PHARMCHEM LABORATORIES INC, DEF 14A, 1997-04-18

PHARMCHEM LABORATORIES INC
DEF 14A, 1997-04-18
MEDICAL LABORATORIES

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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/
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 Section 240.14a-11(c) or Section 240.14a-12

PHARMCHEM LABORATORIES, 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/ 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 the
filing fee is calculated and state how it was determined):
-------------
(4) Proposed maximum aggregate value of transaction:
-----------------------
(5) Total fee paid:
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/ / 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:
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4) Date Filed:
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<PAGE> 2

PharmChem logo

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1997

TO THE SHAREHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of PharmChem
Laboratories, Inc., a California corporation (the "Company"), will be held on
May 20, 1997, at 10:00 a.m., local time, at the Hyatt Rickeys at 4219 El Camino
Real, Palo Alto, California 94036 for the following purposes:

1. To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified.

2. To approve the adoption of the 1997 Equity Incentive Plan.

3. To ratify the appointment of KPMG Peat Marwick LLP as independent
public accountants for the Company for the 1997 fiscal year.

4. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

Only shareholders of record at the close of business on April 1, 1997, are
entitled to notice of and to vote at the Annual Meeting.

All shareholders are cordially invited to attend the Annual Meeting in
person. However, to assure your representation at the Annual Meeting, you are
urged to mark, sign, date and return the enclosed proxy as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. Any shareholder
attending the Annual Meeting may vote in person even if such shareholder has
returned a proxy.

THE BOARD OF DIRECTORS

Menlo Park, California
April 18, 1997

IMPORTANT: Whether or not you plan to attend the Annual Meeting, you are
requested to complete and promptly return the enclosed proxy in the envelope
provided.
<PAGE> 3

PharmChem logo

1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
------------------------

PROXY STATEMENT FOR 1997

ANNUAL MEETING OF SHAREHOLDERS
------------------------

The enclosed proxy is solicited by the Board of Directors of PharmChem
Laboratories, Inc. (the "Company") for use at the Annual Meeting of Shareholders
(the "Annual Meeting") to be held on Tuesday, May 20, 1997, at 10:00 a.m., local
time, and 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 Hyatt Rickeys at 4219 El Camino Real, Palo Alto, California
94036. The Company's principal executive offices are located at 1505-A O'Brien
Drive, Menlo Park, California 94025 and the Company's telephone number is (415)
328-6200.

The proxy solicitation materials were mailed on or about April 18, 1997, to
all shareholders entitled to vote at the Annual Meeting.

INFORMATION CONCERNING SOLICITATION AND VOTING

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 Secretary of 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 AND SOLICITATION; QUORUM

With respect to the election of directors, shareholders have cumulative
voting rights, which means that each shareholder has the number of votes equal
to the number of shares held multiplied by the number of directors to be
elected. Each shareholder may give all such votes to one candidate or distribute
such shareholder's votes among the candidates as the shareholder chooses.
However, the right to cumulate votes may not be exercised until the candidate or
candidates have been nominated and a shareholder has given notice at the Annual
Meeting of the shareholder's intention to vote cumulatively. If any shareholder
present at the Annual Meeting gives such notice, all shareholders may cumulate
their votes. The candidates receiving the highest number of votes of shares
entitled to vote for them, up to the number of directors to be elected, will be
elected. Votes withheld will be counted for the purposes of determining the
presence or absence of a quorum for the transaction of business at the Annual
Meeting, but will have no other legal effect upon the election of directors
under California law. The Company seeks discretionary authority to cumulate
votes in the event that additional persons are nominated at the Annual Meeting
for the election of directors. In the event that cumulative voting is invoked,
the proxy holders intend to cast the votes covered by the proxies received by
them in such a manner under cumulative voting as they believe will ensure the
election of as many of the Company's nominees as possible. While there is no
definitive statutory or case law authority in California as to the proper
treatment of abstentions and broker non-votes, the Company believes that both
abstentions and broker non-votes should be counted for purposes of determining
whether a quorum is present at the Annual Meeting. Abstentions and broker
non-votes will not be counted for the purposes of determining the outcome of the
vote on the election of directors, the proposal to approve the adoption of the
1997 Equity Incentive Plan or the proposal to ratify the appointment of the
Company's independent public accountants.
<PAGE> 4

An automated system administered by the Company's transfer agent tabulates
the proxies received prior to the date of the Annual Meeting. Proxies received
on the date of the Annual Meeting at or prior to the time of voting are
tabulated manually by a representative of the transfer agent.

A majority of the shares outstanding on the record date constitutes the
quorum required to transact business at the Annual Meeting.

The cost of soliciting proxies will be borne by the Company. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Proxies may be solicited by certain of the
Company's directors, officers and regular employees, without additional
compensation, personally or by telephone, telegram or facsimile. The Company may
also retain a professional solicitor to assist in the solicitation of proxies,
at a cost estimated not to exceed $4,000 plus out-of-pocket expenses.

RECORD DATE

Shareholders of record at the close of business on April 1, 1997, are
entitled to notice of the Annual Meeting and to vote at the Annual Meeting. At
the record date, 5,725,148 shares of the Company's Common Stock were issued and
outstanding.

DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS

Proposals of shareholders of the Company which are intended to be presented
by such shareholders at the Company's 1998 Annual Meeting of Shareholders must
be received by the Company no later than December 19, 1997 in order to be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.

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<PAGE> 5

PRINCIPAL SHARE OWNERSHIP

The following table sets forth the beneficial ownership of the Company's
Common Stock as of January 31, 1997, by all persons known to the Company to be
the beneficial owners of more than 5% of the Company's Common Stock, by each
director, by the Chief Executive Officer, by each of the four most highly
compensated executive officers other than the Chief Executive Officer, and by
all directors and executive officers as a group. Such figures are based upon
information furnished by the persons named.

<TABLE>
<CAPTION>
NUMBER PERCENT OF
NAME OF SHARES TOTAL
- - ------------------------------------------------------------------------ --------- ----------
<S> <C> <C>
Palo Alto Investors(1).................................................. 852,500 14.9%
431 Florence Street, Suite 200
Palo Alto, CA 94301
Richard D. Irwin(2)..................................................... 661,211 11.5%
c/o Grumman Hill Associates, Inc.
191 Elm Street
New Canaan, CT 06840
Grumman Hill Investments, L.P.(3)....................................... 535,545 9.4%
c/o Grumman Hill Associates, Inc.
191 Elm Street
New Canaan, CT 06840
Banner Partners(4)...................................................... 456,183 8.0%
c/o Palo Alto Investors
431 Florence Street, Suite 200
Palo Alto, CA 94301
Dimensional Fund Advisors Inc.(5)....................................... 343,200 6.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Prism Partners I, L.P.(6)............................................... 314,500 5.5%
909 Montgomery Street, No. 400
San Francisco, CA 94133
Thomas S. Volpe(7)...................................................... 84,825 1.0%
Joseph W. Halligan(8)................................................... 92,827 1.6%
David A. Lattanzio(9)................................................... 22,916 *
Edward V. Collom, Jr.(10)............................................... 5,000 *
Robert S. Fogerson, Jr.(11)............................................. 37,125 *
Neil A. Fortner(12)..................................................... 27,083 *
All executive officers and directors as a group (7 persons)(13)......... 930,987 15.6%
</TABLE>

- - ---------------
* Less than 1.0%

(1) William L. Edwards, the president and sole shareholder of Palo Alto
Investors, may be deemed to be a beneficial owner of the shares of which
Palo Alto Investors is deemed to be a beneficial owner. Palo Alto Investors
is deemed a beneficial owner by virtue of its voting and dispositive power
with respect to such shares, as an investment adviser managing
discretionary accounts for the benefit of third persons or as a general
partner of partnerships holding such shares. Of these shares, 319,100
shares are held and managed for the benefit of Banner Partners and have
also been included in the number of shares beneficially owned by Banner
Partners; these shares include 10,000 shares held by Mr. Edwards
individually. See footnote 4 below.

(2) The number of shares shown for Mr. Irwin is based in part on his beneficial
ownership interest in the shares of the Company held by Grumman Hill
Investments, L.P. (see footnote 3 below) and also includes 20,000 shares
held by a partnership of which Mr. Irwin is the general partner, 50,000
shares held in the Virginia Irwin Charitable Remainder Unitrust of which
Mr. Irwin is the trustee, and 51,666 shares purchasable by Mr. Irwin within
60 days of January 31, 1997, pursuant to outstanding options. Mr. Irwin is
a director of the Company.

3
<PAGE> 6

(3) Mr. Irwin, as the manager of Grumman Hill Company, L.L.C., the general
partner of Grumman Hill Investments, L.P., may be deemed to be a beneficial
owner of the shares held by Grumman Hill Investments, L.P. Mr. Irwin is a
director of the Company. See footnote 2 above.

(4) Of these shares, 319,100 shares are held and managed for the benefit of
Banner Partners by Palo Alto Investors. Such shares have also been included
in the number of shares beneficially owned by Palo Alto Investors. See
footnote 1 above. Independently of Palo Alto Investors, Banner Partners
owns an additional 137,083 shares of the Company. As general partners of
Banner Partners, William C. Edwards and Alan R. Brudos may be deemed to be
beneficial owners of shares beneficially owned by Banner Partners. The
number of shares shown for Banner Partners includes 10,000 shares held by
Mr. Edwards individually.

(5) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 343,200 shares as of
January 31, 1997, all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment company,
or in series of the DFA Investment Trust Company, a Delaware business
trust, or the DFA Group Trust and DFA Participating Group Trust, investment
vehicles for qualified employee benefit plans, for all of which Dimensional
serves as investment manager. Dimensional disclaims beneficial ownership of
all such shares.

(6) Weintraub Capital Management, an investment adviser to and general partner
of Prism Partners I, and Jerald M. Weintraub, managing general partner of
Weintraub Capital Management, may be deemed to be beneficial owners of the
shares held by Prism Partners I, L.P.

(7) Includes 51,666 shares purchasable by Mr. Volpe within 60 days of January
31, 1997, pursuant to outstanding options. Mr. Volpe is a director of the
Company.

(8) These shares are purchasable by Mr. Halligan within 60 days of January 31,
1997, pursuant to outstanding options. Mr. Halligan is a director and chief
executive officer of the Company.

(9) These shares are purchasable by Mr. Lattanzio within 60 days of January 31,
1997, pursuant to outstanding options. Mr. Lattanzio is an executive
officer of the Company.

(10) These shares are purchasable by Mr. Collom within 60 days of January 31,
1997, pursuant to outstanding options. Mr. Collom is an executive officer
of the Company.

(11) Includes 8,125 shares purchasable by Mr. Fogerson within 60 days of January
31, 1997, pursuant to outstanding options. Mr. Fogerson is an executive
officer of the Company.

(12) These shares are purchasable by Mr. Fortner within 60 days of January 31,
1997, pursuant to outstanding options. Mr. Fortner is an executive officer
of the Company.

(13) Includes 259,283 shares purchasable within 60 days of January 31, 1997,
pursuant to outstanding options. Includes 535,545 shares held by Grumman
Hill Investments, L.P. as noted in footnotes (2) and (3).

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and the holders of 10% or more of
the Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Edward V. Collom, Jr.'s Form 3 was filed
approximately eleven months late. Based upon a review of Forms 3, 4 and 5, and
written representations of the Company's directors, executive officers, and 10%
shareholders as to whether Forms 5 were required to be filed by them, the
Company believes that all other reports required pursuant to Section 16(a) with
respect to the 1996 fiscal year were timely filed.

REPORT OF THE OFFICERS COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

The Officers Compensation Committee of the Board of Directors reviews and
approves salaries, bonuses and other benefits payable to the Company's executive
officers and administers the Company's 1988 Incentive

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<PAGE> 7

Stock Plan and 1992 Director Option Plan with respect to officers and directors.
The Officers Compensation Committee is composed of two non-employee directors.

The philosophy used by the Officers Compensation Committee in establishing
compensation for executive officers, including the Chief Executive Officer, is
to attract and retain key personnel through the payment of competitive base
salaries and, where appropriate, relocation benefits, and to encourage and
reward performance through annual bonuses and stock ownership.

Salaries of executive officers have been negotiated between the Company and
each executive officer, and were influenced by such factors as salaries paid by
similar companies for similar positions, the skills, training and experience of
the individual executive officer, and the availability of persons with similar
abilities. The companies that the Officers Compensation Committee considers to
be similar to the Company for purposes of making such determination are
principally those companies against which the Company competes for executive
personnel, namely, other companies in the business of providing drug testing,
clinical testing and related services. The Officers Compensation Committee
believes that it has an adequate knowledge of the compensation levels of such
other companies as a result of information gathered through recruitment efforts
and compensation negotiations directed at candidates employed by such other
companies, as well as data gathered from time to time by independent consultants
and as a result of interactions between the Company's personnel and the
personnel of such other companies. Based on the information it has been able to
gather with respect to companies in the business of providing drug testing,
clinical testing and related services, the Officers Compensation Committee
believes that the salaries of the Company's executive officers are approximately
at the mean of the executive salary levels of such other companies.

In its annual review and adjustment of executive officers' salaries, the
Officers Compensation Committee takes into account primarily the performance of
the individual executive officer during the prior year, the executive officer's
participation in strategic projects of long-term benefit to the Company such as
improvement of laboratory techniques, and increases in the cost of living. In
determining the Company's ability to increase salaries of executive officers,
the Officers Compensation Committee also takes into account the operating
results and overall operations of the Company as a whole. In determining the
salary increase and bonus of any particular executive officer, the Officers
Compensation Committee takes into account those elements of the Company's
operations within the scope of authority of the particular executive. The
emphasis placed on any particular element of the Company's operations depends on
the nature of the executive officer's responsibilities. For example, revenues
are scrutinized more closely in setting the compensation level of an officer in
charge of sales or customer service functions than an officer in charge of
laboratory operations or scientific matters. The consideration of additional
factors and the weight given to any particular factor are within the discretion
of the Officers Compensation Committee.

The Officers Compensation Committee believes that, because the Chief
Executive Officer is responsible for the overall operations of the Company, his
personal performance should be judged based on the performance of the Company as
a whole, determined primarily by reference to the Company's operating results
and net income, and his contributions to the long-term success of the Company.
Adjustments to the Chief Executive Officer's salary are influenced accordingly.

The Officers Compensation Committee has traditionally taken a conservative
approach to salary increases, choosing to provide incentives to executive
officers primarily through the Company's bonus plan and 1988 Incentive Stock
Plan. Total annualized compensation to executive officers in 1996, based on the
"salary," "bonus" and "other annual compensation" captions in the Summary
Compensation Table which follows, increased 5.3% over the prior year (which
included total compensation to individuals who occupied similar positions with
the Company in 1995 but who are no longer employed.) The total compensation paid
to Mr. Halligan in 1996 represented a 19.2% increase in 1996 with respect to the
compensation paid to Mr. Halligan and his predecessor as Chief Executive Officer
in 1995. When Mr. Halligan was hired in November 1995, his 1996 salary and a
minimum bonus commitment for 1996 of $50,000 were negotiated with the Officers
Compensation Committee. Mr. Halligan was not paid a bonus for 1995.

Under the Company's bonus plan, employees, including executive officers,
are eligible to receive an annual bonus at the end of each year if financial
targets relating to operating income, cash flow and return on

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<PAGE> 8

invested capital and other non-financial targets set annually by the Officers
Compensation Committee are achieved. In the past, the Officers Compensation
Committee has authorized the payment of bonuses even when these targets were not
fully met and may decide to do so again in the future. Typically, in the case
where these targets for the current year are not achieved, but exceed the prior
year's results, bonuses are paid at a reduced level as determined by the
Officers Compensation Committee. If these targets are exceeded, the bonus pool
is normally increased according to a scale set by the Officers Compensation
Committee. The portion of the bonus pool set aside for executive officers, and
the allocation of that amount among the executive officers, is set by the
Officers Compensation Committee after considering the report of the Chief
Executive Officer regarding individual performance and contribution. In 1996,
the aggregate amount paid under the bonus plan to executive officers (including
minimum bonus commitments made to Messrs. Halligan, Collom and Lattanzio in
connection with their hiring of $50,000, $11,000 and $30,000, respectively) was
21.0% of the aggregate base salaries paid to executive officers compared to 9.5%
in 1995 (which included individuals no longer employed by the Company and did
not include Messrs. Halligan,
Collom and Lattanzio). Bonus payments to executive officers for 1996 (which
included such minimum bonus commitments made to Messrs. Halligan, Collom and
Lattanzio) were based upon each individual's performance as well as the overall
results of the Company. The latter include restoring the Company to a breakeven
position in 1996 following a large loss in 1995, the ongoing installation of a
new infrastructure to position the Company to move forward and seize upon
opportunities more quickly and efficiently, returning its U.K. subsidiary
(Medscreen) to profitability after several years of losses and the improvement
of cash flow. Bonuses for 1995 performance were paid in 1996 to the two
executive officers who continued in the Company's employ from 1995 to 1996 as a
result of their achievement of their 1995 operating objectives and are presented
as 1995 payments in the Summary Compensation Table. Based upon the information
available to the Company with respect to companies in the business of providing
drug testing, clinical testing and related services, the Officers Compensation
Committee believes that the total compensation (including salaries and bonuses)
of the Company's executive officers is below the mean of total compensation
levels of such other companies.

Options and stock purchase rights are granted under the Company's 1988
Incentive Stock Plan in order to give employees a stake in the long term success
of the Company. Awards to executive officers are generally made at the time of
their employment with the Company, and from time to time thereafter within the
discretion of the Officers Compensation Committee. The factors considered by the
Officers Compensation Committee in determining the timing of grants under the
1988 Incentive Stock Plan, and the number of shares subject thereto, are similar
to the factors considered by the Officers Compensation Committee in adjusting
base salary. Options to purchase 20,000 and 100,000 shares were granted to Mr.
Collom and Mr. Lattanzio, respectively, upon their joining the Company. No other
options were granted to executive officers in 1996. Option grants under the
Company's 1992 Director Option Plan are automatic and nondiscretionary.

The Company provides relocation assistance to certain executive officers
upon their employment with the Company, when necessary to attract those
personnel. Eligibility for and the terms of relocation benefits are determined
on a case by case basis. No relocation assistance was provided in 1996.

The Officers Compensation Committee has considered the potential future
effects of Section 162(m) of the Internal Revenue Code of 1986, as amended,
which limits the deductibility by corporations of executive compensation in
excess of $1 million per executive per year. The Officers Compensation Committee
currently does not intend to adopt a policy attempting to qualify any portion of
the compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m). The non-equity based compensation
paid to the Chief Executive Officer and the four highest paid other executive
officers in fiscal year 1996, and expected to be paid in fiscal year 1997, does
not exceed $1 million for any individual.

Richard D. Irwin
Thomas S. Volpe

6
<PAGE> 9

EXECUTIVE OFFICERS AND COMPENSATION

EXECUTIVE OFFICERS OF PHARMCHEM

Information listed under the caption "Executive Officers of PharmChem" at
the end of Part I of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, as filed with the Securities and Exchange
Commission, is incorporated in this Proxy Statement by reference.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Officers Compensation Committee of the Company's Board of Directors is
composed of two non-employee directors, Richard D. Irwin and Thomas S. Volpe. No
interlocking relationship exists between the Company's Board of Directors or
Officers Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.

CERTAIN TRANSACTIONS

In connection with his relocation at the time of accepting employment with
the Company in July 1991, the Board approved a loan from the Company to Neil A.
Fortner, Vice President, Laboratory Operations, in the amount of $109,000 (the
"Fortner Loan") for the purpose of purchasing a primary residence. In lieu of
interest payments on the Fortner Loan, the Company is entitled to 25% of the net
proceeds upon the sale of such residence. The Fortner Loan is evidenced by a
loan agreement and promissory note, and is secured by a Deed of Trust on the
primary residence. During 1996, the maximum principal amount outstanding under
the Fortner Loan was $109,000, and the amount outstanding as of December 31,
1996, was $109,000. The Board also approved payment of a monthly housing
allowance to Mr. Fortner designed to compensate Mr. Fortner for the excess of
certain housing expenses over the level of such expenses at his previous
location, which allowances totaled $35,237 during 1996.

CASH COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the cash compensation paid, with respect to
the three most recent fiscal years, to the Chief Executive Officer and the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers at the end of fiscal 1996.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
---------------
NUMBER OF
ANNUAL COMPENSATION SHARES OF
---------------------------------------- COMMON STOCK
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS GRANTED COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ $ (#) $
- - ------------------------------------ ---- ------- ------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph W. Halligan.................. 1996 250,000 60,000 0 0 492(1)
President, Chief Executive Officer 1995 36,932 0 0 278,480 0
Edward V. Collom, Jr. .............. 1996 95,833 12,000 0 20,000 1,205(2)
Vice President, Business
Development
Robert S. Fogerson, Jr. ............ 1996 110,000 13,000 0 0 1,128(3)
Vice President, Laboratory 1995 110,000 8,100(4) 0 15,000 3,701(5)
Technical Director 1994 110,000 3,101 0 0 2,056(6)
Neil A. Fortner..................... 1996 100,000 14,000 35,237(7) 0 3,920(8)
Vice President, Laboratory 1995 100,000 8,214(9) 35,237(7) 50,000 2,251(10)
Operations 1994 100,000 6,101 35,237(7) 0 742(11)
David A. Lattanzio.................. 1996 107,548 40,000 0 100,000 25,839(12)
Vice President, Chief Financial
Officer
</TABLE>

- - ---------------
(1) Includes $302, $122 and $68 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively.

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<PAGE> 10

(2) Includes $1,069, $88 and $48 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively.

(3) Includes $246, $109 and $81 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively, and
$692 for the Company matching contribution to the 401(k) plan.

(4) Includes $8,000 paid in 1996 as a bonus for 1995 performance.

(5) Includes $1,208, $604 and $346 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively, and
$1,543 for the Company matching contribution to the 401(k) plan.

(6) Includes $427 for the Company portion of term life insurance premiums and
$1,629 for the Company matching contribution to the 401(k) plan.

(7) Housing allowance.

(8) Includes $3,171, $104 and $81 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively, and
$564 for the Company matching contribution to the 401(k) plan.

(9) Includes $8,114 paid in 1996 as a bonus for 1995 performance.

(10) Includes $1,548 for the Company portion of health insurance premiums and
$703 for the Company matching contribution to the 401(k) plan.

(11) Company matching contribution to the 401(k) plan.

(12) Includes $1,351, $95 and $41 for the Company portion of health insurance,
term life insurance and long-term disability premiums, respectively, and
$24,352 in consulting fees paid to Mr. Lattanzio for services from January
31, 1996 through March 31, 1996.

OPTIONS

The following tables set forth, as to the executive officers named in the
Summary Compensation Table, certain information relating to options for the
purchase of Common Stock granted and exercised during fiscal 1996, and held at
the end of fiscal 1996.

OPTION GRANTS IN FISCAL 1996

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF SHARES OF STOCK PRICE
COMMON STOCK % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS OPTIONS GRANTED EXERCISE OR OPTION TERM(1)
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME (#) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
- - ----------------------- ------------------- --------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Edward V. Collom,
Jr. ................. 20,000 10.5% $ 4.625 03/01/06 $ 58,100 $147,500
David A. Lattanzio..... 100,000 52.4% $ 3.625 04/04/06 $228,000 $577,700
</TABLE>

- - ---------------
(1) The Potential Realizable Value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of fiscal 1996
granted options, assuming that the stock appreciates in value from the date
of grant until the end of the option term at the annual rate specified (5%
and 10%). Potential Realizable Value is net of the option exercise price.
The assumed rates of appreciation are specified in rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future stock price. Actual gains, if any, resulting from stock
option exercises and Common Stock holdings are dependent on the future
performance of the Common Stock and overall stock market conditions, as well
as the option holder's continued employment through the exercise/ vesting
period. There can be no assurance that the amounts reflected in this table
will be achieved.

(2) Total number of shares subject to options granted to employees in fiscal
1996 was 191,000, which excludes options granted to non-employee directors.

8
<PAGE> 11

OPTION EXERCISES IN FISCAL 1996 AND FISCAL 1996 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
FY-END(#): AT FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- - ----------------------------------- --------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Joseph W. Halligan................. 0 0 75,422/203,058 $94,278/$253,822
Edward V. Collom, Jr............... 0 0 3,750/ 16,250 $ 2,812/$ 12,187
Robert S. Fogerson, Jr............. 0 0 7,188/ 7,812 $24,259/$ 26,365
Neil A. Fortner.................... 0 0 23,958/ 26,042 $80,858/$ 87,892
David A. Lattanzio................. 0 0 16,667/ 83,333 $29,167/$145,833
</TABLE>

STOCKHOLDER RETURN PERFORMANCE PRESENTATION

Set forth below is a line graph comparing the cumulative total returns for
the five years ended December 31, 1996 of a $100 investment on December 31, 1991
in the Company's Common Stock, S&P 500 Composite Index (as the required broad
equity market index) and in the common stock of companies comparable to the
Company as a representative industry index. The companies comprising the
industry index are Substance Abuse Technology, Unilab Corp. and Universal
Standard Medical Labs, Inc., which the Company believes are the only companies
providing substantially comparable services to those of the Company.

<TABLE>
<S> <C> <C> <C>
'PharmChem Lab- S&P 500 Compos-
Measurement Period oratories, Inc.' Peer Group Index ite Index
Dec-91 100.00 100.00 100.00
Dec-92 42.22 66.63 107.62
Dec-93 25.56 57.40 118.46
Dec-94 17.78 45.55 120.03
Dec-95 40.00 29.18 165.13
Dec-96 47.78 13.17 203.05
</TABLE>

9
<PAGE> 12

PROPOSAL ONE:

ELECTION OF DIRECTORS

NOMINEES

A board of three (3) directors is to be elected at the Annual Meeting.
Unless otherwise instructed, the proxy holders will vote the proxies received by
them for the Company's three (3) nominees named below, all of whom are presently
directors of the Company. In the event that any nominee of the Company is unable
or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for any nominee who is designated by the present Board of
Directors to fill the vacancy. It is not expected that any nominee will be
unable or will decline to serve as a director. The term of office of each person
elected as a director will continue until the next Annual Meeting of
Shareholders or until a successor has been elected and qualified.

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION
- - -------------------------- --- -------- ----------------------------------------------------
<S> <C> <C> <C>
Joseph W. Halligan........ 52 1995 President and Chief Executive Officer of the Company
Richard D. Irwin.......... 61 1987 Chairman of the Board of Directors of the Company
and President of Grumman Hill Associates, Inc.
Thomas S. Volpe........... 46 1987 President of Volpe Brown Whelan & Company, LLC
</TABLE>

Mr. Halligan has been President and Chief Executive Officer of the Company
since November 1995. From 1988 to 1995, Mr. Halligan was President and CEO of
E.S.I. Consulting Group, a private consulting practice, specializing in advising
and operating high growth, consumer and service oriented companies. Before
forming his consulting practice, Mr. Halligan served from 1983 to 1987 as
President and CEO of a privately-held company, Laura Scudder's, Inc. From 1969
to 1983, Mr. Halligan served as Senior Vice President of Fotomat Corporation and
President of its subsidiary, Video Services of America.

Mr. Irwin has been Chairman of the Board of Directors of the Company since
November 1995. Mr. Irwin is a co-founder and President of Grumman Hill
Associates, Inc. ("Grumman Hill"), a venture capital firm headquartered in New
Canaan, Connecticut. Prior to founding Grumman Hill in 1985, he served as a
Managing Director of Dillon, Read & Co., Inc. from 1983 to 1985.

Mr. Volpe is the President of Volpe Brown Whelan & Company, LLC, a private
investment banking and risk capital firm in San Francisco, California. Prior to
founding the predecessor of Volpe Brown Whelan & Company, LLC in 1986, Mr. Volpe
was employed by Hambrecht & Quist Incorporated, a venture capital and investment
banking firm, with his most recent positions being President, Chief Executive
Officer and Director. Mr. Volpe is also a member of the board of directors of
Linear Technology Corporation.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held a total of four meetings during
the fiscal year ended December 31, 1996. Each director attended all of the
meetings of the Board of Directors held during fiscal year 1996 and all of the
meetings held by all committees of the Board of Directors during fiscal year
1996 on which he served.

The Audit Committee, which consists of Messrs. Volpe and Irwin, met once
during fiscal year 1996. The functions of the Audit Committee are to recommend
selection of independent public accountants to the Board of Directors, to review
the scope and results of the year-end audit with management and the independent
accountants and to review the Company's accounting principles and its system of
internal accounting controls.

The Officers Compensation Committee, which consists of Messrs. Volpe and
Irwin, met twice during fiscal year 1996. The function of the Officers
Compensation Committee is to review and approve salaries, bonuses and other
benefits payable to the Company's executive officers and to administer the
Company's 1988 Incentive Stock Plan and 1992 Director Option Plan. See "Report
of the Officers Compensation Committee of the Board of Directors."

The Company does not have a nominating committee.

10
<PAGE> 13

COMPENSATION

Each Board member who is not also an employee of the Company has the right
to a fee of $1,000 per meeting attended in consideration of services as a
director. Board members are also reimbursed for their expenses for each meeting
attended. Previously, under the Company's 1992 Director Option Plan each
director annually received an option to purchase 15,000 shares of Common Stock.
The 1992 Director Option Plan was amended to provide that as of January 1, 1996,
each director annually shall receive an option to purchase 5,000 shares of
Common Stock, which grant may be voluntarily waived by a director. Mr. Halligan
waived his 1996 grant. The 1992 Director Option Plan was further amended as of
March 4, 1997 to provide that grants thereunder will be made only to
non-employee directors. The exercise price of options granted under the 1992
Director Option Plan is the fair market value at the date of grant. Except as
described above, directors do not receive additional compensation for their
services as directors of the Company or as members of committees of the Board of
Directors.

VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS

PROPOSAL TWO:

APPROVAL OF ADOPTION OF THE
1997 EQUITY INCENTIVE PLAN

The Company's shareholders are being asked to approve the adoption of the
1997 Equity Incentive Plan (the "1997 Plan") as the successor to the Company's
existing 1988 Incentive Stock Plan (the "1988 Plan"). On March 4, 1997, the
Board of Directors of the Company adopted the 1997 Plan subject to shareholder
approval. Only 103,047 shares remain available for grant under the 1988 Plan.

The 1997 Plan is designed to serve as a comprehensive equity incentive
program to attract and retain individuals essential to the long-term success of
the Company and to strengthen their commitment to the success of the Company and
stimulate their efforts on behalf of the Company.

SUMMARY OF THE 1997 PLAN

The principal terms and provisions of the 1997 Plan are summarized below.
As a summary, the description below is not a complete description of all of the
terms of the 1997 Plan and is qualified in its entirety by reference to the full
text of the 1997 Plan, which is appended as Exhibit A to this Proxy Statement.

Types of Awards. The 1997 Plan permits the granting of any or all of the
following types of awards to employees: (1) stock options, including incentive
stock options ("ISOs") and options other than ISOs ("non-qualified options"),
(2) restricted shares, (3) performance shares conditioned upon meeting
performance criteria, (4) bonus shares and (5) stock appreciation rights
("SARs") (either in tandem with other types of awards or free-standing) (all of
the foregoing collectively, "Awards").

11
<PAGE> 14

Number of Shares. Subject to adjustment as described below, the number of
shares of Common Stock available for grant under the 1997 Plan is 500,000. Of
the aggregate number of shares available under the 1997 Plan, no more than
20,000 shares of Common Stock can be used for the grant of restricted shares, no
more than 20,000 shares of Common Stock can be used for the grant of bonus
shares, and SARs may not be granted with respect to more than 150,000 shares of
Common Stock. In addition, shares of Common Stock subject to any award under the
1997 Plan that fail to vest or otherwise terminate without the issuance of such
shares or of other consideration in lieu of such shares will be available for
subsequent grant under the 1997 Plan.

No Plan participant may be granted options or SARs with respect to more
than 150,000 shares in a calendar year, subject to adjustment as described
below.

Eligibility. Salaried employees (including officers), consultants and
directors of the Company or any subsidiary of the Company are eligible to
participate in the 1997 Plan. As of April 1, 1997, 6 executive officers, 146
other employees, 5 consultants and 2 non-employee directors would be eligible to
participate in the 1997 Plan. For the present time, the Company does not intend
to grant awards under the 1997 Plan to non-employee directors. Non-employee
directors would continue to receive their stock options under the 1992 Director
Option Plan.

Administration. The 1997 Plan will be administered by a committee of the
Board of Directors (the "Committee") consisting of at least two members, all of
the members of which must be both "outside directors" as defined under Section
162(m) of the Internal Revenue Code of 1986 (the "Code") and "non-employee
directors" as defined in Rule 16b-3 promulgated by the Securities and Exchange
Commission. The Committee has the authority to select the eligible participants
to whom awards are granted, to determine the types of awards and the number of
shares covered and to set the terms, conditions and provisions of such awards,
to cancel or suspend awards and to accelerate the exercisability of awards. The
Committee will be authorized to interpret the 1997 Plan, to establish, amend,
and rescind any rules and regulations relating to the 1997 Plan, to determine
and amend the terms of agreements entered into with employees under the 1997
Plan, and to make all other determinations which may be necessary or advisable
for the administration of the 1997 Plan. The Board of Directors may reserve to
itself or delegate to another committee of the Board of Directors all of the
authority with respect to Awards, except, in the case of such other committee,
with respect to Awards to grantees who are subject to potential liability under
Section 16(b) of the Securities Exchange Act of 1934.

Stock Options. The exercise price per share of Common Stock purchasable
under any stock option will be determined by the Committee, but cannot in any
event be less than 100% of the fair market value of the Common Stock on the date
the option is granted. The Committee shall determine the term of each stock
option (subject to a maximum of 10 years) and the time or times when it may be
exercised. Except as otherwise provided in an award agreement, options will be
exercisable with respect to 6.25% of the shares corresponding to the grant on
the first day of each of the first sixteen calendar quarters after the grant
date. The grant and the terms of ISOs shall be restricted to the extent required
for qualification as ISOs by the Code. Options may be exercised by payment of
the exercise price in (i) cash, (ii) at the discretion of the Committee, an
interest-bearing promissory note, (iii) shares of Common Stock, (iv) at the
discretion of the Committee, restricted stock with a fair market value equal to
the exercise price, or (v) pursuant to a "cashless exercise" through a
broker-dealer under an arrangement approved by the Company.

The Committee may, in its discretion, provide for the automatic grant of a
so-called "replacement" or "reload" option to a grantee who delivers
previously-owned shares of Common Stock to the Company to pay the option
exercise price or satisfy tax withholding requirements in connection with the
option exercise. The reload or replacement option would be granted only if the
option is exercised for shares which have a fair market value of at least 120%
of the option price. Any replacement option will (i) cover a number of shares
equal to the number of shares surrendered in connection with the exercise of the
original option, (ii) have an exercise price equal to 100% of fair market value
of the Common Stock on the date is it granted and (ii) expire on the expiration
date of the original option. A replacement option will not have a similar
replacement feature.

12
<PAGE> 15

Restricted Shares. Restricted shares may not be disposed of by the
recipient until certain restrictions established by the Committee lapse. The
Committee will have the discretion to determine the amount, if any, that a
recipient will pay for restricted shares. The participant will have, with
respect to restricted stock, all of the rights of a shareholder, including the
right to vote the shares and the right to receive any cash dividends, unless the
Committee otherwise determines. If restricted shares fail to vest, and the
grantee paid for the shares or acquired them upon the exercise of an option, the
Company will be required to pay the grantee the lesser of (i) the amount paid by
the grantee for the restricted shares or (ii) the fair market value of the
restricted shares of the date of the failure to vest.

Performance Shares. Performance shares entitle the grantee to receive
shares of Common Stock contingent upon achieving specified performance goals
applicable to the performance shares during a specified period of not less than
one year nor more than five years. The performance criteria which the Committee
may designate are any one or more of the following: (i) attainment by the Common
Stock of a specified market value for a specified period of time; (ii) earnings
per share of Common Stock; (iii) return to shareholders (including dividends);
(iv) return on equity; (v) earnings of the Company; (vi) growth in revenues;
(vii) market share; (viii) cash flow; (ix) cost reduction; or (x) customer
service goals. The Committee may in its discretion determine that cash be paid
in lieu of some or all of an award of performance shares. A grantee may not
receive performance shares the fair market value of which at the time of the
grant exceeds 100% of the grantee's salary at the time of the grant multiplied
by the number of years in the relevant performance period.

Bonus Shares. Bonus shares can be awarded to a grantee without cost and
without restrictions in recognition of past performance (whether determined by
reference to another employee benefit plan of the Company or otherwise) or as an
incentive to become an employee, director or consultant of the Company or a
subsidiary of the Company.

Stock Appreciation Rights. An SAR may be granted free-standing or in
tandem with the grant of options, restricted shares or performance shares. Upon
exercise of an SAR, the holder is entitled to receive the excess of the fair
market value of the shares for which the right is exercised over the grant price
of the SAR. The grant price (which shall not be less than 100% of the fair
market value of the shares on the date of grant) and other provisions of the SAR
shall be determined by the Committee (except that the term may not exceed 10
years). Payment by the Company upon such exercise will be in cash unless the
Committee determines that it is to be paid wholly or partly in Common Stock. If
SARs are identified with shares subject to an option, with restricted shares or
with specific performance shares, then, unless otherwise provided in the award
agreement, the SARs will terminate upon the termination or failure to vest of
the option, restricted shares or performance shares, the exercise of such option
or performance shares or the date such restricted shares vest. Except as
otherwise provided in an award agreement, SARs not identified with any other
award will become exercisable with respect to 6.25% of the shares on the first
day of each of the first sixteen calendar quarters after the grant date and each
SAR which is identified with any other award will become exercisable at the same
time the option or restricted shares associated with the SAR may be exercised or
vest.

Adjustments. In the event of any change affecting the shares of Common
Stock by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other similar
corporate change, or any distribution to shareholders other than cash dividends,
the Committee shall make such substitution or adjustment in the aggregate number
of shares which may be distributed under the 1997 Plan in general and for the
grant of restricted shares, bonus shares and SARs and in the number and option
price or other price of shares subject to the outstanding awards granted under
the 1997 Plan as it deems to be appropriate in order to maintain the purpose of
the original grant.

Transferability. Awards may not be transferred other than by will or
intestate succession or, in the case of non-qualified options, to members of a
grantee's immediate family. ISOs are not transferable.

Loans and Guarantees. The Committee may permit a grantee of an Award to
defer payment to the Company or may cause the Company to guarantee a loan of all
or a part of the option price, the purchase price of restricted shares or any
taxes in connection with the exercise or vesting of an Award. If the Committee

13
<PAGE> 16

permits a grantee to defer payment, the grantee must enter into a binding
obligation to repay such deferred sum although the Company may forgive such
repayment.

Termination of Service. If a grantee's service to the Company terminates
on account of death or disability, then the grantee's (i) unvested restricted
shares will vest; (ii) unexercised options or SARs, whether or not exercisable
on the date of termination of service, may be exercised within one year (but
only during the option term); and (iii) any unexercised performance shares may
be exercised within one year. If a grantee's service terminates due to
resignation after age 65 or 10 years of service to the Company or any subsidiary
of the Company or due to elimination of the grantee's position with the Company
or a reduction in the Company's work force, then the grantee's (i) restricted
shares and any SARs identified with the restricted shares that are not vested
shall terminate without vesting (subject to repayment by the Company if the
grantee paid for the restricted shares); (ii) unexercised options or SARs, if
exercisable immediately before termination of the grantee's employment, may be
exercised within the period specified in the award agreement, which may not
exceed three months; and (iii) performance shares and any SARs identified with
the performance shares may vest and be exercised if so permitted by the
Committee. If a grantee's service to the Company terminates for any other
reason, then the grantee's (i) restricted shares that are not vested at the time
of termination will terminate without vesting (subject to repayment by the
Company if the grantee paid for the restricted shares); and (ii) unexercised
options, SARs or performance shares will terminate.

Amendment and Termination. The Board of Directors may amend the 1997 Plan
in any and all respects without shareholder approval, except as such shareholder
approval may be required pursuant to the listing requirements of any national
market system or securities exchange on which the Company's equity securities
are listed, and except that shareholder approval shall be required to increase
the total number of shares reserved for purposes of the 1997 Plan or to change
the employees or class of employees eligible to participate in the 1997 Plan.

Unless sooner terminated by the Board of Directors, the 1997 Plan will
terminate on March 4, 2007. Any awards outstanding under the 1997 Plan will not
be affected by the termination of the 1997 Plan.

TAX ASPECTS OF THE 1997 PLAN

Options. Options granted under the 1997 Plan may be either ISOs which
satisfy the requirements of Section 422 of the Code or non-qualified options
which are not intended to meet such requirements. The current federal income tax
treatment for the two types of options differs as follows:

ISOS.

No taxable income is recognized by the optionee at the time of the
option grant, and no taxable income is generally recognized at the time the
option is exercised. However, the excess of the fair market value of the
shares on the date of exercise over the option exercise price will be
subject to the alternative minimum tax in the year of exercise. The
optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made subject of a taxable disposition. For
federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the
sale or other disposition is made after the optionee has held the shares
for more than two (2) years after the option grant date and more than one
(1) year after the exercise date. If either of these two holding periods is
not satisfied, then a disqualifying disposition will result.

Upon a qualifying disposition of the shares, the optionee will
recognize long-term capital gain in an amount equal to the excess of (i)
the amount realized upon the sale or other disposition of the purchased
shares over (ii) the exercise price paid for those shares. If there is a
disqualifying disposition of the shares, then the excess of (i) the fair
market value of the shares on the exercise date over (ii) the exercise
price paid for those shares will be taxable as ordinary income to the
optionee. Any additional gain or loss recognized upon the disposition will
be taxable as a capital gain or loss. The Company will not have a deduction
at the time of grant or exercise of the option, or on disposition of the
shares acquired on exercise of the option, if the disposition is a
qualifying disposition.

14
<PAGE> 17

If the optionee makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction for
the taxable year in which such disposition occurs, equal to the excess of
(i) the fair market value of such shares on the option exercise date over
(ii) the exercise price paid for the shares. In no other instance will the
Company be allowed a deduction with respect to the optionee's acquisition
or disposition of the purchased shares.

NON-QUALIFIED OPTIONS AND SARS.

No taxable income is recognized by a grantee upon the grant of a
non-qualified option or SAR. The grantee will in general recognize ordinary
income, in the year in which the option or SAR is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise
date over the exercise price paid for the shares, and the optionee will be
required to satisfy the tax withholding requirements applicable to such
income.

The Company will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the grantee with respect to the
exercised non-qualified option or SAR. The deduction will in general be
allowed for the taxable year of the Company in which such ordinary income
is recognized by the grantee.

With respect to other Awards granted under the 1997 Plan that are settled
either in cash or in stock or other property that is either transferable or not
subject to substantial risk of forfeiture, the participant must recognize
ordinary income equal to the cash or the fair market value of shares or other
property received; the Company will be entitled to a deduction for the same
amount. With respect to Awards that are settled in stock or other property that
is restricted as to transferability and subject to substantial risk of
forfeiture, the participant must recognize ordinary income equal to the fair
market value of the shares or other property received at the first time the
shares or other property become transferable or not subject to substantial risk
of forfeiture, whichever occurs earlier; the Company will be entitled to a
deduction for the same amount, subject to possible limitation under Section
162(m) of the Code.

Deductibility of Executive Compensation. Under Section 162(m) of the Code,
the Company cannot claim a federal corporate tax income deduction on
compensation paid to the person who is its chief executive officer on the last
day of the year or any of its four other most-highly compensated executive
officers in excess of $1,000,000 in any year, unless the compensation qualifies
as shareholder approved "performance-based" compensation. No compensation other
than bonus shares and restricted shares that vest over time will be paid under
the Plan in the absence of shareholder approval of the Plan. The Company
anticipates that any compensation deemed paid by it in connection with
disqualifying dispositions of incentive stock option shares or exercises of
non-statutory options or SARs will qualify as performance-based compensation for
purposes of Code Section 162(m). Accordingly, all compensation deemed paid with
respect to those options and SARs will remain deductible by the Company without
limitation under Code Section 162(m). Similarly, the Company intends performance
shares and any restricted shares that vest based on objective performance
criteria to be performance-based compensation, and therefore deductible by the
Company without limitation under Code Section 162(m). Bonus shares and
restricted shares that vest over time, without regard to performance, will be
subject to the limitation on deductibility under Code Section 162(m).

AWARDS UNDER THE 1997 PLAN

Awards under the 1997 Plan are made at the discretion of the Committee. No
Awards have been made under the 1997 Plan and future Awards have not yet been
determined.

On April 7, 1997, the closing price of the Company's Common Stock on the
Nasdaq National Market was $4.00 per share.

VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS

The affirmative vote of a majority of the outstanding shares of the Company
present or represented and voting at the 1997 Annual Meeting (which shares
voting affirmatively also constitute at least a majority of the

15
<PAGE> 18

required quorum) is required for approval of the 1997 Plan. If such approval is
obtained, then the 1997 Plan will become effective immediately. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ADOPTION OF THE 1997 PLAN.

PROPOSAL THREE:

RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS

On April 7, 1997, pursuant to approval by the Board of Directors upon
recommendation by the Audit Committee, the Company selected KPMG Peat Marwick
LLP to replace Arthur Andersen LLP to audit the consolidated financial
statements of the Company for 1997. The former principal accountant's reports on
the Company's financial statements for either of the past two fiscal years have
not contained an adverse opinion or a disclaimer of opinion, nor have its
opinions been qualified or modified as to uncertainty, audit scope or accounting
principles. During the Company's two most recent fiscal years (January 1, 1995
to December 31, 1995 and January 1, 1996 to December 31, 1996) and the
subsequent interim period preceding the Company's replacement of its principal
accountant, there were no disagreements with the former accountant on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of the former accountant, would have caused it to make a reference
to the subject matter of the disagreement in connection with its reports.

Representatives of Arthur Andersen LLP and KPMG Peat Marwick LLP are
expected to be present at the Annual Meeting, will have the opportunity to make
a statement, and are expected to be available to respond to appropriate
questions.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF
THE SELECTION OF KPMG PEAT MARWICK LLP.

OTHER MATTERS

The Company knows of no other matters to be submitted to the Annual
Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent in accordance with the best judgment of such persons.

THE BOARD OF DIRECTORS

Menlo Park, California
April 18, 1997

INFORMATION LISTED UNDER THE CAPTION "EXECUTIVE OFFICERS OF PHARMCHEM" AT
THE END OF PART I OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, IS INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE.

16
<PAGE> 19

EXHIBIT A

PHARMCHEM LABORATORIES, INC.

1997 EQUITY INCENTIVE PLAN
<PAGE> 20

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
1. Purpose......................................................................... 1
2. Definitions..................................................................... 1
3. Scope of the Plan............................................................... 3
4. Administration.................................................................. 3
5. Eligibility..................................................................... 4
6. Conditions to Grants............................................................ 4
7. Non-Transferability............................................................. 8
8. Exercise........................................................................ 8
9. Loans and Guarantees............................................................ 9
10. Notification Under Section 83(b)................................................ 10
11. Mandatory Tax Withholding....................................................... 10
12. Elective Share Withholding...................................................... 10
13. Termination of Employment....................................................... 10
14. Plans of Foreign Subsidiaries................................................... 12
15. Substituted Awards.............................................................. 13
16. Securities Law Matters.......................................................... 13
17. No Employment Rights............................................................ 13
18. No Rights as a Shareholder...................................................... 13
19. Nature of Payments.............................................................. 13
20. Non-Uniform Determinations...................................................... 13
21. Adjustments..................................................................... 13
22. Amendment of the Plan........................................................... 14
23. Termination of the Plan......................................................... 14
24. No Illegal Transactions......................................................... 14
25. Controlling Law................................................................. 14
26. Severability.................................................................... 14
</TABLE>
<PAGE> 21

INTRODUCTION

This Equity Incentive Plan (the "Plan") of PharmChem Laboratories, Inc., a
California corporation (the "Company") is hereby adopted effective as of March
4, 1997 subject to shareholder approval.

1. PURPOSE. The Plan is intended to allow employees, consultants and
directors to acquire or increase equity ownership in the Company, thereby
strengthening their commitment to the success of the Company and stimulating
their efforts on behalf of the Company, and to assist the Company in attracting
new, and retaining existing, employees, consultants and directors.

2. DEFINITIONS. The terms set forth below have the following meanings (such
meanings to be applicable to both the singular and plural forms):

(a) "Award" means options, including incentive stock options and
reload options, Restricted Shares, Bonus Shares, stock appreciation rights
(SARs), or Performance Shares granted under the Plan.

(b) "Award Agreement" means the written agreement by which an Award
shall be evidenced.

(d) "Bonus Shares" means Shares that are awarded to a Grantee without
cost and without restrictions in recognition of past performance (whether
determined by reference to another employee benefit plan of the Company or
otherwise) or as an incentive to become an employee, Consultant or director
of the Company or a Subsidiary.

(e) "Code" means the Internal Revenue Code of 1986, as amended, and
regulations and rulings thereunder. References to a particular section of
the Code include references to successor provisions.

(f) "Committee" means the committee of the Board appointed pursuant to
Section 4(a).

(g) "Common Stock" means the common stock of the Company.

(h) "Company" -- see the introductory paragraph.

(i) "Consultant" means any person who is engaged by the Company or any
Subsidiary to render consulting services and is compensated for such
consulting services.

(j) "Disability" means, for purposes of the exercise of an incentive
stock option after termination of employment, a disability within the
meaning of Section 22(e)(3) of the Code, and for all other purposes, a
mental or physical condition which renders a Grantee unable to perform any
of the essential job responsibilities which such Grantee held or the tasks
to which such Grantee was assigned at the time the disability was incurred,
and which condition is expected to be permanent or for an indefinite
duration exceeding two years.

(k) "Disqualifying Disposition" -- see Section 6(c)(vi).

(l) "Effective Date" means March 4, 1997.

(m) "Fair Market Value" of a Share on any relevant date shall be
determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be deemed equal to the
closing selling price per Share on the date in question, as such price
is reported on the Nasdaq National Market or any successor system.

(ii) If the Common Stock is at the time listed on any national
exchange, then the Fair Market Value shall be deemed equal to the
closing selling price of a Share on the date in question on the
securities exchange determined by the Committee to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange.

If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation exists.

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<PAGE> 22

(n) "Grant Date" -- see Section 6(a)(i).

(o) "Grantee" means an individual who has been granted an Award.

(p) "Immediate Family" means, with respect to a particular Grantee,
such Grantee's spouse, children and grandchildren.

(q) "including" or "includes" means "including, without limitation,"
or "includes, without limitation," respectively.

(r) "Mature Shares" means Shares for which the holder thereof has good
title, free and clear of all liens and encumbrances, and which such holder
either (i) has held for at least six months or (ii) has purchased on the
open market.

(s) "1934 Act" means the Securities Exchange Act of 1934, as amended
from time to time. References to a particular section of, or rule under,
the 1934 Act include references to successor provisions.

(t) "Option Price" means the per share exercise price of an option.

(u) "Option Term" means the period beginning on the Grant Date of an
option and ending on the expiration date of such option, as specified in
the Award Agreement for such option and as may, in the discretion of the
Committee and consistent with the provisions of the Plan, be extended from
time to time prior to the expiration date of such stock option then in
effect, provided, however, that such period as extended shall under no
circumstances extend more than 10 years after the Grant Date.

(v) "Participant" means any salaried employee (including any officer)
of the Company or any Subsidiary, including any such salaried employee who
is on an approved leave of absence, layoff, or has been subject to a
disability which does not qualify as a Disability, or any Consultant to or
any non-employee director of the Company or any Subsidiary.

(w) "Performance Percentage" -- see Section 6(f)(i)(C).

(x) "Performance Period" -- see Section 6(f)(i)(B).

(y) "Performance Share" means a right granted to a Participant under
Section 6(f) to receive Shares, the payment of which is contingent upon
achieving certain performance goals established by the Committee as further
specified in Section 6(f).

(z) "Plan" -- see the introductory paragraph.

(aa) "Reload Option" -- see Section 6(d)

(bb) "Required Withholding" -- see Section 11(a).

(cc) "Restricted Shares" means Shares that are subject to vesting
conditions specified in the Award Agreement applicable to such Shares.

(dd) "SAR" means stock appreciation right.

(ee) "SEC" means the Securities and Exchange Commission.

(ff) "Section 16 Person" means a person who is subject to potential
liability under Section 16(b) of the 1934 Act with respect to transactions
involving equity securities of the Company.

(gg) "Share" means a share of Common Stock.

(hh) "Strike Price" -- see Section 6(e)(ii).

(ii) "Subsidiary" means, for purposes of grants of incentive stock
options, a corporation as defined in Section 424(f) of the Code (with the
Company being treated as the employer corporation for purposes of this
definition) and, for all other purposes, a United States or foreign
corporation with respect to which the Company owns, directly or indirectly,
50% or more of the then-outstanding common stock.

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<PAGE> 23

(jj) "10% Owner" means a person who owns capital stock (including
stock treated as owned under Section 424(d) of the Code) possessing more
than 10% of the Voting Power of all classes of capital stock of the Company
or any Subsidiary.

(kk) "Voting Power" means the combined voting power of the
then-outstanding securities of a corporation entitled to vote generally in
the election of directors.

3. SCOPE OF THE PLAN. Subject to adjustment as provided in Section 21, (a)
the total number of Shares available for grant under the Plan shall be 500,000;
(b) no more than 20,000 Shares shall be cumulatively available for the grant of
Restricted Shares under the Plan; (c) no more than 20,000 Shares shall be
cumulatively available for the grant of Bonus Shares under the Plan; and (d) no
more than 150,000 Shares shall be cumulatively available for the grant of SARs
under the Plan. If any Shares subject to any Award granted hereunder fail to
vest or such Award otherwise terminates without the issuance of such Shares or
of other consideration in lieu of such Shares, the Shares subject to such Award,
to the extent of any such failure to vest or termination, shall again be
available for grant under the Plan.

4. ADMINISTRATION.

(a) Subject to Section 4(b), the Plan shall be administered by a committee
(the "Committee") which shall consist of two or more directors of the Company,
all of whom qualify as "outside directors" as defined for purposes of the
regulations under Code Section 162(m) and as "non-employee directors" under Rule
16b-3 in respect of the exemption of grants to Section 16 Persons from potential
liability under Section 16(b) of the 1934 Act. The number of members of the
Committee shall from time to time be increased or decreased, and shall be
subject to such conditions, in each case as the Board deems appropriate to
permit transactions in Shares pursuant to the Plan to satisfy such conditions of
Rule 16b-3 as are then in effect, and to permit Awards under the Plan to satisfy
the conditions for exemption from the limitations of Code Section 162(m).

(b) The Board may reserve to itself or delegate to another committee of the
Board any or all of the authority of the Committee with respect to Awards
except, in the case of such other committee, with respect to Awards to Grantees
who are Section 16 Persons at the time any such delegated authority is
exercised. Such other committee (the "Management Committee") may consist of one
(or such greater number as may from time to time be required by the bylaws of
the Company) or more directors who may, but need not be, officers or employees
of the Company or a Subsidiary. To the extent that the Board has reserved to
itself or delegated to such Management Committee the authority of the Committee,
all references to the Committee in the Plan shall be to the Board or such
Management Committee.

(c) Subject to the express provisions of the Plan, the Committee has full
and final authority and sole discretion as follows:

(i) to determine when and to whom Awards should be granted and the
terms and conditions applicable to each Award, including the benefit payable
under any SAR or Performance Share, and whether or not specific Awards shall
be identified with other specific Awards, and if so whether they shall be
exercisable cumulatively with, or alternatively to, such other specific
Awards;

(ii) to determine the amount, if any, that a Grantee shall pay for
Restricted Shares, whether to permit or require the payment of cash dividends
thereon to be deferred and the terms related thereto, when Restricted Shares
(including Restricted Shares acquired upon the exercise of an option) shall
vest and whether such shares shall be held in escrow;

(iii) to interpret the Plan and to make all determinations necessary or
advisable for the administration of the Plan;

(iv) to make, amend, and rescind rules relating to the Plan, including
rules with respect to the exercisability and vesting of Awards upon the
termination of employment of a Grantee;

(v) to determine the terms and conditions of all Award Agreements
(which need not be identical) and, with the consent of the Grantee, to
amend any such Award Agreement at any time, among other things, to permit
transfers of such Awards to the extent permitted by the Plan; provided that
the consent

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<PAGE> 24

of the Grantee shall not be required for any amendment which (A) does not
adversely affect the rights of the Grantee, or (B) is necessary or
advisable (as determined by the Committee) to carry out the purpose of the
Award as a result of any new or change in existing applicable law;

(vi) to cancel, with the consent of the Grantee, outstanding Awards
and to grant new Awards in substitution therefor;

(vii) to accelerate the exercisability (including exercisability
within a period of less than one year after the Grant Date) of, and to
accelerate or waive any or all of the terms and conditions applicable to,
any Award or any group of Awards for any reason and at any time, including
in connection with a termination of employment;

(viii) subject to Section 6(a)(ii) and 6(c)(ii), to extend the time
during which any Award or group of Awards may be exercised;

(ix) to make such adjustments or modifications to Awards to Grantees
working outside the United States as are advisable to fulfill the purposes
of the Plan;

(x) to impose such additional terms and conditions upon the grant,
exercise or retention of Awards as the Committee may, before or
concurrently with the grant thereof, deem appropriate, including limiting
the percentage of Awards which may from time to time be exercised by a
Grantee; and

(xi) to take any other action as the Committee may deem necessary or
advisable with respect to any matters relating to the Plan for which it is
responsible.

The determination of the Committee on all matters relating to the Plan or
any Award Agreement shall be final. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Award.

5. ELIGIBILITY. The Committee may in its discretion grant Awards to any
Participant, whether or not he or she has previously received an Award.
References in Section 13 to termination of a Grantee's employment shall be
deemed to include termination of a Grantee's status as a Consultant or
non-employee director of the Company.

6. CONDITIONS TO GRANTS.

(a) General Conditions.

(i) The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by
the Committee.

(ii) Any provision of the Plan to the contrary notwithstanding, an
Option Term shall under no circumstances extend more than 10 years after
the Grant Date, and shall be subject to earlier termination as herein
provided.

(iii) To the extent not set forth in the Plan, the terms and
conditions of each Award shall be set forth in an Award Agreement.

(b) Grant of Options.

(i) No later than the Grant Date of any option, the Committee shall
determine the Option Price of such option. The Option Price of an option
shall not be less than 100% of the Fair Market Value of a Share on the
Grant Date. An option shall be exercisable for unrestricted Shares unless
the Award Agreement provides that it is exercisable for Restricted Shares.

(ii) The Committee may, in its discretion, permit a Participant to
elect, before earning compensation, to be granted an Award in lieu of
receiving such compensation; provided that, in the judgment of the
Committee, the value of such Award on the Grant Date equals the amount of
compensation foregone by such employee.

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<PAGE> 25

(iii) The number of shares for which options may be granted to any
Grantee in any calendar year shall not exceed 150,000, subject to
adjustment as provided in Section 21.

(c) Grant of Incentive Stock Options. At the time of the grant of any
option, the Committee may in its discretion designate that such option shall be
made subject to additional restrictions to permit it to qualify as an "incentive
stock option" under the requirements of Section 422 of the Code. Only employees
(including directors who are employees) may be granted incentive stock options.
Any option designated as an incentive stock option:

(i) shall, if granted to a 10% Owner, have an Option Price not less
than 110% of the Fair Market Value of a Share on the Grant Date;

(ii) shall be for a period of not more than 10 years (five years in
the case of an incentive stock option granted to a 10% Owner) from the
Grant Date, and shall be subject to earlier termination as provided herein
or in the applicable Award Agreement;

(iii) shall not have an aggregate Fair Market Value (determined for
each incentive stock option at its Grant Date) of the Shares with respect
to which incentive stock options are exercisable for the first time by such
Grantee during any calendar year (under the Plan and any other employee
stock option plan of the Grantee's employer or any parent or Subsidiary
thereof ("Other Plans")), determined in accordance with the provisions of
Section 422 of the Code, which exceeds $100,000 (the "$100,000 Limit");

(iv) shall, if the aggregate Fair Market Value of the Shares
(determined on the Grant Date) with respect to the portion of such grant
which is exercisable for the first time during any calendar year ("Current
Grant") and all incentive stock options previously granted under the Plan
and any Other Plans which are exercisable for the first time during a
calendar year ("Prior Grants") would exceed the $100,000 Limit, be
exercisable as follows:

(A) the portion of the Current Grant which would, when added to any
Prior Grants, be exercisable with respect to Shares which would have an
aggregate Fair Market Value (determined as of the respective Grant Date
for such options) in excess of the $100,000 Limit shall, notwithstanding
the terms of the Current Grant, be exercisable for the first time by the
Grantee in the first subsequent calendar year or years in which it could
be exercisable for the first time by the Grantee when added to all Prior
Grants without exceeding the $100,000 Limit; and

(B) if, viewed as of the date of the Current Grant, any portion of
a Current Grant could not be exercised under the preceding provisions of
this Section during any calendar year commencing with the calendar year
in which it is first exercisable through and including the last calendar
year in which it may by its terms be exercised, such portion of the
Current Grant shall not be an incentive stock option, but shall be
exercisable as a separate option at such date or dates as are provided
in the Current Grant;

(v) shall be granted within 10 years from the earlier of the date the
Plan is adopted or the date the Plan is approved by the shareholders of the
Company;

(vi) shall require the Grantee to notify the Committee of any
disposition of any Shares issued pursuant to the exercise of the incentive
stock option under the circumstances described in Section 421(b) of the
Code (relating to certain disqualifying dispositions) (any such
circumstance, a "Disqualifying Disposition"), within 10 days of such
Disqualifying Disposition; and

(vii) shall by its terms not be assignable or transferable other than
by will or the laws of descent and distribution and may be exercised,
during the Grantee's lifetime, only by the Grantee; provided, however, that
the Grantee may, to the extent provided in the Plan in any manner specified
by the Committee, designate in writing a beneficiary to exercise his or her
incentive stock option after the Grantee's death.

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<PAGE> 26

Notwithstanding the foregoing and Section 4(c)(v), the Committee may,
without the consent of the Grantee, at any time before the exercise of an option
(whether or not an incentive stock option), take any action necessary to prevent
such option from being treated as an incentive stock option.

(d) Grant of Reload Options. The Committee may in connection with the grant
of an option or thereafter provide that a Grantee who (i) is a Participant when
he or she exercises an Option, (ii) exercises such option for Shares which have
a Fair Market Value equal to not less than 120% of the Option Price for such
option ("Exercised Option"), and (iii) satisfies the Option Price or Required
Withholding applicable thereto with Shares shall automatically be granted,
subject to Section 3, an additional option ("Reload Option") in an amount equal
to the sum ("Reload Number") of the number of Shares tendered to exercise the
Exercised Option plus, if so provided by the Committee, the number of Shares, if
any, retained by the Company in connection with the exercise of the Exercised
Option to satisfy any federal, state or local tax withholding requirements;
provided that no Reload Option shall be granted in connection with the exercise
of an Option that has been transferred by the initial Grantee thereof.

Reload Options shall be subject to the following terms and conditions:

(i) the Grant Date for each Reload Option shall be the date of
exercise of the Exercised Option to which it relates;

(ii) subject to Section 6(d)(iii), the Reload Option may be exercised
at any time during the Option Term of the Exercised Option (subject to
earlier termination thereof as provided in the Plan or in the applicable
Award Agreement); and

(iii) the terms of the Reload Option shall be the same as the terms of
the Exercised Option to which it relates, except that (A) the Option Price
shall be 100% of the Fair Market Value of a Share on the Grant Date of the
Reload Option, (B) subject to Section 4(c)(vii), no Reload Option may be
exercised within one year after its Grant Date, and (C) in no event shall a
second Reload Option be granted in connection with the exercise of such
initial Reload Option.

(e) Grant of SARS.

(i) When granted, SARs may, but need not, be identified with a
specific option, specific Restricted Shares, or specific Performance Shares
of the Grantee (including any option, Restricted Shares, or Performance
Shares granted on or before the Grant Date of the SARs) in a number equal
to or different from the number of SARs so granted. If SARs are identified
with Shares subject to an option, with Restricted Shares, or with
Performance Shares, then, unless otherwise provided in the applicable Award
Agreement, the Grantee's associated SARs shall terminate upon (x) the
expiration, termination, failure to vest or cancellation of such option,
Restricted Shares, or Performance Shares, (y) the exercise of such option
or Performance Shares or (z) the date such Restricted Shares vest.

(ii) The strike price ("Strike Price") of any SAR shall equal, for any
SAR that is identified with an option, the Option Price of such option, or
for any other SAR, 100% of the Fair Market Value of a Share on the Grant
Date of such SAR; provided that the Committee may (x) specify a higher
Strike Price in the Award Agreement, or (y) provide that the benefit
payable upon exercise of any SAR shall not exceed such percentage of the
Fair Market Value of a Share on such Grant Date as the Committee shall
specify.

(iii) The number of shares for which SARs may be granted to any
Grantee in any calendar year shall not exceed 150,000, subject to
adjustment as provided in Section 21.

(f) Grant of Performance Shares.

(i) Before the grant of any Performance Share, the Committee shall:

(A) determine objective performance goals (which may consist of any
one or more of the following: the attainment by a Share of a specified
Fair Market Value for a specified period of time, earnings per share,
return to shareholders (including dividends), return on equity, earnings
of the Company, growth in revenues, market share, cash flow or cost
reduction or customer service goals, or

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<PAGE> 27

any combination of the foregoing), and the amount of compensation under
the goals applicable to such grant;

(B) designate a period, of not less than one year nor more than
five years, for the measurement of the extent to which performance goals
are attained, which period may begin prior to the Grant Date (the
"Performance Period"); and

(C) assign a "Performance Percentage" to each level of attainment
of performance goals during the Performance Period, with the percentage
applicable to minimum attainment being zero percent (0%) and the
percentage applicable to maximum attainment to be determined by the
Committee from time to time, but not in excess of 200%.

(ii) If a Grantee is promoted, demoted or transferred to a different
position or different business unit of the Company during a Performance
Period, then, to the extent the Committee determines the performance goals
or Performance Period are no longer appropriate, the Committee may adjust,
change or eliminate the performance goals or the applicable Performance
Period as it deems appropriate in order to make them appropriate and
comparable to the initial performance goals or Performance Period.

(iii) When granted, Performance Shares may, but need not, be
identified with Shares subject to a specific option, specific Restricted
Shares or specific SARs of the Grantee granted under the Plan in a number
equal to or different from the number of the Performance Shares so granted.
If Performance Shares are so identified, then, unless otherwise provided in
the applicable Award Agreement, the Grantee's associated Performance Shares
shall terminate upon (A) the expiration, termination, failure to vest or
cancellation of the option, Restricted Shares or SARs with which the
Performance Shares are identified, (B) the exercise of such option or SARs
or (C) the date Restricted Shares vest.

(iv) The Shares related to the Performance Shares awarded to any
Grantee for any Performance Period shall not have a Fair Market Value as of
the Grant Date in excess of 100% of the Grantee's base annual salary in
effect at the time of the grant of the Award multiplied by the number of
years in the Performance Period.

(g) Grant of Restricted Shares.

(i) The Committee shall determine the amount, if any, that a Grantee
shall pay for Restricted Shares.

(ii) The Committee may, but need not, provide that all or any portion
of a Grantee's Restricted Shares, or Restricted Shares acquired upon
exercise of an option shall fail to vest:

(A) except as otherwise specified in the Plan or the Award
Agreement, upon the Grantee's ceasing to be a Participant within a
specified time period after the Grant Date, or

(B) if the Company or the Grantee does not achieve specified
performance goals (if any) within a specified time period after the
Grant Date and before the Grantee ceases to be a Participant, or

(iii) If Restricted Shares fail to vest, then if the Grantee was
required to pay for such shares or acquired such Restricted Shares upon the
exercise of an option, the Grantee shall be deemed to have resold such
Restricted Shares to the Company at a price equal to the lesser of (x) the
amount paid by the Grantee for such Restricted Shares, or (y) the Fair
Market Value of such Restricted Shares on the date of such failure to vest.
The Company shall pay to the Grantee the required amount as soon as is
administratively practical. Such Restricted Shares shall cease to be
outstanding, and shall no longer confer on the Grantee thereof any rights
as a shareholder of the Company, from and after the date or the event
causing the failure to vest, whether or not the Grantee accepts the
Company's tender of payment for such Restricted Shares.

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<PAGE> 28

(iv) The Committee may provide that the certificates for any
Restricted Shares (x) shall be held (together with a stock power executed
in blank by the Grantee) in escrow by the Secretary of the Company until
such Restricted Shares vest or fail to vest, and/or (y) shall bear an
appropriate legend restricting the transfer of such Restricted Shares. If
any Restricted Shares vest, the Company shall cause certificates for such
shares to be issued without such legend.

(v) The Committee may require the payment of cash dividends on
Restricted Shares to be deferred and, if the Committee so determines,
reinvested in additional Restricted Shares. Stock dividends and deferred
cash dividends issued with respect to Restricted Shares shall be subject to
the same restrictions and other terms as apply to the Restricted Shares
with respect to which such dividends are issued. The Committee may provide
for payment of interest on deferred cash dividends.

(h) Grant of Bonus Shares. The Committee may grant Bonus Shares to any
Participant.

7. NON-TRANSFERABILITY. Each Award granted hereunder shall not be
assignable or transferable other than by will or the laws of descent and
distribution and may be exercised, during the Grantee's lifetime, only by the
Grantee or his or her guardian or legal representative, except that, subject to
Section 6(c)(vii) in respect of incentive stock options, a Grantee may in a
manner and to the extent permitted by the Committee in its discretion, (i)
designate in writing a beneficiary to exercise an Award after his or her death
(provided, however, that no such designation shall be effective unless received
by the office of the Company designated for that purpose prior to the Grantee's
death) and (ii) transfer a Stock Option (other than an incentive stock option)
to a member of his or her Immediate Family, to a trust established exclusively
for such Immediate Family member or to a limited liability company or
partnership of which all of the members or partners are members of the Grantee's
Immediate Family. The Committee may specify different or more restrictive
provisions applicable to a transferred Award.

8. EXERCISE.

(a) Exercise of Options.

(i) Subject to Sections 4(c)(vii), 6(d) and 8(d) and except as
otherwise provided in the applicable Award Agreement, each option shall
become exercisable with respect to 6.25% of the shares subject thereto on
the first day of each of the first sixteen calendar quarters after the
Grant Date of such option. Options shall be exercisable for a period of not
more than 10 years from the Grant Date, and shall be subject to earlier
termination as provided herein or in the applicable Award Agreement.

(ii) An option shall be exercised by the delivery to the Company
during the Option Term of (x) written notice of intent to purchase a
specific number of Shares subject to the option and (y) payment in full of
the Option Price of such specific number of Shares.

(iii) Payment of the Option Price may be made by any one or more of
the following means: personal check or wire transfer; Mature Shares, valued
at their Fair Market Value on the date of exercise; with the approval of
the Committee, Restricted Shares held by the Grantee for at least six
months prior to the exercise of the option, each such share valued at the
Fair Market Value of a Share on the date of exercise; through the sale of
the Shares acquired on exercise of the option through a broker-dealer to
whom the Grantee has submitted an irrevocable notice of exercise and
irrevocable instructions to deliver promptly to the Company the amount of
sale or loan proceeds sufficient to pay for such Shares, together with, if
requested by the Company, the amount of federal, state, local or foreign
withholding taxes payable by the Grantee by reason of such exercise; or
through simultaneous sale of shares acquired on exercise of the option
through a broker-dealer acceptable to the Company to whom the Grantee has
submitted an irrevocable notice of exercise, as permitted under Regulation
T of the Federal Reserve Board. In the discretion of the Committee, payment
may also be made in accordance with Section 9. The Committee may in its
discretion specify that, if any Restricted Shares ("Tendered Restricted
Shares") are used to pay the Option Price, (x) all the Shares acquired on
exercise of the option shall be subject to the same restrictions as the
Tendered Restricted Shares, determined as of the date of exercise of the
option, or (y) a number of Shares acquired on exercise of the option equal
to the number of Tendered Restricted

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<PAGE> 29

Shares shall be subject to the same restrictions as the Tendered Restricted
Shares, determined as of the date of exercise of the option.

(b) Exercise of SARS.

(i) Subject to Sections 4(c)(vii), 6(d) and 8(d), and except as
otherwise provided in the applicable Award Agreement, (x) each SAR not
identified with any other Award shall become exercisable with respect to
6.25% of the shares subject thereto on the first day of each of the first
sixteen calendar quarters after the Grant Date of such SAR and (y) each SAR
which is identified with any other Award shall become exercisable as and to
extent that the option or Restricted Shares with which such SAR is
identified may be exercised or becomes nonforfeitable, as the case may be.
SARs shall be exercisable for a period of not more than 10 years from the
Grant Date, and shall be subject to earlier termination as provided herein
or in the applicable Award Agreement.

(ii) SARs shall be exercised by delivery to the Company of written
notice of intent to exercise a specific number of SARs. Unless otherwise
provided in the applicable Award Agreement, the exercise of SARs which are
identified with Shares subject to an option or Restricted Shares shall
result in the cancellation or failure to vest of such option or Restricted
Shares, as the case may be, to the extent of such exercise.

(iii) The benefit for each SAR exercised shall be equal to (x) the
Fair Market Value of a Share on the date of such exercise, minus (y) the
Strike Price of such SAR. Such benefit shall be payable in cash, except
that the Committee may provide in the Award Agreement that benefits may be
paid wholly or partly in Shares.

(c) Payment of Performance Shares. Unless otherwise provided in the Award
Agreement with respect to an Award of Performance Shares, if the minimum
performance goals applicable to such Performance Shares have been achieved
during the applicable Performance Period, then the Company shall pay to the
Grantee of such Award that number of Shares equal to the product of:

(i) the sum of (x) number of Performance Shares specified in the
applicable Award Agreement and (y) the number of Shares that would have
been issuable if such Performance Shares had been Shares outstanding
throughout the Performance Period and the stock dividends, cash dividends
(except as otherwise provided in the Award Agreement), and other property
paid in respect of such shares had been reinvested in additional Shares as
of each dividend payment date, multiplied by

(ii) the Performance Percentage achieved during such Performance
Period.

The Committee may in its discretion determine that cash be paid in lieu of
some or all of such Shares. The amount of cash payable in lieu of a Share shall
be determined by valuing such share at its Fair Market Value on the business day
next preceding the date such cash is to be paid. Payments pursuant to this
Section shall be made as soon as administratively practical after the end of the
applicable Performance Period. Any Performance Shares with respect to which the
performance goals shall not have been achieved by the end of the applicable
Performance Period shall expire.

(d) Pooling Considerations. Any provision of the Plan to the contrary
notwithstanding, if the Committee determines, in its discretion exercised prior
to a sale or merger of the Company that in the Committee's judgment is
reasonably likely to occur, that the exercise of SARs would preclude the use of
pooling-of-interests accounting ("pooling") after the consummation of such sale
or merger and that such preclusion of pooling would have a material adverse
effect on such sale or merger, the Committee may either unilaterally cancel such
SARs prior to the consummation of such sale or merger or cause the Company to
pay the benefit attributable to such SARs in the form of Shares if the Committee
determines that such payment would not cause the transaction to become
ineligible for pooling.

9. LOANS AND GUARANTEES. The Committee may in its discretion allow a
Grantee to defer payment to the Company of all or any portion of (i) the Option
Price of an option, (ii) the purchase price of Restricted Shares, or (iii) any
taxes associated with the exercise, vesting of, or payment of benefits in
connection with, an Award, or cause the Company to guarantee a loan from a third
party to the Grantee, in an amount equal to all

9
<PAGE> 30

or any portion of such Option Price, purchase price or any related taxes. Any
such payment deferral or guarantee by the Company shall be on such terms and
conditions as the Committee may determine; provided that the interest rate
applicable to any such payment deferral shall not be more favorable to the
Grantee than the terms applicable to funds borrowed by the Company from time to
time. Notwithstanding the foregoing, a Grantee shall not be entitled to defer
the payment of such Option Price, purchase price or any related taxes unless the
Grantee enters into a binding obligation to pay the deferred amount. If the
Committee has permitted a payment deferral or caused the Company to guarantee a
loan pursuant to this Section, then the Committee may require the immediate
payment of such deferred amount or the immediate release of such guarantee upon
the Grantee's ceasing to be a Participant or if the Grantee sells or otherwise
transfers his or her Shares purchased pursuant to such deferral or guarantee.
The Committee may at any time in its discretion forgive the repayment of any or
all of the principal of, or interest on, any such deferred payment obligation.

10. NOTIFICATION UNDER SECTION 83(b). If the Grantee, in connection with
the exercise of any option or the grant of Restricted Shares, makes the election
permitted under Section 83(b) of the Code to include in such Grantee's gross
income in the year of transfer the amounts specified in Section 83(b) of the
Code, then such Grantee shall notify the Company of such election within 10 days
of filing the notice of the election with the Internal Revenue Service, in
addition to any filing and notification required pursuant to regulations issued
under Section 83(b) of the Code. The Committee may, in connection with the grant
of an Award or at any time thereafter, prohibit a Grantee from making the
election described above.

11. MANDATORY TAX WITHHOLDING.

(a) Whenever under the Plan Shares are to be delivered upon exercise or
payment of an Award, or upon the vesting of Restricted Shares, or any other
event with respect to rights and benefits hereunder, the Company shall be
entitled to require (i) that the Grantee remit an amount in cash, or in the
Company's discretion, Mature Shares, sufficient to satisfy all federal, state
and local tax withholding requirements related thereto ("Required Withholding"),
(ii) the withholding of such Required Withholding from compensation otherwise
due to the Grantee or from any Shares due to the Grantee under the Plan, or
(iii) any combination of the foregoing.

(b) Any Grantee who makes a Disqualifying Disposition or an election under
Section 83(b) of the Code shall remit to the Company an amount sufficient to
satisfy all resulting Required Withholding; provided that, in lieu of or in
addition to the foregoing, the Company shall have the right to withhold such
Required Withholding from compensation otherwise due to the Grantee or from any
Shares or other payment due to the Grantee under the Plan.

12. ELECTIVE SHARE WITHHOLDING.

(a) Subject to the following subsection, a Grantee may elect the
withholding ("Share Withholding") by the Company of a portion of the Shares
otherwise deliverable to such Grantee upon the exercise of an Award or upon the
vesting of Restricted Shares (each, a "Taxable Event") having a Fair Market
Value equal to (i) the minimum amount necessary to satisfy Required Withholding
liability attributable to the Taxable Event; or (ii) with the Committee's prior
approval, a greater amount, not to exceed the estimated total amount of such
Grantee's tax liability with respect to the Taxable Event.

(b) Each Share Withholding election shall be subject to the following
conditions:

(i) the Grantee's election must be made before the date (the "Tax
Date") on which the amount of tax to be withheld is determined; and

(ii) the Grantee's election shall be irrevocable.

13. TERMINATION OF EMPLOYMENT.

(a) Certain Terminations. If a Grantee's employment is terminated due to
any reason other than those set forth in Sections 13(b), (c) or (d), (i) the
Grantee's Restricted Shares that are not vested at the time of such termination
of employment shall thereupon terminate without vesting, subject to the
provisions of

10
<PAGE> 31

Section 6(g)(iii) regarding repayment of certain amounts to the Grantee; and
(ii) any unexercised option, SAR or Performance Share shall terminate effective
immediately upon such termination of employment.

(b) On Account of Death. Except as otherwise provided by the Committee in
the Award Agreement, if a Grantee's employment terminates on account of death,
then:

(i) the Grantee's Restricted Shares that were not vested shall
thereupon vest;

(ii) any unexercised option or SAR, whether or not exercisable on the
date of such termination of employment, may be exercised, in whole or in
part, within one year after such termination of employment (but only during
the Option Term) by (A) the Grantee's personal representative or by the
person to whom the option or SAR, as applicable, is transferred by will or
the applicable laws of descent and distribution, (B) the Grantee's
beneficiary designated in accordance with Sections 6(c)(vii) or 7, or (C)
the Grantee's Immediate Family member to whom the option or SAR was
transferred in accordance with Section 7; and

(iii) any unexercised Performance Share may be exercised in whole or
in part, at any time within one year after such termination of employment
on account of death, by (A) the Grantee's personal representative or by the
person to whom the Performance Share is transferred by will or the
applicable laws of descent and distribution, (B) the Grantee's beneficiary
designated in accordance with Section 7, or (C) the Grantee's Immediate
Family member to whom the Performance Share was transferred in accordance
with Section 7; provided that the benefit payable with respect to any
Performance Share with respect to which the Performance Period has not
ended as of the date of such termination of employment on account of death
shall be equal to the product of the Fair Market Value of a Share Value
multiplied successively by each of the following:

(1) a fraction, the numerator of which is the number of whole and
partial months that have elapsed between the beginning of such
Performance Period and the date of such termination of employment and
the denominator of which is the number of whole and partial months in
the Performance Period; and

(2) a percentage determined in the discretion of the Committee that
would be earned under the terms of the applicable Award Agreement
assuming that the rate at which the performance goals have been achieved
as of the date of such termination of employment would continue until
the end of the Performance Period, or, if the Committee elects to
compute the benefit after the end of the Performance Period, the
Performance Percentage, as determined by the Committee, attained during
the Performance Period for the Performance Share.

(c) On Account of Disability. Except as otherwise provided by the Committee
in the Award Agreement, if a Grantee's employment terminates on account of
Disability, then:

(i) the Grantee's Restricted Shares that were not vested shall
thereupon vest;

(ii) any unexercised option or SAR, whether or not exercisable on the
date of such termination of employment, may be exercised, in whole or in
part, within one year after such termination of employment (but only during
the Option Term) by the Grantee or, after his or her death, by (A) his or
her personal representative or by the person to whom the option or SAR, as
applicable, is transferred by will or the applicable laws of descent and
distribution, (B) the Grantee's beneficiary designated in accordance with
Sections 6(c)(vii) or 7, or (C) the Grantee's Immediate Family member to
whom the option or SAR was transferred in accordance with Section 7; and

(iii) any unexercised Performance Share may be exercised in whole or
in part, at any time within one year after such termination of employment
on account of Disability by the Grantee or, after the Grantee's death, by
(A) his personal representative or by the person to whom the Performance
Share is transferred by will or the applicable laws of descent and
distribution, (B) the Grantee's beneficiary designated in accordance with
Section 7, or (C) the Grantee's Immediate Family member to whom the
Performance Share was transferred in accordance with Section 7; provided
that the benefit payable with respect to any Performance Share with respect
to which the Performance Period has not ended as of the

11
<PAGE> 32

date of such termination of employment on account of Disability shall be
equal to the product of the Fair Market Value of a Share Value multiplied
successively by each of the following:

(d) Certain Other Terminations. Except as otherwise provided in the Award
Agreement, if a Grantee's employment with or service to the Company terminates
due to (i) resignation after age 65 or 10 years of service to or employment with
the Company or any Subsidiary, provided such Grantee after his or her
resignation is not employed or engaged by, and does not serve on the board of
directors of, a competitor of the Company or any Subsidiary or (ii) elimination
of the Grantee's position with the Company or a reduction in the Company's work
force, then:

(i) the Grantee's Restricted Shares (and any SARs identified
therewith), to the extent not vested on the date of the Grantee's
termination of employment), shall terminate without vesting on such date,
subject to the provisions of Section 6(g)(iii) regarding repayment of
certain amounts to the Grantee;

(ii) any unexercised option or SAR (other than a SAR identified with a
Restricted Share or Performance Share), to the extent exercisable
immediately before the Grantee's termination of employment, may be
exercised in whole or in part within such period as shall be specified in
the Award Agreement, which shall not be later than three months after such
termination of employment (but only during the Option Term); and

(iii) the Grantee's Performance Shares (and any SARs identified
therewith) may vest and may be exercised in whole or in part, only if and
to the extent determined by the Committee.

For purposes of this Section 13(d), the Committee in its sole discretion
shall determine whether a person or entity constitutes a competitor of the
Company or any Subsidiary.

(e) Extended Exercisability. If the Grantee has entered into an agreement
with the Company not to sell any Shares (or the capital stock of a successor to
the Company) for a specified period after the consummation of a business
combination between the Company and another corporation or entity (the
"Specified Period"), an unexercised option or SAR (other than an SAR identified
with a Restricted Share or a Performance Share) may be exercised in whole or in
part until the later of the end of the post-termination period specified in
subparagraphs (b), (c) or (d) of this Section, as applicable, or 10 business
days after the end of the Specified Period.

(f) Extension of Term. In the event of a termination of the Grantee's
employment for any of the reasons specified in subparagraphs (b), (c) and (d) of
this Section, the term of any Award (whether or not exercisable immediately
before such termination) which would otherwise expire after the Grantee's
termination of employment but before the end of the period following such
termination of employment described in subparagraphs (b), (c) and (d) of this
Section for exercise of Awards may, in the Committee's discretion, be extended
so as to permit any unexercised portion thereof to be exercised at any time
within such period. The Committee may further extend the period of
exercisability to permit any unexercised portion thereof to be exercised within
a specified period provided by the Committee.

14. PLANS OF FOREIGN SUBSIDIARIES. The Committee may authorize any foreign
Subsidiary to adopt a plan for granting Awards ("Foreign Plan"). All Awards
granted under such Foreign Plan shall be treated as grants under the Plan. Such
Foreign Plans shall have such provisions as the Committee permits not

12
<PAGE> 33

inconsistent with the provisions of the Plan. Awards granted under a Foreign
Plan shall be governed by the terms of the Plan, except to the extent that the
provisions of the Foreign Plan are more restrictive than the provisions of the
Plan, in which case the Foreign Plan shall control.

15. SUBSTITUTED AWARDS. If the Committee cancels any Award (whether granted
under this Plan or any plan of any entity acquired by the Company or a
Subsidiary), the Committee may in its discretion substitute a new Award therefor
upon such terms and conditions consistent with the Plan as the Committee may
determine; provided, that (a) the Option Price of any new option, and the Strike
Price of any new SAR, shall not be less than 100% (110% in the case of an
incentive stock option granted to a 10% Owner) of the Fair Market Value of a
Share on the date of grant of the new Award; and (b) the Grant Date of the new
Award shall be the date on which such new Award is granted.

16. SECURITIES LAW MATTERS. If the Committee deems it necessary to comply
with any applicable securities law, the Committee may require a written
investment intent representation by the Grantee, or any transferee of the
Grantee, and may require that a restrictive legend be affixed to certificates
for Shares. If, based upon the advice of counsel for the Company, the Committee
determines that the exercise or vesting of, or delivery of benefits pursuant to,
any Award would violate any applicable provision of (a) federal or state
securities laws or (b) the listing requirements of any national securities
exchange or national market system on which are listed any of the Company's
equity securities, then the Committee may postpone any such exercise, vesting or
delivery, as applicable, but the Company shall use all reasonable efforts to
cause such exercise, vesting or delivery to comply with all such provisions at
the earliest practicable date.

17. NO EMPLOYMENT RIGHTS. Neither the establishment of the Plan nor the
grant of any Award shall (a) give any Grantee the right to remain employed by,
or continue in the service of, the Company or any Subsidiary or to any benefits
not specifically provided by the Plan or (b) modify the right of the Company or
any Subsidiary to modify, amend or terminate any benefit plan.

18. NO RIGHTS AS A SHAREHOLDER. A Grantee shall not have any rights as a
shareholder of the Company with respect to the Shares (other than Restricted
Shares) which may be deliverable upon exercise or payment of such Award until
such shares have been delivered to him or her. Restricted Shares, whether held
by a Grantee or in escrow by the Secretary of the Company, shall confer on the
Grantee all rights of a shareholder of the Company, except as otherwise provided
in the Plan or in the Award Agreement.

19. NATURE OF PAYMENTS. Awards shall be special incentive payments to the
Grantee and shall not be taken into account in computing the amount of salary or
compensation of the Grantee for purposes of determining any pension, retirement,
death or other benefit under (a) any pension, retirement, profit-sharing, bonus,
insurance or other benefit plan of the Company or any Subsidiary or (b) any
agreement between (i) the Company or any Subsidiary and (ii) the Grantee, except
as such plan or agreement shall otherwise expressly provide.

20. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the
Plan need not be uniform and may be made by the Committee selectively among
persons who receive, or are eligible to receive, Awards, whether or not such
persons are similarly situated. Without limiting the generality of the
foregoing, the Committee shall be entitled, to enter into non-uniform and
selective Award Agreements as to (a) the identity of the Grantees, (b) the terms
and provisions of Awards, and (c) the treatment of terminations of status as a
Participant.

21. ADJUSTMENTS.

(a) The Committee shall make equitable adjustment of:

(i) the aggregate numbers of Shares available under the Plan for
Awards in general and for the grant of Restricted Shares, Bonus Shares and
SARs and the number of Shares for which options may be granted to any
Grantee pursuant to Section 6(b)(iii) and for which SARs may be granted to
any Grantee pursuant to Section 6(e)(iii),

(ii) the number of Shares, SARs or Performance Shares covered by an
Award, and

13
<PAGE> 34

(iii) the Option Price of all outstanding options and the Strike Price
of all outstanding SARs, to reflect a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
spin-off, split-off, reorganization, rights offering, liquidation or
similar event, of or by the Company.

(b) Notwithstanding any provision in this Plan or any Award Agreement, in
the event of a sale, merger, reorganization, consolidation or similar
transaction in connection with which the holders of Common Stock receive shares
of common stock of the surviving or successor corporation that are registered
under Section 12 of the 1934 Act, there shall be substituted for each option and
SAR outstanding on the date of the consummation of such transaction, a new
option or SAR, as the case may be, reflecting the number and class of shares
into which each outstanding Share shall be converted pursuant to such
transaction and providing each Grantee with rights that are substantially
identical to those under this Plan in all material respects. In the event of any
such substitution, the purchase price per share in the case of an option and the
Strike Price in the case of an SAR shall be appropriately adjusted by the
Committee, such adjustments to be made in the case of outstanding options and
SARs without a change in the aggregate purchase price or Strike Price.

22. AMENDMENT OF THE PLAN. The Board may from time to time in its
discretion amend the Plan without the approval of the Company's shareholders,
except as such shareholder approval may be required under the listing
requirements of any national market system or securities exchange on which are
listed the Company's equity securities or under the Code in order to preserve
the intended federal tax effects of an Award on the Company and the Grantee.
Notwithstanding the foregoing, the Board may not amend the Plan to increase the
total number of Shares reserved for the purposes of the Plan or change the
employees or class of employees eligible to participate in the Plan without
shareholder approval.

23. TERMINATION OF THE PLAN. The Plan shall terminate on the 10th
anniversary of the Effective Date or at such earlier time as the Board may
determine. No termination shall affect any Award then outstanding under the
Plan.

24. NO ILLEGAL TRANSACTIONS. The Plan and all Awards granted pursuant to it
are subject to all applicable laws and regulations. Notwithstanding any
provision of the Plan or any Award, Grantees shall not be entitled to exercise,
or receive benefits under, any Award, and the Company shall not be obligated to
deliver any Shares or deliver benefits to a Grantee, if such exercise or
delivery would constitute a violation by the Grantee or the Company of any
applicable law or regulation.

25. CONTROLLING LAW. The law of California, except its law with respect to
choice of law, shall control all matters relating to the Plan.

26. SEVERABILITY. If any part of the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.

14
<PAGE> 35
PROXY

PHARMCHEM LABORATORIES, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

ANNUAL MEETING OF SHAREHOLDERS MAY 20, 1997

The undersigned shareholder of PharmChem Laboratories, Inc., a California
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated April 18, 1997, and hereby
appoints Joseph W. Halligan and David A. Lattanzio, and each of them
individually, proxy and attorney-in-fact, with full power of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
Annual Meeting of Shareholders of PHARMCHEM LABORATORIES, INC., to be held on
May 20, 1997, at 10:00 a.m., local time, at the Hyatt Rickeys at 4219 El Camino
Real, Palo Alto, California 94036 and at any adjournment(s) thereof, and to
vote all shares of Common Stock which the undersigned would be entitled to vote
if then and there personally present on the matters set forth below.

THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE
VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR LISTED ON THE REVERSE SIDE,
FOR THE APPROVAL OF THE ADOPTION OF THE 1997 EQUITY INCENTIVE PLAN AND FOR THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS AND AS
SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE
MEETING.

Either of such attorneys or substitutes shall have and may exercise all of the
powers of said attorneys-in-fact hereunder.

(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)

- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 36
Please mark
your vote as
indicated in
this example. [X]

WITHHELD
FOR FOR ALL
<S> <C> <C>
1. ELECTION OF DIRECTORS

Nominees: Joseph W. Halligan, Richard D. Irwin, [ ] [ ]
Thomas S. Volpe

WITHHELD FOR: (Write that nominee's name in the
space provided below.)

----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
2. PROPOSAL TO APPROVE THE ADOPTION OF [ ] [ ] [ ]
THE 1997 EQUITY INCENTIVE PLAN.

FOR AGAINST ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF [ ] [ ] [ ]
KPMG Peat Marwick LLP as independent public
accountants for the company for the 1997 fiscal year.

FOR AGAINST ABSTAIN
4. Upon such other matters as may properly come [ ] [ ] [ ]
before the meeting or any adjournments or
postponements thereof.
</TABLE>

PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT IN THE ACCOMPANYING
ENVELOPE.

SIGNATURE(S) DATE
---------------------------------------------------- ------------
NOTE: Please sign exactly as your name appears on this proxy. If signing for
an estate, trust or corporation, your title and capacity should be
stated. If shares are held jointly, each holder should sign.

- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE