees included the engagement of an
investor relations firm and increased fees paid to information system
consultants to prepare our systems for year 2000 issues.

Restructuring

In August 2000, we approved and announced a plan to divest our manufacturing
facility in Taiwan. Solectron, our contract manufacturer, has agreed to
manufacture all of our products after the divestiture. The objective of this
divestiture is to reduce manufacturing overhead and improve gross margins by
utilizing Solectron's advantages in materials procurement and production
capacity. The divestiture plan consisted of terminating 57 employees in the
manufacturing and the general and administrative functions, selling
manufacturing equipment and closing the manufacturing facility. These actions
resulted in a restructuring expense of $600,000, which included $550,000 for
severance and $50,000 for facility related charges. As of December 31, 2000, we
have paid $410,000 in total for severance and facility related charges. We
completed the divestiture in the first quarter of 2001.

Loss (gain) on Sale of Assets

During the fourth quarter of 2000, we recorded a net loss on sale of assets
of $620,000 in connection with the closure of the manufacturing facility in
Taiwan discussed above. In June 1999, we completed the sale of our research and
development facilities in Hsin-chu, Taiwan, and recorded a gain of $1,055,000,
net of payments of broker fees and severance of $216,000. We divested this
research and development facility to reduce our investment in the legacy
products and to focus our resources on the commercialization of NuWave
products.

Interest Income

Interest income was $7.3 million in 2000, compared to $908,000 and $1.5
million in 1999 and 1998. The increase in interest income in 2000 was due to a
net increase in the aggregate balance of cash, cash equivalents and short-term
investments, of which approximately $165 million was received in March 2000
from our follow-on public offering. The decrease in interest income in 1999
from 1998 was primarily due to the declining balance of cash, cash equivalents
and short-term investments throughout 1999 and 1998.

Income Taxes

We did not record a tax benefit associated with the net loss incurred in
2000, 1999 and 1998, as we deemed that it was more likely than not that the
deferred tax assets will not be realized based on evidence available and,
accordingly, a full valuation allowance was provided. During 1998, we received
an income tax refund of $4 million as a result of the carryback claim of the
1997 net operating loss to offset net income recognized in 1995 and 1994. The
related tax benefit was fully recognized in 1997.

Euro Conversion

We have a wholly-owned subsidiary in the Netherlands, which is one of the 11
European countries participating in the adoption of a common currency, the
Euro, on January 1, 1999. Following the introduction of the Euro, the legacy
currency in each participating country remains as legal tender until January 1,
2002. During the transition period, either the Euro or the legacy currency may
be used to pay for goods and services. Beginning January 1, 2002, participating
countries will issue new Euro-denominated bills and coins, and the legacy
currency will no longer be the legal tender for any transactions after July 1,
2002.

Our subsidiary in the Netherlands is a sales office for the entire European
region. Sales made to all European countries are denominated in US dollars.
Expenses incurred by this subsidiary are currently paid in guilders, the legacy
currency. Sales to all European customers accounted for 11%, 14% and 10% of our
total sales in 2000, 1999 and 1998, respectively; and 6% of our total operating
expenses in 2000, 1999 and 1998 were attributed to this subsidiary. Due to the
immateriality of expenses of the Netherlands subsidiary relative to our
operations as a whole, we believe the Euro conversion will not have any
significant impact to our results of operations during and after the transition
period.

Liquidity and Capital Resources

The aggregate balance of cash, cash equivalents and short-term investments
was $87.6 million at March 31, 2001, compared to $96 million at December 31,
2000. The decrease of $8.4 million was primarily due to the use of cash in
financing our operations, capital expenditures and the repurchase of our common
stock.

Net cash used in operating activities for the quarter was $7.4 million,
which was primarily attributed to our net loss of $12.3 million and decreases
in accounts payable and accrued liabilities of $1.2 million in total, partially
offset by depreciation and amortization of $723,000 and decreases in accounts
receivable, inventories and other assets of $6.1 million in total. Our capital
expenditures totaled $602,000 for the quarter, primarily related to purchases
of test equipment and related software for research and development activities.

In 2000, our board of directors approved a common stock repurchase program,
pursuant to which we are authorized to repurchase up to five million shares of
our common stock. As of March 31, 2001, we have repurchased 3,595,000 shares of
our common stock with a total purchase price of approximately $54.5 million.

Net cash used in operating activities in 2000 was $26.0 million, which was
primarily attributed to our net loss of $22.2 million and increases in accounts
receivable and inventories of $1.1 million and $6.8 million, respectively,
partially offset by depreciation and amortization of $2.5 million and increases
in accounts payable and accrued liabilities of $1.9 million in total. We expect
negative cash flows from operations to continue until we realize operating
income. In 1999, net cash used in operating activities was $13.7 million, which
was principally attributed to the net loss of $15.0 million, partially offset
by a decrease in accounts receivable of $3 million.

Our capital expenditures totaled $3.8 million in 2000, which included
approximately $640,000 of leasehold improvements and furniture and fixtures
added to the new research and development facility in Long Island, New York.
The relocation to this new research and development facility was completed in
November 2000. The balance of the capital expenditures in 2000 was primarily
related to purchases of test equipment and related software for research and
development activities. In 1999, capital expenditures totaled $2.6 million, of
which approximately $650,000 was related to capital expenditures for the
corporate headquarters in Fremont, California.

On April 2, 2001, we paid FalconStor $25,000,000 to purchase 9,792,401
shares of FalconStor's Series C preferred stock at a price of $2.553 per share,
and, on May 4, 2001, we entered into a merger agreement with FalconStor. In
connection with the merger, we engaged an investment bank to explore strategic
alternatives for

our NuWave and legacy businesses, which may include selling our NuWave
technology and its related inventories and equipment, terminating some or all
employees, office leases and contracts with certain vendors, including
Solectron, our contract manufacturer. We expect to incur additional merger
related expenses, such as legal, accounting, financial advisor and printing
fees.

Our principal sources of liquidity are our cash, cash equivalents and short-
term investments that are expected to be used for general corporate purposes,
including expansion of operations and capital expenditures. We may also use
these capital resources to acquire or invest in businesses, technologies,
products or services that are complementary to our business. From time to time
we have discussed potential strategic acquisitions and investments in third
parties. Other than as disclosed in this joint proxy statement/prospectus, we
currently have no agreements or commitments regarding any acquisitions or
investments. In addition to our cash, cash equivalents and short-term
investments, we also have a $5.0 million revolving bank line of credit, which
expires on June 1, 2001, and is renewable on an annual basis. Borrowings under
the line of credit bear interest at the bank's prime rate. There were no
borrowings under the line of credit as of March 31, 2001.

We believe that our current balance of cash, cash equivalents and short-term
investments will be sufficient to satisfy our working capital and capital
expenditure requirements for at least the next 12 months.

Recent Accounting Pronouncement

In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. In June 2000, SFAS No. 133 was amended by SFAS
No. 138, which amended or modified certain issues discussed in SFAS No. 133. We
adopted SFAS No. 133 and SFAS No. 138 during the quarter ending March 31, 2001.
To date, we have not engaged in derivative or hedging activities. The adoption
of SFAS No. 133 and SFAS No. 138 did not have any material impact on our
results of operations or financial condition.

Quantitative and Qualitative Disclosures about Market Risk

Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuations in interest rates, which may affect the
interest income and the fair values of our investments. We manage the exposure
to financial market risk by performing ongoing evaluation of our investments
and investing in short-term, high quality debt securities, of which the
majority mature within 12 months. In addition, we do not use investments for
trading or other speculative purposes. As of December 31, 2000, the average
rate of return on the investments was approximately 6.4%. A hypothetical 10%
fluctuation in interest rates would change the interest income by approximately
$614,000 per annum. In addition, due to the relative short maturities of our
investments as of December 31, 2000, we expect that the impact of fluctuations
in interest rates on the fair values of investments is immaterial. However,
from time to time, we may adjust the average maturity of our investments, in
order to maximize the rate of return on investments considering the overall
market condition, as well as when our liquidity requirement changes. Such
adjustment to the average maturity may affect the magnitude of the fluctuation
in the fair value of our investments in the event interest rates increase or
decrease.

BUSINESS OF FALCONSTOR

Overview

FalconStor, Inc. is a provider of storage networking infrastructure
software. FalconStor's open software approach to storage networking enables
companies to capture and manipulate the expanding volume of enterprise data and
existing storage solutions, without rendering those solutions obsolete. By
moving the "intelligence" of storage management from hardware to software,
FalconStor allows companies to adopt Fibre Channel technology while maximizing
their prior investments in Ethernet information technology, or IT,
infrastructure and taking full advantage of the ubiquitous connectivity of the
industry-standard internet protocol, or IP. FalconStor's software technology
can rapidly embrace various input/output, or I/O, interface, communications
standards and innovative storage services as they are introduced. FalconStor's
flagship IPStor product began shipping in May 2001. IPStor is a software
solution that combines industry-standard connectivity with next-generation
network storage services, offering large, widely-dispersed enterprises a
complete storage management solution that includes all four of the key service
categories: universal connectivity supporting both Fibre Channel and IP/iSCSI-
based storage provisioning; virtualization; storage services such as fail-over,
mirroring, replication and snapshot; and unified storage area network, or SAN,
and network-attached storage, or NAS. FalconStor's commitment to open standards
and universal connectivity has been endorsed by industry leaders such as
Adaptec, Cisco, Crossroads, Emulex, Gadzoox, IBM, NEC and QLogic.

FalconStor, with principal executive offices in Melville, New York, is a
Delaware corporation that was incorporated in February 2000.

Industry Background

Rapid Growth of Enterprise Data and Development of Storage Management
Solutions

The rapid growth of data-intensive business applications has increased the
amount of mission-critical enterprise data and, consequently, the need for
dedicated storage. Enterprises are frequently discovering that their existing
storage infrastructure has become inefficient and unable to address evolving
storage requirements. Business enterprises have historically attempted to
support and manage data requirements by directly attaching storage devices to
the individual servers on a local area network, or LAN. Servers communicate in
this direct attached environment using the small computer systems interface, or
SCSI. The SCSI protocol, however, has several drawbacks, including a short
transport distance and an inability to support more than a limited number of
connections. According to IDC, an industry research firm, advances in
technology increased LAN transmission speeds by 100 times during the 1990's,
while storage-to-server data transmission speeds utilizing the SCSI interface
have increased less than 20 times during this period. The result has been
significant congestion at the point of communication between storage systems
and servers.

In order to address these increased storage needs, enterprises are deploying
large RAID devices that are capable of handling multiple Terabytes, or TB (one
trillion bytes), of data. According to Gartner Dataquest, an industry research
firm, average desktop consumption of storage space has grown from 1.4
Gigabytes, or GB (one billion bytes), in 1997 to 3.5 GB in 1999 and is
projected to reach 14.0 GB in 2003. For corporate data centers, the global
storage capacity of RAID devices is expected to grow to 1,300,000 TB by 2003 at
a compounded annual growth rate of 79%. This growth in data storage capacity
has been driven by a number of factors including:

. the rapid expansion of data intensive applications such as e-mail, data
mining and enterprise resource planning;

. the increase in complexity of enterprise computing environments and use
of multiple, incompatible servers and operating systems;

. the need to store redundant copies of enterprise data for business;

. the increase in the number of users accessing computer networks;

. the rapid growth of web hosting, digital video and other multimedia
applications; and

. the decline in the cost of storage (on a per bit basis) as a result of
advances in storage technology.

Accordingly, storage network management has become increasingly more complex
and costly, reflecting the shortcomings and inefficiencies of existing storage
architectures. A locally-attached storage system requires that the storage
devices be managed individually at each server. Also, backup must be done
locally at each server, resulting in high hardware, software and management
costs. Alternatively, it is possible to deploy a single, central backup server
that uses a software agent at each individual server to move data over the
local area network, or LAN, and into the central storage device. However, this
backup process causes network congestion on the LAN, and thus is only performed
during off-peak business hours. Many enterprises operate continuously, which
makes this type of backup procedure impractical. In addition, other servers
cannot share storage space available locally to one server. The space
requirements of various application servers are unpredictable and often cause
IT professionals to over-estimate the amount of storage space required.
Constantly over-estimating storage requirements can be expensive. However,
increasing the amount of data storage space of a particular server that has run
out of storage space is labor intensive and causes service interruption.

Storage area networks, or SAN, and network-attached storage, or NAS, are two
solutions that allow enterprises to reorganize a storage system into a
separately managed storage farm and server farm. The separation of the storage
and server farms creates a more efficient storage network and eventually leads
to a reduction of overall network management complexity. However, SAN and NAS
solutions are two distinct approaches to storage management and address two
separate storage needs.

A NAS appliance is a storage device with a built-in network interface,
network operating system, and storage allocation software. A NAS applicance can
be connected directly to the corporate LAN, making itself accessible through
the use of standard file transport protocols. Users and groups are assigned
read/write privileges and space quota. As the number of users grows, and as
free space becomes low, additional NAS appliance can be plugged in. NAS
simplifies how storage is allocated among clients, however, it does not address
enterprises' need for data backup. Enterprises are still required to run data
backup procedures from a central backup server or to perform backup procedures
unconventionally, such as using proprietary software supplied by the NAS
vendor. Using additional proprietary software leads to increases in management
overhead. In addition, NAS still does not solve the enterprise customer's need
for rapid and scalable data access.

The most effective solution for data-intensive servers is a SAN. In a SAN,
the storage devices are detached from the server, centralized in a storage
farm, and re-connected to the server through a high-speed path. This
configuration increases the overall speed of the network and works well for
data-intensive application servers.

SAN NAS
--------------------------------------------------------------------------------
Pros: Pros:

. Increased data availability . Lower management costs through simplified
. Increased scalability storage process
. Independent server and storage management . File sharing capabilities across multiple platforms
. Scalable architecture . Allows storage subsystems to connect
. Reduced LAN congestion directly onto the LAN
. Increased data transfer rates
. Any-to-any connectivity

Cons: Cons:

. High cost of installation . Inefficient scalability
. Vendor interoperability . Constrained LAN data transmission speeds
. Separate Fibre Channel infrastructure and . Additional proprietary hardware and software
components
. Security concerns

Some corporate data centers are using Fibre Channel to fill their need for
centralized storage management. In 1992, Fibre Channel emerged as a way to
implement a SAN because it was the only viable gigabit-speed transport at that
time. Fibre Channel protocol is an ideal solution for storage traffic because
it can reliably move large blocks of data at high speeds. Fibre Channel can
efficiently move megabytes of data in a single transaction.

Fibre Channel was designed as a network connection tool and did not address
many storage management issues such as:

. quality-of-service;

. snapshot;

. replication;

. mirroring; and

. virtualized storage.

Fibre Channel is essentially an enhanced transport delivery mechanism among
distant hosts and storage devices. Additionally, there is no way to supervise
the data activities or perform data moving operations from a central location.
This presents a security problem for enterprises that want to control a
particular host's ability to access a particular drive. Fibre Channel SANs are
also subject to proprietary standards that reduce the ability of different
storage devices to communicate with each other. This incompatibility raises the
total cost of a storage network because enterprises often use storage
infrastructure from a single vendor.

Fibre Channel SANs also require additional hardware or software to improve
access control and to provide disk sharing.

Storage appliance makers have also started to make high-end, sophisticated
RAID devices, large cabinets with many drives and virtual volume managers to
divide their storage space into individually addressable virtual drives.
Virtual drives enable the storage space to be shared effectively by many hosts.
However, virtualization is only within one cabinet; it is impossible to
virtualize storage resources across multiple cabinets.

There are many fundamental storage security and connectivity issues that are
not addressed by Fibre Channel SAN that require complicated solutions to
address these inefficiencies. Enterprises have been forced to accept a highly
complex, multi-vendor solution with disjointed management tools, reports, and
maintenance procedures to manage their network storage needs.

Market Opportunity

There is a market opportunity emerging for storage networking infrastructure
software that can address the shortcomings of current solutions. As storage
area networks continue to grow in popularity and complexity, innovative
software products will be required to improve the management and transport of
data within an enterprise. Gartner Group estimates that the overall market for
storage management software will grow from $4.2 billion in 1999 to $14.7
billion in 2004, representing a compounded annual growth rate of 28.5%.

Storage virtualization software addresses many of the shortcomings of
current storage network solutions. This software is used to divide available
storage space into virtual volumes without regard to the physical layout of the
actual storage devices. Virtual volumes are not physical storage devices, and
they can be created, expanded, deleted, moved, and selectively presented,
independent of the storage subsystem on which data is actually stored. Storage
virtualization software will allow enterprises:

. to consolidate small computer systems interface, or SCSI, Fibre Channel
and IP storage devices from multiple vendors into a universally
accessible storage pool;

. to connect heterogeneous servers and storage devices and provide greater
functionality and scalability in network storage environments; and

. to preserve investments in legacy storage devices and facilitate the more
cost effective deployment of SANs from different vendors.

In addition, storage virtualization software will provide a storage
operating system for advanced management applications including snapshot,
remote mirroring, and virtual tape.

The storage management challenge led to the development of NAS and SAN
systems, two innovative ways of addressing the storage problem. These two
storage systems do not compete; both are needed by corporate data centers. NAS
represents a quick and simple solution to add general purpose, shareable,
storage space to users and groups and to some application servers that are not
access-intensive. SAN represents a way to separate the server and storage into
two independently managed systems, thereby simplifying the complexity of the
overall information technology, or IT, infrastructure. Fibre Channel, a high-
speed network connection system, has emerged as a viable means to implement a
SAN. However, a pure Fibre Channel SAN alone does not address all the problems
in the areas of connectivity, storage virtualization and storage services.

In order to realize the full potential benefits of storage networks, storage
infrastructure software must also provide connectivity with existing data
networking protocols such as TCP/IP. Enterprises have made substantial
investments in developing their IP networks, and IT professionals are quite
familiar with this networking technology. Storage transport protocols such as
iSCSI, which is compatible with TCP/IP, are emerging to address the enterprise
requirement for convergence between storage and data network technology. IP
compatibility will allow enterprises to connect Fibre Channel SANs across IP-
based wide area networks, and will allow enterprises to leverage their
knowledge of this technology to lower the cost of storage networks. The Company
believes that a market opportunity exists for an intelligent storage networking
software platform that can provide virtualization coupled with advanced
management applications, unified SAN and NAS access and IP connectivity.

FalconStor's Solution

FalconStor's IPStor, an IP/iSCSI-enabled storage networking infrastructure
software, combines the best features of first-generation SANs, such as high
data availability and performance, with the best features of IP networks, such
as product compatibility, proven standards, familiar technology and network
scalability. FalconStor offers fully interoperable products that allow
enterprises to build their storage networking system, using existing
infrastructure, with high-performance, high-availability, manageability and
scalability. By utilizing the connectivity of IP via Ethernet (Fast and/or
Gigabit), FalconStor's IPStor solution greatly expands the reach of the Fibre
Channel SAN while providing the ability to include NAS file sharing under a
unified

management system and delivering the expected benefits of SAN and NAS without
requiring significant hardware purchases. FalconStor's objective is to leverage
IT departments' familiarity with IP to reduce network management costs and to
allow customers to optimize the benefits from existing storage devices. Linking
servers and storage devices over IP network environments creates the benefits
of having a homogeneous network capable of handling all storage traffic.
FalconStor's IPStor is positioned to take advantage of existing IP
infrastructure but also allows enterprises to utilize Fibre Channel and other
emerging storage industry devices and protocols to deliver a comprehensive
storage solution. In addition, IPStor provides the following features:

. Boundless Virtualization. IPStor virtualizes all storage resources across
device, RAID, vendor/brand, and interface boundaries. Any number of
cabinets and/or drives can form a large virtual drive, and a large RAID
drive can be divided into any number of smaller virtual drives to
facilitate sharing across servers or platforms. This enables multiple
application servers to share a single large RAID subsystem. Current Fibre
Channel storage applications cannot do this.

. Rapid Deployment. IPStor is built on open industry standards to provide
easy consolidation of current storage resources and platform neutrality
across operating systems and storage devices. Preserving data allows for
IPStor's rapid deployment because it eliminates the need to perform
migration tasks involving backing up, reformatting and restoring existing
data. IPStor enables IT departments to leverage their expertise in
designing and managing IP networks to solve the storage access problem.
Since IPStor supports both Fibre Channel devices and SCSI devices without
requiring converter boxes, existing data found on the storage devices can
be preserved.

. Scalable Performance. IPStor's IP-based transport mechanism and device-
independent architecture enable IPStor's performance to scale according
to the speed of the processor, the underlying network, the peripheral
interface and the storage device, which will allow users to take
advantage of technological advancements (e.g., Fibre Channel moving from
1 to 2 GB, Gigabit Ethernet evolving from 1 to 10 GB, SCSI bus
accelerating from 160 to 320 MB/s). IPStor enables enterprises to adapt
to rapid changes within the storage market.

. Centralized Management. IPStor provides a Java-based management console
to enable an administrator to manage physical devices, create/manage
virtual drives, define storage management policies, perform end-to-end
diagnostics, and generate reports. IPStor provides centralized end-to-end
monitoring and diagnostics for the entire storage network so that an IT
professional can efficiently operate and manage a heterogeneous storage
network.

. Enterprise-wide Mirroring/Replication with Snapshot. By leveraging IP and
Fibre Channel connectivity, IPStor can perform volume mirroring and
replication across the SAN, LAN, and wide area network, or WAN. Since
IPStor is optimized for data-movement, the mirroring and replication can
be performed without relying on expensive "intelligent controllers" found
only on high-end storage cabinets. The IPStor server's snapshot
capability allows the replication to be performed with integrity, which
addresses the need for rapid backup of enterprise data that is used by
multiple people.

. Zero-impact Backup and Restore. The IPStor server can run industry-
standard backup software to perform ultra-fast, server-free and LAN-free
backup and disaster recovery with zero impact on the application server.
This is essential in a traditional direct attached storage, or DAS,
architecture.

. High-Availability Configuration. IPStor uses two servers to connect to
the storage devices, providing dual-path connections. Both IPStor servers
can be configured to serve requests from different IPStor SAN clients
(running on the application servers) and verify the operational status of
the other IPStor server. If one IPStor server fails, the other alerts the
network supervisor and assumes the additional workload from the failed
server automatically without operator intervention. This configuration
allows constant access to enterprise data, which is critical to
successful operations.

. Advanced Storage Network Security. IPStor offers key-based authentication
to provide comprehensive data network security and prevent application
servers from accessing unauthorized disk space.

Furthermore, because IPStor offers end-to-end storage services using the
standard IP protocol, any off-the-shelf IPSec compliant VPN products can
be used to provide encryption to ensure end-to-end data security.
Currently, Fibre Channel SANs lack a centralized device that supervises
data movement activities, which presents a security problem for
enterprises that want to control specifically a network user's access to a
particular drive.

. Quality of Service. Since SAN or NAS storage services are provided by the
IP server over the Gigabit Ethernet switch, the IPStor server can be
configured to maintain network traffic flow and prevent an aggressive
server from monopolizing the communications bandwidth.

Business Strategy

FalconStor aims to become a leading IP storage networking infrastructure
software provider to enterprises worldwide. FalconStor strives to achieve this
objective through the following strategies:

. Maintain Leadership in IP Storage Networking Infrastructure
Software. FalconStor strives to play a significant role in creating and
defining the IP storage networking infrastructure software market. The
storage networking infrastructure software market is defined by rapid
change, and FalconStor plans to continue to focus its research and
development efforts to create innovative solutions.

. Increase Market Penetration and Brand Recognition Through Enhanced Sales
and Marketing Efforts.

FalconStor plans to increase its sales force and to promote its brand
aggressively by:

. advertising in key business and trade periodicals;

. participating in industry events, conferences and trade shows; and

. targeted promotions and public relations campaigns.

. Expand Internationally. FalconStor recently opened its European
headquarters, and plans to build rapidly its operations capabilities in
Europe. FalconStor also opened headquarters in Asia and believes that it
is developing a strong business presence in the Asia/Pacific Rim.

. Expand Technologies and Capabilities Through Strategic Acquisitions and
Alliances. FalconStor believes that opportunities exist to expand through
acquisitions its technological capabilities, product offerings and
services. When evaluating potential acquisitions, FalconStor will focus
on transactions that enable it to:

. acquire important enabling technology;

. acquire complementary applications;

. realize marketing, sales, customer and technological synergies; or

. add key personnel.

. Seek OEM Relationships with Industry Leaders and Storage Service
Providers. FalconStor intends to establish original equipment
manufacturer partnerships with switch, storage, appliance and operating
system vendors. In addition, FalconStor will seek relationships with
storage service providers to broaden the market for its product. These
relationships will offer storage service providers access to FalconStor's
proprietary technology to improve upon their service offerings and enable
FalconStor to participate in the growing market for outsourced storage
services. In addition, FalconStor's IP-based solution is intended to
simplify the hardware requirements of storage service providers and allow
them to deploy rapidly outsourced storage services for clients without
being subject to distance limitation.

FalconStor's Products

FalconStor products utilize off-the-shelf, industry-standard components such
as Gigabit Ethernet, Fibre Channel/SCSI storage devices and the Linux operating
system to construct IP-based storage networking infrastructure. Under this open
architecture, the storage network consists of the following components:

. IPStor Server. The FalconStor IPStor server software runs on a standard
Linux appliance, which virtualizes the storage devices attached to it
using a Fibre Channel or SCSI interface. The server receives data
input/output requests from remote IPStor SAN Clients over IP, Fibre
Channel, and/or iSCSI, and carries out the operations on the target
device. To support mission-critical computing, IPStor server supports
active cluster configuration for fault tolerance and
mirroring/replication, and snapshot operations for redundancy. An
optional NAS module can be installed to provide IP-connected application
servers or user clients with file level shares.

. IPStor SAN Clients. The IPStor SAN client acts as a virtual SCSI adapter
to enable a network's operating system (e.g., Windows NT 4, Windows 2000,
Linux, Solaris) to access the virtualized SAN storage resources attached
to IPStor server. As the network's operating system accesses the storage
resources, the input/output requests and data are routed to the IPStor
servers using FalconStor's SAN/IPTM transport protocol. SAN/IP is an IP-
based, high performance transport mechanism with windowing and flow
control to ensure end-to-end reliability. FalconStor also plans to
support the emerging iSCSI standard protocol when it becomes available.

. NAS Clients. Since IPStor provides standard SMB/CIFS and NFS file shares,
any Windows/Unix client can access the share (if authorized) on the LAN
via the standard network redirector of the OS. No FalconStor software
driver is necessary at these clients.

. IPStor Java-based Manager Console. A single GUI console provides a system
supervisor with reporting, device discovery, security, SAN/NAS resource
mapping, event notification and end-to-end diagnostics capability.

Research and Development

The storage networking infrastructure software services industry is subject
to rapid technological advancements, changes in customer requirements,
developing industry standards, and regular new product introductions and
enhancements. As a result, FalconStor's success, in part, depends upon its
ability to continue to improve its existing solutions and to develop and
introduce new products at a cost-effective and timely basis. There can be no
assurance that FalconStor will be able to successfully develop new products to
address new customer requirements and technological changes, or that such
products will achieve market acceptance.

FalconStor believes that its continued investment in research and
development is critical to its ability to continue to develop and introduce new
and enhanced products addressing emerging market needs.

FalconStor's research and development staff consisted of 44 employees as of
December 31, 2000. Research and development expenses, primarily consisting of
personnel expenses, were $1,363,668 in 2000. FalconStor anticipates that
research and development expenses will increase in 2001.

Sales, Marketing and Customer Service

FalconStor plans to sell its products primarily through relationships with
original equipment manufacturers, resellers and distributors, and a direct
sales force.

. Original Equipment Manufacturer Relationships. These original equipment
manufacturers will collaborate with FalconStor to integrate FalconStor's
products into their own product offerings or resell FalconStor's products
under their own label.

. Reseller and Distributor Relationships. FalconStor currently plans to
enter into reseller and distributor agreements to help sell its product
in various geographic areas. FalconStor's resellers and distributors will
market the entire IPStor product suite and receive a discount on products
sold.

. Direct Sales Force. FalconStor is currently building a direct sales staff
with responsibilities for pursuing and managing larger customers, as well
as providing support to distributors, resellers and original equipment
manufacturers. FalconStor has been hiring additional salespersons and
expects to continue to do so.

FalconStor's marketing department consists of marketing professionals
dedicated to advertising, public relations, marketing communications, events
and channel partner programs. FalconStor's marketing efforts focus on building
brand recognition and developing leads for the sales force.

A dedicated team of FalconStor professional services people are also
available to hand-hold customers and partners through out the product life
cycle of IPStor deployments. The professional services team includes seasoned
storage architects who can assist in the assessment, planning/design,
deployment, and testing phases of an IPStor deployment project, and a technical
support group for post-deployment assistance and on-going trouble-shooting.

Competition

As the demand for IP-based network storage services increases, more
competitors will enter this high-growth market segment. There is no single
entity that directly competes with FalconStor. Although there are several
companies attempting to fill specific needs for SCSI-IP connectivity, Fibre
Channel-IP connectivity and SAN storage management, these solutions require
their own management platform, thereby potentially increasing overall system
complexity. Currently, FalconStor is the only software-based solution that has
a comprehensive architecture providing SAN, NAS and simplified storage
management in a single, well-managed storage system using standard, off-the-
shelf components. However, some of FalconStor's product capabilities are in
competition with a number of significant players with substantially greater
financial and other resources, including DataCore and StorageApps.
Additionally, Cisco Systems and Nishan Systems both announced IP-based storage
solutions. However, both of these are hardware solutions designed to provide
IP-to-SCSI and/or IP-to-Fibre Channel conversions, thereby giving application
servers the ability to access SCSI or Fibre Channel storage devices.
FalconStor's product provides not only IP-based connectivity to application
servers, but also "storage virtualization' and "storage services' such as high-
availability, mirroring, replication, snapshot, and fast backup/restore
enablers. In fact, both Cisco and Nishan are potential OEM customers to
FalconStor's virtualization and storage services software. There is currently
no other known software company providing all of IP-based connectivity,
virtualization, and storage services. FalconStor believes that the principal
competitive factors affecting its market include product features such as
scalability, data availability, ease of use, price, reliability,
hardware/platform neutrality, customer service and support.

FalconStor's success will depend largely on its ability to generate market
demand and awareness of our IPStor software suite, as well as to develop
additional or enhanced products in a timely manner. FalconStor's success will
also depend on its ability to convince potential partners and customers of the
benefits of its software. FalconStor's future and existing competitors could
introduce products with superior features and existing competitors could
introduce products with superior features, scalability and functionality at
lower prices than its products and could also bundle existing or new products
with other more established products in order to compete with FalconStor.
Increased competition is likely to result in price reductions and reduced gross
margins, which could harm its business.

Intellectual Property

FalconStor's success is dependent upon its proprietary technology.
Currently, the IPStor software suite is the core or our proprietary technology.
FalconStor currently has three pending patent applications and pending
trademark applications related to its IPStor product.

FalconStor seeks to protect its proprietary rights and other intellectual
property through a combination of copyright, trademark and trade secret
protection, as well as through contractual protections such as proprietary
information agreements and nondisclosure agreements. The technological and
creative skills of its personnel, new product developments, frequent product
enhancements and reliable product maintenance are essential to establishing and
maintaining a technology leadership position.

FalconStor generally enters into confidentiality or license agreements with
its key technical employees, officers, consultants and corporate partners, and
generally controls access to and distribution of its software, documentation
and other proprietary information. Despite FalconStor's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use its products or technology. Monitoring unauthorized use of its
products is difficult, and there can be no assurance that the steps taken by
FalconStor will prevent misappropriation of its technology, particularly in
foreign countries whose laws may not protect its proprietary rights as fully as
do the laws of the United States.

Properties

FalconStor's principal development center and executive and administrative
offices are located in a 6,721 square-foot leased facility in Melville, New
York. FalconStor also has leased offices for development, sales and marketing
personnel which total an aggregate of approximately 6,200 square feet in Paris,
France; Taipei, Taiwan; and Tokyo, Japan. Initial lease terms range from one to
four years, with multiple renewal options.

Legal Proceedings

FalconStor is not currently a party to any material litigation. From time to
time, however, FalconStor may be subject to claims and lawsuits arising in the
normal course of business.

Employees

As of June 21, 2001, FalconStor had 98 full-time employees, including 25 in
sales and marketing, 56 in research and development and eight in general
administration. FalconStor is not subject to any collective bargaining
agreements and believes its employee relations are excellent.

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

The following section should be read in conjunction with FalconStor's
consolidated financial statements and related notes and other financial
information included elsewhere in this joint proxy statement/prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. FalconStor's actual results could differ materially from the
results contemplated by these forward-looking statements as a result of certain
factors, including those discussed below and elsewhere in this joint proxy
statement/prospectus, particularly under the heading, "Risk Factors."

Overview

FalconStor was incorporated in Delaware in February 2000 for the purpose of
developing, manufacturing and selling data storage network software. Our unique
open software approach to storage networking enables companies to better
capture and manipulate the expanding volume of enterprise data and existing
storage solutions, without rendering those solutions obsolete. By moving the
intelligence of storage management from hardware to software, we allow
companies to adopt the state-of-the-art Fibre Channel technology while at the
same time, leverage their prior investments in Ethernet information technology
(IT) infrastructure, taking full advantage of the ubiquitous connectivity of
the industry-standard Internet Protocol (IP). Our software technology can
rapidly embrace various input/output (I/O) interface, communications standards
and innovative storage services as they are introduced. Our unique architecture
has been recognized and licensed by partners in Ethernet Switch, SCSI-to-Fibre
Channel Router, Disk-Subsystem and Appliances spaces. Our flagship IPStor
product, which began shipping May 2001, is today the only available all-
software solution that combines industry-standard connectivity with next-
generation network storage services, offering large, distributed enterprises a
complete storage management solution that includes all four of the key service
categories: universal connectivity supporting both Fibre Channel and IP/iSCSI-
based storage provisioning; virtualization; storage services such as fail-over,
mirroring, replication and snapshot; and unified SAN (storage area network) and
NAS (network-attached storage).

In March 2000, we raised $3,000,000 from the issuance of 3,000,000 shares of
Series A preferred stock and raised an additional $7,000,000 in September 2000
from the issuance of 4,900,000 shares of Series B preferred stock. Our
operations since inception were mainly comprised of the development of our core
data storage network software product. During 2000 and the first quarter of
2001, we were in the development stage of operations, as a result there were no
significant revenues generated from our planned principal operations. The
revenues generated in 2000 were from network consulting services.

On March 30, 2001, we entered into a series of related agreements with NPI
pursuant to which NPI purchased 9,792,401 shares of our Series C preferred
stock for an aggregate price of $25,000,000, and obtained an exclusive option
to merge with us. On May 4, 2001, NPI exercised the option and entered into a
merger agreement with us.

Results of Operations for the Three Months Ended March 31, 2001

Since FalconStor did not begin operations until February 10, 2000, there
were no significant activities for the three months ended March 31, 2000. As a
result the following management discussion and analysis does not include
comparisons to prior periods.

Revenues

We did not generate any revenues for the three months ended March 31, 2001
since our software was still in the development process and we did not yet
begin shipping our product. Future revenues are expected to be derived from
software licenses and maintenance fees related to the software.

Cost of Revenues

For the three months ended March 31, 2001 we did not incur any cost of
revenues since we did not begin shipping our product. In the future, cost of
revenues are expected to be mainly comprised of production costs and shipping
costs related to software licenses and personnel costs related to technical
support.

Software Development Costs

Software development costs were $961,492 for the three months ended March
31, 2001 and were mainly comprised of personnel related expenses. Costs
incurred during the quarter were related to the development of our core storage
networking infrastructure software product. Through March 31, 2001, no software
development costs were capitalized. Software development costs are expected to
increase in the future as we continue to modify and enhance our product.

Selling and Marketing

Selling and marketing expenses were approximately $1.1 million for the three
months ended March 31, 2001 and were mainly comprised of personnel costs,
travel and entertainment, public relations expense, trade shows and costs
associated with our sales offices in Taiwan and France. Selling and marketing
expenses are expected to increase in the future as additional sales personnel
are hired and marketing efforts are initiated in order to sell and promote our
software. Additionally, we will incur commission expense, and increased travel
and entertainment and public relation expenses.

General and Administrative

General and administrative expenses were $885,058 for the three months ended
March 31, 2001. These expenses were mainly comprised of personnel costs,
professional fees and rent. General and administrative expenses are expected to
increase in the future to support our overall growth.

Interest Income

Interest income was $78,652 for the three months ended March 31, 2001.
Interest income was earned on cash and cash equivalents, which was raised from
the issuance of Series A and B convertible preferred stock.

Income Taxes

We did not record a tax benefit associated with the pre-tax net loss
incurred from the period from inception (February 10, 2000) through March 31,
2001, as we deemed that it was more likely than not that the deferred tax
assets will not be realized based on our development stage operations and,
accordingly, we provided a full valuation allowance against the deferred tax
asset.

Results of Operations for the Period From Inception (February 10, 2000) Through
December 31, 2000

Since 2000 was our first year of operations, management's discussion and
analysis does not include any comparisons to prior periods.

Services Revenues

Services revenues were $143,294 for the period from inception (February 10,
2000) through December 31, 2000. These revenues were comprised of network
consulting fees, which were billed on a time and materials basis and recognized
as revenue when the services were performed. We do not expect network
consulting fees to comprise a significant percentage of revenues in the future.
Future revenues are expected to be derived from software licenses and
maintenance fees related to the software.

Cost of Revenues

Cost of revenues in 2000 were $223,689 and were comprised of salaries of
personnel working on network consulting contracts. The cost of salaries were
greater than the revenues generated from these contracts, which resulted in a
gross loss for 2000. In the future, cost of revenues are expected to be mainly
comprised of production costs and shipping costs related to software licenses
and personnel costs related to technical support.

Software Development Costs

Software development costs were $1,379,260 in 2000 and were mainly comprised
of personnel related expenses. Costs incurred in 2000 were related to the
development of our core data storage network software product. Through December
31, 2000, no software development costs were capitalized. Software development
costs are expected to increase in the future as we continue to modify and
enhance our product.

Selling and Marketing

Selling and marketing expenses were $327,142 in 2000 and were mainly
comprised of personnel costs. Selling and marketing expenses are expected to
increase in the future as additional sales personnel are hired and marketing
efforts are initiated in order to sell and promote our software. Additionally,
we will incur commission expenses, increased travel and entertainment and
public relation expenses.

General and Administrative

General and administrative expenses were $534,473 for the period from
inception (February 10, 2000) through December 31, 2000. These expenses were
mainly comprised of professional fees, personnel costs and rent. General and
administrative expenses are expected to increase in the future to support our
overall growth.

Interest Income

Interest income was $225,551 for the period from inception (February 10,
2000) through December 31, 2000. Interest income was earned on cash and cash
equivalents, which was raised from the issuance of Series A and B preferred
stock.

Income Taxes

We did not record a tax benefit associated with the pre-tax net loss
incurred from the period from inception (February 10, 2000) through December
31, 2000, as we deemed that it was more likely than not that the deferred tax
assets will not be realized based on our development stage operations and,
accordingly, we provided a full valuation allowance against the deferred tax
asset.

Recent Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, as amended by SFAS No. 137.
In June 2000, SFAS No. 138 was issued which amended certain provisions of SFAS
No. 133. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In accordance with SFAS No. 133,
an entity is required to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of

transactions that receive hedge accounting. The implementation of SFAS No. 133
did not have a significant impact on our consolidated financial statements for
the quarter ended March 31, 2001.

Liquidity and Capital Resources

Our cash and cash equivalents at March 31, 2001, was $5,483,685. Between
April 1, 2001 and May 4, 2001 we received an additional $33,150,000 from the
sale of 12,986,079 shares of Series C preferred stock.

Net cash used in operating activities for the period from inception
(February 10, 2000) through March 31, 2001 was approximately $3,500,000, which
was primarily attributed to our net loss of approximately $5,000,000 and
increases in accounts receivable and prepaid expenses and other current assets
totaling $306,625. These amounts were partially offset by depreciation and
amortization, non-cash professional services expense, equity-based compensation
earned and increases in accounts payable, accrued expenses and deferred
revenue, which totaled approximately $1,800,000 in the aggregate.

Net cash used in investing activities for the period from inception
(February 10, 2000) through March 31, 2001 was approximately $1,000,000, which
was related to the purchase of property and equipment of $784,679, and the
payment of a security deposit of $220,099 related to our office space lease.

Net cash provided by financing activities was approximately $10,000,000. We
raised net proceeds of approximately $10,000,000 through the issuance of Series
A and B preferred stock. Additionally, we raised $55,000 through the issuance
of common stock.

Our principal sources of liquidity are cash and cash equivalents, which are
expected to be used for general corporate purposes, including expansion of
operations and capital expenditures.

We believe that our current balance of cash and cash equivalents, along with
the $33,150,000 we received between April 1, 2001 and May 4, 2001, will be
sufficient to satisfy our working capital and capital expenditure requirements
for at least the next 12 months.

FALCONSTOR SOFTWARE'S MANAGEMENT AFTER THE MERGER

The following table provides information about the intended directors and
executive officer of the combined company. With the exception of Glenn
Penisten, each person listed currently holds the same position with FalconStor.

Management

Term as
Director
Name Age Position Expires
---- --- -------- --------

ReiJane Huai............ 42 President, Chief Executive Officer and Director Nominee 2004
Jacob Ferng, CPA........ 39 Chief Financial Officer and Vice President --
Wai Lam................. 42 Vice President, Engineering --
Wayne Lam............... 37 Vice President, Marketing --
Wendy Petty............. 37 Vice President, Sales, North America --
Bernard Wu.............. 42 Vice President, Business Development --
Eric Chen............... 38 Vice President, GM Asia --
Glenn Penisten.......... 69 Director 2003
Lawrence S. Dolin....... 57 Director Nominee 2004
Steven H. Owings........ 48 Director Nominee 2003
Steven R. Fischer....... 56 Director Nominee 2002

ReiJane Huai has served as president and chief executive officer of
FalconStor since December 2000 and has been a director of FalconStor since July
2000. Mr. Huai came to FalconStor with a career in software development and
management. As executive vice president and general manager, Asia, for Computer
Associates International, Inc., he was responsible for sales, marketing and the
development of strategic joint ventures in the region. Mr. Huai joined Computer
Associates in 1996 with its acquisition of Cheyenne Software, Inc., where he
was president and chief executive officer. Mr. Huai joined Cheyenne Software in
1985 as manager of research and development, and was appointed director of
engineering in 1987. While there, he served as chief architect of ARCserve, the
industry's first storage management solution for the client/server environment.
Mr. Huai received a master's degree in computer science from the State
University of New York at Stony Brook in 1985.

Jacob Ferng has served as chief financial officer and vice president of
FalconStor since August 2000. Mr. Ferng has more than 10 years of experience
handling corporate finance, worldwide software production and product
distribution for publicly-held companies, various private corporations and a
public accounting firm. Mr. Ferng was vice president of finance and production
worldwide for Computer Associates from 1996 to April 2000. He also served as
corporate controller and vice president of finance and operations of Cheyenne
Software from 1991 to 1996. From 1988 to 1990, he was an accountant for General
Aerospace, Bell Associates, CPAs. He has a master's degree in
Accounting/Taxation from Long Island University, C.W. Post. Currently, he is a
certified public accountant in the state of New York.

Wai Lam has served as vice president of engineering of FalconStor since
April 2000. As vice president and architect at Computer Associates, he was
responsible for the eTrust Internet security product strategy and design. Mr.
Lam joined Computer Associates in 1996 with its acquisition of Cheyenne
Software, where he was director and architect of the HSM product line. He
joined Cheyenne in 1993 with its acquisition of Applied Programming
Technologies, Inc., where he was a partner and developer of network storage
systems using the newly available optical libraries. Before joining Applied
Programming Technologies, Mr. Lam worked at Hughes Aircraft, where he was a
microwave circuit designer for space communication systems, and he was
appointed senior staff engineer. Mr. Lam received a Master of Science degree
from UCLA in 1983 and a Bachelor of Engineering degree from Stony Brook in
1982.

Wayne Lam has served as vice president of marketing of FalconStor since
April 2000. Mr. Lam has more than 15 years of software development and
corporate management experience. As vice president at Computer Associates, he
held various roles in product marketing, business development and product
development. Mr. Lam joined Computer Associates in 1996 with its acquisition of
Cheyenne Software, where he held various positions including general manager of
Cheyenne Software Netware Division, director of business development, and head
of Cheyenne Communications, a business development unit focusing on
communication software. From 1989 to 1993 he was co-founder and chief executive
officer of Applied Programming Technologies, where he managed all aspects of
its operations and development projects. From 1987 to 1989 he was vice
president of engineering at Advanced Graphic Applications, where he managed the
development of PC-based document management systems and optical storage device
drivers. Mr. Lam has a B.E. in Electrical Engineering from Cooper Union, where
he was involved with a privately funded research project studying the
feasibility of building paperless offices using optical storage devices. The
success of the project led to the formation of Advanced Graphic Applications.

Wendy Petty has served as the vice president of sales in North America of
FalconStor since October 2000. From 1999 to 2000, she was senior vice president
of indirect channel sales for Opus360 Corp. From 1996 to 1999, Ms. Petty served
in various senior sales executive positions at Computer Associates, most
recently as senior vice president of channel sales. From 1990 to 1996, she held
various sales and sales management positions at Cheyenne Software, including
director, North American sales, manager, corporate accounts and western
regional sales manager. From 1989 to 1990, she was a consultant to NEC's
Computers and Communications division. From 1987 to 1989, she was the director
of software implementations at ENCORE Systems, a developer of hospitality
management software. Ms. Petty holds a B.A. degree from Fairleigh Dickinson
University.

Bernie Wu has served as the vice president of business development of
FalconStor since October 2000. From 1998 to 2000, Mr. Wu was senior vice
president of sales and marketing for the Internet Outsourcing Division of Trend
Micro, a leading Internet security software company. Mr. Wu had worldwide
responsibility for defining, launching, and managing OEM, service, and alliance
partnerships with ISPs, SPs, telecommunication carriers, and other software
companies for the purpose of offering network-based security services. In the
15 years prior to that, Mr. Wu held various executive and managerial positions
at companies such as Intel, Seagate, Conner Peripherals, and Computer
Associates/Cheyenne Software in areas including product development, marketing,
and OEM/channel sales of RAID, optical, and tape-based storage management
software and subsystems. In 1996, he co-authored a patent in the area of SCSI
enclosure management services, which has been widely adopted in the industry.
Mr. Wu has a B.S./M.S. in engineering from the University of California at
Berkeley and an M.B.A from University of California at Los Angeles Anderson
School of Management.

Dr. Eric Chen has been vice president and general manager, Asia Pacific
Operations of FalconStor since March 2000. Dr. Chen oversees FalconStor's
operations including research and development, marketing and sales. From 1991
to 1994, he was a technical staff member of IBM Networking Systems, Research
Triangle Park, North Carolina. Dr. Chen became an associate professor at
National Chung-Hsing University, Taiwan in 1991, teaching graduate courses in
Networking, Protocol Engineering and Distributed Systems. From 1991 to 1994, he
worked on projects that enabled the interworking of different communication
protocols. Dr. Chen received his Ph.D. and Masters degree in Computer and
Information Science from Ohio State University, and a Bachelor degree in
Electrical Engineering from the National Taiwan University.

Steven H. Owings served as the chief executive officer of ScanSource, Inc.,
a value-added distributor of POS and bar code products, from December 1992 to
January 2000. Mr. Owings has served as chairman of the board of directors of
ScanSource, Inc. since its inception in December 1992. From 1991 to 1992, Mr.
Owings served as chairman of the board of directors, chief executive officer
and the sole shareholder of Argent Technologies, Inc., a personal computer
manufacturer. From 1983 to 1991 Mr. Owings held various positions with Gates/FA
Distributing, Inc. and its predecessors, a computer distribution company,
including serving as

president, chief executive officer and chairman of the board of directors. From
December 1987 to September 1994, Mr. Owings served as a director of Gates. From
July 1996 to April 1997, he served as a director of Globelle Corporation, an
international distributor of personal computer products. Mr. Owings holds a
B.A. from Clemson University.

Lawrence S. Dolin has held several positions with Noteworthy Medical
Systems, Inc.,a provider of computerized patient record software, since July
1998. He is currently serving as Noteworthy's chairman, president and chief
executive officer. Since January 1996, Mr. Dolin has been a general partner of
Mordo Partners, an investment management partnership. Since 1981, Mr. Dolin has
served as a director of Morgan's Foods, Inc., which owns through wholly-owned
subsidiaries KFC restaurants, Taco Bell restaurants and Pizza Hut restaurants.
Mr. Dolin holds a B.A. from Case Western Reserve University and a J.D. from
Case Western Reserve University.

Steven R. Fischer has held multiple positions with Transamerica Business
Capital Corporation, which specializes in secured lending for mergers,
acquisitions and restructurings, since March 1992. He is currently serving as
Transamerica's president. From February 1981 to March 1992, Mr. Fischer served
as vice president and regional manager of Citibank, N.A. Since December 1995,
Mr. Fischer has served as a director of ScanSource, Inc., a value-added
distributor of POS and bar code products. Mr. Fischer holds a B.S. in Economics
and Accounting from Queens College and a M.B.A. from Baruch College.

Glenn Penisten's biography appears on page 134 of this joint proxy
statement/prospectus.

NPI AND FALCONSTOR

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Network Peripherals Inc.:

Report of Independent Accountants....................................... 97

Consolidated Balance Sheets............................................. 98

Consolidated Statements of Operations .................................. 99

Consolidated Statements of Stockholders' Equity ........................ 100

Consolidated Statements of Cash Flows .................................. 101

Notes to Consolidated Financial Statements.............................. 102

Financial Statement Schedule:

Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 2000, 1999 and 1998..................................... 115

FalconStor, Inc.:

Independent Auditors' Report ........................................... 116

Consolidated Balance Sheets ............................................ 117

Consolidated Statements of Operations .................................. 118

Consolidated Statements of Stockholders' Equity and Comprehensive Loss.. 119

Consolidated Statements of Cash Flows................................... 120

Notes to Consolidated Financial Statements.............................. 121

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Network Peripherals Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Network Peripherals Inc. and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

San Jose, California
January 26, 2001, except as to Note 13,
which is as of March 30, 2001

NETWORK PERIPHERALS INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

December 31,
March 31, ------------------
2001 2000 1999
----------- -------- --------
(Unaudited)

ASSETS

Current assets:
Cash and cash equivalents.................... $ 43,451 $ 33,810 $ 4,730
Short-term investments....................... 44,175 62,191 4,985
Accounts receivable, net of allowance for
doubtful accounts and returns of $228
(unaudited), $259 and $364.................. 1,359 1,479 428
Receivable from sale of assets............... -- -- 720
Inventories, net............................. 5,683 10,626 3,830
Prepaid expenses and other current assets.... 1,414 1,776 815
-------- -------- --------
Total current assets....................... 96,082 109,882 15,508
Property and equipment, net.................. 5,423 5,547 4,984
Other assets................................. 301 285 360
-------- -------- --------
$101,806 $115,714 $ 20,852
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable............................. $ 1,094 $ 1,902 $ 1,534
Accrued liabilities.......................... 2,488 2,908 1,409
-------- -------- --------
Total current liabilities.................. 3,582 4,810 2,943
-------- -------- --------
Commitments (Note 6)

Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000
shares authorized; no shares issued or
outstanding................................. -- -- --
Common Stock, $0.001 par value, 60,000,000
shares authorized; 12,847,000 (unaudited),
12,907,000 and 12,749,000 shares issued and
outstanding................................. 16 16 13
Additional paid-in capital................... 235,032 234,820 65,955
Accumulated deficit.......................... (82,590) (70,301) (48,059)
Accumulated other comprehensive income....... 225 106 --
-------- -------- --------
152,683 164,641 17,909
Treasury stock, 3,585,000 (unaudited),
3,485,000 and no shares of Common Stock, at
cost........................................ (54,459) (53,737) --
-------- -------- --------
Total stockholders' equity................. 98,224 110,904 17,909
-------- -------- --------
$101,806 $115,714 $ 20,852
======== ======== ========

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

NETWORK PERIPHERALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

For the Three
Months Ended For the Year Ended
March 31, December 31,
----------------- ---------------------------
2001 2000 2000 1999 1998
-------- ------- -------- -------- -------
(Unaudited)

Net sales..................... $ 2,012 $ 3,305 $ 7,514 $ 10,231 $28,585
Cost of sales................. (1,908) (2,518) (7,574) (8,645) (16,160)
Provisions for potential
write-off of excess
inventories.................. (4,500) -- (1,570) (765) (1,090)
-------- ------- -------- -------- -------
Gross profit (loss)....... (4,396) 787 (1,630) 821 11,335
-------- ------- -------- -------- -------
Operating expenses:
Research and development.... 3,776 2,414 11,233 7,803 11,485
Marketing and selling....... 3,091 1,997 10,672 6,437 6,010
General and administrative.. 1,283 1,038 4,749 3,503 3,234
Merger related expenses..... 1,135 -- -- -- --
Restructuring expense....... -- -- 600 -- --
Loss (gain) on sale of
assets..................... -- -- 620 (1,055) --
-------- ------- -------- -------- -------
Total operating expenses.. 9,285 5,449 27,874 16,688 20,729
-------- ------- -------- -------- -------
Loss from operations.......... (13,681) (4,662) (29,504) (15,867) (9,394)
Interest income............... 1,392 779 7,262 908 1,505
-------- ------- -------- -------- -------
Loss before income taxes...... (12,289) (3,883) (22,242) (14,959) (7,889)
Income taxes.................. -- -- -- -- --
-------- ------- -------- -------- -------
Net loss...................... $(12,289) $(3,883) $(22,242) $(14,959) $(7,889)
======== ======= ======== ======== =======
Net loss per share:
Basic and diluted........... $ (0.96) $ (0.28) $ (1.56) $ (1.19) $ (0.64)
======== ======= ======== ======== =======
Weighted average common
shares:
Basic and diluted........... 12,834 13,682 14,224 12,584 12,281
======== ======= ======== ======== =======

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

NETWORK PERIPHERALS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

Common Stock Accumulated
---------------- Additional Other
Number of Paid-in Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income Stock Total
--------- ------ ---------- ----------- ------------- -------- --------

Balance at December 31,
1997................... 12,252 $ 12 $ 63,878 $(25,211) $ -- $ -- $ 38,679
Issuance of Common Stock
upon exercise of stock
options................ 8 -- 38 -- -- -- 38
Issuance of Common Stock
under employee stock
purchase plan.......... 32 -- 144 -- -- -- 144
Net loss................ -- -- -- (7,889) -- -- (7,889)
------ ---- -------- -------- ----- -------- --------
Balance at December 31,
1998................... 12,292 12 64,060 (33,100) -- -- 30,972
Issuance of Common Stock
upon exercise of stock
options................ 457 1 1,895 -- -- -- 1,896
Net loss................ -- -- -- (14,959) -- -- (14,959)
------ ---- -------- -------- ----- -------- --------
Balance at December 31,
1999................... 12,749 13 65,955 (48,059) -- -- 17,909
Issuance of Common Stock
in follow-on public
offering............... 2,875 3 165,361 -- -- -- 165,364
Issuance of Common Stock
upon exercise of stock
options................ 768 -- 3,504 -- -- -- 3,504
Common Stock
repurchased............ (3,485) -- -- -- -- (53,737) (53,737)
Net loss................ -- -- -- (22,242) -- -- (22,242)
Change in unrealized
gain on investments.... -- -- -- -- 106 -- 106
--------
Comprehensive loss...... -- -- -- -- -- -- (22,136)
------ ---- -------- -------- ----- -------- --------
Balance at December 31,
2000................... 12,907 16 234,820 (70,301) 106 (53,737) 110,904
Issuance of Common Stock
upon exercise of stock
options (unaudited).... 50 -- 212 -- -- -- 212
Common Stock repurchased
(unaudited)............ (110) -- -- -- -- (722) (722)
Net loss (unaudited).... -- -- -- (12,289) -- -- (12,289)
Change in unrealized
gain on investments
(unaudited)............ -- -- -- -- 119 -- 119
--------
Comprehensive loss
(unaudited)............ -- -- -- -- -- -- (12,170)
------ ---- -------- -------- ----- -------- --------
Balance at March 31,
2001 (Unaudited)....... 12,847 $ 16 $235,032 $(82,590) $ 225 $(54,459) $ 98,224
====== ==== ======== ======== ===== ======== ========

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

100

NETWORK PERIPHERALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Three
Months Ended For the Year Ended
March 31, December 31,
------------------ ----------------------------
2001 2000 2000 1999 1998
-------- -------- -------- -------- --------
(Unaudited)

Cash flows from operating
activities:
Net loss.................... $(12,289) $ (3,883) $(22,242) $(14,959) $ (7,889)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 723 541 2,495 1,826 2,000
Loss (gain) of sale of
assets.................... -- -- 620 (1,055) --
Changes in assets and
liabilities:
Accounts receivable....... 120 (2,261) (1,051) 3,002 1,740
Inventories............... 4,943 187 (6,796) (706) (1,707)
Income tax refund
receivable............... -- -- -- -- 3,983
Prepaid expenses and other
assets................... 336 247 (926) (131) (146)
Accounts payable.......... (808) (124) 368 (916) 779
Accrued liabilities....... (420) 356 1,499 (718) (2,956)
-------- -------- -------- -------- --------
Net cash used in
operating activities.... (7,395) (4,937) (26,033) (13,657) (4,196)
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Proceeds from sales or
maturity of short-term
investments................ 18,135 3,997 -- 12,829 --
Purchases of short-term
investments................ -- -- (57,100) -- (3,443)
Purchases of property and
equipment.................. (602) (971) (3,836) (2,559) (2,644)
Proceeds from sale of
assets, net of expenses.... 13 -- 918 684 --
Holdback amount from
acquisition................ -- -- -- -- (456)
-------- -------- -------- -------- --------
Net cash provided by
(used in) investing
activities.............. 17,546 3,026 (60,018) 10,954 (6,543)
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net of
offering costs............. 212 166,249 168,868 1,896 182
Repurchase of common stock.. (722) -- (53,737) -- --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities.............. (510) 166,249 115,131 1,896 182
-------- -------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents... 9,641 164,338 29,080 (807) (10,557)
Cash and cash equivalents,
beginning of period......... 33,810 4,730 4,730 5,537 16,094
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period............... $ 43,451 $169,068 $ 33,810 $ 4,730 $ 5,537
======== ======== ======== ======== ========
Supplemental disclosure of
cash flow information
Non-cash transactions:
Receivable from sale of
assets.................. $ -- $ -- $ -- $ 720 $ --

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

101

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company

Network Peripherals Inc., a Delaware corporation (the "Company"), designs
and manufactures Layer 2 and Layer 3 functionality Ethernet and Ethernet
switching products, which it markets primarily to original equipment
manufacturers, distributors, value-added resellers and system integrators. The
Company's switching products are designed for use in workgroups, wiring closets
and network backbones.

As discussed in Notes 13 and 14, on March 30, 2001, the Company entered into
a series of related agreements with FalconStor, Inc. ("FalconStor"), a
privately held company, whereby, among other things, the Company made a $25
million investment in FalconStor, and obtained an exclusive option to merge
with FalconStor. On May 4, 2001, the Company exercised its option and entered
into a merger agreement with FalconStor.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Interim Consolidated Financial Statements (Unaudited)

The financial information as of March 31, 2001 and for the three months
ended March 31, 2001 and 2000 is unaudited and includes all adjustments,
consisting only of normal recurring adjustments, that management considers
necessary for a fair presentation of the Company's financial condition,
operating results and cash flows as of such date and for such periods. Results
for the three months ended March 31, 2001 are not necessarily indicative of the
results to be expected for the year ending December 31, 2001 or for any future
period.

Use of Estimates

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less to be cash equivalents.
The Company's short-term investments consist of marketable debt securities,
substantially of which have maturities between three months and one year. All
marketable debt securities included in short-term investments have been
classified as available-for-sale and are carried at fair market value, and the
unrealized gains or losses on these investments are included as a separate
component of the stockholders' equity. For the years ended December 31, 1999
and 1998, there were no material unrealized gains or losses on investments.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
short-term investments and trade receivables. The Company maintains its cash,
cash equivalents and short-term investments with high credit quality financial
institutions and limits its

102

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

investments to those that are short-term and low risk. Concentration of credit
risk with respect to trade receivables is generally limited due to the
Company's on-going evaluation of its customers' credit worthiness and the
established long-term relationship with certain customers.

Revenue Recognition

Revenue from product sales is recognized when pervasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectability is probable. The Company provides to certain distributors
limited rights of return and price protection on unsold inventory when specific
conditions exist. Provisions for estimated costs of warranty repairs, product
returns, and retroactive price adjustments are recorded at the time products
are shipped based on past experience. Allowances for uncollectible accounts
receivable are provided at the time such receivable is deemed uncollectible.

In December 1999, the Securities and Exchange Commissions issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB 101 in the fourth quarter of 2000 did not have
a material effect on the Company's results of operations or financial
condition.

Inventories

Inventories are stated at the lower of cost, using the first-in, first-out
method, or market. Reserves for potential excess inventories are provided when
management believes that existing inventories are in excess of the forecasted
sales of current products within the following 12-month period, considering
customer demand, competition in the marketplace and progress of new product
development. A provision to increase reserves for potential excess inventories
reduces the Company's gross profit during the period such provision is
recorded, and the actual write-off of excess inventories is charged against the
inventory reserves.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful life of the asset, typically three years.
Depreciation of the Company's enterprise resource planning systems, its
information systems infrastructure, and certain manufacturing equipment is
based on an estimated useful life of five years. Amortization of leasehold
improvements is computed using the remaining lease term.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets acquired and is amortized on a straight-line basis
over the expected period of benefit, generally five years. Periodically, the
Company evaluates the goodwill for impairment and estimates the future
undiscounted cash flows of the acquired business to ensure that the carrying
value has not been impaired. As of December 31, 2000 and 1999, goodwill, net of
accumulated amortization, was $53,000 and $93,000, respectively, and was
included in other assets.

Software Development Costs

The Company's software products are integrated into its hardware products
and are typically available for general release to customers within 30 days
after technological feasibility has been achieved. Accordingly, the

103

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

production costs incurred after the establishment of technological feasibility
and before general release to customers are immaterial. The Company has not
capitalized any software development costs to date.

Advertising Costs

The Company expenses all advertising costs as incurred. Advertising costs
totaled $2,293,000, $634,000 and $381,000 in 2000, 1999 and 1998, respectively.

Income Taxes

The Company accounts for income taxes under the asset and liability method,
which recognizes deferred tax assets and liabilities for the expected tax
consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement reported amounts, and for net
operating loss and credit carryforwards. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such
assets will not be realized.

Foreign Currency Translation

The functional currency of the Company's subsidiaries in Taiwan and the
Netherlands is the U.S. dollar. Accordingly, their assets and liabilities,
which are denominated in the corresponding local currency, are remeasured into
U.S. dollars at year-end exchange rates, except for property and equipment,
which are remeasured at the historical exchange rates when acquired. Income and
expense items are remeasured at average exchange rates during the year.
Remeasurement gains or losses are included in determining consolidated results
of operations.

Employee Benefit Plans

The Company has stock option plans and offers a 401(k) plan covering all of
its U.S. employees. The 401(k) plan provides for matching contributions
determined at the Company's discretion. The Company matched 50% of each
employee's contribution up to $3,000 in 2000 and $1,000 in 1999. The matching
contributions totaled $202,000 and $59,000 in 2000 and 1999, respectively. No
such matching contributions were made in 1998.

Stock-based Compensation

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", as permitted under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25, if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
involving Stock Compensation." FIN 44 clarifies the application of APB Opinion
No. 25 regarding (a) the definition of employee for purposes of applying APB
Opinion No. 25, (b) the criteria for determining whether a stock option plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 became effective on July 1, 2000, but certain conclusions
cover specific events that occurred after either December 15, 1998, or January
12, 2000. The adoption of FIN 44 did not have a material impact on the
Company's results of operations or financial condition.

104

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Loss Per Share

Basic earnings per share are computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options,
restricted stock awards, warrants, and other convertible securities using the
treasury stock method. During 2000, 1999 and 1998, the Company incurred net
losses, such that the inclusion of potential common shares would result in an
antidilutive per share amount. Accordingly, no adjustment is made to the basic
net loss per share to arrive at the diluted net loss per share.

Comprehensive Loss

For the year ended December 31, 2000, the Company's comprehensive loss
included net loss and the change in unrealized gain on investments. There were
no reconciling items between the Company's net loss and comprehensive loss for
the years ended December 31, 1999 and 1998.

Recent Accounting Pronouncement

In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. In June 2000, SFAS No. 133 was amended by SFAS
No. 138, which amended or modified certain issues discussed in SFAS No. 133.
The Company will adopt SFAS No. 133 and SFAS No. 138 during the year ending
December 31, 2001. To date, the Company has not engaged in derivative or
hedging activities. The adoption of SFAS No. 133 and SFAS No. 138 will have no
material impact on the Company's results of operations or financial condition.

Reclassifications

Certain reclassifications have been made to the prior years' amounts in
order to conform to the current year's presentation.

Note 3. Cash, Cash Equivalents and Short-Term Investments (in thousands)

December 31,
December 31, 2000 1999
----------------------------- ------------
Unrealized Fair
Amortized Holding Market Fair Market
Cost Gain (Loss) Value Value
--------- ----------- ------- ------------

Cash and cash equivalents:
Cash and money market funds... $14,037 $ -- $14,037 $2,442
Corporate debt securities..... 19,773 -- 19,773 2,288
------- ----- ------- ------
33,810 -- 33,810 4,730
------- ----- ------- ------
Short-term investments:
Corporate debt securities..... 46,680 97 46,777 --
U.S. government agencies'
securities................... 13,501 9 13,510 4,985
Municipal government
securities................... 1,904 -- 1,904 --
------- ----- ------- ------
62,085 106 62,191 4,985
------- ----- ------- ------
Total....................... $95,895 $ 106 $96,001 $9,715
======= ===== ======= ======

105

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The amortized cost at December 31, 1999 approximated fair market value.

March 31, 2001
----------------------------------
Unrealized Fair
Amortized Holding Market
Cost Gain Value
----------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)

Cash and cash equivalents:
Cash and money market
funds.................... $27,418 $ -- $27,418
Corporate debt
securities............... 16,033 -- 16,033
------- ----- -------
43,451 -- 43,451
------- ----- -------
Short-term investments:
Corporate debt
securities............... 31,227 192 31,419
U.S. government agencies'
securities............... 12,723 33 12,756
------- ----- -------
43,950 225 44,175
------- ----- -------
Total................... $87,401 $ 225 $87,626
======= ===== =======

Note 4. Balance Sheet Components (in thousands)

December 31,
March 31, ----------------
2001 2000 1999
----------- ------- -------
(Unaudited)

Inventories:
Raw materials.............................. $ 5,574 $ 4,843 $ 2,799
Work-in-progress........................... 500 507 596
Finished goods............................. 6,169 7,332 1,623
------- ------- -------
12,243 12,682 5,018
Reserves for potential excess inventories.. (6,560) (2,056) (1,188)
------- ------- -------
$ 5,683 $10,626 $ 3,830
======= ======= =======
Property and equipment:
Computers and equipment.................... $ 9,907 $ 9,408 $ 8,106
Leasehold improvements..................... 1,018 993 528
Furniture and fixtures..................... 774 760 750
------- ------- -------
11,747 11,161 9,384
Accumulated depreciation................... (6,276) (5,614) (4,400)
------- ------- -------
$ 5,423 $ 5,547 $ 4,984
======= ======= =======
Accrued liabilities:
Merger related expenses $ 1,135 $ -- $ --
Salaries and benefits...................... 595 583 592
Consulting expenses........................ 225 1,588 49
Warranty................................... 208 230 375
Co-op advertising and market development
funds..................................... 202 186 250
Other...................................... 123 321 143
------- ------- -------
$ 2,488 $ 2,908 $ 1,409
======= ======= =======

106

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5. Line of Credit

The Company currently has a $5 million revolving bank line of credit, which
expires on June 1, 2001. The line of credit can be used for either letter of
credit or working capital purposes. Borrowings under the line of credit bear
interest at the bank's prime rate and are secured by the Company's short-term
investments of the same amount at the bank. There were no borrowings under the
line of credit in 2000 and 1999.

Note 6. Commitments

The Company has various operating leases related to its facilities,
including its corporate headquarters in Fremont, California, which expires in
October 2004, and its research and development facility in Long Island, New
York, which expires in October 2007. Rent expense for all of the Company's
facilities totaled $880,000, $760,000, and $764,000 in 2000, 1999 and 1998,
respectively.

Future minimum lease payments under operating leases as of December 31, 2000
are as follows (in thousands):

Years ending December 31,
-------------------------

2001......................................... $ 827
2002......................................... 895
2003......................................... 831
2004......................................... 777
2005......................................... 511
Thereafter................................... 989
------
$4,830
======

Note 7. Capital Stock

Authorized Shares of Common Stock

On April 25, 2000, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock from 20 million to 60 million
shares.

Follow-on Public Offering

In March 2000, the Company completed a follow-on public offering of
2,875,000 shares of its Common Stock at a price of $60.875 per share, resulting
in net proceeds to the Company of approximately $165 million, after deducting
offering costs.

Treasury Stock

In 2000, the Company's Board of Directors approved a common stock repurchase
program, pursuant to which the Company may repurchase up to five million shares
of its Common Stock in the open market. As of December 31, 2000, the Company
has repurchased 3,485,000 shares of its Common Stock with a total purchase
price of approximately $53.7 million.

Employee Stock Purchase Plan

Effective May 1998, the Company terminated its Employee Stock Purchase Plan,
which allowed eligible employees to purchase the Company's Common Stock at a
discount through payroll deductions. Prior to the

107

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

termination of the Employee Stock Purchase Plan, the Company reserved 250,000
shares of Common Stock for issuance thereunder, and the Company has issued
223,606 shares of Common Stock for an aggregate purchase price of $1,434,000.

Stock Option Plans

The Company's 1999 Stock Plan, as amended, (the "1999 Plan") provides for
the granting of nonstatutory stock options and restricted stock awards to
eligible employees and consultants. Pursuant to the 1999 Plan, the Company has
reserved 2,500,000 shares of the Company's Common Stock for issuance, and the
terms and conditions of nonstatutory stock options and restricted stock awards
are determined by the Company's Board of Directors, provided that the exercise
price for a nonstatutory stock option is not less than 85% of the fair market
value of the Company's Common Stock on the date of the grant. As of December
31, 2000, options to purchase 644,384 shares of Common Stock were outstanding,
1,855,616 shares were available for future grant, and 2,500,000 shares were
authorized but unissued under the 1999 Plan.

The Company's 1997 Stock Plan, as amended, (the "1997 Plan") provides for
the granting of incentive and nonstatutory stock options and restricted stock
awards to eligible employees, directors and consultants. The Company has
reserved 3,500,000 shares of the Company's Common Stock for issuance under the
1997 Plan. Pursuant to the 1997 Plan, the terms and conditions of stock options
are determined by the Company's Board of Directors, provided that (i) the
exercise price for incentive stock options is not less than the fair market
value of the Company's Common Stock on the date of grant and (ii) the exercise
price for nonstatutory stock options is not less than 85% of the fair market
value of the Company's Common Stock on the date of grant. Options under the
1997 Plan vest over a period determined by the Board of Directors, which is
generally four years. As of December 31, 2000, options to purchase 2,411,844
shares of Common Stock were outstanding, 341,465 shares were available for
future grant, and 2,753,309 shares were authorized but unissued under the 1997
Plan.

Upon adoption of the 1997 Plan in April 1997, the Company terminated the
1993 Stock Option Plan (the "1993 Plan") and the 1996 Nonstatutory Stock Option
Plan (the "1996 Plan"). No further stock options were granted under the 1993
Plan or the 1996 Plan. Outstanding options and shares issued upon the exercise
of options granted continue to be governed by the terms and conditions of the
respective plans. As of December 31, 2000, options to purchase a total of
353,567 shares of Common Stock were outstanding under the 1993 Plan and the
1996 Plan.

The 1994 Outside Directors Stock Option Plan, as amended, (the "1994 Plan")
which provides for the automatic granting of nonqualified stock options to
directors of the Company ("Outside Director"), has a total of 150,000 shares
reserved for issuance. Pursuant to the 1994 Plan, the Company grants to each
new Outside Director an option to purchase 15,000 shares of Common Stock at the
time of their appointment and to each Outside Director an additional option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders. The exercise price of the stock options will be the fair market
value of the Common Stock on the date of grant, and options vest over a period
of four years. As of December 31, 2000, options to purchase 70,000 shares of
Common Stock were outstanding, 69,584 shares were available for future grant,
and 139,584 shares of Common Stock were authorized but unissued under the 1994
Plan.

Stock options generally expire 10 years from the date they are granted.

108

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes stock option activity for all of the
Company's stock option plans (in thousands, except per share amounts):

Options Weighted Average
Outstanding Exercise Price
----------- ----------------

Balance at December 31, 1997.................. 2,597 $ 5.41
Granted..................................... 1,298 4.11
Exercised................................... (9) 4.23
Canceled.................................... (1,087) 6.17
------
Balance at December 31, 1998 (913 shares
exercisable at a weighted average price of
$4.71 per share)............................. 2,799 4.52
Granted..................................... 688 15.62
Exercised................................... (457) 4.14
Canceled.................................... (230) 6.70
------
Balance at December 31, 1999 (1,177 shares
exercisable at a weighted average price of
$4.72 per share)............................. 2,800 7.13
Granted..................................... 2,092 16.28
Exercised................................... (768) 4.54
Canceled.................................... (644) 9.28
------
Balance at December 31, 2000 (1,051 shares
exercisable at a weighted average price of
$6.88 per share)............................. 3,480 12.90
Granted (unaudited)......................... 397 7.41
Exercised (unaudited)....................... (52) 4.21
Canceled (unaudited)........................ (88) 14.53
------
Balance at March 31, 2001 (1,095 shares
exercisable at a weighted average price of
$8.66 per share) (unaudited)................. 3,737 $12.40
======

The Company has elected to continue to follow APB Opinion No. 25 to account
for its employee stock options and adopted the disclosure-only requirements of
SFAS No. 123. SFAS No. 123 requires the disclosure of pro forma net income and
earnings per share as if the Company had accounted for its employee stock
options under the fair value method in accordance with SFAS No. 123. The fair
value of these options is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
expected volatilities of 110% in 2000, 93% in 1999 and 82% in 1998; risk-free
interest rates of 5.1% in 2000, 6.2% in 1999 and 4.6% in 1998; expected lives
of 3.5 years in 2000 and 1999 and 2.5 years in 1998; and no dividend yield for
all periods.

Had compensation cost for the Company's employee stock-based plans been
determined based on the fair value at the grant date for awards consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per share
would have been as follows (in thousands, except per share amounts):

Years ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------

Net loss--as reported.......................... $(22,242) $(14,959) $(7,889)
Net loss--pro forma............................ (29,756) (18,523) (11,368)

Net loss per share:
Basic and diluted--as reported............... (1.56) (1.19) (0.64)
Basic and diluted--pro forma................. (2.09) (1.47) (0.93)

109

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The weighted average estimated grant date fair values, as defined by SFAS
No. 123, for options granted under the stock option plans during 2000, 1999 and
1998 were $11.46, $10.25 and $1.98, respectively.

The following table summarizes information about stock options outstanding
at December 31, 2000 (in thousands, except per share amounts):

Outstanding Exercisable
------------------------------------------ ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Life Exercise Exercise
Prices Shares (in years) Price Shares Price
-------- ------ ---------------- -------- ------ --------

$ 2.63-$ 4.50 235 7.6 $ 3.66 202 $ 3.66
4.56- 4.94 776 6.1 4.92 632 4.93
5.25- 8.25 375 9.2 7.50 53 6.73
9.11- 11.88 768 9.7 11.12 13 10.71
12.50- 13.38 433 9.7 13.35 1 13.00
14.00- 19.72 439 8.8 16.14 112 15.99
21.63- 73.06 454 9.1 35.24 38 28.41
----- -----
3,480 8.5 12.90 1,051 6.88
===== =====

Note 8. Income Taxes

The following is a geographical breakdown of consolidated loss before income
taxes (in thousands):

Three months Years ended December 31,
ended ---------------------------
March 31, 2001 2000 1999 1998
-------------- -------- -------- -------
(Unaudited)

Domestic......................... $(11,937) $(19,731) $(13,898) $(7,302)
Foreign.......................... (352) (2,511) (1,061) (587)
-------- -------- -------- -------
$(12,289) $(22,242) $(14,959) $(7,889)
======== ======== ======== =======

No federal or state income taxes or income tax benefits were recorded for
the three months ended March 31, 2001 and for the years ended December 31,
2000, 1999 and 1998, as the Company incurred net operating losses during these
periods and potential deferred tax benefits associated with net operating loss
carryforwards were completely offset by a full valuation allowance.

Deferred tax assets consist of the following (in thousands):

December 31,
------------------
2000 1999
-------- --------

Net operating loss and credit carryforwards.............. $ 18,315 $ 11,635
Reserves and accruals not currently deductible........... 984 987
Capitalized research and development costs............... 910 367
Inventories.............................................. 456 585
Other.................................................... 631 251
-------- --------
Gross deferred tax assets.............................. 21,296 13,825
Valuation allowance.................................... (21,296) (13,825)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========

110

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be realized, such that a full
valuation allowance has been recorded.

As of December 31, 2000, the Company has federal net operating loss
carryforwards of approximately $44 million, which will expire beginning in
2013. For state tax purposes, the Company has net operating loss carryforwards
of approximately $15.5 million, which will expire beginning in 2002.

Note 9. Restructuring

In August 2000, the Company approved and announced a plan to divest its
manufacturing facility in Taiwan. A turnkey manufacturer will manufacture all
of the Company's products after the divestiture. The objective of the
divestiture is to reduce manufacturing overhead and improve gross margins by
taking advantage of the turnkey manufacturer's economies of scale in materials
procurement and production capacity. The divestiture plan consisted of
terminating 57 employees in the manufacturing and the general and
administrative functions, selling manufacturing equipment and closing the
manufacturing facility. These actions resulted in a restructuring expense of
$600,000, which included $550,000 for severance and $50,000 for facility
related charges. The Company completed the divestiture in the first quarter of
2001. The following table summarizes the activities of the accrual for
restructuring expense (in thousands):

Closure of
Severance Facility Total
--------- ---------- -----

Reserve provided............................... $ 550 $ 50 $ 600
Reserve utilized............................... (391) (19) (410)
----- ----- -----
Balance at December 31, 2000................. 159 31 190
Reserve utilized............................... (110) (53) (163)
Reversal of unused reserve to statement of
operations.................................... (49) 22 (27)
----- ----- -----
Balance at March 31, 2001.................... $ -- $ -- $ --
===== ===== =====

Note 10. Sale of Assets

During the fourth quarter of 2000, the Company recorded a net loss on sale
of assets of $620,000 in connection with the closure of its manufacturing
facility in Taiwan discussed in Note 9 above. In June 1999, the Company sold
its research and development facility located in Hsin Chu, Taiwan, for a total
of $1,620,000, of which $900,000 was received in 1999, and the remaining
balance of $720,000 was received in July 2000. In connection therewith, the
Company recorded a gain of $1,055,000, net of payments of broker fees and
severance of $216,000.

Note 11. Geographic Information

The Company operates in one business segment, which is the design,
development, production, marketing and support of high performance networking
solutions. Geographic information relating to the Company's net sales and long-
lived assets is reported in the tables below.

111

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net sales based on customers' locations are as follows (in thousands):

Years ended December
Three months 31,
ended ----------------------
March 31, 2001 2000 1999 1998
-------------- ------ ------- -------
(Unaudited)

North America........................ $1,411 $5,569 $ 5,732 $19,695
Asia................................. 389 1,086 3,047 5,900
Europe............................... 212 859 1,452 2,990
------ ------ ------- -------
$2,012 $7,514 $10,231 $28,585
====== ====== ======= =======

No one foreign country accounted for more than 10% of the Company's net
sales for the three months ended March 31, 2001 and in 2000. Sales to Taiwan-
based customers accounted for 17% of the Company's net sales in 1999 and 1998.

Long-lived assets, which consist of property and equipment and other assets,
are reported below based on the location of an asset (in thousands):

December 31,
March 31, -------------
2001 2000 1999
----------- ------ ------
(Unaudited)

North America.................................... $5,607 $5,708 $3,593
Asia............................................. 117 117 1,728
Europe........................................... -- 7 23
------ ------ ------
$5,724 $5,832 $5,344
====== ====== ======

Note 12. Concentrations

The Company's proprietary ASICs (Application-Specific Integrated Circuits)
are currently manufactured by a single foundry. In addition, subsequent to the
closure of the Company's manufacturing facility in Taiwan in the fourth quarter
of 2000, all of the Company's products are manufactured by one turnkey
manufacturer. In the event that the foundry or the turnkey manufacturer fails
to deliver the expected volumes or meet the required quality standard, the
Company may experience delay in production of its products and loss of
revenues, which could adversely impact the Company's operating results.

The following table summarizes the percentage of net sales accounted for by
the Company's significant customers with sales of 10% or more:

Years ended
Three months December 31,
ended --------------
March 31, 2001 2000 1999 1998
-------------- ---- ---- ----
(Unaudited)

Customer A................................... 18% 32% 36% 35%
Customer B................................... 17% 11% -- --
Customer C................................... -- -- -- 11%
Customer D................................... 10% -- -- --

112

NETWORK PERIPHERALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 13. Subsequent Events

On March 30, 2001, the Company entered into a series of related agreements
with FalconStor, pursuant to which the Company purchased Series C Preferred
Stock of FalconStor having an aggregate purchase price of $25,000,000, and
obtained an exclusive option to merge with FalconStor. FalconStor develops and
markets network storage infrastructure software that enables storage over IP
using standard industry components such as Gigabit Ethernet, Fibre Channel and
SCSI, with planned support for iSCSI and Infiniband. The investment agreements
provide that the Company has the right to designate one member of FalconStor's
board of directors and entitle the Company to liquidation, registration, voting
and preemptive rights customary for venture capital style investments.

The option agreement gives the Company the right to merge with FalconStor.
The form of merger agreement provides that, as consideration for all
outstanding shares of FalconStor's stock, the Company would issue a number of
newly issued shares of its common stock determined in accordance with a
formula. The number of shares issuable in the merger would depend upon a number
of variable factors, including the trading price per share of the Company's
common stock at the time of the merger, the Company's assets at the time of the
merger and other factors. The actual number of shares is expected to result in
the Company's current stockholders having a one-third interest in the combined
entity. In addition, the Company would assume all outstanding options to
acquire shares of FalconStor's common stock, which would result in the
potential issuance of approximately 4,500,000 shares if those options vested
and were exercised. The merger would be structured as a tax free reorganization
and would be accounted for as a purchase. Completion of the merger would be
subject to the expiration of the applicable Hart-Scott-Rodino waiting period,
stockholder approval and other customary closing conditions. In the event that
the Company does not exercise the option, and under certain other
circumstances, the Company may be required to pay FalconStor a penalty of
$3,000,000.

Note 14. Subsequent Events (Unaudited)

On April 2, 2001, the Company paid FalconStor $25,000,000 to purchase
9,792,401 shares of FalconStor's Series C Preferred Stock as discussed in Note
13 above. On May 4, 2001, the Company exercised the option to merge with
FalconStor and entered into a merger agreement with FalconStor. In connection
with the merger, the Company engaged an investment bank to explore strategic
alternatives for its Ethernet switching business, which included selling the
Company's NuWave technology and its related inventories and equipment,
terminating some or all employees, office leases and contracts with certain
vendors, including the Company's contract manufacturer.

After efforts to find a buyer for these businesses, on June 1, 2001, the
last party that had expressed an interest in buying the NuWave and legacy
business assets informed the Company that it was no longer interested in doing
so. As a result, the Company determined that the only method of disposal of
these assets available to them would be to wind-down the businesses. The wind-
down will include finding potential buyers or liquidators of any remaining
inventories and property and equipment used in the manufacture and research and
development of these products. It is expected that this wind-down will be
substantially concluded by the end of August 2001. As a result of the decision
to discontinue these businesses, the Company will be a non-operating public
shell with no continuing operations. The Company expects to present the NuWave
and legacy businesses as discontinued operations in the quarter ending June 30,
2001, with a measurement date for the purpose of determining the gain or loss
on disposal of June 1, 2001. The Company expects to incur a net loss from
discontinued operations for the period from April 1, 2001 to June 1, 2001
(measurement date) of approximately $4.9 million. Further, the Company expects
to incur a loss on the disposal of discontinued operations of approximately
$19.6 million, which includes a provision of $4.0 million for operating losses
during the wind-down period.

113

During April 2001, as a result of general business conditions and also due
to the pending merger with FalconStor, the Company cancelled substantially all
of its outstanding purchase orders with Solectron, its contract manufacturer.
According to the contract between the Company and Solectron, the Company may be
liable for certain cancellation charges, and such charges could be significant.
The Company has begun discussions with Solectron to resolve this matter;
however, the Company cannot reasonably estimate its liability at this time.

Note 15. Quarterly Financial Data (Unaudited)

The following consolidated financial information reflects all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. Summarized quarterly
data for fiscal years 2000 and 1999 are as follows (in thousands, except per
share data):

2000 Quarter Ended
------------------------------
Q1 Q2 Q3 Q4
------ ------ ------ ------

Net sales................................ 3,305 339 1,429 2,441
Gross profit (loss)...................... 787 (1,144) (163) (1,111)
Net loss per share, basic and diluted
(1)..................................... (0.28) (0.32) (0.33) (0.65)
Net loss................................. (3,883) (4,945) (4,799) (8,615)

1999 Quarter Ended
------------------------------
Q1 Q2 Q3 Q4
------ ------ ------ ------

Net sales................................ 3,783 3,393 2,271 784
Gross profit (loss)...................... 665 439 159 (442)
Net loss per share, basic and diluted
(1)..................................... (0.21) (0.21) (0.35) (0.42)
Net loss................................. (2,566) (2,646) (4,443) (5,304)

--------
(1) Net loss per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net loss
per share will not necessarily equal the total for the year.

114

NETWORK PERIPHERALS INC.

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

SCHEDULE II

Additions
-------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Year Expenses Accounts Deductions of Year
---------- ---------- -------- ---------- -------

Allowance for doubtful
accounts and sales returns:
Year ended December 31, 1998
Allowance for doubtful
accounts................. $ 298 $ -- $ -- $ (215) $ 83
Allowance for sales
returns and other
credits.................. 886 82 -- (528) 440
------ ------ ----- ------- ------
Total................... $1,184 $ 82 $ -- $ (743) $ 523
====== ====== ===== ======= ======

Year ended December 31, 1999
Allowance for doubtful
accounts................. $ 83 $ 47 $ -- $ (71) $ 59
Allowance for sales
returns and other
credits.................. 440 -- -- (135) 305
------ ------ ----- ------- ------
Total................... $ 523 $ 47 $ -- $ (206) $ 364
====== ====== ===== ======= ======
Year ended December 31, 2000
Allowance for doubtful
accounts................. $ 59 $ 220 $ -- $ (240) $ 39
Allowance for sales
returns and other
credits.................. 305 -- -- (85) 220
------ ------ ----- ------- ------
Total................... $ 364 $ 220 $ -- $ (325) $ 259
====== ====== ===== ======= ======

Reserves for potential
excess inventories:
Year ended December 31,
1998....................... $4,128 $1,090 $ -- $(1,699) $3,519
====== ====== ===== ======= ======
Year ended December 31,
1999....................... $3,519 $ 765 $ -- $(3,096) $1,188
====== ====== ===== ======= ======
Year ended December 31,
2000....................... $1,188 $1,570 $ -- $ (702) $2,056
====== ====== ===== ======= ======

115

Independent Auditors' Report

The Board of Directors and Stockholders
Falconstor, Inc.:

We have audited the accompanying consolidated balance sheet of Falconstor,
Inc. and subsidiary (a development stage enterprise) as of December 31, 2000,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for the period from inception (February 10,
2000) through December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Falconstor,
Inc. and subsidiary as of December 31, 2000, and the results of their
operations and their cash flows for the period from inception (February 10,
2000) through December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.

/s/ KPMG LLP

Melville, New York
April 20, 2001

116

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Consolidated Balance Sheets

March 31, December 31,
2001 2000
----------- ------------
(unaudited)

ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 5,483,685 $ 7,727,182
Accounts receivable................................ 146,814 15,814
Prepaid expenses and other current assets.......... 159,811 47,995
----------- -----------
Total current assets............................. 5,790,310 7,790,991
Property and equipment, net.......................... 682,378 583,201
Security deposits.................................... 220,099 220,099
----------- -----------
Total assets................................... $ 6,692,787 $ 8,594,291
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................... $ 500,537 $ 137,365
Accrued expenses................................... 404,762 266,949
Deferred revenue................................... 400,000 133,000
----------- -----------
Total current liabilities...................... 1,305,299 537,314
----------- -----------

Commitments

Stockholders' equity:
Convertible preferred stock--$.001 par value,
10,000,000 shares authorized,
Series A--3,000,000 shares issued and
outstanding..................................... 3,000 3,000
Series B--4,900,000 shares issued and
outstanding..................................... 4,900 4,900
Common stock--$.001 par value, 100,000,000 shares
authorized, 15,100,000 shares issued and
outstanding....................................... 15,100 15,100
Additional paid-in capital......................... 11,796,450 10,621,052
Deferred compensation.............................. (1,408,069) (469,351)
Deficit accumulated during the development stage... (5,007,887) (2,095,719)
Accumulated other comprehensive loss............... (16,006) (22,005)
----------- -----------
Total stockholders' equity..................... 5,387,488 8,056,977
----------- -----------
Total liabilities and stockholders' equity..... $ 6,692,787 $ 8,594,291
=========== ===========

See accompanying notes to consolidated financial statements.

117

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Consolidated Statements of Operations

Period from Period from Period from
Inception Inception Inception
Three Months (February 10, 2000) (February 10, 2000) (February 10, 2000)
Ended through through through
March 31, 2001 March 31, 2000 December 31, 2000 March 31, 2001
-------------- ------------------- ------------------- -------------------
(Unaudited) (Unaudited) (Unaudited)

Services revenues....... $ -- $ -- $ 143,294 $ 143,294
Cost of revenues........ -- -- 223,689 223,689
----------- ---------- ----------- -----------
Gross loss.......... -- -- (80,395) (80,395)
----------- ---------- ----------- -----------
Operating expenses:
Software development
costs................ 961,492 46,021 1,379,260 2,340,752
Selling and
marketing............ 1,144,270 -- 327,142 1,471,412
General and
administrative....... 885,058 5,453 534,473 1,419,531
----------- ---------- ----------- -----------
2,990,820 51,474 2,240,875 5,231,695
----------- ---------- ----------- -----------
Operating loss...... (2,990,820) (51,474) (2,321,270) (5,312,090)
Interest income......... 78,652 -- 225,551 304,203
----------- ---------- ----------- -----------
Loss before income
taxes.............. (2,912,168) (51,474) (2,095,719) (5,007,887)

Provision for income
taxes.................. -- -- -- --
----------- ---------- ----------- -----------
Net loss............ $(2,912,168) $ (51,474) $(2,095,719) $(5,007,887)
=========== ========== =========== ===========
Basic and diluted net
loss per share......... $ (0.19) $ (0.00) $ (0.14) $ (0.33)
=========== ========== =========== ===========
Weighted average basic
and diluted common
shares outstanding..... 15,100,000 15,000,000 15,018,769 15,036,390
=========== ========== =========== ===========

See accompanying notes to consolidated financial statements.

118

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Consolidated Statements of Stockholders' Equity and Comprehensive Loss

Deficit Accumulated
Series A Series B accumulated other
convertible convertible Additional Deferred during the compre- Total Compre-
preferred preferred Common paid-in Compen- development hensive stockholders' hensive
stock stock stock capital sation stage loss equity loss
----------- ----------- ------- ----------- ----------- ----------- ----------- ------------- -----------

Balance at
inception
(February 10,
2000).......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
15,100,000
shares of
common stock... -- -- 15,100 39,900 -- -- -- 55,000 --
Issuance of
3,000,000
shares of
Series A
preferred
stock.......... 3,000 -- -- 2,973,329 -- -- -- 2,976,329 --
Issuance of
4,900,000
shares of
Series B
preferred
stock.......... -- 4,900 -- 6,992,216 -- -- -- 6,997,116 --
Issuance of
stock options
and common
stock to non-
employees...... -- -- -- 118,647 -- -- -- 118,647 --
Deferred
compensation... -- -- -- 496,960 (496,960) -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 27,609 -- -- 27,609 --
Net loss........ -- -- -- -- -- (2,095,719) -- (2,095,719) (2,095,719)
Foreign currency
translation
adjustment..... -- -- -- -- -- -- (22,005) (22,005) (22,005)
------ ------ ------- ----------- ----------- ----------- -------- ----------- -----------
Balance,
December 31,
2000........... 3,000 4,900 15,100 10,621,052 (469,351) (2,095,719) (22,005) 8,056,977 $(2,117,724)
===========
Issuance of
stock options
and common
stock to non-
employees
(unaudited).... -- -- -- 146,758 -- -- -- 146,758 $ --
Deferred
compensation
(unaudited).... -- -- -- 1,028,640 (1,028,640) -- -- -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- 89,922 -- -- 89,922 --
Net loss
(unaudited).... -- -- -- -- -- (2,912,168) -- (2,912,168) (2,912,168)
Foreign currency
translation
adjustment
(unaudited).... -- -- -- -- -- -- 5,999 5,999 5,999
------ ------ ------- ----------- ----------- ----------- -------- ----------- -----------
Balance,
March 31, 2001
(unaudited).... $3,000 $4,900 $15,100 $11,796,450 $(1,408,069) $(5,007,887) $(16,006) $ 5,387,488 $(2,906,169)
====== ====== ======= =========== =========== =========== ======== =========== ===========

See accompanying notes to consolidated financial statements.

119

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Consolidated Statements of Cash Flows

Period from Period from
Period from Inception Inception
Inception (February (February
Three (February 10, 10, 2000) 10, 2000)
Months Ended 2000) through through through
March 31, March 31, December March 31,
2001 2000 31, 2000 2001
------------ ------------- ----------- -----------
(unaudited) (unaudited) (unaudited)

Cash flows from operating
activities:
Net loss................ $(2,912,168) $ (51,474) $(2,095,719) $(5,007,887)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 51,396 -- 50,905 102,301
Non-cash professional
services expenses..... 146,758 -- 118,647 265,405
Equity-based
compensation earned... 89,922 -- 27,609 117,531
Change in operating
assets and
liabilities:
Accounts receivable... (131,000) -- (15,814) (146,814)
Prepaid expenses and
other current
assets............... (111,816) -- (47,995) (159,811)
Accounts payable...... 363,172 -- 137,365 500,537
Accrued expenses...... 137,813 -- 266,949 404,762
Deferred revenue...... 267,000 -- 133,000 400,000
----------- ---------- ----------- -----------
Net cash used in
operating
activities.......... (2,098,923) (51,474) (1,425,053) (3,523,976)
----------- ---------- ----------- -----------
Cash flows from investing
activities:
Purchases of property
and equipment.......... (150,573) -- (634,106) (784,679)
Security deposits....... -- -- (220,099) (220,099)
----------- ---------- ----------- -----------
Net cash used in
investing
activities.......... (150,573) -- (854,205) (1,004,778)
----------- ---------- ----------- -----------
Cash flows from financing
activities:
Net proceeds from
issuance of preferred
stock.................. -- 2,976,329 9,973,445 9,973,445
Proceeds from issuance
of common stock........ -- 30,000 55,000 55,000
----------- ---------- ----------- -----------
Net cash provided by
financing
activities.......... -- 3,006,329 10,028,445 10,028,445
----------- ---------- ----------- -----------
Effect of exchange rate
changes on cash......... 5,999 -- (22,005) (16,006)
----------- ---------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents......... (2,243,497) 2,954,855 7,727,182 5,483,685
Cash and cash equivalents
at beginning of period.. 7,727,182 -- -- --
----------- ---------- ----------- -----------
Cash and cash equivalents
at end of period........ $ 5,483,685 $2,954,855 $ 7,727,182 $ 5,483,685
=========== ========== =========== ===========
Supplemental cash flow
information:
Cash paid during the
year for interest...... $ -- $ -- $ -- $ --
=========== ========== =========== ===========
Cash paid during the
year for income taxes.. $ -- $ -- $ -- $ --
=========== ========== =========== ===========

See accompanying notes to consolidated financial statements.

120

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements
December 31, 2000

(1) Summary of Significant Accounting Policies

(a) The Company and Nature of Operations

Falconstor, Inc. (the "Company") was incorporated in Delaware on February
10, 2000 for the purpose of developing, manufacturing and selling storage
networking infrastructure software. The Company also provides network
consulting services in the metropolitan New York area.

As of December 31, 2000, the Company was in the development stage, as
operations from inception through December 31, 2000 consisted primarily of the
development of the Company's core data storage network software product, and no
significant revenues were generated from the Company's planned principal
operations. In April, 2001, the Company completed the development of its
principal product, and anticipates releasing it for sale and commencing the
generation of software license revenue.

(b) Unaudited Interim Financial Information

The unaudited interim financial statements of the Company as of and for the
three months ended March 31, 2001, and the period from inception (February 10,
2000) through March 31, 2000 and the period from inception (February 10, 2000)
through March 31, 2001, included herein have been prepared, without audit,
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial
statements.

In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
at March 31, 2001, and the results of its operations and its cash flows for the
three months ended March 31, 2001 and the period from inception (February 10,
2000) through March 31, 2000 and the period from inception (February 10, 2000)
through March 31, 2001.

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Falconstor, Ltd., Taiwan, which
was primarily involved in development activities during 2000. All significant
intercompany transactions and balances have been eliminated in consolidation.

(d) Cash equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents,
consisting of money market funds, amounted to $7,548,124 at December 31, 2000

(e) Revenue Recognition

The Company recognizes revenue from software licenses in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition. Accordingly,
revenue for non-customized software is recognized when persuasive evidence of
an arrangement exists, the fee is fixed and determinable and the software is
delivered, provided no significant obligations remain and collection of the
resulting receivable is deemed probable. Software delivered to a customer on a
trial basis is not recognized as revenue until a

121

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

permanent key is delivered to the customer. When a customer licenses software
together with the purchase of maintenance, the Company allocates a portion of
the fee to maintenance for its fair value based on the contractual maintenance
renewal rate. Software maintenance fees are deferred and recognized as revenue
ratably over the term of the contract. The cost of providing technical support
is included in cost of revenues. The Company had no revenue from software
licenses or maintenance fees in 2000.

Network consulting fees, which are billed on a time and materials basis, are
recognized as revenue when the services are performed. These services have not
been provided to our end user software license customers and, thus, are not a
component of multi-element arrangements. Costs of providing these services are
included in cost of revenues.

The Company has entered into various distribution, licensing and joint
promotion agreements with OEM's, whereby the Company has provided the OEM a
non-exclusive software license to install the Company's software on certain
hardware in exchange for royalty payments based on the number of products
distributed by the OEM. Nonrefundable advances received by the Company from an
OEM for software engineering services are recorded as deferred revenue and
recognized as revenue when the services are complete and the software product
master is delivered and accepted. Deferred revenue related to such arrangements
amounted to $133,000 at December 31, 2000.

(f) Property and Equipment

Property and equipment are recorded at cost. Depreciation is recognized
using the straight-line method over the estimated useful lives of the assets (3
to 7 years).

(g) Software Development Costs

Costs associated with the development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Through December 31, 2000, no software
development costs were capitalized.

(h) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(i) Long-Lived Assets

The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If the sum of the expected future cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.

122

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

(j) Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation. The Company has elected to
record compensation expense for stock options and warrants granted to employees
and directors only if the then-current market price of the underlying stock
exceeds the exercise price on the date of grant, in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, rather than the fair value based method of
measuring compensation cost under SFAS No. 123. Accordingly, the Company has
disclosed the pro-forma net loss as if the fair value method of SFAS No. 123
had been used to measure compensation cost. Transactions in which options and
warrants are granted to other than employees and directors are accounted for at
fair value.

(k) Financial Instruments

As of December 31, 2000, the fair value of the Company's financial
instruments including cash and equivalents, accounts receivable, accounts
payable and accrued expenses, approximates book value due to the short maturity
of these instruments.

(l) Stock Split

In July, 2000, the Company's Board of Directors declared a five-for-one
stock split to be effected in the form of a common stock dividend. For purposes
of the accompanying consolidated financial statements, all share and per share
information has been adjusted for the stock split.

(m) Foreign Currency

Assets and liabilities of foreign operations are translated at rates of
exchange at the end of the period, while results of operations are translated
at average exchange rates in effect for the period. Unrealized gains and losses
from the translation of foreign assets and liabilities are classified as a
separate component of stockholders' equity. Realized gains and losses from
foreign currency transactions are included in the statement of operations.

(n) Earnings Per Share (EPS)

Basic EPS is computed based on the weighted average number of shares of
common stock outstanding. Diluted EPS is computed based on the weighted average
number of common shares outstanding increased by dilutive common stock
equivalents. Due to a net loss, all common stock equivalents were excluded from
diluted loss per share. As of December 31, 2000, potentially dilutive common
stock equivalents included 6,559,500 stock options outstanding and 24,800,000
shares issuable upon the conversion of convertible preferred stock.

(o) New Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, as amended by SFAS No. 137.
In June 2000, SFAS No. 138 was issued which amended certain provisions of SFAS
No. 133. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments

123

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

embedded in other contracts, and for hedging activities. In accordance with
SFAS No. 133, an entity is required to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The Company does not believe that the implementation of SFAS No.
133 will have a significant impact on its consolidated financial statements
when adopted on January 1, 2001.

(p) Comprehensive Income (Loss)

Comprehensive income (loss) includes the Company's net income (loss) and
foreign currency translation adjustments and is included the consolidated
statement of stockholders' equity.

(q) Use of Estimates

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

(2) Liquidity

As shown in the accompanying financial statements, the Company incurred a
net loss and negative cash flow from operations during the period from
inception (February 10, 2000) through December 31, 2000. Management has
formulated plans that it believes will provide the Company with sufficient
liquidity to meet its cash obligations at least through January 31, 2002. Such
plans include (a) the availability of $7,727,182 in cash and cash equivalents
as of December 31, 2000, (b) the commencement of the marketing of its core data
storage network software, and (c) the receipt by the Company of $25,000,000
from the sale of Series C Preferred Stock (note 9).

(3) Property and Equipment

Property and equipment consist of the following at:

March 31, December 31, Useful
2001 2000 lives
----------- ------------ ---------
(unaudited)

Computer hardware and software.......... $ 695,247 $516,261 3 years
Furniture and equipment................. 89,432 117,845 5-7 years
--------- --------
784,679 634,106
Less accumulated depreciation........... (102,301) (50,905)
--------- --------
$ 682,378 $583,201
========= ========

124

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

(4) Income Taxes

Due to pre-tax losses, there was no provision for Federal, state or foreign
income taxes in 2000. The tax effects of temporary differences that give rise
to the Company's deferred tax assets as of December 31, 2000 are as follows:

Deferred tax assets:
U.S. net operating loss carryforwards......................... $ 485,500
Start-up costs not currently deductible for taxes............. 230,200
Depreciation.................................................. 21,400
Other......................................................... 69,600
---------
806,700

Valuation allowance............................................. (806,700)
---------
$ --
=========

The difference between the provision for income taxes computed at the
Federal statutory rate and the reported amount of tax expense attributable to
loss before income taxes for the period from inception (February 10, 2000)
through December 31, 2000 is as follows:

Tax recovery at Federal statutory rate......................... $(712,500)
Increase (reduction) in income taxes resulting from:
State and local taxes, net of Federal income tax benefit..... (147,300)
Non-deductible expenses...................................... 34,700
Non-deductible expenses of foreign operations................ 18,400
Increase in valuation allowance.............................. 806,700
---------
$ --
=========

For the period from inception (February 10, 2000) through December 31, 2000,
the Company had a pre-tax loss of $2,044,000 in the U.S. and a pre-tax loss
from foreign operations of $52,000. As of December 31, 2000, the Company has
U.S. net operating loss carryforwards of approximately $1,150,000, which expire
in 2020. At December 31, 2000, the Company has established a valuation
allowance against its net deferred tax assets due to the Company's development
stage losses and the resulting likelihood that the deferred tax asset is not
realizable. The utilization of certain of these tax loss carryforwards may be
subject to annual limitations imposed by the Internal Revenue Code Section 382
due to the Company's various equity transactions which may result in a change
of control.

(5) Stockholders' Equity

Upon the incorporation of the Company on February 10, 2000, the Company
issued 15,000,000 shares of its common stock for proceeds of $30,000.

In November 2000, in connection with a three year consulting agreement, the
Company, in addition to agreeing to pay a monthly consulting fee, sold 100,000
shares of common stock to the consultant for $25,000. The consultant's rights
to such shares will vest for 33,000 on each of November 1, 2001 and 2002 and
34,000 on November 1, 2003. If, prior to November 1, 2003, the consultant
ceases to provide consulting services for

125

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

any reason, the Company has the right to repurchase any unvested shares at
$0.25 per share. The excess of the fair value of the common stock over $0.25
amounting to $32,000 as of December 31, 2000, was recorded as consulting
expense with a corresponding credit to additional paid-in capital during 2000.
The expense related to those common shares will be adjusted to fair value until
performance of these services has been completed.

In March 2000, the Company issued 3,000,000 shares of its Series A
convertible preferred stock ("Series A") at $1.00 per share for net proceeds of
$2,976,329. Each share of Series A is convertible, at the option of the holder,
into five shares of common stock. The Series A will automatically convert into
common stock upon the affirmative vote of the holders of a majority of the
outstanding shares of Series A and upon the closing of a public offering under
certain circumstances. The holders of Series A are entitled to receive
cumulative cash dividends at the same rate as dividends are paid with respect
to the common stock. The Series A is not redeemable at the option of the holder
and has a liquidation preference equal to the greater of $1.00 per share plus
all accumulated unpaid dividends, or the amount that the Series A holders would
have received had they converted all Series A into shares of common stock. The
holders of the Series A are entitled to elect two directors of the Company.

In September 2000, the Company issued 4,900,000 shares of its Series B
convertible preferred stock ("Series B") at $1.43 per share for net proceeds of
$6,997,116. Each share of Series B is convertible, at the option of the holder,
into two shares of common stock. The Series B will automatically convert into
common stock upon the affirmative vote of the holders of a majority of the
outstanding shares of Series B and upon the closing of a public offering of the
Company's common stock under certain circumstances. The holders of Series B are
entitled to receive cumulative cash dividends at the same rate as dividends are
paid with respect to the common stock. The Series B is not redeemable at the
option of the holder and has a liquidation preference equal to the greater of
the amount that the Series B holders would have received had they converted all
Series B into shares of common stock, or the aggregate purchase price paid for
the Series B plus all accumulated unpaid dividends.

At December 31, 2000 the Company had reserved, authorized and unissued
common shares, for the following purposes:

Shares
----------

Conversion of Series A preferred stock.......................... 15,000,000
Conversion of Series B preferred stock.......................... 9,800,000
Stock options................................................... 8,000,000
----------
32,800,000
==========

(6) Stock Options

As of May 1, 2000, the Company adopted the Falconstor, Inc. 2000 Stock
Option Plan (the "Plan"). The Plan is administered by the Board of Directors
and provides for the issuance of stock-based compensation to employees,
consultants and non-employee directors. The maximum number of shares which may
be awarded under the plan is 8,000,000. Options may be incentive ("ISO") or
non-qualified. Exercise prices of ISOs granted must be at least equal to the
fair value of the common stock on the date of grant, and have terms not greater
than ten years, except those to an employee who owns stock greater than 10% of
the voting power of all classes of stock of the Company, in which case they
must (a) have an option price at least 110% of the fair value of the stock, and
(b) expire after five years from the date of grant.

126

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

During 2000, the Company granted its employees options to purchase an
aggregate of 6,245,000 shares of common stock at an exercise price of $0.25 per
share. Such options generally vest over a period of three years and are
exercisable for a period of ten years from the date of grant. As of December
31, 2000, no options were exercisable. No options were exercised or canceled
during 2000. Certain of the options granted to employees had exercise prices
less than the fair value of the common stock on the grant date, which resulted
in deferred compensation of $496,960 in 2000 and an additional $1,028,640 in
the quarter ended March 31, 2001. The amortization of deferred compensation
amounted to $27,609 in 2000 and an additional $89,922 in the quarter ended
March 31, 2001.

Also during 2000, the Company granted options to certain non-employee
consultants to purchase an aggregate of 274,500 shares of common stock in
exchange for certain professional services received during 2000. These options
have an exercise price of $0.25 per share, vest over a period of three years
and are exercisable for a period of ten years from the date of grant. The
aggregate fair value of these options as determined using the fair value method
under SFAS No. 123, amounting to approximately $83,406, was recorded as general
and administrative expense with a corresponding credit to additional paid-in
capital.

In addition, in November 2000, the Company granted options to certain non-
employee consultants to purchase an aggregate of 40,000 shares of common stock
in exchange for certain professional services which are to be performed during
the period from November 2000 through November 2001. These options have an
exercise price of $0.25 per share, vest over a period of three years and are
exercisable for a period of ten years from the date of grant. The aggregate
fair value of these options as determined using the fair value method under
SFAS No. 123, amounts to approximately $19,449, $3,241 of which was recorded as
general and administrative expense during 2000 with a corresponding credit to
additional paid-in capital. The expense related to these options will be
adjusted to fair value until performance of the services has been completed.

Stock option activity for the periods indicated is as follows:

Weighted
average
Number of exercise
Options price
--------- --------

Outstanding at February 10, 2000 (inception)............. --
Granted.................................................. 6,559,500 $0.25
Exercised................................................ --
Canceled................................................. --
---------
Outstanding at December 31, 2000......................... 6,559,500 $0.25
Granted (unaudited)...................................... 1,147,000 $0.28
Exercised (unaudited).................................... --
Canceled (unaudited)..................................... (505,000) $0.25
---------
Outstanding at March 31, 2001............................ 7,201,500 $0.25
=========
Vested at December 31, 2000 and March 31, 2001........... --
=========
Options available at December 31, 2000................... 1,440,500
=========
Options available at March 31, 2001...................... 798,500
=========

127

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

The following table summarizes information about stock options outstanding
at March 31, 2001 (unaudited):

Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Contractual Average Exercise Number Average Exercise
Exercise Price Outstanding Life (Years) Price Outstanding Price
-------------- ----------- --------------------- ---------------- ----------- ----------------

$0.25 7,121,500 9 $0.25 --
$0.73 80,000 9 $0.73 --
--------- ---- ---
7,201,500 --
========= ==== ===

The per share weighted average fair value of stock options granted during
the period from inception (February 10, 2000) to December 31, 2000 was $0.23 on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected dividend yield of 0%, risk
free interest rate of 6%, expected stock volatility of 60% and an expected
option life of five years for options granted to employees of the Company, and
an option life of ten years for options granted to non-employees.

The Company applies the provisions of APB Opinion No. 25 in accounting for
stock-based employee compensation. Had the Company determined stock-based
compensation cost based upon the fair value method under SFAS No. 123, the
Company's pro-forma net loss and diluted net loss per share for the period from
inception (February 10, 2000) through December 31, 2000, would have been
$2,256,180, and $0.15, respectively.

(7) Commitments

The Company has an operating lease covering its primary office facility that
expires in September, 2005. Upon inception of this lease the Company was
required to pay a $201,596 security deposit to the lessor. The Company also has
an operating lease covering its office space in Taiwan that expires in
November, 2001. The following is a schedule of future minimum lease payments
for these operating leases as of December 31, 2000:

Year ending December 31,
------------------------

2001............................................................ $141,791
2002............................................................ 146,831
2003............................................................ 152,072
2004............................................................ 157,523
2005............................................................ 84,146
--------
$682,363
========

These leases require the Company to pay its proportionate share of real
estate taxes and other common charges. Total rent expense for operating leases
was $68,571 for the period from inception (February 10, 2000) through December
31, 2000.

The Company is a party to various claims arising in the ordinary course of
its business, the resolution of none of which, the Company believes will have a
material adverse effect on the Company's liquidity or results of operations.

128

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

(8) Subsequent Event

On March 30, 2001, the Company entered into an agreement with Network
Peripherals Inc. ("NPI"), a public company that designs and manufactures
Ethernet switching hardware, whereby on April 2, 2001 the Company issued
9,792,401 shares of its $0.001 par value Series C convertible preferred stock
("Series C") at $2.55 per share to NPI for gross proceeds of $25,000,000. Each
share of Series C is convertible, at the option of the holder, into one share
of common stock. The Series C will automatically convert into common stock upon
the affirmative vote of the holders of a majority of the outstanding shares of
Series C and upon either (i) the closing of a public offering of the Company's
common stock under certain circumstances, or (ii) the consummation of a merger
or consolidation of the Company with or into another company. The holders of
Series C are entitled to receive cumulative cash dividends at the same rate as
dividends are paid with respect to the common stock. The Series C is not
redeemable at the option of the holder and has a liquidation preference equal
to the greater of $2.55 per share plus all accumulated unpaid dividends, or the
amount that the Series C holders would have received had they converted all
Series C into shares of common stock. The holders of the Series C are entitled
to elect one director of the Company.

In connection with the sale of the Series C, on March 30, 2001 the Company
and NPI entered into an irrevocable option agreement whereby NPI received an
exclusive option to merge with the Company. The option may be exercised through
April 27, 2001, unless extended by written consent of NPI and the Company. The
merger agreement provides that, as consideration for all outstanding shares of
the Company's common stock, NPI would issue a number of newly issued shares of
NPI common stock as determined in accordance with the merger agreement. Based
on the agreement, the number of NPI common shares to be issued would result in
the Company's stockholders having at least a two-thirds ownership in the
combined entity. The merger would be structured as a tax free reorganization,
and would be accounted for as a purchase transaction. Completion of the merger
would be subject to the expiration of the applicable Hart-Scott-Rodino waiting
period, stockholder approval and other customary closing conditions. In the
event that NPI does not exercise the option, and under certain other
circumstances, NPI may be required to pay the Company a penalty of $3,000,000.
There can be no assurance that the merger will be consummated in a timely
manner, if at all.

(9) Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the
period from inception (February 10, 2000) through December 31, 2000:

Inception
(February 10,
2000) through
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
------------- ---------- ------------- ------------

Revenues................ $ -- $ -- $ 68,350 $ 74,944
========== ========== ========== ===========
Net loss................ $ (51,474) $ (155,744) $ (489,388) $(1,399,113)
========== ========== ========== ===========
Basic and diluted net
loss per share......... $ (0.00) $ (0.01) $ (0.03) $ (0.09)
========== ========== ========== ===========
Weighted average basic
and diluted common
shares outstanding..... 15,000,000 15,000,000 15,000,000 15,066,304
========== ========== ========== ===========

The sum of the quarterly net loss per share amounts do not always equal the
annual amount reported, as per share amounts are computed independently for
each quarter and the annual period based on the weighted average common shares
outstanding in each such period.

129

FALCONSTOR, INC. AND SUBSIDIARY
(a development stage enterprise)

Notes to Consolidated Financial Statements--(Continued)
December 31, 2000

(10) Subsequent Events (Unaudited)

On May 4, 2001, the Company issued 3,193,678 shares of its Series C at $2.55
per share for gross proceeds of $8,153,460. Each share of Series C preferred
stock is convertible into one share of common stock, is not redeemable at the
option of the holder and has other terms similar to the previous issuance of
Series C shares. The issuance of the Series C resulted in a beneficial
conversion feature, which will be recorded as a preferred stock dividend in the
second quarter of 2001, since the Series C was convertible at issuance. Also on
May 4, 2001, NPI exercised its option to merge with the Company, and the
Company and NPI entered into a definitive merger agreement.

130

NPI PROPOSAL NO. 2

AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION

Under Delaware law, NPI may only issue shares of common stock to the extent
such shares have been authorized for issuance under NPI's restated certificate
of incorporation. The restated certificate of incorporation currently
authorizes the issuance by NPI of up to 60,000,000 shares of common stock.
Although NPI currently has a sufficient number of shares of common stock
authorized to complete the merger, NPI's board of directors recommends that the
stockholders approve an increase in the authorized shares of common stock to
enable the board of directors to issue additional shares for various corporate
purposes following the merger, as discussed below. The merger agreement also
provides for this proposed increase.

As of July 11, 2001, 13,280,181 shares of NPI common stock were issued and
outstanding, and 5,252,997 shares of common stock were reserved for issuance
under NPI's stock option plans. Approximately 29,732,912 shares of common stock
are proposed to be issued to holders of FalconStor capital stock pursuant to
the merger, and, in addition, approximately 8,234,424 shares of NPI common
stock must be reserved effective as of the closing of the merger for shares
reserved for issuance under FalconStor's Stock Option Plan that will be assumed
by NPI pursuant to the merger agreement. Therefore, immediately following the
merger, there will only be approximately 3,499,486 shares of common stock
available for issuance.

The purpose of the proposed amendment to the restated certificate of
incorporation to increase the number of shares of common stock authorized for
issuance to 100,000,000 is to authorize additional shares of common stock which
will be available for issuance following the merger, for a reserve for issuance
upon exercise of stock options assumed in the merger, and also in the event the
board of directors determines that it is necessary or appropriate to issue
additional shares in connection with a stock dividend, additional equity
incentives to employees and officers, or for other corporate purposes. The
availability of additional shares of common stock is particularly important in
the event that NPI needs to undertake any of the foregoing actions on an
expedited basis and wishes to avoid the time and expense of seeking stockholder
approval in connection with the contemplated issuance of common stock. NPI has
no present agreement or arrangement to issue any of the additional authorized
shares other than in connection with the merger and the exercise of options
assumed in the merger.

The increase in authorized common stock will not have any immediate effect
on the rights of existing stockholders except the effects of the merger
described in this section. However, the board will have the authority to issue
common stock without requiring future stockholder approval of such issuance,
except as may be required by applicable law. To the extent that additional
shares are issued in the future, they may decrease the existing stockholders'
percentage equity ownership and, depending on the price at which they are
issued, could be dilutive to the existing stockholders.

The increase in the authorized number of shares of common stock and the
subsequent issuance of shares could have the effect of delaying or preventing a
change in control of NPI without further action by the stockholders. Shares of
authorized and unissued common stock could, within the limits imposed by
applicable law, be issued in one or more transactions which make a change in
control of NPI more difficult, and therefore less likely. Any such issuance of
additional stock could have the effect of diluting the earnings per share and
book value per share of outstanding shares of common stock, and such additional
shares could be used to dilute the stock ownership or voting rights of a person
seeking to obtain control of NPI. The board of directors is not currently aware
of any attempt to acquire NPI. While it may be deemed to have potential anti-
takeover effects, the proposed amendment to increase the authorized common
stock is not prompted by any specific effort or takeover threat currently
perceived by management.

In addition to the increase in the authorized shares of common stock, in
connection with the merger, NPI has proposed to amend its restated certificate
of incorporation to provide for the change of the corporate name to "FalconStor
Software, Inc." Since the combined company will be adopting and pursuing
Falconstor's business strategy, changing NPI's name to FalconStor will allow
the name of the combined company to better reflect the business of the combined
company on a going-forward basis.

131

Vote Required and Board of Directors' Recommendation

The affirmative vote of a majority of all outstanding votes entitled to be
cast at the annual meeting of NPI stockholders, at which a quorum representing
a majority of all outstanding shares of common stock of NPI's present, either
in person or by proxy is required for approval of this proposal. Abstentions
and broker non-votes will each be counted as present for purposes of
determining the presence of a quorum. Abstentions and broker non-votes will
each have the same effect as a negative vote on this proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
AMEND NPI'S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF NPI'S COMMON STOCK FROM 60,000,000 SHARES TO 100,000,000
SHARES AND CHANGE THE CORPORATE NAME TO FALCONSTOR SOFTWARE, INC.

132

ADDITIONAL ANNUAL MEETING MATTERS FOR NPI

NPI PROPOSAL NO. 3

THE ELECTION OF DIRECTORS

In the event the merger is not approved and completed pursuant to Proposal
No. 1, the NPI stockholders are being asked to elect two Class I Directors at
the annual meeting to hold office until the annual meeting to be held in 2004
and until their successors have been elected and qualified.

NPI's bylaws authorize the board of directors to fix the number of directors
and provide that the directors shall be divided into three classes, with the
classes of directors serving for staggered, three-year terms. There are
currently five members on the board of directors. If the merger is not
completed, then two Class I directors need to be elected. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for NPI's
two nominees named below, who are presently directors of NPI. In the event that
any nominee of NPI 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 shall be
designated by the present board of directors to fill the vacancy. In the event
that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them in such a manner as will
assure the election of the nominee listed below, and, in such event, the
specific nominee to be voted for will be determined by the proxy holders.

The following information sets forth the names and ages of the nominees, and
each director of NPI whose term of office continues after the annual meeting
assuming that the merger is not completed, the principal occupation of each
during the past five years, and the period during which each has served as a
director of NPI:

Nominees for Election as Class I Directors Serving for Three-Year Terms
Expiring in 2004

Michael Gardner, age 55, has served as a director of NPI since May 1998.
From July 1999 to the present, he has been executive vice president of
worldwide operations at Blue Pumpkin Software, a software company. From
February 1998 to April 1999, he served as senior vice president for Sybase,
Inc., an information management software company. From November 1996 to
February 1998, he was chief operating officer for ACT Networks, a wide-area
network access products manufacturer. From May 1995 to November 1996, he was
president of Whittaker Communications (formerly Hughes LAN Systems), a
networking company.

James Regel, age 58, joined NPI in August 2000 as president, chief operating
officer and director and became the chief executive officer of NPI in October
2000. From January 2000 to July 2000, Mr. Regel was vice president of worldwide
sales at Proxim, a manufacturer of wireless networking products. Mr. Regel
joined Proxim in January 2000 through Proxim's acquisition of Wavespan, a high
speed wireless networking company, where he served as chief executive officer
from June 1999 to January 2000 and senior vice president of sales from March
1997 to June 1999. Previously, he held executive positions in sales and
marketing at Verilink Corporation, Network Equipment Technologies and Rolm
Corporation.

Incumbent Directors Not Standing for Re-election at the 2001 Annual Meeting

Thomas Brown, age 59, has served as a director of NPI since July 2000. From
1990 until his retirement in January 1997, Mr. Brown was an executive officer
at Xircom, Inc., a provider of networking and information access solutions for
mobile computer users. From 1997 until the present, Mr. Brown has served as a
director of several private companies, including Bourns, Inc., Computer
Economics, Inc., and Intematix. In addition, he has worked as a consultant in
the networking and telecommunications industry.

Charles Hart, age 63, has served as a director of NPI since November 1996.
From February 2000 to present, Mr. Hart has served as the chairman and chief
executive officer of SurfMonkey, Inc., a family Internet technology company.
From February 1999 to August 2000, he was the chief executive officer of
SANetworks, Inc., a manufacturer of networking interface cards and switches.
Previously in 1998, he served as the

133

chief executive officer and a director of Micronics Computers Inc., a supplier
of advanced system boards for high-performance personal computers. From April
1997 through February 1998, he served as the executive vice president, business
development, for NPI. From August 1995 to May 1997, he was a founding board
member of InsWeb Corporation, an internet technology company providing a
vertically integrated marketplace for the insurance industry on the World Wide
Web. Previously, he held positions of president and chief executive officer at
Semaphore Communications Corporation. Phaser Systems, Etak, Inc. and Nestar
Systems, Inc. Mr. Hart also serves as a director of CES Communication Ltd., in
New Zealand.

Glenn Penisten, age 69, has served as the chairman of the board of directors
of NPI since June 1996. From 1985 to present, he has been a partner of Alpha
Partners, a venture capital firm. He has served as chief executive officer for
several leading technology companies including; Superconductor Technologies,
Inc., from May 1987 to June 1988; American Microsystems, Inc., from July 1976
to December 1984, and Data Transmission Co., from February 1972 to April 1976.
Mr. Penisten has also held director level positions at Dataproducts
Corporation, Sanders Associates and Gould, Inc. He served as a corporate
officer at Texas Instruments, Inc., and chairman of the American Electronics
Association. Mr. Penisten currently serves as director for IKOS Systems, Bell
Microproducts, Pinnacle Systems, and Superconductor Technologies, Inc.

Vote Required and Board of Directors' Recommendation

The affirmative vote of a plurality of the votes actually cast at the annual
meeting of NPI stockholders, at which a quorum representing a majority of all
outstanding shares of common stock of NPI is present either in person or by
proxy, is required for approval of this proposal. Directors are elected by a
plurality of votes cast. Abstentions and broker non-votes will each be counted
as present for purposes of determining the presence of a quorum. Abstentions or
broker non-votes will have no effect on the election of directors.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE NAMED NOMINEES.

134

NPI PROPOSAL NO. 4

RATIFICATION OF APPOINTMENT OF ACCOUNTANTS

In the event the merger is not completed and approved pursuant to Proposal
No. 1, the NPI stockholders are being asked to ratify the board of directors'
selection of PricewaterhouseCoopers LLP as NPI's independent accountants to
audit the financial statements of NPI for the fiscal year ending December 31,
2001.
PricewaterhouseCoopers has audited NPI's financial statements since 1989. A
representative of PricewaterhouseCoopers is expected to be present at the
annual meeting with the opportunity to make a statement if he or she so
desires, and is expected to be available to respond to appropriate questions.

The following table sets forth the aggregate fees billed to NPI for the
fiscal year ended December 31, 2000 by PricewaterhouseCoopers:

Audit Fees....................................................... $138,000
Financial Information Systems Design and Implementation Fees..... $ --
All Other Fees................................................... $170,000

The audit committee has considered the role of PricewaterhouseCoopers in
providing information technology, business consulting and tax services and
other non-audit services to NPI and has concluded that such services are
compatible with PricewaterhouseCoopers' independence as NPI's auditors.

Vote Required and Board of Directors' Recommendation

The affirmative vote of a majority of the votes actually cast at the annual
meeting of NPI stockholders, at which a quorum representing a majority of all
outstanding shares of common stock of NPI is present, either in person or by
proxy, is required for approval of this proposal. Abstentions and broker non-
votes will each be counted as present for purposes of determining the presence
of a quorum. Abstentions and broker non-votes will have no effect on the
outcome of this vote.

The board of directors has conditioned its appointment of NPI's independent
accountants upon the receipt of the affirmative vote. In the event that the
stockholders do not approve the selection of PricewaterhouseCoopers, the board
of directors will reconsider the appointment of the independent accountants.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS NPI'S INDEPENDENT
ACCOUNTANTS.

135

BOARD OF DIRECTORS' MEETINGS AND COMMITTEES

The board of directors of NPI held a total of seven meetings and acted by
written consent on six separate occasions during 2000. No current director
participated in fewer than 75% of all such meetings and actions by the board of
directors, if any, and the committees, upon which such directors served, at the
time they were directors of NPI.

The board of directors currently has an audit committee and a compensation
committee. It does not have a nominating committee or a committee performing
the functions of a nominating committee. The functions of a nominating
committee are performed by the board of directors as a whole.

The audit committee recommends the engagement of NPI's independent
accountants, reviews and approves the scope of an annual audit and other
services performed by the independent accountants, and reviews and evaluates
NPI's accounting principles and its systems of internal accounting controls.
The audit committee held four meetings in 2000 and currently consists of Mr.
Gardner (chairperson), Mr. Brown and Mr. Hart. See "Report of the Audit
Committee."

The compensation committee reviews and approves the compensation policies
applicable to NPI's executive officers, and reviews and approves grants of
stock options pursuant to NPI's stock option plans. The compensation committee
held five meetings in 2000 and currently consists of Mr. Hart (chairperson),
Mr. Brown and Mr. Gardner. See "Report of the Compensation Committee of the
Board of Directors on Executive Compensation."

136

EXECUTIVE COMPENSATION AND OTHER MATTERS

Summary Compensation Table

The following table sets forth certain information concerning the
compensation of NPI's chief executive officer, NPI's former chief executive
officer, the one other most highly compensated executive officer and two former
executive officers whose salary and bonus for the year ended December 31, 2000
exceeded $100,000. The individuals included in the table will be collectively
referred to as the "Named Officers."

Annual
Compensation Long-Term
-------------------- Compensation
Name and Principal Awards All Other
Position Year Salary Bonus (1) Options (1) Compensation (2)
------------------ ---- -------- -------- ------------ ---------------

James Regel............ 2000 $145,833 $ -- 375,000 $ --
President and Chief
Executive Officer

Joseph Botta........... 2000 151,000 -- 62,500 --
(former Vice President
of Operations) 1999 70,062 -- 85,000 --

Robert Zecha........... 2000 172,884 -- 32,500 3,000
(former Vice President
of Research and 1999 152,884 62,500 10,000 1,000
Development) 1998 167,875 -- 20,000 --

William F.
Rosenberger........... 2000 221,474 200,000 -- 86,333
(former President and
Chief Executive
Officer) 1999 250,000 75,000 -- 1,000
1998 125,000 50,000(3) 500,000 --

James Sullivan......... 2000 228,923(4) -- 10,000 3,000
(former Vice President
of Sales) 1999 246,086(4) -- 15,000 1,000
1998 253,574(4) -- 60,000 --

--------
(1) From time to time, the compensation committee reviews the performance of an
executive officer and may award cash bonuses and/or stock options to an
officer.

(2) The stated amounts for all Named Officers, except for Mr. Rosenberger, were
NPI's matching contributions to NPI's 401(k) plan. Mr. Rosenberger's amount
for year 2000 included a payment of $83,333 based on the terms of his
separation agreement and $3,000 of NPI's matching contributions.

(3) Bonus paid to Mr. Rosenberger in 1998 was pursuant to "sign-on" provisions
in the employment contract.

(4) Included in Mr. Sullivan's salaries were commissions of $125,750, $96,086,
$103,574 in 2000, 1999 and 1998, respectively.

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Option Grants in Last Fiscal Year

The following table sets forth details regarding stock options granted to
the Named Officers in 2000. NPI granted no stock appreciation rights in 2000.
In addition, in accordance with the SEC rules, the table shows the hypothetical
gains or "option spreads" that would exist for the respective options. These
gains are based on assumed rates of annual compound stock price appreciation of
5% and 10% from the date the options were granted over the full option term.
The actual value, if any, an executive may realize will depend on the spread
between the market price and the exercise price on the date the option is
exercised.

Individual Grants Potential Realizable
-------------------------------------------- Value at Assumed
Number of Percent of Exercise Annual Rates of Stock
Securities Total Options or Base Price Appreciation
Underlying Granted to Price for Option Term (1)
Options Employees in Per Expiration ---------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------

James Regel............. 250,000 11.95% $13.375 08/01/2010 $2,102,866 $5,329,076
125,000 5.98% 11.875 08/24/2010 933,515 2,365,711

Joseph Botta............ 12,500 0.60% 24.375 04/18/2010 191,616 485,593
50,000 2.39% 11.875 08/24/2010 373,406 946,285

Robert Zecha............ 12,500 0.60% 24.375 04/18/2010 191,616 485,593
20,000 0.96% 11.875 08/24/2010 149,362 378,514

William F. Rosenberger.. -- -- -- -- -- --

James Sullivan.......... 10,000 0.48% 24.375 04/18/2010 153,293 388,475

--------
(1) The potential gain is calculated based on the fair market value of NPI's
common stock on the date of grant, which is equal to the closing price
reported on The Nasdaq National Market. These amounts only represent
certain assumed rates of appreciation as established by the SEC. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of NPI and overall stock market conditions. There can be no
assurance that the amounts reflected in this table or the associated rates
of appreciation will be achieved.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth certain information concerning options
exercised by the Named Officers during 2000, including the aggregate value of
gains on the date of exercise. In addition, this table includes the number of
shares covered by both exercisable and unexercisable stock options as of year-
end. Also reported are the values for "in-the-money" options, which represent
the positive spread between the exercise price of any such existing stock
options and the year-end price of NPI's common stock.

Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
Shares End at Fiscal Year End (1)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ---------- ----------- ------------- ----------- -------------

James Regel............. -- $ -- -- 375,000 $ -- $ --
Joseph Botta............ -- -- 31,875 115,625 -- --
Robert Zecha............ 15,000 1,078,594 97,915 64,585 159,842 37,502
William F. Rosenberger.. 285,102 2,699,438 6,564 -- 15,179 --
James Sullivan.......... 94,165 1,156,463 -- -- -- --

--------
(1) Market value of underlying securities, based on the closing price of NPI's
common stock, as reported by The Nasdaq National Market System, on December
31, 2000 of $6.4375, minus the exercise price.

138

Employment Contracts, Termination of Employment and Change in Control
Arrangements

In September 2000, NPI entered into an employment agreement with James Regel
whereby Mr. Regel agreed to become the president and co-chief executive
officer. Pursuant to the employment agreement, Mr. Regel's annual base salary
is $250,000, and Mr. Regel is eligible to earn an annual bonus of $100,000, of
which $75,000 is guaranteed during the first 12 months of his employment and
the payment of the remaining balance is based on the attainment of performance
objectives determined by the compensation committee. Mr. Regel was granted an
option to purchase 375,000 shares of NPI's common stock with a vesting period
of four years. If a change in control occurs during the first six months of Mr.
Regel's employment, 50% of his unvested stock options will immediately vest; if
a change in control occurs between the seventh- and the twelfth-month of
employment, 75% of his unvested stock options will immediately vest; and if a
change in control occurs after 12 months, all of his unvested stock options
will immediately vest. If Mr. Regel is terminated without cause or resigns upon
constructive termination following a change of control, he is entitled to
receive the following: (i) an amount equal to his annual base salary at the
time of termination payable over one year following termination, (ii) medical
insurance coverage for one year, and (iii) immediate vesting of all unvested
stock options which remain exercisable for one year following the termination.
In October 2000, the compensation committee approved an increase in Mr. Regel's
annual base salary to $350,000, retroactively effective as of the commencement
of his employment with NPI, and any guaranteed bonus already paid was
considered part of the increased salary.

In October 2000, NPI entered into an employment agreement with Ronald
Rutherford whereby Mr. Rutherford agreed to be the vice president of worldwide
sales. The employment agreement provides that Mr. Rutherford's annual base
salary is $155,000 and that his annual target commission is set at $100,000.
Upon the commencement of his employment with NPI, Mr. Rutherford was granted an
option to purchase 160,000 shares of NPI's common stock with a vesting period
of four years. If a change in control occurs during the first 12 months of
employment, 50% of Mr. Rutherford's stock options will immediately vest, and if
a change in control occurs after 12 months, all of Mr. Rutherford's stock
options will immediately vest. If Mr. Rutherford is terminated without cause,
he will receive a severance payment equal to his six-month base salary.

In December 2000, NPI entered into an employment agreement with James
Williams whereby Mr. Williams accepted the position of senior vice president of
finance and administration, secretary, treasurer and chief financial officer.
The employment agreement with Mr. Williams provides that his annual base salary
is $225,000. Upon the commencement of his employment with NPI, Mr. Williams was
granted an option to purchase 175,000 shares of NPI's common stock with a
vesting period of four years. If a change in control occurs during the first
six months of employment, 50% of Mr. Williams' stock options will immediately
vest; if a change in control occurs between the seventh- and the twelfth-month
of employment, 75% of Mr. Williams' stock options will immediately vest; and if
a change in control occurs after 12 months, all of Mr. Williams' stock options
will immediately vest. If Mr. Williams is terminated without cause, he will
receive a severance payment equal to his six-month base salary.

In December 2000, NPI also entered into an employment agreement with James
Baker whereby Mr. Baker agreed to be the senior vice president of engineering
and chief technology officer. The employment agreement with Mr. Baker provides
that his annual base salary is $235,000 and that he is eligible to earn a bonus
of $150,000 based on the performance objectives set forth in the bonus plan.
Upon the commencement of his employment with NPI, Mr. Baker was granted an
option to purchase 200,000 shares of NPI's common stock with a vesting period
of four years. If a change in control occurs during the first 12 months of
employment, 50% of Mr. Baker's stock options will immediately vest, and if a
change in control occurs after 12 months, all of Mr. Baker's stock options will
immediately vest. If Mr. Baker is terminated without cause, he will receive a
severance payment in the amount of his six-month base salary.

NPI has entered into a separation and release agreement with Joseph Botta.
Pursuant to the agreement, upon the closing of the proposed merger with
FalconStor, Mr. Botta shall receive a severance payment of $500,000 in total
(in the form of cash payment from NPI and proceeds from sales of NPI's common
stock upon

139

exercise of his vested stock options). In addition, in exchange for his signing
of the agreement and an advance of his severance payment equal to $25,000, Mr.
Botta waives his right to the severance benefits set forth in the salary
continuation agreement that was previously entered into with NPI. On July 1,
2001, NPI removed Mr. Botta from his position with NPI.

NPI has also entered into a salary continuation agreement with Robert Zecha.
Such agreement provides that in the event Mr. Zecha is terminated, including a
constructive termination or a termination within a specified time period around
a change in control, as those terms are defined in each agreement, he shall be
entitled to continued salary and bonus payments for a period of one year. Mr.
Zecha shall also be entitled to continued medical coverage by NPI during the
period of salary continuation unless he is covered by another employer's group
health plan. In the event of a change in control, all stock options granted to
Mr. Zecha shall become exercisable 30 days before the consummation of such
change in control. On July 1, 2001, NPI removed Mr. Zecha from his position
with NPI. As a result, Mr. Zecha has entered into his one year severance
period.

NPI's 1997 Stock Plan provides that the board of directors may, in its sole
discretion, accelerate the vesting and the ability to exercise options in the
event of a change of control.

Compensation of Directors

Directors who are not employees of NPI are considered outside directors.
Outside directors are entitled to receive a director fee of $4,000 per fiscal
quarter so long as they remain directors of NPI. Directors do not receive any
additional or special remuneration for their services on any of the committees
established by the board of directors.

An outside director is eligible to participate in NPI's 1994 Outside
Directors Stock Option Plan. The Outside Directors Plan, as amended, provides
for the automatic granting of nonstatutory stock options to outside directors
of NPI. Each new outside director will be granted an option to purchase 15,000
shares of NPI's common stock on the date of election. Each continuing outside
director will be granted an option to purchase 5,000 shares of common stock on
the date of each annual meeting of stockholders.

Compensation Committee Interlocks and Insider Participation

During 2000, no member of the compensation committee was an executive
officer or employee of NPI. In addition, no executive officer of NPI has served
on the board of directors or compensation committee of any other entity that
has an executive officer serving as a member of NPI's board of directors.

Certain Relationships and Related Transactions

Section 16(a) Beneficial Ownership Reporting Compliance

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

Based solely on NPI's review of such forms furnished to NPI and written
representations from certain reporting persons, NPI believes that all filing
requirements applicable to NPI's executive officers, directors and more than
10% stockholders were complied with, except that Ronald Rutherford and James
Baker were late with respect to filing one report on Form 3 each.

140

Report of the Compensation Committee of the Board of Directors on Executive
Compensation

The compensation committee of the board of directors is comprised of non-
employee directors. The compensation committee is responsible for setting and
administering policies governing compensation of executive officers. The
compensation committee reviews the performance and compensation levels for
executive officers, sets salary and bonus levels and makes option grants under
NPI's 1997 Option Plan.

Compensation Policies

The goals of NPI's executive officer compensation policies are to attract,
retain and reward executive officers who contribute to NPI's success, to align
executive officer compensation with NPI's performance and to motivate executive
officers to achieve NPI's business objectives. NPI uses salary, bonuses and
stock options to achieve these goals. The compensation committee reviews
various available data, including compensation surveys, to enable the
compensation committee to compare NPI's compensation package with that of other
high technology companies of similar size and growth rates in NPI's geographic
area.

Compensation Components

Salaries are set for each executive officer with reference to a range of
salaries for comparable positions among high technology companies of similar
size, growth rate and location. Annual salary adjustments take into account
achievements of individual executive officers during the prior fiscal year as
measured against key company-wide objectives set each year by the board of
directors, as well as the executive officers' performance of their individual
responsibilities. Each compensation committee member weighs objective and
subjective performance factors, and a consensus is obtained through discussion.
The compensation committee also considers relative levels of responsibility
among executive officers in attempting to reach equitable and appropriate
projected compensation levels.

Cash incentive compensation is provided through participation in NPI's
executive bonus plan. The compensation committee determines the amount of an
individual's bonus based on subjective judgment of NPI's financial performance
and the achievement of established goals. A performance bonus of $200,000 was
paid to William Rosenberger in 2000.

The compensation committee strongly believes that equity ownership by
executive officers provides incentives to build stockholder value and aligns
the interests of executive officers with the stockholders. The size of an
initial option grant to an executive officer has generally been determined with
reference to comparable equity compensation offered by high technology
companies of similar size for similar positions, the responsibilities and
expected future contributions of the executive officer, as well as recruitment
considerations. In determining the size of subsequent grants, the compensation
committee has considered the individual executive officer's performance during
the previous fiscal year, the expected contributions during the coming year,
the amount of options already held and the level of recent grants. Stock
options granted to executive officers during 2000 were based upon available
data concerning option grants to executive officers of companies of similar
size, growth and location and a review of recent grants. The compensation
committee believes that future subsequent option grants, with vesting schedules
of up to four years, will provide strong incentives for executive officers to
remain with NPI.

Chief Executive Officer Compensation

The compensation of the chief executive officer is based upon the same
criteria outlined above for the other executive officers of NPI. While the
chief executive officer makes recommendations about the compensation levels,
goals and performance of the other executive officers, he does not participate
in the discussions regarding his compensation or performance.

141

Qualifying Compensation

The compensation committee has considered the potential impact of Section
162(m) of the Internal Revenue Code ("Section 162(m)") adopted under the
Federal Revenue Reconciliation Act of 1993. Section 162(m) disallows a tax
deduction for any publicly held corporation for certain executive officers'
compensation exceeding $1,000,000 per person in any taxable year unless it is
"performance based" within the meaning of Section 162(m). Since to date the
cash compensation plus restricted stock vesting of each of NPI's executive
officers has been below the $1,000,000 threshold and since the committee
believes that any options granted under NPI's option plan will meet the
requirement of being performance-based under the provisions of Section 162(m),
the committee believes that Section 162(m) will not reduce the tax deduction
available to NPI for fiscal year 2000 or prior years. NPI's policy is, to the
extent reasonable, to qualify its executive officers' compensation for
deductibility under the applicable tax laws.

Compensation Committee

Charles Hart, Chairperson
Thomas Brown
Michael Gardner

Report of the Audit Committee

The audit committee of the board of directors consists of three independent
directors, each of whom has been determined to be "independent" under the
current listing standards of National Association of Securities Dealers. The
audit committee acts pursuant to the audit committee charter adopted by the
board of directors, a copy of which is attached as Annex E to this joint proxy
statement/prospectus.

Management is responsible for NPI's internal controls and the financial
reporting process. The independent accountants are responsible for performing
an independent audit of the NPI's consolidated financial statements in
accordance with generally accepted auditing standards and expressing an opinion
on the conformity of those audited financial statements in accordance with
generally accepted accounting principles. The audit committee's responsibility
is to monitor and oversees these processes.

The audit committee has reviewed and discussed NPI's audited consolidated
financial statements for the year ended December 31, 2000 with management. The
audit committee has discussed with PricewaterhouseCoopers LLP, NPI's
independent accountants, the matters required to be discussed by Statement of
Auditing Standards No. 61 which includes, among other items, matters related to
the conduct of the audit of NPI's financial statements. The audit committee has
also received written disclosures and the letter from PricewaterhouseCoopers
LLP required by Independence Standards Board Standard No. 1, which relates to
the accountant's independence from NPI and its related entities, and has
discussed with PricewaterhouseCoopers LLP their independence from NPI.

Based on the review and discussions referred to above, the audit committee
recommended to NPI's board of directors that NPI's audited consolidated
financial statements be included in NPI's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.

Submitted by the Audit Committee

Michael Gardner, Chairperson
Thomas Brown
Charles Hart

142

COMPARISON OF STOCKHOLDER RETURN

Stock Performance Graph

The following graph compares the cumulative total return on NPI's common
stock with The Nasdaq Stock Market Index, an indicator of broad market
performance, and the Nasdaq Computer Manufacturer Stocks Index (SIC 357), an
indicator of the market performance of this sector, over the past five years.
The graph assumes a $100 investment at the closing price on December 29, 1995
in NPI's common stock and in each index listed above, and reinvestment of
dividends. Dividends have never been declared on NPI's common stock. The stock
price performance shown on the graph below is not necessarily indicative of
future price performance.

[STOCK PERFORMANCE GRAPH]

12/95 12/96 12/97 12/98 12/99 12/00
----- ----- ----- ----- ----- -----

Network Peripherals Inc.................... $100 $151 $ 62 $ 38 $402 $ 55
Nasdaq Stock Market Index.................. $100 $123 $151 $213 $395 $238
Nasdaq Computer Manufacturer Index......... $100 $134 $162 $352 $746 $420

143

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of NPI's common
stock as of July 11, 2001 by: (a) each director; (b) each of the Named Officers
in the Summary Compensation Table; (c) all current directors and executive
officers as a group; and (d) each person known to NPI who beneficially owns 5%
or more of the outstanding shares of its common stock. The number and
percentage of shares beneficially owned is determined under rules of the SEC,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment power
and also any shares which the individual has the right to acquire within 60
days after July 11, 2001 through the exercise of any stock option or other
right. To NPI's knowledge, the persons named in the following table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable
and the information contained in the footnotes to this table. A total of
13,280,181 shares of NPI's common stock were issued and outstanding as of July
11, 2001.

Shares
Beneficially
Owned
-----------------
Name and Address(1) of Beneficial Owner Number Percent
--------------------------------------- --------- -------

Walter Scheuer (2)....................................... 1,426,000 10.2%
Glenn Penisten (3)....................................... 406,925 2.9%
Thomas Brown (4)......................................... 4,687 *
Michael Gardner (4)...................................... 24,665 *
Charles Hart (4)......................................... 28,644 *
James Regel (4).......................................... 98,958 *
Joseph Botta (4)(7)...................................... 45,624 *
Robert Zecha (5)(6)...................................... 70,000 *
William F. Rosenberger (6)............................... -- *
James Sullivan (6)....................................... -- *
All current directors and executive officers as a group
(8 persons) (8)......................................... 563,879 4.0%

--------
* Represents less than 1%.

(1) Unless otherwise indicated, the address for each beneficial owner named in
this table is 2859 Bayview Drive, Fremont, California 94538.

(2) Based on information contained in the Schedule 13G/A filed on June 11, 2001
with the Securities and Exchange Commission by the above person and other
affiliated individuals and entities as a group. The address of each of
these parties is 635 Madison Avenue, New York, New York 10022.

(3) Includes 386,667 shares issuable upon exercise of outstanding stock
options, which are exercisable within 60 days after July 11, 2001.

(4) Represents the number of shares issuable upon exercise of outstanding stock
options, which were exercisable within 60 days after July 11, 2001.

(5) Includes 57,500 shares issuable upon exercise of outstanding stock options,
which are exercisable within 60 days after July 11, 2001.

(6) Former executive officer of NPI named in the Summary Compensation Table.

(7) Mr. Botta resigned on July 2, 2001.

(8) Includes 543,621 shares issuable upon exercise of outstanding stock
options, which are exercisable within 60 days after July 11, 2001.

144

EXPERTS

The consolidated financial statements of NPI as of December 31, 2000 and
1999 and for each of the three years in the period ended December 31, 2000
included in this joint proxy statement/prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of FalconStor (a development stage
enterprise) as of December 31, 2000 and for the period from inception (February
10, 2000) through December 31, 2000 have been included in this joint proxy
statement/prospectus and in the registration statement in reliance on the
report of KPMG LLP, independent certified public accountants, included herein,
and upon the authority of said firm as experts in accounting and auditing.

LEGAL MATTERS

The validity of the shares of NPI common stock to be issued in the merger
will be passed upon for NPI by Gray Cary Ware & Freidenrich LLP, San Diego,
California. The tax consequences of the merger under section 368 of the
Internal Revenue Code have been passed upon for NPI by Gray Cary Ware &
Freidenrich LLP, San Diego, California, and for FalconStor by Olshan Grundman
Frome Rosenzweig & Wolosky LLP, New York, New York. Steven Wolosky, a member of
Olshan Grundman Frome Rosenzweig & Wolosky LLP, holds 25,000 shares of Series A
preferred stock of FalconStor.

STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT NPI ANNUAL MEETING

Proposals of stockholders intended to be presented at the next Annual
Meeting of Stockholders of NPI (i) must be received by NPI at its offices at
2859 Bayview Drive, Fremont, California 94538 not later than , 2002;
and (ii) must satisfy the conditions established by the Securities and Exchange
Commission for stockholder proposals to be included in NPI's Proxy Statement
for that meeting and the other requirements contained in NPI's bylaws.

WHERE YOU CAN FIND MORE INFORMATION

NPI files annual, quarterly, and special reports, proxy statements, and
other information with the SEC. NPI's common stock is traded on the Nasdaq
National Market under the symbol "NPIX." You may read and copy any document
filed by NPI at the SEC's public reference facilities or on the SEC's website
at http://www.sec.gov, as discussed in more detail below.

FalconStor is not a reporting company and therefore no additional reports or
financial information about it are publicly available.

145

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows NPI to "incorporate by reference" the information it files
with the SEC, which means that it can disclose important information by
referring you to documents previously filed with the SEC. The information
incorporated by reference is considered a part of this joint proxy
statement/prospectus, and any later information that NPI files with the SEC
will automatically update and supersede this information. This joint proxy
statement/prospectus is part of a registration statement on Form S-4 filed by
NPI with the SEC.

NPI incorporates by reference the documents listed below, and any additional
documents filed by NPI with the SEC between the date of this joint proxy
statement/prospectus and the date of the NPI annual meeting. The documents NPI
incorporates by reference are:

NPI's annual report on Form 10-K for the fiscal year ended December 31,
2000;

NPI's report on Form 8-K filed April 16, 2001;

NPI's annual report on Form 10-K/A filed April 27, 2001; and

NPI's quarterly report on Form 10-Q filed May 15, 2001.

Documents incorporated by reference are available without charge, excluding
all exhibits unless such exhibits have been specifically incorporated by
reference in this joint proxy statement/prospectus. You may obtain documents
incorporated by reference by requesting them in writing or by telephone from
the appropriate company as follows:

Network Peripherals Inc.
2859 Bayview Drive
Fremont, California 94538
Attention: James Williams
Phone Number: (510) 897-5000
Web Address: www.npix.com

In order to ensure timely delivery of the documents, any requests should be
made by , 2001.

In addition, copies of the documents incorporated by reference may be
inspected and copied at the following public reference facility maintained by
the SEC:

Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549

Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements, and other
information regarding each of NPI. The address of the SEC website is
http://www.sec.gov. Reports, proxy statements, and other information concerning
NPI can also be inspected at the Nasdaq National Market, Operations,
1735 K Street, N.W., Washington, D.C.

NPI has filed a registration statement under the Securities Act with the SEC
with respect to the NPI common stock to be issued under the merger agreement
with FalconStor. This joint proxy statement/prospectus constitutes the
prospectus of NPI filed as part of the registration statement. This joint proxy
statement/ prospectus does not contain all of the information set forth in the
registration statement because certain parts of the registration statement are
omitted as provided by the rules and regulations of the SEC. You may inspect
and copy the registration statement at any of the addresses listed above.

146

TRANSACTION OF OTHER BUSINESS

At the date of this joint proxy statement/prospectus, the only business
which the board of directors intends to present or knows that others will
present at the meeting is as set forth herein. If any other matter or matters
are properly brought before the meeting, or any adjournment thereof, it is the
intention of the persons named in the accompanying form of proxy to vote the
proxy on such matters in accordance with their best judgment.

By Order of the Board of Directors

/s/ James Williams
_____________________________________
James Williams
Chief Financial Officer
(Authorized Officer)

July 19, 2001

147

ANNEX A

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement"),
dated as of May 4, 2001, is among FalconStor, Inc., a Delaware corporation (the
"Company"), Network Peripherals Inc., a Delaware corporation ("NPI") and Empire
Acquisition Corp., a Delaware corporation and a wholly-owned Subsidiary of NPI
("Merger Sub"). Certain capitalized and non-capitalized terms used herein are
defined in Section 8.13.

RECITALS

WHEREAS, the Boards of Directors of the Company, NPI and Merger Sub each
have, in light of and subject to the terms and conditions set forth herein,
approved this Agreement and the transactions contemplated hereby, including the
Merger, and declared the Merger advisable and fair to, and in the best
interests of, their respective stockholders;

WHEREAS, the Company and NPI are parties to that certain Option Agreement,
dated March 30, 2001, under which the Company granted to NPI an option to merge
with the Company pursuant to the terms of this Agreement and NPI has exercised
its rights under the Option Agreement in accordance with the terms therein;

WHEREAS, pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding
shares of capital stock of the Company, other than such shares held by NPI,
Merger Sub or the Company, shall be converted into the right to receive shares
of common stock, par value $0.001 per share, of NPI (the "NPI Common Stock");

WHEREAS, as an inducement to NPI and Merger Sub to enter into this
Agreement, (i) certain stockholders of the Company have previously entered into
a voting agreement in the form attached hereto as Exhibit A ("Company Voting
Agreement") pursuant to which, among other things, such stockholders have
agreed to vote all shares of capital stock of the Company owned by them in
favor of the Merger (ii) all stockholders of the Company have entered into that
certain Second Amended and Restated Stockholders Agreement dated as of March
30, 2001, by and among the Company and the Persons set forth on Schedule I
thereto (the "Stockholders Agreement"), and all officers and directors of the
Company will have, at the Effective Time entered into a lock-up agreements in
the form attached hereto as Exhibit B ("Company Lockup Agreement") pursuant to
which, among other things, such persons will agree to refrain from selling
shares of NPI Common Stock during a specified period following consummation of
the Merger and (iii) all affiliates of the Company will have, prior to the
consummation of the Merger, entered into an affiliate agreement in the form
attached hereto as Exhibit C ("Affiliate Agreement");

WHEREAS, as an inducement to the Company to enter this Agreement, (i)
certain stockholders of NPI have concurrently herewith entered into a voting
agreement in the form attached hereto as Exhibit D ("NPI Voting Agreement")
pursuant to which, among other things, such persons have agreed to vote all
capital stock of NPI owned by them in favor of the Merger and (ii) all
officers, directors and certain stockholders of NPI will have, at the Effective
Time, entered into lock-up agreements in the form attached hereto as Exhibit E
("NPI Lock-up Agreement") pursuant to which, among other things, such
stockholders will agree to refrain from selling shares of NPI Common Stock
during a specified period following consummation of the Merger;

WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and

A-1

WHEREAS, the Company, NPI and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger as set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the Company, NPI and Merger Sub hereby
agree as follows:

ARTICLE I

THE MERGER

Section 1.1 The Merger. At the Effective Time and upon the terms and subject
to the conditions of this Agreement and in accordance with the applicable
provisions of the Delaware General Corporation Law ("Delaware Law"), Merger Sub
shall be merged with and into the Company (the "Merger"). Following the Merger,
the Company shall continue as the surviving corporation (the "Surviving
Corporation"), and the separate corporate existence of Merger Sub shall cease.

Section 1.2 Effective Time. Subject to the provisions of this Agreement, the
Company, NPI and Merger Sub shall cause the Merger to be consummated by filing
an appropriate certificate of merger in the form attached hereto as Exhibit F
and other appropriate documents (the "Certificate of Merger") with the
Secretary of State of the State of Delaware in such form as required by, and
executed in accordance with, the relevant provisions of Delaware Law, as soon
as practicable on the Closing Date. The Merger shall become effective upon the
filing of the Certificate of Merger (the "Effective Time").

Section 1.3 Closing of the Merger. The closing of the Merger (the "Closing")
will take place at a time and on a date to be specified by the parties (the
"Closing Date"), which shall be no later than the third business day after
satisfaction or waiver of the conditions set forth in ARTICLE VI (other than
those conditions that by their nature are to be satisfied at the Closing, but
subject to the fulfillment or waiver of those conditions), at the offices of
Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue, New York, New
York 10022, or at such other time, date or place as agreed to in writing by the
parties hereto.

Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Certificate of Merger and the applicable
provisions of Delaware Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all of the properties, rights,
privileges, powers and franchises of Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.

Section 1.5 Directors and Officers.

(a) NPI. As of the Effective Time, (i) the directors of NPI shall be
comprised in accordance with Schedule 1.5 hereto and (ii) the individuals
listed on Schedule 1.5 hereto shall have been appointed as the officers of NPI
in accordance with Schedule 1.5 hereto.

(b) Surviving Corporation. The directors of the Surviving Corporation shall
be comprised in accordance with Schedule 1.5 hereto and shall hold office in
accordance with the certificate of incorporation and bylaws of the Surviving
Corporation until their successors are duly elected or appointed and qualified
or until their earlier death, resignation or removal. The officers of the
Company at the Effective Time shall be the initial officers of the Surviving
Corporation and shall hold office in accordance with the certificate of
incorporation and bylaws of the Surviving Corporation until their successors
are duly elected or appointed and qualified or until their earlier death,
resignation or removal.

Section 1.6 Certificate of Incorporation and Bylaws.

(a) NPI. The certificate of incorporation and bylaws of NPI in effect
immediately prior to the Effective Time shall remain in full force and effect
after the Effective Time; provided, however, that Article FIRST of

A-2

the certificate of incorporation of NPI shall be amended to read in its
entirety as follows: "The name of the corporation is FalconStor, Inc." until
thereafter amended as provided by law.

(b) Surviving Corporation. Effective immediately following the Merger, the
certificate of incorporation of Merger Sub, as in effect immediately prior to
the Effective Time, shall be amended in its entirety to read as set forth in
the Certificate of Merger. Effective immediately following the Merger, the
bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Corporation until amended in accordance
with applicable Law.

ARTICLE II

CONVERSION OF SECURITIES

Section 2.1 Conversion of Shares.

(a) By action of the holders of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (collectively,
"Company common stock"), each share of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock outstanding immediately prior to
the Effective Time shall be converted immediately prior to the Effective Time
(subject to the satisfaction of the conditions set forth in Section 6.1 and
Section 6.3) into that number of shares of Company's common stock, par value
$0.001 (the "Company Common Stock") into which one share of Series A Common
Stock, Series B Preferred Stock and Series C Preferred Stock is then
convertible.

(b) At the Effective Time, each outstanding share of common stock, par value
$.001 per share, of Merger Sub shall, by virtue of the Merger and without any
action on the part of the Company, NPI or Merger Sub, be converted into one
fully paid and non-assessable share of common stock of the Surviving
Corporation.

(c) At the Effective Time, each share of Company Common Stock, issued and
outstanding immediately prior to the Effective Time (individually, a "Share"
and collectively, the "Shares") (other than (i) Shares held by the Company,
(ii) Shares held by NPI or Merger Sub or (iii) Dissenting Shares (as
hereinafter defined)) shall, by virtue of the Merger and without any action on
the part of NPI, Merger Sub or the Company or any holder thereof, be converted
into and be exchangeable for the right to receive the number (rounded to the
nearest ten thousandth) of fully paid and non-assessable shares of NPI Common
Stock equal to the Exchange Ratio.

(d) For purposes of this Agreement, the "Exchange Ratio" shall be determined
in accordance with the following formula:

E = 2(X + 0) + B-CB [2(X + 0)]
---------------------
Y + V

where E = the Exchange Ratio

X = all shares of NPI Common Stock issued and outstanding as of two
days prior to the NPI Stockholders Meeting

O = all shares of NPI Common Stock issuable under outstanding, vested,
in-the-money options to purchase such stock as of two days prior to
the NPI Stockholders Meeting

A-3

Merger by NPI prior to the Effective Time (the "Closing Cash");
provided that for purposes of this formula, Closing Cash shall not
exceed $90,000,000. For purposes of this paragraph, estimated cash
payments due under the Management Agreements shall be determined
(a) using the closing sales price of one share of NPI Common Stock
on Nasdaq two days prior to the NPI Stockholders' Meeting and (b)
by giving effect to any acceleration of vesting of options caused
by the Closing

B = $90,000,000

Y = all outstanding shares of Company Common Stock (assuming conversion
of all outstanding shares of Company Preferred Stock into shares of
Company Common Stock) minus shares of Company Preferred Stock or
Company Common Stock owned by NPI or the Company, calculated two
days prior to the NPI Stockholders' Meeting

V = all shares of Company Common Stock issuable under outstanding,
vested, in-the-money options or warrants to purchase such stock or
other securities convertible or exchangeable for shares of Company
Common Stock, calculated two days prior to the NPI Stockholders'
Meeting

All such shares of NPI Common Stock issued pursuant to this Section 2.1,
together with any cash paid in lieu of fractional shares of NPI Common Stock
to be paid pursuant to Section 2.7, are referred to herein as the "Merger
Consideration."

(e) At the Effective Time, each Share of Company Common Stock owned by NPI,
Merger Sub or the Company immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof and no consideration
shall be delivered in exchange therefor.

(f) If, between the date of this Agreement and the Effective Time, either
(i) the outstanding shares of Company Common Stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall have been changed
into a different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination
or exchange of shares, or any similar event, or (ii) the number of shares of
Company Common Stock issuable upon conversion of each share of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall
have been changed pursuant to contract, an anti-dilution adjustment provision
contained in the Company's certificate of incorporation or otherwise, the
calculation of the Exchange Ratio shall be correspondingly adjusted to the
extent necessary to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
change in conversion ratio or such similar event.

(g) If, between the date of this Agreement and the Effective Time, the
outstanding shares of NPI Common Stock shall have been changed into a
different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination
or exchange of shares, or any similar event, the calculation of the Exchange
Ratio shall be correspondingly adjusted to the extent necessary to reflect
such stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, or such similar event.

Section 2.2 Stock Options. At the Effective Time, the Company Stock
Options, whether vested or unvested, will be assumed by NPI ("Assumed Stock
Options"). Section 2.2 of the Company Disclosure Schedule hereto sets forth a
true and complete list as of the date hereof of all holders of outstanding
options to purchase shares of Company Common Stock ("Company Stock Options"),
including the number of shares of Company Common Stock subject to each such
option, the exercise or vesting schedule, the exercise price per share and the
term of each such option. On the Closing Date, the Company shall deliver to
NPI an updated Section 2.2 of the Company Disclosure Schedule hereto current
as of such date. Each such option so assumed by NPI under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth
in the Company Stock Option Plan ("Company Option Plan") and any other
document governing such option

A-4

immediately prior to the Effective Time, except that (a) such option will be
exercisable for that number of whole shares of NPI Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable upon
exercise of such option immediately prior to the Effective Time multiplied by
the Exchange Ratio and rounded down to the nearest whole number of shares of
NPI Common Stock, (b) the per share exercise price for the shares of NPI Common
Stock issuable upon exercise of such assumed option will be equal to the
quotient determined by dividing the exercise price per share of Company Common
Stock at which such option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole tenth of a cent and
(c) any restriction on the exercisability of such Company Stock Option shall
continue in full force and effect, and the term, exercisability, vesting
schedule and other provisions of such Company Stock Option shall remain
unchanged. Consistent with the terms of the Company Option Plan and the
documents governing the outstanding options, the Merger will not terminate any
of the outstanding options under the Company Option Plan or accelerate the
exercisability or vesting of such options or the shares of NPI Common Stock
which will be subject to those options upon NPI's assumption of the options in
the Merger. It is the intention of the parties that the options so assumed by
NPI following the Effective Time will remain incentive stock options as defined
in Section 422 of the Code to the extent such options qualified as incentive
stock options prior to the Effective Time, and the parties hereto shall use
their commercially reasonable efforts to carry out such intention. Within 10
business days after the Effective Time, NPI will issue to each person who,
immediately prior to the Effective Time was a holder of an outstanding option
under the Company Option Plan a document in form and substance reasonably
satisfactory to the Company evidencing the foregoing assumption of such option
by NPI. NPI agrees to file with the Securities and Exchange Commission ("SEC")
after the Closing a registration statement on Form S-8 covering the shares of
NPI Common Stock issuable pursuant to Assumed Stock Options. The Company shall
cooperate with and assist NPI in the preparation of such registration
statement.

Section 2.3 Exchange Fund. Prior to the Effective Time, NPI shall appoint a
commercial bank or trust company reasonably acceptable to the Company to act as
exchange agent hereunder for the purpose of exchanging Shares for the Merger
Consideration (the "Exchange Agent"). At or prior to the Effective Time, NPI
shall deposit with the Exchange Agent, in trust for the benefit of holders of
Shares, certificates representing the NPI Common Stock issuable pursuant to
Section 2.1 in exchange for outstanding Shares and an estimated amount of cash
sufficient to pay the cash payable in lieu of fractional shares pursuant to
Section 2.7. NPI agrees to make available to the Exchange Agent from time to
time as needed, cash sufficient to pay cash in lieu of fractional shares
pursuant to Section 2.7 and any dividends and other distributions pursuant to
Section 2.5. Any cash and certificates of NPI Common Stock deposited with the
Exchange Agent shall hereinafter be referred to as the "Exchange Fund."

Section 2.4 Exchange Procedures. As soon as reasonably practicable after the
Effective Time (and in any event within three business days after the Effective
Time), NPI and the Surviving Corporation shall use their commercially
reasonable efforts to cause the Exchange Agent to mail to each holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Shares (the "Certificates") (a) a letter of transmittal
which shall specify that delivery shall be effective, and risk of loss and
title to the Certificates shall pass, only upon delivery of the Certificates to
the Exchange Agent, and which letter shall be in customary form and have such
other provisions as NPI may reasonably specify; and (b) instructions for
effecting the surrender of such Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate to the Exchange Agent together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor (i) shares of NPI Common Stock
representing, in the aggregate, the whole number of shares that such holder has
the right to receive pursuant to Section 2.1 (after taking into account all
Shares then held by such holder) and (ii) a check in the amount equal to the
cash that such holder has the right to receive pursuant to the provisions of
this ARTICLE II, including cash in lieu of any dividends and other
distributions pursuant to Section 2.5 and cash in lieu of fractional shares
pursuant to Section 2.7, and the Shares formerly represented by such
Certificate and the Certificate so surrendered shall forthwith be canceled.
Until surrendered as contemplated by this Article II, each

A-5

Certificate shall be deemed at any time after the Effective Date to represent
only the right to receive the Merger Consideration payable upon surrender of
the Certificates. No interest will be paid or will accrue on any cash payable
pursuant to Section 2.5 or Section 2.7. In the event of a transfer of ownership
of Shares which is not registered in the transfer records of the Company,
shares of NPI Common Stock evidencing, in the aggregate, the proper number of
shares of NPI Common Stock, a check in the proper amount of cash in lieu of any
fractional shares of NPI Common Stock pursuant to Section 2.7 and any dividends
or other distributions to which such holder is entitled pursuant to Section
2.5, may be issued with respect to such Shares to such a transferee if the
Certificate representing such Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable Transfer Taxes have been paid.

Section 2.5 Distributions with Respect to Unsurrendered Certificates. No
dividends or other distributions declared or made with respect to shares of NPI
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of NPI
Common Stock that such holder would be entitled to receive upon surrender of
such Certificate and no cash payment in lieu of fractional shares of NPI Common
Stock shall be paid to any such holder pursuant to Section 2.7 until such
holder shall surrender such Certificate in accordance with Section 2.4. Subject
to the effect of applicable Laws (as hereinafter defined), following surrender
of any such Certificate, there shall be paid to such holder of shares of NPI
Common Stock issuable in exchange therefor, without interest, (a) promptly
after the time of such surrender, the amount of any cash payable in lieu of
fractional shares of NPI Common Stock to which such holder is entitled pursuant
to Section 2.7 and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
shares of NPI Common Stock, and (b) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to such surrender and a payment date subsequent to such surrender
payable with respect to such shares of NPI Common Stock.

Section 2.6 No Further Ownership Rights in Company Common Stock. All shares
of NPI Common Stock issued and cash paid upon conversion of the Shares in
accordance with the terms of ARTICLE I and this ARTICLE II (including any cash
paid pursuant to Section 2.5 and Section 2.7) shall be deemed to have been
issued or paid in full satisfaction of all rights pertaining to the Shares.

Section 2.7 No Fractional Shares of NPI Common Stock.

(a) No certificates or scrip of shares of NPI Common Stock representing
fractional shares of NPI Common Stock or book-entry credit of the same shall be
issued upon the surrender for exchange of Certificates and such fractional
share interests will not entitle the owner thereof to vote or to have any
rights of a stockholder of NPI or a holder of shares of NPI Common Stock.

(b) Notwithstanding any other provision of this Agreement, each holder of
Shares exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a share of NPI Common Stock (after taking into account
all Certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to the product of (i) such fractional
part of a share of NPI Common Stock multiplied by (ii) the reported closing
sales price of one share of NPI Common Stock on the Nasdaq National Market
("Nasdaq") at the Effective Time. As promptly as practicable after the
determination of the aggregate amount of cash to be paid to holders of
fractional interests, the Exchange Agent shall notify NPI and NPI shall deposit
such amount with the Exchange Agent (to the extent the amount deposited with
the Exchange Agent pursuant to Section 2.3 is insufficient), and shall cause
the Exchange Agent to forward payments to such holders of fractional interests
subject to and in accordance with the terms hereof.

Section 2.8 Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of Certificates for six months after
the Effective Time shall be delivered to the Surviving Corporation or otherwise
on the instruction of the Surviving Corporation, and any holders of the
Certificates who have not theretofore complied with this ARTICLE II shall
thereafter look only to the

A-6

Surviving Corporation and NPI for the Merger Consideration with respect to the
Shares formerly represented thereby to which such holders are entitled pursuant
to Section 2.1 and Section 2.4, any cash in lieu of fractional shares of NPI
Common Stock to which such holders are entitled pursuant to Section 2.7 and any
dividends or distributions with respect to shares of NPI Common Stock to which
such holders are entitled pursuant to Section 2.5. Any such portion of the
Exchange Fund remaining unclaimed by holders of Shares five years after the
Effective Time (or such earlier date immediately prior to such time as such
amounts would otherwise escheat to or become property of any Governmental
Entity) shall, to the extent permitted by law, become the property of the
Surviving Corporation free and clear of any claims or interest of any person
previously entitled thereto.

Section 2.9 No Liability. None of NPI, Merger Sub, the Company, the
Surviving Corporation or the Exchange Agent shall be liable to any person in
respect of any Merger Consideration from the Exchange Fund delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar Law.

Section 2.10 Investment of the Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund as directed by NPI on a daily
basis. Any interest and other income resulting from such investments promptly
shall be paid to NPI.

Section 2.11 Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity by such
person against any claim that may be made against the Surviving Corporation
with respect to such Certificate, the Exchange Agent will deliver in exchange
for such lost, stolen or destroyed Certificate the applicable Merger
Consideration with respect to the Shares formerly represented thereby and any
unpaid dividends and distributions on shares of NPI Common Stock deliverable in
respect thereof, pursuant to this Agreement.

Section 2.12 Backup Withholding Rights. Each of NPI, the Surviving
Corporation and the Exchange Agent shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this Agreement to
any holder of Shares such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code and the rules and
regulations promulgated thereunder, or any provision of a tax Law. To the
extent that amounts are so withheld by NPI, the Surviving Corporation or the
Exchange Agent, as the case may be, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the Shares
in respect to which such deduction and withholding was made by NPI, the
Surviving Corporation or the Exchange Agent, as the case may be.

Section 2.13 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368(a)
of the Code. Each party hereto shall use its commercially reasonable efforts to
cause the Merger to be so qualified, shall report the transactions contemplated
by this Agreement in a manner consistent with such reorganization treatment and
will not take any position inconsistent therewith in any Tax Return (as
hereinafter defined), refund claim, litigation or otherwise unless required to
do so by law. The Merger shall be treated as a purchase for accounting
purposes.

Section 2.14 Stock Transfer Books. The stock transfer books of the Company
shall be closed immediately upon the Effective Time and there shall be no
further registration of transfers of Shares thereafter on the records of the
Company. On or after the Effective Time, any Certificates presented to the
Exchange Agent or NPI for any reason shall be converted into the Merger
Consideration with respect to the Shares formerly represented thereby, any cash
in lieu of fractional shares of NPI Common Stock to which the holders thereof
are entitled pursuant to Section 2.7 and any dividends or other distributions
to which the holders thereof are entitled pursuant to Section 2.5.

Section 2.15 Affiliates. Notwithstanding anything to the contrary herein, no
shares of NPI Common Stock or cash shall be delivered to a person who may be
deemed an "affiliate" of the Company for purposes

A-7

of Rule 145 under the Securities Act of 1933, as amended (the "Securities
Act"), until such person has executed and delivered to NPI the written
agreement contemplated by Section 5.10.

Section 2.16 Appraisal Rights. Notwithstanding anything in this Agreement to
the contrary, Shares that are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who did not vote in favor of
the Merger (the "Dissenting Shares"), which stockholders comply with all of the
relevant provisions of Delaware Law (the "Dissenting Stockholders"), shall not
be converted into or be exchangeable for the right to receive the Merger
Consideration, unless and until such holders shall have failed to perfect or
shall have effectively withdrawn or lost their rights to appraisal under
Delaware Law. If any Dissenting Shareholder shall have failed to perfect or
shall have effectively withdrawn or lost such right, such holder's Shares shall
thereupon be converted into and become exchangeable for the right to receive,
as of the Effective Time, the Merger Consideration without any interest
thereon. The Company shall give NPI (a) prompt notice of any written demands
for appraisal of any Shares, attempted withdrawals of such demands and any
other instruments served pursuant to Delaware Law and received by the Company
relating to stockholders' rights of appraisal, and (b) the opportunity to
direct, in its reasonable business judgment, all negotiations and proceedings
with respect to demands for appraisal under Delaware Law. Neither the Company
nor the Surviving Corporation shall, except with the prior written consent of
NPI, voluntarily make any payment with respect to, or settle or offer to
settle, any such demand for payment. If any Dissenting Shareholder shall fail
to perfect or shall have effectively withdrawn or lost the right to dissent,
the Shares held by such Dissenting Shareholder shall thereupon be treated as
though such Shares had been converted into the right to receive the Merger
Consideration pursuant to Section 2.1.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

Except as set forth on the schedule delivered by the Company to NPI and
Merger Sub in connection with the execution and delivery of this Agreement (the
"Company Disclosure Schedule") the Company hereby represents and warrants to
NPI and Merger Sub, and except as set forth in the disclosure schedule
delivered by NPI and Merger Sub to the Company in connection with the execution
and delivery of this Agreement (the "NPI Disclosure Schedule"), NPI and Merger
Sub hereby represent and warrant to the Company, in each case as set forth in
this ARTICLE III, with the party making such representations and warranties
being referred to as the "Representing Party" and such Representing Party's
Disclosure Schedule as the "Representing Party's Disclosure Schedule."
Notwithstanding the foregoing, any representation or warranty which expressly
refers to NPI or its Subsidiaries is being made solely by NPI and Merger Sub
and any representation or warranty which expressly refers to the Company or its
Subsidiaries is being made solely by the Company.

Section 3.1 Organization, Qualification.

(a) The Representing Party is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
and has the corporate power and authority required for it to own its properties
and assets and to carry on its business as it is now being conducted. The
Representing Party is duly qualified to do business and is in good standing in
each jurisdiction in which the ownership of its properties or the conduct of
its business requires such qualification, except for jurisdictions in which the
failure to be so qualified or in good standing would not, individually or in
the aggregate, be reasonably likely to have a Material Adverse Effect on the
Representing Party or substantially delay consummation of the transactions
contemplated by this Agreement or otherwise prevent the Representing Party from
performing its obligations hereunder. As used in this Agreement, "Material
Adverse Effect" means any change, effect, event, occurrence, state of facts or
developments that (i) materially adversely affects the assets, liabilities,
business, results of operations, condition (financial or otherwise) or
prospects of the Representing Party and its Subsidiaries, taken as a whole or
(ii) adversely affects or delays the ability of the Representing Party to
consummate the transactions contemplated by this Agreement, provided, however,
that none of the following shall be deemed in

A-8

themselves, either alone or in combination, to constitute a Material Adverse
Effect on a Representing Party as indicated (A) any change in the market price
or trading volume of NPI Common Stock after the date hereof; (B) any failure by
the Representing Party to meet internal revenue or earnings projections or
forecasts or published revenue or earnings projections for any period ending
(or for which revenues or earnings are released) on or after the date of this
Agreement and prior to the Effective Time; (C) decreases in working capital
substantially consistent with the NPI's internal projections; (D) any adverse
change, effect, event, occurrence, state of facts or development, change,
effect, event, occurrence, state of facts or developments directly caused by
the announcement or pendency of the Merger (including any cancellations of or
delays in customer orders, any reduction in sales, any disruption in supplier,
distributor, partner or similar relationships or any loss of employees); (E)
any adverse change in NPI's assets or results of operations arising from
actions taken by NPI reasonably intended to preserve the Closing Cash at a
level sufficient to satisfy the condition set forth in Section 6.3(b); (F) any
adverse change, effect, event, occurrence, state of facts or developments
directly caused by, resulting from or attributable to conditions affecting the
data storage or networking industries as a whole or the U.S. or world economies
as a whole; (G) any adverse change, effect, event, occurrence, state of facts
or development directly resulting from or attributable or relating to out-of-
pocket fees and expenses (including legal, accounting, investment banking and
other fees and expenses) incurred in connection with the transactions
contemplated by this Agreement; or (H) any adverse change, effect, event,
occurrence, state of facts or development directly caused by compliance with
the terms of, or the taking of any action required by, this Agreement; and
provided, further, that with respect to any dispute regarding whether any
adverse change, effect, event, occurrence, state of facts or development is
"directly caused" by any of the foregoing, the Representing Party shall have
the burden of proof by a preponderance of the evidence. Each Representing Party
has made available to the other copies of its certificate of incorporation and
bylaws. Such copies of each Representing Party's certificate of incorporation
and bylaws are complete and correct and in full force and effect, and the
Representing Party is not in violation of any of the provisions of its
certificate of incorporation or bylaws.

(b) Each of the Representing Party's Subsidiaries is listed in Section 3.1
of the Representing Party's Disclosure Schedule and is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. Each of the Representing Party's
Subsidiaries has the corporate power and authority required for it to own its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so qualified or in good standing would not, individually or in
the aggregate, be reasonably likely to have a Material Adverse Effect on the
Representing Party, taken as a whole. All the outstanding shares of capital
stock of, or other ownership interests in, the Representing Party's
Subsidiaries are duly authorized, validly issued, fully paid and non-assessable
and, with respect to such shares or ownership interests that are owned by the
Representing Party and its Subsidiaries, are owned free and clear of all liens,
claims, mortgages, encumbrances, pledges and security interests of any kind.
All the outstanding shares of capital stock of, or other ownership interests
in, the Representing Party's Subsidiaries are wholly owned by the Representing
Party, directly or indirectly.

Section 3.2 Capital Stock.

(a) Section 3.2(a) of the Representing Party's Disclosure Schedule sets
forth as of May 4, 2001: (i) the number of authorized shares of each class or
series of capital stock of the Representing Party; (ii) the number of shares of
each class or series of capital stock of the Representing Party which are
issued and outstanding; (iii) the number of shares of each class or series of
capital stock which are held in the treasury of such Representing Party; (iv)
the number of shares of each class or series of capital stock of the
Representing Party which are reserved for issuance, indicating each specific
reservation; and (v) the number of shares of each class or series of capital
stock of such Representing Party which are subject to employee stock options or
other rights to purchase or receive capital stock granted under such Person's
stock option or other stock based employee or non-employee director benefit
plans, indicating the name of the plan, the date of grant, the number of shares
and the exercise price thereof.

A-9

(b) All the outstanding shares of capital stock of the Representing Party
are, and all shares of NPI Common Stock to be issued in the Merger will be when
issued in accordance with the terms of this Agreement, duly authorized, validly
issued, fully paid and non-assessable and issued in compliance with all
applicable U.S. state and federal securities laws. Except for the transactions
contemplated by this Agreement, (i) there are no shares of capital stock of the
Representing Party authorized, or as of the date of this Agreement, issued or
outstanding, (ii) as of the date of this Agreement there are no authorized or
outstanding options, warrants, calls, preemptive rights, subscriptions or other
rights, agreements, arrangements or commitments of any character relating to
the issued or unissued capital stock of the Representing Party or any of its
Subsidiaries, obligating the Representing Party or any of its Subsidiaries to
issue, transfer or sell or cause to be issued, transferred or sold any shares
of capital stock or other equity interest in the Representing Party or any of
its Subsidiaries or securities convertible into or exchangeable for such shares
or equity interests, or obligating the Representing Party or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
subscription or other right, agreement, arrangement or commitment, (iii) there
are no outstanding contractual obligations of the Representing Party or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Representing Party or any Subsidiary of the Representing
Party or to provide funds to make any investment (in the form of a loan,
capital contribution or otherwise) in any Subsidiary of the Representing Party
or other entity, and (iv) there are no shareholder agreements, voting trusts or
other agreements to which the Representing Party is a party or to which it is
bound relating to the voting of any shares of the capital stock of the
Representing Party (other than the Voting Agreements). With respect to the
Company, (i) the holders of the Company Common Stock who are party to the
Company Voting Agreement hold a sufficient number of shares of Company Common
Stock (or securities convertible into Company Common Stock) to effect (A) the
Company Stockholder Approval (as defined herein) and (B) the conversion into
shares of Company Common Stock of all shares of Company common stock, and (ii)
all stockholders, directors and officers of the Company are party to and bound
by at least one of the following agreements that restricts such stockholder's
rights to sell or dispose of shares of NPI Common Stock for a specified period
following the consummation of the Merger: Company Voting Agreement, Company
Lock-Up Agreement or the Stockholders Agreement.

Section 3.3 Corporate Authority Relative to this Agreement; No Violation.

(a) The Company has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of the Company and, except for obtaining the requisite approval of
the stockholders of the Company (the "Company Stockholder Approval"), as
contemplated in Section 5.2 and the filing of the Certificate of Merger, no
other corporate proceedings on the part of the Company are necessary to
authorize the consummation of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming this Agreement constitutes a valid and binding agreement of NPI,
constitutes a valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except as may be limited by (i)
bankruptcy laws and other similar laws affecting creditor's rights generally
and (ii) general principles of equity.

(b) NPI has the corporate power and authority to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of NPI, and other
than the obtaining the requisite approval of the stockholders of NPI (the "NPI
Stockholder Approval") as contemplated in Section 5.3 and the filing of the
Certificate of Merger no other corporate proceedings on the part of NPI are
necessary to authorize the consummation of the transactions contemplated
hereby. The Board of Directors of NPI has taken all appropriate action so that
Section 203 of Delaware Law will not be applicable to the Company or to NPI for
any purpose. This Agreement has been duly and validly executed and delivered by
NPI and, assuming this Agreement constitutes a valid and binding agreement of
the Company, constitutes a valid and binding agreement of NPI, enforceable
against NPI in accordance with its terms, except as may be limited by (i)
bankruptcy laws and other similar laws affecting creditor's rights generally
and (ii) general principles of equity.

A-10

(c) Except as may be required under, and other applicable requirements of,
the Securities Act, the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (the "Exchange Act"), the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
state securities or blue sky laws, and the rules and regulations of Nasdaq, and
the filing of the Certificate of Merger under Delaware Law, none of the
execution, delivery or performance of this Agreement by the Representing Party,
the consummation by the Representing Party of the transactions contemplated
hereby or compliance by the Representing Party with any of the provisions
hereof will (i) conflict with or result in any breach of any provision of the
certificate of incorporation, bylaws or similar organizational documents of the
Representing Party or any of its Subsidiaries, (ii) require any filing with, or
permit, authorization, consent or approval of, any federal, regional, state or
local court, arbitrator, tribunal, administrative agency or commission or other
governmental or other regulatory authority or agency, whether U.S. or foreign
(a "Governmental Entity"), (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or
obligation to which the Representing Party or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be
bound, or (iv) violate any order, writ, injunction, decree, judgment, permit,
license, ordinance, law, statute, rule or regulation ("Law") applicable to the
Representing Party, any of its Subsidiaries or any of their properties or
assets, excluding from the foregoing clauses (ii), (iii) and (iv) such filings,
permits, authorizations, consents, approvals, violations, breaches or defaults
which are not, individually or in the aggregate, reasonably likely to have a
Material Adverse Effect on the Representing Party or prevent or substantially
delay the consummation of the transactions contemplated hereby.

Section 3.4 Reports and Financial Statements.

(a) NPI has previously furnished or otherwise made available (by electronic
filing or otherwise) to the Company true and complete copies of: (i) Annual
Reports on Form 10-K filed with the SEC for each of the years ended December
31, 1999 and 2000; (ii) each Quarterly Report on Form 10-Q filed with the SEC
for the three fiscal quarters occurring since the Annual Report on Form 10-K
for the year ended December 31, 1999; (iii) each definitive proxy statement
filed with the SEC since December 31, 1999; (iv) each final prospectus filed
with the SEC since December 31, 1999, except any final prospectus on Form S-8;
and (v) all Current Reports on Form 8-K filed with the SEC since January 1,
2000.

As of their respective dates, such reports, proxy statements and
prospectuses filed with the SEC by NPI (collectively with, and giving effect
to, all amendments, supplements and exhibits thereto, the "SEC Reports") (i)
complied as to form in all material respects with the applicable requirements
of the Securities Act and the Exchange Act, and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of NPI's
Subsidiaries is required to file any forms, reports or other documents with the
SEC. The audited consolidated financial statements and unaudited consolidated
interim financial statements included in the SEC Reports (including any related
notes and schedules) fairly present in all material respects the financial
position of NPI and its consolidated Subsidiaries as of the dates thereof and
the results of operations and cash flows for the periods or as of the dates
then ended (subject, in the case of the unaudited interim financial statements,
to normal recurring adjustments), in each case in accordance with past practice
and generally accepted accounting principles in the United States ("GAAP")
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto). Since January 1, 2000, NPI has timely filed all reports,
registration statements and other filings required to be filed by it with the
SEC under the rules and regulations of the SEC.

(b) The Company has delivered to NPI copies of the audited balance sheets of
the Company as of December 31, 2000, together with the related audited
statements of income, stockholders' equity and changes in cash flow for the
fiscal year ended December 31, 2000, and the notes thereto (such audited
financial statements being hereinafter referred to as the "Financial
Statements"). The Financial Statements, including

A-11

the notes thereto, (i) were prepared in accordance with GAAP throughout the
periods covered thereby, and (ii) present fairly in all material respects the
financial position, results of operations and changes in cash flow of the
Company and its consolidated Subsidiaries as of such dates and for the periods
then ended.

Section 3.5 No Undisclosed Liabilities. Neither the Representing Party nor
any of its Subsidiaries has any liabilities or obligations of any nature
required to be set forth on a balance sheet of the Representing Party under
GAAP, whether or not accrued, contingent or otherwise, and there is no existing
condition, situation or set of circumstances which would be expected to result
in such a liability or obligation, except (a) liabilities or obligations with
respect to NPI reflected in the SEC Reports and with respect to the Company
reflected in the Financial Statements or (b) liabilities and obligations which
are not, individually or in the aggregate, reasonably expected to have a
Material Adverse Effect on the Representing Party.

Section 3.6 No Default; Compliance with Applicable Laws. The businesses of
the Representing Party and each of its Subsidiaries is not in conflict with, or
in default or violation of, any term, condition or provision of (i) its
respective certificate of incorporation or bylaws or similar organizational
documents, (ii) any Company Material Contracts or NPI Material Contracts, as
applicable, or (iii) any federal, state, local or foreign statute, Law,
concession, grant, franchise, Permit or other governmental authorization or
approval applicable to the Representing Party or any of its Subsidiaries,
excluding from the foregoing clauses (ii) and (iii), defaults or violations
which would not, either individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Representing Party.

Section 3.7 Environmental Matters.

(a) Each of the Representing Party and its Subsidiaries has obtained all
licenses, permits, authorizations, approvals and consents from Governmental
Entities which are required under any applicable Environmental Law and
necessary for it to carry on its business or operations as now conducted
("Environmental Permits"), except for such failures to have Environmental
Permits which, individually or in the aggregate, are not reasonably expected to
have a Material Adverse Effect on the Representing Party. Each of such
Environmental Permits is in full force and effect, and each of the Representing
Party and its Subsidiaries is in compliance with the terms and conditions of
all such Environmental Permits and with all applicable Environmental Laws,
except for such failures to be in full force and effect or to be in compliance
which, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on the Representing Party.

(b) There are no Environmental Claims pending, or to the knowledge of the
Representing Party, threatened, against the Representing Party or any of its
Subsidiaries, or, to the knowledge of the Representing Party, any Person whose
liability for any such Environmental Claim the Representing Party or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law for which reserves have not been established in accordance
with GAAP, that, individually or in the aggregate, would have a Material
Adverse Effect on the Representing Party.

(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
threatened release or presence of any Hazardous Material, that would form the
basis of any Environmental Claim against the Representing Party or any of its
Subsidiaries, or for which the Representing Party or any of its Subsidiaries is
liable, except for such liabilities which, individually or in the aggregate,
are not reasonably likely to have a Material Adverse Effect on the Representing
Party.

(d) As used in this Agreement: (i) "Environmental Claim" means any claim,
action, lawsuit or proceeding by any Person which seeks to impose liability
(including, without limitation, liability for investigatory costs, cleanup
costs, governmental response costs, natural resources, damages, property
damages, personal injuries or penalties) arising out of, based on or resulting
from (A) the presence, or release or threatened release, of any Hazardous
Materials at any location, whether or not owned or operated by the Representing
Party or any of its Subsidiaries, or (B) circumstances which would give rise to
any violation, or alleged violation, of any Environmental Law; (ii)
"Environmental Law" means any law or order of any

A-12

Governmental Entity relating to (A) the generation, treatment, storage,
disposal, use, handling, manufacturing, transportation or shipment of, or (B)
the environment or to emissions, discharges, releases or threatened releases
of, Hazardous Materials, into the environment; (iii) "Hazardous Materials"
means (A) any petroleum or petroleum products, radioactive materials or friable
asbestos; (B) any chemicals or other materials or substances which are now
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes," "restricted
hazardous wastes," "toxic substances," or "toxic pollutants" under any
Environmental Law; and (C) pesticides.

Section 3.8 Litigation. There is no suit, claim, action, proceeding or
investigation pending or, to the Representing Party's knowledge, threatened
against the Representing Party, its Subsidiaries or any of its assets or
properties which (a) has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Representing
Party or its Subsidiaries, or (b) questions the validity of this Agreement or
any action to be taken by the Representing Party in connection with the
consummation of the transactions contemplated hereby or could otherwise prevent
or materially delay the consummation of the transactions contemplated by this
Agreement. The Representing Party and its Subsidiaries are not subject to any
outstanding order, writ, injunction or decree which has had or could reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect on the Representing Party and its Subsidiaries. There is no action,
suit, proceeding or investigation pending or, to the Representing Party's
knowledge, threatened against any current or former officer, director,
employee, consultant, contractor or agent of the Representing Party (in his or
her capacity as such) which gives rise or could reasonably be expected to give
rise to a claim for contribution or indemnification against the Representing
Party.

Section 3.9 Permits. The Representing Party holds, and has at all times
held, all permits, licenses, variances, exemptions, orders, and approvals of
all Governmental Entities necessary for the lawful conduct of its business (the
"Permits"), except for such Permits the absence of which would not reasonably
be expected to have a Material Adverse Effect on the Representing Party. The
Representing Party is in material compliance with the terms of the Representing
Party Permits. No investigation or review by any Governmental Entity in respect
of the Representing Party is pending or, to the Representing Party's knowledge,
threatened, nor has the Representing Party received notice from any
Governmental Entity of its intention to conduct the same.

Section 3.10 Employee Plans.

(a) Section 3.10(a) of the Representing Party's Disclosure Schedule sets
forth a true, correct and complete list of:

(i) all "employee benefit plans," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
which the Representing Party has any obligation or liability, contingent or
otherwise (the "Benefit Plans");

(ii) all employees, consultants and independent contractors of the
Representing Party; and

(iii) all employment, consulting, termination, profit sharing,
severance, change of control, individual compensation or indemnification
agreements, and all bonus or other incentive compensation, deferred
compensation, salary continuation, disability, severance, stock award,
stock option, stock purchase, educational assistance, legal assistance,
club membership, employee discount, employee loan, credit union or vacation
agreements, policies or arrangements under which the Representing Party has
any obligation or liability (contingent or otherwise) in respect of any
current or former officer, director, employee, consultant or contractor of
the Representing Party (the "Employee Arrangements").

Benefit Plans and Employee Arrangements which cover current or former
employees, consultants, contractors, officers, or directors (or their
equivalent) of the Representing Party are separately identified, by the
applicable country, on Section 3.10(a) of the Representing Party's Disclosure
Schedule.

(b) In respect of each Benefit Plan and Employee Arrangement of the Company,
a complete and correct copy of each of the following documents (if applicable)
has been made available to NPI: (i) the most recent

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plan and related trust documents, and all amendments thereto; (ii) the most
recent summary plan description, and all related summaries of material
modifications thereto; (iii) the most recent Form 5500 (including, schedules
and attachments); (iv) the most recent Internal Revenue Service ("IRS")
determination, opinion or notification letter; (v) each of the stock option
grant agreements used to make grants under the Company Option Plans, and all
amendments thereto; (vi) each written employment, consulting or individual
severance or other compensation agreement, and all amendments thereto; and
(vii) the most recent actuarial reports (including for purposes of Financial
Accounting Standards Board report nos. 87, 106 and 112).

(c) None of the Benefit Plans or Employee Arrangements is subject to Title
IV of ERISA, constitutes a defined benefit retirement plan or is a multi-
employer plan described in Section 3(37) of ERISA, and the Representing Party
does not have any obligation or liability (contingent or otherwise) in respect
of any such plans. The Company is not a member of a group of trades or
businesses under common control or treated as a single employer pursuant to
Section 414 of the Code.

(d) The Benefit Plans and their related trusts intended to qualify under
Sections 401 and 501(a) of the Code, respectively, have either received a
favorable determination, opinion or notification letter from the IRS with
respect to each such Benefit Plan as to its qualified status under the Code, or
has remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a letter and make any amendments
necessary to obtain a favorable determination as to the qualified status of
each such Benefit Plans. Any voluntary employee benefit association which
provides benefits to current or former employees of the Representing Party, or
their beneficiaries, is and has been qualified under Section 501(c)(9) of the
Code.

(e) All contributions or other payments required to have been made by the
Representing Party to or under any Benefit Plan or Employee Arrangement by
applicable Law or the terms of such Benefit Plan or Employee Arrangement (or
any agreement relating thereto) have been timely and properly made.

(f) The Benefit Plans and Employee Arrangements have been maintained and
administered in all material respects in accordance with their terms and
applicable Laws. In particular, no individual who has performed services for
the Representing Party has been improperly excluded from participation in any
Benefit Plan or Employee Arrangement.

(g) There are no pending or, to the Representing Party's knowledge,
threatened actions, claims, or proceedings against or relating to any Benefit
Plan or Employee Arrangement (other than routine benefit claims by persons
entitled to benefits thereunder), and, to the knowledge of the Representing
Party, there are no facts or circumstances which could form the basis for any
of the foregoing.

(h) The Representing Party does not have any obligation or liability
(contingent or otherwise) to provide post-retirement life insurance or health
benefits coverage for current or former officers, directors, employees,
consultants or contractors of the Representing Party except (i) as may be
required under Part 6 of Title I of ERISA at the sole expense of the
participant or the participant's beneficiary, (ii) a medical expense
reimbursement account plan pursuant to Section 125 of the Code, or (iii)
through the last day of the calendar month in which the participant terminates
employment with the Representing Party.

(i) None of the assets of any Benefit Plan is stock of the Representing
Party or any of its affiliates, or property leased to or jointly owned by the
Representing Party or any of its affiliates.

(j) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee, consultant or contractor (current,
former, or retired) of the Representing Party, (ii) increase any benefits under
any Benefit Plan or Employee Arrangement or (iii) result in the acceleration of
the time of payment of, vesting of, or other rights in respect of any such
benefits (except as which may be required by the partial or full termination of
any Benefit Plan intended to be qualified under Section 401 of the Code).

(k) The Representing Party has delivered to the other a true and correct
list of the following for each employee, consultant and contractor of the
Representing Party: base salary, any bonus obligations, immigration

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status, hire date, time-off balance, an indication of the existence of a signed
assignment of invention agreement for each employee and including effective
date and term for the contract, pay rate, termination provisions, indication
that they have not received W-2 statements from the Representing Party,
indication that they have not received Representing Party employee benefits and
indication of a signed assignment of invention agreement for each consultant
and contractor.

(l) To the knowledge of the Representing Party, all employees of the
Representing Party who are not U.S. citizens but who are assigned to the U.S.
operations of the Representing Party or otherwise travel, from time to time, to
the United States on behalf of the Representing Party, possess all applicable
passports, visas and other authorizations required by the Laws of the United
States and have otherwise complied with all applicable immigration and similar
Laws of the United States.

(m) To the Representing Party's knowledge, all employees of the Representing
Party assigned to work outside the United States possess all applicable
passports, visas and other authorizations required by the Laws of the
respective countries to which they are assigned.

Section 3.11 Labor Matters.

(a) The Representing Party is not a party to any labor or collective
bargaining agreement, and no employees of the Representing Party are
represented by any labor organization. Within the preceding three years, there
have been no representation or certification proceedings, or petitions seeking
a representation proceeding, pending or, to the Representing Party's knowledge,
threatened in writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority. Within the preceding
three years, to the Representing Party's knowledge, there have been no
organizing activities involving the Representing Party in respect of any group
of employees of the Representing Party.

(b) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes pending
or, to the knowledge of the Representing Party, threatened against or involving
the Representing Party. There are no unfair labor practice charges, grievances
or complaints pending or, to the Representing Party's knowledge, threatened by
or on behalf of any employee or group of employees of the Representing Party
and, to the knowledge of the Representing Party, there are no facts or
circumstances which could form the basis for any of the foregoing.

(c) There are no complaints, charges or claims against the Representing
Party pending or, to the Representing Party's knowledge, threatened to be
brought or filed with any Governmental Entity or arbitrator based on, arising
out of, in connection with, or otherwise relating to the employment or
termination of employment of any individual by the Representing Party, and, to
the knowledge of the Representing Party, there are no facts or circumstances
which could form the basis for any of the foregoing.

(d) The Representing Party is in material compliance with all Laws relating
to the employment of labor, including all such Laws relating to wages, hours,
the Worker Adjustment and Retraining Notification Act, as amended ("WARN"),
collective bargaining, discrimination, civil rights, safety and health,
workers' compensation and the collection and payment of withholding and/or
Social Security Taxes and any similar Tax.

(e) There has been no "mass layoff" or "plant closing" as defined by WARN in
respect of the Representing Party within the six months prior to the date
hereof.

Section 3.12 Absence of Certain Changes or Events.

Since December 31, 2000 (i) the businesses of the Representing Party and its
Subsidiaries have been conducted in all material respects in the ordinary
course and (ii) there has not been:

(a) a material adverse change in the assets, liabilities, business, results
of operations, condition (financial or otherwise) or prospects of the
Representing Party and its Subsidiaries, taken as a whole, or any event,
occurrence or development which has had or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on the
Representing Party and its Subsidiaries, taken as a whole;

A-15

(b) any declaration, setting aside or payment of any dividend or other
distribution in respect of any shares of capital stock of the Representing
Party, or any repurchase, redemption or other acquisition by the Representing
Party of any Representing Party securities;

(c) any incurrence or assumption by the Representing Party of any
indebtedness for borrowed money (or any renewals, replacements, or extensions
that do not increase the aggregate commitments thereunder) except (i) in the
ordinary and usual course of business consistent with past practice or (ii) in
connection with any capital expenditure permitted by Section 4.1 or Section
4.2, as applicable, or (iii) any guarantee, endorsement, or other incurrence
or assumption of liability (whether directly, contingently or otherwise) by
the Representing Party for the obligations of any other person;

(d) any creation or assumption by the Representing Party of any material
Lien on any material asset of the Representing Party other than Permitted
Liens;

(e) any making of any loan, advance or capital contribution to or
investment in any person by the Representing Party other than loans or
advances to employees, contractors or consultants of the Representing Party
made in the ordinary and usual course of business consistent with past
practice;

(f) (i) any contract or agreement entered into by the Representing Party on
or prior to the date hereof relating to any material acquisition or
disposition of any assets or business or (ii) any modification, amendment,
assignment, termination or relinquishment by the Representing Party of any
contract, license or other right (including, any insurance policy naming it as
a beneficiary or a loss payable payee) that does or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
on the Representing Party, other than those contemplated by this Agreement;

(g) any (i) grant of any severance or termination pay to any director,
officer, employee, consultant or contractor of the Representing Party; (ii)
entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any director,
officer, employee, consultant or contractor of the Representing Party; (iii)
increase in benefits payable under any existing severance or termination pay
policies or employment agreements; or (iv) increase in compensation, bonus or
other benefits payable to directors, officers, employees, consultants or
contractors of the Representing Party other than, in the case of clause (iv)
only, increases prior to the date hereof in compensation, bonus or other
benefits payable to employees, consultants or contractors of the Representing
Party in the ordinary and usual course of business consistent with past
practice or merit increases in salaries of employees, consultants or
contractors at regularly scheduled times in customary amounts consistent with
past practices;

(h) any adoption, entering into, amendment, alteration or termination of
(partially or completely) any Benefit Plan or Employee Arrangement except as
contemplated by this Agreement or to the extent required by applicable Law;

(i) any (i) making or revoking of any material election relating to Taxes
(as hereinafter defined), (ii) settlement or compromise of any material claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, or (iii) change to any material methods of
reporting income or deductions for federal income tax purposes;

(j) any capital expenditures in excess of $100,000 individually and in
excess of $500,000 in the aggregate;

(k) any lease, license or grant to any Person of any rights in any of the
Representing Party's assets or properties;

(l) any amendment of the certificate of incorporation or bylaws of the
Representing Party;

(m) any sufferance of any material damage, destruction or loss (whether or
not covered by insurance) to any material assets of the Representing Party; or

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(n) any strike, slowdown or demand for recognition by a labor organization
by or with respect to any of the employees of the Representing Party.

Section 3.13 Registration Statement; Joint Proxy Statement/Prospectus.

(a) The information supplied by the Representing Party for inclusion in the
registration statement on Form S-4 pursuant to which shares of NPI Common Stock
issued in the Merger will be registered with the SEC (the "Registration
Statement") shall not contain, at the time the Registration Statement is
declared effective by the SEC, any untrue statement of a material fact or omit
to state any material fact required to be stated in the Registration Statement
or necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information supplied by the Representing Party for inclusion in the joint proxy
statement/prospectus (the "Joint Proxy Statement") to be sent to the
stockholders of the Company in connection with the special meeting of the
Company's stockholders to consider this Agreement and the Merger (the "Company
Stockholders Meeting") and to the stockholders of NPI in connection with the
special meeting of NPI's stockholders to consider the issuance of NPI Common
Stock in connection with the Merger (the "NPI Stockholders Meeting") shall not,
on the date the Joint Proxy Statement is first mailed to stockholders of NPI
and the Company, at the time of the Company Stockholders Meeting, at the time
of the NPI Stockholders Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any matter or omit to state
any material fact necessary in order to make the statements contained in the
Joint Proxy Statement not false or misleading or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the NPI Stockholders Meeting or the
Company Stockholders Meeting which has become false or misleading.

Section 3.14 Tax Matters.

(a) For purposes of this Agreement: (i) "Taxes" means any and all federal,
state, local, foreign or other taxes of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without
limitation, taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment, social security, workers' compensation, unemployment
compensation or net worth, and taxes or other charges in the nature of excise,
withholding, ad valorem or value added, and (ii) "Tax Return" means any return,
report or similar statement (including the attached schedules) required to be
filed with respect to any Tax, including, without limitation, any information
return, claim for refund, amended return or declaration of estimated Tax.

(b) All federal, state, local and foreign Tax Returns required to be filed
by or on behalf of the Representing Party, each affiliated, combined,
consolidated or unitary group of which the Representing Party is a member (an
"Affiliated Group") have been timely filed or requests for extensions have been
timely filed and any such extension has been granted and has not expired, and
all such filed Tax Returns are complete and accurate except to the extent any
failure to file or any inaccuracies in filed Tax Returns would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect on the Representing Party. All Taxes due and owing by the
Representing Party or any Representing Party's Affiliated Group, including
estimates and withheld Taxes, have been paid, or adequately reserved in
accordance with GAAP, except to the extent any failure to pay or reserve for
would not, individually or in the aggregate, be reasonably likely to have a
Material Adverse Effect on the Representing Party. There is no audit or
examination in process or pending and there has been no notification of any
request for such audit or other examination and there is no deficiency, refund
litigation, proposed adjustment or matter in controversy with respect to any
Taxes due and owing by the Representing Party or any Representing Party's
Affiliated Group which if determined adversely would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on the
Representing Party. All assessments for Taxes due and owing by the Representing
Party or any Representing Party's Affiliated Group with respect to completed
and settled examinations or concluded litigation have been paid, except to the
extent that any failures to pay would not, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect on the Representing Party.

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(c) The Representing Party has not (i) entered into a closing agreement or
other similar agreement with a taxing authority relating to Taxes of the
Representing Party or any Representing Party's Affiliated Group with respect to
a taxable period for which the statute of limitations is still open, or (ii)
with respect to U.S. federal income Taxes, granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment
of, any income Tax, in either case, that is still outstanding. There are no
Liens relating to material Taxes upon the assets of the Representing Party or
any Representing Party's Affiliated Group other than Liens relating to Taxes
not yet due and Liens that would not, individually or in the aggregate, have a
Material Adverse Effect on the Representing Party. Neither the Representing
Party nor any Representing Party's Affiliated Group is a party to or is bound
by any Tax sharing agreement, Tax indemnity obligation or similar agreement in
respect of Taxes (other than with respect to agreements solely between or among
members of the consolidated group of which the Representing Party is the common
parent and agreements and obligations that would not, individually or in the
aggregate, have a Material Adverse Effect on the Representing Party).

(d) Neither the Representing Party nor any Representing Party's Affiliated
Group has taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of the Code.

(e) Section 3.14 of the Representing Party's Disclosure Schedule lists each
Tax Return of the Representing Party's or any Affiliated Group for which an
accurate copy of the actual Tax Return as filed with the relevant taxing
authority has been made available by the Representing Party to the other on or
before the date hereof.

(f) Neither the Representing Party nor any Affiliated Group has requested or
received any private letter ruling from the Internal Revenue Service or
comparable rulings from other taxing authorities.

(g) Neither the Representing Party nor any member of any Affiliated Group
has constituted either a "distributing corporation" or a "controlled
corporation" (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of stock (to any Person or entity that is not a member of any
Affiliated Group) qualifying for tax-free treatment under Section 355 of the
Code (i) within the two-year period ending on the date hereof or (ii) in a
distribution which could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.

(h) Neither the Representing Party nor any member of any Affiliated Group
has any employment, severance or termination agreements, other compensation
arrangements, or Benefit Plans currently in effect which provide for the
payment of any amount (whether in cash or property or the vesting of property)
as a result of any of the transactions contemplated by this Agreement that
individually or collectively (either alone or upon the occurrence of any
additional or subsequent event), could give rise to a payment which is
nondeductible by reason of Section 280G of the Code.

(i) Neither the Representing Party nor any member of any Affiliated Group
has filed any consent agreement under Section 341(f) of the Code or agreed to
have Section 341(f)(4) applied to any disposition of assets owned by the
Representing Party or any Affiliated Group.

(j) Neither the Representing Party nor any member of any Affiliated Group
has been at any time a United States Real Property Holding Corporation within
the meaning of Section 897(c)(2) of the Code.

Section 3.15 Absence of Questionable Payments. Neither the Representing
Party nor, to the Representing Party's knowledge, any director, officer, agent,
employee, consultant, contractor or other person acting on behalf of the
Representing Party, has used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others
or established or maintained any unlawful or unrecorded funds in violation of
the Foreign Corrupt Practices Act of 1977, as amended, or any other domestic or
foreign Law. Neither the

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Representing Party nor, to the Representing Party's knowledge, any director,
officer, agent, employee, consultant, contractor or other person acting on
behalf of the Representing Party, has accepted or received any unlawful
contributions, payments, gifts or expenditures.

Section 3.16 Title and Related Matters. The Representing Party or one of its
Subsidiaries has good and valid title to, or a valid leasehold or contractual
interest in, all of the properties and assets reflected in the latest balance
sheet included, in the case of the Company in the Financial Statements and in
the case of NPI in the SEC Reports, or acquired after the date thereof (except
for properties or assets sold or otherwise disposed of since the date thereof),
free and clear of all Liens, statutory Liens securing payments not yet due or
delinquent or the validity of which is being contested in good faith by
appropriate proceedings, and such imperfections or irregularities in title that
do not materially and adversely affect the current use of the properties or
assets subject thereto or affected thereby, affect the ability to convey title
thereto or otherwise materially impair the business operations currently
conducted at such properties. As of the date hereof, Section 3.16 of the
Representing Party's Disclosure Schedule contains a complete and correct list
of all real property owned or leased by the Representing Party or any of its
Subsidiaries, and a complete and correct list of each title insurance policy
insuring title to any of such real properties.

Section 3.17 Material Contracts.

(a) Company Contracts.

(i) Section 3.17 of the Company Disclosure sets forth a list of all
agreements the Company would be required to file as material contracts
under Item 601 of Regulation S-K were the Company subject to the Exchange
Act and the disclosure requirements of Regulation S-K (the "Company
Material Contracts"). The Company has heretofore made available to NPI
true, correct and complete copies of all Company Material Contracts. The
Company is not a party to nor bound by any severance or other agreement
with any employee, consultant or contractor pursuant to which such person
would be entitled to receive any additional compensation or an accelerated
payment of compensation as a result of the consummation of the transactions
contemplated hereby.

(ii) Each of the Company Material Contracts constitutes the valid and
legally binding obligation of the Company, enforceable in accordance with
its terms, and is in full force and effect, except as may be limited by (A)
bankruptcy laws and other similar laws affecting creditors' rights
generally and (B) general principles of equity. The Company is not in
breach or default in any material respects of any provisions of any Company
Material Contract and, to the Company's knowledge, no event has occurred
which with notice or lapse of time would constitute a material breach or
default by the Company or permit termination, modification or acceleration
thereunder, and which with respect to each of the foregoing, could not be
timely cured by the Company. The Company does not have any knowledge of any
termination or material breach of anticipated termination or material
breach by the other parties to any Company Material Contract or commitment
to which it is a party or to which any of its assets are subject.

(iii) No party to any such Company Material Contract has given notice to
the Company of or made a claim against the Company in respect of any breach
or default thereunder.

(iv) No terms and conditions of any Company Material Contract or other
arrangement or understanding between the Company and any other Person in
effect on the date of this Agreement prevent, delay or materially restrict
the Company's ability to deploy any material portion of its assets or
resources as it deems appropriate, and after the Closing shall prevent,
delay or materially restrict the Company's ability to deploy any material
portion of its assets or resources as it deems appropriate.

(b) NPI Contracts

(i) The SEC Reports contain true and accurate copies of all of the
agreements required to filed as material contracts under Item 601 of
Regulation S-K under the Securities Act (the "NPI Material

A-19

Contracts"). NPI is not a party to nor bound by any severance or other
agreement with any employee, consultant or contractor pursuant to which
such person would be entitled to receive any additional compensation or an
accelerated payment of compensation as a result of the consummation of the
transactions contemplated hereby.

(ii) Each of the NPI Material Contracts constitutes the valid and
legally binding obligation of NPI, enforceable in accordance with its
terms, and is in full force and effect, except as may be limited by
(A) bankruptcy laws and other similar laws affecting creditors' rights
generally and (B) general principles of equity. NPI is not in breach or
default in any material respects of any provisions of any NPI Material
Contract and, to NPI's knowledge, no event has occurred which with notice
or lapse of time would constitute a material breach or default by NPI or
permit termination, modification or acceleration thereunder, and which with
respect to each of the foregoing, could not be timely cured by NPI. NPI
does not have any knowledge of any termination or material breach or
anticipated termination or material breach by the other parties to any NPI
Material Contract or commitment to which it is a party or to which any of
its assets are subject.

(iii) No party to any such NPI Material Contract has given notice to NPI
of or made a claim against NPI in respect of any breach or default
thereunder.

(iv) No terms and conditions of any NPI Material Contract or other
arrangement or understanding between NPI and any other Person in effect on
the date of this Agreement prevent, delay or materially restrict NPI's
ability to deploy any material portion of its assets or resources as it
deems appropriate, and after the Closing shall prevent, delay or materially
restrict NPI's ability to deploy any material portion of its assets or
resources as it deems appropriate.

Section 3.18 Insurance. Section 3.18 of the Representing Party's Disclosure
Schedule sets forth a true and complete list and brief summary description
(including information on the premiums payable in connection therewith and the
scope and amount of the coverage provided thereunder) of directors and officers
liability and general liability insurance policies maintained by the
Representing Party. Such policies have been issued by insurers which, to the
Representing Party's knowledge, are reputable and financially sound and provide
coverage for the operations conducted by the Representing Party of a scope and
coverage consistent with customary industry practice. Complete and correct
copies of each such policy have been delivered by the Company to NPI and by NPI
to the Company. All such policies are in full force and effect and no notice of
cancellation has been given with respect to any such policy. All premiums due
thereon have been paid in a timely manner. There are no pending claims or, to
the knowledge of the Representing Party, threatened claims, under any of the
Representing Party's insurance policies.

Section 3.19 Subsidies. No grants, subsidies or similar arrangements exist
directly or indirectly between or among the Representing Party, on the one
hand, and any domestic or foreign Governmental Entity or any other person, on
the other hand. The Representing Party has not requested, sought, applied for
or entered into any grant, subsidy or similar arrangement directly or
indirectly from or with any domestic or foreign Governmental Entity or any
other person.

Section 3.20 Intellectual Property.

(a) For purposes of this Agreement, "Intellectual Property" means:

(i) all issued patents, reissued or reexamined patents, revivals of
patents, utility models, certificates of invention, registrations of
patents and extensions thereof, regardless of country or formal name
(collectively, "Issued Patents");

(ii) all published or unpublished nonprovisional and provisional patent
applications, reexamination proceedings, invention disclosures and records
of invention (collectively "Patent Applications" and, with the Issued
Patents, the "Patents");

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(iii) all copyrights, copyrightable works, semiconductor topography and
mask work rights, including all rights of authorship, use, publication,
reproduction, distribution, performance transformation, moral rights and
rights of ownership of copyrightable works, semiconductor topography works
and mask works, and all rights to register and obtain renewals and
extensions of registrations, together with all other interests accruing by
reason of international copyright, semiconductor topography and mask work
conventions (collectively, "Copyrights");

(iv) common law trademarks, registered trademarks, applications for
registration of trademarks, common law service marks, registered service
marks, applications for registration of service marks, trade names,
registered trade names and applications for registrations of trade names
and trade dress (collectively, "Trademarks");

(v) all technology, ideas, inventions, designs, proprietary information,
manufacturing and operating specifications, know-how, formulae, trade
secrets, technical data, computer programs, hardware, software and
processes related to the business of the Representing Party as such
business is currently conducted and as its business is proposed to be
conducted;

(vi) all domain names registered by the Representing Party; and

(vii) all other intangible intellectual property assets, properties and
rights (whether or not appropriate steps have been taken to protect, under
applicable law, such other intangible assets, properties or rights).

(b) The Representing Party owns and has good and marketable title to, or
possesses legally enforceable rights to use, all Intellectual Property used or
currently proposed to be used in the business of the Representing Party as
currently conducted or as proposed to be conducted by the Representing Party
(the "Representing Party's Intellectual Property"), free and clear of all
liens, claims or encumbrances. The Representing Party's Intellectual Property
constitutes all of the Intellectual Property necessary to enable the
Representing Party to conduct its business as such business is currently being
conducted and as its business is proposed to be conducted. No current or former
officer, director, stockholder, employee, consultant or independent contractor
has asserted any right, claim or interest in or with respect to any
Representing Party Intellectual Property and the Representing Party is not
aware of a basis for any such claim. There is no unauthorized use, disclosure
or misappropriation of any Representing Party Intellectual Property by any
employee or, to the Representing Party's knowledge, former employee of the
Representing Party or, to the Representing Party's knowledge, by any other
third party. There are no royalties, fees or other payments payable by the
Representing Party to any third person under any written or oral contract or
understanding by reason of the ownership, use, sale or disposition of
Representing Party Intellectual Property.

(c) With respect to each item of Representing Party Intellectual Property
incorporated into any product of the Representing Party or otherwise used in
the business of the Representing Party (except "off the shelf" or other
software widely available through regular commercial distribution channels at a
cost not exceeding $10,000 on standard terms and conditions, as modified for
the Representing Party's operations) the Representing Party Disclosure Schedule
lists:

(i) all Patents and Patent Applications, Trademarks, and Copyrights,
including the jurisdictions in which each such Intellectual Property has
been issued or registered or in which any such application for such
issuance and registration has been filed; and

(ii) the following agreements relating to each of the products of the
Representing Party (the "Representing Party Products") or other
Representing Party Intellectual Property: all (A) agreements granting any
right to distribute or sublicense a Representing Party Product on any
exclusive basis, (B) any exclusive licenses of Intellectual Property to or
from the Representing Party, (C) agreements pursuant to which the amounts
actually paid or payable under firm commitments to the Representing Party
are [$10,000] or more, (D) joint development agreements, (E) any agreement
by which the Representing Party grants any ownership right to any
Representing Party Intellectual Property owned by the Representing

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Party, (F) any judicial, administrative, regulatory or other governmental
order relating to Intellectual Property, (G) any option relating to any
Representing Party Intellectual Property, and (H) agreements pursuant to
which any party is granted any rights to access source code or to use
source code, including without limitation any rights to create derivative
works of Representing Party Products.

(d) The Representing Party Disclosure Schedule contains an accurate list as
of the date of this Agreement of all licenses, sublicenses and other agreements
to which the Representing Party is a party and pursuant to which the
Representing Party is authorized to use any Intellectual Property owned by any
third party, excluding "off the shelf" or other software at a cost not
exceeding $10,000 and widely available through regular commercial distribution
channels on standard terms and conditions ("Third Party Intellectual
Property").

(e) To the knowledge of the Representing Party, there is no unauthorized
use, disclosure, infringement or misappropriation of any Representing Party
Intellectual Property, including any Third Party Intellectual Property by any
third party, including any employee or former employee of the Representing
Party. Other than in respect of agreements with the Representing Party's
officers and directors, the Representing Party has not entered into any
agreement to indemnify any other person against any charge of infringement of
any Intellectual Property, other than indemnification provisions contained in
standard sales or agreements to end users arising in the ordinary course of
business. There are no royalties, fees or other payments payable by the
Representing Party to any Person by reason of the ownership, use, sale or
disposition of Intellectual Property.

(f) The Representing Party is not in breach of any license, sublicense or
other agreement relating to the Representing Party Intellectual Property or
Third Party Intellectual Property Rights. Neither the execution, delivery or
performance of this Agreement or any ancillary agreement contemplated hereby
nor the consummation of the Merger or any of the transactions contemplated by
this Agreement will contravene, conflict with or result in an infringement on
the Representing Party Intellectual Property, including any Third Party
Intellectual Property.

(g) All Patents, registered Trademarks, registered service marks and
registered Copyrights held by the Representing Party are valid and subsisting.
All maintenance and annual fees have been fully paid and all fees paid during
prosecution and after issuance of any patent comprising or relating to such
item have been paid in the correct entity status amounts. The Representing
Party is not infringing, misappropriating or making unlawful use of, or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of any proprietary asset owned or used by any third party. There
is no proceeding pending or, to the Representing Party's knowledge, threatened
nor has any claim or demand been made, which challenges the legality, validity,
enforceability or ownership of any item of the Representing Party Intellectual
Property or Third Party Intellectual Property or alleges a claim of
infringement of any Patents, Trademarks, service marks, Copyrights or violation
of any trade secret or other proprietary right of any third party. The
Representing Party has not brought a proceeding alleging infringement of the
Representing Party Intellectual Property or breach of any license or agreement
involving Intellectual Property against any third party.

(h) All current and former officers and employees of the Representing Party
have executed and delivered to the Representing Party an agreement (containing
no exceptions or exclusions from the scope of its coverage) regarding the
protection of proprietary information and the assignment to the Representing
Party of any Intellectual Property arising from services performed for the
Representing Party by such persons. All current and former consultants and
independent contractors to the Representing Party involved in the development,
modification, marketing and servicing of the Representing Party's products,
and/or the Representing Party Intellectual Property have executed and delivered
to the Representing Party an agreement (containing no exceptions or exclusions
from the scope of its coverage) regarding the protection of proprietary
information and the assignment to the Representing Party of any Intellectual
Property arising from services performed for the Representing Party by such
persons. To the Representing Party's knowledge, no employee or independent
contractor of the Representing Party is in violation of any term of any patent
disclosure agreement or employment contract or any other contract or agreement
relating to the relationship of any such employee or independent contractor
with the Representing Party.

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(i) The Representing Party has taken all commercially reasonable and
customary measures and precautions necessary to protect and maintain the
confidentiality of all the Representing Party Intellectual Property (except
such Representing Party Intellectual Property whose value would be unimpaired
by public disclosure) and otherwise to maintain and protect the full value of
all Intellectual Property it owns or uses. All Intellectual Property not
otherwise protected by Patents or Copyrights ("Confidential Information") owned
by the Representing Party used by or disclosed to a third party has been
pursuant to the terms of a written agreement between the Representing Party and
such third party.

(j) No product liability claims have been communicated in writing to or, to
the Representing Party's knowledge, threatened against the Representing Party.

(k) A complete list of each of the Representing Party Products and the
Representing Party's proprietary software ("Representing Party Software"),
together with a brief description of each, is set forth in Section 3.20 of the
Representing Party's Disclosure Schedule. The Representing Party Software and
Representing Party Products conform in all material respects with any
specification, documentation, performance standard, representation or statement
provided with respect thereto by or on behalf of the Representing Party.

(l) The Representing Party is not subject to any proceeding or outstanding
decree, order, judgment, or stipulation restricting in any manner the use,
transfer, or licensing thereof by the Representing Party, or which may affect
the validity, use or enforceability of such Representing Party Intellectual
Property. The Representing Party is not subject to any agreement which
restricts in any material respect the use, transfer, or licensing by the
Representing Party of the Representing Party Intellectual Property or
Representing Party Products.

Section 3.21 Minute Books; Stock Record Books. True and correct copies of
the Representing Party's minute books and, in the case of the Company, stock
record books have been made available to the other. The minute books of the
Representing Party contain true and complete originals or copies of all minutes
of meetings of and actions by the stockholders, Board of Directors and all
committees of the Board of Directors of the Representing Party, and accurately
reflect in all material respects all corporate actions of the Representing
Party which are required by law to be passed upon by the Board of Directors or
stockholders of the Representing Party. The stock record books accurately
reflect all transactions in shares of the Company's capital stock.

Section 3.22 Bank Accounts; Powers of Attorney. Section 3.22 of the
Representing Party's Disclosure Schedule hereto sets forth a complete and
correct list showing: (a) all banks in which the Representing Party maintains a
bank account or safe deposit box (collectively, "Bank Accounts"), together
with, as to each such Bank Account, the account number, the names of all
signatories thereof and the authorized powers of each such signatory and, with
respect to each such safe deposit box, the number thereof and the names of all
persons having access thereto; and (b) the names of all persons holding powers
of attorney from the Representing Party, true and correct copies thereof which
have been delivered to the other.

Section 3.23 Disclosure. The representations and warranties by the
Representing Party in this Agreement and the statements contained in the
schedules, certificates and other writings furnished and to be furnished by the
Representing Party to the other party pursuant to this Agreement, when
considered as a whole and giving effect to any supplements or amendments
thereof prior to the time of signing on the date hereof, do not and will not
contain any untrue statement of a material fact and do not and will not omit to
state any material fact necessary to make the statements herein, in light of
the circumstances under which they were or shall be made, not misleading, it
being understood that as used in this Section 3.23 "material" means material to
the Representing Party and its Subsidiaries, taken as a whole. The Representing
Party has provided to the other copies of all contracts and agreements that can
be reasonably construed as material to the business of the Representing Party.

Section 3.24 Opinion of Financial Advisors. The Board of Directors of NPI
has received the opinion of Lehman Brothers Inc., dated the date of this
Agreement, substantially to the effect that, as of such date, the consideration
to be issued and delivered by NPI in the Merger is fair to NPI from a financial
point of view.

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Section 3.25 NPI Share Ownership. As of the date hereof, NPI does not own
any securities of the Company.

Section 3.26 Brokers or Finders.

(a) The Company represents, as to itself, its Subsidiaries and its
affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any brokers' or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, except Credit Suisse First Boston, whose fees
and expenses will be paid by the Company in accordance with the Company's
agreement with such firm dated March 26, 2001; and the Company agrees to
indemnify and hold NPI harmless from and against any and all claims,
liabilities or obligations with respect to any other fees, commissions or
expenses asserted by any person on the basis of any act or statement alleged to
have made by such party or its affiliates.

(b) NPI represents, as to itself, its Subsidiaries and its affiliates, that
no agent, broker, investment banker, financial advisor or other firm or person
is or will be entitled to any brokers' or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement, except Lehman Brothers, whose fees and expenses will be paid by NPI
in accordance with NPI's agreement with such firm dated March 22, 2001; and NPI
agrees to indemnify and hold the Company harmless from and against any and all
claims, liabilities or obligations with respect to any other fees, commissions
or expenses asserted by any person on the basis of any act or statement alleged
to have been made by such party or its affiliates.

Section 3.27 No Prior Activities. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby, NPI
represents and warrants that Merger Sub has neither incurred any obligation or
liability nor engaged in any business or activity of any type or kind
whatsoever or entered into any agreement or arrangement with any person.

ARTICLE IV

COVENANTS RELATED TO CONDUCT OF BUSINESS

Section 4.1 Conduct of Business of the Company. Except as contemplated by
this Agreement, during the period from the date hereof to the Effective Time,
the Company will conduct its operations in the ordinary and usual course of
business consistent with past practice and, to the extent consistent therewith,
with no less diligence and effort than would be applied in the absence of this
Agreement, use commercially reasonable efforts to preserve intact its current
business organizations, keep available the service of its current officers and
employees, preserve its relationships with customers, suppliers and others
having business dealings with it and preserve the goodwill of the Company
through the Effective Time. Without limiting the generality of the foregoing,
and except as otherwise expressly provided in this Agreement or in Schedule
4.1, prior to the Effective Time, the Company will not, without the prior
written consent of NPI:

(a) amend its certificate of incorporation or bylaws (or other similar
organizational or governing instruments), as each such document is in effect on
the date hereof;

(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any
stock of any class or any other securities convertible into or exchangeable for
any stock or any equity equivalents (including, any stock options or stock
appreciation rights), except for the issuance or sale of Shares pursuant to
outstanding Company Stock Options, and except for the issuance of Company Stock
Options to purchase up to an aggregate of 848,500 shares of Company Common
Stock to employees, consultants or directors pursuant to the Company's Stock
Option Plans and consistent with past practices;

A-24

stock; (iii) make any other actual, constructive or deemed distribution in
respect of any shares of its capital stock or otherwise make any payments to
stockholders in their capacity as such; or (iv) redeem, repurchase or otherwise
acquire, directly or indirectly, any of its securities;

(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company (other than the Merger);

(e) (i) incur or assume any long-term or short-term debt or issue any debt
securities; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations
of any other person; (iii) make any loans, advances or capital contributions
to, or investments in, any other person (other than customary loans or advances
to employees, consultants or contractors in the ordinary and usual course of
business consistent with past practice and in amounts not material to the maker
of such loan or advance); (iv) pledge or otherwise encumber shares of capital
stock of the Company; or (v) mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to exist any Lien thereupon, other
than as disclosed in the schedules hereto and Permitted Liens;

(f) (i) except as may be required by Law or as contemplated by this
Agreement, enter into, adopt or amend or terminate (partially or completely)
any Benefit Plan, Employee Arrangement (including, the repricing of any stock
options or the acceleration or vesting of any stock options), stock
appreciation right, restricted stock, performance unit, stock equivalent or
stock purchase agreement for the benefit or welfare of any director, officer,
employee, consultant or contractor in any manner, (ii) except as required under
existing agreements, increase in any manner the compensation or fringe benefits
of any director, officer, employee, consultant or contractor or pay any benefit
not required by any plan and arrangement as in effect as of the date hereof
(including, the granting of stock appreciation rights or performance units) or
grant any completion bonuses or change of control payments in respect of the
Merger or that will be affected thereby; or (iii) hire, promote or change the
classification or status in respect of any employee or individual; provided,
however, that NPI shall not unreasonably withhold or delay any consent sought
to hire, promote or change the classification or status of any employee or
individual.

(g) acquire, sell, lease or dispose of any assets outside the ordinary and
usual course of business consistent with past practice or any assets which in
the aggregate are material to the Company, enter into any commitment or
transaction outside the ordinary and usual course of business consistent with
past practice or grant any exclusive distribution rights;

(h) acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof or
any equity interest therein;

(i) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby;

(j) take any action (including, any action otherwise permitted by this
Section 4.1) that would prevent or impede the Merger from qualifying as a
"reorganization" under Section 368(a) of the Code;

(k) fail to comply in any material respect with any Law applicable to the
Company or its assets which would reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect on the Company;

(l) effect a "mass layoff" or "plant closing" as defined in WARN;

(m) dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, copyright or other intangible asset that is material to
the Company, or dispose of or disclose to any Person any trade secret, formula,
process or know-how not theretofore a matter of public knowledge unless, in
respect of disclosure, such Person has executed a confidentiality agreement in
form acceptable to the Company;

(n) sell or dispose of any Company Intellectual Property;

A-25

(o) change any of the banking or safe deposit arrangements described in
Section 3.23 hereto, except in the ordinary course of business;

(p) fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years; or

(q) take, propose to take, or agree in writing or otherwise to take, any of
the actions described in Section 4.1(a) through Section 4.1(p) or any action
which would make any of the representations or warranties of the Company
contained in this Agreement untrue, incomplete or incorrect.

Section 4.2 Conduct of Business of NPI. Except as contemplated by this
Agreement, during the period from the date hereof to the Effective Time, NPI
will conduct its operations in the ordinary and usual course of business
consistent with past practice and, to the extent consistent therewith, with no
less diligence and effort than would be applied in the absence of this
Agreement, use commercially reasonable efforts to preserve intact its current
business organizations, keep available the service of its current officers and
employees, preserve its relationships with customers, suppliers and others
having business dealings with it and preserve the goodwill of NPI through the
Effective Time. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement or in Schedule 4.2, prior to the
Effective Time, NPI will not, without the prior written consent of Company:

(a) amend its certificate of incorporation or bylaws (or other similar
organizational or governing instruments), as each such document is in effect on
the date hereof;

(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any
stock of any class or any other securities convertible into or exchangeable for
any stock or any equity equivalents (including, any stock options or stock
appreciation rights), except for the issuance or sale of NPI Common Stock
pursuant to outstanding NPI Stock Options, and except for the issuance of NPI
Stock Options to purchase up to an aggregate of 1,959,794 shares of NPI Common
Stock to employees, consultants and directors pursuant to NPI's Stock Option
Plans and consistent with past practices;

(c) (i) split, combine or reclassify any shares of its capital stock; (ii)
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(iii) make any other actual, constructive or deemed distribution in respect of
any shares of its capital stock or otherwise make any payments to stockholders
in their capacity as such; or (iv) redeem, repurchase or otherwise acquire,
directly or indirectly, any of its securities;

(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of NPI
(other than the Merger);

(e) (i) incur or assume any long-term or short-term debt or issue any debt
securities; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations
of any other person; (iii) make any loans, advances or capital contributions
to, or investments in, any other person (other than customary loans or advances
to employees, consultants or contractors in the ordinary and usual course of
business consistent with past practice and in amounts not material to the maker
of such loan or advance); (iv) pledge or otherwise encumber shares of capital
stock of NPI; or (v) mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any Lien thereupon, other than as
disclosed in the schedules hereto and Permitted Liens;

A-26

increase in any manner the compensation or fringe benefits of any director,
officer, employee, consultant or contractor or pay any benefit not required by
any plan and arrangement as in effect as of the date hereof (including, the
granting of stock appreciation rights or performance units) or grant any
completion bonuses or change of control payments in respect of the Merger or
that will be affected thereby; or (iii) hire, promote or change the
classification or status in respect of any employee or individual; provided,
however, that the Company shall not unreasonably withhold or delay any consent
sought to hire, promote or change the classification or status of any employee
or individual.

(g) acquire, sell, lease or dispose of any assets outside the ordinary and
usual course of business consistent with past practice or any assets which in
the aggregate are material to NPI, enter into any commitment or transaction
outside the ordinary and usual course of business consistent with past practice
or grant any exclusive distribution rights;

(h) acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof or
any equity interest therein;

(i) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby;

(j) take any action (including, any action otherwise permitted by this
Section 4.2) that would prevent or impede the Merger from qualifying as a
"reorganization" under Section 368(a) of the Code;

(k) fail to comply in any material respect with any Law applicable to NPI or
its assets which would reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect on NPI;

(l) effect a "mass layoff" or "plant closing" as defined in WARN;

(m) dispose of or permit to lapse any rights to the use of any patent,
trademark, trade name, copyright or other intangible asset that is material to
NPI, or dispose of or disclose to any Person any trade secret, formula, process
or know-how not theretofore a matter of public knowledge unless, in respect of
such disclosure, such Person has executed a confidentiality agreement in form
acceptable to NPI;

(n) sell or dispose of any NPI Intellectual Property;

(o) change any of the banking or safe deposit arrangements described in
Section 3.23 hereto, except in the ordinary course of business;

(p) fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years; or

(q) take, propose to take, or agree in writing or otherwise to take, any of
the actions described in Section 4.2(a) through Section 4.2(p) or any action
which would make any of the representations or warranties of NPI contained in
this Agreement untrue, incomplete or incorrect.

Section 4.3 Access to Information.

(a) Between the date hereof and the Effective Time, the Company, NPI and
Merger Sub will each give the authorized representatives (including, counsel,
financial advisors and auditors) of the other reasonable access to all its
employees, consultants, contractors, plants, offices, warehouses and other
facilities and to all its books and records, will permit the other to make such
inspections and investigations as each may require, including, without
limitation, the sampling of surface water, groundwater, soil, indoor and
outdoor air quality and building materials. Each of the Company, NPI and Merger
Sub will cause its officers to furnish the other with such financial and
operating data and other information in respect of its business, properties and
personnel as each may from time to time reasonably request, provided that no
investigation pursuant to this Section 4.3(a) shall affect or be deemed to
modify any of the representations or warranties made by each of the Company,
NPI and Merger Sub.

A-27

(b) Between the date hereof and the Effective Time, the Company, NPI and
Merger Sub shall each furnish to the other (i) within five business days after
the delivery thereof to management, such monthly financial statements and data
as are regularly prepared for distribution to Company management, NPI
management and Merger Sub management respectively, and (ii) at the earliest
time they are available, such quarterly and annual financial statements as are
regularly prepared for the Company Board of Directors, NPI Board of Directors
and Merger Sub Board of Directors, respectively.

(c) Each of NPI, Merger Sub and the Company will hold and will cause its
authorized representatives to hold in confidence all documents and information
concerning the other furnished in connection with the transactions contemplated
by this Agreement.

Section 4.4 Continuation of Insurance Coverage. From the date hereof to the
Closing, each of the Company and NPI shall keep in full force and effect
insurance coverage for its assets and operations comparable in amount and scope
to the coverage now maintained covering its assets and operations.

ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.1 Joint Proxy Statement; Registration Statement.

(a) As promptly as practicable after the date of this Agreement, NPI and the
Company shall prepare and cause to be filed with the SEC the Joint Proxy
Statement and NPI shall prepare and cause to be filed with the SEC the
Registration Statement, in which the Joint Proxy Statement will be included as
a prospectus, with respect to the issuance of NPI Common Stock in the Merger.
Each of NPI and the Company shall furnish all information concerning it and the
holders of its capital stock as the other may reasonably request in connection
with the preparation of the Registration Statement and Joint Proxy Statement.
Each of NPI and the Company shall use all reasonable efforts to cause the
Registration Statement and the Joint Proxy Statement to comply with the rules
and regulations promulgated by the SEC, to respond promptly to any comments of
the SEC or its staff and to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after it is filed with the
SEC. NPI will cause the Joint Proxy Statement to be mailed to NPI's
stockholders, and the Company will cause the Joint Proxy Statement to be mailed
to the Company's stockholders, as promptly as practicable after the
Registration Statement is declared effective under the Securities Act. Each of
NPI and the Company shall also promptly file, use all reasonable efforts to
cause to become effective as promptly as possible and, if required, mail to its
stockholders any amendment to the Registration Statement or Joint Proxy
Statement that becomes necessary after the date the Registration Statement is
declared effective.

(b) If at any time prior to the Effective Time any event or circumstance
relating to NPI, any NPI Subsidiary or their respective directors or officers
is discovered by NPI which is required to be set forth in an amendment or
supplement to the Registration Statement or Joint Proxy Statement, NPI shall
promptly inform the Company. All documents that NPI is responsible for filing
with the SEC in connection with the transactions contemplated hereby will
comply as to form and substance in all material respects with the applicable
requirements of the Securities Act and the Exchange Act.

(c) If at any time prior to the Effective Time any event or circumstance
relating to the Company, any Company Subsidiary or their respective directors
or officers is discovered by the Company which is required to be set forth in
an amendment or supplement to the Registration Statement or Joint Proxy
Statement, the Company shall promptly inform NPI. All documents that the
Company is responsible for filing with the SEC in connection with the
transaction contemplated herein will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and
the Exchange Act.

(d) Each of NPI and the Company will advise the other, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment thereto has been

A-28

filed, the issuance of any stop order, or any request by the SEC for amendment
of the Joint Proxy Statement or Registration Statement or comments thereon or
responses thereto.

(e) Prior to the Effective Time, NPI shall use reasonable efforts to obtain
all regulatory approvals needed to ensure that the NPI Common Stock to be
issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Common Stock has an address of record on the record date for
determining the stockholders entitled to notice of and to vote at the Company
Stockholders' Meeting; provided, however, that NPI shall not be required (i) to
qualify to do business as a foreign corporation in any jurisdiction in which it
is not now qualified or (ii) to file a general consent to service of process in
any jurisdiction.

Section 5.2 Company Stockholders' Meeting.

(a) The Company shall take all action necessary under all applicable Laws to
call, give notice of and hold the Company Stockholders' Meeting. The Company
Stockholders' Meeting shall be held (on a date selected by the Company in
consultation with NPI) as promptly as practicable after the Registration
Statement is declared effective under the Securities Act. The Company shall
ensure that all proxies solicited in connection with the Company Stockholders'
Meeting are solicited in compliance with all applicable Laws .

(b) Subject to Section 5.2(c): (i) the Joint Proxy Statement shall include a
statement to the effect that the board of directors of the Company recommends
that the Company's stockholders vote to adopt this Agreement at the Company
Stockholders' Meeting (the recommendation of the Company's board of directors
that the Company's stockholders vote to adopt this Agreement being referred to
as the "Company Board Recommendation"); and (ii) the Company Board
Recommendation shall not be withdrawn or modified in a manner adverse to NPI,
and no resolution by the board of directors of the Company or any committee
thereof to withdraw or modify the Company Board Recommendation in a manner
adverse to NPI shall be adopted or proposed.

(c) Notwithstanding anything to the contrary contained in Section 5.2(b), at
any time prior to the adoption of this Agreement by the Company Stockholder
Approval, the Company Board Recommendation may be withdrawn or modified in a
manner adverse to NPI if the Company board of directors shall have determined
in accordance with Section 5.5(a)(ii) that the withdrawal or modification of
such recommendation is necessary.

Section 5.3 NPI Stockholders' Meeting.

(a) NPI shall take all action necessary under all applicable Laws to call,
give notice of and hold the NPI Stockholders' Meeting. The NPI Stockholders'
Meeting will be held on the same date as the Company Stockholders' Meeting is
held. NPI shall ensure that all proxies solicited in connection with the NPI
Stockholders' Meeting are solicited in compliance with all applicable Laws.

(b) Subject to Section 5.3(c), the Joint Proxy Statement shall include a
statement to the effect that the board of directors of NPI recommends that
NPI's stockholders vote to approve the issuance of NPI Common Stock in the
Merger (the recommendation of NPI's board of directors that NPI's stockholders
vote to approve the issuance of NPI Common Stock in the Merger being referred
to as the "NPI Board Recommendation"). The NPI Board Recommendation shall not
be withdrawn or modified in a manner adverse to the Company, and no resolution
by the board of directors of NPI or any committee thereof to withdraw or modify
the NPI Board Recommendation in a manner adverse to the Company shall be
adopted or proposed.

(c) Notwithstanding anything to the contrary contained in Section 5.3(b), at
any time prior to the adoption of this Agreement by the NPI Stockholder
Approval, the NPI Board Recommendation may be withdrawn or modified in a manner
adverse to the Company if the NPI board of directors shall have determined in
accordance with Section 5.5(b)(ii), that the withdrawal or modification of such
recommendation is necessary.

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Section 5.4 Commercially Reasonable Efforts.

(a) Subject to the terms and conditions of this Agreement, each party will
use commercially reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate the Merger and the other transactions
contemplated by this Agreement. Neither the Company, NPI nor Merger Sub will
take, agree to take or knowingly permit to be taken any action or do or
knowingly permit to be done anything in the conduct of the business of the
companies, or otherwise, which would be contrary to or in breach of any of the
terms or provisions of this Agreement.

(b) In furtherance and not in limitation of the covenants of the parties
contained in Section 5.2 and Section 5.3, each of NPI, Merger Sub and the
Company shall use commercially reasonable efforts to resolve such objections if
any, as may be asserted by a Governmental Entity or other person in respect of
the transactions contemplated hereby, including, without limitation, under any
antitrust or other Law, or by any Dissenting Stockholder in respect of
Dissenting Shares. In connection with the foregoing, if any administrative or
judicial action or proceeding, including any proceeding by a private party, is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement, each of NPI, Merger Sub and the Company shall
cooperate in all respects with each other and use its respective commercially
reasonable efforts to contest and resist any such action or proceeding and to
have vacated, lifted, reversed or overturned any decree, judgment, injunction,
or other order, whether temporary, preliminary or permanent, that is in effect
and that prohibits, prevents or restricts consummation of the transactions
contemplated by this Agreement. Notwithstanding the foregoing or any other
provision of this Agreement, nothing in this Section 5.4(b) shall (i) limit a
party's right to terminate this Agreement pursuant to Section 7.2 so long as
such party has up to then complied in all material respects with its
obligations under this Section 5.4(b), or (ii) require NPI to dispose or hold
separate any part of its or the Company's business or operations (or a
combination of NPI's and the Company's business or operations), or comply with
any other material restriction affecting its business or operations.

(c) The Company and NPI agree that in connection with any litigation which
may be brought against the Company or its directors or NPI or its directors
relating to the transactions contemplated hereby, the party subject to such
litigation will keep the other, and any counsel which the other may retain at
its own expense, informed of the course of such litigation, to the extent the
other is not also a party thereto. The parties agree that they will consult
with each other prior to entering into any settlement or compromise of any such
litigation, and that no such settlement or compromise will be entered into by
either party without the prior written consent of the other party, which
consent shall not be unreasonably withheld.

Section 5.5 Acquisition Proposals.

(a) Restrictions on the Company.

(i) The Company and its Subsidiaries will not, nor will they authorize
or permit any officer, director, employee, consultant or contractor of or
any investment banker, attorney, accountant or other advisor or
representative of, the Company or its Subsidiaries to, directly or
indirectly, (A) solicit, initiate or encourage the submission of any
Company Acquisition Proposal (as hereinafter defined) or (B) participate in
any discussions or negotiations regarding, or furnish to any person any
information in respect of, or take any other action to facilitate, any
Company Acquisition Proposal or any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any Company
Acquisition Proposal. Notwithstanding the foregoing, in the event that the
Company receives an unsolicited Company Acquisition Proposal, prior to the
adoption of this Agreement by the Company Stockholder Approval, this
Section 5.5(a) shall not prohibit the Company from furnishing nonpublic
information regarding the Company to, or entering into discussions with,
any Person in response to a bona fide Company Acquisition Proposal that can
reasonably be expected to lead to a Superior Proposal that is submitted to
the Company by such Person (and not withdrawn) if (1) neither the Company,
its Subsidiaries nor any representative of any of the Company or its
Subsidiaries shall have violated any of the restrictions set forth in this
Section 5.5(a), (2) the board of directors of the Company concludes in good
faith, after having

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taken into account the advice of its outside legal counsel, that failure to
take such action would be inconsistent with fiduciary duties of the board
of directors of the Company to the Company's stockholders, (3) at least two
business days prior to furnishing any such nonpublic information to, or
entering into discussions with, such Person, the Company gives NPI written
notice of the identity of such Person and of the Company's intention to
furnish nonpublic information to, or enter into discussions with, such
Person, and the Company receives from such Person an executed
confidentiality agreement containing customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
Person by or on behalf of the Company, and (4) at least two business days
prior to furnishing any such nonpublic information to such Person, the
Company furnishes such nonpublic information to NPI (to the extent such
nonpublic information has not been previously furnished by the Company to
NPI). Immediately after the execution and delivery of this Agreement, the
Company and its Subsidiaries will, and will use their commercially
reasonable efforts to cause their affiliates, and their respective
officers, directors, employees, consultants, contractors, investment
bankers, attorneys, accountants and other agents and representatives to,
cease and terminate any existing activities, discussions or negotiations
with any parties conducted heretofore in respect of any possible Company
Acquisition Proposal and shall immediately inform NPI of the receipt by the
Company of any subsequent Company Acquisition Proposal. The Company and its
Subsidiaries shall take all necessary steps to promptly inform the
individuals or entities referred to in the first sentence of this Section
5.5(a) of the obligations undertaken in this Section 5.5(a). "Company
Acquisition Proposal" means an inquiry, offer or proposal regarding any of
the following (other than the transactions contemplated by this Agreement)
involving the Company: (v) any merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction; (w)
any sale of shares of capital stock of the Company after which stockholders
of the Company immediately prior to such sale would hold less than a
majority of the issued and outstanding capital stock of the Company, (x)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of all or substantially all the assets of the Company in a single
transaction or series of related transactions; (y) any tender offer or
exchange offer for 20% or more of the outstanding Shares or the filing of a
registration statement under the Securities Act in connection therewith; or
(z) any public announcement of a proposal, plan or intention to do any of
the foregoing or any agreement to engage in any of the foregoing. "Company
Superior Proposal" shall mean an unsolicited, bona fide written offer made
by a third party to purchase all of outstanding Company Common Stock on
terms that the board of directors of the Company determines, in its
reasonable judgment, to be more favorable to the Company and its
stockholders (taking into account, among other things, all legal,
financial, regulatory and other aspects of the proposal and identity of the
offeror) as compared to the transactions contemplated hereby and which is
reasonably capable of being consummated; provided, however, that any such
offer shall not be deemed to be a Company Superior Proposal if any
financing required to consummate the transaction contemplated by such offer
is not committed and is not reasonably capable of being obtained by such
third party.

(ii) The Company board of directors will not withdraw or modify, or
propose to withdraw or modify, in a manner adverse to NPI, its approval or
recommendation of this Agreement or the Merger unless the Company board of
directors, after consultation with independent legal counsel, determines in
good faith that such action is necessary to avoid a breach by the Company
board of directors of its fiduciary duties to the Company's stockholders.
Nothing contained in this Section 5.5(a) shall prohibit the Company from
making any disclosure to the Company's stockholders which, in the good
faith reasonable judgment of the Company board of directors, after
consultation with independent legal counsel, is required under applicable
Law; provided, that except as otherwise permitted in this Section 5.5(a),
the Company may not withdraw or modify, or propose to withdraw or modify,
its position with respect to the Merger or approve or recommend, or propose
to approve or recommend, a Company Acquisition Proposal. Nothing in this
Section 5.5(a) shall (A) permit the Company to terminate this Agreement or
(B) affect any other obligations of the Company under this Agreement.

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(b) Restrictions on NPI

(i) NPI and its Subsidiaries will not, nor will they authorize or permit
any officer, director, employee, consultant or contractor of or any
investment banker, attorney, accountant or other advisor or representative
of, NPI or its Subsidiaries to, directly or indirectly, (A) solicit,
initiate or encourage the submission of any NPI Acquisition Proposal (as
hereinafter defined) or (B) participate in any discussions or negotiations
regarding, or furnish to any person any information in respect of, or take
any other action to facilitate, any NPI Acquisition Proposal or any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any NPI Acquisition Proposal. Notwithstanding the
foregoing, in the event that NPI receives an unsolicited NPI Acquisition
Proposal, prior to the adoption of this Agreement by the NPI Stockholder
Approval, this Section 5.5(b) shall not prohibit NPI from furnishing
nonpublic information regarding NPI to, or entering into discussions with,
any Person in response to a bona fide NPI Acquisition Proposal that can
reasonably be expected to lead to a Superior Proposal that is submitted to
NPI by such Person (and not withdrawn) if (1) neither NPI, its
Subsidiaries, nor any representative of NPI or its Subsidiaries shall have
violated any of the restrictions set forth in this Section 5.5(b), (2) the
board of directors of the NPI concludes in good faith, after having taken
into account the advice of its outside legal counsel, that failure to take
such action would be inconsistent with fiduciary duties of the board of
directors of NPI to the Company's stockholders, (3) at least two business
days prior to furnishing any such nonpublic information to, or entering
into discussions with, such Person, NPI gives the Company written notice of
the identity of such Person and of NPI's intention to furnish nonpublic
information to, or enter into discussions with, such Person, and NPI
receives from such Person an executed confidentiality agreement containing
customary limitations on the use and disclosure of all nonpublic written
and oral information furnished to such Person by or on behalf of NPI, and
(4) at least two business days prior to furnishing any such nonpublic
information to such Person, NPI furnishes such nonpublic information to the
Company (to the extent such nonpublic information has not been previously
furnished by NPI to the Company). Immediately after the execution and
delivery of this Agreement, NPI and its Subsidiaries will, and will use
their commercially reasonable efforts to cause their affiliates, and their
respective officers, directors, employees, consultants, contractors,
investment bankers, attorneys, accountants and other agents and
representatives to, cease and terminate any existing activities,
discussions or negotiations with any parties conducted heretofore in
respect of any possible NPI Acquisition Proposal and shall immediately
inform the Company of the receipt by NPI of any subsequent NPI Acquisition
Proposal. NPI and its Subsidiaries shall take all necessary steps to
promptly inform the individuals or entities referred to in the first
sentence of this Section 5.5(b) of the obligations undertaken in this
Section 5.5(b). "NPI Acquisition Proposal" means an inquiry, offer or
proposal regarding any of the following (other than the transactions
contemplated by this Agreement) involving NPI: (v) any merger,
consolidation, share exchange, recapitalization, business combination or
other similar transaction; (w) any sale of shares of capital stock of NPI
after which stockholders of NPI immediately prior to such sale would hold
less than a majority of the outstanding capital stock of NPI, (x) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of all or
substantially all the assets of NPI in a single transaction or series of
related transactions, other than assets of NPI related directly to NPI's
Ethernet switching business, (y) any tender offer or exchange offer for 20%
or more of the outstanding NPI Common Stock or the filing of a registration
statement under the Securities Act in connection therewith, or (z) any
public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing. "NPI Superior
Proposal" shall mean an unsolicited, bona fide written offer made by a
third party to purchase all of outstanding NPI Common Stock on terms that
the board of directors of NPI determines, in its reasonable judgment, to be
more favorable to the NPI and its stockholders (taking into account, among
other things, all legal, financial, regulatory and other aspects of the
proposal and identity of the offeror) as compared to the transactions
contemplated hereby and which reasonably capable of being consummated;
provided, however, that any such offer shall not be deemed to be a NPI
Superior Proposal if any financing required to consummate the transaction
contemplated by such offer is not committed and is not reasonably capable
of being obtained by such third party.

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(ii) The NPI board of directors will not withdraw or modify, or propose
to withdraw or modify, in a manner adverse to the Company, its approval or
recommendation of this Agreement or the Merger unless the NPI board of
directors, after consultation with independent legal counsel, determines in
good faith that such action is necessary to avoid a breach by the NPI board
of directors of its fiduciary duties to the NPI stockholders under
applicable Law. Nothing contained in this Section 5.5(b) shall prohibit NPI
from making any disclosure to the NPI stockholders which, in the good faith
reasonable judgment of the NPI board of directors, after consultation with
independent legal counsel, is required under applicable Law; provided, that
except as otherwise permitted in this Section 5.5(b), NPI may not withdraw
or modify, or propose to withdraw or modify, its position with respect to
the Merger or approve or recommend, or propose to approve or recommend, an
NPI Acquisition Proposal. Nothing in this Section 5.5(b) shall (A) permit
NPI to terminate this Agreement or (B) affect any other obligations of NPI
under this Agreement.

Section 5.6 Public Announcements. Each of NPI, Merger Sub and the Company
will consult with one another before issuing any press release or otherwise
making any public statements in respect of the transactions contemplated by
this Agreement, including, the Merger, and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by applicable Law or by obligations pursuant to any listing
agreement with Nasdaq, as determined by NPI, Merger Sub or the Company, as the
case may be, a copy of which shall be sent simultaneously to the other party
upon such release.

Section 5.7 Indemnification.

(a) The Company shall, and from and after the Effective Time, the Surviving
Corporation and NPI shall, indemnify, defend and hold harmless the present and
former directors and officers of the Company (the "Indemnified Parties")
against all losses, claims, damages, costs, expenses (including reasonable
attorneys' fees and expenses), liabilities or judgments or amounts that are
paid in settlement with the approval of the indemnifying party of or in
connection with any threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out
of or pertaining to the fact that such person is or was a director or officer
of the Company whether pertaining to any matter existing at or prior to the
Effective Time and whether asserted or claimed prior to, at or after the
Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out
of, or pertaining to this Agreement or the transactions contemplated hereby, in
each case to the fullest extent the Company is permitted under the Company's
certificate of incorporation and/or bylaws in effect immediately prior to the
Merger and under Delaware Law as the same exists or may hereafter be amended
(but, in the case of any amendment, only to the extent that such amendment
permits broader rights than such law permitted prior to such amendment and only
to the extent such amendment is not retroactively applicable) to indemnify its
own directors or officers, as the case may be. Without limiting the foregoing,
in the event any such claim, action, suit, proceeding or investigation is
brought against any Indemnified Parties (whether arising before or after the
Effective Time), (a) the Indemnified Parties may retain counsel satisfactory to
them and the Company or, from and after the Effective Time, the Surviving
Corporation, and the Surviving Corporation or NPI, as applicable, shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and otherwise advance to such
Indemnified Party upon request reimbursement of reasonable documented expenses
incurred, in either case to the fullest extent and in the manner permitted by
Delaware Law; and (b) the Company or the Surviving Corporation, as applicable,
will use all reasonable efforts to assist in the vigorous defense of any such
matter, provided that neither the Company, NPI nor the Surviving Corporation
shall be liable for any settlement effected without its prior written consent
(which consent shall not be unreasonably withheld). Any Indemnified Party
wishing to claim indemnification under this Section 5.7, upon learning of any
such claim, action, suit, proceeding or investigation, shall promptly notify
the Company (or after the Effective Time, the Surviving Corporation) (but the
failure so to notify shall not relieve a party from any liability which it may
have under this Section 5.7 except to the extent such failure materially
prejudices such party), and shall to the extent required by the Company's
certificate of incorporation and/or bylaws in effect immediately prior to the
Merger and Delaware Law deliver to the Company (or after

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the Effective Time, the Surviving Corporation) the undertaking contemplated by
the Company's certificate of incorporation and/or bylaws in effect immediately
prior to the Merger and Delaware Law. The Indemnified Parties as a group may
retain only one law firm to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any two or more Indemnified
Parties.

(b) NPI, Merger Sub and the Company agree that all rights to indemnification
and all limitations of liability existing in favor of the Indemnified Party as
provided in the Company's certificate of incorporation and bylaws as in effect
as of the date hereof shall survive the Merger and shall continue in full force
and effect, without any amendment thereto, for a period of six years from the
Effective Time to the extent such rights are consistent with Delaware Law;
provided, that in the event any claim or claims are asserted or made within
such six-year period all rights to indemnification in respect of any such claim
or claims shall continue until disposition of any and all such claims; provided
further, that any determination required to be made with respect to whether an
Indemnified Party's conduct complies with the standards set forth under
Delaware Law, the Company's certificate of incorporation or bylaws or such
agreements, as the case may be, shall be made by independent legal counsel
selected by the Indemnified Party and reasonably acceptable to NPI; and
provided further, that nothing in this Section 5.7 shall impair any rights or
obligations of any present or former directors or officers of the Company.

(c) In the event NPI or the Surviving Corporation or any of their successors
or assigns (i) consolidates with or mergers into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its properties
and assets to any person, then, and in each such case, to the extent necessary
to effectuate the purposes of this Section 5.7, proper provision shall be made
so that the successors and assigns of NPI and the Surviving Corporation assume
the obligations set forth in this Section 5.7 and none of the actions described
in clauses (i) or (ii) shall be taken until such provision is made.

(d) NPI or the Surviving Corporation shall maintain directors' and officers'
liability insurance ("D&O Insurance") for a period of not less than six years
after the Effective Date; provided, that (i) the Surviving Corporation may
substitute therefor policies of substantially similar coverage and amounts
containing terms no less advantageous to such former directors or officers and
(ii) if the existing D&O Insurance expires or is canceled during such period,
NPI or the Surviving Corporation will use its commercially reasonable efforts
to obtain substantially similar D&O Insurance, (iii) in no event shall NPI or
the Surviving Corporation be required to expend an amount per year in excess of
150% of current annual premiums paid by NPI to maintain or procure D&O
insurance pursuant hereto; and (iv) if the annual premiums of such D&O
Insurance would exceed 150% of current annual premiums, NPI or the Surviving
Corporation shall obtain a policy with the greatest coverage available for a
cost not exceeding 150% of current annual premiums.

Section 5.8 Notification of Certain Matters. The Company shall give prompt
notice to NPI and Merger Sub, and NPI and Merger Sub shall give prompt notice
to the Company, of (a) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time, (b) any
material failure of the Company, NPI or Merger Sub, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder, (c) any notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with the transactions contemplated by this Agreement, or (d) any
facts or circumstances that could reasonably be expected to result in a
Material Adverse Effect; provided, however, that the delivery of any notice
pursuant to this Section 5.8 shall not cure such breach or non-compliance or
limit or otherwise affect the rights, obligations or remedies available
hereunder to the party receiving such notice.

Section 5.9 Employee Matters, Management Agreements.

(a) NPI will cause the Surviving Corporation to honor the obligations of the
Company under the provisions of all Benefit Plans and Employee Arrangements set
forth in the Company's Disclosure Schedule,

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subject to NPI's right to amend or terminate any such Benefit Plan or Employee
Arrangement in accordance with its terms. After the Effective Time, the
employees of the Company will be eligible to participate in the Company's
Benefit Plans or, if so determined by NPI, NPI's applicable Benefit Plans, as
such plans may be in effect from time to time, and, at NPI's sole discretion,
will become employees of NPI. With respect to each such employee of the
Company, service with the Company may be counted for purposes of determining
periods of eligibility to participate or to vest in benefits under any
applicable Benefit Plan of NPI. At NPI's sole discretion, administrative
functions, including but not limited to payroll processing, may be transferred
to processors of NPI's choosing.

(b) The Company, NPI and Merger Sub agree that the Merger shall constitute a
change in control with respect to the Management Agreements and any payments or
benefits due to parties under the Management Agreements resulting therefrom
shall be paid promptly to each payee after the expiration of such payee's NPI
Lockup Agreement.

(c) At the Closing, NPI may cause the Surviving Corporation to deposit with
an escrow agent reasonably acceptable to all parties hereto and pursuant to the
terms of a mutually acceptable escrow agreement, an amount sufficient to pay
any amount due pursuant to retention agreements disclosed in the NPI Disclosure
Schedule.

Section 5.10 Affiliate Agreements. Section 5.10 of the Company Disclosure
Schedule sets forth a list of all persons who are, and all persons who to the
Company's knowledge will be at the Closing Date, "affiliates" of the Company
for purposes of Rule 145 under the Securities Act. The Company will cause such
list to be updated promptly through the Closing Date. No later than 15 days
after the date of this Agreement (but in any event prior to the Effective
Time), the Company shall cause its "affiliates" to deliver to NPI an Affiliate
Agreement.

Section 5.11 Lock-up Agreements.

(a) Section 5.11 of the Company Disclosure Schedule sets forth a list of all
the Company's officers, directors and stockholders. Prior to the Effective
Time, the Company shall cause all officers and directors of the Company to
deliver to NPI a Company Lock-up Agreement.

(b) Section 5.11 of the NPI Disclosure Schedule sets forth a list of all
NPI's officers, directors, stockholders affiliated with NPI's officers and
directors, and NPI employees who hold more than 30,000 shares of NPI Common
Stock. Prior to the Effective Time, NPI shall cause all such individuals or
entities to deliver to NPI an NPI Lock-up Agreement.

Section 5.12 Listing of Stock. NPI shall use its commercially reasonable
efforts to cause the shares of NPI Common Stock to be issued in connection with
the Merger to be approved for listing on Nasdaq on or prior to the Closing
Date, subject to official notice of issuance.

Section 5.13 Antitakeover Statutes. If any antitakeover statute is or may
become applicable to the Merger, each of NPI and the Company shall take such
actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any antitakeover statute on the Merger.

Section 5.14 Third Party Consents.

(a) Each of NPI, Merger Sub and the Company shall use its commercially
reasonable efforts to obtain at the earliest practicable date all consents of
third parties (including, but not limited to, such as are listed on Section 3.3
of the Company Disclosure Schedule or NPI Disclosure Schedule, as applicable)
and Governmental Entities necessary to the consummation of the transactions
contemplated hereby (the "Third Party Consents") and will provide to the other
parties hereto copies of each such Third Party Consent promptly after it is
obtained. Each of NPI, Merger Sub and the Company agrees to cooperate fully
with the other parties hereto in

A-35

connection with the obtaining of the Third Party Consents; provided, however,
that no party shall be required to pay any additional sums to secure such Third
Party Consents of the other parties hereto.

(b) The Company and NPI shall take all reasonable actions necessary to file
as soon as practicable notifications under the HSR Act and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as soon as practicable
to all inquiries and requests received from any Governmental Entity in
connection with antitrust matters. Notwithstanding anything to the contrary
herein (including the other provisions of this Section 5.14), NPI and its
Subsidiaries shall not be required to divest, or agree to any restrictions with
respect to, any of its businesses or assets or the businesses or assets to be
acquired in connection with the transactions contemplated hereby. Nothing
herein shall prevent NPI, on not more than one occasion, from withdrawing a
notification under the HSR Act if NPI intends to refile such notification
thereafter in accordance with the terms hereof.

(c) In furtherance and not in limitation of the covenants of the parties
contained in Section 5.14(a) and Section 5.14(b), if any administrative or
judicial action or proceeding, including any proceeding by a private party, is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement, each of NPI, Merger Sub and the Company shall
cooperate in all respects with each other and use its respective commercially
reasonable efforts to contest and resist any such action or proceeding and to
have vacated, lifted, reversed or overturned any decree, judgement, injunction
or other order, whether temporary, preliminary or permanent, that is in effect
and that prohibits, prevents or restricts consummation of the transactions
contemplated by this Agreement.

(d) If any objections are asserted with respect to the transactions
contemplated hereby or if any suit is instituted by any Governmental Entity or
any private party challenging any of the transactions contemplated hereby as
violative of any regulatory Law, each of NPI, Merger Sub and the Company shall
use its commercially reasonable efforts to resolve any such objections or
challenge as such Governmental Entity or private party may have to such
transactions under such regulatory Law so as to permit consummation of the
transactions contemplated by this Agreement.

Section 5.15 Conversion of common stock.

(a) To the extent applicable, NPI hereby consents to the conversion of all
shares of Company Common Stock into shares of Company Common Stock effective
immediately prior to the Effective Time.

(b) The Company shall use its commercially reasonable efforts to obtain the
consent of all holders of Company Preferred Stock to the conversion of such
shares into shares of Company Common Stock effective immediately prior to the
Effective Time.

Section 5.16 Reorganization Treatment Tax-Free. The Company, NPI and Merger
Sub shall execute and deliver to Gray Cary Ware & Freidenrich LLP, counsel to
NPI, and Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to the
Company, certificates substantially in the forms attached hereto as Exhibits G
and H at such time or times as reasonably requested by such law firms in
connection with their respective deliveries of opinions in respect of the
transactions contemplated hereby. Prior to the Effective Time, none of the
Company, NPI or Merger Sub shall take or cause to be taken any action which
would cause to be untrue (or fail to take or cause not to be taken any action
which would cause to be untrue) any of the representations in such previously-
agreed certificates.

ARTICLE VI

CONDITIONS TO CONSUMMATION OF THE MERGER

Section 6.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at

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or prior to the Effective Time of each of the following conditions, any or all
of which may be waived in whole or in part by the party being benefited
thereby, to the extent permitted by applicable Law:

(a) This Agreement shall have been approved and adopted by the Company
Stockholder Approval and the NPI Stockholder Approval.

(b) The Company, NPI and Merger Sub shall have timely obtained from each
Governmental Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the transactions contemplated hereby,
including such approvals, waivers and consents as may be required under the HSR
Act, Securities Act and under blue sky laws, if any, except for such
authorizations, consents or approvals, the failure of which to have been made
or obtained does not and could not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect.

(c) There shall not be in effect any Law of any Governmental Entity of
competent jurisdiction restraining, enjoining or otherwise preventing
consummation of the transactions contemplated by this Agreement and no
Governmental Entity shall have instituted any proceeding which continues to be
pending seeking any such Law.

(d) The Registration Statement shall have been declared effective by the SEC
and shall be effective at the Effective Time, and no stop order suspending
effectiveness shall have been issued; no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness of the Registration
Statement shall have been initiated and be continuing; and all necessary
approvals under state securities Laws or the Securities Act or Exchange Act
relating to the issuance or trading of the NPI Common Stock shall have been
received.

(e) The NPI Common Stock required to be issued hereunder shall have been
approved for listing on Nasdaq, subject only to official notice of issuance.

Section 6.2 Conditions to the Obligations of NPI and Merger Sub. The
respective obligations of NPI and Merger Sub to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to
the Effective Time of each of the following additional conditions, any or all
of which may be waived in whole or part by NPI and Merger Sub to the extent
permitted by applicable Law:

(a) The representations and warranties of the Company contained herein shall
be true (for the purposes of this Section 6.2(a), without regard to any
materiality or Material Adverse Effect qualifier contained therein), except
where the failure to be true, individually or in the aggregate, has not had or
is not reasonably expected to have a Material Adverse Effect on the Company, in
each case on and as of the Closing (except for representations and warranties
made as of a specified date, which shall speak only as of the specified date).

(b) The Company shall have performed or complied in all material respects
with all agreements and conditions contained herein required to be performed or
complied with by it prior to or at the time of the Closing.

(c) The Company shall have delivered to NPI a certificate, dated the date of
the Closing, signed by the President of the Company (but without personal
liability thereto), certifying as to the fulfillment of the conditions
specified in Section 6.2(a) and Section 6.2(b).

(d) Prior to the Closing, there shall not have occurred any Material Adverse
Effect on the Company.

(e) All holders of shares of Company Preferred Stock shall have converted
such shares into shares of Company Common Stock.

(f) NPI shall have received an opinion of Gray Cary Ware & Freidenrich LLP,
dated the Closing Date, substantially to the effect that on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing as of the Closing Date, for federal income tax
purposes the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code.

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Section 6.3 Conditions to the Obligations of the Company. The obligations of
the Company to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable Law:

(a) The representations and warranties of NPI and Merger Sub contained
herein shall be true (for the purposes of this Section 6.3(a), without regard
to any materiality or Material Adverse Effect qualifier contained therein),
except where the failure to be true, individually or in the aggregate, has not
had or is not reasonably expected to have a Material Adverse Effect on NPI, in
each case on and as of the Closing Date (except for representations and
warranties made as of a specified date, which shall speak only as of the
specified date).

(b) The Closing Cash shall be no less than $80,000,000.

(c) NPI and Merger Sub shall have performed or complied in all material
respects with all agreements and conditions contained herein required to be
performed or complied with by it prior to or at the time of the Closing.

(d) NPI shall have delivered to the Company a certificate, dated the date of
the Closing, signed by an executive officer of NPI (but without personal
liability thereto), certifying as to the actual Closing Cash and fulfillment of
the conditions specified in Section 6.3(a), Section 6.3(b) and Section 6.3(c).

(e) Prior to the Closing, there shall not have occurred any Material Adverse
Effect on NPI.

(f) The Company shall have received an opinion of Olshan Grundman Frome
Rosenzweig & Wolosky LLP, dated the Closing Date, substantially to the effect
that on the basis of facts, representations and assumptions set forth in such
opinion which are consistent with the state of facts existing as of the Closing
Date, for federal income tax purposes the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code.

ARTICLE VII

TERMINATION; AMENDMENT; WAIVER

Section 7.1 Termination by Mutual Agreement. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval of the Merger by the Company
Stockholder Approval and NPI Stockholder Approval referred to in Section
6.1(a), by mutual written consent of the Company and NPI by action of their
respective boards of directors.

Section 7.2 Termination by either NPI or the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the board of directors of either NPI or the Company if:

(a) the Merger shall not have been consummated by September 30, 2001,
whether such date is before or after the date of approval of the Merger by the
Company Stockholder Approval and NPI Stockholder Approval (the "Termination
Date"); provided, however, that if any condition of Closing set forth in
Section 6.1 that remains reasonably capable of satisfaction has not been
fulfilled or waived prior to September 30, 2001, the Termination Date shall be
automatically extended to December 31, 2001;

(b) after the Company convenes and holds the Company Stockholders' Meeting
and certifies the vote with respect to the Merger, the Company Stockholder
Approval shall not have been obtained;

(c) after NPI convenes and holds the NPI Stockholders' Meeting and certifies
the vote with respect to the Merger, the NPI Stockholder Approval shall not
have been obtained; or

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(d) any Law permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether
before or after the approval of the Merger by the Company Stockholder Approval
and NPI Stockholder Approval); provided, however, that the right to terminate
this Agreement pursuant to this Section 7.2 shall not be available to any
party that has breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure of the Merger to be consummated; provided further,
however, that the right to terminate this Agreement pursuant to this Section
7.2 shall not be available to either party in the event that any of its
stockholders who are party to the Voting Agreement have breached their
obligations thereunder.

Section 7.3 Termination by the Company. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time,
whether before or after the approval of the Merger by the Company Stockholder
Approval and NPI Stockholder Approval referred to in Section 6.1(a), by action
of the Company board of directors, if:

(a) (i) any of NPI's representations and warranties shall have been
inaccurate as of the date of this Agreement, such that the condition set forth
in Section 6.3 would not be satisfied, or (ii) if (A) any of NPI's
representations and warranties become inaccurate as of a date subsequent to
the date of this Agreement (as if made on such subsequent date), such that the
condition set forth in Section 6.3 would not be satisfied and (B) such
inaccuracy has not been cured by NPI within ten business days after its
receipt of written notice thereof and remains uncured at the time notice of
termination is given, or (iii) any of NPI's covenants contained in this
Agreement shall have been breached, such that the condition set forth in
Section 6.3 would not be satisfied; or

(b) the board of directors of NPI shall have withdrawn its recommendation
of this Agreement or modified the recommendation in a manner adverse to the
Company or shall have resolved to do the foregoing.

Section 7.4 Termination by NPI. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval of the Merger by the Company Stockholder Approval
and NPI Stockholder Approval referred to in Section 6.1(a), by action of the
Board of Directors of NPI, if:

(a) (i) any of the Company's representations and warranties shall have been
inaccurate as of the date of this Agreement, such that the condition set forth
in Section 6.2 would not be satisfied, or (ii) if (A) any of the Company's
representations and warranties become inaccurate as of a date subsequent to
the date of this Agreement (as if made on such subsequent date), such that the
condition set forth in Section 6.2 would not be satisfied and (B) such
inaccuracy has not been cured by the Company within ten business days after
its receipt of written notice thereof and remains uncured at the time notice
of termination is given, or (iii) any of the Company's covenants contained in
this Agreement shall have been breached, such that the condition set forth in
Section 6.2 would not be satisfied; or

(b) the board of directors of the Company shall have withdrawn its
recommendation of this Agreement or modified the recommendation in a manner
adverse to NPI or shall have resolved to do the foregoing.

Section 7.5 Effect of Termination and Abandonment. Subject to the terms of
Section 7.6, in the event of termination of this Agreement and the abandonment
of the Merger pursuant to this ARTICLE VII, this Agreement (other than this
Section 7.5, Section 4.3(c) and Section 8.2(a)) shall become void and of no
effect with no liability on the part of any party hereto (or of any of its
directors, officers, employees, consultants, contractors, agents, legal and
financial advisors, or other representatives); provided, however, that except
as otherwise provided herein, no such termination shall relieve any party
hereto of any liability or damages resulting from any willful breach of this
Agreement.

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Section 7.6 Termination Fee.

(a) If this Agreement is terminated by NPI or the Company for any reason
other than pursuant to Section 7.4, NPI shall pay to the Company upon such
termination a termination fee of three million dollars ($3,000,000) in cash in
immediately available funds (the "NPI Termination Fee").

(b) In no event shall NPI be required to pay the NPI Termination Fee if,
immediately prior to the applicable termination of this Agreement, the Company
is in material breach of any of its obligations under this Agreement.

Section 7.7 Amendment. This Agreement may be amended by action taken by the
Company, NPI and Merger Sub at any time before or after approval of the Merger
by the Company Stockholder Approval and NPI Stockholder Approval but, after any
such approvals, no amendment shall be made which changes the amount or form of
the Merger Consideration. This Agreement may not be amended except by an
instrument in writing signed on behalf of the parties hereto.

Section 7.8 Extension; Waiver. At any time prior to the Effective Time, each
party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto, or (c) waive
compliance by the other party with any of the agreements or conditions
contained herein. Any agreement on the part of either party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party hereto to
assert any of its rights hereunder shall not constitute a waiver of such
rights.

ARTICLE VIII

MISCELLANEOUS

Section 8.1 No Survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time.

Section 8.2 Entire Agreement; Assignment.

(a) This Agreement constitutes the entire agreement between the parties
hereto in respect of the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties in
respect of the subject matter hereof (including, without limitation, the Option
Agreement between the Company and NPI effective as of March 30, 2001), other
than the Non-disclosure Agreement between the parties dated as of March 30,
2001 (which shall remain in effect).

(b) Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by operation of Law (including, by merger or
consolidation) or otherwise. Any assignment in violation of the preceding
sentence shall be void. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of, and be enforceable by, the parties
and their respective successors and permitted assigns.

Section 8.3 Notices. All notices, requests, instructions or other documents
to be given under this Agreement shall be in writing and shall be deemed given,
(a) five business days following sending by registered or certified mail,
postage prepaid, (b) when sent if sent by facsimile; provided, however, that
the facsimile is promptly confirmed by telephone confirmation thereof by the
intended recipient, (c) when delivered, if delivered personally to the intended
recipient, and (d) one business day following sending by overnight delivery via
a national courier service, and in each case, addressed to a party at the
following address for such party:

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if to Merger Sub or NPI, to: Network Peripherals Inc.
2859 Bayview Drive
Fremont, California 94538
Attention: James Regel, Chief
Executive Officer
Fax: (510) 897-5056

with copies to: Gray Cary Ware & Freidenrich LLP
4365 Executive Drive, Suite 1600
San Diego, California 92121
Attention: Scott Stanton, Esq.
Facsimile: (858) 677-1477

if to the Company, to: FalconStor, Inc.
125 Baylis Road, Suite 140
Melville, New York 11747
Attention: ReiJane Huai, Chief
Executive Officer
Facsimile: (631) 501-7633

with a copy to: Olshan Grundman Frome Rosenzweig &
Wolosky LLP
505 Park Avenue
New York, NY 10022-1170
Attention: Steve Wolosky, Esq.
Facsimile: (212) 980-7177

or to such other address or facsimile number as the person to whom notice is
given may have previously furnished to the other in writing in the manner set
forth above.

Section 8.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the Laws of the State of Delaware, without giving effect to
the choice of Law principles thereof.

Section 8.5 Expenses. The Company shall be solely responsible for the legal,
accounting and other fees and expenses incurred by the Company in connection
with the execution of this Agreement and the consummation of the transactions
contemplated hereby. NPI and Merger Sub shall be solely responsible for the
legal, accounting and other fees and expenses incurred by NPI and Merger Sub in
connection with execution of this Agreement and the consummation of the
transactions contemplated hereby. Any and all Transfer Taxes shall be timely
paid by the Company.

Section 8.6 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.

Section 8.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and, except as provided in Section 5.7, nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.

Section 8.8 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity

A-41

or unenforceability affect the validity or enforceability of such provision,
or the application thereof, in any other jurisdiction.

Section 8.9 Specific Performance. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement, this being in
addition to any other remedy to which they are entitled at Law or in equity.

Section 8.10 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.

Section 8.11 Further Assurances. Each party to this Agreement agrees (a) to
furnish upon request to the other party such further information, (b) to
execute and deliver to the other party such other documents and (c) to do such
other acts and things as the other party reasonably requests for the purpose
of carrying out the intent of this Agreement and the documents and instruments
referred to herein.

Section 8.12 Interpretation.

(a) The words "hereof," "herein," "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit, and schedule references are to the articles,
sections, paragraphs, exhibits, and schedules of this Agreement unless
otherwise specified. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." All terms defined in this Agreement shall have the
defined meanings contained herein when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined therein.
The definitions contained in this Agreement are applicable to the singular as
well as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such terms. Any agreement, instrument, or
statute defined or referred to herein or in any agreement or instrument that
is referred to herein means such agreement, instrument, or statute as from
time to time, amended, qualified or supplemented, including (in the case of
agreements and instruments) by waiver or consent and (in the case of statutes)
by succession of comparable successor statutes and all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns.

(b) The phrases "the date of this Agreement," "the date hereof," and terms
of similar import, unless the context otherwise requires, shall be deemed to
refer to May 4, 2001.

(c) The parties have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.

Section 8.13 Definitions. As used herein,

(a) "Affiliate" has the meaning given to it in Rule 12b-2 of Regulation 12B
under the Exchange Act.

(b) "Beneficial ownership" or "beneficially own" has the meaning provided
in Section 13(d) of the Exchange Act and the rules and regulations thereunder.

(c) "Know" or "knowledge" means, (i) in respect of NPI, the knowledge of
NPI's executive officers and (ii) in respect of the Company, the knowledge of
the Company's executive officers.

(d) "Lien" means, in respect of any asset (including, any security) any
mortgage, lien, pledge, charge, security interest, or encumbrance of any kind
in respect of such asset.

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(e) "Permitted Lien" means a statutory Lien not yet delinquent; a purchase
money Lien arising in the ordinary course of business consistent with past
practices; a Lien reflected in the financial statements of the applicable
party; or a Lien which does not materially detract from the value or impair the
use of the asset or property in question.

(f) "Person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).

(g) "Subsidiary" means, in respect of any party, any corporation,
partnership or other entity or organization, whether incorporated or
unincorporated, of which (i) such other party or any other subsidiary of such
party is a general partner (excluding such partnerships where such party or any
subsidiary of such party does not have a majority of the voting interest in
such partnership) or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the board of directors or others performing similar functions in respect of
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries.

(h) "Transfer Taxes" means any and all state, local, foreign or provincial
sales, use, real property, stock transfer or similar taxes (including any
interest or penalties with respect thereto, but not including any shareholder
level taxes based upon net income) attributable to the transactions
contemplated herein.

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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly
executed on its behalf as of the date first above written.

FALCONSTOR, INC.

/s/ ReiJane Huai
By: _________________________________
Name:ReiJane Huai
Title: Chief Executive Officer

NETWORK PERIPHERALS INC.

/s/ James Regel
By: _________________________________
Name:James Regel
Title: Chief Executive Officer

EMPIRE ACQUISITION CORP.

/s/ James Regel
By: _________________________________
Name:James Regel
Title: President

A-44

ANNEX B

LEHMAN BROTHERS

March 30, 2001

Board of Directors
Network Peripherals Inc.
2859 Bayview Drive
Fremont, California 94538

Members of the Board:

We understand that Network Peripherals Inc. ("NPI" or the "Company") intends
to enter into an option agreement (the "Option Agreement") with FalconStor,
Inc. ("FalconStor") under which NPI will have an exclusive option (the
"Option") to merge with FalconStor and that NPI intends to exercise the Option
and merge FalconStor with a wholly owned subsidiary of NPI (the "Proposed
Transaction"). In the Proposed Transaction, all of the issued and outstanding
shares of capital stock of FalconStor and all outstanding, unexpired and
unexercised options, warrants, convertible notes, and other rights to acquire
or receive shares of FalconStor capital stock (collectively, the "FalconStor
Equity") will be converted into the right to receive, in the aggregate, between
68.9% and 71.5% of the shares of common stock of NPI on a fully-diluted basis
(the "Aggregate Consideration"). We further understand that the exact
percentage of shares to be paid by the Company will vary depending on (1) the
amount of cash, cash equivalents, short term investments and certain other
assets held by the Company at the time of the Proposed Transaction, (2) the
number of shares issued by FalconStor upon sale of its Series C Convertible
Preferred Stock to investors other than NPI, (3) the number of vested, in-the-
money options to purchase shares of NPI common stock outstanding at the time of
the Proposed Transaction and (4) the number of vested, in-the-money options to
purchase shares of FalconStor common stock outstanding at the time of the
Proposed Transaction. The terms and conditions of the Proposed Transaction are
set forth in more detail in the Option Agreement and the Agreement and Plan of
Merger and Reorganization between NPI and FalconStor (collectively, the
"Agreement").

We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company of the Aggregate Consideration to be paid by the Company for the
FalconStor Equity in the Proposed Transaction. We have not been requested to
opine as to, and our opinion does not in any manner address, the Company's
underlying business decision to proceed with or effect the Proposed
Transaction.

In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning NPI that we believe to be relevant to our analysis,
including the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 2000 and the Company's
earnings release for the quarter and fiscal year ended December 31, 2000,
(3) financial and operating information with respect to the business,
operations and prospects of NPI furnished to us by NPI, including projections
for the next five years prepared by the management of the Company (the "Company
Projections"), (4) a trading history of the Company's common stock over the
past one year and five years, and a comparison of that trading history with
those of other companies that we deemed relevant, (5) financial and operating
information with respect to the business, operations and prospects of
FalconStor furnished to us by FalconStor, including projections for the next
three years prepared by the management of FalconStor (the "FalconStor
Projections"), (6) a comparison of the historical financial results and present
financial condition of the Company and FalconStor with those of other companies
that we deemed relevant, (7) a comparison of the financial terms of the
Proposed Transaction with the financial terms of certain

B-1

other transactions that we deemed relevant, (8) a possible liquidation of the
Company, including the cash that would be distributed to the Company's
stockholders in connection with such liquidation, and (9) the results of our
efforts to solicit indications of interest from third parties with respect to a
purchase of the Company or its operating business. In addition, we have had
discussions with the managements of FalconStor and NPI concerning the business,
operations, assets, financial condition and prospects of FalconStor (including
the FalconStor Projections) and discussions with the management of NPI
concerning its business, operation, assets, financial condition and prospects,
and have undertaken such other studies, analyses and investigations as we
deemed appropriate.

In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of management of the Company and FalconStor
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the Company Projections,
upon advice of the Company we have assumed that such projections have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company and that the Company will perform
substantially in accordance with the Company Projections. With respect to the
FalconStor Projections, upon advice of FalconStor and the Company we have
assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of FalconStor as to the future financial performance of FalconStor
and that FalconStor will perform substantially in accordance with the
FalconStor Projections. In arriving at our opinion, we have not conducted a
physical inspection of the properties and facilities of FalconStor or the
Company and have not made or obtained any evaluations or appraisals of the
assets or liabilities of FalconStor or the Company. Our opinion necessarily is
based upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.

Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Aggregate Consideration
to be paid by the Company for the FalconStor Equity in the Proposed Transaction
is fair to the Company.

The Company has agreed to indemnify us for certain liabilities that may
arise out of the rendering of this opinion. We also have performed various
investment banking services for the Company in the past and have received
customary fees for such services. In the ordinary course of our business, we
actively trade in the securities of the Company for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.

This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as
to how such stockholder should vote with respect to the Proposed Transaction.

Very truly yours,

LEHMAN BROTHERS

/s/ Mark D. Dicioccio
By: _________________________________
Mark D. Dicioccio
Managing Director

B-2

ANNEX C

Delaware General Corporation Law, Section 262. APPRAISAL RIGHTS

(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with the provisions of subsection (d) of this
Section and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Sec. 228 of this Chapter shall be
entitled to an appraisal by the Court of Chancery of the fair value of his
shares of stock under the circumstances described in subsections (b) and (c)
of this Section.

(b) Appraisal rights shall be available for the shares of any class or
series of stock or a constituent corporation in a merger or consolidation to
be effected pursuant to Secs. 251, 252, 254, 257, 258 or 263 of this title:

(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities
exchange or (ii) held of record by more than 2,000 stockholders; and
further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger
did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of Sec. 251 of this
title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Secs.
251, 252, 254, 257 and 258 of this title to accept for such stock anything
except:

a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;

b. Shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or held of record by more than 2,000 stockholders;

c. Cash in lieu of fractional shares of the corporations described in
the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock and cash in lieu of
fractional shares described in the foregoing subparagraphs a., b., and
c. of this paragraph.

(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation not less than 20 days prior to the meeting,
shall notify each of its stockholders entitled to such appraisal rights
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the

C-1

corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporations of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or

(2) If the merger or consolidation was approved pursuant to Sec. 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends to demand the appraisal of his shares.

(e) Within 120 days after the effective date of the merger or consolidation;
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock of the Register in Chancery for notation
thereon of the pendency of the appraisal

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proceedings; and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificate of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and in the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.

(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.

C-3

ANNEX D

VOTING AGREEMENT

by and among

NETWORK PERIPHERALS INC.

FALCONSTOR, INC.

and

CERTAIN STOCKHOLDERS OF NETWORK PERIPHERALS INC.

Dated as of May 3, 2001

VOTING AGREEMENT

VOTING AGREEMENT (the "Agreement"), dated as of May 3, 2001, by and among
FalconStor, Inc., a Delaware corporation ("FalconStor"), Network Peripherals
Inc., a Delaware corporation ("NPI") and the individuals listed on Schedule A
attached hereto (each a "Stockholder" and collectively, the "Stockholders").

RECITALS

WHEREAS, FalconStor desires to receive a capital investment from NPI to
continue and expand its business.

WHEREAS, NPI has agreed to provide Twenty Five Million Dollars ($25,000,000)
of capital to FalconStor in the form of an equity investment (the "Equity
Investment").

WHEREAS, contemporaneously with the execution of this Agreement, NPI and
FalconStor are entering into and executing stock purchase and related
agreements, including the Amended and Restated Registration Rights Agreement
and the Amended and Restated Stockholders Agreement, to consummate the Equity
Investment (the "Equity Investment Agreements").

WHEREAS, NPI and FalconStor have negotiated a term sheet which describes the
terms upon which NPI proposes to enter into discussions to (i) invest in
FalconStor, (ii) engage in a series of transactions whereby a wholly owned
subsidiary of NPI will merge with and into FalconStor with FalconStor surviving
as the continuing entity (the "Merger Transaction") and (iii) resolve certain
other related matters.

WHEREAS, a substantial and material inducement to NPI to consummate the
Equity Investment is the grant by FalconStor to NPI of an option (the "Option
Agreement") to execute the Merger Transaction pursuant to an agreement and plan
of merger and reorganization (the "Merger Agreement") and FalconStor's and the
Stockholders' execution and delivery of this Agreement.

WHEREAS, a condition precedent to the execution and delivery of the Option
Agreement is the execution and delivery of this Agreement.

WHEREAS, as of the date hereof, each Stockholder is the registered owner of,
or has the power to vote, the number of shares of common stock of NPI ("NPI
Common Stock") and/or the number of shares of common stock of NPI ("NPI
Preferred Stock" and, together with the NPI Common Stock, the "NPI Stock") as
indicated on Schedule A.

NOW, THEREFORE for valuable consideration, including the execution and
delivery of the Option Agreement, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:

AGREEMENT

1. VOTING OF SHARES.

a. Voting of Shares and Proxy. At every meeting of the Stockholders of NPI
called, and at every adjournment hereof, and on every action or approval by
written consent of the Stockholders of NPI, each Stockholder shall vote (or
cause to be voted) the Shares (as defined in Section 1(b) below) owned by such
Stockholder to be voted: (i) in favor of the adoption of the Merger Agreement
and the other transactions contemplated by the Merger Agreement; (ii) against
any proposal for any merger, consolidation, sale of assets, recapitalization or
other business combination involving NPI (other than the Merger Transaction) or
any other action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of NPI under
the Merger Agreement or which would result in any of the conditions to NPI's
obligations under the Merger Agreement not being fulfilled; and (iii) in favor
of any other matter relating to consummation of the transactions contemplated
by the Merger Agreement.

D-2

b. "Shares" shall mean: (i) all securities of NPI (including all shares of
NPI Stock and all options, warrants and other rights to acquire NPI Stock)
owned by each Stockholder as of the date of this Agreement; and (ii) all
additional securities of NPI (including all shares of NPI Stock and all
additional options, warrants and other rights to acquire NPI Stock) of which
each Stockholder acquires ownership during the period from the date of this
Agreement through the termination of this Agreement. In the event of a stock
dividend or distribution, or any change in NPI Stock by reason of any stock
dividend or distribution, or any change, in NPI Stock by reason of any stock
dividend, split-up, recapitalization, combination, exchange of shares or the
like, the term "Shares" shall be deemed to refer to and include the Shares as
well as all such stock dividends and distributions and any securities into
which or for which any or all of the Shares may be changed or exchanged or
which are received in such transaction.

c. Concurrently with the execution of this Agreement, each Stockholder
agrees to deliver to FalconStor a proxy in the form attached hereto as Exhibit
A (the "Proxy"), which shall be irrevocable to the fullest extent permissible
by law but subject to termination as stated herein, with respect to the Shares
owned by each Stockholder.

d. Each Stockholder hereby gives any consents or waivers that are reasonably
required for the approval of the Merger Transaction under the terms of any
agreements to which the Stockholder is a party.

2. RESTRICTIONS ON TRANSFER OF SHARES.

a. Restrictions on Transfer of Shares Prior to the Consummation of the
Merger Transaction. Prior to the consummation of the Merger Transaction, each
Stockholder hereby agrees not to take any of the following actions, except in
accordance with subsection (b) of this Section 2: (i) tender any of the
Stockholder's Shares or any securities convertible into or exchangeable or
exercisable for the Stockholder's Shares to any person; (ii) sell, transfer,
distribute, pledge, encumber, assign or otherwise dispose of (or enter into any
transaction or device that is designed to, or could reasonably be expected to,
result in the disposition by any person at any time in the future of) any of
the Stockholder's Shares or any securities convertible into or exchangeable or
exercisable for the Stockholder's Shares; (iii) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of any of the Stockholder's Shares;
(iv) enforce or permit the execution of the provisions of any redemption, share
purchase or sale, recapitalization or other agreement with NPI (except with
respect to the approval of the Merger Agreement); (v) deposit any of the
Stockholder's Shares into a voting trust or depositary facility or enter into a
voting agreement or arrangement with respect to any Shares or grant any proxy
with respect thereto; or (vi) enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for sale,
sale, transfer, pledge, encumbrance, assignment or other disposition of, any of
its Shares, any securities convertible into or exchangeable or exercisable for
shares of NPI Stock or any other capital stock of NPI or any interest in any of
the foregoing with any person (any transaction referred to in clause (i), (ii),
(iii), (iv), (v) or (vi) is hereinafter referred to as a "Transfer").

b. Notwithstanding subsection (a) above, each Stockholder may take an action
described in subsection (a) of this Section 2 if (i) FalconStor gives its prior
written consent to such action or (ii) the proposed transferee shall have
executed a counterpart of this Agreement and the Proxy and shall have agreed to
hold such Shares or interest in such Shares subject to all of the terms and
provisions of this Agreement.

c. No Stockholder shall request that NPI or its transfer agent register the
Transfer (book-entry or otherwise) of any certificate or uncertificated
interest representing any of such Stockholder's Shares, and each Stockholder
hereby consents to the entry of stop transfer instructions by NPI of any
Transfer of such Stockholder's Shares, unless such Transfer is made in
compliance with this Agreement.

d. NPI will not register the Transfer (book-entry or otherwise) of any
certificate or uncertified interest representing any of the Stockholder's
Shares and will enter a stop transfer instruction on any Transfer attempted in
violation of this Agreement.

D-3

3. REPRESENTATIONS AND WARRANTIES; ADDITIONAL COVENANTS OF THE STOCKHOLDERS.

Each Stockholder hereby represents and warrants and covenants to FalconStor
as follows:

a. Authorization. Each Stockholder has the power, corporate or otherwise,
and authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby by each Stockholder have been duly and
validly authorized by such Stockholder and no other proceedings, corporate or
otherwise, on the part of the Stockholder is necessary to authorize the
execution and delivery of this Agreement or the performance by the Stockholder
of its obligations hereunder. The Agreement has been duly and validly executed
and delivered by the Stockholder and constitutes the legal, valid and binding
obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms.

b. No Conflict. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not (i)
conflict with or result in any breach of any provision of the certificate of
incorporation, bylaws or similar organizational documents, if any, of
Stockholder, or (ii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
Stockholder is a party or by which any of its properties or assets including
the Shares may be bound, or (iii) violate any order, writ, injunction, decree,
judgment, permit, license, ordinance, law, statute, rule or regulation
applicable to Stockholder or any of its properties or assets including the
Shares.

c. Title to Shares. Stockholder is the registered or beneficial owner of
its Shares free and clear of any lien or encumbrance, proxy or voting
restriction other than pursuant to this Agreement. Such Shares are all the
securities of NPI owned of record or beneficially by Stockholder on the date
of this Agreement.

d. Accredited Investor. Stockholder is an "accredited investor" within the
meaning of the United States Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.

e. Reliance by FalconStor. Each Stockholder acknowledges that the execution
and delivery of this Agreement is a material and substantial inducement for
FalconStor to execute and deliver the Option Agreement.

f. Certain Actions. Prior to the termination of this Agreement, each
Stockholder agrees not to, directly or indirectly, take any other action that
would make any representation or warranty of Stockholder contained herein
untrue or incorrect.

g. Market Stand-Off Agreement. Each Stockholder hereby agrees that, such
Stockholder shall not, directly or indirectly sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who agree
to be similarly bound) any of its Shares at any time during the 365 day period
following the consummation of the Merger Transaction (the "Lock-Up Period");
provided, however, that the provisions of this Section 3(g) shall have no
force or effect unless each officer and director of FalconStor and each
stockholder who is an affiliate of such officer or director (as that term is
defined in Rule 405 promulgated under the Securities Act of 1933, as amended)
executes a similar market stand-off agreement.

The Shares held by Stockholders who are not also directors and who are (i)
employed by NPI immediately following the execution and delivery of the Merger
Agreement by NPI and FalconStor and who (ii) are subsequently terminated by
NPI without Cause or voluntarily resign for Good Reason, after the execution
and delivery of the Merger Agreement by NPI and FalconStor will be released
from the requirements of this Section 3(g) prior to the expiration of the
Lock-Up Period.

D-4

For purposes of this Section 3(g), "Cause" is defined as a termination for
any of the following reasons: (i) theft, dishonesty or falsification of any
employment or NPI records; (ii) conviction of a felony or any act involving
moral turpitude; (iii) Stockholder's intentional failure or refusal to perform
duties reasonably assigned to Stockholder by the Board of Directors or Chief
Executive Officer of NPI within 10 days of Stockholder's receipt of written
notice of such failure or refusal from NPI; (iv) disclosure of NPI's
confidential or proprietary information; (v) Stockholder becomes unable to
perform the essential functions or duties of his position with or without
reasonable accommodations; (vi) any conduct by the Stockholder that has a
detrimental effect on NPI's reputation or business, or is otherwise detrimental
to NPI; (vii) any material breach by such employee or officer of this Agreement
or the employment agreement of such employee or officer; or (viii) NPI ceases
to do business or files for bankruptcy.

For purposes of this Section 3(g), "Good Reason" is defined as (i) NPI's
material breach of this Agreement; (ii) Stockholder's base salary being reduced
by more than 20% below Stockholder's salary in effect immediately following the
Merger Transaction, unless the reduction is made as part of, and is generally
consistent with, a general reduction of salaries; or (iii) Stockholder's
position and/or duties are so modified that Stockholder's duties are no longer
consistent with his or her position immediately following the Merger
Transaction.

Following the consummation of the Merger Transaction, the Board of Directors
of NPI may, in its sole discretion, release any or all of the Shares held by
Stockholders from the obligations of this Section 3(g) prior to the expiration
of the Lock-Up Period.

h. No Solicitation. Stockholder will not, directly or indirectly, and will
instruct the Stockholder's agents, representatives, affiliates, employees,
officers and directors not to, directly or indirectly, solicit, initiate or
knowingly encourage (including by way of furnishing nonpublic information), or
take any other action knowingly to facilitate, any inquires or the making of
any proposal or offer (including, without limitation, any proposal or offer to
the Stockholders of NPI) that constitutes, or may reasonably be expected to
lead to, any acquisition of NPI (an "Acquisition"), or enter into or maintain
or continue discussion or negotiate with any person or entity in furtherance of
such inquires to obtain an Acquisition, or agree to or endorse an Acquisition,
or authorize or permit any of the agents, representatives, affiliates (other
than in the case of a limited partnership, the limited partners hereof),
employees, officers and directors, to take any such action, subject to the
terms of Section 2 of that certain Option Agreement, dated as of the date
hereof, by and between NPI and FalconStor, for each Stockholder who is also an
officer or director of NPI. Stockholder shall notify FalconStor immediately
after receipt by Stockholder or any of Stockholder's agents, representatives,
affiliates, employees, officers and directors, of any proposal for, or inquiry
respecting, an Acquisition or any request for nonpublic information in
connection with such a proposal or inquiry, or for access to the properties,
books or records of NPI by any person or entity that informs or has informed
NPI or Stockholder that it is considering making or has made such a proposal or
inquiry. Such notice to FalconStor shall indicate in reasonable detail the
identity of the person making the proposal or inquiry and the terms and
conditions of such proposal or inquiry. Stockholder immediately shall cease and
cause to be terminated all existing discussions or negotiations with any
parties conducted heretofore with respect to an Acquisition, except in respect
of the transactions contemplated by this Agreement, to the extent that such
Stockholder is also an officer or director of NPI.

i. Acknowledgment and Approval of the Merger Agreement. The Stockholder
hereby acknowledges and agrees that the Stockholder has received a copy of the
Merger Agreement and that the Stockholder has reviewed and understands the
terms hereof.

j. Ownership. Nothing contained in this Agreement shall be deemed to vest in
FalconStor any direct or indirect ownership or incidence of ownership of or
with respect to any of the Stockholder's Shares. Except as otherwise provided
herein, all rights, ownership and economic benefits of and relating to the
Stockholder's Shares shall remain and belong to the Stockholder, and FalconStor
shall not have any authority to manage, direct, superintend, restrict,
regulate, govern, or administer any of the policies or operations of NPI or
exercise

D-5

any power or authority to direct Stockholder in the voting of any of
Stockholder's Shares, except as otherwise provided herein, or the performance
of Stockholder's duties or responsibilities as a Stockholder of NPI.

4. GENERAL PROVISIONS.

a. Notices. All notices and other communications given or made pursuant to
this Agreement shall be in writing and shall be deemed given, (i) five business
days following sending by registered or certified mail, postage prepaid, (ii)
when sent if sent by facsimile; provided, however, that the facsimile is
promptly confirmed by telephone confirmation thereof, (iii) when delivered, if
delivered personally to the intended recipient, and (iv) one business day
following sending by overnight delivery via a national courier service, and in
each case, addressed to a party at the following address for such party (or at
such other addresses as shall be specified by notice given in accordance with
this Section 4):

if to NPI:

Network Peripherals Inc.
2859 Bayview Drive
Fremont, CA 94538
Attention: James Regel, Chief Executive Officer
Facsimile No.: (510) 897-5056

with a copy to:

Gray Cary Ware & Freidenrich LLP
4365 Executive Drive, Suite 1600
San Diego, CA 92121-2189
Attention: Scott M. Stanton, Esq.
Facsimile No.: (858) 677-1477

if to a Stockholder:

then to the address listed opposite such Stockholder's name on Schedule
A attached hereto.

if to FalconStor:

FalconStor, Inc.
125 Baylis Road, Suite 140
Melville, NY 11747
Attention: ReiJane Huai, Chief Executive Officer
Facsimile No.: (631) 501-7633

with a copy to:

Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, NY 10022-1170
Attention: Steve Wolosky, Esq.
Facsimile No.: (212) 980-7177

b. Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.

D-6

any provision of this Agreement, or the application hereof to any person or any
circumstance, is invalid or unenforceable, (i) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (ii) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
hereof, in any other jurisdiction.

d. Entire Agreement; Amendment; Waiver. This Agreement, the Proxy, the
Option Agreement and the Merger Agreement constitute the entire agreement of
the parties and supersede all prior agreements and undertakings, both written
and oral, between the parties, or any of them, with respect to the subject
matter hereof and hereof. This Agreement may not be amended or modified except
in an instrument in writing signed by, or on behalf of, the parties hereto. No
failure or delay by any party in exercising any right, power or privilege
hereunder shall operate as a waiver hereof, nor shall any single or partial
exercise hereof preclude any other or further exercise hereof or the exercise
of any other right, power or privilege.

e. Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights, interests or obligations of the parties hereto
may be assigned by any of the parties by operation of law or otherwise without
the prior written consent of the other party.

f. Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity.

g. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
choice of law principles hereof. in accordance with the laws of the State of
Delaware, without giving effect to the choice of law principles hereof.

h. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.

i. Submission to Jurisdiction; Waivers; Consent to Service of Process. NPI,
FalconStor and each of the Stockholders irrevocably agrees that any legal
action or proceeding with respect to this Agreement or for recognition and
enforcement of any judgment in respect hereof brought by another party hereto
or its successors or assigns shall be brought and determined only in a United
States District Court sitting in the State of Delaware, or in the event (but
only in the event) that no such court has subject matter jurisdiction over such
action or proceeding, in the courts of the State of Delaware. NPI, FalconStor
and each of the Stockholders hereby irrevocably submits with regard to any such
action or proceeding for itself and in respect to its property, generally and
unconditionally, to the personal jurisdiction of the aforesaid courts in the
event that any dispute arises out of this Agreement or any transaction
contemplated hereby. Any service of process to be made in such action or
proceeding may be made by delivery of process in accordance with the notice
provisions contained in Section 4. NPI, FalconStor and each of the Stockholders
hereby irrevocably waives, and agrees not to assert, by way of motion, as a
defense, counterclaim or otherwise, in any action or proceeding with respect to
this Agreement, (i) any claim that it is not personally subject to the
jurisdiction of the above-named courts for any reason other than the failure to
serve process in accordance with this Section 4(i), (ii) that it or its
property is exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service of notice,
attachment prior to judgment, attachment in aid of execution of judgment,
execution of judgment or otherwise), and (iii) to the fullest extent permitted
by applicable law that (A) the suit,

D-7

action or proceeding in any such court is brought in an inconvenient forum, (B)
the venue of such suit, action or proceeding is improper and (C) this
Agreement, or the subject matter hereof, may not be enforced in or by such
courts.

j. Counterparts. This Agreement may be executed in two or more counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.

k. Waiver of Jury Trial. Each party acknowledges and agrees that any
controversy that may arise under this Agreement is likely to involve
complicated issues and, therefore, such party hereby irrevocably and
unconditionally waives any right that such party may have to a trial by jury in
respect of any litigation directly or indirectly arising out of or relating to
this Agreement or the transactions contemplated by this Agreement. Each party
certifies and acknowledges (i) that such party understands and has considered
the implications of this waiver, (ii) that such party makes this waiver
voluntarily and (iii) such party has been induced to enter into this Agreement
by, among other things, the mutual waivers and certifications in this Section
4(k).

l. Termination. This Agreement and the Proxy, and all obligations of the
parties hereunder and thereunder, shall terminate immediately, without any
further action being required, upon the earlier of (i) any termination of the
Option Agreement other than a termination of the Option Agreement as a result
of the execution and delivery of the Merger Agreement, (ii) any termination of
the Merger Agreement and (iii) the consummation of the Merger Transaction.

m. Further Assurance. Each party to this Agreement agrees (i) to furnish
upon request to the other party such further information, (ii) to execute and
deliver to the other party such other documents and (iii) to do such other acts
and things as the other party reasonably requests for the purpose of carrying
out the intent of this Agreement and the documents and instruments referred to
herein.

n. Interpretation. The words "hereof," "herein," "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement,
section and exhibit references are to the sections and exhibits of this
Agreement unless otherwise specified. Whenever the words "include," "includes,"
or "including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation." All terms defined in this Agreement shall
have the defined meanings contained herein when used in any certificate or
other document made or delivered pursuant hereto unless otherwise defined
therein. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms. Any agreement, instrument,
or statute defined or referred to herein or in any agreement or instrument that
is referred to herein means such agreement, instrument, or statute as from time
to time, amended, qualified or supplemented, including (in the case of
agreements and instruments) by waiver or consent and (in the case of statutes)
by succession of comparable successor statutes and all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of
any provisions of this Agreement.

D-8

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.

"FalconStor"

"NPI"

FalconStor, Inc.

Network Peripherals Inc.

By: /s/ ReiJane Huai By: /s/ James Regel
--------------------------------- -----------------------------
Name: ReiJane Huai Name: James Regel
------------------------------- ---------------------------
Title: Chief Executive Officer Title: Chief Executive Officer
------------------------------- ----------------------------

"STOCKHOLDERS"

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

Officers and Directors of NPI.
-------------------------------------

Signatures on file with NPI.
-------------------------------------

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

[Signature Page to Voting Agreement]

D-9

EXHIBIT A

STOCKHOLDERS

Name Address Number and Type of Shares
---- -------- -------------------------

D-10

EXHIBIT B

IRREVOCABLE PROXY

The undersigned Stockholder of Network Peripherals Inc., a Delaware
corporation ("NPI"), hereby irrevocably (to the fullest extent permitted by
law), but subject to the termination provisions hereof, appoints FalconStor,
Inc., a Delaware corporation ("FalconStor"), as the sole and exclusive attorney
and proxy of the undersigned, with full power of substitution and
resubstitution, to vote and exercise all voting and related rights (to the full
extent that the undersigned is entitled to do so) with respect to all of the
shares of NPI that now are or hereafter may be beneficially owned by the
undersigned, and any and all other shares or securities of NPI issued or
issuable in respect hereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Proxy. The Shares beneficially
owned by the undersigned Stockholder of NPI as of the date of this Proxy are
listed on the final page of this Proxy. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by the undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares and the matters set forth in the
third paragraph hereof.

This Proxy is irrevocable (to the fullest extent permitted by law), subject
to the termination provisions hereof, is coupled with an interest and is
granted pursuant to that certain Voting Agreement of even date herewith by and
among FalconStor, NPI and the undersigned Stockholder (the "Voting Agreement"),
and is granted in consideration of FalconStor's execution and delivery of the
Equity Investment Agreements (as defined in the Voting Agreement) and Option
Agreement (as defined in the Voting Agreement).

FalconStor is hereby authorized and empowered by the undersigned to act as
the undersigned's attorney and proxy to vote the Shares, and to exercise all
voting, consent and similar rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents) at every annual, special or adjourned meeting of Stockholders of NPI
and in every written consent in lieu of such meeting: (i) in favor of the
adoption of the Merger Agreement and the other transactions contemplated by the
Merger Agreement, (ii) against any proposal for any merger, consolidation, sale
of assets, recapitalization or other business combination involving NPI (other
than the Merger Transaction) or any other action or agreement that would result
in a breach of any covenant, representation or warranty or any other obligation
or agreement of NPI under the Merger Agreement or which would result in any of
the conditions to NPI's obligations under the Merger Agreement not being
fulfilled, and (iii) in favor of any other matter relating to approval of the
Merger Agreement.

FalconStor may not exercise this Proxy on any other matter except as
provided above. The undersigned Stockholder may vote the Shares on all other
matters.

Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.

This Proxy is irrevocable (to the fullest extent permitted by law), subject
to the termination provisions hereof.

D-11

This Proxy, and all obligations of the undersigned hereunder, shall
terminate immediately, without any further action being required, upon the
earlier of (i) any termination of the Option Agreement other than a termination
of the Option Agreement as a result of the execution and delivery of the Merger
Agreement, (ii) any termination of the Merger Agreement and (iii) the
consummation of the Merger Transaction.

Dated: May , 2001

By: _________________________________
Name:
Title:

Shares beneficially owned:

shares of NPI Common Stock

shares of NPI Preferred Stock

[Signature Page to Irrevocable Proxy]

D-12

ANNEX D

VOTING AGREEMENT

by and among

NETWORK PERIPHERALS INC.

FALCONSTOR, INC.

and

CERTAIN STOCKHOLDERS OF
FALCONSTOR, INC.

Dated as of March 30, 2001

D-13

VOTING AGREEMENT

VOTING AGREEMENT (the "Agreement"), dated as of March 30, 2001, by and among
FalconStor, Inc., a Delaware corporation ("FalconStor"), Network Peripherals
Inc., a Delaware corporation ("NPI") and the individuals listed on Schedule A
attached hereto (each a "Stockholder" and collectively, the "Stockholders").

RECITALS

WHEREAS, FalconStor desires to receive a capital investment from NPI to
continue and expand its business.

WHEREAS, NPI has agreed to provide Twenty Five Million Dollars ($25,000,000)
of capital to FalconStor in the form of an equity investment (the "Equity
Investment").

WHEREAS, a substantial and material inducement to NPI to consummate the
Equity Investment is the grant by FalconStor to NPI of an option to execute the
Merger Transaction pursuant to an agreement and plan of merger and
reorganization (the "Merger Agreement") and FalconStor's and the Stockholders'
execution and delivery of this Agreement.

WHEREAS, as of the date hereof, each Stockholder is the registered owner of,
or has the power to vote, the number of shares of common stock of FalconStor
("FalconStor Common Stock") and/or the number of shares of common stock of
FalconStor ("FalconStor Preferred Stock" and, together with the FalconStor
Common Stock, the "FalconStor Stock"); as indicated on Schedule A.

NOW, THEREFORE for valuable consideration, including the execution and
delivery of the Equity Investment Agreements, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:

AGREEMENT

1. Voting of Shares.

a. Voting of Shares and Proxy. At every meeting of the Stockholders of
FalconStor called, and at every adjournment hereof, and on every action or
approval by written consent of the Stockholders of FalconStor, each
Stockholder shall vote (or cause to be voted) the Shares (as defined in
Section 1(b) below) owned by such Stockholder to: (i) in favor of the
adoption of the Merger Agreement and the other transactions contemplated by
the Merger Agreement; (ii) against any proposal for any merger,
consolidation, sale of assets, recapitalization or other business
combination involving FalconStor (other than the Merger Transaction) or any
other action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of
FalconStor under the Merger Agreement or which would result in any of the
conditions to FalconStor's obligations under the Merger Agreement not being
fulfilled; and (iii) in favor of any other matter relating to consummation
of the transactions contemplated by the Merger Agreement.

D-14

b. "Shares" shall mean: (i) all securities of FalconStor (including all
shares of FalconStor Stock and all options, warrants and other rights to
acquire FalconStor Stock) owned by each Stockholder as of the date of this
Agreement; and (ii) all additional securities of FalconStor (including all
shares of FalconStor Stock and all additional options, warrants and other
rights to acquire FalconStor Stock) of which each Stockholder acquires
ownership during the period from the date of this Agreement through the
termination of this Agreement. In the event of a stock dividend or
distribution, or any change in FalconStor Stock by reason of any stock
dividend or distribution, or any change, in FalconStor Stock by reason of
any stock dividend, split-up, recapitalization, combination, exchange of
shares or the like, the term "Shares" shall be deemed to refer to and
include the Shares as well as all such stock dividends and distributions
and any securities into which or for which any or all of the Shares may be
changed or exchanged or which are received in such transaction.

c. Concurrently with the execution of this Agreement, each Stockholder
agrees to deliver to NPI a proxy in the form attached hereto as Exhibit A
(the "Proxy"), which shall be irrevocable to the fullest extent permissible
by law but subject to termination as stated herein, with respect to the
Shares owned by each Stockholder.

d. Each Stockholder hereby gives any consents or waivers that are
reasonably required for the approval of the Merger Transaction under the
terms of any agreements to which the Stockholder is a party.

2. Restrictions on Transfer of Shares.

a. Restrictions on Transfer of Shares Prior to the Consummation of the
Merger Transaction. Prior to the consummation of the Merger Transaction,
each Stockholder hereby agrees not to take any of the following actions,
except in accordance with subsection (b) of this Section 2: (i) tender any
of the Stockholder's Shares or any securities convertible into or
exchangeable or exercisable for the Stockholder's Shares to any person;
(ii) sell, transfer, distribute, pledge, encumber, assign or otherwise
dispose of (or enter into any transaction or device that is designed to, or
could reasonably be expected to, result in the disposition by any person at
any time in the future of) any of the Stockholder's Shares or any
securities convertible into or exchangeable or exercisable for the
Stockholder's Shares; (iii) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of any of the Stockholder's Shares;
(iv) enforce or permit the execution of the provisions of any redemption,
share purchase or sale, recapitalization or other agreement with FalconStor
(except with respect to the sale of Series C Convertible Preferred Stock of
FalconStor or the approval of the Merger Agreement), (v) deposit any of the
Stockholder's Shares into a voting trust or depositary facility or enter
into a voting agreement or arrangement with respect to any Shares or grant
any proxy with respect thereto; or (vi) enter into any contract, option or
other arrangement or understanding with respect to or consent to the offer
for sale, sale, transfer, pledge, encumbrance, assignment or other
disposition of, any of its Shares, any securities convertible into or
exchangeable or exercisable for shares of FalconStor Stock or any other
capital stock of FalconStor or any interest in any of the foregoing with
any person (any transaction referred to in clause (i), (ii), (iii), (iv),
(v) or (vi) is hereinafter referred to as a "Transfer").

b. Notwithstanding subsection (a) above, each Stockholder may take an
action described in subsection (a) of this Section 2 if (i) NPI gives its
prior written consent to such action or (ii) the proposed transferee shall
have executed a counterpart of this Agreement and shall have agreed to hold
such Shares or interest in such Shares subject to all of the terms and
provisions of this Agreement.

c. No Stockholder shall request that FalconStor or its transfer agent
register the Transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Stockholder's Shares, and
each Stockholder hereby consents to the entry of stop transfer instructions
by FalconStor of any Transfer of such Stockholder's Shares, unless such
Transfer is made in compliance with this Agreement.

d. FalconStor will not register the Transfer (book-entry or otherwise)
of any certificate or uncertified interest representing any of the
Stockholder's Shares and will enter a stop transfer instruction on any
Transfer attempted in violation of this Agreement.

D-15

3. Representations and Warranties; Additional Covenants of the
Stockholders. Each Stockholder hereby represents and warrants and covenants to
NPI as follows:

a. Authorization. Each Stockholder has the power, corporate or
otherwise, and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby by each Stockholder
have been duly and validly authorized by such Stockholder and no other
proceedings, corporate or otherwise, on the part of the Stockholder is
necessary to authorize the execution and delivery of this Agreement or the
performance by the Stockholder of its obligations hereunder. The Agreement
has been duly and validly executed and delivered by the Stockholder and
constitutes the legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms.

b. No Conflict. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will
not (i) conflict with or result in any breach of any provision of the
certificate of incorporation, bylaws or similar organizational documents,
if any, of Stockholder, or (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which Stockholder is a party or by which
any of its properties or assets including the Shares may be bound, or (iii)
violate any order, writ, injunction, decree, judgment, permit, license,
ordinance, law, statute, rule or regulation applicable to Stockholder or
any of its properties or assets including the Shares.

c. Title to Shares. Stockholder is the registered or beneficial owner of
its Shares free and clear of any lien or encumbrance, proxy or voting
restriction other than pursuant to this Agreement. Such Shares are all the
securities of FalconStor owned of record or beneficially by Stockholder on
the date of this Agreement.

d. Accredited Investor. Stockholder is an "accredited investor" within
the meaning of the United States Securities and Exchange Commission ("SEC")
Rule 501 of Regulation D, as presently in effect.

e. Reliance by NPI. Each Stockholder acknowledges that the execution and
delivery of this Agreement and the grant by FalconStor to NPI of an option
to merge with FalconStor, is a material and substantial inducement for NPI
to execute and deliver the Equity Investment Agreements.

f. Certain Actions. Prior to the termination of this Agreement, each
Stockholder agrees not to, directly or indirectly, take any other action
that would make any representation or warranty of Stockholder contained
herein untrue or incorrect.

g. Market Stand-Off Agreement.

i. Each Stockholder hereby agrees that, such Stockholder shall not,
directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of NPI received by such
Stockholder in exchange for its Shares in connection with the Merger
Transaction (the "NPI Shares") at any time during the 365-day period
following the consummation of the Merger Transaction (the "Lock-Up
Period"); provided, however, that the provisions of this Section 3(g)
shall have no force or effect unless each employee of NPI who is the
record or beneficial owner of at least 30,000 shares of common stock of
NPI, officer and director of NPI and each stockholder who is an
affiliate of such employee, officer or director (as that term is
defined in Rule 405 promulgated under the Securities Act of 1933, as
amended, executes a similar market stand-off agreement; provided,
further, that each such employee of NPI shall be released from such
market stand-off agreement if such employee's employment with NPI
following the consummation of the Merger Transaction is terminated
involuntarily or constructively for any reason other than cause.

D-16

ii. Following the consummation of the Merger Transaction, the Board
of Directors of NPI may, in its sole discretion, release any or all of
the NPI Shares held by Stockholders from the obligations of this
Section 3(g) prior to the expiration of the Lock-Up Period.

h. Conversion. Each Stockholder agrees to convert any shares of
FalconStor Common Stock held by it into FalconStor Common Stock conditioned
upon, and immediately prior to, the consummation of the Merger Transaction
or to exchange any shares of FalconStor Preferred Stock held by it for NPI
Common Stock conditioned upon, and concurrently with, the consummation of
the Merger Transaction, in accordance with the terms of FalconStor's
Certificate of Incorporation, as amended.

i. No Solicitation. Stockholder will not, directly or indirectly, and
will instruct the Stockholder's agents, representatives, affiliates,
employees, officers and directors not to, directly or indirectly, solicit,
initiate or knowingly encourage (including by way of furnishing nonpublic
information), or take any other action knowingly to facilitate, any
inquires or the making of any proposal or offer (including, without
limitation, any proposal or offer to the Stockholders of FalconStor) that
constitutes, or may reasonably be expected to lead to, any acquisition of
FalconStor (an "Acquisition") (it being understood that the sale and
issuance by FalconStor of additional shares Series C Convertible Common
Stock shall not be deemed an Acquisition), or enter into or maintain or
continue discussion or negotiate with any person or entity in furtherance
of such inquires or to obtain an Acquisition, or agree to or endorse an
Acquisition, or authorize or permit any of the agents, representatives,
affiliates (other than in the case of a limited partnership, the limited
partners hereof), employees, officers and directors, to take any such
action, subject to the terms of Section 2 of that certain Option Agreement,
dated the date hereof, by and between NPI and FalconStor, for each
Stockholder who is also an officer or director of FalconStor. Stockholder
shall notify NPI immediately after receipt by Stockholder or any of
Stockholder's agents, representatives, affiliates, employees, officers and
directors, of any proposal for, or inquiry respecting, an Acquisition or
any request for nonpublic information in connection with such a proposal or
inquiry, or for access to the properties, books or records of FalconStor by
any person or entity that informs or has informed FalconStor or Stockholder
that it is considering making or has made such a proposal or inquiry. Such
notice to NPI shall indicate in reasonable detail the identity of the
person making the proposal or inquiry and the terms and conditions of such
proposal or inquiry. Stockholder immediately shall cease and cause to be
terminated all existing discussions or negotiations with any parties
conducted heretofore with respect to an Acquisition, except in respect of
the transactions contemplated by this Agreement, to the extent that such
Stockholder is also an officer or director of FalconStor.

j. Acknowledgment and Approval of the Merger Agreement. The Stockholder
hereby acknowledges and agrees that the Stockholder has received a copy of
the Merger Agreement and that the Stockholder has reviewed and understands
the terms hereof.

k. Ownership. Nothing contained in this Agreement shall be deemed to
vest in NPI any direct or indirect ownership or incidence of ownership of
or with respect to any of the Stockholder's Shares. Except as otherwise
provided herein, all rights, ownership and economic benefits of and
relating to the Stockholder's Shares shall remain and belong to the
Stockholder, and NPI shall not have any authority to manage, direct,
superintend, restrict, regulate, govern, or administer any of the policies
or operations of FalconStor or exercise any power or authority to direct
Stockholder in the voting of any of Stockholder's Shares, except as
otherwise provided herein, or the performance of Stockholder's duties or
responsibilities as a Stockholder of FalconStor.

4. General Provisions.

a. Notices. All notices and other communications given or made pursuant
this Agreement shall be in writing and shall be deemed given, (i) five
business days following sending by registered or certified mail, postage
prepaid, (ii) when sent if sent by facsimile; provided, however, that the
facsimile is promptly confirmed by telephone confirmation thereof, (iii)
when delivered, if delivered personally to the intended recipient, and (iv)
one business day following sending by overnight delivery via a national
courier service,

D-17

and in each case, addressed to a party at the following address for such
party (or at such other addresses as shall be specified by notice given in
accordance with this Section 4):

if to NPI:

Network Peripherals Inc.
2859 Bayview Drive
Fremont, CA 94538
Attention: James Regel, Chief Executive Officer
Facsimile No.: (510) 897-5056

with a copy to:

Gray Cary Ware & Freidenrich LLP
4365 Executive Drive, Suite 1600
San Diego, CA 92121-2189
Attention: Scott M. Stanton, Esq.
Facsimile No.: (858) 677-1477

if to a Stockholder:

then to the address for such Stockholder listed on the records of
FalconStor.

if to FalconStor:

FalconStor, Inc.
125 Baylis Road, Suite 140
Melville, NY 11747
Attention: ReiJane Huai, Chief Executive Officer
Facsimile No.: (631) 501-7633

with a copy to:

Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, NY 10022-1170
Attention: Steve Wolosky, Esq.
Facsimile No.: (212) 980-7177

b. Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.

c. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If
any provision of this Agreement, or the application hereof to any person or
any circumstance, is invalid or unenforceable, (i) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as
may be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (ii) the remainder of this Agreement and the
application of such provision to other persons or circumstances shall not
be affected by such invalidity or unenforceability, nor shall such
invalidity or unenforceability affect the validity or enforceability of
such provision, or the application hereof, in any other jurisdiction.

d. Entire Agreement; Amendment; Waiver. This Agreement, the Proxy, the
Option Agreement, of even date herewith, by and between FalconStor and NPI
(the "Option Agreement") and the Merger Agreement constitute the entire
agreement of the parties and supersede all prior agreements and
undertakings, both written and oral, between the parties, or any of them,
with respect to the subject matter hereof and hereof. This Agreement may
not be amended or modified except in an instrument in writing signed by, or
on behalf of, the parties hereto. No failure or delay by any party in
exercising any right,

D-18

power or privilege hereunder shall operate as a waiver hereof, nor shall
any single or partial exercise hereof preclude any other or further
exercise hereof or the exercise of any other right, power or privilege.

e. Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights, interests or obligations of the parties
hereto may be assigned by any of the parties by operation of law or
otherwise without the prior written consent of the other party.

f. Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement, this being
in addition to any other remedy to which they are entitled at law or in
equity.

g. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to
the choice of law principles hereof.

h. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns, and nothing in this Agreement, express or implied, is intended to
or shall confer upon any other person any rights, benefits or remedies of
any nature whatsoever under or by reason of this Agreement.

i. Submission to Jurisdiction; Waivers; Consent to Service of
Process. NPI and each of the Stockholders irrevocably agrees that any legal
action or proceeding with respect to this Agreement or for recognition and
enforcement of any judgment in respect hereof brought by another party
hereto or its successors or assigns shall be brought and determined only in
a United States District Court sitting in the State of Delaware, or in the
event (but only in the event) that no such court has subject matter
jurisdiction over such action or proceeding, in the courts of the State of
Delaware. NPI and each of the Stockholders hereby irrevocably submits with
regard to any such action or proceeding for itself and in respect to its
property, generally and unconditionally, to the personal jurisdiction of
the aforesaid courts in the event that any dispute arises out of this
Agreement or any transaction contemplated hereby. Any service of process to
be made in such action or proceeding may be made by delivery of process in
accordance with the notice provisions contained in Section 4. NPI and each
of the Stockholders hereby irrevocably waives, and agrees not to assert, by
way of motion, as a defense, counterclaim or otherwise, in any action or
proceeding with respect to this Agreement, (i) any claim that it is not
personally subject to the jurisdiction of the above-named courts for any
reason other than the failure to serve process in accordance with this
Section 4(i), (ii) that it or its property is exempt or immune from
jurisdiction of any such court or from any legal process commenced in such
courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or
otherwise), and (iii) to the fullest extent permitted by applicable law
that (A) the suit, action or proceeding in any such court is brought in an
inconvenient forum, (B) the venue of such suit, action or proceeding is
improper and (C) this Agreement, or the subject matter hereof, may not be
enforced in or by such courts.

j. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other parties.

k. Waiver of Jury Trial. Each party acknowledges and agrees that any
controversy that may arise under this Agreement is likely to involve
complicated issues and, therefore, such party hereby irrevocably and
unconditionally waives any right that such party may have to a trial by
jury in respect of any litigation directly or indirectly arising out of or
relating to this Agreement or the transactions contemplated by this
Agreement. Each party certifies and acknowledges (i) that such party
understands and has considered the implications of this waiver, (ii) that
such party makes this waiver voluntarily and (iii) such party has been
induced to enter into this Agreement by, among other things, the mutual
waivers and certifications in this Section 4(k).

D-19

l. Termination. This Agreement and the Proxy and all obligations of the
parties hereunder and thereunder, shall terminate immediately, without any
further action being required, upon the earlier of (i) any termination of
the Option Agreement other than a termination of the Option Agreement as a
result of the execution and delivery of the Merger Agreement, (ii) any
termination of the Merger Agreement and (iii) the consummation of the
Merger Transaction.

m. Further Assurance. Each party to this Agreement agrees (i) to furnish
upon request to the other party such further information, (ii) to execute
and deliver to the other party such other documents and (iii) to do such
other acts and things as the other party reasonably requests for the
purpose of carrying out the intent of this Agreement and the documents and
instruments referred to herein.

n. Interpretation. The words "hereof," "herein," "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole and not to any particular provision of this
Agreement, section and exhibit references are to the sections and exhibits
of this Agreement unless otherwise specified. Whenever the words "include,"
"includes," or "including" are used in this Agreement, they shall be deemed
to be followed by the words "without limitation." All terms defined in this
Agreement shall have the defined meanings contained herein when used in any
certificate or other document made or delivered pursuant hereto unless
otherwise defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such terms.
Any agreement, instrument, or statute defined or referred to herein or in
any agreement or instrument that is referred to herein means such
agreement, instrument, or statute as from time to time, amended, qualified
or supplemented, including (in the case of agreements and instruments) by
waiver or consent and (in the case of statutes) by succession of comparable
successor statutes and all attachments thereto and instruments incorporated
therein. References to a person are also to its permitted successors and
assigns. The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.

"NPI"
"FalconStor"

Network Peripherals Inc.
FalconStor, Inc.

By: /s/ James Regel
By: /s/ ReiJane Huai -----------------------------
--------------------------------- Name: James Regel
Name: ReiJane Huai ---------------------------
------------------------------- Title: Chief Executive Officer
Title: Chief Executive Officer ----------------------------
-------------------------------

"STOCKHOLDERS"

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

Certain stockholders of FalconStor.
-------------------------------------

Signatures on file at FalconStor.
-------------------------------------

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

[Signature Page to Voting Agreement]

D-20

SCHEDULE A

STOCKHOLDERS

Name Number and Type of Shares
---- -------------------------

Applegreen Partners.............. 75,000 shares of Series A Preferred
Applegreen Partners.............. 52,500 shares of Series B Preferred
Barry Fingerhut.................. 210,000 shares of Series B Preferred
Barry Rubenstein................. 500,000 shares of Series A Preferred
Brookwood Partners............... 250,000 shares of Series A Preferred
Brookwood Partners............... 140,000 shares of Series B Preferred
Eli Oxenhorn..................... 800,000 shares of Series A Preferred
Eli Oxenhorn Family LP........... 100,000 shares of Series A Preferred
Eli Oxenhorn Family LP........... 140,000 shares of Series B Preferred
Gordon Freeman................... 140,000 shares of Series B Preferred
Irwin Lieber..................... 500,000 shares of Series A Preferred
Irwin Lieber..................... 70,000 shares of Series B Preferred
Jon Lieber....................... 17,500 shares of Series B Preferred
Larry Altman..................... 70,000 shares of Series B Preferred
Odeon Capital Foreign Partners,
Ltd............................. 73,354 shares of Series B Preferred
Odeon Capital Partners, LP....... 261,596 shares of Series B Preferred
Philip Bloom..................... 69,000 shares of Series B Preferred
ReiJane Huai..................... 14,995,000 shares of Common Stock
Seneca Ventures.................. 150,000 shares of Series A Preferred
Seneca Ventures.................. 70,000 shares of Series B Preferred
Wheatley Associates III, LP...... 207,665 shares of Series B Preferred
Wheatley Foreign Partners III,
LP.............................. 202,957 shares of Series B Preferred
Wheatley Foreign Partners, LP.... 28,405 shares of Series B Preferred
Wheatley Partners II, LP......... 124,740 shares of Series B Preferred
Wheatley Partners III, LP........ 948,951 shares of Series B Preferred
Wheatley Partners, LP............ 335,282 shares of Series B Preferred
Woodland Partners................ 150,000 shares of Series A Preferred
Woodland Partners................ 105,000 shares of Series B Preferred
Woodland Venture Fund............ 150,000 shares of Series A Preferred
Woodland Venture Fund............ 140,000 shares of Series B Preferred

D-21

EXHIBIT A

IRREVOCABLE PROXY

The undersigned Stockholder of FalconStor, Inc., a Delaware corporation
("FalconStor"), hereby irrevocably (to the fullest extent permitted by law),
but subject to the termination provisions hereof, appoints Network Peripherals
Inc., a Delaware corporation ("NPI"), as the sole and exclusive attorney and
proxy of the undersigned, with full power of substitution and resubstitution,
to vote and exercise all voting rights (to the full extent that the undersigned
is entitled to do so) with respect to all of the shares of FalconStor that now
are or hereafter may be beneficially owned by the undersigned, and any and all
other shares or securities of FalconStor issued or issuable in respect hereof
on or after the date hereof (collectively, the "Shares") in accordance with the
terms of this Proxy. The Shares beneficially owned by the undersigned
Stockholder of FalconStor as of the date of this Proxy are listed on the final
page of this Proxy. Upon the undersigned's execution of this Proxy, any and all
prior proxies given by the undersigned with respect to any Shares are hereby
revoked and the undersigned agrees not to grant any subsequent proxies with
respect to the Shares and the matters set forth in the third paragraph hereof.

This Proxy is irrevocable (to the fullest extent permitted by law), subject
to the termination provisions hereof, is coupled with an interest and is
granted pursuant to that certain Voting Agreement of even date herewith by and
among FalconStor, NPI and the undersigned Stockholder (the "Voting Agreement"),
and is granted in consideration of NPI's execution and delivery of the Equity
Investment Agreements (as defined in the Voting Agreement) and Option Agreement
(as defined in the Voting Agreement).

NPI is hereby authorized and empowered by the undersigned to act as the
undersigned's attorney and proxy to vote the Shares, and to exercise all
voting, consent and similar rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents) at every annual, special or adjourned meeting of Stockholders of
FalconStor and in every written consent in lieu of such meeting: (i) in favor
of the adoption of the Merger Agreement and the other transactions contemplated
by the Merger Agreement, (ii) against any proposal for any merger,
consolidation, sale of assets, recapitalization or other business combination
involving FalconStor (other than the Merger Transaction) or any other action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of FalconStor under the Merger
Agreement or which would result in any of the conditions to FalconStor's
obligations under the Merger Agreement not being fulfilled, and (iii) in favor
of any other matter relating to approval of the Merger Agreement.

NPI may not exercise this Proxy on any other matter except as provided
above. The undersigned Stockholder may vote the Shares on all other matters.

Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.

This Proxy is irrevocable (to the fullest extent permitted by law), subject
to the termination provisions hereof.

D-22

Dated: March , 2001

By: _________________________________
Name:
Title:

Shares beneficially owned:

shares of FalconStor Common Stock

[Signature Page to Irrevocable Proxy]

D-23

ANNEX E

Network Peripherals Inc.

CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

I. Purpose

The purpose of the Audit Committee (the "Committee") of the Board of
Directors (the "Board") of Network Peripherals Inc. (the "Company") is to
assist the Board in fulfilling its statutory and fiduciary oversight
responsibilities relating to the Company's financial accounting, reporting and
controls. The Committee's principal functions are to:

. monitor the periodic reviews of the adequacy of the accounting and
financial reporting processes and systems of internal control that are
conducted by the Company's independent auditors, and the Company's
financial and senior management;

. review and evaluate the independence and performance of the Company's
independent auditors; and

. facilitate communication among the Company's independent auditors, the
Company's financial and senior management, and the Board.

The Committee will fulfill these functions primarily by carrying out the
activities enumerated in Part IV of this charter. In order to serve these
functions, the Committee shall have unrestricted access to Company personnel
and documents, and shall have authority to direct and supervise an
investigation into any matters within the scope of its duties, including the
power to retain outside counsel in connection with any such investigation.

While the Audit Committee has the responsibilities and powers set forth in
this charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with generally accepted accounting principles. This is
the responsibility of management and the Company's independent auditors. Nor is
it the duty of the Committee to conduct investigations, to resolve
disagreements, if any, between management and its independent auditors or to
assure compliance with laws and regulations and the Company's policies and
procedures.

II. Membership

All members of the Committee will be appointed by, and shall serve at the
discretion of, the Board. Unless a chair is elected by the full Board, the
members of the Committee may designate a Chair by majority vote of the
Committee membership.

As of the date this charter is adopted and until June 13, 2001, the
Committee shall consist of at least two members of the Board. At least a
majority of the members shall be persons who are not officers or employees of
the Company or any subsidiary and who do not have any other relationship which,
in the opinion of the Board of Directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. As of
June 14, 2001, the Committee shall consist of three or more members of the
Board, with the exact number being determined by the Board. Each member of the
Committee shall be "independent" as defined by the rules of The Nasdaq Stock
Market, as they may be amended from time to time (the "Rules"), except as
otherwise permitted by such Rules. Each member of the Committee shall have the
ability to read and understand fundamental financial statements (or become able
to do so within a reasonable time after joining the Committee) and at least one
member shall have prior experience in accounting, financial management or
financial oversight, as required by the Rules.

E-1

III. Meetings

Meetings of the Committee shall be held from time to time as determined by
the Board. The Committee should periodically meet with the independent auditors
out of the presence of management about internal controls, the fullness and
accuracy of the Company's financial statements and any other matters that the
Committee or these groups believe should be discussed privately with the
Committee. The Committee members should communicate with management and the
independent auditors on a quarterly basis in connection with their review of
the Company's financial statements.

IV. Responsibilities and Duties

The following shall be the principal recurring processes of the Committee in
carrying out its oversight responsibilities. These processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate and may establish policies and procedures from time to time that it
deems necessary or advisable in fulfilling its responsibilities.

1. Review the Company's quarterly and annual financial statements, including
any report or opinion by the independent auditors, prior to distribution to the
public or filing with the Securities and Exchange Commission.

2. In connection with the Committee's review of the annual financial
statements:

. Discuss with the independent auditors and management the financial
statements and the results of the independent auditors' audit of the
financial statements.

. Discuss any items requiring communication by the independent auditors in
accordance with SAS 61, as amended. These discussions should include the
independent auditors' judgments about the quality and appropriateness of
the Company's accounting principles, the reasonableness of significant
judgments, the clarity of the disclosures in the Company's financial
statements and any significant difficulties encountered during the
course of the audit, including any restrictions on the scope of work or
access to required information.

3. In connection with the Committee's review of the quarterly financial
statements:

. Discuss with the independent auditors and management the results of the
independent auditors' SAS 71 review of the quarterly financial
statements.

. Discuss significant issues, events and transactions and any significant
changes regarding accounting principles, practices, judgments or
estimates with management and the independent auditors, including any
significant disagreements among management and the independent auditors.

4. Discuss any comments or recommendations of the independent auditors
outlined in their annual management letter. Approve a schedule for implementing
any recommended changes and monitor compliance with the schedule.

5. Discuss with the independent auditors and management their periodic
reviews of the adequacy of the Company's accounting and financial reporting
processes and systems of internal control, including the adequacy of the
systems of reporting to the audit committee by each group.

6. Periodically consult with the independent auditors out of the presence of
management about internal controls, the fullness and accuracy of the Company's
financial statements and any other matters that the Committee or these groups
believe should be discussed privately with the Committee.

7. Review the independence and performance of the independent auditors.
Recommend to the Board of Directors the appointment or discharge of the
independent auditors.

E-2

8. Communicate with the Company's independent auditors about the Company's
expectations regarding its relationship with the auditors, including the
following: (i) the independent auditors' ultimate accountability to the Board
and the Committee, as representatives of the Company's stockholders; and (ii)
the ultimate authority and responsibility of the Board and the Committee to
select, evaluate and, where appropriate, replace the independent auditors.

9. Review and approve processes and procedures to ensure the continuing
independence of the Company's independent auditors.

10. Review the independent auditors' audit plan.

11. Approve the fees and other significant compensation to be paid to the
independent auditors.

12. Periodically review the status of any legal matters that could have a
significant impact on the Company's financial statements.

13. Annually prepare a report to the Company's stockholders for inclusion
in the Company's annual proxy statement as required by the rules and
regulations of the Securities and Exchange Commission, as they may be amended
from time to time.

14. Maintain minutes of meetings and periodically report to the Board of
Directors on significant matters related to the Committee's responsibilities.

15. Review and reassess the adequacy of the Committee's charter at least
annually. Submit the charter to the Company's Board of Directors for review and
include a copy of the charter as an appendix to the Company's proxy statement
as required by the rules and regulations of the Securities and Exchange
Commission, as they may be amended from time to time (currently, once every
three years).

16. Perform any other activities required by applicable law, rules or
regulations, including the rules of the Securities and Exchange Commission and
any stock exchange or market on which the Company's Common Stock is listed, and
perform other activities that are consistent with this charter, the Company's
Bylaws and governing laws, as the Committee or the Board deems necessary or
appropriate.

E-3

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. NPI's certificate of incorporation and
bylaws provide that NPI shall indemnify NPI's directors, officers, employees,
and agents to the full extent permitted by Delaware law. These indemnification
provisions may be sufficiently broad to permit indemnification of NPI's
officers and directors for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act of 1933, as amended.

NPI has a policy of directors' and officers' liability insurance that
insures NPI's directors and officers against the cost of defense, settlement or
payment of a judgment under certain circumstances.

At present, there is no pending litigation or proceeding involving any of
NPI's directors, officers, employees or other agents in which indemnification
is being sought. NPI are not aware of any threatened litigation that may result
in a claim for indemnification by any of NPI's directors, officers, employees
or other agents.

Item 21. Exhibits.

The following exhibits are filed with this Registration Statement:

Exhibit
Number Exhibit Title
------- -------------

2.1* Agreement and Plan of Merger and Reorganization, dated as of May 4,
2001, among
FalconStor, Inc., Registrant and Empire Acquisition Corp. Reference is
made to Annex A to the joint proxy statement/prospectus which is
included in this Registration Statement.
3.1(1) Restated Certificate of Incorporation.
3.2(1) Bylaws.
3.3(2) Certificate of Amendment of the Certificate of Incorporation.
3.4* Form of Certificate of Amendment to Restated Certificate of
Incorporation of Registrant.
4.1* Voting Agreement, dated as of May 3, 2001, between Registrant,
FalconStor, Inc. and certain stockholders of Registrant. Reference is
made to Annex D to the joint proxy statement/prospectus which is
included in this Registration Statement.
4.2* Voting Agreement, dated as of March 30, 2001 between Registrant,
FalconStor, Inc. and certain
stockholders of FalconStor, Inc. Reference is made to Annex D to the
joint proxy statement/prospectus which is included in this
Registration Statement.
5.1* Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel for
Registrant.
8.1 Tax opinion of Gray Cary Ware & Freidenrich LLP, counsel for
Registrant.
8.2 Tax opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel
for FalconStor, Inc.
10.61* Option Agreement, dated as of March 30, 2001, by and between
Registrant and FalconStor, Inc.
21.1(3) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of KPMG LLP.
23.3* Consent of Gray Cary Ware & Freidenrich LLP (See Exhibit 5.1).

II-1

Exhibit
Number Exhibit Title
------- -------------

23.4 Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (See Exhibit
8.2).
23.5* Consent of Lehman Brothers Inc.
24.1* Power of Attorney (included as page II-4).
99.1* Form of Proxy Card of Registrant.
99.2* Form of Proxy Card of FalconStor.
99.4* Consent of ReiJane Huai to serve as a director of Registrant.
99.6* Consent of Lawrence S. Dolin to serve as a director of Registrant.
99.7* Consent of Steven H. Owings to serve as a director of Registrant.
99.8* Consent of Steven R. Fischer to serve as a director of Registrant.

--------
* previously filed

(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to the Registrant's Registration Statement on Form S-1 (File No.
33-78350).

(2) Incorporated by reference to the corresponding Exhibit in the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 2000.

(3) Filed with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.

Item 22. Undertakings.

(1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the joint proxy statement/prospectus
pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.

(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.

II-2

(5)(A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which as a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fremont, State of California, on the
19th day of July, 2001.

NETWORK PERIPHERALS INC.

/s/ James Williams
By: _________________________________
James Williams
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

* President, Chief July 19, 2001
____________________________________ Executive Officer and
James Regel Director (Principal
Executive Officer)

/s/ James Williams Senior Vice President of July 19, 2001
____________________________________ Finance and
James Williams Administration,
Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

* Chairman of the Board July 19, 2001
____________________________________
Glenn Penisten

* Director July 19, 2001
____________________________________
Thomas Brown

* Director July 19, 2001
____________________________________
Michael Gardner

* Director July 19, 2001
____________________________________
Charles Hart

*By: /s/ James Williams July 19, 2001
__________________________________
James Williams
Attorney-In-Fact

II-4

EXHIBIT INDEX

Exhibit
Number Exhibit Title
------- -------------

2.1* Agreement and Plan of Merger and Reorganization, dated as of May 4,
2001, among FalconStor, Inc., Registrant and Empire Acquisition Corp.
Reference is made to Annex A to the joint proxy statement/prospectus
which is included in this Registration Statement.
3.1(1) Restated Certificate of Incorporation.
3.2(1) Bylaws.
3.3(2) Certificate of Amendment of the Certificate of Incorporation.
3.4* Form of Certificate of Amendment to Restated Certificate of
Incorporation of Registrant.
4.1* Voting Agreement, dated as of May 3, 2001, between Registrant,
FalconStor, Inc. and certain stockholders of Registrant. Reference is
made to Annex D to the joint proxy statement/prospectus which is
included in this Registration Statement.
4.2* Voting Agreement, dated as of March 30, 2001 between Registrant,
FalconStor, Inc. and certain stockholders of FalconStor, Inc.
Reference is made to Annex D to the joint proxy statement/prospectus
which is included in this Registration Statement.
5.1* Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel for
Registrant.
8.1 Tax opinion of Gray Cary Ware & Freidenrich LLP, counsel for
Registrant.
8.2 Tax opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel
for FalconStor, Inc.
10.61* Option Agreement, dated as of March 30, 2001, by and between
Registrant and FalconStor, Inc.
21.1(3) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of KPMG LLP.
23.3* Consent of Gray Cary Ware & Freidenrich LLP (See Exhibit 5.1).
23.4 Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (See Exhibit
8.2).
23.5* Consent of Lehman Brothers Inc.
24.1* Power of Attorney (included as page II-4).
99.1* Form of Proxy Card of Registrant.
99.2* Form of Proxy Card of FalconStor.
99.4* Consent of ReiJane Huai to serve as a director of Registrant.
99.6* Consent of Lawrence S. Dolin to serve as a director of Registrant.
99.7* Consent of Steven H. Owings to serve as a director of Registrant.
99.8* Consent of Steven R. Fischer to serve as a director of Registrant.

--------
* previously filed

(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to the Registrant's Registration Statement on Form S-1 (File No.
33-78350).

(2) Incorporated by reference to the corresponding Exhibit in the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 2000.

(3) Filed with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.