YIELDUP INTERNATIONAL CORP, PRE 14A, 1998-07-02

YIELDUP INTERNATIONAL CORP
PRE 14A, 1998-07-02
SPECIAL INDUSTRY MACHINERY, NEC

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]

File by a Party other than the Registrant [ ]

Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12

YIELDUP INTERNATIONAL CORPORATION
(Name of Registrant as Specified In Its Charter)

Payment of filing fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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 (set forth the amount on which
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] 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 No.:

(3) Filing Party:

(4) Date Filed:

<PAGE> 2

YIELDUP INTERNATIONAL CORPORATION
117 EASY STREET
MOUNTAIN VIEW, CA 94043

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 20, 1998
------------------------

Dear Stockholder:

You are invited to attend the Annual Meeting of Stockholders of YieldUP
International Corporation (the "Company"), which will be held on August 20, 1998
at 10:00 a.m. Pacific Daylight Time at the Company's headquarters, 117 Easy
Street, Mountain View, California 94043 for the following purposes:

1. To elect two Class III directors, each to hold office for a three-year
term and until their respective successors are elected and qualified.
Management has nominated the following persons for election at the
meeting: Raj Mohindra and Werner Kern.

2. To consider and vote upon a proposal to amend the Company's 1995 Stock
Option Plan to increase the maximum aggregate number of shares reserved
for issuance thereunder by 300,000 and to establish a share grant
limitation.

3. To consider and vote upon a proposal to amend the Company's 1995 Outside
Director Stock Option Plan to increase the maximum aggregate number of
shares reserved for issuance thereunder by 100,000.

4. To approve the issuance of the Company's Common Stock upon the
conversion of up to 2,400 shares of the Series A Convertible Preferred
Stock.

5. To consider a proposal to ratify the appointment of KPMG Peat Marwick
LLP as the Company's independent public accountants for the fiscal year
ending December 31, 1998.

6. To transact such other business as may properly come before the meeting.

Stockholders of record at the close of business on July 7, 1998 are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof.

By order of the Board of Directors,

Abhay Bhushan
Secretary

Mountain View, California
July [ ], 1998

IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY
CARD IN THE ACCOMPANYING POSTPAID ENVELOPE TO ASSURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY CHOOSE TO VOTE IN
PERSON EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY CARD
<PAGE> 3

YIELDUP INTERNATIONAL CORPORATION

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 20, 1998

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................... 1
EXECUTIVE COMPENSATION AND OTHER MATTERS.................... 5
PROPOSAL 1 -- ELECTION OF DIRECTORS......................... 7
PROPOSAL 2 -- AMENDMENT TO THE 1995 STOCK OPTION PLAN....... 7
PROPOSAL 3 -- AMENDMENT TO 1995 OUTSIDE DIRECTORS STOCK
OPTION PLAN................................... 11
PROPOSAL 4 -- APPROVAL OF ISSUANCE OF COMMON STOCK UPON
CONVERSION OF SERIES A CONVERTIBLE
PREFERRED STOCK.......................... 13
PROPOSAL 5 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT
PUBLIC ACCOUNTANTS............................ 16
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL
MEETING................................................... 17
TRANSACTION OF OTHER BUSINESS............................... 17
</TABLE>

i
<PAGE> 4

YIELDUP INTERNATIONAL CORPORATION
117 EASY STREET
MOUNTAIN VIEW, CA 94043
------------------------

PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
------------------------

The accompanying proxy is solicited by the Board of Directors of YieldUP
International Corporation, a Delaware corporation (the "Company"), for use at
the Annual Meeting of Stockholders to be held August 20, 1998, or any
adjournment thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting. The approximate date on which this Proxy Statement and the
accompanying form of proxy were first sent or given to stockholders is [July
], 1998.

GENERAL INFORMATION

Annual Report. An annual report for the fiscal year ended December 31,
1997, is enclosed with this Proxy Statement.

Voting Securities. Only stockholders of record as of the close of business
on July 7, 1998, will be entitled to vote at the meeting and any adjournment
thereof. As of June 1, there were a total of 4,411,391 shares of Common Stock
and a total of 1,364,497 shares of Class A Common Stock of the Company, issued
and outstanding. Stockholders may vote in person or by proxy. Each holder of
shares of Common Stock is entitled to one vote for each such share of stock held
on the proposals presented at the Annual Meeting. Each holder of shares of Class
A Common Stock is entitled to five votes for each such share of stock held on
the proposals presented at the Annual Meeting. The Company's Bylaws provide that
representation in person or by proxy of a third of the outstanding shares shall
constitute a quorum for the transaction of business at the meeting. Abstentions
and broker non-votes will each be counted as present for purposes of determining
a quorum.

Solicitation Of Proxies. The cost of soliciting proxies will be borne by
the Company. The Company may solicit stockholders by mail or through its regular
employees, and may request banks and brokers, and other custodians, nominees,
and fiduciaries, to solicit their customers who have stock of the Company
registered in the names of such persons and will reimburse them for their
reasonable, out-of-pocket costs. The Company may use the services of its
officers, directors, and others to solicit proxies, personally, by facsimile, or
by telephone, without additional compensation. In addition, the Company has
engaged the services of American Stock Transfer and Trust Company to solicit
proxies. The Company will pay a fee for such services, which it reasonably
expects to be no more than $2,000.

Voting Of Proxies. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted in favor of
election of the nominee for director named in these materials and in favor of
the other proposals. A stockholder giving a proxy has the power to revoke his or
her proxy, at any time prior to the time it is voted, by delivery to the
Secretary of the Company of a written instrument revoking the proxy or a duly
executed proxy with a later date, or by attending the meeting and voting in
person.
<PAGE> 5

Stock Ownership Of Certain Beneficial Owners And Management. The following
table sets forth certain information, as of June 1, 1998, with respect to the
beneficial ownership of the Company's Common Stock and Class A Common Stock by,
(i) all persons known by the Company to be the beneficial owners of more than 5%
of the outstanding Common Stock and Class A Common Stock of the Company, (ii)
each director and director-nominee of the Company, (iii) each executive officer
of the Company named in the Summary Compensation Table, and (iv) all executive
officers and directors of the Company as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NUMBER OF SHARES OF SHARES OF PERCENTAGE OF
SHARES OF PERCENTAGE OF CLASS A CLASS A VOTING POWER
NAME AND ADDRESS OF COMMON SHARES OF COMMON COMMON FOR ALL COMMON
BENEFICIAL OWNER(1) STOCK(2) COMMON STOCK(3) STOCK(2) STOCK(3) STOCK
------------------- --------- --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Raj Mohindra............... 10,000 * 980,257(4) 63.7% 40.1%
Abhay Bhushan.............. 96,605(5) 2.2% 262,070(6) 18.4% 11.9%
Suraj Puri................. 65,000(7) 1.5% 172,544(8) 12.2% 8.2%
Ram Paul Gupta............. 30,000(9) * 12,646(10) * *
Werner Kern................ 20,000(11) * -- -- *
All directors and executive
officers as a group (five
(5) persons)............. 221,605(12) 4.87% 1,427,517(13) 94.1% 62.3%
</TABLE>

- ---------------
* Represents less than one percent.

(1) All beneficial owners listed may be reached at 117 Easy Street, Mountain
View, California 94043.

(2) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting, and investment
power is held by the persons named.

(3) Based on 1,364,497 shares of Class A Common Stock and 4,411,391 shares of
Common Stock outstanding as of June 1, 1998, plus shares which may be
acquired by the named person(s) upon exercise of outstanding options
exercisable within 60 days of June 1, 1998. Each share of Class A Common
Stock has five votes, and each share of Common Stock has one vote.

(4) Includes 125,971 shares of Class A Common Stock issuable upon exercise of
options exercisable within 60 days of June 1, 1998. Also includes 44,161
shares held by family members of Mr. Mohindra, but Mr. Mohindra disclaims
beneficial ownership of all such shares except to the extent of any
pecuniary interest therein which he may have.

(5) Includes 90,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of June 1, 1998.

(6) Includes 14,479 shares of Class A Common Stock issuable upon exercise of
options exercisable within 60 days of June 1, 1998. Also includes 43,434
shares of Class A Common Stock held by family members of Mr. Bhushan, but
Mr. Bhushan disclaims beneficial ownership of all such shares except to the
extent of any pecuniary interest therein which he may have.

(7) Includes 40,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of June 1, 1998.

(8) Includes 7,239 shares of Class A Common Stock held by a family member of
Mr. Puri, but Mr. Puri disclaims beneficial ownership of all such shares
except to the extent of any pecuniary interest therein which he may have.

(9) Includes 30,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of June 1, 1998.

(10) Includes 12, 646 shares of Class A Common Stock issuable upon exercise of
options exercisable within 60 days of June 1, 1998.

(11) Includes 20,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of June 1, 1998.

(12) Includes 180,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of June 1, 1998.
2
<PAGE> 6

(13) Includes 153,096 shares of Class A Common Stock issuable upon exercise of
options exercisable within 60 days of June 1, 1998. Also includes 94,834
shares of Class A Common Stock, beneficial ownership of which is
disclaimed. See Footnotes 4, 6, and 8.

Directors. The table below sets forth for the Company's directors,
including the Class II nominee proposed to be elected at this meeting, certain
information with respect to age and background.

<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE DIRECTOR SINCE
---- ------------------------- --- --------------
<S> <C> <C> <C>
CLASS III DIRECTORS TO BE ELECTED AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS
Raj Mohindra.............................. President, Chief Executive Officer, 53 1993
and Director
Werner Kern............................... Director [71] 1997

CLASS I DIRECTORS WHOSE TERM EXPIRES AT THE 1999 ANNUAL MEETING OF STOCKHOLDERS
Ram Paul Gupta............................ Director 59 1995
Suraj Puri................................ Vice President, Chief Technical 54 1993
Officer, and Director

CLASS II DIRECTOR WHOSE TERM EXPIRES AT THE 2000 ANNUAL MEETING OF STOCKHOLDERS
Abhay K. Bhushan.......................... Director 53 1993
</TABLE>

Abhay K. Bhushan co-founded the Company in 1993 and has served as Executive
Vice President and Chief Financial Officer since June 1997, and as a director of
the Company since its inception. He also served as Chief Financial Officer of
the Company from August 1993 until July 1995. From 1996 to 1997, Mr. Bhushan was
co-founder of Portola Communication, a software company, where he served as
Chairman, President, Chief Financial Officer and Vice President Business
Development. From 1974 through 1995, Mr. Bhushan was employed by Xerox
Corporation, where he served in various capacities, including Manager of the
Xerox Environmental Leadership Programs, Manager of Systems Engineering and
Standards and Manager of Business Strategy.

Ram Paul Gupta has served as a director of the Company since July 1995.
From 1992 to the present, Mr. Gupta has served as President, Chief Operating
Officer and Vice President of Operations of Quality Semiconductor, Inc., a
semiconductor manufacturer. From 1988 to 1992, Mr. Gupta served as President of
Blackship Computers, Inc., a systems integration company.

Werner Kern has served as a director of the Company since September 1997.
Mr. Kern is President of Werner Kern Associates, and is the recipient of the
1997 SEMI Award for Process Technology. Mr. Kern is a fellow of the
Electrochemical Society and was chairman of the Society's Dielectric and
Insulation Division.

Raj Mohindra co-founded the Company in 1993 and has served as President,
Chief Executive Officer and a director of the Company since its inception. Prior
to joining the Company, from 1968 to 1993, he worked for IBM where he held a
number of operational, management and technical positions, including head of the
IBM Productivity Competence Center, Manager of Systems Engineering and Senior
Technical Staff Member.

Suraj Puri co-founded the Company in 1993 and has served as Vice President,
Chief Technical Officer and a director of the Company since its inception. Prior
to joining the Company, from 1986 to 1993, Mr. Puri served as an independent
consultant in the semiconductor industry.

Board Meetings. During the fiscal year ended December 31, 1997, the Board
of Directors held six meetings. Each director serving on the Board of Directors
during his respective term in fiscal year 1997 attended at least 75% of the
meetings of the Board of Directors and the Committees on which he served during
such period.

Committees Of The Board. The Board of Directors has an Audit Committee and
a Compensation Committee. The Board of Directors does not have a Nominating
Committee. The members of the Audit Committee at the beginning of fiscal 1997
were Ram Paul Gupta and William W.R. Elder. In May, Mr. Elder was no longer a
member of the Committee and in September, Mr. Kern joined the Committee. The

3
<PAGE> 7

responsibilities of the Audit Committee include the selection of the independent
public accountants, the review of the annual audit, the approval of non-audit
professional services performed by such accountants and the review of the scope
and adequacy of the Company's internal accounting controls. The Audit Committee
met twice during the 1997 fiscal year.

The members of the Compensation Committee at the beginning of fiscal 1997
were Ram Paul Gupta and William W.R. Elder. In May, Mr. Elder was no longer a
member of the Committee and in September, Mr. Kern joined the Committee. The
Compensation Committee met twice during the 1997 fiscal year. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all executive officers of the Company, and administers the Company's
1995 Stock Option Plan.

Director Compensation. Directors of the Company do not receive compensation
for their services as directors other than pursuant to the 1995 Outside
Directors Stock Option Plan (the "Directors Plan"). Under the Directors Plan,
each new director elected who is not an employee of the Company is automatically
granted an option to purchase 20,000 shares of Common Stock upon his election.
Additionally, each outside director, except for outside directors who have
received an initial grant of an option to purchase 20,000 shares within six
months of the Annual Meeting of Stockholders, is automatically granted an option
to purchase 5,000 shares of Common Stock on the date of each Annual Meeting of
Stockholders. The exercise price of the options in all cases shall be equal to
the fair market value of the Common Stock on the date of grant. Options granted
under the Directors Plan are immediately exercisable but vest over four years
and generally must be exercised within ten years. As of December 31, 1997,
options had been granted under the Directors Plan to Messrs. Bhushan and Gupta
for 30,000 shares each and to Mr. Kern for 20,000 shares. Effective as of August
20, 1998, the date of the 1998 Annual Meeting of Stockholders, Mr. Gupta and Mr.
Kern will each be automatically granted an additional option to purchase 5,000
shares of Common Stock.

EXECUTIVE COMPENSATION AND OTHER MATTERS

The following table sets forth the aggregate base salary and bonuses paid
by the Company for services rendered during 1995, 1996 and 1997 to the Company's
chief executive officer and the other executive officers (the "Named Executive
Officers") who earned more than $100,000 in any of these years. In 1995 no
executive officer of the Company received in excess of $100,000 compensation for
services rendered to the Company.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ------------
-------------------------------- SECURITIES
ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
--------------------------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C>
Raj Mohindra................................... 1995 $ 84,000 -- 125,971
President and Chief Executive 1996 $138,459 $5,400(1) --
Officer 1997 $159,045 $7,200(1) --
Abhay Bhushan.................................. 1997 $ 67,721 $4,200(1) 60,000
Executive Vice President and
Chief Financial Officer(2)
Suraj Puri..................................... 1997 $ 98,242 $4,200(1) --
Vice President and Chief
Technical Officer
</TABLE>

- ---------------
(1) Represents automobile allowance payments.

(2) Mr. Bhushan became an employee of the company in June 1997.

4
<PAGE> 8

STOCK OPTION INFORMATION

The following table contains information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1997.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE($/SH) DATE
---- --------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
Raj Mohindra............................... -- -- -- --
Abhay Bhushan(1)........................... 60,000 20.4% $9.66 6/3/07
Suraj Puri................................. -- -- -- --
</TABLE>

- ---------------
(1) This does not include 30,000 options granted to Mr. Bhushan for being a
non-employee Director of the Company, prior to his employment at the
Company, in accordance with the Directors Plan.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table sets forth, for the Named Executive Officers, the
shares acquired and the value realized on exercise of stock options during the
year ended December 31, 1997 and the year-end number and value of exercisable
and unexercisable options.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raj Mohindra......... -- -- 125,971 -- $1,100,987 --
Abhay Bhushan........ -- -- 30,000 -- --
</TABLE>

- ---------------
(1) The fiscal year-end value of "in-the-money" stock options represents the
difference between the exercise price of such options and the fair market
value of the Company's Common Stock as of December 31, 1997. None of the
options held by Mr. Mohindra were "in-the-money" on December 31, 1997.

The Company does not have employment agreements with any of its executive
officers or directors.

COMPENSATION OF DIRECTORS

From time to time, directors have received grants of options to purchase
the Company's Common Stock. Directors who are not employees of the Company
receive yearly grants of options to purchase Common Stock under the Directors
Plan. The Company does not pay additional amounts for committee participation or
special assignments of the Board of Directors.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

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 Securities and Exchange Commission (the
"Commission") 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 Commission
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 representation that no other
reports were required, all Section 16(a) filing requirements

5
<PAGE> 9

applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with during the year ended December 31, 1997, except for
Mr. Bhushan who was late with respect to one report.

PROPOSAL 1

ELECTION OF DIRECTORS

The Company has a classified Board of Directors currently consisting of two
Class I directors (Ram Paul Gupta and Suraj Puri), one Class II director (Abhay
K. Bhushan), and two Class III directors (Raj Mohindra and Werner Kern), who
will serve until the Annual Meetings of Stockholders to be held in 1998, 1999
and 2000, respectively, and until their respective successors are duly elected
and qualified. Directors in a class are elected for a term of three years to
succeed the directors in such class whose terms expire at such annual meeting.
See "GENERAL INFORMATION -- Directors."

Management's nominees for election as Class III Board of Directors are Ray
Mohindra and Werner Kern. If elected, the nominees will serve as directors until
the Company's Annual Meeting of Stockholders in 2001, and until their successors
are elected and qualified. If a nominee declines to serve or becomes unavailable
for any reason, or if a vacancy occurs before the election, the proxies may be
voted for such substitute nominee as the Board of Directors may designate.

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION

If a quorum is present, either in person or by proxy the two nominees for
the positions as Class III directors receiving the highest number of votes will
be elected. Abstentions will have the same effect as a negative vote. Broker
non-votes will have no effect on the vote. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED ABOVE.

PROPOSAL 2

AMENDMENT TO THE 1995 STOCK OPTION PLAN

The Company's 1995 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors in July 1995. As of June 1, 1998, only 77,871 shares remained
available for future option grants under the Option Plan. The Board of Directors
believes this amount is insufficient to satisfy the Company's anticipated equity
incentive objectives. Accordingly, on [ ], 1998 the Board of
Directors approved, subject to stockholder approval, the reservation of an
additional 300,000 shares for issuance under the Option Plan.

The Internal Revenue Code of 1986, as amended (the "Code") limits the
amount of compensation paid to a corporation's chief executive officer and four
other most highly compensated officers that the corporation may deduct as an
expense for Federal income tax purposes. To enable the Company to continue to
deduct in full all amounts of ordinary income recognized by its executive
officers in connection with options granted under the Option Plan, the Board of
Directors has amended the Option Plan, subject to stockholder approval, to limit
to 250,000 the maximum number of shares for which options may be granted to any
employee in any fiscal year (the "Grant Limit"). However, the Company's stock
option grants typically do not approach this limit.

The stockholders are now being asked to approve the increase from 750,000
to 1,050,000 shares as the maximum aggregate number of shares that may be issued
under the Option Plan and the establishment of the Grant Limit. The Board of
Directors believes that approval of these amendments is in the best interests of
the Company and its stockholders because the availability of an adequate stock
option program is an important factor in attracting, motivating and retaining
qualified officers, employees and consultants essential to the success of the
Company and in aligning their long-term interests with those of the
stockholders.

6
<PAGE> 10

SUMMARY OF THE PROVISIONS OF THE OPTION PLAN

The following summary of the Option Plan is qualified in its entirety by
the specific language of the Option Plan, a copy of which is available to any
stockholder upon request.

General. The Option Plan provides for the grant of incentive stock options
within the meaning of section 422 of the Code, and nonstatutory stock options.

Shares Subject to Plan. A maximum of 750,000 shares of the authorized but
unissued Common Stock of the Company may be issued upon the exercise of options
granted pursuant to the Option Plan. If the amendment to the Option Plan is
approved by the stockholders at the 1998 Annual Meeting of Stockholders, an
additional 300,000 shares may be issued upon exercise of options granted
pursuant to the Option Plan. In the event of any stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or similar
change in the capital structure of the Company, appropriate adjustments will be
made to the shares subject to the Option Plan and to outstanding options. To the
extent any outstanding option under the Option Plan expires or terminates prior
to exercise in full or if shares issued upon exercise of an option are
repurchased by the Company, the shares of Common Stock for which such option is
not exercised or the repurchased shares are returned to the Option Plan and
become available for future grant.

Administration. The Option Plan is administered by the Board of Directors
or a duly appointed committee of the Board of Directors. The Option Plan
provides that with respect to the participation of individuals whose
transactions in the Company's equity securities are subject to Section 16 of the
Exchange Act, the Option Plan must be administered in compliance with the
requirements of Rule 16b-3 under the Exchange Act. Subject to the provisions of
the Option Plan, the Board of Directors determines the persons to whom options
are to be granted, the number of shares to be covered by each option, whether an
option is to be an incentive stock option or a nonstatutory stock option, the
timing and terms of exercisability of each option or the vesting of shares
acquired upon the exercise of an option, including the effect thereon of an
optionee's termination of service, the exercise price of and the type of
consideration to be paid to the Company upon the exercise of each option, the
duration of each option, and all other terms and conditions of the options. The
Option Plan authorizes the Board of Directors to amend, modify, extend, renew,
or grant a new option in substitution for, any option, to waive any restrictions
or conditions applicable to any option or any shares acquired upon the exercise
thereof, and to accelerate, continue, extend or defer the exercisability of any
option or the vesting of any shares acquired upon the exercise of an option,
including with respect to the period following an optionee's termination of
service with the Company. The Option Plan also provides, subject to certain
limitations, for indemnification by the Company of any director, officer or
employee against all reasonable expenses, including attorneys' fees, incurred in
connection with any legal action arising from such person's action or failure to
act in administering the Option Plan. The Board of Directors will interpret the
Option Plan and options granted thereunder, and all determinations of the Board
of Directors will be final and binding on all persons having an interest in the
Option Plan or any option.

Eligibility. All employees, directors and consultants of the Company or of
any present or future parent or subsidiary corporations of the Company are
eligible to participate in the Option Plan. The Option Plan provides that no
director serving on a committee intended to administer the plan in compliance
with Rule 16b-3 under the Exchange Act may be granted an option. In addition,
the Option Plan permits options to be granted to prospective employees and
consultants in connection with written offers of employment or engagement.
However, any such options may not become exercisable prior to such individual's
commencement of service. Any person eligible under the Option Plan may be
granted a nonstatutory option. However, only employees may be granted incentive
stock options.

Terms and Conditions of Options. Each option granted under the Option Plan
is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the Option Plan.
The exercise price per share must equal at least the fair market value of a
share of the Company's Common Stock on the date of grant of an incentive stock
option and at least 85% of the fair market value of a share of the Common Stock
on the date of grant of a nonstatutory stock option. The Option Plan provides
that the exercise price of any incentive stock option granted to a person who at
the time of grant owns stock possessing more than 10%
7
<PAGE> 11

of the total combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation of the Company (a "Ten Percent Stockholder")
must be at least 110% of the fair market value of a share of the Company's
Common Stock on the date of grant.

Under the Option Plan, the option exercise price may be paid in cash, by
check, or in cash equivalent, by tender of shares of the Company's Common Stock
owned by the optionee having a fair market value not less than the exercise
price, by the assignment of the proceeds of a sale or loan with respect to some
or all of the shares of Common Stock being acquired upon the exercise of the
option, by means of a recourse promissory note, or by any combination of these
or any other lawful consideration approved by the Board of Directors. The Board
of Directors may restrict the forms of payment permitted in connection with any
option grant.

Options granted under the Option Plan become exercisable and vested at such
times and subject to such conditions as specified by the Board of Directors.
Generally, options granted under the Option Plan are exercisable on and after
the date of grant, subject to the right of the Company to reacquire at the
optionee's exercise price any unvested shares held by the optionee upon
termination of employment or service with the Company or if the optionee
attempts to transfer any unvested shares. Shares subject to options generally
vest in installments subject to the optionee's continued employment or service.
The Option Plan provides that the maximum term of an incentive stock option is
ten years unless granted to a Ten Percent Stockholder, in which case the maximum
term is five years. The Option Plan does not limit the term of a nonstatutory
stock option. Options are nontransferable by the optionee other than by will or
by the laws of descent and distribution, and are exercisable during the
optionee's lifetime only by the optionee.

Transfer of Control. The Option Plan provides that, in the event of (i) a
sale or exchange by the stockholders of more than 50% of the Company's voting
stock, (ii) a merger or consolidation in which the Company is a party, (iii) the
sale, exchange or transfer of all or substantially all of the assets of the
Company, or (iv) a liquidation or dissolution of the Company wherein, upon any
such event, the stockholders of the Company immediately before such event do not
retain direct or indirect beneficial ownership of at least 50% of the total
combined voting power of the voting stock of the Company, its successor, or the
corporation to which the assets of the Company were transferred (a "Transfer of
Control"), the acquiring or successor corporation may assume the Company's
rights and obligations under outstanding options or substitute substantially
equivalent options for such corporation's stock. To the extent that the options
outstanding under the Option Plan are not assumed, substituted for, or exercised
prior to the Transfer of Control, they will terminate.

Termination or Amendment. The Option Plan will continue in effect until the
earlier of its termination by the Board of Directors or the date on which all
shares available for issuance under the Option Plan have been issued and all
restrictions on such shares under the terms of the Option Plan and the option
agreements have lapsed, provided that all incentive stock options must be
granted within ten years of July 26, 1995, the date on which the Board of
Directors approved the Option Plan. The Option Plan further provides that the
period for granting incentive stock options will be extended to a period of ten
years following any subsequent approval of an increase in the maximum number of
shares issuable under the Option Plan. The Board of Directors may terminate or
amend the Option Plan at any time, but, without stockholder approval, the Board
of Directors may not amend the Option Plan to increase the total number of
shares of Common Stock issuable thereunder, change the class of persons eligible
to receive incentive stock options, or expand the class of persons eligible to
receive nonstatutory stock options. No amendment may adversely affect an
outstanding option without the consent of the optionee, unless the amendment is
required to preserve the option's status as an incentive stock option or is
necessary to comply with any applicable law.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION PLAN.

The following summary is intended only as a general guide as to the United
States Federal income tax consequences under current law of participation in the
Option Plan and does not attempt to describe all possible Federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.

Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an
incentive stock option qualifying under section 422 of the Code.
8
<PAGE> 12

Optionees who do not dispose of their shares for two years following the date
the option was granted nor within one year following the exercise of the option
will normally recognize a long-term capital gain or loss equal to the
difference, if any, between the sale price and the purchase price of the shares.
If an optionee satisfies such holding periods upon a sale of the shares, the
Company will not be entitled to any deduction for Federal income tax purposes.
If an optionee disposes of shares within two years after the date of grant or
within one year from the date of exercise (a "disqualifying disposition"), the
difference between the fair market value of the shares on the determination date
(see discussion under "Nonstatutory Stock Options" below) and the option
exercise price (not to exceed the gain realized on the sale if the disposition
is a transaction with respect to which a loss, if sustained, would be
recognized) will be taxed as ordinary income at the time of disposition. Any
gain in excess of that amount will be a capital gain. If a loss is recognized,
there will be no ordinary income, and such loss will be a capital loss. A
capital gain or loss will be long-term if the optionee's holding period is more
than 12 months. Any ordinary income recognized by the optionee upon the
disqualifying disposition of the shares generally should be deductible by the
Company for Federal income tax purposes, except to the extent such deduction is
limited by applicable provisions of the Code or the regulations thereunder.

The difference between the option exercise price and the fair market value
of the shares on the determination date of an incentive stock option (see
discussion under "Nonstatutory Stock Options" below) is an adjustment in
computing the optionee's alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.

Nonstatutory Stock Options. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options. Nonstatutory stock
options have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the determination date (as defined below). If the
optionee is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. The "determination date" is the date
on which the option is exercised unless the shares are subject to a substantial
risk of forfeiture and are not transferable, in which case the determination
date is the earlier of (i) the date on which the shares are transferable or (ii)
the date on which the shares are not subject to a substantial risk of
forfeiture. If the determination date is after the exercise date, the optionee
may elect, pursuant to Section 83(b) of the Code, to have the exercise date be
the determination date by filing an election with the Internal Revenue Service
not later than 30 days after the date the option is exercised. Upon the sale of
stock acquired by the exercise of a nonstatutory stock option, any gain or loss,
based on the difference between the sale price and the fair market value on the
determination date, will be taxed as capital gain or loss. A capital gain or
loss will be long-term if the optionee's holding period is more than 12 months.
No tax deduction is available to the Company with respect to the grant of a
nonstatutory option or the sale of the stock acquired pursuant to such grant.
The Company generally should be entitled to a deduction equal to the amount of
ordinary income recognized by the optionee as a result of the exercise of a
nonstatutory option, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.

CHANGES TO BENEFIT PLANS

1995 Stock Option Plan. The Board of Directors of the Company has adopted,
subject to stockholder approval, an amendment to the Option Plan to increase the
maximum number of shares that may be issued thereunder by 300,000 shares. See
"PROPOSAL TO AMEND THE 1995 STOCK OPTION PLAN." As of June 1, 1998, no grant of
options had been made to any person conditioned upon stockholder approval of the
increase in the share reserve of the Option Plan.

Information regarding options granted under the Option Plan to the Named
Executive Officers is set forth in the Section "EXECUTIVE COMPENSATION AND OTHER
MATTERS." The executive
9
<PAGE> 13

officers as a group were granted 100,000 options under the Option Plan. Each
option granted to an executive officer under the Option Plan was granted at a
weighted average exercise price of $9.70 per option. The non-executive directors
as a group were not granted any options under the Option Plan. The non-executive
officer employees as a group were granted an aggregate of 831,550 options under
the Option Plan at a weighted average exercise price of $8.20 per option.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION.

The Board of Directors believes that approval of the increase in the number
of shares issuable under the Option Plan and the establishment of the Grant
Limit is in the best interests of the Company and the stockholders for the
reasons stated above. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE "FOR" APPROVAL OF THE INCREASE IN THE SHARE RESERVE OF THE 1995 STOCK
OPTION PLAN AND THE ESTABLISHMENT OF THE GRANT LIMIT.

PROPOSAL 3

AMENDMENT TO 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN

The Company's 1995 Outside Directors Stock Option Plan (the "Directors
Plan") was adopted by the Board of Directors in August 1995. As of June 1, 1998,
only 10,000 shares remained available for future option grants under the
Directors Plan. The Board of Directors believes this amount is insufficient to
satisfy the Company's anticipated equity incentive objectives. Accordingly, on
[ ], 1998 the Board of Directors approved, subject to stockholder
approval, the reservation of an additional 100,000 shares for issuance under the
Directors Plan.

The stockholders are now being asked to approve the increase from 100,000
to 200,000 shares as the maximum aggregate number of shares that may be issued
under the Directors Plan. The Board of Directors believes that approval of this
amendment is in the best interests of the Company and its stockholders because
the availability of an adequate stock option program is an important factor in
attracting, motivating and retaining qualified directors essential to the
success of the Company and in aligning their long-term interests with those of
the stockholders.

SUMMARY OF THE PROVISIONS OF THE DIRECTORS PLAN

The following summary of the Directors Plan is qualified in its entirety by
the specific language of the Directors Plan, a copy of which is available to any
stockholder upon request.

General. The Directors Plan provides for the automatic grant of
nonstatutory stock options to nonemployee directors of the Company and is
intended to qualify as a "formula plan" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934.

Shares Subject to Plan. A maximum of 100,000 shares of the authorized but
unissued or reacquired shares of the Common Stock of the Company may be issued
upon the exercise of options granted pursuant to the Directors Plan. In the
event of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure of the
Company, appropriate adjustments will be made to the shares subject to the
Directors Plan, to the terms of automatic option grants under the plan, and to
outstanding options. To the extent that any outstanding option under the
Directors Plan expires or terminates prior to exercise in full or if shares
issued upon the exercise of an option are repurchased by the Company, the shares
of Common Stock for which such option is not exercised or the repurchased shares
are returned to the plan and become available for future grants.

10
<PAGE> 14

Administration. The Directors Plan is administered by the Board of
Directors of Directors or a duly appointed committee of the Board of Directors.
However, the Board of Directors has no discretion to select the nonemployee
directors of the Company who are granted options under the Directors Plan, to
set the exercise price of such options, to determine the number of shares for
which or the time at which particular options are granted or to establish the
duration of such options. The Directors Plan provides, subject to certain
limitations, for indemnification by the Company of any director, officer or
employee against all reasonable expenses, including attorneys' fees, incurred in
connection with any legal action arising from such person's action or failure to
act in administering the Directors Plan. The Board of Directors is authorized to
interpret the Directors Plan and options granted thereunder, and all
determinations of the Board of Directors will be final and binding on all
persons having an interest in the Directors Plan or any option.

Eligibility. Only directors of the Company who are not at the time of
option grant employees of the Company or of any parent or subsidiary corporation
of the Company (the "Outside Directors") are eligible to participate in the
Directors Plan. Currently, the Company has two Outside Directors.

Automatic Grant of Options. The Directors Plan provides that each Outside
Director first elected or appointed to the Board of Directors will be granted
automatically, on the date of such initial election or appointment, an option to
purchase 20,000 shares of Common Stock (an "Initial Option"). The Directors Plan
also provides for the automatic annual grant, on the date of each annual meeting
of the stockholders of the Company, of an additional option to purchase 5,000
shares of Common Stock (an "Annual Option") to each Outside Director who has
served continuously as a member of the Board of Directors of Directors for more
than six months.

Terms and Conditions of Options. Each option granted under the Directors
Plan will be evidenced by a written agreement between the Company and the
Outside Director specifying the number of shares subject to the option and the
other terms and conditions of the option, consistent with the requirements of
the Directors Plan. The exercise price of any option granted under the Directors
Plan must equal the fair market value, as determined pursuant to the plan, of a
share of the Company's Common Stock on the date of grant. Generally, the fair
market value of the Common Stock will be the closing price per share on the date
of grant as reported on the Nasdaq SmallCap Market. No option granted under the
Directors Plan is exercisable after the expiration of 10 years after the date
such option is granted, subject to earlier termination in the event the
optionee's service with the Company ceases or in the event of a Transfer of
Control of the Company, as discussed below. Initial Options granted under the
Directors Plan will become vested and exercisable in installments, with 1/4 of
the shares subject to the option becoming exercisable one year after the date of
grant, and the remainder becoming exercisable at the rate of 1/48 per month
thereafter. Annual Options will become vested and exercisable in 12 monthly
installments, with the first such installment becoming exercisable on the date
37 months after the date of grant.

Generally, the exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares of Common Stock being acquired upon the exercise of the option, or by any
combination of these. During the lifetime of the optionee, the option may be
exercised only by the optionee. An option may not be transferred or assigned,
except by will or the laws of descent and distribution.

Transfer of Control. The Directors Plan provides that, in the event of (i)
a sale or exchange by the stockholders of more than 50% of the Company's voting
stock, (ii) a merger or consolidation in which the Company is a party, (iii) the
sale, exchange or transfer of all or substantially all of the assets of the
Company, or (iv) a liquidation or dissolution of the Company wherein, upon any
such event, the stockholders of the Company immediately before such event do not
retain direct or indirect beneficial ownership of at least 50% of the total
combined voting power of the voting stock of the Company, its successor, or the
corporation to which the assets of the Company were transferred (a "Transfer of
Control"), all options outstanding under the Directors Plan will become
immediately exercisable and vested in full ten days prior to the Transfer of
Control. In addition, the acquiring or successor corporation may assume or
substitute substantially equivalent options for the options outstanding under
the Directors Plan. To the extent that the options outstanding under

11
<PAGE> 15

the Directors Plan are not assumed, substituted for, or exercised prior to the
Transfer of Control, they will terminate.

Termination or Amendment. The Directors Plan will continue until terminated
by the Board of Directors or until all of the shares reserved for issuance under
the plan have been issued. The Board of Directors may terminate or amend the
Directors Plan at any time, but, without stockholder approval, the Board of
Directors may not amend the Directors Plan to increase the total number of
shares of Common Stock reserved for issuance thereunder or expand the class of
persons eligible to receive options. The provisions of the Directors Plan
addressing eligibility to participate in the plan and the amount, price and time
of the grant of options may not be amended more than once every six months,
other than to comport to changes in the Code, the Employee Retirement Income
Security Act of 1974, or the rules thereunder. No termination or amendment of
the Directors Plan may adversely affect an outstanding option without the
consent of the optionee, unless such termination or amendment is necessary to
comply with any applicable law.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTORS PLAN.

For a description of the United States Federal income tax consequences
under current law of nonstatutory stock options granted under the Directors
Plan, please see the discussion above under "PROPOSAL 2 AMENDMENT TO THE 1995
STOCK OPTION PLAN -- Summary of United States Federal Income Tax Consequences of
the Option Plan."

CHANGES TO BENEFIT PLANS.

1995 Directors Plan. The Board of Directors of the Company has adopted,
subject to stockholder approval, an amendment to the Directors Plan to increase
the maximum number of shares that may be issued thereunder by 100,000 shares. As
of June 1, 1998, no grant of options had been made to any person conditioned
upon stockholder approval of the increase in the share reserve of the Directors
Plan.

Only non-employee directors are granted options under the Directors Plan.
The non-executive directors as a group were granted an aggregate of 90,000
options under the Directors Plan at a weighted average exercise price of $7.46
per option. In addition, Mr. Bhushan received 30,000 options under the Directors
Plan, prior to becoming Executive Vice President and Chief Financial Officer at
a weighted average exercise price of $6.42 per option.

VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION.

The Board of Directors believes that approval of the increase in the number
of shares issuable under the Directors Plan is in the best interests of the
Company and the stockholders for the reasons stated above. THEREFORE, THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE INCREASE IN THE
SHARE RESERVE OF THE 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN.

PROPOSAL 4

APPROVAL OF ISSUANCE OF COMMON STOCK UPON
CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK

At the Annual Meeting, the stockholders will be asked to approve the
issuance of shares of the Company's Common Stock upon the conversion of up to
2,400 shares of the Company's Series A Convertible Preferred Stock (the "Series
A Shares").

12
<PAGE> 16

On March 30, 1998, the Company completed the initial closing (the "Initial
Closing") of a privately placed equity financing of Series A Convertible
Preferred Stock (the "Series A Shares") pursuant to a Securities Purchase
Agreement (the "Purchase Agreement") with seven (7) investors (the "Investors").
At the Initial Closing, the Company raised gross proceeds of $6 million through
the sale of 600 Series A Shares. After the satisfaction of certain holding
periods, each Series A Share is convertible, at the option of its holder, into
shares of Common Stock of the Company based upon a conversion price equal to the
lower of (i) 110% of the lowest closing market price of the Company's Common
Stock on the date the Series A Shares were issued ($10.8625 for the Series A
Shares issued at the Initial Closing) or (ii) the lowest closing market price of
the Company's Common Stock during the 20 consecutive trading days immediately
preceding the date of conversion.

Subject to various additional conditions, including, but not limited to,
approval of the Company's stockholders, the Company has the option ("Company Put
Option") to require the Investors to purchase additional Series A Shares, and
the Investors have the right to require that the Company sell to them additional
Series A Shares ("Investor Call Option"). The maximum number of additional
Series A Shares which the Company may require the Investors to purchase is 600
Series A Shares, for an additional purchase price of $6 million. Subject to
certain conditions, the Investors may require that the Company sell to them
pursuant to the Investor Call Option a maximum of 600 additional Series A Shares
(1,200 if the Company exercises its right to sell the maximum number of shares
pursuant to the Company Put Option) for a purchase price of $10,000 per share.
The Series A Shares issued upon exercise of the Company Put Option or the
Investor Call Option will have the same terms and rights as the Series A Shares
issued at the Initial Closing.

Notwithstanding the above, in order to comply with the rules of the Nasdaq
Stock Market which require stockholder approval for issuances of 20% or more of
the Company's outstanding stock, the number of shares of the Company's Common
Stock issuable pursuant to this financing cannot exceed 20% of the Company's
outstanding Common Stock unless the Company obtains the approval of the
Company's stockholders.

TERMS OF THE SERIES A SHARES.

The following is a summary of the rights, preferences and privileges of the
Series A Shares and the rights granted pursuant to the Purchase Agreement, the
Certificate of Designation for Series A Preferred Stock (the "Certificate of
Designation"), and the Registration Rights Agreement for the Series A Preferred
Stock.

Dividends. The Series A Shares do not bear cash dividends. However, the
Series A shares have a 5 percent cumulative annual dividend payable in Common
Stock upon conversion.

Voting Rights. The holders of the Series A Shares shall have no voting
rights, except as required by law. However, the affirmative vote of the holders
of the Series A Shares at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Series A Shares, shall be required for (a) any change to
the Certificate of Designation or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Series A Shares, or (b) any issuance of Series A
Shares other than pursuant to the Purchase Agreement.

Liquidation Preference. Upon any liquidation, dissolution or winding up of
the affairs of the Company, the holder of each Series A Share shall be entitled
to be paid an amount per share equal to (i) $12,000 and (ii) an amount equal to
the product of (.05)(N/365)($12.00) out of the assets of the Company where "N"
equals the number of days since the initial issuance of such shares. If the
assets of the Company upon such event are insufficient to make such payment in
full, then the holders of Series A Shares shall be entitled to pro rata
distribution, along with holders of other preferred stock that are pari passu
with the holders of Series A Shares, of all the assets of the Company. After
payment in full of the liquidation preference to the holders of Series A Shares,
such holders are entitled to no further distributions.

Conversion. The Series A Shares are convertible into shares of Common Stock
at the election of the holder of such Series A Shares, at a price (the
"Conversion Rate") equal to the lower of 110% of the market price at the
original date of issuance of such share (the "Fixed Conversion Price") or the
lowest market price

13
<PAGE> 17

during the 20 consecutive days immediately preceding the date a holder of Series
A Shares delivers notice of his election to convert such shares. The Series A
Shares have a 5% annual cumulative dividend payable in Common Stock which is
reflected in the conversion formula. "Market price" is generally determined by
the closing price for the Company's Common Stock on the applicable date.

As an example, using the Fixed Conversion Price, and assuming that the
Series A Shares had been held for one year such that the holder was entitled to
a 5% dividend payable in shares of Common Stock upon conversion, the formula for
conversion would be:

Therefore, one Series A Share would convert to 967 shares of the Company's
Common Stock.

The Investor(s) may convert, in aggregate, only up to a maximum of a
specified percentage of the Series A Shares according to the following schedule:

<TABLE>
<CAPTION>
DAYS FROM % OF SHARES
CLOSING CONVERTIBLE
--------- -----------
<S> <C>
1 through 90................................... 0
91 through 135.................................. 20
136 through 180.................................. 40
181 through 225.................................. 60
226 through 270.................................. 80
271 through term................................. 100
</TABLE>

Notwithstanding the foregoing, the conversion restrictions set forth above
shall not apply (x) if there shall have occurred a Material Adverse Change (as
defined below), (y) with respect to any conversion of Series A Shares at a
Conversion Price which is not less than the Fixed Conversion Price then in
effect, or (z) if there is an announcement of a pending Major Transaction (as
defined below). "Material Adverse Change" means any change, event, result or
happening involving, directly or indirectly, the Company or any of its
subsidiaries resulting in a material adverse effect on the business, prospects,
financial condition or results or operations of the Company and its
subsidiaries, taken as a whole, including, without limitation, an event
constituting a Major Transaction or a Triggering Event (as defined below) shall
have occurred or the Company shall have been notified by the exchange or
automated quotation system on which the Common Stock trades that it is beginning
or has begun proceedings or steps to delist or suspend the Common Stock from
trading on such market.

"Major Transaction" shall be deemed to have occurred at such time as any of
the following events:

(i) the consolidation, merger or other business combination of the
Company with or into another Person (other than (A) a consolidation, merger
or other business combination in which holders of the Company's voting
power immediately prior to the transaction continue after the transaction
to hold, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity
or entities or (B) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company) (a
"Change of Control Transaction");

(ii) the sale or transfer of all or substantially all of the Company's
assets; or

(iii) a purchase, tender or exchange offer made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock.

A "Triggering Event" shall be deemed to have occurred at such time as any
of the following events:

(i) the failure of the Registration Statement required to be filed by
the Company pursuant to the Registration Rights Agreement to be declared
effective by the Commission on or prior to the date that is 180 days after
the Initial Issuance Date;

14
<PAGE> 18

(ii) while the Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Series A Shares for sale in accordance
with the terms of the Registration Rights Agreement, and such lapse or
unavailability continues for a period of ten consecutive trading days,
provided that the cause of such lapse or unavailability is not due to
factors solely within the control of such holder of Series A Shares;

(iii) suspension from listing or delisting of the Common Stock from
the Nasdaq SmallCap Market, The Nasdaq National Market or The New York
Stock Exchange, Inc. for a period of five consecutive days;

(iv) the Company's notice to any holder of Series A Shares, including
by way of public announcement, at any time, of its intention not to comply
with proper requests for conversion of any Series A Shares into shares of
Common Stock, or the Company's failure to deliver the Common Stock within
fifteen days of the conversion date; or

(v) the Company breaches any representation, warranty or covenant of
the Purchase Agreement, the Registration Rights Agreement, the Certificate
of Designation or the Irrevocable Transfer Agent Instructions (as defined
in the Purchase Agreement), except to the extent that such breach would not
have a material adverse effect and except, in the case of a breach of a
covenant which is curable, only if such breach continues for a period of at
least ten days.

Any Series A Shares outstanding three years after the date such shares were
initially issued (the "Mandatory Conversion Date") will automatically convert
into shares of the Company's Common Stock at the then applicable Conversion
Rate.

Notwithstanding the foregoing, if the Common Stock is not designated for
quotation on the Nasdaq SmallCap Market, the Nasdaq National Market or listed on
The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. but such
events do not constitute a Triggering Event, then the Mandatory Conversion Date
shall be extended until the Common Stock is so designated or listed.

Adjustments to Conversion Rate. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other similar
change to the capital stock of the Company as well as other adjustments upon the
issuance, or deemed issuance, of other shares of Common Stock at a price below
the then effective Fixed Conversion Price.

Mandatory Conversion. After the Company publicly discloses a Change of
Control Transaction, the Company shall have the right to require that all of the
outstanding Series A Shares be converted to Common Stock. To exercise this right
the Company must substantially meet the following conditions: (i) the
Registration Statement shall be effective and available for the sale of the
number of shares of Common Stock then issuable upon the conversion of all
outstanding Series A Shares; (ii) the Common Stock is designated for quotation
on The Nasdaq National Market or the Nasdaq SmallCap Market or listed on The New
York Stock Exchange, Inc. and is not suspended from trading; (iii) the Company
shall have delivered shares of Common Stock upon conversion of the Series A
Shares to the holders on a timely basis; and (iv) the Company otherwise has
satisfied its obligations in all material respects and is not in default in any
material respect under this Certificate of Designation, the Purchase Agreement
and the Registration Rights Agreement.

Redemption. The holders of Series A Shares have a right to require the
Company to redeem the Series A Shares upon the occurrence of a Major
Transaction, or a Triggering Event.

Registration Rights. The Company is obligated to promptly (and in any event
prior to April 30, 1998) file a registration statement (the "Registration
Statement") with the Commission to cover the resale of the Company's Common
Stock issuable upon the conversion of the Series A Shares. The Company is
obligated to use its reasonable best efforts to have the Registration Statement
declared effective by the Commission and remain effective until the Company's
Common Stock subject to the Registration Statement may otherwise be freely
traded without registration. The Company is also obligated to list such shares
on the Nasdaq SmallCap Market and to take certain actions to comply with
applicable state securities laws and regulations.

15
<PAGE> 19

CLOSING AND OPTIONS.

The Initial Closing of the sale of Series A Shares took place on March 30,
1998. At the Initial Closing, 600 Series A Shares were issued for aggregate
gross proceeds of $6 million.

Company Put Option. Beginning 180 days after the earlier of (x) the
effective date of the Registration Statement; or (y) 120 days after the Initial
Closing, the Company may require that the Investors purchase up to 600
additional Series A Shares, for a purchase price of $6 million, (pro rata per
Investor) under the same terms and conditions as the initial issuance of Series
A Shares. The Company's ability to exercise such option is subject to the terms
and conditions of the Purchase Agreement which requires, among other things,
that: (i) the Company has obtained stockholder approval for the issuance of
additional securities, (ii) the Registration Statement has been effective for at
least 60 consecutive calendar days; (iii) the Company's Common Stock has not
been delisted from the Nasdaq SmallCap Market and/or suspended from trading;
(iv) there has been neither a Major Transaction nor a Triggering Event; (v)
certain tests are met regarding minimum average daily trading price in the
Company's Common Stock; (vi) the Company has performed its obligations under the
Certificate of Designation; and (vii) a put closing date has not occurred
previously.

Investor Call Option. At any date which is 210 days from the Initial
Closing through the Mandatory Conversion Date, as defined in the Certificate of
Designation, each Investor has a right, subject to the terms and conditions of
the Purchase Agreement and payment for the additional Series A Shares, to
require the Company to issue and sell to each such Investor up to two times as
many Series A Shares as the Investor had initially purchased. Any Investor may
only exercise this right twice.

LIMITATIONS ON CONVERSION AND EXERCISE.

The Purchase Agreement provides that the number of shares of the Company's
Common Stock issuable upon conversion of the Series A Shares cannot exceed 20%
of the outstanding shares of the Company's Common Stock without the approval of
the stockholders of the Company. Likewise, the number of shares of the Company's
Common Stock issuable from to time to any single Investor cannot exceed 4.99% or
more of the Company's outstanding Common Stock.

EFFECT ON RIGHTS OF EXISTING SECURITY HOLDERS.

There is no change to the rights, preferences or privileges of the holders
of the Company's Common Stock as a result of the transactions which are the
subject of the Purchase Agreement. However, in addition to the dilutive impact
of the issuance of additional shares of capital stock, the Series A Shares have
a liquidation preference which entitles the holders thereof to receive payment
upon any dissolution or liquidation of the Company in preference to the holders
of Common Stock. The amount of such preference is equal to $12,000 plus an
amount equal to the product of (.05)(N/365)($12,000) for each of the Series A
Shares where "N" is the number of days since the initial issuance of such
shares.

VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION.

The affirmative vote of a plurality of the votes cast at the Annual Meeting
of Stockholders, at which a quorum is present and voting, either in person or by
proxy, is required for approval of this proposal. Abstentions will have the same
effect as a negative vote. Broker non-votes will have no effect on the outcome
of the vote.

The Board of Directors believes that the approval of the issuance of Common
Stock upon conversion of the Series A Shares is in the best interests of the
stockholders and the Company for the reasons stated above. THEREFORE, THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ISSUANCE OF
COMMON STOCK UPON CONVERSION OF THE SERIES A SHARES.

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PROPOSAL 5

RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors of the Company has selected KPMG Peat Marwick LLP as
its independent accountants to audit the financial statements of the Company for
the fiscal year ended December 31, 1998. KPMG Peat Marwick LLP has acted in such
capacity since 1995. A representative of KPMG Peat Marwick LLP is expected to be
present at the Annual Meeting of Stockholders with the opportunity to make a
statement if the representative desires to do so, and is expected to be
available to respond to appropriate questions.

The affirmative vote of a plurality of the votes cast at the Annual Meeting
of Stockholders at which a quorum is present and voting, either in person or by
proxy, is required for approval of this proposal. Abstentions will have the same
effect as a negative vote. Broker non-votes will have no effect on the outcome
of the vote. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.

STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING

Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 117 East Street, Mountain View, California 94043, not later than
April 20, 1999 and satisfy the conditions established by the Commission for
stockholder proposals to be included in the Company's proxy statement for that
meeting.

TRANSACTION OF OTHER BUSINESS

At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.

By order of the Board of Directors,

Abhay Bhushan
Secretary

Dated: [July ], 1998

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<PAGE> 21
PROXY

YIELDUP INTERNATIONAL CORPORATION

PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoints [ ], and each of them, with
full power of substitution to represent the undersigned and to vote all of the
shares of stock of YieldUP International Corporation (the "Company") which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Company to be held at the Company headquarters, 117 Easy Street, Mountain View,
California on August 20, 1998 at 10:00 a.m., and at any adjournment thereof (i)
as hereinafter specified upon the proposals listed on the reverse side and as
more particularly described in the Company's Proxy Statement, receipt of which
is hereby acknowledged, and (ii) in their discretion upon such other matters as
may properly come before the meeting.

THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE

<PAGE> 22
<TABLE>
<S> <C>
A vote FOR the following proposals is recommended by the 4. To appropriate issuance of the Company's
Board of Directors: Common Stock upon the conversion of up to 2,400 shares
of the Series A Convertible Preferred Stock.
1. ELECTION OF DIRECTORS
FOR WITHHELD FOR AGAINST ABSTAIN
Nominee: Raj Mohindra [ ] [ ] [ ] [ ] [ ]
FOR WITHHELD
Nominee: Werner Kern [ ] [ ] 5. To approve the selection of KPMG Peat Marwick LLP as
the Company's independent public accountants for the
year ending December 31, 1998.
2. To approve the amendment of the Company's 1995 Stock
Option Plan to increase the maximum aggregate number FOR AGAINST ABSTAIN
of shares reserved for issuance thereunder by 300,000 [ ] [ ] [ ]
and to establish the share grant limitation. Even if you are planning to attend the meeting in
person, you are urged to sign and mail this Proxy in
FOR AGAINST ABSTAIN the return envelope so that your stock may be
[ ] [ ] [ ] represented at the meeting.

Sign exactly as your name(s) appears on your stock
3. To approve the amendment of the Company's 1995 certificates. If shares of stock stand on record in
Outside Director Stock Option Plan to increase the the names of two or more persons or in the name of
maximum aggregate number of shares reserved for husband and wife, whether as joint tenants or
issuance thereunder by 100,000. otherwise, both or all of such persons should sign
this Proxy. If shares of stock are held of record by
FOR AGAINST ABSTAIN a corporation, the Proxy should be executed by the
[ ] [ ] [ ] President or Vice President and the Secretary or
Assistant Secretary, and the corporate seal should be
affixed thereto. Executors or administrators or other
fiduciaries who execute this Proxy for a deceased
stockholder should give their title. Please date this
Proxy

Signatures______________________________________________ Date_________________

______________________________________________

</TABLE>