Ontrak Systems Inc – ‘DEF 14A’ for 11/21/96

As of:  Monday, 10/21/96   ·   For:  11/21/96   ·   Accession #:  912057-96-23333   ·   File #:  0-26222

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Definitive Proxy Solicitation Material   —   Schedule 14A
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Document/Exhibit                   Description                      Pages   Size 

 1: DEF 14A     Definitive Proxy Solicitation Material                75    363K 

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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT 
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 

Filed by the Registrant / /                                             
Filed by a Party other than the Registrant / /                          

Check the appropriate box:                                              
/ /  Preliminary Proxy Statement                                        
/ /  Confidential, for Use of the Commission Only (as permitted by Rule 
14a-6(e)(2))                                                  
/X/  Definitive Proxy Statement                                         
/ /  Definitive Additional Materials                                    
/ /  Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12      

                  ONTRAK SYSTEMS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):                              

/X/  $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or 
Item 22(a)(2) of Schedule 14A.                                        
/ /  $500 per each party to the controversy pursuant to Exchange Act            
Rule 14a-6(i)(3).                                                     
/ /  Fee computed on table below per Exchange Act                               
Rules 14a-6(i)(4) and 0-11.                                           
(1) Title of each class of securities to which transaction applies:   
        ------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:      
        ------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed  
pursuant to Exchange Act Rule 0-11:                             
        ------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:                  
        ------------------------------------------------------------------------
(5) Total fee paid: $                                                 
        ------------------------------------------------------------------------
/X/  Fee paid previously with preliminary materials.                            
/ /  Check box if any part of the fee is offset as provided by Exchange Act Rule
  0-11(a)(2) and identify the filing for which the offsetting fee was paid
   previously.Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.                   
(1) Amount previously paid:                                           
        ------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:                     
        ------------------------------------------------------------------------
(3) Filing party:                                                     
        ------------------------------------------------------------------------
(4) Date filed:                                                       
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[LOGO]

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 21, 1996 

TO THE SHAREHOLDERS:                                                            

The 1996 Annual Meeting of Shareholders of OnTrak Systems, Inc., a      
California corporation (the "Company"), will be held at the Company's principal 
executive offices at 1010 Rincon Circle, San Jose, California, on Thursday,     
November 21, 1996, at 10:00 a.m., for the following purposes:                   

    1.  To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified. Management's nominees for    
  director are James W. Bagley, Michael C. Child, Jerauld J. Cutini, Richard
J. Elkus, Jr., and Gary Hultquist.                                      

2.  To authorize the Company to change the Company's state of   
incorporation from California to Delaware.                              

       3.  To approve the adoption of the Company's 1996 Equity Incentive Plan
and the reservation of 2,000,000 shares of Common Stock for issuance    
thereunder.                                                             

  4.  To ratify the selection of Price Waterhouse LLP as independent
accountants of the Company for the current fiscal year.                 

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

   Only shareholders of record at the close of business on September 27, 1996,
are entitled to notice of and to vote at the meeting. The stock transfer books  
will not be closed.                                                             

All shareholders are cordially invited to attend the meeting in person. 
Whether or not you plan to attend the meeting, please mark, sign, date and      
return the enclosed proxy as promptly as possible in the envelope enclosed for  
that purpose. Any shareholder attending the meeting may vote in person even if  
he or she previously has returned a proxy.                                      

             Sincerely

                   James W. Bagley

                                   CHAIRMAN OF THE BOARD AND CHIEF
                     EXECUTIVE OFFICER

San Jose, California                                                            
October 21, 1996                                                                

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ONTRAK SYSTEMS, INC.
1010 RINCON CIRCLE
SAN JOSE, CALIFORNIA 95131

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

PROXY STATEMENT 
--------------------- 

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL                                                                         

The enclosed Proxy is solicited on behalf of OnTrak Systems, Inc., a    
California corporation (the "Company"), for use at the Annual Meeting of        
Shareholders to be held on Thursday, November 21, 1996 at 10:00 a.m., local     
time, or at any adjournment thereof, for the purposes set forth herein and in   
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting   
will be held at the Company's principal executive offices at 1010 Rincon Circle,
San Jose, California. The telephone number at the Company's principal executive 
offices is (408) 577-1010.                                                      

   These proxy solicitation materials were mailed on or about October 21, 1996
to all shareholders entitled to vote at the Annual Meeting.                     

RECORD DATE                                                                     

 Shareholders of record at the close of business on September 27, 1996 are
entitled to notice of, and to vote at, the Annual Meeting. At the record date,  
7,557,964 shares of the Company's Common Stock, no par value, 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 the Company a written     
notice of revocation or a duly executed proxy bearing a later date or by        
attending the Annual Meeting and voting in person.                              

VOTING                                                                          

   The shares represented by the proxies received will be voted as you direct.
If you give no direction, the shares will be voted as recommended by the Board  
of Directors.                                                                   

Every shareholder voting for the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of shares held by such      
shareholder, or distribute the shareholder's votes on the same principle among  
as many candidates as the shareholder may select, up to the number of directors 
to be elected. However, no shareholder shall be entitled to cumulate votes      
unless the name of the candidate or candidates for whom such votes are proposed 
to be cast has been placed in nomination prior to the voting and the            
shareholder, or any other shareholder, has given notice at the Annual Meeting   
prior to the voting of the intention to cumulate the shareholder's votes. On all
other matters, each share of Common Stock has one vote.                         

 Abstentions and broker "non-votes" as to any matter (indicating a lack of
authority to vote on such matter) will each be counted as present for purposes  
of determining the presence of a quorum. Abstentions will have the same effect  
as a negative vote. Broker non-votes, on the other hand, will have no effect on 
the outcome of the vote on any matters except the proposal to reincorporate in  
Delaware, as to which a broker non-vote will have the same effect as a negative 
vote.                                                                           

SOLICITATION                                                                    

The Company will bear the entire cost of solicitation, including the    
preparation, assembly, printing and mailing of this Proxy Statement, the proxy  
and any additional soliciting materials sent to shareholders. The Company has   
retained the services of the First National Bank of Boston to aid in the        
solicitation of                                                                 

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proxies, deliver proxy materials to brokers, nominees, fiduciaries and other    
custodians for distribution to beneficial owners of stock and to solicit proxies
therefrom. The First National Bank of Boston will be reimbursed for all         
reasonable out-of-pocket expenses in connection with the distribution of proxy  
materials. The Company has also retained Corporate Investor Communications,     
Inc., to assist in the solicitation of proxies for a fee of $4,000 and          
reimbursement of certain expenses. In addition, the Company may reimburse       
brokerage firms and other persons representing beneficial owners of shares for  
their expenses incurred in forwarding solicitation materials to such beneficial 
owners. Proxies may also be solicited by certain of the Company's directors,    
officers and regular employees, without additional compensation, personally or  
by telephone, telegram or other means. Except as described above, the Company   
does not currently intend to solicit proxies other than by mail.                

DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING           

Shareholder proposals intended to be considered at the Annual Meeting of
Shareholders for the fiscal year ended June 30, 1997 must be received by the    
Company no later than June 23, 1997. Such proposals may be included in next     
year's proxy statement if they comply with certain rules and regulations        
promulgated by the Securities and Exchange Commission ("SEC").                  

PROPOSAL NO. 1
ELECTION OF DIRECTORS 

NOMINEES                                                                        

A board of five directors will be elected at the Annual Meeting. Unless 
otherwise instructed, the proxy holders will vote the proxies received by them  
for the five nominees named below, all of whom are currently directors of the   
Company. The Company is not aware of any nominee who will be unable or will     
decline to serve as a director. In the event that any such nominee is unable or 
declines to serve as a director at the time of the Annual Meeting, the proxies  
will be voted for any nominee who 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 in accordance with cumulative voting  
as will assure the election of as many of the nominees listed below as possible,
and, in such event, the specific nominees to be voted for will be determined by 
the proxy holders. In no event will the proxy holders vote proxies for more than
five nominees. The five candidates receiving the highest number of affirmative  
votes of the shares voting at the Annual Meeting will be elected directors of   
the Company. The term of office of each person elected as a director will       
continue until the next Annual Meeting of Shareholders or until such time as his
or her successor has been duly elected and qualified.                           

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The names of the Company's nominees for director and certain information
about them are set forth below.                                                 

                                                        [Enlarge/Download Table]

                                                                                                   DIRECTOR  
NAME OF NOMINEE                   AGE                      PRINCIPAL OCCUPATION                      SINCE   
--------------------------------  ---     ------------------------------------------------------  -----------
                                                                                                             
James W. Bagley (1).............      57  Chairman of the Board of Directors and Chief Executive        1996 
                                           Officer of the Company                                            

Jerauld J. Cutini...............      37  Executive Vice President, Strategic Marketing,                1990 
                                           Business Management and Customer Service, and                     
                                           Secretary of the Company                                          

Michael C. Child (1)(2).........      41  Managing Director, TA Associates, Inc.                        1994 
                                           (a venture capital firm)                                          

Richard J. Elkus, Jr. (2).......      61  Vice Chairman of the Board and Executive Vice                 1996 
                                           President of Tencor Instruments                                   

Gary Hultquist (1)..............      53  Managing Director of Hultquist Capital, Inc. (a               1995 
                                           financial services and consulting company)                        

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

(1) Member of Audit Committee.                                                  

(2) Member of Compensation Committee.                                           

  Mr. Bagley has served as Chairman of the Board and Chief Executive Officer
of the Company since June 1996. Prior to joining OnTrak, Mr. Bagley was employed
by Applied Materials, Inc. for 15 years in various management positions, most   
recently as Vice Chairman of the Board of Directors. He joined Applied Materials
in 1981 as Senior Vice President, was Chief Operating Officer from 1987 through 
October 1995, served as President from December 1987 to December 1993 and was   
appointed Vice Chairman of the Board of Directors in December 1993. Mr. Bagley  
was employed by Texas Instruments before he joined Applied Materials. Mr. Bagley
is also a director of Tencor Instruments, Teradyne, Inc. and Kulicke and Soffa  
Industries, Inc.                                                                

   Mr. Cutini joined the Company in August 1990 as Vice President of Sales. He
has served as a director of the Company since November 1990. He served as the   
Company's Chief Financial Officer from November 1990 until September 1992. He   
became Secretary in September 1992, and became Executive Vice President, Sales  
and Marketing in November 1994. From February 1989 to August 1990, Mr. Cutini   
was Senior Sales Engineer for Applied Materials, Inc. From September 1988 to    
February 1989, Mr. Cutini was Western Regional Sales Manager for Solitec, Inc., 
a semiconductor equipment company. From May 1981 to September 1988, Mr. Cutini  
was employed by Silicon Valley Group, Inc., in various positions in customer    
service and sales.                                                              

  Mr. Child has served as a director of the Company since November 1994. Mr.
Child has been employed by TA Associates, Inc., a venture capital firm, or it   
predecessor, since July 1982, has been a partner of affiliated venture funds    
since January 1986 and is currently a Managing Director of TA Associates, Inc.  
Mr. Child is also a director of Ultratech Stepper, Inc., a semiconductor        
equipment company, and Sonic Solutions, a professional audio company.           

   Mr. Elkus has served as a director of the Company since August 1996. He has
been Vice Chairman of the Board and Executive Vice President of Tencor          
Instruments since February 1994. Mr. Elkus was one of the founders of Prometrix 
Corporation, which was acquired by Tencor in February 1994. Mr. Elkus was the   
Chairman of the Board and Chief Executive Officer of Prometrix from 1983 until  
February 1994.                                                                  

Mr. Hultquist has served as a director of the Company since April 1995. 
Since July 1996, Mr. Hultquist has served as Chairman of the Board and Chief    
Executive Officer of Titanium Memory Systems, Inc., a development stage company 
that has developed and is preparing to manufacture high performance titanium    
substrates for the computer disk drive industry. Since September 1995, Mr.      
Hultquist has served as Managing Director of Hultquist Capital, Inc., a         
financial services and consulting firm which specializes in advising            
technology-based companies. From April 1988 until September 1995, he served as  
President                                                                       

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and Chief Executive Officer of Bridgemere Capital, Inc., a financial services   
and consulting company which specialized in advising technology-based companies.
Mr. Hultquist served as Chief Operating Officer of Bridgemere from November 1986
until April 1988. Prior to joining Bridgemere, Mr. Hultquist practiced law for  
18 years, including service in the US Army.                                     

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

BOARD MEETINGS AND COMMITTEES                                                   

   The Board of Directors of the Company held 8 meetings during the year ended
June 30, 1996. The Board of Directors has an Audit Committee and a Compensation 
Committee. The Board of Directors has no standing nominating committee or       
committee performing similar functions. During the year ended June 30, 1996, no 
director attended fewer than 75% of the aggregate of (i) all meetings of the    
Board of Directors (held during the period in which such director served) and   
(ii) all meetings of committees of the Board on which such director served.     

   The Audit Committee of the Board of Directors currently consists of Messrs.
Bagley, Child, and Hultquist. The Audit Committee recommends the engagement of  
independent auditors, consults with the independent auditors regarding the scope
of annual audits and reviews the Company's system of internal accounting        
controls. The Audit Committee held 4 meetings during the year ended June 30,    
1996.                                                                           

  The Compensation Committee of the Board of Directors currently consists of
Messrs. Child and Elkus. The Compensation Committee makes recommendations to the
Board regarding executive compensation and related matters and also has sole and
exclusive responsibility to administer the Company's 1992 Stock Option Plan. The
Compensation Committee held one meeting during the year ended June 30, 1996, and
acted by written consent without a meeting on fourteen occasions.               

PROPOSAL NO. 2

REINCORPORATION IN DELAWARE 

INTRODUCTION                                                                    

  The Board of Directors believes that the best interests of the Company and
its shareholders will be served by changing the state of incorporation of the   
Company from California to Delaware (the "Reincorporation Proposal" or the      
"Proposed Reincorporation"). As discussed below, the principal reasons for      
reincorporation are the greater flexibility of Delaware corporate law, the      
substantial body of case law interpreting that law and the increased ability of 
the Company to attract and retain qualified directors. Shareholders are urged to
read the following sections of this Proxy Statement carefully, including the    
related exhibits, before voting on the Reincorporation Proposal. THE BOARD OF   
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE PROPOSED  
REINCORPORATION.                                                                

   The Reincorporation Proposal will be effected by merging the Company into a
wholly-owned subsidiary of the Company, which was incorporated for this purpose.
Throughout the Proxy Statement, the term "OnTrak California" refers to the      
existing California corporation, and the term "OnTrak Delaware" refers to the   
new Delaware corporation, which is the proposed successor to OnTrak California. 
Upon completion of the merger, OnTrak California will cease to exist, and OnTrak
Delaware will continue to operate the business of the Company under the name    
OnTrak Systems, Inc.                                                            

    Pursuant to the Agreement and Plan of Merger, which will be substantially in
the form attached hereto as Exhibit A (the "Merger Agreement"), each outstanding
share of OnTrak California Common Stock will automatically be converted into one
share of OnTrak Delaware Common Stock, $0.0001 par value, upon the effective    
date of the merger. Each stock certificate representing issued and outstanding  
shares of OnTrak California Common Stock will continue to represent the same    
number of shares of Common Stock of OnTrak Delaware. IT WILL NOT BE NECESSARY   
FOR SHAREHOLDERS TO EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR STOCK        
CERTIFICATES OF ONTRAK DELAWARE. However, shareholders may exchange their       
certificates if they so choose. The                                             

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Common Stock of OnTrak California is listed for trading on the Nasdaq National  
Market, and after the merger OnTrak Delaware's Common Stock will continue to be 
traded on the Nasdaq National Market without interruption under the same symbol 
("ONTK") as the shares of OnTrak California Common Stock were traded on such    
system prior to the merger.                                                     

   Under California law, the affirmative vote of a majority of the outstanding
shares of Common Stock of OnTrak California is required for approval of the     
Merger Agreement and the other terms of the Proposed Reincorporation. See "Vote 
Required for the Reincorporation Proposal." The Proposed Reincorporation has    
been approved by OnTrak California's Board of Directors, which unanimously      
recommends a vote in favor of the proposal. If approved by the shareholders, it 
is anticipated that the merger will become effective as soon as practicable     
following the Annual Meeting of Shareholders (the "Effective Date"). However,   
pursuant to the Merger Agreement, the merger may be abandoned or the Merger     
Agreement may be amended by the Board of Directors (except that the principal   
terms may not be amended without shareholder approval) either before or after   
shareholder approval has been obtained and prior to the Effective Date of the   
Proposed Reincorporation if, in the opinion of the Board of Directors of either 
company, circumstances arise which make either action advisable.                

Shareholders of OnTrak California will have no dissenters' rights of    
appraisal with respect to the Reincorporation Proposal. See "Significant        
Differences Between the Corporation Laws of California and Delaware--Appraisal  
Rights."                                                                        

   The discussion set forth below is qualified in its entirety by reference to
the Merger Agreement, the Certificate of Incorporation of OnTrak Delaware (the  
"Certificate of Incorporation") and the Bylaws of OnTrak Delaware, which will be
substantially in the forms attached hereto as Exhibits A, B and C, respectively.

APPROVAL BY SHAREHOLDERS OF THE PROPOSED REINCORPORATION WILL CONSTITUTE
APPROVAL OF THE MERGER AGREEMENT, THE CERTIFICATE OF INCORPORATION AND THE      
BYLAWS OF ONTRAK DELAWARE, WHICH WILL BE SUBSTANTIALLY IN THE FORMS SET FORTH AS
EXHIBITS A, B AND C TO THIS PROXY STATEMENT.                                    

PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION                              

   FLEXIBILITY OF DELAWARE LAW.  For many years Delaware has followed a policy
of encouraging incorporation in that state and, in furtherance of that policy,  
has been a leader in adopting, construing and implementing comprehensive,       
flexible corporate laws responsive to the legal and business needs of           
corporations organized under its laws. Many corporations have initially chosen  
Delaware for their state of incorporation or have subsequently changed their    
corporate domicile to Delaware in a manner similar to that proposed by the      
Company. Because of Delaware's prominence as the state of incorporation for many
major corporations, both the legislature and courts in Delaware have            
demonstrated an ability and a willingness to act quickly and effectively to meet
changing business needs. The Delaware courts have developed considerable        
expertise in dealing with corporate issues, and a substantial body of case law  
has developed construing Delaware law and establishing public policies with     
respect to corporate legal affairs.                                             

ATTRACTION AND RETENTION OF QUALIFIED DIRECTORS.  Both California and   
Delaware law permit a corporation to include a provision in its certificate of  
incorporation which reduces, limits or eliminates the monetary liability of     
directors for breaches of fiduciary duty in certain circumstances. The          
increasing frequency of claims and litigation directed against directors and    
officers has greatly expanded the risks facing directors and officers of        
corporations in exercising their respective duties. The amount of time and money
required to respond to such claims and to defend such litigation can be         
substantial. It is the Company's desire to reduce such risks to its directors   
and officers and to limit situations in which monetary damages can be recovered 
against directors so that the Company may continue to attract and retain        
qualified directors who might otherwise be unwilling to serve because of the    
increased risks involved.                                                       

  In accordance with current California law, OnTrak California's Articles of
Incorporation include a provision which limits director liability in certain    
circumstances. In general, however, the ability to limit liability may be       
somewhat broader under Delaware law, and Delaware case law is also more         
developed to                                                                    

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provide guidance in this regard. It should be noted, however, that neither      
California nor Delaware law permits a corporation to limit or eliminate the     
liability of its directors for intentional misconduct, bad faith conduct or any 
transaction from which the director derives an improper personal benefit. In    
addition, liability for violations of federal laws such as the federal          
securities laws may not be subject to any such limitations. See "Significant    
Differences Between the Corporation Laws of California and Delaware--           
Indemnification and Limitation of Liability."                                   

In addition, Delaware law permits a corporation to adopt a number of    
measures, through amendment of the corporate charter or bylaws or otherwise,    
designed to reduce a corporation's vulnerability to unsolicited takeover        
attempts. The Board of Directors has no present intention following the Proposed
Reincorporation to amend the Certificate of Incorporation or Bylaws to include  
additional provisions which might deter an unsolicited takeover attempt.        
However, in the discharge of its fiduciary obligations to shareholders, the     
Board of Directors has evaluated the Company's vulnerability to potential       
unsolicited bids to acquire the Company on unfavorable terms. In the process of 
this evaluation, the Board of Directors has considered, or may consider in the  
future, certain anti-takeover strategies which may enhance the Board's ability  
to negotiate with an unsolicited bidder.                                        

POSSIBLE DISADVANTAGES                                                          

Despite the unanimous belief of the Board of Directors that the         
Reincorporation Proposal is in the best interests of OnTrak California and its  
shareholders, it should be noted that Delaware law has been criticized by some  
commentators on the grounds that it does not afford minority shareholders the   
same substantive rights and protections as are available in a number of other   
states. For a comparison of shareholders' rights and the powers of management   
under Delaware and California law, see "Significant Differences Between the     
Corporation Laws of California and Delaware." The Reincorporation Proposal,     
however, does not include certain changes to the Company's Articles of          
Incorporation and Bylaws permitted by Delaware law which may reduce shareholder 
participation in important corporate decisions. See "The Charters and Bylaws of 
OnTrak California and OnTrak Delaware."                                         

NO CHANGE IN THE NAME, BOARD MEMBERS, BUSINESS, MANAGEMENT, LOCATION OF         
PRINCIPAL FACILITIES OR EMPLOYEE PLANS OF THE COMPANY                       

    The Reincorporation Proposal will effect only a change in the legal domicile
of the Company and other changes of a legal nature, certain of which are        
described in this Proxy Statement. The Proposed Reincorporation will NOT result 
in any change in the name, business, management, fiscal year, location of the   
principal facilities, assets or liabilities of the Company. The five directors  
who are elected at the Annual Meeting of Shareholders will become the directors 
of OnTrak Delaware. All employee benefit, stock option and stock purchase plans 
of OnTrak California will be continued by OnTrak Delaware, and each option or   
right issued pursuant to any such plan will automatically be converted into an  
option or right to purchase the same number of shares of OnTrak Delaware Common 
Stock, at the same price per share, upon the same terms, and subject to the same
conditions, as set forth in such plan. Shareholders should note that approval of
the Reincorporation Proposal will also constitute approval of the assumption of 
these plans by OnTrak Delaware. OnTrak California's other officer and employee  
benefit arrangements will also be continued by OnTrak Delaware upon the terms,  
and subject to the conditions, currently in effect. As noted above, after the   
merger, the shares of Common Stock of OnTrak Delaware will continue to be       
traded, without interruption, on the Nasdaq National Market under the same      
symbol ("ONTK") as the shares of Common Stock of OnTrak California were traded  
prior to the merger.                                                            

THE CHARTERS AND BYLAWS OF ONTRAK CALIFORNIA AND ONTRAK DELAWARE                

The provisions of the OnTrak Delaware Certificate of Incorporation and  
Bylaws are similar to those of the OnTrak California Articles of Incorporation  
and Bylaws in most respects. Delaware law does permit the implementation of     
certain provisions in a corporation's certificate of incorporation or bylaws    
which would alter some of the rights of shareholders and the powers of          
management of a California company. Although the Board of Directors of OnTrak   
California has no current plan to implement these changes, certain changes could
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OnTrak Delaware following stockholder approval, and certain changes could be    
implemented by amendment of the Bylaws of OnTrak Delaware without stockholder   
approval. For a discussion of such changes, see "Significant Differences Between
the Corporation Laws of California and Delaware." This discussion of the        
Certificate of Incorporation and Bylaws of OnTrak Delaware is qualified by      
reference to Exhibits B and C hereto, respectively.                             

AUTHORIZED STOCK.  The Articles of Incorporation of OnTrak California   
authorize thirty million (30,000,000) shares of Common Stock, no par value, and 
three million (3,000,000) shares of undesignated Preferred Stock, no par value. 
The proposed Certificate of Incorporation of OnTrak Delaware authorizes OnTrak  
Delaware to issue thirty million (30,000,000) shares of Common Stock, $0.0001   
par value, as well as three million (3,000,000) shares of undesignated Preferred
Stock, $0.0001 par value.                                                       

NUMBER OF DIRECTORS.  The Bylaws of OnTrak California authorize the     
directors to fix the number of directors within a range from four to seven, with
the number of directors currently set at five. The Bylaws of OnTrak Delaware    
will also authorize the directors to fix the number of directors within a range 
from four to seven, with the number of directors set at five. In contrast to the
Bylaws of OnTrak California, however, the Bylaws of OnTrak Delaware provide that
the range, as well as the exact number, of directors may be changed by the Board
of Directors without further shareholder approval. See "Significant Differences 
Between the Corporation Laws of California and Delaware--Size of the Board of   
Directors."                                                                     

 MONETARY LIABILITY OF DIRECTORS.  The Articles of Incorporation of OnTrak
California and the Certificate of Incorporation of OnTrak Delaware both provide 
for the elimination of personal monetary liability of directors to the fullest  
extent permissible under the laws of each corporation's respective state of     
incorporation. The provision eliminating monetary liability of directors set    
forth in the Certificate of Incorporation of OnTrak Delaware is potentially more
expansive, in that it incorporates future amendments to Delaware law with       
respect to the elimination of such liability.                                   

SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE 

The General Corporation Laws of California and Delaware differ in many  
respects. While not all of such differences are summarized in this Proxy        
Statement, a number of the principal differences which could materially affect  
the rights of shareholders are discussed below.                                 

  SIZE OF THE BOARD OF DIRECTORS.  Under California law, although changes in
the number of directors must in general be approved by a majority of the        
outstanding shares, the Board of Directors may fix the exact number of directors
within a stated range set forth in the articles of incorporation or bylaws, if  
that stated range has been approved by the shareholders. Delaware law permits   
the Board of Directors alone to change the authorized number, or the range, of  
directors by amendment to the bylaws, unless the directors are not authorized to
amend the bylaws or the number of directors is fixed in the certificate of      
incorporation (in which case a change in the number of directors may be made    
only by an amendment to the certificate of incorporation approved by the        
stockholders). The Certificate of Incorporation of OnTrak Delaware provides that
the number of directors shall be as specified in the Bylaws and authorizes the  
Board of Directors to make, alter, amend or repeal the Bylaws. The Board of     
Directors of OnTrak Delaware may therefore change the authorized range, as well 
as the exact number, of directors. If the Reincorporation Proposal is approved, 
the five directors of OnTrak California who are elected at the Annual Meeting of
Shareholders will continue as directors of OnTrak Delaware after the Proposed   
Reincorporation is consummated.                                                 

    CUMULATIVE VOTING.  Under California law, if any shareholder gives notice of
his or her intention to cumulate votes for the election of directors, any other 
shareholder of the corporation is also entitled to cumulate his or her votes at 
such election. Under Delaware law, cumulative voting in the election of         
directors is not mandatory. THE CERTIFICATE OF INCORPORATION OF ONTRAK DELAWARE 
DOES NOT PROVIDE FOR CUMULATIVE VOTING, SO THAT UNLESS THE CERTIFICATE OF       
INCORPORATION OF ONTRAK DELAWARE IS AMENDED FOLLOWING THE PROPOSED              
REINCORPORATION TO SPECIFY CUMULATIVE VOTING (WHICH MAY BE DONE ONLY WITH       
STOCKHOLDER APPROVAL), STOCKHOLDERS OF ONTRAK DELAWARE WILL HAVE NO CUMULATIVE  
VOTING RIGHTS. The elimination of cumulative voting would limit the ability of  
minority stockholders to obtain representation on the Board of Directors.       

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    CLASSIFIED BOARD OF DIRECTORS.  A classified board is one on which a certain
number of the directors, but not all, are elected on a rotating basis each year.
California law prohibits a classified board of directors unless the corporation 
is a "listed corporation." A "listed corporation" is a corporation whose shares 
are either (i) listed on the New York or American Stock Exchanges or (ii)       
designated for trading on the Nasdaq National Market and held by at least 800   
shareholders. OnTrak California's Articles of Incorporation and Bylaws do not   
provide for a classified board of directors. Delaware law permits, but does not 
require, a classified board of directors, with staggered terms under which      
one-half or one-third of the directors are elected for terms of two or three    
years, respectively. This method of electing directors makes changes in the     
composition of the board of directors, and thus a change in control of a        
corporation, a lengthier and more difficult process. The OnTrak Delaware        
Certificate of Incorporation and Bylaws do not provide for a classified board of
directors. The establishment of a classified board following the Proposed       
Reincorporation would require the approval of the stockholders of OnTrak        
Delaware.                                                                       

POWER TO CALL SPECIAL MEETINGS OF SHAREHOLDERS.  Under California law, a
special meeting of shareholders may be called by the board of directors, the    
chairman of the board, the president, the holders of shares entitled to cast not
less than ten percent of the votes at such meeting and such additional persons  
as are authorized by the articles of incorporation or the bylaws. Under Delaware
law, a special meeting of stockholders may be called by the board of directors  
or by any other person authorized to do so in the certificate of incorporation  
or the bylaws. Although permitted to do so, the Bylaws of OnTrak Delaware do not
eliminate the right of stockholders to call a special meeting of stockholders;  
instead, the Bylaws of OnTrak Delaware provide that special meetings of         
stockholders may be called by the board of directors, the chairman of the board,
the president, or the holders of shares entitled to cast not less than ten      
percent of the votes at such meeting to call a special meeting of stockholders. 
Following the Proposed Reincorporation, the Board of Directors of OnTrak        
Delaware could (although it has no current intention to do so) amend the Bylaws 
to limit or eliminate the right of stockholders to call a special meeting of    
stockholders. Any such limitation could make it more difficult for stockholders 
to initiate action that is opposed by the Board of Directors.                   

   STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS.  In the last several
years, a number of states (but not California) have adopted special laws        
designed to make certain kinds of "unfriendly" corporate takeovers, or other    
transactions involving a corporation and one or more of its significant         
shareholders, more difficult. Under Section 203 of the Delaware General         
Corporation Law ("Section 203"), certain "business combinations" with           
"interested stockholders" of Delaware corporations are subject to a three-year  
moratorium unless specified conditions are met.                                 

 Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the time
that such person becomes an interested stockholder. With certain exceptions, an 
interested stockholder is a person or group who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock   
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which  
the person has voting rights only), or is an affiliated associate of the        
corporation and was the owner of 15% or more of such voting stock at any time   
within the previous three years.                                                

For purposes of Section 203, the term "business combination" is defined 
broadly to include mergers with or caused by the interested stockholder; sales  
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a         
subsidiary equal to ten percent or more of the aggregate market value of the    
corporation's consolidated assets or its outstanding stock; the issuance or     
transfer by the corporation or a subsidiary of stock of the corporation or such 
subsidiary to the interested stockholder (except for transfers in a conversion  
or exchange or a pro rata distribution or certain other transactions, none of   
which increase the interested stockholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's stock); or any receipt by   
the interested stockholder (except proportionately as a stockholder), directly  
or indirectly, of any loans, advances, guarantees, pledges or other financial   
benefits provided by or through the corporation or a subsidiary.                

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 The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time at which such stockholder becomes an   
interested stockholder the board of directors approves either the business      
combination or the transaction which resulted in the person becoming an         
interested stockholder; (ii) the interested stockholder owns 85% of the         
corporation's voting stock upon consummation of the transaction which made him  
or her an interested stockholder (excluding from the 85% calculation shares     
owned by directors who are also officers of the target corporation and shares   
held by employee stock plans which do not permit employees to decide            
confidentially whether to accept a tender or exchange offer); or (iii) on or    
after the time such person becomes an interested stockholder, the board approves
the business combination and it is also approved at a stockholder meeting by    
sixty-six and two-thirds percent (66 2/3%) of the voting stock not owned by the 
interested stockholder.                                                         

Section 203 applies only to Delaware corporations which have a class of 
voting stock that is listed on a national securities exchange, are quoted on an 
interdealer quotation system such as Nasdaq (as is OnTrak California, and as    
OnTrak Delaware would be) or are held of record by more than 2,000 stockholders.
However, a Delaware corporation may elect not to be governed by Section 203 by a
provision in its original certificate of incorporation or an amendment thereto  
or to the bylaws, which amendment must be approved by a majority of the shares  
entitled to vote and, in the case of a bylaw amendment, may not be further      
amended by the board of directors. OnTrak Delaware does not intend to elect not 
to be governed by Section 203; therefore, Section 203 will apply to OnTrak      
Delaware.                                                                       

 The Company believes that Section 203 will have the effect of encouraging
any potential acquiror to negotiate with the Company's Board of Directors.      
Section 203 should also discourage certain potential acquirors unwilling to     
comply with its provisions.                                                     

REMOVAL OF DIRECTORS.  Under California law, any director or the entire 
board of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual     
director may be removed (unless the entire board is removed) if the number of   
votes cast against such removal would be sufficient to elect the director under 
cumulative voting. Under Delaware law, a director of a corporation that does not
have a classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote. In the case of a Delaware corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without   
cause unless the shares voted against such removal would not be sufficient to   
elect the director under such cumulative voting procedures. A director of a     
corporation with a classified board of directors may be removed only for cause, 
unless the certificate of incorporation otherwise provides. The Certificate of  
Incorporation of OnTrak Delaware does not provide for cumulative voting or for a
classified board of directors. Consequently, any director may be removed from   
office at any time with or without cause upon the affirmative vote of the       
holders of a majority of the then outstanding voting stock.                     

FILLING VACANCIES ON THE BOARD OF DIRECTORS.  Under California law, any 
vacancy on the board of directors, other than one created by removal of a       
director, may be filled by the board. If the number of directors is less than a 
quorum, a vacancy may be filled by the unanimous written consent of the         
remaining directors in office, or the affirmative vote of a majority of the     
remaining directors at a meeting. A vacancy created by removal of a director may
be filled by the board only if so authorized by a corporation's articles of     
incorporation or by a bylaw approved by the corporation's shareholders. OnTrak  
California's Bylaws do not permit directors to fill vacancies created by removal
of a director. Under Delaware law, vacancies and newly created directorships may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or bylaws.
The Bylaws of OnTrak Delaware provide, consistent with the Bylaws of OnTrak     
California, that any vacancy resulting from the removal of a director by the    
stockholders of OnTrak Delaware may only be filled by the stockholders.         
Following the Proposed Reincorporation, the Board of Directors of OnTrak        
Delaware could (although it has no current intention to do so) amend the Bylaws 
to provide that directors may fill any vacancy created by the removal of a      
director by the stockholders.                                                   

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  LOANS TO OFFICERS AND EMPLOYEES.  Under California law, the directors of a
California corporation are authorized to approve loans or guaranties to or on   
behalf of officers (whether or not such officers are directors) if the board    
determines that such loans or guaranties may reasonably be expected to benefit  
the corporation. Under Delaware law, a corporation, its officers or other       
employees may make loans to, guarantee the obligations of or otherwise assist   
its officers or other employees and those of its subsidiaries (including        
directors who are also officers or employees) when such action, in the judgment 
of the directors, may reasonably be expected to benefit the corporation.        

  INDEMNIFICATION AND LIMITATION OF LIABILITY.  California and Delaware have
similar laws respecting indemnification by a corporation of its officers,       
directors, employees and other agents. The laws of both states also permit a    
corporation to adopt a provision in its articles of incorporation or certificate
of incorporation eliminating the liability of a director to the corporation or  
its shareholders for monetary damages for breach of the director's fiduciary    
duty of care. There are nonetheless certain differences between the laws of the 
two states respecting indemnification and limitation of liability.              

  The Articles of Incorporation of OnTrak California eliminate the liability
of directors to the corporation to the fullest extent permissible under         
California law. California law does not permit the elimination of monetary      
liability where such liability is based on: (i) intentional misconduct or       
knowing and culpable violation of law; (ii) acts or omissions that a director   
believes contrary to the best interests of the corporation or its shareholders, 
or that involve the absence of good faith on the part of the director; (iii)    
receipt of an improper personal benefit; (iv) acts or omissions that show       
reckless disregard for the director's duty to the corporation or its            
shareholders, where the director in the ordinary course of performing a         
director's duties should be aware of a risk of serious injury to the corporation
or its shareholders; (v) acts or omissions that constitute an unexcused pattern 
of inattention that amounts to an abdication of the director's duty to the      
corporation and its shareholders; (vi) interested transactions between the      
corporation and a director in which a director has a material financial         
interest; or (vii) liability for improper distributions, loans or guarantees.   

The Certificate of Incorporation of OnTrak Delaware also eliminates the 
liability of directors to the fullest extent permissible under Delaware law, as 
such law exists currently or as it may be amended in the future. Under Delaware 
law, such a provision may not eliminate or limit director monetary liability    
for: (i) breaches of the director's duty of loyalty to the corporation or its   
stockholders; (ii) acts or omissions not in good faith or involving intentional 
misconduct or knowing violations of law; (iii) the payment of unlawful dividends
or unlawful stock repurchases or redemptions; or (iv) transactions in which the 
director received an improper personal benefit. Such a limitation of liability  
provision also may not limit a director's liability for violation of, or        
otherwise relieve OnTrak Delaware or its directors from the necessity of        
complying with, federal or state securities laws or affect the availability of  
nonmonetary remedies such as injunctive relief or rescission.                   

    California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (i) no      
indemnification may be made without court approval when a person is adjudged    
liable to the corporation in the performance of that person's duty to the       
corporation and its shareholders, unless a court determines that person is      
entitled to indemnity for expenses, and then such indemnification may be made   
only to the extent that the court so determines, and (ii) no indemnification may
be made without court approval in respect of amounts paid or expenses incurred  
in settling or otherwise disposing of a threatened or pending action or in      
respect of amounts incurred in defending a pending action which is settled or   
otherwise disposed of without court approval.                                   

  Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its       
shareholders, as determined by a majority vote of a disinterested quorum of the 
directors, independent legal counsel (if a quorum of independent directors is   
not obtainable), a majority vote of a quorum of the shareholders (excluding     
shares owned by the indemnified party), or the court handling the action.       
California law requires indemnification when the individual has successfully    
defended the action on the merits (as opposed to Delaware law which requires    
indemnification relating to any successful defense, whether on the merits or    
otherwise).                                                                     

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Delaware law generally permits indemnification of expenses (including   
attorneys' fees) incurred in the defense or settlement of a derivative or       
third-party action, provided there is a determination by a majority vote of the 
disinterested directors even though less than a quorum, by independent legal    
counsel or by stockholders that the person seeking indemnification acted in good
faith and in a manner reasonably believed to be in or (in contrast to California
law) not opposed to the best interests of the corporation. Without court        
approval, however, no indemnification may be made in respect of any derivative  
action in which such person is adjudged liable for negligence or misconduct in  
the performance of his or her duty to the corporation. Delaware law also        
requires indemnification of expenses when the individual being indemnified has  
successfully defended the action on the merits or otherwise.                    

California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements, bylaws 
or other corporate action beyond that specifically authorized by statute. The   
Articles of Incorporation of OnTrak California include such a provision.        

A provision of Delaware law states that the indemnification provided by 
statute shall not be deemed exclusive of any other rights under any bylaw,      
agreement, vote of stockholders or disinterested directors or otherwise. As a   
result, Delaware law permits the indemnification agreements such as those       
entered into by OnTrak California with its officers and directors, and such     
agreements will be assumed by OnTrak Delaware upon completion of the Proposed   
Reincorporation.                                                                

 The indemnification and limitations of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers  
of OnTrak California taken prior to the Proposed Reincorporation.               

   A voter initiative on the ballot in California for the elections to be held
on November 5, 1996 (Proposition 211) would, among other things, prohibit       
corporations from indemnifying any executive officer or director who is         
determined to be personally liable for securities law violations covered by the 
initiative. By its terms, Proposition 211 is not limited to corporations        
incorporated in California and, if it is passed, could apply to the Company even
if it reincorporates in Delaware. Proposition 211 is the subject of vigorous    
debate and, if it is passed, it is possible that its ultimate scope will be     
subject to legal challenges that may not be resolved for several years.         

 INSPECTION OF SHAREHOLDERS' LIST.  Both California and Delaware law allow
any shareholder to inspect a corporation's shareholders' list for a purpose     
reasonably related to such person's interest as a shareholder. California law   
provides, in addition, an absolute right to inspect and copy the corporation's  
shareholders' list to persons holding an aggregate of 5% or more of a           
corporation's voting shares, or shareholders holding an aggregate of 1% or more 
of such shares who have filed a Schedule 14B with the Securities and Exchange   
Commission relating to the election of directors. Delaware law does not provide 
for any such absolute right of inspection, and no such right is granted under   
the Certificate of Incorporation or Bylaws of OnTrak Delaware.                  

DIVIDENDS AND REPURCHASES OF SHARES.  California law dispenses with the 
concepts of par value of shares as well as statutory definitions of capital,    
surplus and the like. The concepts of par value, capital and surplus are        
retained under Delaware law.                                                    

    Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)    
unless either the corporation's retained earnings immediately prior to the      
proposed distribution equal or exceed the amount of the proposed distribution   
or, immediately after giving effect to such distribution, the corporation's     
assets (exclusive of goodwill, capitalized research and development expenses and
deferred charges) would be at least equal to 1 1/4 times its liabilities (not   
including deferred taxes, deferred income and other deferred credits), and the  
corporation's current assets would be at least equal to its current liabilities 
(or 1 1/4 times its current liabilities if the average pre-tax and pre-interest 
expense earnings for the preceding two fiscal years were less than the average  
interest expense for such years). Under California law, there are exceptions to 
the foregoing rules for repurchases of shares in connection with certain        
rescission actions or pursuant to certain employee stock plans.                 

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Delaware law permits a corporation to declare and pay dividends out of  
surplus or, if there is no surplus, out of net profits for the fiscal year in   
which the dividend is declared and/or for the preceding fiscal year as long as  
the amount of capital of the corporation following the declaration and payment  
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the 
distribution of assets. In addition, Delaware law generally provides that a     
corporation may redeem or repurchase its shares only if such redemption or      
repurchase would not impair the capital of the corporation.                     

    To date, the Company has not paid cash dividends on its capital stock. It is
the current policy of the Board of Directors to retain earnings for use in the  
Company's business, and therefore, the Company does not anticipate paying cash  
dividends on its Common Stock in the foreseeable future.                        

    SHAREHOLDER VOTING.  Both California and Delaware law generally require that
the holders of a majority in voting power of the outstanding shares of stock of 
both acquiring and target corporations entitled to vote approve statutory       
mergers. Delaware law does not require a stockholder vote of the surviving      
corporation in a merger (unless the corporation provides otherwise in its       
certificate of incorporation) if (i) the merger agreement does not amend the    
existing certificate of incorporation, (ii) each share of the surviving         
corporation outstanding before the merger is an identical outstanding or        
treasury share after the merger, and (iii) the number of shares to be issued by 
the surviving corporation in the merger does not exceed 20% of the shares       
outstanding immediately prior to the merger. California law contains a similar  
exception to its voting requirements for reorganizations where shareholders or  
the corporation itself, or both, immediately prior to the reorganization will   
own immediately after the reorganization equity securities constituting more    
than five-sixths of the voting power of the surviving or acquiring corporation  
or its parent entity.                                                           

Both California and Delaware law also require that a sale of all or     
substantially all of the assets of a corporation be approved by a majority of   
the outstanding voting shares of the corporation transferring such assets.      

With certain exceptions, California law also requires that mergers,     
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. By contrast, Delaware law  
generally does not require class voting, except in certain transactions         
involving an amendment to the certificate of incorporation which adversely      
affects a specific class or series of shares.                                   

California law also requires that holders of nonredeemable common stock 
receive nonredeemable common stock in a merger of the corporation with the      
holder of more than 50% but less than 90% of such common stock or its affiliate 
unless all of the holders of such common stock consent to the transaction. This 
provision of California law may have the effect of making a "cash-out" merger by
a majority shareholder more difficult to accomplish. Delaware law has no        
comparable provision.                                                           

  California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is made 
by an interested party (generally, a controlling or managing party of the target
corporation), an affirmative opinion in writing as to the fairness of the       
consideration to be paid to the shareholders must be delivered to shareholders. 
This fairness opinion requirement does not apply to a corporation which does not
have shares held of record by at least 100 persons, or to a transaction which   
has been qualified under California state securities laws. Furthermore, if a    
tender of shares or vote is sought pursuant to an interested party's proposal   
and a later proposal is made by another party at least ten days prior to the    
date of acceptance of the interested party proposal, the shareholders must be   
informed of the later offer and be afforded a reasonable opportunity to withdraw
any vote, consent or proxy, or to withdraw any tendered shares. Again, Delaware 
law has no comparable provision.                                                

  INTERESTED DIRECTOR TRANSACTIONS.  Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's       
directors has an interest are not void or voidable solely because of such       
interest provided that certain conditions, such as obtaining the required       
approval and fulfilling the requirements of good faith and full disclosure, are 
met. With certain exceptions, the conditions are similar under California and   
Delaware law. Under California and Delaware law, (i) either                     

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the shareholders or the board of directors must approve any such contract or    
transaction after full disclosure of the material facts, and in the case of     
board approval the contract or transaction must also be "just and reasonable"   
(in California) or "fair" (in Delaware) to the corporation, or (ii) the contract
or transaction must have been just and reasonable or fair, as applicable, to the
corporation at the time it was approved. In the latter case, California law     
explicitly places the burden of proof on the interested director. Under         
California law, if shareholder approval is sought, the interested director is   
not entitled to vote his shares at a shareholder meeting with respect to any    
action regarding such contract or transaction. If board approval is sought, the 
contract or transaction must be approved by a majority vote of a quorum of the  
directors, without counting the vote of any interested directors (except that   
interested directors may be counted for purposes of establishing a quorum).     
Under Delaware law, if board approval is sought, the contract or transaction    
must be approved by a majority of the disinterested directors (even though less 
than a majority of a quorum). Therefore, certain transactions that the Board of 
Directors of OnTrak California might not be able to approve because of the      
number of interested directors, or the exclusion of interested director shares, 
could be approved by a majority of the disinterested directors of OnTrak        
Delaware, although less than a majority of a quorum, or by a majority of all    
voting shares, which might not include a majority of the disinterested shares.  
The Company is not aware of any plans to propose any transaction involving      
directors of the Company which could not be so approved under California law but
could be so approved under Delaware law.                                        

 VOTING BY BALLOT.  California law provides that the election of directors
may proceed in the manner described in a corporation's bylaws. OnTrak           
California's Bylaws provide that the election of directors at a shareholders'   
meeting may be by voice vote or ballot, unless prior to such vote a shareholder 
demands voting by ballot, in which case such vote must be by ballot. Under      
Delaware law, the right to vote by written ballot may be restricted if so       
provided in the certificate of incorporation. The Bylaws of OnTrak Delaware     
provide that election need not be by ballot, but the Certificate of             
Incorporation of OnTrak Delaware, consistent with OnTrak California's Bylaws,   
provides that if a stockholder specifically demands election of directors by    
ballot (or if the Bylaws provide that elections shall be by ballot) then        
elections shall be held by ballot. Stockholders of OnTrak Delaware may therefore
continue to demand election by ballot, unless and until the Certificate of      
Incorporation is amended, which would require a majority stockholder vote. It   
may be more difficult for a stockholder to contest the outcome of a vote which  
has not been conducted by written ballot.                                       

 SHAREHOLDER DERIVATIVE SUITS.  California law provides that a shareholder
bringing a derivative action on behalf of a corporation need not have been a    
shareholder at the time of the transaction in question, provided that certain   
tests are met. Under Delaware law, a stockholder may only bring a derivative    
action on behalf of the corporation if the stockholder was a stockholder of the 
corporation at the time of the transaction in question or his or her stock      
thereafter devolved upon him or her by operation of law. California law also    
provides that the corporation or the defendant in a derivative suit may make a  
motion to the court for an order requiring the plaintiff shareholder to furnish 
a security bond. Delaware does not have a similar bonding requirement.          

   APPRAISAL RIGHTS.  Under both California and Delaware law, a shareholder of
a corporation participating in certain major corporate transactions may, under  
varying circumstances, be entitled to appraisal 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 the consideration he or she would otherwise receive in the
transaction. Under Delaware law, unless the certificate of incorporation        
otherwise provides, such appraisal rights are not available (i) with respect to 
the sale, lease or exchange of all or substantially all of the assets of a      
corporation, (ii) with respect to a merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange 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 held of record by more than 2,000   
holders, plus cash in lieu of fractional shares, or any combination thereof, or 
(iii) 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                                                

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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.                                                             

    The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California       
corporation whose shares are listed on a national securities exchange or on a   
list of over-the-counter margin stocks issued by the Board of Governors of the  
Federal Reserve System (as are the shares of OnTrak California) generally do not
have such appraisal rights unless the holders of at least 5% of the class of    
outstanding shares claim the right or unless the corporation or any law         
restricts the transfer of such shares. Appraisal rights are unavailable,        
however, if the shareholders of a corporation or the corporation itself, or     
both, immediately prior to the reorganization will own immediately after the    
reorganization equity securities constituting more than five-sixths of the      
voting power of the surviving or acquiring corporation or its parent entity. In 
general, California law affords appraisal rights in sale of assets              
reorganizations.                                                                

  AS A CONSEQUENCE OF THE FOREGOING, APPRAISAL OR DISSENTERS' RIGHTS ARE NOT
AVAILABLE TO SHAREHOLDERS OF ONTRAK CALIFORNIA WITH RESPECT TO THE              
REINCORPORATION PROPOSAL.                                                       

   DISSOLUTION.  Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without   
the approval of the corporation's board of directors, and this right may not be 
modified by the articles of incorporation. Under Delaware law, unless the board 
of directors approves the proposal to dissolve, the dissolution must be approved
by stockholders holding 100% of the total voting power of the corporation. Only 
if the dissolution of a Delaware corporation is initiated by the board of       
directors may it be approved by a simple majority of the corporation's          
stockholders. In the event of such a board-initiated dissolution, Delaware law  
allows a Delaware corporation to include in its certificate of incorporation a  
supermajority voting requirement in connection with dissolutions. OnTrak        
Delaware's Certificate of Incorporation contains no such supermajority voting   
requirement, however, and a majority of shares voting at a meeting at which a   
quorum is present would be sufficient to approve a dissolution of OnTrak        
Delaware which had previously been approved by its Board of Directors.          

APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE            
CORPORATIONS                                                                

Under Section 2115 of the California General Corporation Law, certain   
foreign corporations (i.e. corporations not organized under California law) are 
placed in a special category if they have characteristics of ownership and      
operation which indicate that they have significant contacts with California. So
long as a Delaware or other foreign corporation is in this special category, and
it does not qualify for one of the statutory exemptions, it is subject to a     
number of key provisions of the California General Corporation Law applicable to
corporations incorporated in California. Among the more important provisions are
those relating to the election and removal of directors, cumulative voting,     
prohibition of classified boards of directors, standards of liability and       
indemnification of directors, distributions, dividends and repurchases of       
shares, shareholder meetings, approval of certain corporate transactions,       
dissenters' and appraisal rights and inspection of corporate records. See       
"Significant Differences Between the Corporation Laws of California and         
Delaware" above.                                                                

   Exemptions from Section 2115 are provided for corporations whose shares are
listed on a major national securities exchange or are traded in the Nasdaq      
National Market and which have 800 or more shareholders of record. Following the
Proposed Reincorporation, the Common Stock of OnTrak Delaware will be traded on 
the Nasdaq National Market, and held beneficially by more than 800 stockholders 
as of the record date of its most recent annual meeting and, accordingly, OnTrak
Delaware will be exempt from Section 2115.                                      

CERTAIN FEDERAL INCOME TAX CONSEQUENCES                                         

   The following is a discussion of certain federal income tax consequences to
holders of OnTrak California Common Stock who receive OnTrak Delaware Common    
Stock in exchange for their OnTrak                                              

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California Common Stock as a result of the Proposed Reincorporation. The        
discussion does not address all the tax consequences of the Proposed            
Reincorporation that may be relevant to particular OnTrak California            
shareholders, such as dealers in securities, holders of stock options or those  
OnTrak California shareholders who acquired their shares upon the exercise of   
stock options. In view of the varying nature of such tax consequences, each     
shareholder is urged to consult its own tax advisor as to the specific tax      
consequences to it of the Proposed Reincorporation, including the applicability 
of federal, state, local or foreign tax laws.                                   

The Company has not requested a ruling from the Internal Revenue Service
(the "IRS") with respect to the federal income tax consequences of the Proposed 
Reincorporation under the Internal Revenue Code of 1986, as amended (the        
"Code"). The Company will, however, receive an opinion from its legal counsel   
substantially to the effect that: (i) the Proposed Reincorporation will         
constitute a tax-free reorganization under Section 368(a) of the Code; (ii) no  
gain or loss will be recognized by holders of Common Stock of OnTrak California 
upon receipt of Common Stock of OnTrak Delaware pursuant to the Proposed        
Reincorporation; (iii) the aggregate tax basis of the Common Stock of OnTrak    
Delaware received by each shareholder will be the same as the aggregate tax     
basis of the Common Stock of OnTrak California held by such shareholder at the  
time of the Proposed Reincorporation; and (iv) the holding period of the Common 
Stock of OnTrak Delaware received by each shareholder of OnTrak California will 
include the period for which such shareholder held the Common Stock of OnTrak   
California surrendered in exchange therefor, provided that such OnTrak          
California stock was held by such shareholder as a capital asset at the time of 
the Proposed Reincorporation. Counsel's opinion will be subject to certain      
assumptions and qualifications and will be based upon certain representations   
made by the management of OnTrak California. Counsel's opinion is not binding   
upon the IRS nor does it preclude the IRS from taking a contrary position.      

A successful IRS challenge to the tax-free status of the Proposed       
Reincorporation would result in a shareholder recognizing gain or loss with     
respect to each share of OnTrak California Common Stock surrendered equal to the
difference between that shareholder's basis in such share and the fair market   
value, as of the time of the Proposed Reincorporation, of the OnTrak Delaware   
Common Stock received in exchange therefor. In such event, a shareholder's      
aggregate basis in the shares of OnTrak Delaware Common Stock received in the   
exchange would equal such fair market value, and his or her holding period for  
such shares would not include the period during which he or she held OnTrak     
California Common Stock.                                                        

State, local or foreign income tax consequences to shareholders may vary
from the federal tax consequences described above. SHAREHOLDERS SHOULD CONSULT  
THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THE REINCORPORATION PROPOSAL UNDER   
APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX OR FRANCHISE TAX LAWS.   

The Company should not recognize gain or loss for federal income tax    
purposes as a result of the Proposed Reincorporation, and OnTrak Delaware will  
succeed without adjustment to the federal income tax attributes of OnTrak       
California.                                                                     

VOTE REQUIRED FOR THE REINCORPORATION PROPOSAL                                  

Approval of the Reincorporation Proposal, which includes approval of the
Merger Agreement, OnTrak Delaware's Certificate of Incorporation and Bylaws, and
approval of the assumption of OnTrak California's employee benefit plans, stock 
option plans and stock purchase plan by OnTrak Delaware, requires the           
affirmative vote of a majority of the shares of OnTrak California Common Stock  
outstanding on the record date.                                                 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE  
PROPOSED REINCORPORATION IN DELAWARE. THE EFFECT OF AN ABSTENTION OR A BROKER   
NON-VOTE IS THE SAME AS THAT OF A VOTE AGAINST THE REINCORPORATION PROPOSAL.    

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PROPOSAL NO. 3
APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN

At the Annual Meeting, the shareholders are being asked to approve the  
Company's 1996 Equity Incentive Plan (the "1996 Equity Plan") and the           
reservation of 2,000,000 shares of Common Stock for issuance thereunder.        
Management believes that the availability of additional options to purchase     
Common Stock is necessary to attract new employees, and to enable the Company to
continue to provide its employees with equity ownership as an incentive to      
contribute to the Company's success. If such shareholder approval is not        
obtained, the Company's ability to provide equity incentives to employees will  
terminate once the shares reserved under the 1992 Stock Option Plan have been   
issued. As of August 31, 1996, only approximately 226,000 shares were available 
for future grant under the Company's 1992 Stock Option Plan.                    

   Moreover, the Company recently granted options for 800,000 shares of Common
Stock to James W. Bagley as part of the compensation arrangement that the       
Company negotiated with Mr. Bagley to attract him as its new Chairman of the    
Board and Chief Executive Officer. See "Executive Compensation-- Employment,    
Severance and Change of Control Provisions." If the 1996 Equity Plan is adopted,
the Company intends to grant to Mr. Bagley an option to purchase 800,000 shares 
of Common Stock under the 1996 Equity Plan, and the options to purchase 800,000 
shares of Common Stock previously granted to Mr. Bagley will be cancelled. The  
issuance of options to Mr. Bagley under the 1996 Equity Plan would provide      
certain tax benefits to the Company upon the exercise of the options which would
not otherwise be available.                                                     

The closing price of the Company's Common Stock reported on The Nasdaq  
National Market on August 31, 1996 was $14 5/8 per share.                       

SUMMARY OF THE 1996 EQUITY INCENTIVE PLAN                                       

 Set forth below is a summary of the principal features of the 1996 Equity
Plan. Such summary does not purport to be complete and is qualified in its      
entirety by the specific language of the 1996 Equity Plan, a copy of which is   
available to any shareholder upon request.                                      

GENERAL                                                                 

The 1996 Equity Plan allows the granting of stock options and restricted
stock awards (collectively, "Awards") to eligible participants in the 1996      
Equity Plan. While the Company has no current plans to grant awards other than  
stock options, the Board of Directors believes that the ability to utilize      
different types of equity compensation vehicles will give it the flexibility    
needed to most effectively adapt over time to changes in the labor market and in
equity compensation practices.                                                  

PURPOSE                                                                 

The 1996 Equity Plan is intended to attract, motivate and retain (1)    
employees of the Company and its affiliates, (2) consultants who provide        
significant services to the Company and its affiliates and (3) directors of the 
Company who are not employees of either the Company or any affiliate. The 1996  
Equity Plan is also designed to encourage stock ownership by participants,      
thereby aligning their interests with those of the Company's shareholders.      

ADMINISTRATION                                                          

  The 1996 Equity Plan will be administered by the Compensation Committee of
the Board of Directors (the "Committee"), except that grants of options to      
non-employee directors will be administered by the Board of Directors. The      
members of the Committee must qualify as "non-employee directors" under Rule    
16b-3 under the Securities Exchange Act of 1934, and as "outside directors"     
under Section 162(m) of the Internal Revenue Code (for purposes of qualifying   
amounts received under the 1996 Equity Plan as "performance-based compensation" 
under Section 162(m)).                                                          

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Subject to the terms of the 1996 Equity Plan, the Committee has the sole
discretion to determine the employees and consultants who shall be granted      
Awards, the size and type of such Awards, and the terms and conditions of such  
Awards. The Committee may delegate its authority to grant and administer Awards 
to a separate committee appointed by the Committee, but only the Committee may  
make Awards to participants who are executive officers of the Company.          

Grants of options to non-employee directors will be made by the Board of
Directors, rather than the Committee.                                           

ELIGIBILITY                                                             

Employees and consultants of the Company and its affiliates (i.e., any  
corporation or other entity controlling, controlled by, or under common control 
with the Company) are eligible to be selected to receive one or more Awards. The
actual number of employees and consultants who will receive Awards under the    
1996 Equity Plan cannot be determined because selection for participation in the
1996 Equity Plan is in the discretion of the Committee, which will select the   
participants and determine the number of shares to be subject to each Award. The
1996 Equity Plan also provides for the grant of stock options to the Company's  
non-employee directors, which grants will be determined by the Board of         
Directors.                                                                      

OPTIONS                                                                 

    Each option is evidenced by a stock option agreement between the Company and
the person to whom such option is granted, which sets forth the terms and       
conditions of the option. The Committee may grant nonstatutory stock options or 
"incentive stock options," which are entitled to favorable tax treatment, or a  
combination thereof. The 1996 Equity Plan provides that the number of shares    
subject to options that may be granted under the 1996 Equity Plan to any        
employee during any fiscal year shall not exceed (i) 800,000 in the case of any 
employee who serves as Chief Executive Officer at any time during such fiscal   
year or (ii) 300,000 in the case of any other employee. In addition, the value  
of the shares subject to all incentive stock options held by an optionee that   
become exercisable for the first time during any calendar year may not exceed   
$100,000 (determined as of the date of grant). The following terms and          
conditions will generally apply to all options, unless the stock option         
agreement provides otherwise:                                                   

 EXERCISE OF THE OPTION.  The optionee must earn the right to exercise his
option by continuing to work for the Company. The Committee determines when     
options granted under the 1996 Equity Plan may be exercisable. An option may be 
exercised by written notice of exercise to the Company specifying the number of 
full shares of Common Stock to be purchased, together with payment to the       
Company of the purchase price. The purchase price of shares purchased upon      
exercise of an option may be paid by any of the following means, or by any      
combination thereof: (i) cash; (ii) check; (iii) the tender of other shares of  
the Company's Common Stock; or (iv) by any other means which the Committee      
determines to be consistent with the purpose of the 1996 Equity Plan. Any taxes 
to be withheld must be paid by the participant at the time of exercise.         

    EXERCISE PRICE.  The exercise price of options granted under the 1996 Equity
Plan will be determined by the Committee and will generally be 100% of the fair 
market value of the Company's Common Stock on the date of grant. Thus, an option
will have value only if the Company's Common Stock appreciates in value after   
the date of grant. Where the participant owns stock representing more than 10%  
of the total combined voting power of the Company's outstanding capital stock,  
the exercise price for an incentive stock option must not be less than 110% of  
such fair market value.                                                         

TERMINATION OF OPTIONS.  Options expire at the times established by the 
Committee but not later than 10 years after the date of grant. However, no      
options granted under the 1996 Equity Plan to any participant who owns stock    
possessing more than 10% of the total combined voting power of the Company's    
outstanding capital stock may have a term exceeding five years from the date of 
grant. The Committee may extend the maximum term of any option granted under the
1996 Equity Plan, subject to the preceding limits.                              

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RESTRICTED STOCK AWARDS                                                 

  Restricted stock awards are shares of the Company's Common Stock that vest
in accordance with terms established by the Committee. The number of shares of  
restricted stock (if any) granted to a participant will be determined by the    
Committee, but during any fiscal year of the Company, no participant may be     
granted more than 20,000 shares.                                                

   In determining the vesting schedule for each award of restricted stock, the
Committee may impose whatever conditions to vesting as it determines to be      
appropriate. For example, the Committee may (but is not required to) provide    
that restricted stock will vest only if one or more performance goals are       
satisfied. In order for the award to qualify as "performance-based" compensation
under Section 162(m) of the Code (see "Report of the Compensation Committee of  
the Board of Directors--Deductibility of Executive Compensation"), the Committee
must set restrictions based upon the achievment of performance objectives       
established in accordance with Code Section 162(m). The Committee may apply     
performance measures as deemed appropriate in light of the participant's        
specific responsibilities. The Committee may, in its discretion, accelerate the 
time at which any restrictions lapse or remove any restrictions.                

TRANSFERABILITY OF AWARDS                                               

The Committee may, in its discretion, authorize all or a portion of the 
options granted to an optionee to be transferred to immediate family members or 
trusts, partnerships or other family entities. Unless authorized by the         
Committee, Awards are not transferable other than by will or the laws of descent
and distribution. However, a participant may designate one or more beneficiaries
to receive any exercisable or vested Awards following his or her death.         

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION                              

 In the event of any change in the Company's capital structure (whether by
reason of any recapitalization, stock dividend, stock split, combination of     
shares or other similar change in corporate structure), appropriate adjustments 
shall be made in the number of shares subject to each Award and the per share   
exercise price therefor. All obligations of the Company under the 1996 Equity   
Plan with respect to Awards granted thereunder shall be binding on any successor
to the Company, whether by purchase, merger, consolidation or otherwise.        

AMENDMENT AND TERMINATION OF THE 1996 EQUITY PLAN                       

 The Board of Directors may amend the 1996 Equity Plan at any time or from
time to time or may terminate it without the approval of the shareholders;      
provided, however, that shareholder approval will be required for certain       
material amendments to the 1996 Equity Plan in accordance with Section 162(m) of
the Code and Rule 16b-3 under the Exchange Act. However, no such action by the  
Board of Directors or shareholders may alter or impair any option previously    
granted under the 1996 Equity Plan. In any event, the 1996 Equity Plan shall    
terminate in November 2006.                                                     

ACCOUNTING TREATMENT                                                            

Under current accounting rules, option grants or stock issuances to     
employees and directors with exercise or issue prices equal to the fair market  
value of the shares on the grant or issue date will not result in any direct    
charge to the Company's reported earnings. However, outstanding options may have
to be taken into account in the calculation of earnings per share on a          
fully-diluted basis. In addition, FASB 123, a new accounting standard which the 
Company will adopt in fiscal 1997, will require pro forma statements and        
footnote disclosure to the Company's financial statements indicating the impact 
which the options granted under the Company's option plans would have upon the  
Company's reported earnings were the value of those options at the time of grant
treated as compensation expense.                                                

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FEDERAL INCOME TAX CONSEQUENCES                                                 

INCENTIVE STOCK OPTIONS                                                 

   Section 422 of the Code provides favorable federal income tax treatment for
"incentive stock options." When an option granted under the 1996 Equity Plan    
qualifies as an incentive stock option, the optionee does not recognize income  
for federal income tax purposes upon grant or exercise of the incentive stock   
option (unless the alternative minimum tax applies as discussed below). The     
Company is not allowed a deduction for federal income tax purposes as a result  
of the exercise of the incentive stock option regardless of the applicability of
the alternative minimum tax. Upon a sale of the shares (assuming that the sale  
occurs no sooner than two years after the grant of the option and one year after
the receipt of the shares by the optionee), any gain or loss will be treated as 
long-term capital gain or loss for federal income tax purposes.                 

    The favorable federal income tax consequences described above will not apply
to the extent the optionee disposes of the shares acquired within one year of   
the date of exercise or two years of the date of grant of the option            
(hereinafter a "disqualifying disposition"). In the event of a disqualifying    
disposition, the optionee generally will recognize ordinary income in the year  
of disposition equal to the amount by which the fair market value of the stock  
at the date of exercise exceeds the exercise price. Any additional gain will be 
long-term or short-term gain, depending on how long the optionee has held the   
stock. A different rule for measuring income upon a disqualifying disposition   
may apply if the optionee is also an officer, director or 10% shareholder of the
Company.                                                                        

ALTERNATIVE MINIMUM TAX FOR NON-CORPORATE TAXPAYERS                     

 The excess of the stock's fair market value over the exercise price of an
incentive stock option, which is generally not subject to tax at the time of    
exercise, is treated as an item of income in determining an individual          
taxpayer's alternative minimum tax liability. In determining alternative minimum
tax liability in subsequent years, however, the optionee will be entitled to    
increase the basis of the stock by the amount of this income adjustment.        
Furthermore, if there is a disqualifying disposition of the stock in the year of
exercise, the alternative minimum taxable income adjustment will be limited to  
the gain on the sale.                                                           

NONSTATUTORY STOCK OPTIONS                                              

   Options granted under the 1996 Equity Plan that do not qualify as incentive
stock options are considered "nonstatutory" stock options and will not qualify  
for any special tax benefits to the optionee. Because the Company's stock       
options are not deemed to have a readily ascertainable value, the optionee will 
not recognize any taxable income at the time he or she is granted a nonstatutory
stock option. However, upon exercise of a nonstatutory stock option, the        
optionee will recognize ordinary income measured by the excess of the then fair 
market value of the shares over the option price. Upon a sale of the shares by  
the optionee, any difference between the sale price and the exercise price, to  
the extent not recognized as ordinary income, will be treated as capital gain or
loss.                                                                           

  The income recognized by the optionee will be treated as wage compensation
and will be subject to federal and state income tax and F.I.C.A. withholding by 
the Company out of the current earnings paid to the optionee.                   

RESTRICTED STOCK AWARDS                                                 

Upon receipt of restricted stock, the participant will not have taxable 
income unless he or she elects to be taxed. Absent such election, upon vesting  
the participant will recognize ordinary income equal to the fair market value of
the shares at such time.                                                        

COMPANY TAX DEDUCTIONS                                                  

  The Company generally will be allowed a tax deduction to the extent and in
the year that compensation income is recognized by the optionee upon the        
exercise of nonstatutory stock options, provided the                            

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Company has withheld income taxes in accordance with the law. The Company       
receives no deduction in connection with the exercise of an incentive stock     
option. In the event of a disqualifying disposition, however, the Company will  
be allowed a deduction for the amount of income recognized by the optionee with 
respect to his exercise for the tax year of the Company in which the            
disqualifying disposition occurs. Code Section 162(m) contains special rules    
regarding the federal income tax deductibility of compensation paid to the      
Company's Chief Executive Officer and to each of the other four most highly     
compensated executive officers. The general rule is that annual compensation    
paid to any of these specific executives will be deductible only to the extent  
that it does not exceed $1 million. However, the Company can preserve the       
deductibility of certain compensation in excess of $1 million if it complies    
with conditions imposed by the Section 162(m) rules, including (1) the          
establishment of a maximum number of shares with respect to which Awards may be 
granted to any one employee during a specified time period, and (2) for         
restricted stock, inclusion in the 1996 Equity Plan of performance goals which  
must be achieved prior to payment. The 1996 Equity Plan has been designed to    
permit the Committee to grant Awards which satisfy the requirements of Section  
162(m).                                                                         

   The foregoing summary of the effect of current federal income taxation upon
optionees and the Company with respect to the grant of Awards, and the purchase 
and subsequent disposition of shares of Common Stock, under the 1996 Equity Plan
does not purport to be complete, and reference is made to the applicable        
provisions of the Code. The foregoing summary also does not reflect provisions  
of the income tax laws of any state or foreign jurisdiction in which optionees  
may reside, and does not address prospective estate, gift and other tax         
consequences of acquiring stock under the 1996 Equity Plan.                     

NEW PLAN BENEFITS                                                               

No Awards have been made to date under the 1996 Equity Plan. If the     
shareholders approve this proposal, Mr. Bagley will receive an option grant for 
800,000 shares of Common Stock, and the options to purchase 800,000 shares of   
Common Stock previously granted to Mr. Bagley will be cancelled. The option     
grant will have an exercise price per share equal to $17.25, the exercise price 
of an option previously granted to Mr. Bagley. As discussed above, all employees
of the Company, including executive officers, will be eligible to receive Awards
and non-employee directors will be eligible to receive option grants under the  
1996 Equity Plan. As of August 31, 1996, there were approximately 330 employees 
of the Company.                                                                 

REQUIRED VOTE                                                                   

 The affirmative vote of the holders of a majority of the shares of Common
Stock present or represented by proxy and entitled to vote at the Annual Meeting
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 will have the same effect as a negative vote. Broker non-votes, on  
the other hand, will have no effect on the outcome of the vote.                 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE  
APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN.                                     

PROPOSAL NO. 4
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS

   The Board of Directors has selected Price Waterhouse LLP as the independent
accountants of the Company for the current fiscal year. The selection of the    
independent accountants is being submitted to the shareholders for ratification 
at the Annual Meeting. In the event that ratification by the shareholders of the
selection of Price Waterhouse LLP as the Company's independent accountants is   
not obtained, the Board of Directors will reconsider such selection.            

 Price Waterhouse LLP has audited the Company's financial statements since
1992. Its representatives are expected to be present at the Annual Meeting, will
have the opportunity to make a statement if they so desire, and will be         
available to respond to appropriate questions.                                  

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  The ratification of the selection of Price Waterhouse LLP will require the
affirmative vote of not less than a majority of the shares of the Company's     
Common Stock represented and voting at the Annual Meeting.                      

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE  
RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP.                          

OTHER BUSINESS

The Company currently knows of no other matters to be submitted at the  
Annual Meeting. If any other matters properly come before the Annual Meeting, it
is the intention of the persons named in the enclosed form of Proxy to vote the 
shares they represent as the Board of Directors may recommend.                  

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PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP BY MANAGEMENT

The following table sets forth certain information regarding beneficial 
ownership of the Company's Common Stock as of August 31, 1996 (unless otherwise 
stated in the footnotes) by: (i) each person (or group of affiliated persons)   
who is known by the Company to own beneficially more than 5% of the outstanding 
shares of Common Stock, (ii) each director of the Company, (iii) each executive 
officer named in the tables under "Executive Compensation," and (iv) all        
directors and officers of the Company as a group.                               

                                                        [Enlarge/Download Table]

NAME AND ADDRESS OF                                                               NUMBER OF                 
BENEFICIAL OWNER                                                               SHARES OWNED(1)     PERCENT  
-----------------------------------------------------------------------------  ----------------  -----------
                                                                                                            
TA Associates Group (2) .....................................................       1,341,193         17.7% 
  c/o TA Associates, Inc.                                                                                   
  125 High Street,                                                                                          
  Suite 2500                                                                                                
  Boston, MA 02110                                                                                          

Kenneth J. Smith (3) ........................................................         669,000          8.9  
  21617 Villa Maria Court                                                                                   
  Cupertino, CA 95014                                                                                       

Jerauld J. Cutini (4) .......................................................         656,500          8.7  
  1010 Rincon Circle                                                                                        
  San Jose, CA 95131                                                                                        

James W. Bagley (5) .........................................................         400,000          5.0  
  1010 Rincon Circle                                                                                        
  San Jose, CA95131                                                                                         

Wilbur Krusell (6)...........................................................         290,000          3.8  

Patrick C. O'Connor (7)......................................................         284,035          3.7  

Gary Hultquist (8)...........................................................         123,600          1.6  

Michael C. Child (9).........................................................           7,117         *     

Richard J. Elkus, Jr.........................................................         --             --     

Wells Fargo Bank, N.A. (10) .................................................         562,000          7.4  
  464 California Street                                                                                     
  San Francisco, CA94163                                                                                    

All current directors and executive officers as                                     1,761,252         21.4  
  a group (7 persons) (11)...................................................                               

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

* Less than 1% of the outstanding Common Stock.                               

 (1) Except as indicated and pursuant to applicable community property laws, the
 Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.                                                          

(2) Includes 914,040 shares of Common Stock owned by Advent VII L.P., 236,701 
   shares of Common Stock owned by Advent Atlantic and Pacific II L.P., 91,403
shares of Common Stock owned by Advent New York L.P., 85,337 shares of  
    Common Stock owned by Advent Industrial II L.P., and 13,712 shares of Common
 Stock owned by TA Venture Investors Limited Partnership. Advent VII L.P.,
Advent Atlantic and Pacific II L.P., Advent New York L.P. and TA Venture
   Investors Limited Partnership are part of an affiliated group of investment
partnerships referred to, collectively, as the TA Associates Group. Mr. 
  Child, a director of the Company, is a Managing Director of TA Associates,
Inc. which is the sole general partner of TA Associates VII L.P., TA    
Associates VI L.P. and TA Associates AAP II                             

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  Partners L.P. TA Associates VII L.P. is the sole general partner of Advent
VII L.P. TA Associates VI L.P. is the sole general partner of Advent New
  York L.P. and Advent Industrial II L.P. TA Associates AAP II Partners L.P.
    is the sole general partner of Advent Atlantic and Pacific II L.P. Mr. Child
is a general partner of TA Venture Investors Limited Partnership. TA    
   Associates, Inc. exercises sole voting and investment power with respect to
   all of the shares held of record by the named investment partnerships, with
the exception of those shares held by TA Venture Investors Limited      
Partnership; individually no shareholder, director or officer of TA     
    Associates, Inc. is deemed to have or share such voting or investment power.
Principals and employees of TA Associates, Inc. (including Mr. Child)   
  comprise the general partners of TA Venture Investors Limited Partnership.
In such capacity, Mr. Child may be deemed to share voting and investment
  power with respect to 13,712 shares held of record by TA Venture Investors
Limited Partnership. Mr. Child disclaims beneficial ownership of such   
shares, except to the extent of the 2,117 shares as to which he holds a 
pecuniary interest.                                                     

(3) Includes (i) 100,000 shares of Common Stock held by Smith OTS Partners, a 
    California limited partnership, of which Mr. Smith and his wife are the sole
general partners, and (ii) 38,000 shares held in the name of Mr. Smith's
wife.                                                                   

(4) Includes (i) 52,000 shares of Common Stock held by a trust for the benefit
of Mr. Cutini's children and (ii) 12,500 shares underlying stock options
  which are currently exercisable or which will become exercisable within 60
days after August 31, 1996.                                             

 (5) Mr. Bagley became Chairman of the Board and Chief Executive Officer on June
   1, 1996. Pursuant to an Employment Agreement dated May 17, 1996, Mr. Bagley
  was granted options to purchase 800,000 shares of Common Stock, 400,000 of
which are presently exercisable.                                        

(6) Includes 90,000 shares underlying stock options which are currently       
    exercisable or which will become exercisable within 60 days after August 31,
1996.                                                                   

(7) Includes (i) 20,000 shares of Common Stock held by trusts for the benefit 
  of Mr. O'Connor's children and (ii) 35,000 shares underlying stock options
  which are currently exercisable or which will become exercisable within 60
days after August 31, 1996.                                             

 (8) Represents shares underlying stock options and warrants which are currently
    exercisable or which will become exercisable within 60 days after August 31,
1996.                                                                   

(9) Includes (i) 2,117 shares beneficially owned by Mr. Child through TA      
  Venture Investors Limited Partnership, all of which shares are included in
   the 1,341,193 shares described in footnote (2) above, and (ii) 5,000 shares
underlying stock options which are currently exercisable or which will  
become exercisable within 60 days after August 31, 1996.                

(10) Based on the Form 13F filed with the SEC to report ownership as of the end 
of June 1996.                                                           

(11) Includes 666,100 shares underlying stock options and warrants which are    
   presently exercisable or which will become exercisable within 60 days after
August 31, 1996.                                                        

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the   
"Exchange Act"), requires the Company's directors and executive officers, and   
persons who own more than ten percent of a registered class of the Company's    
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the      
Company. Officers, directors and greater than ten percent beneficial owners are 
required by SEC regulation to furnish the Company with copies of all reports    
they file under Section 16(a). To the Company's knowledge, based solely on its  
review of the copies of such reports furnished to the Company and written       
representations that no other reports were required, all Section 16(a) filing   
requirements applicable to its officers, directors and greater than ten percent 
beneficial owners were complied with during the period beginning on July 10,    
1995 (the date the Company became subject to the reporting requirements of the  
Exchange Act) through the end of                                                

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its fiscal year on June 30, 1996, except that a report relating to the sale of  
stock received upon the exercise of a stock option by Mr. Krusell was filed     
late.                                                                           

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION                                          

   The following table sets forth information concerning the compensation paid
by the Company to each person who served as the Company's Chief Executive       
Officer during the 1996 fiscal year and each of the Company's other executive   
officers whose salary plus bonus for the 1996 fiscal year exceeded $100,000     
(collectively, the "Named Officers") for the fiscal years ended June 30, 1994,  
1995 and 1996:                                                                  

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                                                 LONG-TERM                        
                                                                            COMPENSATION AWARDS                   
                                                     ANNUAL COMPENSATION    --------------------                  
        NAME AND PRINCIPAL            YEAR ENDED    ----------------------  NUMBER OF SECURITIES     ALL OTHER    
             POSITION                 JUNE 30,(1)     SALARY      BONUS      UNDERLYING OPTIONS   COMPENSATION(2) 
-----------------------------------  -------------  ----------  ----------  --------------------  ----------------
                                                                                                                  
James W. Bagley (3) ...............         1996    $   11,538      --              800,000              --       
  Chairman of the Board and Chief                                                                                 
  Executive Officer                                                                                               

Kenneth J. Smith (4) ..............         1996    $  205,289  $  100,000           --              $   32,590(5)
  Former President and Chief                1995       172,292     188,000           50,000              34,891   
  Executive Officer                         1994       110,369      94,025           --                  21,995   

Jerauld J. Cutini .................         1996       175,000     100,000           --                  24,522   
  Executive Vice President, Sales           1995       172,292     188,000           50,000              25,832   
  and Marketing                             1994       112,429     121,525           --                  18,989   

Patrick C. O'Connor ...............         1996       160,000      75,000           --                  20,383   
  Vice President Finance and Chief          1995       138,437      98,000           25,000              11,566   
  Financial Officer                         1994        74,539      53,915           --                   4,469   

Wilbur Krusell ....................         1996       146,051      95,000          100,000              15,052   
  Executive Vice President and              1995       130,961      52,280           25,000              11,462   
  Chief Technical Officer                   1994       110,345      51,150           --                   4,330   

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

(1) The Company became subject to the reporting requirements of the Exchange Act
on July 10, 1995. The Company provided information concerning executive 
    compensation for its fiscal years ended June 30, 1994 and 1995 in connection
  with the filing of a registration statement pursuant to the Securities Act
of 1933, as amended, in June 1995.                                      

(2) Except as otherwise noted, All Other Compensation includes: (i) the dollar  
  value of premiums paid on long-term disability and life insurance premiums
for the benefit of the Named Officer; (ii) Company contributions to     
    executive officers' 401(k) accounts; and (iii) automobile allowance, payment
of tax consulting fees and miscellaneous dues.                          

(3) Mr. Bagley became an executive officer of the Company on June 1, 1996.      

(4) Mr. Smith's employment with the Company as an executive officer terminated  
on May 31, 1996.                                                        

(5) Includes $7,020 paid in lieu of accrued vacation.                           

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STOCK OPTION GRANTS                                                             

  The following table contains information concerning stock option grants to
the Named Officers during the fiscal year ended June 30, 1996:                  

                                                        [Enlarge/Download Table]

                                                  INDIVIDUAL GRANTS                                                  
                             -----------------------------------------------------------  POTENTIAL REALIZABLE VALUE 
                              NUMBER OF                                                    AT ASSUMED ANNUAL RATE OF 
                             SECURITIES                                                    STOCK PRICE APPRECIATION  
                             UNDERLYING    % OF TOTAL OPTIONS   EXERCISE OR                     FOR OPTION TERM      
                               OPTIONS    GRANTED TO EMPLOYEES  BASE PRICE   EXPIRATION   ---------------------------
NAME                         GRANTED(1)      IN FISCAL YEAR     (($)/SH)(1)     DATE        5%($)(2)      10%($)(2)  
---------------------------  -----------  --------------------  -----------  -----------  ------------  -------------
                                                                                                                     
James W. Bagley (3)........     800,000            63.1%         $   17.25      5/17/03   $  5,617,980  $  13,092,336
Kenneth J. Smith...........      --                --               --           --            --            --      
Jerauld J. Cutini..........      --                --               --           --            --            --      
Patrick C. O'Connor........      --                --               --           --            --            --      
Wilbur Krusell (4).........     100,000             7.9%         $   21.25     10/23/00        587,097      1,297,334

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

(1) Options were granted at the fair market value of the Common Stock on the    
date of grant, as determined by the Board of Directors of the Company.  

(2) The 5% and 10% assumed annual rates of compounded stock appreciation are    
  mandated by the rules of the Securities and Exchange Commission. There can
    be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the  
    option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the 
 option term, no value will be realized from the option grants made to the
executive officers.                                                     

(3) Options to purchase 400,000 shares are fully vested and exercisable and     
   options to purchase 400,000 shares will vest and become exercisable in four
    equal installments over four years beginning on May 17, 1997. The option has
a term of seven years.                                                  

(4) The option vests and becomes exercisable in four equal installments over    
four years beginning on October 23, 1996 and has a term of five years.  

OPTION EXERCISES AND YEAR-END HOLDINGS                                          

The table below sets forth certain information with respect to the Named
Officers concerning the exercise of options during the fiscal year ended June   
30, 1996 and unexercised options held as of the end of such fiscal year.        

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

                                                        [Enlarge/Download Table]

                                                                        NUMBER OF SECURITIES        VALUE OF UNEXERCISED    
                                          NUMBER OF                    UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS    
                                           SHARES       AGGREGATE        OPTIONS AT FY-END             AT FY-END($)(1)      
                                         ACQUIRED ON      VALUE      --------------------------  ---------------------------
NAME                                      EXERCISE    REALIZED($)(2) EXERCISABLE  UNEXERCISABLE  EXERCISABLE   UNEXERCISABLE
---------------------------------------  -----------  -------------  -----------  -------------  ------------  -------------
                                                                                                                            
James W. Bagley........................      --            --           400,000        400,000        --            --      
Kenneth J. Smith.......................      --            --            12,500         37,500   $    120,625   $   361,875 
Jerauld J. Cutini......................      --            --            12,500         37,500        120,625       361,875 
Patrick C. O'Connor....................      35,000    $   464,625       35,000         25,000        560,875       256,250 
Wilbur Krusell.........................      10,000        145,750       90,000        225,000      1,442,250     1,858,750 

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

(1) Based on the fair market value of the option shares at fiscal year-end      
($16.25) less the exercise price.                                       

(2) Based on the fair market value of the shares on the exercise date less the  
exercise price paid for those shares.                                   

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COMPENSATION OF DIRECTORS                                                       

   Directors do not receive cash compensation for their services as directors,
but are reimbursed for out-of-pocket expenses for attending board meetings.     
Directors who are not employees of the Company will also receive periodic option
grants for shares of the Company's Common Stock pursuant to an automatic        
nondiscretionary grant mechanism in the Company's 1995 Director Stock Option    
Plan (the "Director Option Plan"). The Director Option Plan provides for an     
initial grant of options to purchase 15,000 shares of Common Stock to each      
non-employee director of the Company upon the effectiveness of the Director     
Option Plan or at the time a non-employee is first elected as a Director.       
Subsequently, each non-employee director shall automatically be granted an      
additional option to purchase 5,000 shares of Common Stock at the next meeting  
of the Board of Directors following the annual meeting of shareholders in each  
year beginning with the annual meeting held in calendar 1996 if on such date    
such non-employee director shall have served on the Board of Directors for at   
least six months. The term of such options shall be five years. Any option for  
15,000 shares shall become exercisable to the extent of one-third ( 1/3) of the 
shares on each of the first three anniversaries of the date of grant. Any option
for 5,000 shares shall become exercisable on the third anniversary of the date  
of grant. Upon a merger or dissolution, all outstanding options under the       
Director Option Plan will be assumed or replaced with an equivalent option by   
the successor corporation, or each optionee will be given 10 days notice of the 
merger or dissolution and be given the opportunity to exercise all currently    
exercisable options, as well as all options that would become exercisable at the
next succeeding vesting date. All options not so exercised within the 10-day    
notice period will expire. In May 1995, Messrs. Child and Hultquist each        
received options to purchase 15,000 shares of Common Stock pursuant to the      
Director Option Plan, at an exercise price of $7.00 per share. In August 1996,  
Mr. Elkus received options to purchase 15,000 shares of Common Stock pursuant to
the 1995 Director Option Plan at an exercise price of $14 5/8 per share. Such   
options become exercisable to the extent of one-third ( 1/3) of the shares on   
each of the first three anniversaries of the date of grant.                     

EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS                        

  The Company and James W. Bagley, its Chairman and Chief Executive Officer,
entered into an Employment Agreement on May 17, 1996. The agreement has a term  
of seven years, commencing June 1, 1996. The agreement fixed Mr. Bagley's annual
salary at $100,000, subject to annual discretionary increases. The agreement    
also provides for reimbursement of necessary business expenses incurred in      
performing services as Chairman and Chief Executive Officer. The agreement      
further entitles Mr. Bagley to option grants for an aggregate of 800,000 shares,
of which options to purchase 400,000 shares are fully vested and options to     
purchase 400,000 shares will vest in equal increments over a 4-year period      
commencing on May 17, 1997, subject to accelerated vesting upon a "change in    
control" of the Company and certain other events. In the event Mr. Bagley is    
terminated other than for cause, or if he voluntarily terminates his employment 
because of a substantial change in his job duties or title or specified acts of 
misconduct by the Company, he is entitled under the agreement to receive a      
severance payment of $750,000 and all options shall immediately become fully    
exercisable.                                                                    

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION                     

 The Compensation Committee currently consists of Messrs. Child and Elkus.
During the fiscal year ended June 30, 1996, the Compensation Committee consisted
of Messrs. Child and Hultquist. The Company has entered into certain            
transactions described below with Messrs. Child and Hultquist, or entities with 
which they are affiliated.                                                      

The Company and certain investors, including investment partnerships    
affiliated with TA Associates, Inc. (the "TA Associates Group"), who purchased  
shares of the Company's Series A and Series B Preferred Stock in November 1994, 
are parties to a Preferred Stock Purchase Agreement (the "Preferred Stock       
Purchase Agreement"). Mr. Child, a director of the Company, is a managing       
director of TA Associates, Inc. Upon the closing of the offering to the public  
of Common Stock in July 1995 (the "Offering"), the Series A Preferred Stock was 
automatically converted into 1,789,483 shares of Common Stock. Immediately      
following the closing of the Offering, the Series B Preferred Stock was redeemed
for                                                                             

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approximately $3.5 million. Pursuant to the Preferred Stock Purchase Agreement, 
the TA Associates Group is entitled to certain rights with respect to           
registration under the Securities Act of the Common Stock issuable upon         
conversion of the Series A Preferred Stock.                                     

In October 1995, the Company entered into a financial advisory services 
agreement with Hultquist Capital, Inc. ("Hultquist Capital"), of which Gary     
Hultquist, a director of the Company, is managing director. Pursuant to the     
financial advisory services agreement, Hultquist Capital received $10,000 per   
month as a consulting fee (the "Consulting Fees") for providing a range of      
consulting and financial advisory services to the Company. The agreement also   
provided that if the Company engaged Hultquist Capital to provide services in   
connection with selected acquisitions by the Company, Hultquist Capital would be
entitled to receive a success fee upon the consummation of the transaction. The 
financial advisory services agreement could be terminated at any time with or   
without cause and was terminated in February 1996. The agreement with Hultquist 
Capital replaced an agreement between the Company and Bridgemere Capital, Inc.  
("Bridgemere"), of which Mr. Hultquist served as President, that was in place   
until September 1995. In fiscal 1996, the Company paid to Hultquist Capital and 
Bridgemere aggregate financial advisory fees of $80,000.                        

 In November 1994, in consideration of services provided to the Company by
Bridgemere in connection with financing activities, including the sale of       
Preferred Stock to the TA Associates Group, the Company (i) paid to Bridgemere a
financial advisory fee of $288,000, and (ii) issued to Mr. Hultquist and another
affiliate of Bridgemere, stock purchase warrants (the "Bridgemere Warrants") to 
purchase an aggregate of 98,000 shares of Common Stock of the Company at a      
purchase price of $3.542 per share. The Bridgemere Warrants expire in November  
1997. Holders of the Bridgemere Warrants are entitled to "piggyback"            
registration rights with respect to certain registered offerings of securities  
by the Company.                                                                 

In April 1995, the Company granted to Mr. Hultquist options to purchase 
50,000 shares of Common Stock under the 1992 Stock Option Plan, at an exercise  
price of $6.50 per share, which options vested immediately with respect to      
25,000 shares and with respect to the remaining 25,000 shares on the first      
anniversary of the date of grant.                                               

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION                  

    Annual compensation of the Company's executive officers is determined by the
Compensation Committee of the Board of Directors (the "Compensation Committee"),
which recommends the amount of salary and bonus to be paid to each executive    
officer, subject to ratification by the Board of Directors. The Compensation    
Committee is also responsible for administering the 1992 Stock Option Plan (the 
"1992 Option Plan"), including the grant of options under such plan. No         
directors who are employees or former employees of the Company serve on the     
Compensation Committee.                                                         

COMPENSATION PHILOSOPHY                                                         

The Compensation Committee has two principal objectives in determining  
executive compensative policies:                                                

- to attract and retain key executive personnel, and                    

- to reward executive performance that creates long term value to       
shareholders, including earnings per share, thereby aligning the    
  motivations and incentives of executive officers with the interests of
shareholders.                                                       

Accordingly, the Company's overall executive compensation structure is  
intended to provide competitive pay levels for the positions, reward individual 
performance relative to goals and objectives determined for the executive       
position, and reward outstanding contributions to the Company's success,        
including overall Company performance and individual executive contribution to  
overall Company performance. In                                                 

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furtherance of such objectives and structure, the Compensation Committee has    
adopted the following overriding policies:                                      

   - the Company will compensate competitively with other similar companies in
the semiconductor equipment and related industries;                 

- performance by individual executives, including the achievement of    
   specific goals and objectives set for the executive and contribution by
the executive to the Company's overall performance, will determine a
significant portion of the compensation for each executive;         

- performance-based compensation will be based upon realizable but      
challenging objectives; and                                         

- the Company will encourage executive officers to hold substantial,    
long-term equity stakes in the Company.                             

COMPONENTS OF COMPENSATION                                                      

  BASE SALARY.  Base salaries for the executive officers other than James W.
Bagley, the Company's Chief Executive Officer, for fiscal 1996 were determined  
on the basis of the policies described above. Salaries will generally be        
reviewed annually and will be subject to increases based on the Compensation    
Committee's determination that the individual's level of contribution to the    
Company has increased since his or her salary had last been reviewed and        
increases in competitive pay levels and the cost of living.                     

EXECUTIVE BONUS PLAN.  Bonuses paid to the Named Officers under the     
executive bonus plan in fiscal 1996 are set forth above in the Summary          
Compensation Table, and were determined in accordance with the compensation     
philosophy described above. In conjunction with the hiring of James W. Bagley as
the Company's Chief Executive Officer, the Compensation Committee is developing 
a revised executive bonus plan for the current fiscal year. Incentive           
compensation under the new plan will be aligned to relate to overall Company    
performance, as well as the attainment of specific performance objectives for   
each individual executive officer.                                              

STOCK OPTIONS.  The Company believes that executive officers, other     
corporate officers and key employees should hold substantial, long-term equity  
stakes in the Company so that their collective interests will coincide with the 
interests of the stockholders. Thus, stock options constitute a significant     
portion of the Company's incentive compensation program. At June 30, 1996,      
substantially all of the Company's full-time employees held options to purchase 
Common Stock. In granting stock options to executive officers, the Compensation 
Committee considers numerous objective and subjective factors, such as the      
individual's position and responsibilities with the Company, the individual's   
future potential to influence the Company's mid- and long-term growth, the      
vesting schedule of the options awarded and the number of options previously    
granted, with no particular weight being assigned to any one factor. See the    
table under "Stock Option Grants," above, for information regarding options to  
purchase Common Stock granted to the Named Officers during fiscal 1996.         

COMPENSATION AND EMPLOYEE BENEFITS GENERALLY AVAILABLE TO ALL COMPANY   
EMPLOYEES.  The Company maintains compensation and employee benefits that are   
generally available to all Company employees, including medical, dental and life
insurance benefits, the 1995 Stock Purchase Plan, a 401(k) retirement savings   
plan, a profit-sharing plan and a flexible benefits plan. The Company's         
executive officers are not eligible to participate in the Company's             
profit-sharing plan, but instead participate in the executive bonus plan.       

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COMPENSATION OF THE CHIEF EXECUTIVE OFFICER                                     

The Compensation Committee uses the same factors and criteria described 
above in making compensation decisions regarding the Chief Executive Officer.   
For fiscal 1996, Kenneth J. Smith, the Company's Chief Executive Officer through
May 31, 1996, received base compensation of $205,289 and a bonus of             
approximately 49% of his base compensation. The Compensation Committee believes 
this compensation was appropriate considering the Company's significant         
achievements in fiscal 1996, including completion of the Company's initial      
public offering in July 1995, and growth in revenues and net income of more than
100% from the prior year.                                                       

The compensation paid and to be paid to James W. Bagley, the Company's  
current Chief Executive Officer, was determined in accordance with an employment
agreement dated May 17, 1996, which was negotiated at arm's length between the  
Company and Mr. Bagley and approved and ratified by the Compensation Committee. 
The agreement fixed Mr. Bagley's annual salary at $100,000, subject to annual   
discretionary increases. The agreement further entitled Mr. Bagley to option    
grants for an aggregate 800,000 shares, of which options to purchase 400,000    
shares are fully vested and options to purchase 400,000 shares will vest in     
equal increments over a 4-year period commencing on May 17, 1997, subject to    
accelerated vesting upon a "change in control" and certain other events. In the 
event Mr. Bagley is terminated other than for cause, or if he voluntarily       
terminates his employment because of a substantial change in his job duties or  
title or specified acts of misconduct by the Company, he is entitled to receive 
a severance payment of $750,000 and all options will become fully exercisable.  

DEDUCTIBILITY OF EXECUTIVE COMPENSATION                                         

 The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the
Code. Section 162(m) denies a deduction to any publicly held corporation for    
compensation paid to a "covered employee" in a taxable year to the extent that  
compensation exceeds $1,000,000. A "covered employee" is defined as the chief   
executive officer on the last day of the taxable year or any other individual   
whose compensation is required to be reported to shareholders under the         
Securities Exchange Act of 1934, as amended (the "Exchange Act"), by reason of  
being among the four most highly compensated executive officers. Certain        
exceptions to the limitation on the deduction of compensation paid to a covered 
employee are available for performance-based compensation. The Company believes 
that options granted under the 1992 Option Plan and the 1996 Equity Plan will   
satisfy the exception for performance-based compensation set forth in Proposed  
Treasury Regulation Section 1.162-27. The Company generally intends to structure
the compensation arrangements with its executive officers so that all           
compensation paid to such officers is deductible. However, it may decide in a   
particular instance that compensation in excess of the deductible amount should 
be paid in order to attract or retain a key employee.                           

COMPENSATION COMMITTEE FOR FISCAL YEAR ENDED JUNE 30, 1996                      
Michael C. Child                                                        
Gary Hultquist                                                          

    The Report of the Compensation Committee on Executive Compensation shall not
be deemed to be incorporated by reference as a result of any general            
incorporation by reference of this proxy statement or any part thereof in the   
Company's Annual Report on Form 10-K.                                           

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PERFORMANCE GRAPH 

 The Company consummated an initial public offering of its Common Stock on
July 10, 1995. Prior to the offering, there was no trading market for the       
Company's Common Stock. Set forth below is a graph indicating cumulative total  
return at June 30, 1996 on $100 invested, alternatively, in the Company's Common
Stock, the Nasdaq Stock Market and a peer group of ten semiconductor equipment  
companies on July 10, 1995 (the date of the Company's initial public offering). 

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC                     

                                                                [Download Table]

                            7/10/1995   6/30/1996 
                                                  
OnTrak Systems                 $100.00      $55.56
The NASDAQ Stock Market        $100.00     $122.74
Peer Group                     $100.00      $54.36

                                                                [Download Table]

                                                                7/10/95    6/30/96 
                                                               ---------  ---------
                                                                                   
OnTrak Systems, Inc. (1)...................................... $  100.00  $   55.56
The Nasdaq Stock Market (US).................................. $  100.00  $  122.74
Peer Group (2)................................................ $  100.00  $   54.36

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

(1) No cash dividends have been paid on the Company's Common Stock.             

(2) The peer group consists of Applied Materials, Inc., Electroglas, Inc., FSI  
International, Inc., Integrated Process Equipment Corporation, KLA      
  Instruments Corporation, Lam Research Corporation, Novellus Systems, Inc.,
Silicon Valley Group, Inc., Speedfam International, Inc. and Ultratech  
Stepper, Inc. The stock of all of the above companies is traded on the  
Nasdaq Stock Market.                                                    

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CERTAIN TRANSACTIONS

As discussed above, the Company has entered into an Employment Agreement
with James W. Bagley. See "Executive Compensation--Employment, Severance and    
Change of Control Provisions."                                                  

 As discussed above, the Company and certain shareholders are parties to a
Preferred Stock Purchase Agreement which provides for registration rights with  
respect to shares of the Company's Common Stock owned by them. See "Executive   
Compensation--Compensation Committee Interlocks and Insider Participation."     

   As discussed above, the Company has entered into agreements with firms with
which Gary Hultquist is associated. See "Executive Compensation--Compensation   
Committee Interlocks and Insider Participation."                                

   The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by the California Corporations     
Code. The Company has entered into indemnification agreements with its directors
and officers and certain of its significant shareholders containing provisions  
which are in some respects broader than the specific indemnification provisions 
contained in the California Corporations Code. The indemnification agreements   
may require the Company, among other things, to indemnify such officers,        
directors and significant shareholders against certain liabilities that may     
arise by reason of their status or service as officers or directors or status as
controlling shareholders (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any    
proceeding against them as to which they could be indemnified, and to obtain    
officers' and directors' insurance if available on reasonable terms. The Company
maintains insurance covering directors and officers.                            

Dated: October 21, 1996                   THE BOARD OF DIRECTORS                

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                                                                       EXHIBIT A

FORM OF 
AGREEMENT AND PLAN OF MERGER
OF ONTRAK SYSTEMS, INC.,
A DELAWARE CORPORATION, 
AND 
ONTRAK SYSTEMS, INC., 
A CALIFORNIA CORPORATION

THIS AGREEMENT AND PLAN OF MERGER dated as of            , 1996 (the    
"Agreement") is between OnTrak Systems, Inc., a Delaware corporation ("OnTrak   
Delaware"), and OnTrak Systems, Inc., a California corporation ("OnTrak         
California"). OnTrak Delaware and OnTrak California are sometimes referred to   
herein as the "Constituent Corporations."                                       

RECITALS

 A. OnTrak Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of 30,000,000 shares
of "Common Stock," $0.0001 par value, and 3,000,000 shares of "Preferred Stock,"
$0.0001 par value. As of            , 1996, 100 shares of Common Stock were     
issued and outstanding, all of which are held by OnTrak California.             

    B.  OnTrak California is a corporation duly organized and existing under the
laws of the State of California and has an authorized capital of 30,000,000     
shares of "Common Stock," no par value, and 3,000,000 shares of "Preferred      
Stock," no par value. As of            , 1996,     shares of Common Stock and no
shares of Preferred Stock were issued and outstanding.                          

    C.  The Board of Directors of OnTrak California has determined that, for the
purpose of effecting the reincorporation of OnTrak California in the State of   
Delaware, it is advisable and in the best interests of OnTrak California that   
OnTrak California merge with and into OnTrak Delaware upon the terms and        
conditions herein provided.                                                     

D. The respective Boards of Directors of OnTrak Delaware and OnTrak     
California have approved this Agreement and have directed that this Agreement be
submitted to a vote of their respective stockholders and executed by the        
undersigned officers.                                                           

   NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, OnTrak Delaware and OnTrak California hereby agree, subject to the
terms and conditions hereinafter set forth, as follows:                         

I.
MERGER

1.1  MERGER.  In accordance with the provisions of this Agreement, the  
Delaware General Corporation Law and the California General Corporation Law,    
OnTrak California shall be merged with and into OnTrak Delaware (the "Merger"), 
the separate existence of OnTrak California shall cease and OnTrak Delaware     
shall be, and is herein sometimes referred to as, the "Surviving Corporation,"  
and the name of the Surviving Corporation shall be OnTrak Systems, Inc.         

  1.2  FILING AND EFFECTIVENESS.  The Merger shall become effective when the
following actions shall have been completed:                                    

      (a) This Agreement and the Merger shall have been adopted and approved
  by the stockholders of each Constituent Corporation in accordance with the
requirements of the Delaware General Corporation Law and the California 
General Corporation Law;                                                

     (b) All of the conditions precedent to the consummation of the Merger
   specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof;                                 

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        (c) An executed Certificate of Merger or an executed counterpart of this
  Agreement meeting the requirements of the Delaware General Corporation Law
   shall have been filed with the Secretary of State of the State of Delaware;
and                                                                     

        (d) An executed Certificate of Merger or an executed counterpart of this
    Agreement meeting the requirements of the California General Corporation Law
shall have been filed with the Secretary of State of the State of       
California.                                                             

  The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."                               

1.3  EFFECT OF THE MERGER.  Upon the Effective Date of the Merger, the  
separate existence of OnTrak California shall cease and OnTrak Delaware, as the 
Surviving Corporation, (i) shall continue to possess all of its assets, rights, 
powers and property as constituted immediately prior to the Effective Date of   
the Merger, (ii) shall be subject to all actions previously taken by its and    
OnTrak California's Board of Directors, (iii) shall succeed, without other      
transfer, to all of the assets, rights, powers and property of OnTrak California
in the manner as more fully set forth in Section 259 of the Delaware General    
Corporation Law, (iv) shall continue to be subject to all of its debts,         
liabilities and obligations as constituted immediately prior to the Effective   
Date of the Merger, and (v) shall succeed, without other transfer, to all of the
debts, liabilities and obligations of OnTrak California in the same manner as if
OnTrak Delaware had itself incurred them, all as more fully provided under the  
applicable provisions of the Delaware General Corporation Law and the California
General Corporation Law.                                                        

II. 
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 

2.1  CERTIFICATE OF INCORPORATION.  The Certificate of Incorporation of 
OnTrak Delaware as in effect immediately prior to the Effective Date of the     
Merger shall continue in full force and effect as the Certificate of            
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.                                      

  2.2  BYLAWS.  The Bylaws of OnTrak Delaware as in effect immediately prior
to the Effective Date of the Merger shall continue in full force and effect as  
the Bylaws of the Surviving Corporation until duly amended in accordance with   
the provisions thereof and applicable law.                                      

   2.3  DIRECTORS AND OFFICERS.  The directors and officers of OnTrak Delaware
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until their successors shall have been    
duly elected and qualified or until as otherwise provided by law, the           
Certificate of Incorporation of the Surviving Corporation or the Bylaws of the  
Surviving Corporation.                                                          

III.
MANNER OF CONVERSION OF STOCK 

    3.1  ONTRAK CALIFORNIA COMMON STOCK.  Upon the Effective Date of the Merger,
each share of OnTrak California Common Stock, no par value, issued and          
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by the Constituent Corporations, the holder of such shares or any    
other person, be converted into and exchanged for one fully paid and            
nonassessable share of Common Stock, $.0001 par value, of the Surviving         
Corporation.                                                                    

   3.2  ONTRAK CALIFORNIA OPTIONS.  Upon the Effective Date of the Merger, the
Surviving Corporation shall assume and continue, on the terms provided therein, 
the OnTrak Systems, Inc. 401(k) Plan, stock option and stock purchase plans     
(including the 1992 Stock Option Plan, as amended, the 1995 Director Stock      
Option Plan, and the 1995 Employee Stock Purchase Plan) and all other employee  
benefit plans of OnTrak California. Each outstanding and unexercised option to  
purchase OnTrak California Common Stock shall become an option to purchase the  
Surviving Corporation's Common Stock on the basis of one share of the Surviving 
Corporation's Common Stock for each share of OnTrak California Common Stock     

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issuable pursuant to any such option to purchase on the same terms and          
conditions and at an exercise price per share equal to the exercise price       
applicable to any such OnTrak California option at the Effective Date of the    
Merger.                                                                         

A number of shares of the Surviving Corporation's Common Stock shall be 
reserved for issuance upon the conversion or exercise of options equal to the   
number of shares of OnTrak California Common Stock so reserved immediately prior
to the Effective Date of the Merger.                                            

  3.3  ONTRAK DELAWARE COMMON STOCK.  Upon the Effective Date of the Merger,
each share of Common Stock, $.0001 par value, of OnTrak Delaware issued and     
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by OnTrak Delaware, the holder of such shares or any other person, be
cancelled and returned to the status of authorized but unissued shares.         

    3.4  EXCHANGE OF CERTIFICATES.  After the Effective Date of the Merger, each
holder of an outstanding certificate representing shares of OnTrak California   
Common Stock may, at such stockholder's option, surrender the same for          
cancellation to The First National Bank of Boston, as exchange agent (the       
"Exchange Agent"), and each such holder shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of shares of the 
Surviving Corporation's Common Stock into which the surrendered shares were     
converted as herein provided. Until so surrendered, each outstanding certificate
theretofore representing shares of OnTrak California Common Stock shall be      
deemed for all purposes to represent the number of shares of the Surviving      
Corporation's Common Stock into which such shares of OnTrak California Common   
Stock were converted in the Merger.                                             

  The registered owner on the books and records of the Surviving Corporation
or the Exchange Agent of any such outstanding certificate shall, until such     
certificate shall have been surrendered for transfer or conversion or otherwise 
accounted for to the Surviving Corporation or the Exchange Agent, have and be   
entitled to exercise any voting and other rights with respect to and to receive 
dividends and other distributions upon the shares of Common Stock of the        
Surviving Corporation represented by such outstanding certificate as provided   
above.                                                                          

  Each certificate representing Common Stock of the Surviving Corporation so
issued in the Merger shall bear the same legends, if any, with respect to the   
restrictions on transferability as the certificates of OnTrak California so     
converted and given in exchange therefor, unless otherwise determined by the    
Board of Directors of the Surviving Corporation in compliance with applicable   
laws.                                                                           

   If any certificate for shares of OnTrak Delaware stock is to be issued in a
name other than that in which the certificate surrendered in exchange therefor  
is registered, it shall be a condition of issuance thereof that the certificate 
so surrendered shall be properly endorsed and otherwise in proper form for      
transfer, that such transfer otherwise be proper and that the person requesting 
such transfer pay to the Exchange Agent any transfer or other taxes payable by  
reason of the issuance of such new certificate in a name other than that of the 
registered holder of the certificate surrendered or establish to the            
satisfaction of OnTrak Delaware that such tax has been paid or is not payable.  

IV. 
GENERAL 

4.1  COVENANTS OF ONTRAK DELAWARE.  OnTrak Delaware covenants and agrees
that it will, on or before the Effective Date of the Merger:                    

   (a) Qualify to do business as a foreign corporation in the State of
California and in connection therewith irrevocably appoint an agent for 
  service of process as required under the provisions of Section 2105 of the
California General Corporation Law;                                     

      (b) File any and all documents with the California Franchise Tax Board
   necessary for the assumption by OnTrak Delaware of all of the franchise tax
liabilities of OnTrak California; and                                   

        (c) Take such other actions as may be required by the California General
Corporation Law.                                                        

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   4.2  FURTHER ASSURANCES.  From time to time, as and when required by OnTrak
Delaware or by its successors or assigns, there shall be executed and delivered 
on behalf of OnTrak California such deeds and other instruments, and there shall
be taken or caused to be taken by it such further and other actions, as shall be
appropriate or necessary in order to vest or perfect in or conform of record or 
otherwise by OnTrak Delaware the title to and possession of all the property,   
interests, assets, rights, privileges, immunities, powers, franchises and       
authority of OnTrak California and otherwise to carry out the purposes of this  
Agreement, and the officers and directors of OnTrak Delaware are fully          
authorized in the name and on behalf of OnTrak California or otherwise to take  
any and all such action and to execute and deliver any and all such deeds and   
other instruments.                                                              

    4.3  ABANDONMENT.  At any time before the Effective Date of the Merger, this
Agreement may be terminated and the Merger may be abandoned for any reason      
whatsoever by the Board of Directors of either OnTrak California or OnTrak      
Delaware, or of both, notwithstanding the approval of this Agreement by the     
shareholders of OnTrak California or by the sole stockholder of OnTrak Delaware,
or by both.                                                                     

    4.4  AMENDMENT.  The Boards of Directors of the Constituent Corporations may
amend this Agreement at any time prior to the filing of this Agreement (or      
certificate in lieu thereof) with the Secretary of State of the State of        
Delaware, provided that an amendment made subsequent to the adoption of this    
Agreement by the stockholders of either Constituent Corporation shall not: (1)  
alter or change the amount or kind of shares, securities, cash, property and/or 
rights to be received in exchange for or on conversion of all or any of the     
shares of any class or series thereof of such Constituent Corporation, (2) alter
or change any term of the Certificate of Incorporation of the Surviving         
Corporation to be effected by the Merger, or (3) alter or change any of the     
terms and conditions of this Agreement if such alteration or change would       
adversely affect the holders of any class or series thereof of such Constituent 
Corporation.                                                                    

   4.5  REGISTERED OFFICE.  The registered office of the Surviving Corporation
in the State of Delaware is located at 1013 Centre Road, in the City of         
Wilmington, Delaware 19805, County of New Castle, and The Prentice-Hall         
Corporation System, Inc. is the registered agent of the Surviving Corporation at
such address.                                                                   

 4.6  AGREEMENT.  Executed copies of this Agreement will be on file at the
principal place of business of the Surviving Corporation at 1010 Rincon Circle, 
San Jose, California 95131 and copies thereof will be furnished to any          
stockholder of either Constituent Corporation, upon request and without cost.   

4.7  GOVERNING LAW.  This Agreement shall in all respects be construed, 
interpreted and enforced in accordance with and governed by the laws of the     
State of Delaware and, so far as applicable, the merger provisions of the       
California General Corporation Law.                                             

   4.8  COUNTERPARTS.  In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.                                                        

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IN WITNESS WHEREOF, this Agreement, having first been approved by       
resolutions of the Boards of Directors of OnTrak Delaware and OnTrak California,
is hereby executed on behalf of each of such two corporations and attested by   
their respective officers thereunto duly authorized.                            

ATTEST:                         ONTRAK SYSTEMS, INC.,                           
      a Delaware corporation

----------------------------             ----------------------------         
By: 
JERAULD J. CUTINI, SECRETARY                   JAMES W. BAGLEY                
                                CHAIRMAN AND
                               CHIEF EXECUTIVE OFFICER

ATTEST:                         ONTRAK SYSTEMS, INC.,                           
        a California corporation

----------------------------             ----------------------------         
By: 
JERAULD J. CUTINI, SECRETARY                   JAMES W. BAGLEY                
                                CHAIRMAN AND
                               CHIEF EXECUTIVE OFFICER

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                                                                       EXHIBIT B

CERTIFICATE OF INCORPORATION
OF
ONTRAK SYSTEMS, INC.

   The undersigned, for purposes of incorporating and organizing a corporation
under the General Corporation Law of the State of Delaware, does hereby certify 
as follows:                                                                     

    FIRST:  The name of the corporation (which is hereinafter referred to as the
"Corporation") is OnTrak Systems, Inc.                                          

   SECOND:  The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,  
Zip Code 19805. The name of its registered agent at such address is The         
Prentice-Hall Corporation System, Inc.                                          

THIRD:  The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized and incorporated under the     
General Corporation Law of the State of Delaware (the "GCL").                   

FOURTH:  The total number of shares of all classes of stock which the   
Corporation shall have authority to issue is Thirty-Three Million (33,000,000), 
consisting of Three Million (3,000,000) shares of Preferred Stock, $.0001 par   
value (hereinafter referred to as "Preferred Stock"), and Thirty Million        
(30,000,000) shares of Common Stock, $.0001 par value (hereinafter referred to  
as "Common Stock").                                                             

  The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of      
shares of Preferred Stock in one or more series and, by filing a certificate    
pursuant to the applicable law of the State of Delaware (hereinafter referred to
as "Preferred Stock Designation"), to establish from time to time the number of 
shares to be included in each such series, and to fix the designation, powers,  
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors   
with respect to each series shall include, but not be limited to, determination 
of the following:                                                               

 (a) The designation of the series, which may be by distinguishing number,
letter or title.                                                                

   (b) The number of shares of the series, which number the Board of Directors
may thereafter (except where otherwise provided in the Preferred Stock          
Designation) increase or decrease (but not below the number of shares thereof   
then outstanding). If the number of shares of any series is so decreased, then  
the shares constituting such decrease shall resume the status which they had    
prior to the adoption of the Preferred Stock Designation originally fixing the  
number of shares of such series.                                                

   (c) The dividend rate on the shares of that series, whether dividends shall
be cumulative, and, if so, from which date or dates, and the relative rights of 
priority, if any, of payment of dividends on shares of that series.             

   (d) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights.            

 (e) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment of  
the conversion rate in such events as the Board of Directors shall determine.   

 (f) Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or dates    
upon or after which they shall be redeemable, and the amount per share payable  
in case of redemption, which amount may vary under different conditions and at  
different redemption dates.                                                     

(g) Whether that series shall have a sinking fund for the redemption or 
purchase of shares of that series, and, if so, the terms and amount of such     
sinking fund.                                                                   

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(h) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, and the  
relative rights of priority, if any, of payment of shares of that series.       

  (i) Any other relative rights, preferences and limitations of that series.

FIFTH:  The name of the incorporator of the Corporation is Patrick C.   
O'Connor, whose mailing address is c/o OnTrak Systems, Inc., 1010 Rincon Circle,
San Jose, California 95131.                                                     

    SIXTH:  In furtherance of, and not in limitation of, the powers conferred by
law, the Board of Directors of the Corporation is expressly authorized and      
empowered to make, adopt, amend and repeal the Bylaws of the Corporation,       
subject to the power of the stockholders of the Corporation entitled to vote    
with respect thereto to adopt, alter, amend and repeal Bylaws made by the Board 
of Directors.                                                                   

  SEVENTH:  The number of directors of the Corporation shall be fixed by the
Bylaws of the Corporation and may be increased or decreased from time to time in
such a manner as may be prescribed by the Bylaws.                               

    EIGHTH:  The election of directors of the Corporation need not be by written
ballot unless a stockholder demands election by written ballot at a meeting of  
stockholders and before voting begins or unless the Bylaws of the Corporation   
shall so provide.                                                               

    NINTH:  A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a      
director, except to the extent such exemption from liability or limitation      
thereof is not permitted under the GCL as the same exists or may hereafter be   
amended. Neither any amendment, modification or repeal of the foregoing         
sentence, nor the adoption of any provision inconsistent with this Article      
Ninth, shall adversely affect any right or protection of a director of the      
Corporation under this Article Ninth in respect of any act or omission occurring
prior to the time of such amendment, modification, repeal, or adoption of an    
inconsistent provision.                                                         

    TENTH:  The Corporation reserves the right at any time and from time to time
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions        
authorized by the laws of the State of Delaware at the time in force may be     
added or inserted, in the manner now or hereafter prescribed herein or by       
applicable law, and all rights, preferences and privileges of whatsoever nature 
conferred upon stockholders, directors or any other persons whomsoever by and   
pursuant to this Certificate of Incorporation in its present form or as         
hereafter amended are granted subject to the right reserved in this Article     
Tenth; PROVIDED, HOWEVER, that any amendment or repeal of Article Ninth of this 
Certificate of Incorporation shall not adversely affect any right or protection 
existing hereunder in respect of any act or omission occurring prior to such    
amendment or repeal; and PROVIDED, FURTHER that no Preferred Stock Designation  
shall be amended after the issuance of any shares of the series of Preferred    
Stock created thereby, except in accordance with the terms of such Preferred    
Stock Designation and the requirements of applicable law.                       

   ELEVENTH:  Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of    
Delaware at such place or places as may be designated from time to time by the  
Board of Directors or in the Bylaws of the Corporation.                         

    TWELFTH:  The powers of the incorporator are to terminate upon the filing of
this Certificate of Incorporation with the Secretary of State of the State of   
Delaware. The name and mailing address of the person who is to serve as the     
initial director of the Corporation until the first annual meeting of           
stockholders of the Corporation, or until his successor is elected and          
qualified, is:                                                                  

                       Patrick C. O'Connor

                            c/o OnTrak Systems, Inc.

                      1010 Rincon Circle

                      San Jose, CA 95131

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The undersigned incorporator hereby acknowledges that the foregoing     
Certificate of Incorporation is his act and deed on this    day of          ,   
1996.                                                                           

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

                                     Patrick C. O'Connor, Incorporator

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                                                                       EXHIBIT C

BYLAWS

OF

ONTRAK SYSTEMS, INC., 

A DELAWARE CORPORATION

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BYLAWS OF 

ONTRAK SYSTEMS, INC., 

A DELAWARE CORPORATION

TABLE OF CONTENTS 

                                                        [Enlarge/Download Table]

                                                                                                                     PAGE   
                                                                                                                   ---------
                                                                                                                            
ARTICLE I    CORPORATE OFFICES....................................................................................         1

                1.1   Registered Office...........................................................................         1
                1.2   Other Offices...............................................................................         1

ARTICLE II    MEETINGS OF STOCKHOLDERS............................................................................         1

                2.1   Place of Meetings...........................................................................         1
                2.2   Annual Meetings.............................................................................         1
                2.3   Special Meetings............................................................................         1
                2.4   Notice of Stockholders' Meetings............................................................         1
                2.5   Manner of Giving Notice; Affidavit of Notice................................................         1
                2.6   Quorum......................................................................................         1
                2.7   Adjourned Meeting; Notice...................................................................         2
                2.8   Conduct of Business.........................................................................         2
                2.9   Voting......................................................................................         2
                2.10  Waiver of Notice............................................................................         2
                2.11  Stockholder Action by Written Consent Without a Meeting.....................................         2
                2.12  Record Date for Stockholder Notice..........................................................         3
                2.13  Proxies.....................................................................................         3
                2.14  List of Stockholders Entitled to Vote.......................................................         3

ARTICLE III    DIRECTORS..........................................................................................         4

                3.1   Powers......................................................................................         4
                3.2   Number of Directors.........................................................................         4
                3.3   Election, Qualification and Term of Office of Directors.....................................         4
                3.4   Resignation and Vacancies...................................................................         4
                3.5   Place of Meetings; Meetings by Telephone....................................................         5
                3.6   Regular Meetings............................................................................         5
                3.7   Special Meetings; Notice....................................................................         5
                3.8   Quorum......................................................................................         5
                3.9   Waiver of Notice............................................................................         5
                3.10  Board Action by Written Consent Without a Meeting...........................................         5
                3.11  Fees and Compensation of Directors..........................................................         5
                3.12  Approval of Loans to Officers...............................................................         6
                3.13  Removal of Directors........................................................................         6

ARTICLE IV    COMMITTEES..........................................................................................         6

                4.1   Committees of Directors.....................................................................         6
                4.2   Committee Minutes...........................................................................         7
                4.3   Meetings and Action of Committees...........................................................         7

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ARTICLE V    OFFICERS.............................................................................................         7
                                                                                                                            

                5.1   Officers....................................................................................         7
                5.2   Appointment of Officers.....................................................................         7
                5.3   Subordinate Officers........................................................................         7
                5.4   Removal and Resignation of Officers.........................................................         7
                5.5   Vacancies in Offices........................................................................         7
                5.6   Chairman of the Board.......................................................................         7
                5.7   President...................................................................................         8
                5.8   Vice Presidents.............................................................................         8
                5.9   Secretary...................................................................................         8
                5.10  Chief Financial Officer.....................................................................         8
                5.11  Assistant Secretary.........................................................................         8
                5.12  Assistant Treasurer.........................................................................         9
                5.13  Authority and Duties of Officers............................................................         9
                5.14  Representation of Shares of Other Corporations..............................................         9

ARTICLE VI    INDEMNIFICATION.....................................................................................         9

                6.1   Right to Indemnification....................................................................         9
                6.2   Prepayment of Expenses......................................................................         9
                6.3   Claims......................................................................................         9
                6.4   Nonexclusivity of Rights....................................................................         9
                6.5   Other Sources...............................................................................        10
                6.6   Amendment or Repeal.........................................................................        10
                6.7   Other Indemnification and Prepayment of Expenses............................................        10

ARTICLE VII    RECORDS AND REPORTS................................................................................        10

                7.1   Maintenance and Inspection of Records.......................................................        10
                7.2   Inspection by Directors.....................................................................        10
                7.3   Annual Statement to Stockholders............................................................        10

ARTICLE VIII    GENERAL MATTERS...................................................................................        11

                8.1   Checks......................................................................................        11
                8.2   Execution of Corporate Contracts and Instruments............................................        11
                8.3   Stock Certificates; Partly Paid Shares......................................................        11
                8.4   Special Designation on Certificates.........................................................        11
                8.5   Lost Certificates...........................................................................        11
                8.6   Construction; Definitions...................................................................        12
                8.7   Dividends...................................................................................        12
                8.8   Fiscal Year.................................................................................        12
                8.9   Seal........................................................................................        12
                8.10  Transfer of Stock...........................................................................        12
                8.11  Stock Transfer Agreements...................................................................        12
                8.12  Registered Stockholders.....................................................................        12

ARTICLE IX    AMENDMENTS..........................................................................................        12

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BYLAWS
OF
ONTRAK SYSTEMS, INC., 
A DELAWARE CORPORATION
ARTICLE I 
CORPORATE OFFICES 

  1.1  REGISTERED OFFICE.  The registered office of the corporation shall be
in the City of Wilmington, County of New Castle, State of Delaware. The name of 
the registered agent of the corporation at such location is The Prentice-Hall   
Corporation System, Inc.                                                        

   1.2  OTHER OFFICES.  The board of directors may at any time establish other
offices at any place or places where the corporation is qualified to do         
business.                                                                       

ARTICLE II
MEETINGS OF STOCKHOLDERS

2.1  PLACE OF MEETINGS.  Meetings of stockholders shall be held at any  
place, within or outside the State of Delaware, designated by the board of      
directors. In the absence of any such designation, stockholders' meetings shall 
be held at the registered office of the corporation.                            

    2.2  ANNUAL MEETINGS.  The annual meeting of stockholders shall be held each
year on a date and at a time designated by the board of directors. At the       
meeting, directors shall be elected and any other proper business may be        
transacted.                                                                     

   2.3  SPECIAL MEETINGS.  A special meeting of the stockholders may be called
at any time by the board of directors, the chairman of the board, the president,
or by one or more stockholders holding shares in the aggregate entitled to cast 
not less than ten percent (10%) of the votes at that meeting.                   

    If a special meeting is called by any person or persons other than the board
of directors, the request shall be in writing, specifying the time of such      
meeting and the general nature of the business proposed to be transacted, and   
shall be delivered personally or sent by registered mail or by telegraphic or   
other facsimile transmission to the chairman of the board, the president or the 
secretary of the corporation. No business may be transacted at such special     
meeting otherwise than specified in such notice. The officer receiving the      
request shall cause notice to be promptly given to the stockholders entitled to 
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article 
II, that a meeting will be held at the time requested by the person or persons  
who called the meeting, not less than thirty-five (35) nor more than sixty (60) 
days after the receipt of the request. If the notice is not given within twenty 
(20) days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.         

2.4  NOTICE OF STOCKHOLDERS' MEETINGS.  All notices of meetings of      
stockholders shall be in writing and shall be sent or otherwise given in        
accordance with Section 2.5 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder entitled to  
vote at such meeting. The notice shall specify the place, date, and hour of the 
meeting, and in the case of a special meeting, the purpose or purposes for which
the meeting is called.                                                          

 2.5  MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.  Written notice of any
meeting of stockholders, if mailed, is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears 
on the records of the corporation. An affidavit of the secretary or an assistant
secretary or of the transfer agent of the corporation that the notice has been  
given shall, in the absence of fraud, be prima facie evidence of the facts      
stated therein.                                                                 

   2.6  QUORUM.  The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall  
constitute a quorum at all meetings of the stockholders for the transaction of  
business except as otherwise provided by statute or by the certificate of       
incorporation. If, however, such quorum is not present or represented at any    
meeting of the stockholders,                                                    

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then either (i) the chairman of the meeting or (ii) the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to    
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At such adjourned meeting
at which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally noticed.                

When a quorum is present at any meeting, the vote of the holders of a   
majority of the stock having voting power present in person or represented by   
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws or of the Certificate of    
Incorporation, a different vote is required, in which case such express         
provision shall govern and control the decision of the question.                

    2.7  ADJOURNED MEETING; NOTICE.  When a meeting is adjourned to another time
or place, unless these bylaws otherwise require, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at 
which the adjournment is taken. At the adjourned meeting the corporation may    
transact any business that might have been transacted at the original meeting.  
If the adjournment is for more than thirty (30) days, or if after the           
adjournment a new record date is fixed for the adjourned meeting, a notice of   
the adjourned meeting shall be given to each stockholder of record entitled to  
vote at the meeting.                                                            

    2.8  CONDUCT OF BUSINESS.  The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including    
such matters as the regulation of the manner of voting and the conduct of       
business.                                                                       

2.9  VOTING.  The stockholders entitled to vote at any meeting of       
stockholders shall be determined in accordance with the provisions of Section   
2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the  
General Corporation Law of Delaware (relating to voting rights of fiduciaries,  
pledgors and joint owners of stock and to voting trusts and other voting        
agreements). Voting at meetings of stockholders need not be by written ballot   
and, unless otherwise required by law, need not be conducted by inspectors of   
election unless so determined by the holders of shares of stock having a        
majority of the votes which could be cast by the holders of all outstanding     
shares of stock entitled to vote thereon which are present in person or by proxy
at such meeting.                                                                

Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock  
held by such stockholder. At all meetings of stockholders for the election of   
directors a plurality of the votes cast shall be sufficient to elect.           

  2.10  WAIVER OF NOTICE.  Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the certificate of   
incorporation or these bylaws, a written waiver thereof, signed by the person   
entitled to notice, whether before or after the time stated therein, shall be   
deemed equivalent to notice. Attendance of a person at a meeting shall          
constitute a waiver of notice of such meeting, except when the person attends a 
meeting for the express purpose of objecting, at the beginning of the meeting,  
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any     
regular or special meeting of the stockholders need be specified in any written 
waiver of notice unless so required by the certificate of incorporation or these
bylaws.                                                                         

2.11  STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.  Unless  
otherwise provided in the certificate of incorporation, any action required by  
this article to be taken at any annual or special meeting of stockholders of the
corporation, or any action that may be taken at any annual or special meeting of
such stockholders, may be taken without a meeting, without prior notice, and    
without a vote if a consent in writing, setting forth the action so taken, is   
signed by the 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.    

Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who    
have not consented in writing. If the action which is                           

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consented to is such as would have required the filing of a certificate under   
any section of the General Corporation Law of Delaware if such action had been  
voted on by stockholders at a meeting thereof, then the certificate filed under 
such section shall state, in lieu of any statement required by such section     
concerning any vote of stockholders, that written notice and written consent    
have been given as provided in Section 228 of the General Corporation Law of    
Delaware.                                                                       

    2.12  RECORD DATE FOR STOCKHOLDER NOTICE.  In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of   
stockholders or any adjournment thereof, or entitled to express consent to      
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to   
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in  
advance, a record date, which shall not be more than sixty (60) nor less than   
ten (10) days before the date of such meeting, nor more than sixty (60) days    
prior to any other action.                                                      

If the board of directors does not so fix a record date:                

    (i) The record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day  
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is     
held.                                                                           

(ii) The record date for determining stockholders entitled to express   
consent to corporate action in writing without a meeting, when no prior action  
by the board of directors is necessary, shall be the day on which the first     
written consent is expressed.                                                   

(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors    
adopts the resolution relating thereto.                                         

  A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;     
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.                                                              

2.13  PROXIES.  Each stockholder entitled to vote at a meeting of       
stockholders or to express consent or dissent to corporate action in writing    
without a meeting may authorize another person or persons to act for him by a   
written proxy, signed by the stockholder and filed with the secretary of the    
corporation, but no such proxy shall be voted or acted upon after three (3)     
years from its date, unless the proxy provides for a longer period. A proxy     
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic or facsimile transmission or      
otherwise) by the stockholder or the stockholder's attorney-in-fact. The        
revocability of a proxy that states on its face that it is irrevocable shall be 
governed by the provisions of Section 212(c) of the General Corporation Law of  
Delaware.                                                                       

   2.14  LIST OF STOCKHOLDERS ENTITLED TO VOTE.  The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)   
days before every meeting of stockholders, a complete list of the stockholders  
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of  
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a   
period of at least ten (10) days prior to the meeting, either at a place within 
the city where the meeting is to be held, which place shall be specified in the 
notice of the meeting, or, if not so specified, at the place where the meeting  
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any          
stockholder who is present. Such list shall presumptively determine the identify
of the stockholders entitled to vote at the meeting and the number of shares    
held by each of them.                                                           

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ARTICLE III 
DIRECTORS 

 3.1  POWERS.  Subject to the provisions of the General Corporation Law of
Delaware and any limitation in the certificate of incorporation or these bylaws 
relating to action required to be approved by the stockholders or by the        
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the    
board of directors.                                                             

   3.2  NUMBER OF DIRECTORS.  The board of directors shall consist of not less
than four (4) nor more than seven (7) members, with the exact number thereof to 
be determined by resolution of the board of directors. The exact number of      
directors shall initially be five (5), until changed by a resolution of the     
board of directors or by an amendment to this bylaw.                            

3.3  ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.  Except as
provided in Section 3.4 of these bylaws, directors shall be elected at each     
annual meeting of stockholders to hold office until the next annual meeting.    
Directors need not be stockholders unless so required by the certificate of     
incorporation or these bylaws, wherein other qualifications for directors may be
prescribed. Each director, including a director elected to fill a vacancy, shall
hold office until his successor is elected and qualified or until his earlier   
resignation or removal.                                                         

Elections of directors need not be by written ballot.                   

 3.4  RESIGNATION AND VACANCIES.  Any director may resign at any time upon
written notice to the attention of the secretary of the corporation. When one or
more directors so resigns and the resignation is effective at a future date, a  
majority of the directors then in office, including those who have so resigned, 
shall have power to fill such vacancy or vacancies, the vote thereon to take    
effect when such resignation or resignations shall become effective, and each   
director so chosen shall hold office as provided in this section in the filling 
of other vacancies.                                                             

Unless otherwise provided in the certificate of incorporation or these  
bylaws:                                                                         

    (i) Vacancies and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors    
then in office, although less than a quorum, or by a sole remaining director.   

    (ii) Whenever the holders of any class or classes of stock or series thereof
are entitled to elect one or more directors by the provisions of the certificate
of incorporation, vacancies and newly created directorships of such class or    
classes or series may be filled by a majority of the directors elected by such  
class or classes or series thereof then in office, or by a sole remaining       
director so elected.                                                            

If at any time, by reason of death or resignation or other cause, the   
corporation should have no directors in office, then any officer or any         
stockholder or any executor, administrator, trust or guardian of a stockholder, 
or other fiduciary entrusted with like responsibility for the person or estate  
of a stockholder, may call a special meeting of stockholders in accordance with 
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.                      

 If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board 
(as constituted immediately prior to any such increase), then the Court of      
Chancery may, upon application of any stockholder or stockholders holding at    
least ten percent (10%) of the total number of the shares at the time           
outstanding having the right to vote for such directors, summarily order an     
election to be held to fill any such vacancies or newly created directorships,  
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.                               

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 3.5  PLACE OF MEETINGS; MEETINGS BY TELEPHONE.  The board of directors of
the corporation may hold meetings, both regular and special, either within or   
outside the State of Delaware. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the board of directors, or any        
committee designated by the board of directors, may participate in a meeting of 
the board of directors, or any committee, by means of conference telephone or   
similar communications equipment by means of which all persons participating in 
the meeting can hear each other, and such participation in a meeting shall      
constitute presence in person at the meeting.                                   

 3.6  REGULAR MEETINGS.  Regular meetings of the board of directors may be
held at such times and at such places as shall from time to time be determined  
by the board, and if so determined notices thereof need not be given.           

  3.7  SPECIAL MEETINGS; NOTICE.  Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the    
board, the president, or any two (2) directors.                                 

Notice of the time and place of special meetings shall be delivered     
personally or by telephone to each director or sent by first-class mail or      
facsimile, charges prepaid, addressed to each director at that director's       
address as it is shown on the records of the corporation. If the notice is      
mailed, it shall be deposited in the United States mail at least four (4) days  
before the time of the holding of the meeting. If the notice is delivered       
personally or by telephone or by facsimile, it shall be delivered personally or 
by telephone or to the facsimile telephone number at least twenty-four (24)     
hours before the time of the holding of the meeting. Any oral notice given      
personally or by telephone may be communicated either to the director or to a   
person at the office of the director who the person giving the notice has reason
to believe will promptly communicate it to the director. The notice need not    
specify the purpose or the place of the meeting, if the meeting is to be held at
the principal executive office of the corporation.                              

  3.8  QUORUM.  At all meetings of the board of directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of 
business and the act of a majority of the directors present at any meeting at   
which there is a quorum shall be the act of the board of directors, except as   
may be otherwise specifically provided by statute or by the certificate of      
incorporation. If a quorum is not present at any meeting of the board of        
directors, then the directors present thereat may adjourn the meeting from time 
to time, without notice other than announcement at the meeting, until a quorum  
is present.                                                                     

 A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is    
approved by at least a majority of the required quorum for that meeting.        

 3.9  WAIVER OF NOTICE.  Whenever notice is required to be given under any
provision of the General Corporation Law of Delaware or of the certificate of   
incorporation or these bylaws, a written waiver thereof, signed by the person   
entitled to notice, whether before or after the time stated therein, shall be   
deemed equivalent to notice. Attendance of a person at a meeting shall          
constitute a waiver of notice of such meeting, except when the person attends a 
meeting for the express purpose of objecting, at the beginning of the meeting,  
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor other purpose of, any   
regular or special meeting of the directors, or members of a committee of       
directors, need be specified in any written waiver of notice unless so required 
by the certificate of incorporation or these bylaws.                            

  3.10  BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.  Unless otherwise
restricted by the certificate of incorporation or these bylaws, any action      
required or permitted to be taken at any meeting of the board of directors, or  
of any committee thereof, may be taken without a meeting if all members of the  
board or committee, as the case may be, consent thereto in writing and the      
writing or writings are filed with the minutes of proceedings of the board or   
committee.                                                                      

 3.11  FEES AND COMPENSATION OF DIRECTORS.  Unless otherwise restricted by
the certificate of incorporation or these bylaws, the board of directors shall  
have the authority to fix the compensation of directors. The directors may be   
paid their expenses, if any, of attendance at each meeting of the board of      
directors                                                                       

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and may be paid a fixed sum for attendance at each meeting of the board of      
directors or a stated salary as director. No such payment shall preclude any    
director from serving the corporation in any other capacity and receiving       
compensation therefor. Members of special or standing committees may be allowed 
like compensation for attending committee meetings.                             

   3.12  APPROVAL OF LOANS TO OFFICERS.  The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee  
of the corporation or of its subsidiaries, including any officer or employee who
is a director of the corporation or its subsidiaries, whenever, in the judgment 
of the directors, such loan, guaranty or assistance may reasonably be expected  
to benefit the corporation. The loan, guaranty or other assistance may be with  
or without interest and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to  
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.                                                

   3.13  REMOVAL OF DIRECTORS.  Unless otherwise restricted by statute, by the
certificate of incorporation or by these bylaws, any director or the entire     
board of directors may be removed, with or without cause, by the holders of a   
majority of the shares then entitled to vote at an election of directors;       
provided, however, that, so long as shareholders of the corporation are entitled
to cumulative voting, if less than the entire board is to be removed, no        
director may be removed without cause if the votes cast against his removal     
would be sufficient to elect him if then cumulatively voted at an election of   
the entire board of directors.                                                  

   No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.

ARTICLE IV
COMMITTEES

4.1  COMMITTEES OF DIRECTORS.  The board of directors may, by resolution
passed by a majority of the whole board, designate one or more committees, with 
each committee to consist of one or more of the directors of the corporation.   
The board may designate one or more directors as alternate members of any       
committee, who may replace any absent or disqualified member at any meeting of  
the committee. In the absence or disqualification of a member of a committee,   
the member or members thereof present at any meeting and not disqualified from  
voting, whether or not he or they constitute a quorum, may unanimously appoint  
another member of the board of directors to act at the meeting in the place of  
any such absent or disqualified member. Any such committee, to the extent       
provided in the resolution of the board of directors or in the bylaws of the    
corporation, shall have and may exercise all the powers and authority of the    
board of directors in the management of the business and affairs of the         
corporation, and may authorize the seal of the corporation to be affixed to all 
papers that may require it; but no such committee shall have the power or       
authority to (i) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in    
Section 151(a) of the General Corporation Law of Delaware, fix the designation  
and any of the preferences or rights of such shares relating to dividends,      
redemption, dissolution, any distribution of assets of the corporation or the   
conversion into, or the exchange of such shares for, shares of any other class  
or classes or any other series of the same or any other class or classes of     
stock of the corporation or fix the number of shares of any series of stock or  
authorize the increase or decrease of the shares of any series), (ii) adopt an  
agreement of merger or consolidation under Sections 251 or 252 of the General   
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and       
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,   
unless the board resolution establishing the committee, the bylaws or the       
certificate of incorporation expressly so provide, no such committee shall have 
the power or authority to declare a dividend, to authorize the issuance of      
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.                                     

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 4.2  COMMITTEE MINUTES.  Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.           

   4.3  MEETINGS AND ACTION OF COMMITTEES.  Meetings and actions of committees
shall be governed by, and held and taken in accordance with, the provisions of  
Article III of these bylaws, Section 3.5 (place of meetings and meetings by     
telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and   
notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 
(action without a meeting), with such changes in the context of those bylaws as 
are necessary to substitute the committee and its members for the board of      
directors and its members; provided, however, that the time of regular meetings 
of committees may be determined either by resolution of the board of directors  
or by resolution of the committee, that special meetings of committees may also 
be called by resolution of the board of directors and that notice of special    
meetings of committees shall also be given to all alternate members, who shall  
have the right to attend all meetings of the committee. The board of directors  
may adopt rules for the government of any committee not inconsistent with the   
provisions of these bylaws.                                                     

ARTICLE V 
OFFICERS

5.1  OFFICERS.  The officers of the corporation shall be a president, a 
secretary, and a chief financial officer. The corporation may also have, at the 
discretion of the board of directors, a chairman of the board, one or more vice 
presidents, one or more assistant vice presidents, one or more assistant        
secretaries, and one or more assistant treasurers, and any such other officers  
as may be appointed in accordance with the provisions of Section 5.3 of these   
bylaws. Any number of offices may be held by the same person.                   

   5.2  APPOINTMENT OF OFFICERS.  The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Sections 5.3  
or 5.5 of these bylaws, shall be appointed by the board of directors, subject to
the rights, if any, of an officer under any contract of employment.             

  5.3  SUBORDINATE OFFICERS.  The board of directors may appoint, or empower
the president to appoint, such other officers and agents as the business of the 
corporation may require, each of whom shall hold office for such period, have   
such authority, and perform such duties as are provided in these bylaws or as   
the board of directors may from time to time determine.                         

    5.4  REMOVAL AND RESIGNATION OF OFFICERS.  Subject to the rights, if any, of
an officer under any contract of employment, any officer may be removed, either 
with or without cause, by an affirmative vote of the majority of the board of   
directors at any regular or special meeting of the board or, except in the case 
of an officer chosen by the board of directors, by any officer upon whom such   
power of removal may be conferred by the board of directors.                    

Any officer may resign at any time by giving written notice to the      
corporation. Any resignation shall take effect at the date of the receipt of    
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be        
necessary to make it effective. Any resignation is without prejudice to the     
rights, if any, of the corporation under any contract to which the officer is a 
party.                                                                          

5.5  VACANCIES IN OFFICES.  Any vacancy occurring in any office of the  
corporation shall be filled by the board of directors.                          

   5.6  CHAIRMAN OF THE BOARD.  The chairman of the board, or the president if
there is no chairman of the board, shall preside at all meetings of the         
stockholders and of the board of directors. The chairman of the board or the    
president, as the case may be, shall be responsible for the general management  
of the affairs of the corporation and shall perform all duties incidental to his
office which may be required by law and all such other duties as are properly   
required of him by the board of directors. Except where by law the signature of 
the president is required, the chairman of the board shall possess the same     
power as the president to sign all certificates, contracts, and other           
instruments of the corporation which may be authorized by the board of          
directors. The chairman or the president, as the case may be, shall make reports

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to the board of directors and the stockholders, and shall perform all such other
duties as are properly required of him by the board of directors. The chairman  
or the president shall see that all orders and resolutions of the board of      
directors and of any committee thereof are carried into effect.                 

    5.7  PRESIDENT.  The president shall act in a general executive capacity and
oversee the administration and operation of the corporation's business and      
general supervision of its policies and affairs. The president shall, in the    
absence of or because of the inability to act of the chairman of the board,     
perform all duties of the chairman of the board and preside at all meetings of  
stockholders and of the board of directors. The president may sign, alone or    
with the secretary, or an assistant secretary, or any other proper officer of   
the corporation authorized by the board of directors, certificates, contracts,  
and other instruments of the corporation as authorized by the board of          
directors.                                                                      

 5.8  VICE PRESIDENTS.  In the absence or disability of the president, the
vice presidents, if any, in order of their rank as fixed by the board of        
directors or, if not ranked, a vice president designated by the board of        
directors, shall perform all the duties of the president and when so acting     
shall have all the powers of, and be subject to all the restrictions upon, the  
president. The vice presidents shall have such other powers and perform such    
other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the president or the chairman of the board.   

5.9  SECRETARY.  The secretary shall keep or cause to be kept, at the   
principal executive office of the corporation or such other place as the board  
of directors may direct, a book of minutes of all meetings and actions of       
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'      
meetings or committee meetings, the number of shares present or represented at  
stockholders' meetings, and the proceedings thereof.                            

 The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent  
or registrar, as determined by resolution of the board of directors, a share    
register, or a duplicate share register, showing the names of all stockholders  
and their addresses, the number and classes of shares held by each, the number  
and date of certificates evidencing such shares, and the number and date of     
cancellation of every certificate surrendered for cancellation.                 

 The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in  
safe custody and shall have such other powers and perform such other duties as  
may be prescribed by the board of directors or by these bylaws.                 

5.10  CHIEF FINANCIAL OFFICER.  The chief financial officer shall be the
treasurer of the corporation. The chief financial officer shall keep and        
maintain, or cause to be kept and maintained, adequate and correct books and    
records of accounts of the properties and business transactions of the          
corporation, including accounts of its assets, liabilities, receipts,           
disbursements, gains, losses, capital retained earnings, and shares. The books  
of account shall at all reasonable times be open to inspection by any director. 

   The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be  
designated by the board of directors. He shall disburse the funds of the        
corporation as may be ordered by the board of directors, shall render to the    
president and directors, whenever they request it, an account of all his        
transactions as chief financial officer and of the financial condition of the   
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or these bylaws.                           

 5.11  ASSISTANT SECRETARY.  The assistant secretary, or, if there is more
than one, the assistant secretaries in the order determined by the stockholders 
or board of directors (or if there be no such determination, then in the order  
of their election) shall, in the absence of the secretary or in the event of his
or her inability or refusal to act, perform the duties and exercise the powers  
of the secretary and shall perform such other duties and have such other powers 
as may be prescribed by the board of directors or these bylaws.                 

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 5.12  ASSISTANT TREASURER.  The assistant treasurer, or, if there is more
than one, the assistant treasurers, in the order determined by the stockholders 
or board of directors (or if there be no such determination, then in the order  
of their election), shall, in the absence of the chief financial officer or in  
the event of his or her inability or refusal to act, perform the duties and     
exercise the powers of the chief financial officer and shall perform such other 
duties and have such other powers as may be prescribed by the board of directors
or these bylaws.                                                                

5.13  AUTHORITY AND DUTIES OF OFFICERS.  In addition to the foregoing   
authority and duties, all officers of the corporation shall respectively have   
such authority and perform such duties in the management of the business of the 
corporation as may be designated from time to time by the board of directors or 
the stockholders.                                                               

  5.14  REPRESENTATION OF SHARES OF OTHER CORPORATIONS.  The chairman of the
board, the president, the chief financial officer, the secretary of this        
corporation, or any other person authorized by the board of directors or the    
president, is authorized to vote, represent, and exercise on behalf of this     
corporation all rights incident to any and all shares of any other corporation  
or corporations standing in the name of this corporation. The authority granted 
herein may be exercised either by such person directly or by any other person   
authorized to do so by proxy or power of attorney duly executed by such person  
having the authority.                                                           

ARTICLE VI
INDEMNIFICATION 

6.1  RIGHT TO INDEMNIFICATION.  The corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently     
exists or may hereafter be amended, any person (an "Indemnitee") who was or is  
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a 
"proceeding"), by reason of the fact that he or she, or a person for whom he or 
she is the legal representative, is or was a director of the corporation or,    
while a director or officer of the corporation, is or was serving at the request
of the corporation as a director, officer, employee or agent of another         
corporation or of a partnership, joint venture, trust, enterprise or nonprofit  
entity, including service with respect to employee benefit plans, against all   
liability and loss suffered and expenses (including attorneys' fees) reasonably 
incurred by such Indemnitee. Notwithstanding the preceding sentence, except as  
otherwise provided in Section 6.3, the corporation shall be required to         
indemnify an Indemnitee in connection with a proceeding (or part thereof)       
commenced by such Indemnitee only if the commencement of such proceeding (or    
part thereof) by the Indemnitee was authorized by the board of directors of the 
corporation.                                                                    

6.2  PREPAYMENT OF EXPENSES.  The corporation shall pay the expenses    
(including attorneys' fees) incurred by an Indemnitee in defending any          
proceeding in advance of its final disposition, provided, however, that, to the 
extent required by law, such payment of expenses in advance of the final        
disposition of the proceeding shall be made only upon receipt of an undertaking 
by the Indemnitee to repay all amounts advanced if it should be ultimately      
determined that the Indemnitee is not entitled to be indemnified under this     
Article VI or otherwise.                                                        

 6.3  CLAIMS.  If a claim for indemnification or payment of expenses under
this Article VI is not paid in full within sixty days after a written claim     
therefor by the Indemnitee has been received by the corporation, the Indemnitee 
may file suit to recover the unpaid amount of such claim and, if successful in  
whole or in part, shall be entitled to be paid the expense of prosecuting such  
claim. In any such action the corporation shall have the burden of proving that 
the Indemnitee is not entitled to the requested indemnification or payment of   
expenses under applicable law.                                                  

 6.4  NONEXCLUSIVITY OF RIGHTS.  The rights conferred on any Indemnitee by
this Article VI shall not be exclusive of any other rights which such Indemnitee
may have or hereafter acquire under any statute, provision of the certificate of
incorporation, these bylaws, agreement, vote of stockholders or disinterested   
directors or otherwise.                                                         

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  6.5  OTHER SOURCES.  The corporation's obligation, if any, to indemnify or
to advance expenses to any Indemnitee who was or is serving at its request as a 
director, officer, employee or agent of another corporation, partnership, joint 
venture, trust, enterprise or nonprofit entity shall be reduced by any amount   
such Indemnitee may collect as indemnification or advancement of expenses from  
such other corporation, partnership, joint venture, trust, enterprise or        
nonprofit enterprise.                                                           

6.6  AMENDMENT OR REPEAL.  Any repeal or modification of the foregoing  
provisions of this Article VI shall not adversely affect any right or protection
hereunder of any Indemnitee in respect of any act or omission occurring prior to
the time of such repeal or modification.                                        

6.7  OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.  This Article VI 
shall not limit the right of the corporation, to the extent and in the manner   
permitted by law, to indemnify and to advance expenses to persons other than    
Indemnitees when and as authorized by appropriate corporate action.             

ARTICLE VII 
RECORDS AND REPORTS 

  7.1  MAINTENANCE AND INSPECTION OF RECORDS.  The corporation shall, either
at its principal executive office or at such place or places as designated by   
the board of directors, keep a record of its stockholders listing their names   
and addresses and the number and class of shares held by each stockholder, a    
copy of these bylaws as amended to date, accounting books, and other records.   

  Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right      
during the usual hours for business to inspect for any proper purpose the       
corporation's stock ledger, a list of its stockholders, and its other books and 
records and to make copies or extracts therefrom. A proper purpose shall mean a 
purpose reasonably related to such person's interest as a stockholder. In every 
instance where an attorney or other agent is the person who seeks the right to  
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on     
behalf of the stockholder. The demand under oath shall be directed to the       
corporation at its registered office in Delaware or at its principal place of   
business.                                                                       

The officer who has charge of the stock ledger of the corporation shall 
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in  
alphabetical order, showing the address of each stockholder and the number of   
shares registered in the name of each stockholder. Such list shall be open to   
the examination of any stockholder, for any purpose germane to the meeting,     
during ordinary business hours, for a period of at least ten (10) days prior to 
the meeting, either at a place within the city where the meeting is to be held, 
which place shall be specified in the notice of the meeting, or, if not so      
specified, at the place where the meeting is to be held. The list shall also be 
produced and kept at the time and place of the meeting during the whole time    
thereof, and may be inspected by any stockholder who is present.                

   7.2  INSPECTION BY DIRECTORS.  Any director shall have the right to examine
the corporation's stock ledger, a list of its stockholders, and its other books 
and records for a purpose reasonably related to his position as a director. The 
Court of Chancery is hereby vested with the exclusive jurisdiction to determine 
whether a director is entitled to the inspection sought. The Court may summarily
order the corporation to permit the director to inspect any and all books and   
records, the stock ledger, and the stock list and to make copies or extracts    
therefrom. The Court may, in its discretion, prescribe any limitations or       
conditions with reference to the inspection, or award such other and further    
relief as the Court may deem just and proper.                                   

    7.3  ANNUAL STATEMENT TO STOCKHOLDERS.  The board of directors shall present
at each annual meeting, and at any special meeting of the stockholders when     
called for by vote of the stockholders, a full and clear statement of the       
business and condition of the corporation.                                      

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ARTICLE VIII
GENERAL MATTERS 

  8.1  CHECKS.  From time to time, the board of directors shall determine by
resolution which person                                                         
or persons may sign or endorse all checks, drafts, other orders for payment of  
money, notes or other evidences of indebtedness that are issued in the name of  
or payable to the corporation, and only the persons so authorized shall sign or 
endorse those instruments.                                                      

8.2  EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.  The board of    
directors, except as otherwise provided in these bylaws, may authorize any      
officer or officers, or agent or agents, to enter into any contract or execute  
any instrument in the name of and on behalf of the corporation; such authority  
may be general or confined to specific instances. Unless so authorized or       
ratified by the board of directors or within the agency power of an officer, no 
officer, agent or employee shall have any power or authority to bind the        
corporation by any contract or engagement or to pledge its credit or to render  
it liable for any purpose or for any amount.                                    

   8.3  STOCK CERTIFICATES; PARTLY PAID SHARES.  The shares of the corporation
shall be represented by certificates, provided that the board of directors of   
the corporation may provide by resolution or resolutions that some or all of any
or all classes or series of its stock shall be uncertificated shares. Any such  
resolution shall not apply to shares represented by a certificate until such    
certificate is surrendered to the corporation. Notwithstanding the adoption of  
such a resolution by the board of directors, every holder of stock represented  
by certificates and upon request every holder of uncertificated shares shall be 
entitled to have a certificate signed by, or in the name of, the corporation by 
the chairman or vice-chairman of the board of directors, or the president or    
vice president, and by the chief financial officer or an assistant treasurer, or
the secretary or an assistant secretary of the corporation representing the     
number of shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or      
registrar who has signed or whose facsimile signature has been placed upon a    
certificate has ceased to be such officer, transfer agent or registrar before   
such certificate is issued, it may be issued by the corporation with the same   
effect as if he were such officer, transfer agent or registrar at the date of   
issue.                                                                          

    The corporation may issue the whole or any part of its shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor. 
Upon the face or back of each stock certificate issued to represent any such    
partly paid shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be  
paid therefor and the amount paid thereon shall be stated. Upon the declaration 
of any dividend on fully paid shares, the corporation shall declare a dividend  
upon partly paid shares of the same class, but only upon the basis of the       
percentage of the consideration actually paid thereon.                          

   8.4  SPECIAL DESIGNATION ON CERTIFICATES.  If the corporation is authorized
to issue more than one class of stock or more than one series of any class, then
the powers, the designations, the preferences, and the relative, participating, 
optional or other special rights of each class of stock or series thereof and   
the qualifications, limitations or restrictions of such preferences and/or      
rights shall be set forth in full or summarized on the face or back of the      
certificate that the corporation shall issue to represent such class or series  
of stock; provided, however, that, except as otherwise provided in Section 202  
of the General Corporation Law of Delaware, in lieu of the foregoing            
requirements there may be set forth on the face or back of the certificate that 
the corporation shall issue to represent such class or series of stock a        
statement that the corporation will furnish without charge to each stockholder  
who so requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences 
and/or rights.                                                                  

8.5  LOST CERTIFICATES.  Except as provided in this Section 8.5, no new 
certificates for shares shall be issued to replace a previously issued          
certificate unless the latter is surrendered to the corporation and cancelled at
the same time. The corporation may issue a new certificate of stock or          
uncertificated shares in                                                        

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the place of any certificate theretofore issued by it, alleged to have been     
lost, stolen or destroyed, and the corporation may require the owner of the     
lost, stolen or destroyed certificate, or his legal representative, to give the 
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such     
certificate or the issuance of such new certificate or uncertificated shares.   

   8.6  CONSTRUCTION; DEFINITIONS.  Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the Delaware      
General Corporation Law shall govern the construction of these bylaws. Without  
limiting the generality of this provision, the singular number includes the     
plural, the plural number includes the singular, and the term "person" includes 
both a corporation and a natural person.                                        

8.7  DIVIDENDS.  The directors of the corporation, subject to any       
restrictions contained in (i) the General Corporation Law of Delaware or (ii)   
the corporation's certificate of incorporation, may declare and pay dividends   
upon the shares of its capital stock. Dividends may be paid in cash, in         
property, or in shares of the corporation's capital stock.                      

 The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper    
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the   
corporation, and meeting contingencies.                                         

8.8  FISCAL YEAR.  The fiscal year of the corporation shall be fixed by 
resolution of the board of directors and may be changed by the board of         
directors.                                                                      

8.9  SEAL.  The corporation may adopt a corporate seal, which shall be  
adopted and which may be altered by the board of directors, and may use the same
by causing it or a facsimile thereof to be impressed or affixed or in any other 
manner reproduced.                                                              

   8.10  TRANSFER OF STOCK.  Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or           
accompanied by proper evidence of succession, assignation or authority to       
transfer, it shall be the duty of the corporation to issue a new certificate to 
the person entitled thereto, cancel the old certificate, and record the         
transaction in its books.                                                       

   8.11  STOCK TRANSFER AGREEMENTS.  The corporation shall have power to enter
into and perform any agreement with any number of stockholders of any one or    
more classes of stock of the corporation to restrict the transfer of shares of  
stock of the corporation of any one or more classes owned by such stockholders  
in any manner not prohibited by the General Corporation Law of Delaware.        

8.12  REGISTERED STOCKHOLDERS.  The corporation shall be entitled to    
recognize the exclusive right of a person registered on its books as the owner  
of shares to receive dividends and to vote as such owner, shall be entitled to  
hold liable for calls and assessments the person registered on its books as the 
owner of shares, and shall not be bound to recognize any equitable or other     
claim to or interest in such share or shares on the part of another person,     
whether or not it shall have express or other notice thereof, except as         
otherwise provided by the laws of Delaware.                                     

ARTICLE IX
AMENDMENTS

  The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the      
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so 
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.                             

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CERTIFICATE OF ADOPTION OF BYLAWS 
OF
ONTRAK SYSTEMS, INC., A DELAWARE CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY BOARD OF DIRECTORS

    The undersigned hereby certifies that he is the duly elected, qualified, and
acting Secretary of OnTrak Systems, Inc., a Delaware corporation, and that the  
foregoing bylaws, comprising               (  ) pages, were adopted as the      
Bylaws of the corporation as of               , 1996, by the Board of Directors 
of the corporation.                                                             

 IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal as of the   day of             , 1996.                       

------------------------------                                                  
, Secretary                                             

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      ONTRAK SYSTEMS, INC.
      1996 EQUITY INCENTIVE PLAN

ONTRAK SYSTEMS, INC. hereby adopts the OnTrak Systems, Inc. 1996 Equity         
Incentive Plan, effective as of November 21, 1996, as follows:                  

     SECTION 1
      BACKGROUND, PURPOSE AND DURATION

1.1  BACKGROUND AND EFFECTIVE DATE.  The Plan permits the grant of      
Nonstatutory Stock Options, Incentive Stock Options and Restricted Stock.       
The Plan is effective as of November 21, 1996, subject to ratification by an    
affirmative vote of the holders of a majority of the Shares which are present   
in person or by proxy and entitled to vote at the 1996 Annual Meeting of        
Stockholders.  Awards may be granted prior to the receipt of such vote, but     
such grants shall be null and void if such vote is not in fact received.        

 1.2  PURPOSE OF THE PLAN.  The Plan is intended to attract, motivate, and
retain (1) employees of the Company and its Affiliates, (2) consultants who     
provide significant services to the Company and its Affiliates, and (3)         
directors of the Company who are not employees of either the Company or any     
Affiliate.  The Plan also is designed to encourage stock ownership by           
Participants, thereby aligning their interests with those of the Company's      
shareholders.                                                                   

     SECTION 2
     DEFINITIONS

  The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:                           

2.1  "1934 ACT" means the Securities Exchange Act of 1934, as amended.  
Reference to a specific section of the 1934 Act or regulation thereunder shall  
include such section or regulation, any valid regulation promulgated under such 
section, and any comparable provision of any future legislation or regulation   
amending, supplementing or superseding such section or regulation.              

  2.2  "AFFILIATE" means any corporation or any other entity (including, but
not limited to, partnerships and joint ventures) controlling, controlled by, or 
under common control with the Company.                                          

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2.3  "AWARD" means, individually or collectively, a grant under the Plan
of Nonstatutory Stock Options, Incentive Stock Options or Restricted Stock.     

  2.4  "AWARD AGREEMENT" means the written agreement setting forth the terms
and provisions applicable to each Award granted under the Plan.                 

2.5  "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.                                                                        

   2.6  "CODE" means the Internal Revenue Code of 1986, as amended.  Reference
to a specific section of the Code or regulation thereunder shall include such   
section or regulation, any valid regulation promulgated under such section, and 
any comparable provision of any future legislation or regulation amending,      
supplementing or superseding such section or regulation.                        

2.7  "COMMITTEE" means the committee appointed by the Board (pursuant to
Section 3.1) to administer the Plan.                                            

  2.8 "COMPANY" means OnTrak Systems, Inc., a California corporation, or any
successor thereto.                                                              

2.9 "CONSULTANT" means any consultant, independent contractor, or other 
person who provides significant services to the Company or its Affiliates, but  
who is neither an Employee nor a Director.                                      

2.10 "DIRECTOR" means any individual who is a member of the Board of    
Directors of the Company.                                                       

   2.11 "DISABILITY" means a permanent and total disability within the meaning
of Code Section 22(e)(3), provided that in the case of Awards other than        
Incentive Stock                                                                 

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2.12 "EMPLOYEE" means any employee of the Company or of an Affiliate,   
whether such employee is so employed at the time the Plan is adopted or becomes 
so employed subsequent to the adoption of the Plan.                             

  2.13 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.  Reference to a specific section of ERISA or regulation thereunder     
shall include such section or regulation, any valid regulation promulgated under
such section, and any comparable provision of any future legislation or         
regulation amending, supplementing or superseding such section or regulation.   

  2.14 "EXERCISE PRICE" means the price at which a Share may be purchased by
a Participant pursuant to the exercise of an Option.                            

  2.15 "FAIR MARKET VALUE" means the last quoted per share selling price for
Shares on the relevant date, or if there were no sales on such date, the        
arithmetic mean of the highest and lowest quoted selling prices on the nearest  
day before and the nearest day after the relevant date, as determined by the    
Committee.  Notwithstanding the preceding, for federal, state, and local income 
tax reporting purposes, fair market value shall be determined by the Committee  
(or its delegate) in accordance with uniform and nondiscriminatory standards    
adopted by it from time to time.                                                

2.16 "FISCAL YEAR" means the fiscal year of the Company.                

  2.17 "GRANT DATE" means, with respect to an Award, the date that the Award
was granted.                                                                    

 2.18 "INCENTIVE STOCK OPTION" means an Option to purchase Shares which is
designated as an Incentive Stock Option and is intended to meet the requirements
of Section 422 of the Code.                                                     

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2.19 "NONEMPLOYEE DIRECTOR" means a Director who is not an employee of  
either the Company or of any Affiliate.                                         

 2.20 "NONSTATUTORY STOCK OPTION" means an option to purchase Shares which
is not intended to be an Incentive Stock Option.                                

2.21 "OPTION" means an Incentive Stock Option or a Nonstatutory Stock   
Option.                                                                         

 2.22 "PARTICIPANT" means an Employee, Consultant, or Nonemployee Director
who has an outstanding Award.                                                   

  2.23 "PERIOD OF RESTRICTION" means the period during which the transfer of
Shares of Restricted Stock are subject to restrictions and, therefore, the      
Shares are subject to a substantial risk of forfeiture.  As provided in         
Section 6, such restrictions may be based on the passage of time, the           
achievement of target levels of performance, or the occurrence of other events  
as determined by the Committee, in its discretion.                              

 2.24 "PLAN" means the OnTrak Systems, Inc. 1996 Equity Incentive Plan, as
set forth in this instrument and as hereafter amended from time to time.        

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   2.25 "RESTRICTED STOCK" means an Award granted to a Participant pursuant to
Section 6.                                                                      

2.26 "RETIREMENT" means, in the case of an Employee, a Termination of   
Service by reason of the Employee's retirement at or after his or her normal    
retirement date.  With respect to a Consultant, no Termination of Service shall 
be deemed to be on account of "Retirement."  With respect to a Nonemployee      
Director, "Retirement" means termination of service on the Board at or after age
65.                                                                             

  2.27 "RULE 16b-3" means Rule 16b-3 promulgated under the 1934 Act, and any
future regulation amending, supplementing or superseding such regulation.       

2.28 "SECTION 16 PERSON" means a person who, with respect to            
the Shares, is subject to Section 16 of the 1934 Act.                           

2.29 "SHARES" means the shares of Common Stock of the Company.          

2.30 "SUBSIDIARY" means any corporation in an unbroken chain of         
corporations  beginning with the Company if each of the corporations other than 
the last corporation in the unbroken chain then owns stock possessing fifty     
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.                                 

2.31 "TERMINATION OF SERVICE" means (a) in the case of an Employee, a   
cessation of the employee-employer relationship between an employee and the     
Company or an Affiliate for any reason, including, but not by way of limitation,
a termination by resignation,                                                   

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discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate,
but excluding any such termination where there is a simultaneous reemployment by
the Company or an Affiliate; and (b) in the case of a Consultant, a cessation of
the service relationship between a Consultant and the Company or an Affiliate   
for any reason, including, but not by way of limitation, a termination by       
resignation, discharge, death, Disability, or the disaffiliation of an          
Affiliate, but excluding any such termination where there is a simultaneous     
re-engagement of the consultant by the Company or an Affiliate.                 

     SECTION 3
      ADMINISTRATION

  3.1  THE COMMITTEE.  The Plan shall be administered by the Committee.  The
Committee shall consist of not less than two (2) Directors.  The members of the 
Committee shall be appointed from time to time by, and shall serve at the       
pleasure of, the Board of Directors.  The Committee shall be comprised solely of
Directors who both are (a) "non-employee directors" under Rule 16b-3, and (b)   
"outside directors" under Section 162(m) of the Code.                           

3.2  AUTHORITY OF THE COMMITTEE.  It shall be the duty of the Committee 
to administer the Plan in accordance with the Plan's provisions.  The           
Committee shall have all powers and discretion necessary or appropriate to      
administer the Plan and to control its operation, including, but not limited    
to, the power to (a) determine which Employees and Consultants shall be         
granted Awards, (b) prescribe the terms and conditions of the Awards (other     
than the Options granted to Nonemployee Directors), (c) interpret the Plan      
and the Awards, (d) adopt such procedures and subplans as are necessary or      
appropriate to permit participation in the Plan by Employees, Consultants and   
Directors who are foreign nationals or employed outside of the United States,   
(e) adopt rules for the administration, interpretation and application of the   
Plan as are consistent therewith, and (f) interpret, amend or revoke any such   
rules.                                                                          

3.3  DELEGATION BY THE COMMITTEE.  The Committee, in its sole discretion
and on such terms and conditions as it may provide, may delegate all or any part
of its authority and powers under the Plan to one or more directors or officers 
of the Company; provided, however, that the Committee may not delegate its      
authority and powers (a) with respect to Section 16 Persons, or (b) in any way  
which would jeopardize the Plan's qualification under Section 162(m) of the Code
or Rule 16b-3.                                                                  

3.4  NONEMPLOYEE DIRECTOR OPTIONS.  Notwithstanding any contrary        
provision of this Section 3, the Board shall administer grants of Options to    
Nonemployee Directors, and the Committee shall exercise no discretion with      
respect to grants of Options to Nonemployee Directors.  In the Board's          
administration of Options granted to Nonemployee Directors, the Board shall     
have all of the authority and discretion otherwise granted to the Committee     
with respect to the administration of the Plan.                                 

3.5  DECISIONS BINDING.  All determinations and decisions made by the   
Committee, the Board, and any delegate of the Committee pursuant to the         
provisions of                                                                   

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the Plan shall be final, conclusive, and binding on all persons, and shall be   
given the maximum deference permitted by law.                                   

     SECTION 4
      SHARES SUBJECT TO THE PLAN

 4.1  NUMBER OF SHARES.  Subject to adjustment as provided in Section 4.3,
the total number of Shares available for grant under the Plan shall not exceed  
2,000,000.  Shares granted under the Plan may be either authorized but unissued 
Shares or treasury Shares.                                                      

4.2  LAPSED AWARDS.  If an Award is settled in cash, or is cancelled,   
terminates, expires, or lapses for any reason, any Shares subject to such       
Award again shall be available to be the subject of an Award.                   

4.3  ADJUSTMENTS IN AWARDS AND AUTHORIZED SHARES.  In the event of any  
merger, reorganization, consolidation, recapitalization, separation,            
liquidation, stock dividend, split-up, share combination, or other change in    
the corporate structure of the Company affecting the Shares, the Committee      
shall adjust the number and class of Shares which may be delivered under the    
Plan, the number, class, and price of Shares subject to outstanding Awards,     
and the numerical limits of Sections 5.1 and 6.1, in such manner as the         
Committee (in its sole discretion) shall determine to be appropriate to         
prevent the dilution or diminution of such Awards.  In the case of Options      
granted to Nonemployee Directors, the foregoing adjustments shall be made by    
the Board, and any such adjustments also shall apply to future grants.          
Notwithstanding the preceding, the number of Shares subject to any Award        
always shall be a whole number.                                                 

     SECTION 5
     STOCK OPTIONS

5.1  GRANT OF OPTIONS.  Subject to the terms and provisions of the Plan,
Options may be granted to Employees and Consultants at any time and from time   
to time as determined by the Committee in its sole discretion, and Options      
may be granted to Nonemployee Directors at any time and from time to time as    
determined by the Board in its sole discretion.  The Committee, in its sole     
discretion, shall determine the number of Shares subject to each Option,        
provided that during any Fiscal Year, the employee who serves as Chief          
Executive Officer of the Company shall not be granted Options covering more     
than 800,000 Shares and no other Participant shall be granted Options           
covering more than 300,000 Shares.  The Committee may grant Incentive Stock     
Options, Nonstatutory Stock Options, or a combination thereof.                  

   5.2  AWARD AGREEMENT.  Each Option shall be evidenced by an Award Agreement
that shall specify the Exercise Price, the expiration date of the Option, the   
number of Shares to which the Option pertains, any conditions to exercise of the
option, and such other terms and conditions as the Committee, in its discretion,
shall determine.  The                                                           

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Award Agreement shall also specify whether the Option is intended to be an      
Incentive Stock Option or a Nonstatutory Stock Option.                          

5.3  EXERCISE PRICE.  Subject to the provisions of this Section 5.3, the
Exercise Price for each Option shall be determined by the Committee in its sole 
discretion.                                                                     

      5.3.1     NONSTATUTORY STOCK OPTIONS.  In the case of a Nonstatutory
Stock Option, the Exercise Price shall be not less than one hundred percent     
(100%) of the Fair Market Value of a Share on the Grant Date.                   

       5.3.2     INCENTIVE STOCK OPTIONS.  In the case of an Incentive Stock
Option, the Exercise Price shall be not less than one hundred percent (100%) of 
the Fair Market Value of a Share on the Grant Date; provided, however, that if  
on the Grant Date, the Employee (together with persons whose stock ownership is 
attributed to the Employee pursuant to Section 424(d) of the Code) owns stock   
possessing more than 10% of the total combined voting power of all classes of   
stock of the Company or any of its Subsidiaries, the Exercise Price shall be not
less than one hundred and ten percent (110%) of the Fair Market Value of a Share
on the Grant Date.                                                              

  5.3.3     SUBSTITUTE OPTIONS.  Notwithstanding the provisions of
Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate         
consummates a transaction described in Section 424(a) of the Code (e.g., the    
acquisition of property or stock from an unrelated corporation), persons who    
become Employees or Consultants on account of such transaction may be granted   
Options in substitution for options granted by their former employer.  If such  
substitute options are granted, the Committee, in its sole discretion and       
consistent with Section 424(a) of the Code, may determine that such substitute  
Options shall have an exercise price less than one hundred percent (100%) of the
Fair market Value of the Shares on the Grant Date.                              

5.4  EXPIRATION OF OPTIONS.                                             

        5.4.1     EXPIRATION DATES.  Each Option shall terminate no later than
the first to occur of the following events:                                     

    (a)  The date for termination of the Option set forth in
the written Award Agreement; or                                                 

         (b)  The expiration of ten (10) years from the Grant Date; or

    (c)  The expiration of one (1) year from the date of the
Optionee's Termination of Service for a reason other than the Optionee's death, 
Disability or Retirement; or                                                    

       (d)  The expiration of three (3) years from the date of the
Optionee's Termination of Service by reason of Disability; or                   

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       (e)  The expiration of three (3) years from the date of the
Optionee's Retirement (except as provided in Section 5.8.2 regarding Incentive  
Stock Options).                                                                 

    5.4.2     DEATH OF OPTIONEE.  Notwithstanding Section 5.4.1, if an
Optionee dies prior to the expiration of his or her Options, the Committee, in  
its discretion, may provide that his or her Options shall be exercisable for up 
to three (3) years after the date of death, provided that in no event may an    
Option be exercisable more than ten (10) years after the Grant Date.            

5.4.3     COMMITTEE DISCRETION.  Subject to the limits of     
Sections 5.4.1 and 5.4.2, the Committee, in its sole discretion, (a) shall      
provide in each Award Agreement when each Option expires and becomes            
unexercisable, and (b) may, after an Option is granted, extend the maximum term 
of the Option (subject to Section 5.8.4 regarding Incentive Stock Options).     

5.5  EXERCISABILITY OF OPTIONS.  Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as 
the Committee shall determine in its sole discretion.  After an Option is       
granted, the Committee, in its sole discretion, may accelerate the              
exercisability of the Option.  However, in no event may any Option granted to a 
Section 16 Person be exercisable until at least six (6) months following the    
Grant Date (or such shorter period as may be permissible while maintaining      
compliance with Rule 16b-3).                                                    

  5.6  PAYMENT.  Options shall be exercised by the Participant's delivery of
a written notice of exercise to the Chief Financial Officer of the Company (or  
its designee), setting forth the number of Shares with respect to which the     
Option is to be exercised, accompanied by full payment for the Shares.          

      Upon the exercise of any Option, the Exercise Price shall be payable
to the Company in full in cash or its equivalent.  The Committee, in its sole   
discretion, also may permit exercise (a) by tendering previously acquired Shares
having an aggregate Fair Market value at the time of exercise equal to the total
Exercise Price, or (b) by any other means which the Committee, in its sole      
discretion, determines to both provide legal consideration for the Shares, and  
to be consistent with the purposes of the Plan.                                 

   As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participant's designated broker), Share certificates    
(which may be in book entry form) representing such Shares.                     

  5.7  RESTRICTIONS ON SHARE TRANSFERABILITY.  The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option as it 
may deem advisable, including, but not limited to, restrictions related to      
applicable Federal securities laws, the requirements of any national securities 
exchange or system upon which Shares are then listed or traded, or any blue sky 
or state securities laws.                                                       

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5.8  CERTAIN ADDITIONAL PROVISIONS FOR INCENTIVE STOCK OPTIONS.         

        5.8.1     EXERCISABILITY.  The aggregate Fair Market Value (determined
on the Grant Date(s)) of the Shares with respect to which Incentive Stock       
Options are exercisable for the first time by any Employee during any calendar  
year (under all plans of the Company and its Subsidiaries) shall not exceed     
$100,000.                                                                       

     5.8.2     TERMINATION OF SERVICE.  No Incentive Stock Option may be
exercised more than three (3) months after the Participant's Termination of     
Service for any reason other than Disability or death, unless (a) the           
Participant dies during such three-month period, and (b) the Award Agreement or 
the Committee permits later exercise.  No Incentive Stock Option may be         
exercised more than one (1) year after the Participant's termination of         
employment on account of Disability, unless (a) the Participant dies during such
one-year period, and (b) the Award Agreement or the Committee permit later      
exercise.                                                                       

       5.8.3     COMPANY AND SUBSIDIARIES ONLY.  Incentive Stock Options may
be granted only to persons who are employees of the Company or a Subsidiary on  
the Grant Date.                                                                 

   5.8.4     EXPIRATION.  No Incentive Stock Option may be exercised
after the expiration of ten (10) years from the Grant Date; provided, however,  
that if the Option is granted to an Employee who, together with persons whose   
stock ownership is attributed to the Employee pursuant to Section 424(d) of the 
Code, owns stock possessing more than 10% of the total combined voting power of 
all classes of the stock of the Company or any of its Subsidiaries, the Option  
may not be exercised after the expiration of five (5) years from the Grant Date.

5.9       TRANSFER OF OPTIONS.  The Committee may, in its     
discretion, either (a) authorize all or a portion of the Options granted to a   
Participant to be on terms which permit transfer by such Participant, or (b)    
upon request of a Participant amend an Option to permit transfer by such        
Participant, to (i) the spouse, children or grandchildren of the Participant    
("Immediate Family Members"), (ii) a trust or trusts for the exclusive          
benefit of such Immediate Family Members, (iii) a partnership in which such     
Immediate Family Members are the only partners, or (iv) any other entity        
affiliated with the Participant that may be approved by the Committee,          
provided that (x) there may be no consideration for any such transfer, (y)      
the Award Agreement pursuant to which such Options are granted, or any          
amendment thereto, must be approved by the Committee, and must expressly        
provide for transferability in a manner consistent with this Section 5.9, and   
(z) subsequent transfers of transferred Options shall be prohibited except      
those in accordance with Section 7.7. Following transfer, any such Options      
shall continue to be subject to the same terms and conditions as were           
applicable immediately prior to transfer, provided that the term optionee or    
Participant shall be deemed to refer to the transferee. The events of           
termination of employment of Section 5.4 hereof or in the Award Agreement       
shall continue to be applied with respect to the original Participant,          
following which the Options shall be exercisable by the transferee only to      
the extent, and for the periods specified in the Award Agreement or Section     
5.4, as applicable.                                                             

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     SECTION 6
      RESTRICTED STOCK

   6.1  GRANT OF RESTRICTED STOCK.  Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of     
Restricted stock to Employees and Consultants in such amounts as the Committee, 
in its sole discretion, shall determine.  The Committee, in its sole discretion,
shall determine the number of Shares to be granted to each Participant, provided
that during any Fiscal Year no Participant shall receive more than 20,000       
Shares of Restricted Stock.                                                     

 6.2  RESTRICTED STOCK AGREEMENT.  Each Award of Restricted Stock shall be
evidenced by an Award Agreement that shall specify the Period of Restriction,   
the number of Shares granted, and such other terms and conditions as the        
Committee, in its sole discretion, shall determine.  Unless the Committee       
determines otherwise, Shares of Restricted Stock shall be held by the Company as
escrow agent until the restrictions on such Shares have lapsed.                 

6.3  TRANSFERABILITY.  Except as provided in this Section 6, Shares  of 
Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise  
alienated or hypothecated until the end of the applicable Period of Restriction.
However, in no event may the restrictions on Restricted Stock granted to a      
Section 16 Person lapse prior to six (6) months following the Grant Date (or    
such shorter period as may be permissible while maintaining compliance with     
Rule 16b-3).                                                                    

   6.4  OTHER RESTRICTIONS.  The Committee, in its sole discretion, may impose
such other restrictions on Shares of Restricted Stock as it may deem advisable  
or appropriate, in accordance with this Section 6.4.                            

     6.4.1     GENERAL RESTRICTIONS.  The Committee may set restrictions
based upon the achievement of specific performance objectives (Company-wide,    
divisional, or individual), applicable Federal or state securities laws, or any 
other basis determined by the Committee in its discretion.                      

     6.4.2     SECTION 162(M) PERFORMANCE RESTRICTIONS.  For purposes of
qualifying grants of Restricted Stock as "performance-based compensation"       
under Section 162(m) of the Code, the Committee, in its discretion, may set     
restrictions based upon the achievement of performance objectives established   
by the Committee.  The performance objectives shall be set by the Committee     
on or before the latest date permissible to enable the Restricted Stock to      
qualify as "performance-based compensation" under Section 162(m) of the Code.   
In granting Restricted Stock which is intended to qualify under Code Section  
162(m), the Committee shall follow any procedures determined by it from time    
to time to be necessary or appropriate to ensure qualification of the           
Restricted Stock under Code Section 162(m) (e.g., in determining the            
performance objectives).                                                        

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      6.4.3     LEGEND ON CERTIFICATES.  The Committee, in its discretion,
may legend the certificates representing Restricted Stock to give appropriate   
notice of such restrictions.  For example, the Committee may determine that some
or all certificates representing Shares of Restricted Stock shall bear the      
following legend:                                                               

             "The sale or other transfer of the shares of stock represented by
     this certificate, whether voluntary, involuntary or by operation of
     law, is subject to certain restrictions on transfer as set forth in
the OnTrak Systems, Inc. 1996 Equity Incentive Plan, and in a 
     Restricted Stock Agreement.  A copy of the Plan and such Restricted
       Stock Agreement may be obtained from the Secretary of OnTrak Systems,
Inc."                                                         

6.5  REMOVAL OF RESTRICTIONS.  Except as otherwise provided in this     
Section 6, Shares of Restricted Stock covered by each Restricted Stock grant    
made under the Plan shall be released from escrow as soon as practicable after  
the last day of the Period of Restriction.  The Committee, in its discretion,   
may accelerate the time at which any restrictions shall lapse, and remove any   
restrictions; provided, however, that the Period of Restriction on Shares       
granted to a Section 16 Person may not lapse until at least six (6) months after
the Grant Date (or such shorter period as may be permissible while maintaining  
compliance with Rule 16b-3).  After the restrictions have lapsed, the           
Participant shall be entitled to have any legend or legends under Section 6.4.3 
removed from his or her Share certificate, and the Shares shall be freely       
transferable by the Participant.                                                

   6.6  VOTING RIGHTS.  During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights    
with respect to those Shares, unless the Committee determines otherwise.        

  6.7  DIVIDENDS AND OTHER DISTRIBUTIONS.  During the Period of Restriction,
Participants holding Shares of Restricted Stock shall be entitled to receive all
dividends and other distributions paid with respect to such Shares unless       
otherwise provided in the Award Agreement.  If any such dividends or            
distributions are paid in Shares, the Shares shall be subject to the same       
restrictions on transferability and forfeitability as the Shares of Restricted  
Stock with respect to which they were paid.                                     

 6.8  RETURN OF RESTRICTED STOCK TO COMPANY.  On the date set forth in the
Award Agreement, the Restricted Stock for which restrictions have not lapsed    
shall revert to the Company and again shall become available for grant under the
Plan.                                                                           

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     SECTION 7
     MISCELLANEOUS

7.1 DEFERRALS.  The Committee, in its sole discretion, may permit a     
Participant to defer receipt of the payment of cash or the delivery of Shares   
that would otherwise be due to such Participant under an Award.  Any such       
deferral elections shall be subject to such rules and procedures as shall be    
determined by the Committee in its sole discretion.                             

7.2 NO EFFECT ON EMPLOYMENT OR SERVICE.  Nothing in the Plan shall      
interfere with or limit in any way the right of the Company to terminate any    
Participant's employment or service at any time, with or without cause.  For    
purposes of the Plan, transfer of employment of a Participant between the       
Company and any one of its Affiliates (or between Affiliates) shall not be      
deemed a Termination of Service.  Employment with the Company and its           
Affiliates is on an at-will basis only.                                         

7.3 PARTICIPATION.  No Employee or Consultant shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to   
be selected to receive a future Award.                                          

7.4 INDEMNIFICATION.  Each person who is or shall have been a member of 
the Committee, or of the Board, shall be indemnified and held harmless by the   
Company against and from (a) any loss, cost, liability, or expense that may     
be imposed upon or reasonably incurred by him or her in connection with or      
resulting from any claim, action, suit, or proceeding to which he or she may    
be a party or in which he or she may be involved by reason of any action        
taken or failure to act under the Plan or any Award Agreement, and (b) from     
any and all amounts paid by him or her in settlement thereof, with the          
Company's approval, or paid by him or her in satisfaction of any judgment in    
any such claim, action, suit, or proceeding against him or her, provided he     
or she shall give the Company an opportunity, at its own expense, to handle     
and defend the same before he or she undertakes to handle and defend it on      
his or her own behalf.  The foregoing right of indemnification shall not be     
exclusive of any other rights of indemnification to which such persons may be   
entitled under the Company's Articles of Incorporation or Bylaws, by            
contract, as a matter of law, or otherwise, or under any power that the         
Company may have to indemnify them or hold them harmless.                       

7.5 SUCCESSORS.  All obligations of the Company under the Plan, with    
respect to Awards granted hereunder, shall be binding on any successor to the   
Company, whether the existence of such successor is the result of a direct or   
indirect purchase, merger, consolidation, or otherwise, of all or               
substantially all of the business or assets of the Company.                     

7.6 BENEFICIARY DESIGNATIONS.  If permitted by the Committee, a         
Participant under the Plan may name a beneficiary or beneficiaries to whom      
any vested but unpaid  Award shall be paid in the event of the Participant's    
death. Each such designation shall revoke all prior designations by the         
Participant and shall be effective                                              

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only if given in a form and manner acceptable to the Committee.  In the absence 
of any such designation, any vested benefits remaining unpaid at the            
Participant's death shall be paid to the Participant's estate and, subject to   
the terms of the Plan and of the applicable Award Agreement, any unexercised    
vested Award may be exercised by the administrator or executor of the           
Participant's estate.                                                           

7.7 NONTRANSFERABILITY OF AWARDS.  Except as expressly authorized by the
Committee pursuant to Section 5.9, no Award granted under the Plan may be       
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,   
other than by will, by the laws of descent and distribution, or to the          
limited extent provided in Section 7.6.                                         

7.8 NO RIGHTS AS STOCKHOLDER.  Except to the limited extent provided in 
Sections 6.6 and 6.7, no Participant (nor any beneficiary) shall have any of    
the rights or privileges of a stockholder of the Company with respect to any    
Shares issuable pursuant to an Award (or exercise thereof), unless and until    
certificates representing such Shares shall have been issued, recorded on the   
records of the Company or its transfer agents or registrars, and delivered to   
the Participant (or beneficiary).                                               

     SECTION 8
      AMENDMENT, TERMINATION, AND DURATION

8.1 AMENDMENT, SUSPENSION, OR TERMINATION.  The Board, in its sole      
discretion, may amend or terminate the Plan, or any part thereof, at any time   
and for any reason.  However, if and to the extent required to maintain the     
Plan's qualification under Rule 16b-3, any such amendment shall be subject to   
stockholder approval.  The amendment, suspension, or termination of the Plan    
shall not, without the consent of the Participant, alter or impair any rights   
or obligations under any Award theretofore granted to such Participant.  No     
Award may be granted during any period of suspension or after termination of    
the Plan.                                                                       

8.2 DURATION OF THE PLAN.  The Plan shall commence on the date specified
herein, and subject to Section 8.1 (regarding the Board's right to amend or     
terminate the Plan), shall remain in effect thereafter.  However, without       
further stockholder approval, no Incentive Stock Option may be granted under    
the Plan after November 21, 2006.                                               

     SECTION 9
     TAX WITHHOLDING

9.1 WITHHOLDING REQUIREMENTS.  Prior to the  delivery of any Shares or  
cash pursuant to an Award (or exercise thereof), the Company shall have the     
power and the right to deduct or withhold, or require a Participant to remit to 
the Company, an amount sufficient to satisfy Federal, state, and local taxes    
(including the Participant's FICA obligation) required to be withheld with      
respect to such Award (or exercise thereof). The Participant shall remain       
responsible for the payment of all such withholding taxes with respect to any   
Options that are transferred in accordance with the provisions of Section 5.9.  

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9.2 WITHHOLDING ARRANGEMENTS.  The Committee, in its sole discretion and
pursuant to such procedures as it may specify from time to time, may permit a   
Participant to satisfy such tax withholding obligation, in whole or in part by  
(a) electing to have the Company withhold otherwise deliverable Shares, or (b)  
delivering to the Company already-owned shares having a Fair Market Value equal 
to the amount required to be withheld.  The amount of the withholding           
requirement shall be deemed to include any amount which the Committee agrees may
be withheld at the time the election is made not to exceed the amount determined
by using the maximum Federal, state or local marginal income tax rates          
applicable to the Participant with respect to the Award on the date that the    
amount of tax to be withheld is to be determined.  The Fair Market Value of the 
Shares to be withheld or delivered shall be determined as of the date that the  
taxes are required to be withheld.                                              

      SECTION 10
      LEGAL CONSTRUCTION

 10.1 GENDER AND NUMBER.  Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.                 

10.2 SEVERABILITY.  In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.                      

10.3 REQUIREMENTS OF LAW.  The granting of Awards and the issuance of   
Shares under the Plan shall be subject to all applicable laws, rules, and       
regulations, and to such approvals by any governmental agencies or national     
securities exchanges as may be required.                                        

10.4 SECURITIES LAW COMPLIANCE.  With respect to Section 16 Persons,    
transactions under this Plan are intended to comply with all applicable         
conditions of Rule 16b-3.  To the extent any provision of the Plan, Award       
Agreement or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee. 

 10.5 GOVERNING LAW.  The Plan and all Award Agreements shall be construed
in accordance with and governed by the laws of the State of California.         

10.6 CAPTIONS.  Captions are provided herein for convenience only, and  
shall not serve as a basis for interpretation or construction of the Plan.      

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     EXECUTION

 IN WITNESS WHEREOF, OnTrak Systems, Inc., by its duly authorized officer,
has executed the Plan on the date indicated below.                              

                  ONTRAK SYSTEMS, INC.

Dated: __________,  1996                    By:_______________________________  
                                          Name:_____________________________
                                          Title:____________________________

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     PROXY FOR 1996 ANNUAL MEETING OF SHAREHOLDERS
      OF
      ONTRAK SYSTEMS, INC.

        The undersigned hereby appoints James W. Bagley and Jerauld J. Cutini,
and each of them, with full power of substitution, proxy for the undersigned to 
vote all shares of Common Stock of OnTrak Systems, Inc. (the "Company") that the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the    
Company to be held on November 21, 1996, at the Company's principal executive   
offices at 1010 Rincon Circle, San Jose, California, at 10:00 a.m. local time,  
or any adjournment thereof.                                                     

   WHETHER NOR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE
URGED TO SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR  
SHARES MAY BE REPRESENTED AT THE MEETING.                                       

1.  ELECTION OF DIRECTORS:                                                      

( )  FOR                           ( )  WITHHELD FOR ALL                

NOMINEES:  James W. Bagley, Michael C. Child, Jerauld J. Cutini, Richard J.     
Elkus, Jr., and Gary Hultquist.                                                 

--------------------------------------------------------------------------------
     For all nominees except as noted above.

2.  PROPOSAL TO AUTHORIZE the Company to change the Company's state of          
incorporation from California to Delaware.                                      

FOR ( )        AGAINST ( )         ABSTAIN ( )                

3.  PROPOSAL TO APPROVE the adoption of the Company's 1996 Equity Incentive     
Plan and the reservation of 2,000,000 shares of Common Stock for issuance       
thereunder.                                                                     

FOR ( )        AGAINST ( )         ABSTAIN ( )                

4.  PROPOSAL TO RATIFY the selection of Price Waterhouse LLP as the independent 
accountants of the Company for the current fiscal year.                         

FOR ( )        AGAINST ( )         ABSTAIN ( )                

5.  In their discretion, the proxies are authorized to vote upon such other     
business as may properly come before the meeting or any adjournment thereof.    

DEF 14A
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       IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2,
3 AND 4.  THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4. 

        This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.                                          

      Please sign exactly as the name appears hereon.  Joint owners should
each sign.  When signing as attorney, executor, administrator, trustee or       
guardian, please give full title as such.                                       

Date:  ______________, 1996                                                     

                                      ________________________________________
       Signature

                                       _________________________________________
       Signature

18  

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘DEF 14A’ Filing		Date		First		Last			Other Filings
		11/21/06		71
		6/30/97		4
		6/23/97		4
		5/17/97		27		31
For Period End:		11/21/96		2		74			PRE 14A
		11/5/96		13
		10/23/96		27
Filed on:		10/21/96		2		33
		9/27/96		2		3			10-K
		8/31/96		18		25
		6/30/96		6		32			10-K,  10-K/A
		6/1/96		25		28
		5/31/96		26		31
		5/17/96		25		31
		7/10/95		25		32
		6/30/95		26
		6/30/94		26
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