TARGET THERAPEUTICS INC, DEF 14A, 1996-07-24

TARGET THERAPEUTICS INC
DEF 14A, 1996-07-24
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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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:

<TABLE>
<S> <C>
/ / 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 sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

Target Therapeutics, 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):

/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (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:

/X/ Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
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TARGET THERAPEUTICS, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD SEPTEMBER 4, 1996

TO THE STOCKHOLDERS:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of TARGET
THERAPEUTICS, INC., a Delaware corporation (the "Company"), will be held on
Wednesday, September 4, 1996 at 9:30 a.m., local time, at the Company's
principal offices located at 47201 Lakeview Boulevard, Fremont, California
94538, for the following purposes:

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

2. To approve an amendment to the 1988 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
1,500,000 shares.

3. To approve amendments to the 1991 Director Option Plan to make certain
changes to the formulas pursuant to which options are granted thereunder
and to the provisions regarding adjustments necessitated by changes in
the Company's capital structure.

4. To approve amendments to the 1991 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 100,000 shares and make certain other changes to
participation standards and offering periods.

5. To approve an amendment to the Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 25,000,000 to
120,000,000.

6. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending March 31, 1997.

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

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. Only stockholders of record at the close of
business on July 12, 1996 are entitled to notice of and to vote at the Annual
Meeting and any adjournments thereof.

All stockholders are cordially invited to attend the Annual Meeting.
However, to assure your representation at the 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 stockholder attending
the meeting may vote in person even if he or she returned a proxy.

Very truly yours,

Michael W. Hall
Secretary

Fremont, California

July 22, 1996

IMPORTANT

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL HAVE THE ADDED EXPENSE OF
RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU
MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.

THANK YOU FOR ACTING PROMPTLY.
<PAGE> 3

TARGET THERAPEUTICS, INC.

PROXY STATEMENT

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed proxy is solicited on behalf of the Board of Directors of
Target Therapeutics, Inc. (the "Company" or "Target") for use at the Annual
Meeting of Stockholders to be held Wednesday, September 4, 1996 at 9:30 a.m.,
local time, or at any postponement or adjournment thereof (the "Annual
Meeting"), for the purposes set forth herein and in the accompanying Notice of
Annual Meeting of Stockholders. The Annual Meeting will be held at the Company's
principal offices located at 47201 Lakeview Boulevard, Fremont, California
94538. The Company's telephone number at its principal executive offices is
(510) 440-7700.

These proxy solicitation materials were mailed on or about July 24, 1996 to
all stockholders entitled to vote at the Annual Meeting.

RECORD DATE

Stockholders of record of the Company's Common Stock at the close of
business on July 12, 1996 (the "Record Date") are entitled to notice of, and to
vote at, the Annual Meeting. At the Record Date, 15,071,521 shares of the
Company's Common Stock were issued and outstanding.

REVOCABILITY OF PROXIES

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
Robert E. McNamara, Inspector of Elections) a written notice of revocation or a
duly executed proxy bearing a later date or by attending the meeting and voting
in person.

VOTING AND SOLICITATION

Holders of shares of Common Stock are entitled to one vote per share on all
matters, except that all such holders are entitled to cumulate their votes in
the election of directors.

Every stockholder voting for the election of directors may cumulate such
stockholder's votes and give one candidate the number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
stockholder's shares are entitled, or may distribute such stockholder's votes on
the same principle among as many candidates as the stockholder may select,
provided that votes cannot be cast for more than six candidates. However, no
stockholder shall be entitled to cumulate votes unless the names of the
candidates for which votes are being cumulated have been placed in nomination
prior to the voting and the stockholder, or any other stockholder, has given
notice at the meeting, prior to the voting, of the stockholder's intention to
cumulate the stockholder's votes. On all other matters, each share of Common
Stock has one vote.

Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections (the "Inspector") with the assistance of the
Company's transfer agent. The Inspector will also determine whether or not a
quorum is present. Except with respect to the election of directors where
cumulative voting is invoked and except in certain other specific circumstances,
the affirmative vote of a majority of shares present in person or represented by
proxy at a duly held meeting at which a quorum is present is required under
Delaware law for approval of proposals presented to stockholders. In general,
Delaware law also provides that a quorum consists of a majority of the shares
entitled to vote and present in person or represented by proxy. The Inspector
will treat abstentions as shares that are present and entitled to vote for
purposes of determining the presence of a quorum and as negative votes for
purposes of determining the approval of any matter submitted to the stockholders
for a vote. Any proxy which is returned using the form of proxy enclosed and
which is not marked as to a particular item will be voted for the election of
directors, for ratification of the appointment of the designated independent
auditors and as the proxy holders deem advisable on other matters that may come
before the meeting, as the case may be with respect to the item not marked. If a
broker indicates on the enclosed proxy or its substitute that it does not have
discretionary authority as to certain
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shares to vote on a particular matter ("broker non-votes"), those shares will
not be considered as present with respect to that matter. The Company believes
that the tabulation procedures to be followed by the Inspector are consistent
with the general statutory requirements in Delaware concerning voting of shares
and determination of a quorum.

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
material to such beneficial owners. Proxies may also be solicited by certain of
the Company's directors, officers and regular employees, without additional
compensation, personally or by telephone or telegram.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING

Proposals of stockholders that are intended to be presented by such
stockholders at the Company's 1997 Annual Meeting must be received by the
Company no later than March 24, 1997 in order that such proposals may be
included in the proxy statement and form of proxy relating to that meeting.

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<PAGE> 5

PROPOSAL NO. 1:

ELECTION OF DIRECTORS

NOMINEES

A board of seven directors is to be elected at the meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's seven nominees named below, all of whom are currently
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 shall be designated by the present Board of Directors to fill
the vacancy. In the event that additional persons are nominated for election as
directors, the proxy holders intend to vote all proxies received by them in such
a manner in accordance with cumulative voting as will assure the election of as
many of the nominees listed below as possible and, in such event, the specific
nominees to be voted for will be determined by the proxy holders. It is expected
that all nominees will be able and willing to serve as directors. The term of
office of each person elected as a director will continue until the next Annual
Meeting or until such director's successor has been elected and qualified.

The names of the nominees and certain information about them as of June 1,
1996, are set forth below:

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------------- --- ------------------------------- --------
<S> <C> <C> <C>
Gary R. Bang................................. 50 President, Chief Executive 1993
Officer and director of the
Company
William G. Davis............................. 64 Independent business 1988
consultant; director of Target
Therapeutics, Inc.; retired
President of Medical Instrument
Systems Division, Eli Lilly and
Company
Kathleen G. Murray, M.S.N.................... 46 Executive Vice President and 1995
Chief Operating Officer of
Northwestern Memorial Hospital
</TABLE>

<TABLE>
<S> <C> <C> <C>
Howard D. Palefsky........................... 49 Chairman of the Board of 1985
Directors and Chief Executive
Officer of Collagen Corporation
Richard D. Randall........................... 44 President and Chief Executive 1989
Officer of Innovasive Devices,
Inc.
Charles M. Strother, M.D. ................... 55 Professor of Radiology, 1990
Neurology and Neurosurgery at
the University of Wisconsin
John C. Villforth............................ 65 President of The Food and Drug 1992
Law Institute in Washington,
D.C.
</TABLE>

Except as set forth below, each of the nominees has been engaged in his or
her principal occupation described above during the past five years. There is no
family relationship between any of the directors or executive officers of the
Company.

Mr. Bang joined the Company in May 1993 as President and Chief Executive
Officer and a director. Prior to joining Target, Mr. Bang worked for Baxter
International, a diversified multinational manufacturer of health care products
("Baxter"), for 19 years. In his most recent position with Baxter, Mr. Bang
served from April 1990 to April 1993 as President of the Pharmaseal Surgical
Division, a world leader in disposable

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products sold to hospital operating rooms. Mr. Bang served as President of the
Gloves Strategic Business Unit from November 1989 to April 1990. From October
1986 to November 1989, Mr. Bang served as Vice President, Sales and Marketing of
Baxter U.K. in England. Prior to 1986, he served in various capacities including
President, Vice President, Division Controller of divisions of Baxter, whose
products included solutions, dialysis products and disposable hospital products.
Mr. Bang is also a director of The Spectranetics Corporation.

Dr. Strother joined the Company as a member of the Scientific Advisory
Board in October 1989 and was elected a director of the Company in May 1990 and
Chairman of the Board of Directors in May 1994. Since July 1976, Dr. Strother
has been a Professor of Radiology, Neurology and Neurosurgery at the University
of Wisconsin.

Mr. Davis, an independent business consultant, has served as a director of
the Company since August 1988 and served as Chairman of the Board of Directors
from June 1989 to July 1991. From 1957 to 1984, Mr. Davis was associated with
Eli Lilly & Company, a diversified health care company, where he served as
Executive Vice President, Eli Lilly International Corporation, from 1972 to
1975, Executive Vice President, Pharmaceutical Division, from 1975 to 1982, and
President, Medical Instrument Systems Division, from 1982 until his retirement
in 1984. Mr. Davis is also a director of Alza Corporation, Endosonics
Corporation and Collagen Corporation ("Collagen").

Ms. Murray was elected to the Company's Board of Directors in February
1995. She has been employed by Northwestern Memorial Hospital since 1986 and
currently serves as its Executive Vice President and Chief Operating Officer.
Prior to 1986, Ms. Murray was Senior Vice President at St. Joseph Hospital.

Mr. Palefsky has served as a director of the Company since 1985 and
Chairman of the Board of Directors and Chief Executive Officer of Collagen, a
biomedical device manufacturer, since February 1995. He was president, Chief
Executive Officer and director of Collagen from 1978 to 1995. Prior to joining
Collagen Corporation, Mr. Palefsky was with Alza Corporation of Palo Alto,
California from 1973 to 1978, where he held a variety of management positions,
the last of which was Vice President of Marketing. Prior to 1973, Mr. Palefsky
held the position of Assistant to the President of Whitehall Laboratories, a
division of American Home Products. He is also a director of Calgene, Inc.,
Sequana Therapeutics, Inc. and Innovasive Devices, Inc.

Mr. Randall joined the Company in June 1989 as President and Chief
Executive Officer and a director, and served as Chief Financial Officer of the
Company from July 1991 to June 1992. Mr. Randall served as President and Chief
Executive Officer of the Company until May 1993 and as Chairman of the Board of
Directors of the Company from April 1993 to May 1994. Mr. Randall has served as
President, Chief Executive Officer and a director of Innovasive Devices, Inc., a
medical device manufacturer, since January 1994. Prior to joining Target, he
served in various capacities with Trimedyne, Inc., a cardiovascular laser
company, Baxter and the U.S.C.I. Division of C.R. Bard, Inc., a medical products
company. Mr. Randall currently serves as Chairman of the Board of Directors of
Conceptus, Inc., and is also a director of Neuro Navigational Corporation.

Mr. Villforth has served as a director of the Company since September 1992.
He has been President of The Food and Drug Law Institute in Washington, D.C., a
non-profit association providing education with regard to U.S. Food and Drug
Administration ("FDA") regulations, since January 1991. Prior to that time, Mr.
Villforth served as Executive Director of The Food and Drug Law Institute from
September 1990 to January 1991. From July 1982 to September 1990, Mr. Villforth
served as Director of the Center for Devices and Radiological Health at the FDA.
He is also a director of MiniMed Inc.

BOARD MEETINGS AND CERTAIN COMMITTEES

The Board of Directors of the Company held a total of six (6) meetings
during the fiscal year ended March 31, 1996. While the Board of Directors has an
Audit Committee and a Compensation Committee, there is no nominating committee
or committee performing the functions of a nominating committee.

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The Audit Committee reviews the adequacy of the Company's internal controls
and meets periodically with management and the independent auditors. This
Committee, which currently consists of directors Palefsky and Randall, held five
(5) meetings during fiscal 1996.

The Compensation Committee recommends salaries, incentives and other forms
of compensation for directors, officers and other employees of the Company,
administers the Company's various incentive compensation and benefit plans
(including stock plans) and recommends policies relating to such incentive
compensation and benefit plans. This Committee, which consists of directors
Davis and Murray, held eight (8) meetings during fiscal 1996.

No incumbent director attended fewer than 75 percent of the aggregate
number of meetings (held while such director was a member) of the Board of
Directors and of the committees, if any, upon which such director served in
fiscal 1996, except that Mr. Villforth attended four (4) of the six (6) meetings
of the Board of Directors held during the year.

The Company currently pays each of its six non-employee directors, Mr.
Davis, Ms. Murray, Mr. Palefsky, Mr. Randall, Dr. Strother and Mr. Villforth, a
monthly retainer of $1,000, along with a fee of $1,000 for each Board of
Directors meeting attended in person, $500 for each committee meeting attended
in person and $250 for each Board of Directors or committee meeting attended via
telephone conference call. Each eligible non-employee director participates in
the Company's 1991 Director Option Plan, pursuant to which non-employee
directors are automatically granted options to purchase shares of Common Stock
of the Company on the terms and conditions set forth in such plan. See "PROPOSAL
NO. 3 -- AMENDMENTS TO 1991 DIRECTOR OPTION PLAN." During the year ended March
31, 1996, each of Messrs. Davis, Palefsky, Randall, Strother and Villforth were
granted options to purchase 4,000 shares of Common Stock at an exercise price of
$17.875 per share (as adjusted to reflect the Company's two-for-one share stock
split effected in December 1995 (the "Stock Split")). All directors are
reimbursed for expenses actually incurred in attending meetings of the Board of
Directors and its committees.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE NOMINEES LISTED
ABOVE.

PROPOSAL NO. 2:

AMENDMENTS TO THE 1988 STOCK OPTION PLAN

At the Annual Meeting, the Company's stockholders are being asked to
approve an amendment to the 1988 Stock Option Plan (the "1988 Option Plan") that
would increase the shares of Common Stock reserved for issuance thereunder by
1,500,000 shares, to an aggregate of 5,900,000 shares that have been reserved
from time to time under the 1988 Option Plan, as adjusted to reflect the Stock
Split.

GENERAL

The 1988 Option Plan was adopted by the Board of Directors in May 1988 and
approved by the stockholders in June 1988. In December 1991, the Board of
Directors amended the 1988 Option Plan to increase the number of shares reserved
thereunder by 200,000 shares, to a total of 1,200,000 shares. This amendment was
approved by the Company's stockholders in January 1992. In August 1992, the
Board of Directors further amended the 1988 Option Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 500,000 shares, to
a total of 1,700,000 shares. This amendment was approved by the Company's
stockholders in October 1992. In May 1994, the Board of Directors amended the
1988 Option Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 500,000 shares, to a total of 2,200,000 shares, and to
make such other changes in response to changes in federal tax law. These
amendments were approved by the Company's stockholders in August 1994. In
December 1995, the Company effected the Stock Split pursuant to which the shares
then reserved for issuance pursuant to the 1988 Option Plan and all options
outstanding under the 1988 Option Plan were adjusted proportionately. In May
1996, the

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Board of Directors amended the 1988 Option Plan to increase the number of shares
of Common Stock reserved for issuance thereunder by 1,500,000 shares, to a total
of 5,900,000 shares, on a post-split basis, which amendment is the subject of
this proposal.

The Board of Directors believes that, in order to attract qualified
employees to the Company and to provide incentive to its current employees, it
is necessary to grant options to purchase Common Stock to such employees
pursuant to the 1988 Option Plan. Stockholders are being asked to approve the
amendments to the 1988 Option Plan at the Annual Meeting.

Options granted under the 1988 Option Plan may be either "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or nonstatutory stock options at the discretion of the
Board of Directors and as reflected in the terms of the written option
agreement.

The 1988 Option Plan is not a qualified deferred compensation plan under
Section 401(a) of the Code, and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").

As of May 31, 1996, without giving effect to the May 1996 amendment to the
1988 Option Plan, a total of 2,287,953 shares had been issued upon exercise of
options granted under the 1988 Option Plan, options for 1,935,044 shares were
outstanding under the 1988 Option Plan and 177,003 shares remained available for
future grants. Shares not purchased under an option prior to its expiration will
be available for future option grants under the 1988 Option Plan. As of May 31,
1996, the aggregate fair market value of shares subject to outstanding options
was $95,784,678, based upon the closing price of the Common Stock as reported on
the Nasdaq National Market on such date.

During the fiscal year ended March 31, 1996, options to purchase an
aggregate of up to 313,412 shares of Common Stock were granted pursuant to the
1988 Option Plan to the Company's current executive officers (eleven persons as
of June 14, 1996), and options to purchase an aggregate of up to 257,533 shares
of Common Stock were granted to the Company's other employees and consultants as
a group (180 persons as of March 31, 1996). Each of the Company's current
directors who are not executive officers (six persons) are non-employee
directors and as such are not eligible to participate in the 1988 Option Plan.
However, options to purchase an aggregate of up to 20,000 shares of Common Stock
were granted to such directors during fiscal 1996 under the Company's 1991
Director Option Plan as discussed below under "PROPOSAL NO. 3 -- AMENDMENTS TO
1991 DIRECTOR OPTION PLAN." For information with respect to options to purchase
Common Stock of the Company granted in the fiscal year ended March 31, 1996
under the 1988 Option Plan to the Company's Chief Executive Officer, and the
four other most highly compensated executive officers of the Company whose
annual salary and bonus exceeded $100,000 for fiscal 1996, see "COMPENSATION OF
EXECUTIVE OFFICERS -- STOCK OPTION GRANTS IN LAST FISCAL YEAR." Subsequent to
the end of fiscal 1996, options to purchase 81,400 shares of Common Stock were
granted to the Company's current executive officers and options to purchase
168,578 shares of Common Stock were granted to the Company's other employees.
The actual benefits, if any, to the holders of stock options issued under the
1988 Option Plan are not determinable prior to exercise as the value, if any, of
such stock options to their holders is represented by the difference between the
market price of a share of the Company's Common Stock on the date of exercise
and the exercise price of a holder's stock option, as set forth below. See also
"Compensation of Executive Officers -- Aggregate Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values."

PURPOSE

The purposes of the 1988 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants of the Company and to promote
the success of the Company's business.

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<PAGE> 9

ADMINISTRATION

The 1988 Option Plan may be administered by the Board of Directors or by a
committee (or subcommittee in certain instances) of the Board of Directors. The
1988 Option Plan is currently being administered by the Board of Directors and
the Compensation Committee of the Board of Directors. The Compensation Committee
has the exclusive authority to grant stock options and otherwise administer the
1988 Option Plan with respect to the Company's directors and officers eligible
to participate in the 1988 Option Plan. If all members of the Compensation
Committee do not meet the definition of "outside directors" under Code Section
162(m), a subcommittee of the Compensation Committee consisting of such "outside
directors" will have the exclusive authority to grant stock options and
otherwise administer the 1988 Option Plan with respect to "covered employees"
described in Code Section 162(m). Members of the Board of Directors receive no
additional compensation for their services in connection with the administration
of the 1988 Option Plan. All questions of interpretation of the 1988 Option Plan
are determined by the Board of Directors or its committee and its decisions are
final and binding upon all participants.

ELIGIBILITY

The 1988 Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to employees (including officers and
directors who are also employees) of the Company or any of its subsidiaries. In
addition, the 1988 Option Plan provides that nonstatutory stock options may be
granted to consultants (not including directors who are not compensated for
their services or are paid only a director's fee by the Company) of the Company
or any of its subsidiaries. The Board of Directors or its committee selects the
optionees and determines the number of shares to be subject to each option. In
making such determination, there are taken into account the duties and
responsibilities of the optionee, the value of the optionee's services, the
optionee's present and potential contribution to the success of the Company, and
other relevant factors.

The 1988 Option Plan provides that the maximum number of shares of Common
Stock which may be granted under options to any one employee during any fiscal
year shall be 500,000, subject to adjustment as provided in the 1988 Option
Plan. To the extent than an optionee would have the right in any calendar year
to exercise for the first time one or more incentive stock options for shares
having an aggregate fair market value (under all plans of the Company and
determined for each share as of the date the option to purchase the share was
granted) in excess of $100,000, such excess options shall be treated as
nonstatutory stock options.

TERMS OF OPTIONS

Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional terms and
conditions:

(a) Exercise of the Option. The Board of Directors or its committee
determines when options may be exercised. An option is exercised by giving
written notice of exercise to the Company specifying the number of full
shares of Common Stock to be purchased and by tendering of payment of the
purchase price. The purchase price of the shares purchased upon exercise of
an option shall be paid in consideration of such form as is determined by
the Board of Directors or its committee and specified in the option
agreement, and such form of consideration may vary for each option.

(b) Exercise Price. The exercise price under the 1988 Option Plan is
determined by the Board of Directors or its committee and may not be less
than 100 percent of the fair market value of the Common Stock on the date
the option is granted. The fair market value per share is equal to the
closing price on the Nasdaq National Market on the date of grant. In the
case of an incentive stock option granted to an optionee who owns more than
ten percent of the voting power of all classes of stock of the Company, its
parent or subsidiaries, the exercise price must not be less than 110
percent of the fair market value on the date of the grant.

(c) Termination of Employment. If the optionee's employment or
consulting relationship terminates for any reason other than disability or
death, options under the 1988 Option Plan may be exercised

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<PAGE> 10

not later than thirty days (or such other period of time not exceeding
three months in the case of an incentive stock option or six months in the
case of a nonstatutory stock option as is determined by the Board of
Directors or its committee at the time of grant) after such termination and
may be exercised only to the extent the option was exercisable on the date
of termination. In no event may an option be exercised by any person after
the expiration of its term.

(d) Disability. If an optionee is unable to continue his or her
employment or consulting relationship with the Company as a result of his
or her total and permanent disability, options may be exercised within six
months (or such other period of time not exceeding twelve months as is
determined by the Board of Directors or its committee) of termination and
may be exercised only to the extent the option was exercisable on the date
of termination, but in no event may the option be exercised after its
termination date.

(e) Death. Under the 1988 Option Plan, if an optionee should die
while employed or retained by the Company or during the thirty day period
(or such other period of time not exceeding three months as is determined
by the Board of Directors or its Committee) following termination of the
optionee's employment or consulting relationship, options may be exercised
within six months after the date of death to the extent the options would
have been exercisable (i) twelve months after the date of death, in the
case of an optionee who dies while employed or retained by the Company, or
(ii) on the date of termination of employment or consulting relationship,
in the case of an optionee who dies within thirty days after termination of
employment or consulting relationship.

(f) Termination of Options. The 1988 Option Plan provides that
options granted under the 1988 Option Plan have the term provided in the
option agreement. In general, these agreements currently provide for a term
of ten years. Incentive stock options granted to an optionee who,
immediately before the grant of such option, owned more than ten percent of
the total combined voting power of all classes of stock of the Company, its
parents or subsidiaries, may not in any case have a term of more than five
years. No option may be exercised by any person after its expiration.

(g) Option Not Transferable. An option is nontransferable by the
optionee other than by will or the laws of descent and distribution, and is
exercisable only by the optionee during his or her lifetime and in the
event of the optionee's death by a person who acquires the right to
exercise the option by bequest or inheritance or by reason of the death.

(h) Acceleration of Options. In the event of a merger or
consolidation in which the Company is not the surviving entity, the Board
of Directors is obligated to either accomplish a substitution or assumption
of options or give thirty days notice of the acceleration of the optionee's
right to exercise his or her outstanding options as to some or all of the
optioned stock at any time within thirty days of such notice.

(i) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the 1988 Option Plan
as may be determined by the Board of Directors or its committee.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1988 Option Plan. In the event of the proposed dissolution or
liquidation of the Company, each option will terminate unless otherwise provided
by the Board of Directors or its committee.

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AMENDMENT AND TERMINATION

The Board of Directors may amend the 1988 Option Plan at any time or from
time to time or may terminate it without approval of the stockholders; provided,
however, that stockholder approval is required for any amendment to the 1988
Option Plan that increases the number of shares that may be issued under the
1988 Option Plan, modifies the standards of eligibility, modifies the limitation
on grants to employees described in the 1988 Option Plan or results in other
changes which would require stockholder approval to qualify options granted
under the 1988 Option Plan as performance-based compensation under Section
162(m) of the Code, or, so long as the Company has a class of equity securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), materially increases the benefits to participants that may
accrue under the 1988 Option Plan. However, no action by the Board of Directors
or stockholders may alter or impair any option previously granted under the 1988
Option Plan. The 1988 Option Plan will terminate in April 1998, provided that
any options then outstanding under the 1988 Option Plan will remain outstanding
until they expire by their terms.

FEDERAL INCOME TAX ASPECTS OF THE 1988 OPTION PLAN

Options granted under the 1988 Option Plan may be either "incentive stock
options," as defined in Section 422 of the Code, or nonstatutory stock options.

If an option granted under the 1988 Option Plan is an incentive stock
option, under Federal tax laws the optionee will recognize no income upon grant
of the incentive stock option and incur no tax liability due to the exercise,
although the exercise of an incentive stock option may give rise to alternative
minimum tax. The Company will not be allowed a deduction for Federal income tax
purposes as a result of the exercise of an incentive stock option regardless of
the applicability of the alternative minimum tax. Upon the sale or exchange of
the shares at least two years after grant of the option and one year after
receipt of the shares by the optionee, any gain will be treated as long-term
capital gain under Federal tax laws. If these holding periods are not satisfied,
the optionee will recognize ordinary income under Federal tax laws equal to the
difference between the exercise price and the lower of the fair market value of
the stock at the date of the option exercise or the sale price of the stock. A
different rule for measuring ordinary income upon such a premature disposition
may apply if the optionee is also an officer, director, or ten percent
stockholder of the Company. The Company will be entitled to a deduction in the
same amount as the ordinary income recognized by the optionee. Any gain
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income will be characterized under Federal tax laws as
long-term capital gain if the sale occurs more than one year after exercise of
the option or as short-term capital gain if the sale is made earlier. The
current federal tax rate on long-term capital gains is capped at 28 percent.
Capital losses are allowed under Federal tax laws in full against capital gains
plus $3,000 of other income.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income under Federal tax laws at the time he or she is granted a
nonstatutory option. However, upon its exercise, under Federal tax laws the
optionee will recognize ordinary income for tax purposes measured by the excess
of the then fair market value of the shares over the exercise price. In certain
circumstances, where the shares are subject to a substantial risk of forfeiture
when acquired or where the optionee is an officer, director or ten percent
stockholder of the Company, the date of taxation under Federal tax laws may be
deferred unless the optionee files an election with the Internal Revenue Service
under Section 83(b) of the Code. The income recognized by an optionee who is
also an employee of the Company will be subject to tax withholding by the
Company by payment in cash or out of the current earnings paid to the optionee.
Upon resale of such shares by the optionee, any difference between the sales
price and the optionee's tax basis (exercise price plus the income recognized
upon exercise) will be treated under Federal tax laws as capital gain or loss,
and will qualify for long-term capital gain or loss treatment if the shares have
been held for more than one year. The Company will be entitled to a deduction in
the same amount as the ordinary income recognized by the optionee upon the
exercise of a nonstatutory stock option.

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<PAGE> 12

The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Directors' Option Plan, does not purport to be complete, and
does not discuss the income tax laws of any municipality, state or foreign
country in which an optionee may reside.

REQUIRED VOTE

The approval of the amendment to the 1988 Option Plan requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE 1988
STOCK OPTION PLAN. THE EFFECT OF AN ABSTENTION IS THE SAME AS THAT OF A VOTE
AGAINST THE APPROVAL OF THE AMENDMENT TO THE 1988 STOCK OPTION PLAN.

PROPOSAL NO. 3:

AMENDMENTS TO 1991 DIRECTOR OPTION PLAN

At the Annual Meeting, the Company's stockholders are being asked to
approve amendments to the 1991 Director Option Plan (the "Directors' Option
Plan") that would make certain changes to the formulas pursuant to which options
are granted under the Directors' Option Plan and to the provisions regarding
adjustments necessitated by changes in the Company's capital structure.

GENERAL

The Directors' Option Plan was adopted by the Board of Directors in
December 1991 and approved by the stockholders in January 1992. A total of
200,000 shares of Common Stock were initially reserved for issuance under the
Directors' Option Plan, as adjusted to reflect the stock split. In June 1996,
the Board of Directors adopted amendments to the Directors' Option Plan, subject
to approval of the Company's stockholders, to make certain changes to the
formulas pursuant to which options are granted under the Directors' Option Plan
and to the provisions regarding adjustments necessitated by changes in the
Company's capital structure. The stockholders are being asked to approve the
amendments at the Annual Meeting.

As of May 31, 1996, options to purchase 124,000 shares of Common Stock had
been granted to the Company's nonemployee directors under the Directors' Option
Plan, 108,000 of such options were outstanding, 8,000 options had been exercised
and 8,000 options had been cancelled. A total of 84,000 shares remain available
for future option grants. As of May 31, 1996, the aggregate fair market value of
shares subject to outstanding options under the Directors' Option Plan was
$5,346,000, based upon the closing price of the Common Stock as reported on the
Nasdaq National Market on such date.

Employees and employee directors are ineligible to participate in the
Directors' Option Plan. During the fiscal year ended March 31, 1996 five of the
Company's six nonemployee directors were each granted an option to purchase up
to 2,000 shares, (subsequently adjusted to 4,000 shares to reflect the Stock
Split), at an adjusted exercise price of $17.875 per share. In addition, in
April 1996, pursuant to the terms of the Directors' Option Plan, each of the
Company's six nonemployee directors was granted an additional option to purchase
up to 2,000 shares, at an exercise price of $61.50 per share.

PURPOSE

The Directors' Option Plan is designed to provide nonemployee directors
with a proprietary interest in the Company, to encourage these individuals to
continue to serve the Company as directors and to assist the Company in
recruiting highly qualified individuals when vacancies occur on the Board.

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ADMINISTRATION

The Directors' Option Plan is designed to work automatically and not to
require administration. However, to the extent administration is necessary, it
will be provided by the Board of Directors. No discretion concerning decisions
regarding the Directors' Option Plan shall be afforded to any person who is not
a "disinterested" person under Rule 16b-3 promulgated under the Exchange Act.
The interpretation and construction of any provisions of the Directors' Option
Plan by the Board of Directors shall be final and conclusive. Members of the
Board receive no additional compensation for their services in connection with
the administration of the Directors' Option Plan.

ELIGIBILITY

The Directors' Option Plan currently provides that each director who is not
an employee of the Company or any parent or subsidiary of the Company, other
than nonemployee directors as of November 30, 1991, shall be granted an option
to purchase 10,000 shares of Common Stock (an "Initial Option") on the date on
which the optionee first becomes a director of the Company. On April 1 of each
year after the effective date of the plan (April 1, 1992), whether or not a
nonemployee director on November 30, 1991, each nonemployee director shall be
granted an option to purchase 2,000 shares of Common Stock (an "Annual Option")
if, on such date, he or she shall have served on the Company's Board of
Directors for at least six months. The Board of Directors has adopted certain
amendments, described below, that would increase the number of shares of Common
Stock subject to each Annual Option, which amendments are being submitted for
approval by the Company's stockholders at the Annual Meeting. See "Amendments to
Provide for Adjustments to Formula Grants Upon Changes in Capitalization and to
Increase Formula Grants."

Except for automatic option grants under the Directors' Option Plan,
nonemployee directors will not be eligible to receive any additional option
grants or stock issuances under the Directors' Option Plan or any other stock
plan of the Company. The Directors' Option Plan provides for neither a maximum
nor a minimum number of shares subject to options that may be granted to any one
nonemployee director, but does provide for the number of shares which may be
included in any grant and the method of making a grant.

TERMS OF OPTIONS

Options granted under the Directors' Option Plan have a term of ten years.
Each option is evidenced by an option agreement between the Company and the
director to whom such option is granted and is subject to the following
additional terms and conditions:

(a) Rule 16b-3. Options granted to directors must comply with the
applicable provisions of Rule 16b-3, or any successor thereto, and shall
contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to Directors' Option Plan transactions.

(b) Exercise of the Option. The Initial Options become exercisable
cumulatively to the extent of 33 1/3 percent of the shares subject to the
option on each of the first three anniversaries of the date of grant. The
Annual Options become exercisable in whole on the third anniversary of the
date of grant. An option is exercised by giving written notice of exercise
to the Company, specifying the number of full shares of Common Stock to be
purchased and tendering payment to the Company of the purchase price.
Payment for shares issued upon exercise of an option is determined by the
Board and may consist of (i) cash, (ii) check, (iii) promissory note, (iv)
an exchange of shares of the Company's Common Stock held for at least six
months, (v) delivery of a properly executed exercise notice together with
such documentation necessary to effect an exercise of the option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, (vi) delivery of an irrevocable subscription agreement
which obligates the optionee to take and pay for the shares not more than
twelve months later, (vii) a combination of the foregoing methods or (viii)
such other consideration and method of payment permitted by applicable law.

(c) Exercise Price. The per share exercise price of options under the
Directors' Option Plan is 100 percent of the fair market value of the
Company's Common Stock on the date of grant. The fair market

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<PAGE> 14

value is determined based upon the closing sales price of the Company's
Common Stock on the Nasdaq National Market on the date the option is
granted.

(d) Termination of Status as a Director. The Directors' Option Plan
provides that if an optionee ceases to serve as a director of the Company,
the option may be exercised within three months after the date he or she
ceases to be a director as to all or part of the shares that the optionee
was entitled to exercise at the date of such termination.

(e) Death. In the event of the death of an optionee, the option may
be exercised by the optionee's estate or beneficiary at any time within six
months after death, but only to the extent that the option would have been
exercisable at the time of death.

(f) Disability. If an optionee is unable to continue his or her
service as a director of the Company as a result of his or her total and
permanent disability, the option may be exercised at any time within six
months after the date of his or her termination, but only to the extent he
or she was entitled to exercise it at the date of such termination.

(g) Termination of Options. No option is exercisable by any person
after the expiration of ten years from the date the option was granted.

(h) Nontransferability of Options. An option is nontransferable by
the optionee, other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order, and is exercisable only
by the optionee during his or her lifetime or, in the event of death, by a
person who acquires the right to exercise the option by bequest or
inheritance or by reason of the death of the optionee.

(i) Acceleration of Options. In the event of a proposed sale of all
or substantially all of the assets of the Company or the merger of the
Company with or into another corporation, the option shall be assumed or an
equivalent option shall be substituted by the successor corporation. In the
event that the successor does not agree to assume the option or to
substitute an equivalent option, the Board of Directors shall declare
acceleration of the optionee's right to exercise his or her outstanding
option and give thirty days notice of the acceleration of the optionee's
right to exercise his or her outstanding options in full at any time within
thirty days of such notice.

(j) Other Provisions. The option agreement may contain such other
terms, provisions and conditions not inconsistent with the Directors'
Option Plan as may be determined by the Board of Directors.

ADJUSTMENT TO OUTSTANDING OPTIONS UPON CHANGES IN CAPITALIZATION

In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the
outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made in the option price and in the
number of shares subject to each outstanding option. However, without taking
into account the proposed amendments discussed below, no adjustment shall be
made to the number of shares to be granted pursuant to formula option grants
upon the occurrence of any such event. In the event of a proposed dissolution or
liquidation of the Company, all options will terminate immediately prior to the
consummation of such action, unless otherwise provided by the Board. The Board
of Directors may, in its sole discretion, make provisions for accelerating the
exercisability of the shares subject to an option under the Directors' Option
Plan in such event.

AMENDMENTS TO PROVIDE FOR ADJUSTMENTS TO FORMULA GRANTS UPON CHANGES IN
CAPITALIZATION AND TO INCREASE FORMULA GRANTS

In addition to the foregoing discussion, the Company is requesting
stockholder approval of the following additional amendments to the Directors'
Option Plan. These amendments provide for additional option grants to each
current nonemployee director of the Company. Although each current nonemployee
director will benefit from the approval of these amendments, the Board of
Directors believes such amendments are in the

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<PAGE> 15

best interests of the stockholders as they are designed to provide what the
Board of Directors believes to be appropriate incentives for the Company's
nonemployee directors.

1. In the event that the Company effects a reverse stock split or other
recapitalization transaction pursuant to which the number of shares of the
outstanding capital stock of the Company is combined into a smaller number of
shares, the number of shares of Common Stock to be granted pursuant to each
Initial Option and each Annual Option shall be adjusted ratably to reflect the
Company's new capital structure. For example, in the event that the Company were
to effect a one-for-two share reverse stock split, the amount of each Initial
Option and each Annual Option to be granted under the Directors' Option Plan
would be reduced by 50 percent.

2. In the event that the Company effects a forward stock split, stock
dividend or other recapitalization transaction pursuant to which the number of
shares of the outstanding capital stock of the Company is increased into a
larger number of shares, the number of shares of Common Stock to be granted
pursuant to each Initial Option and each Annual Option shall be adjusted ratably
to reflect 50 percent of the changes to the Company's capital structure, up to a
maximum of 15,000 shares to be granted pursuant to each Initial Option and 5,000
shares to be granted pursuant to each Annual Option. For example, in the event
the Company were to effect another two-for-one share forward stock split (via
stock dividend or otherwise), the number of shares to be granted under each
Initial Option and each Annual Option would increase by 50 percent (representing
one-half of the effect of such stock split on the outstanding stock of the
Company), provided that any such adjustment could not increase the grant amounts
above the maximum amounts stated in this paragraph.

3. In light of the Stock Split in December 1995, for which no adjustments
to the formula grants under the Directors' Option Plan were made, and the
foregoing proposed amendments to the Directors' Option Plan, the amount of each
Annual Grant issuable under the Directors' Option Plan will be increased to
3,000 shares.

4. Because the Company's nonemployee directors on April 1, 1996, received
grants under the Directors' Option Plan that were not adjusted to reflect the
Stock Split, each such director will receive a one-time grant of 1,000 shares on
the date of the Annual Meeting at the fair market value on the date of grant.
These options will vest in accordance with the vesting terms of the Annual
Options granted to such directors on April 1, 1996. With these additional
grants, the Company's nonemployee directors will have received the equivalent of
what they would have received if the Annual Option grants on April 1, 1996, had
been adjusted to reflect the Stock Split in accordance with the proposed
amendments discussed above.

The foregoing amendments have no effect on the options currently
outstanding under the Directors' Option Plan.

AMENDMENT AND TERMINATION

The Board of Directors may amend the Directors' Option Plan at any time, or
from time to time, or may terminate it without approval of the stockholders, but
no amendment or termination shall be made that would impair the rights of any
optionee under any prior grant without his or her consent. In addition, the
Company shall obtain stockholder approval of any amendment to the Directors'
Option Plan in such a manner and to the extent necessary to comply with Rule
16b-3 under the Exchange Act, the provisions of the Code or any other applicable
law or regulation. Further, the provisions of the Directors' Option Plan
concerning the grants of options under the Directors' Option Plan may not be
amended more than once every six months other than to comply with changes in the
Code or ERISA. In any event, the Directors' Option Plan will terminate in
December 2001.

TAX INFORMATION

Options granted under the Directors' Option Plan are nonstatutory stock
options. An optionee will not recognize any taxable income under Federal tax
laws at the time he is granted a nonstatutory stock option. However, upon its
exercise, the optionee will recognize ordinary income for tax purposes measured
by the excess of the then fair market value of the shares over the option price.
Because the optionee is a director of

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<PAGE> 16

the Company, the date of taxation (and the date of measurement of taxable
ordinary income) may be deferred unless the optionee files an election with the
Internal Revenue Service under Section 83(b) of the Code. Upon resale of such
shares by the optionee, any difference between the sales price and the exercise
price, to the extent not recognized as ordinary income as provided above, will
be treated as capital gain (or loss). The current Federal tax rate on long-term
capital gains is capped at 28 percent, which will be long-term capital gain (or
loss) if the sale occurs more than one year after exercise of the option as
short-term capital gain if sold earlier. Capital losses are allowed in full
against capital gains plus $3,000 of other income. The Company will be entitled
to a tax deduction in the amount and at the time that the optionee recognizes
ordinary income with respect to shares acquired upon exercise of a nonstatutory
option.

REQUIRED VOTE

The approval of the amendments to the Directors' Option Plan requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENTS
TO THE DIRECTORS' OPTION PLAN. THE EFFECT OF AN ABSTENTION IS THE SAME AS THAT
OF A VOTE AGAINST THE APPROVAL OF THE AMENDMENTS TO THE DIRECTORS' OPTION PLAN.

PROPOSAL NO. 4

AMENDMENTS TO THE 1991 EMPLOYEE STOCK PURCHASE PLAN

At the Annual Meeting, the Company's stockholders are being asked to
approve amendments to the Company's 1991 Employee Stock Purchase Plan (the
"Purchase Plan") to (i) increase the number of shares of Common Stock reserved
for issuance thereunder by 100,000 shares, to a total of 300,000 shares, as
adjusted to reflect the Stock Split, (ii) remove the five month waiting period
for an employee to become eligible to participate in the Purchase Plan, (iii)
increase the rate of contribution allowed from ten percent to twelve percent of
a participants eligible compensation, and (iv) increase the duration of an
offering period from six months to twelve months. The Purchase Plan provides for
employee purchases of the Company's Common Stock through accumulated payroll
deductions. Employees make such purchases by participation in regular offering
periods from which they may withdraw at any time. The amendments will provide
sufficient additional stock and additional benefit to employees to continue the
Company's policy of equity ownership by employees as an incentive for employees
to exert maximum efforts for the success of the Company.

GENERAL

The Purchase Plan was adopted by the Board of Directors in December 1991
and approved by the stockholders in January 1992. A total of 200,000 shares of
Common Stock were initially reserved for issuance under the Purchase Plan, as
adjusted to reflect the Stock Split. In May 1996, the Board of Directors amended
the Purchase Plan, subject to approval of the Company's stockholders, to
increase the number of shares reserved for issuance by 100,000 shares, to a
total of 300,000 shares. The Purchase Plan, and the right of participants to
make purchases thereunder, is intended to qualify under the provisions of
Section 423 the Code. The Purchase Plan is not a qualified deferred compensation
plan under Section 401(a) of the Code, and is not subject to the provisions of
ERISA.

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As of May 31, 1996, a total of 106,290 shares had been issued to the
Company's employees under the Purchase Plan and 93,710 shares remain available
for future issuance. The average per share issuance price for shares purchased
by employees under the Purchase Plan to date was approximately $11.95, as
adjusted for the Stock Split, and the total net value realized by employees as a
group from the purchase of such shares was $2,004,195. As of May 31, 1996,
approximately 368 employees were eligible to participate in the Purchase Plan,
of which 189 were participating.

PURPOSE

The purpose of the Purchase Plan is to provide employees of the Company
(and any of its subsidiaries designated by the Board of Directors) who
participate in the Purchase Plan with an opportunity to purchase Common Stock of
the Company through payroll deductions.

ADMINISTRATION

The Purchase Plan may be administered by the Board of Directors or a
committee appointed by the Board of Directors. All questions of interpretation
of the Purchase Plan are determined by the Board of Directors or its committee,
and its decisions are final and binding upon all participants. Members of the
Board of Directors or its committee who are eligible employees are permitted to
participate in the Purchase Plan, provided that any such eligible member may not
vote on any matter affecting the administration of the Purchase Plan or the
grant of any option pursuant to it, or serve on a committee appointed to
administer the Purchase Plan. No charges for administrative or other costs may
be made against the payroll deductions of a participant in the Purchase Plan.
Members of the Board of Directors receive no additional compensation for their
services in connection with the administration of the Purchase Plan.

ELIGIBILITY

Any person who is customarily employed by the Company (or any of its
majority-owned subsidiaries) for at least 20 hours per week and more than five
months in any calendar year is eligible to participate in the Purchase Plan
after being employed by the Company for at least five months, provided that the
employee is employed on the first day of an offering period and subject to
certain limitations imposed by Section 423(b) of the Code. See "Purchase of
Stock; Exercise of Option." The Board of Directors has adopted an amendment,
described below, that will eliminate the requirement that a participant have
been employed for at least five months, which amendment is being submitted for
approval by the Company's stockholders at the Annual Meeting. See "Amendments to
the Purchase Plan."

OFFERING DATES

In general, the Purchase Plan is implemented by a series of six-month
offering periods commencing on the first trading day in May and November
coinciding with the beginning of the second full pay period in such month. The
Board of Directors has the power to change the duration and/or frequency of the
offering periods with respect to future offerings without stockholder approval
if such change is announced at least fifteen (15) days prior to the scheduled
beginning of the first offering period to be affected. The Board of Directors
has adopted an amendment, described below, that will extend the duration of the
offering periods to twelve (12) months, each consisting of two six-month
purchase periods, which amendment, notwithstanding the Board's power to do so
otherwise, is being submitted for approval by the Company's Stockholders at the
Annual Meeting. See "Amendments to the Purchase Plan."

PARTICIPATION IN THE PLAN

Eligible employees may participate in the Plan by completing a subscription
agreement on the form provided by the Company and filing it with the Company at
least five business days prior to the applicable offering date, unless a later
time for filing the subscription agreement is set by the Board for all eligible
employees with respect to a given offering. The subscription agreement currently
authorizes payroll deductions of up to ten percent of the participant's eligible
compensation on the date of the purchase.

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PURCHASE PRICE

The purchase price per share at which shares are sold under the Purchase
Plan is 85 percent of the lower of the fair market value of the Common Stock on
the date of commencement of the offering period or on the applicable exercise
date. The fair market value shall be the closing price of the Common Stock on
the Nasdaq National Market as of such date.

PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS

The purchase price of the shares is accumulated by payroll deductions
during the offering period. The deductions may be up to ten percent of a
participant's eligible compensation received on each payday during the offering
period. Eligible compensation is defined in the Purchase Plan to include the
regular straight time gross earnings including payments for overtime, shift
premium, incentive compensation, bonuses and commissions, except to the extent
exclusion of any of such items for all participants is directed by the Board of
Directors. A participant may discontinue his or her participation in the
Purchase Plan at any time during the offering period prior to an exercise date,
and may decrease or increase the rate of his or her payroll deductions once
during the offering period by completing and filing a new subscription
agreement. Payroll deductions shall commence on the first payroll following the
offering date and shall end on the last payroll paid on or prior to the exercise
date of the offering to which the subscription agreement is applicable, unless
sooner terminated by the participant as provided under termination. No interest
accrues on the payroll deductions of a participant in the Purchase Plan. The
Board of Directors has adopted an amendment, described below, that will increase
the maximum permitted deduction from ten percent to twelve percent of eligible
compensation, which amendment is being submitted for approval by the Company's
Stockholders at the Annual Meeting. See "Amendments to the Purchase Plan."

PURCHASE OF STOCK; EXERCISE OF OPTION

By executing a subscription agreement to participate in the Purchase Plan,
the participant is entitled to have shares placed under option. The maximum
number of shares placed under option to a participant in an offering period is
the number determined by dividing $25,000 by the fair market value of one share
of the Company's Common Stock on the offering date. Within this limit, the
number of shares purchased by a participant will be determined by dividing the
amount of the participant's total payroll deductions accumulated during each
annual exercise period by the lower of (i) 85% of the fair market value of the
Common Stock at the beginning of the offering period, or (ii) 85% of the fair
market value of the Common Stock on the applicable exercise date. See "Payment
of Purchase Price; Payroll Deductions" for additional limitations on payroll
deductions. Unless the participant's participation is discontinued, each
participant's option for the purchase of shares will be exercised automatically
at the end of each exercise period at the applicable price. See "Withdrawal."
Notwithstanding the foregoing, no participant shall be permitted to subscribe
for shares under the Purchase Plan if immediately after the grant of the option
he or she would own 5% or more of the voting power or value of all classes of
stock of the Company or of a parent or of any of its subsidiaries (including
stock which may be purchased under the Purchase Plan or pursuant to any other
options), nor shall any participant be granted an option which would permit the
participant to buy pursuant to the Purchase Plan more than $25,000 worth of
stock (determined at the fair market value of the shares at the time the option
is granted) in any calendar year. Furthermore, if the number of shares which
would otherwise be placed under option at the beginning of an offering period
exceeds the number of shares then available under the Purchase Plan, a pro rata
allocation of the available shares shall be made in as equitable a manner as is
practicable.

WITHDRAWAL

While each participant in the Purchase Plan is required to sign a
subscription agreement authorizing payroll deductions, the participant's
interest may be increased or decreased once during any given offering period by
completing and filing a new subscription agreement with the Company. In
addition, a participant's interest may be terminated in whole, but not in part,
by signing and delivering to the Company a notice of withdrawal from the
Purchase Plan. Such withdrawal may be elected at any time prior to the end of
the

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applicable six-month period prior to an exercise date under the Purchase Plan,
unless the subscription agreement was made irrevocably by the participant (at
his or her own election).

Any withdrawal by the participant of accumulated payroll deductions for a
given offering period automatically terminates the participant's interest in
that offering period. In effect, the participant is given an installment option,
for a maximum number of shares, which may or may not be exercised at the end of
each six-month exercise period. However, unless the participant actively
withdraws from the offering period, the option will be exercised automatically
at the end of each exercise period, and the maximum number of full shares
purchasable (within the limits of the Purchase Plan) with the participant's
accumulated payroll deductions will be purchased for that participant at the
applicable price.

A participant's withdrawal from an offering period does not have an effect
upon such participant's eligibility to participate in subsequent offering
periods under the Purchase Plan; however, the participant may not re-enroll in
the same offering period after withdrawal. Officers, directors and other persons
subject to Section 16 of the Exchange Act may not re-enroll for a period of six
months after withdrawal.

TERMINATION OF EMPLOYMENT

Upon termination of the participant's continuous status as an employee
prior to the exercise date of an offering period for any reason, including
retirement or death, the contributions credited to his or her account will be
returned to him or her, without interest, or, in the case of his or her death,
to the person or persons entitled thereto, and his or her option will be
automatically terminated.

In the event an employee fails to remain in continuous status as an
employee of the Company for at least twenty (20) hours per week during the
offering period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Purchase Plan and the contributions
credited to his or her account will be returned to him or her, without interest,
and his or her option terminated.

ADJUSTMENT UPON CHANGES IN CAPITALIZATION

In the event any change, such as a stock split or stock dividend, is made
in the Company's capitalization which results in an increase or decrease in the
number of outstanding shares of Common Stock without receipt of consideration by
the Company, appropriate adjustments will be made in the shares subject to
purchase and in the purchase price per share, as well as in the number of shares
available for issuance under the Purchase Plan. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate unless
otherwise provided by the Board of Directors or its committee.

NONTRANSFERABILITY

No rights or accumulated payroll deductions of a participant under the
Purchase Plan may be pledged, assigned or transferred for any reason and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.

REPORTS

Individual accounts will be maintained for each participant in the Purchase
Plan. Each participant shall receive at least annually a report of such
participant's account setting forth the total amount of payroll deductions
accumulated, the per share purchase price and the number of shares purchased and
the remaining cash balance, if any, to be returned or carried over to the next
offering period.

AMENDMENTS TO THE PURCHASE PLAN

In addition to the foregoing discussion, in order to maintain a competitive
benefit plan by which to attract and retain employees and to encourage employee
ownership of the Company's Common Stock, the following

17
<PAGE> 20

amendments to the Purchase Plan are proposed to be effective for the offering
period commencing in November 1996:

1. An employee who is customarily employed by the Company for at least
twenty (20) hours per week and more than five (5) months in any calendar year
shall be eligible to participate in the Purchase Plan immediately upon
commencement of employment.

2. A Purchase Plan participant shall be entitled to authorize payroll
deductions up to twelve percent of the participant's eligible compensation
during an offering period.

3. The Purchase Plan shall be implemented by a series of twelve-month
offering periods, each of which shall consist of two consecutive purchase
periods of six months duration with the last day of each purchase period being
designated a Purchase Date. The number of shares purchased by a participant on a
purchase date will be determined by dividing the amount of the participant's
total payroll deductions accumulated during the purchase period by the lower of
(i) 85 percent of the fair market value of the Common Stock at the beginning of
the offering period (the "Offering Date"), or (ii) 85 percent of the fair market
value of the Common Stock on the Purchase Date. If the fair market value on a
Purchase Date is less than the fair market value on the Offering Date, a new
twelve-month offering period will automatically begin on the first business day
following the Purchase Date with a new fair market value. For example, an
offering period beginning on November 16, 1996 would have Purchase Dates on May
15 and November 15, 1997. Assume that the fair market value on the Offering Date
is $50.00, on the May 15 Purchase Date is $60.00 and on the November 15 Purchase
Date is $70.00. A participant will purchase shares on May 15 for $42.50 per
share (85 percent of $50.00 -- the lower of the two applicable values). The
participant will also purchase shares on November 15 for $42.50 per share (85
percent of $50.00 -- the lower of the two applicable values). A new offering
period would then commence on November 16, 1997, with an initial fair market
value of $70.00.

AMENDMENT AND TERMINATION OF THE PLAN

The Board of Directors may at any time amend or terminate the Purchase
Plan, except that such termination shall not affect options previously granted
nor may any amendment make any change in any option granted prior thereto which
adversely affects the rights of any participant. No amendment may be made to the
Purchase Plan without prior approval of the stockholders of the Company if such
amendment would increase the number of shares reserved under the Purchase Plan,
permit a new class of employees to participate in the Purchase Plan or make any
other change to the Purchase Plan for which stockholder approval is required to
comply with the rules regarding "discretionary plans" under Section 16 of the
Exchange Act and Rule 16b-3 or under Section 423 of the Code (or any successor
provisions thereto).

FEDERAL INCOME TAX ASPECTS OF THE PURCHASE PLAN

General Tax Information. The Purchase Plan, and the right of participants
to make purchases thereunder, is intended to qualify for the federal income tax
treatment provided to employee stock purchase plans and their participants under
the provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition
of the shares, the participant will generally be subject to tax in an amount
which depends upon the holding period of the shares. If the shares are sold or
otherwise disposed of more than two years from the first day of the offering
period and one year from the date the shares are purchased, the participant will
recognize ordinary income measured as the lesser of (a) the excess of the fair
market value of the shares at the time of such sale or disposition over the
purchase price, or (b) an amount equal to 15 percent of the fair market value of
the shares as of the first day of the offering period. Any additional gain will
be treated as long-term capital gain. If the shares are sold or otherwise
disposed of before the expiration of either of these holding periods, the
participant will recognize ordinary income generally measured as the excess of
the fair market value of the shares on the date the shares are purchased over
the purchase price. Any additional gain or loss on such sale or disposition will
be long-term or short-term capital gain or loss, depending on whether or not the
disposition occurs more than one year after the date the shares are purchased.
The Company is not entitled to a deduction for amounts taxed as ordinary income
or capital

18
<PAGE> 21

gain to a participant except to the extent of ordinary income recognized by a
participant upon a sale or disposition of shares prior to the expiration of the
holding periods described above. Capital losses are allowed in full against
capital gains plus $3,000 of other income.

Officers Subject to Section 16(b) Liability. In the case of a participant
who is subject to Section 16(b) of the Exchange Act, the Purchase Date for
purposes of calculating such participant's compensation income and the beginning
of the capital gain holding period may be deferred for up to six months under
certain circumstances. Such individuals should consult with their personal tax
advisors prior to participating in the Purchase Plan or selling shares issued
pursuant to such plan.

The ordinary income reported under the rules described above, added to the
actual purchase price of the shares, determines the tax basis of the shares for
the purpose of determining capital gain or loss on a sale or exchange of the
shares.

The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the purchase and sale of
shares under the Purchase Plan, does not purport to be complete, and does not
discuss the income tax laws of any municipality, state or foreign country in
which a participant may reside.

REQUIRED VOTE

The affirmative vote of the holders of a majority of the Common Stock
present or represented by proxy at the Annual Meeting is required to approve the
amendments to the Purchase Plan.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENTS
TO THE PURCHASE PLAN. THE EFFECT OF AN ABSTENTION IS THE SAME AS THAT OF A VOTE
AGAINST THE APPROVAL OF THE AMENDMENTS TO THE PURCHASE PLAN.

PROPOSAL NO. 5

AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED COMMON STOCK

At the Annual Meeting, the Company's stockholders are being asked to
approve an amendment to the Company's Certificate of Incorporation, as amended,
to increase the number of authorized shares of Common Stock from 25,000,000 to
120,000,000. In May 1996, the Board of Directors authorized the foregoing
amendment of the Certificate of Incorporation to increase the authorized Common
Stock, subject the approval of the Company's stockholders.

The Certificate of Incorporation of the Company, as amended and presently
in effect, authorizes the issuance of 25,000,000 shares of Common Stock, $0.0025
par value per share, and 2,000,000 shares of Preferred Stock, $0.001 par value
per share. As of the Record Date, there were 15,071,521 shares of Common Stock
outstanding and 9,928,479 shares of Common Stock were authorized but unissued.
Of the unissued shares, 4,038,751 shares were reserved for issuance pursuant to
the Company's various stock plans, leaving a balance of approximately 5,889,728
authorized, unissued, unreserved and uncommitted shares of Common Stock.

PURPOSES AND EFFECTS

The Board of Directors believes that the increase in the number of
authorized shares of Common Stock will provide greater flexibility for the Board
of Directors to declare stock dividends or stock splits, use stock for future
acquisitions, raise equity capital, adopt additional employee benefit plans or
increase the shares available under existing plans or to use the additional
shares for other general corporate purposes.

19
<PAGE> 22

If approved, the Company's Certificate of Incorporation, as amended, will
be amended to increase the authorized shares of Common Stock of the Company to
120,000,000. No change in the authorized Preferred Stock is being proposed. The
proposed shares of Common Stock for which authorization is sought would be part
of the existing class of such stock and would have no effect upon the terms of
the Common Stock or the rights of the holders of such stock. If this proposed
amendment is adopted, the additional authorized shares of Common Stock will be
available for issuance from time to time at the discretion of the Board of
Directors without further action by the stockholders, although use of such
shares for certain employee benefit plans or other transactions may require
shareholder approval. The proposed additional authorized shares of Common Stock
would have the same rights and privileges as the shares of Common Stock
presently outstanding. Holders of the Company's Common Stock do not have
preemptive rights to purchase additional shares of Common Stock.

REQUIRED VOTE

The approval of the amendment to the Certificate of Incorporation to
increase the authorized Common Stock requires the affirmative vote of the
holders of a majority of the shares of the Company's Common Stock present at the
Annual Meeting in person or by proxy and entitled to vote.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION. THE EFFECT OF AN ABSTENTION IS THE SAME AS
THAT OF A VOTE AGAINST THE APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED COMMON STOCK.

PROPOSAL NO. 6:

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has appointed Ernst & Young LLP, independent
auditors, to audit the consolidated financial statements of the Company for the
fiscal year ending March 31, 1997, and recommends that stockholders vote for
ratification of such appointment. In the event of a negative vote on such
ratification, the Board of Directors will reconsider its selection.

Ernst & Young LLP has audited the Company's financial statements annually
since fiscal 1985. Representatives of Ernst & Young LLP are expected to be
present at the meeting, with the opportunity to make a statement if they desire
to do so, and to respond to appropriate questions.

REQUIRED VOTE

The ratification of the appointment of Ernst & Young LLP as independent
auditors for the Company requires the affirmative vote of the holders of a
majority of the shares of the Company's Common Stock present at the Annual
Meeting in person or by proxy and entitled to vote.

RECOMMENDATION OF THE BOARD OF DIRECTORS

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR THE COMPANY. THE
EFFECT OF AN ABSTENTION IS THE SAME AS THAT OF A VOTE AGAINST THE PROPOSAL.

20
<PAGE> 23

OTHER INFORMATION

COMMON STOCK OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company's
Common Stock as of May 31, 1996 as to (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table beginning on page 22, and (iv)
all directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
FIVE PERCENT STOCKHOLDERS, DIRECTORS, ------------------------
NAMED EXECUTIVE OFFICERS, AND DIRECTORS PERCENT OF
AND EXECUTIVE OFFICERS AS A GROUP NUMBER TOTAL(2)
- ----------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Collagen Corporation................................................... 1,605,888 10.9%
2500 Faber Place
Palo Alto, CA 94303
Charles M. Strother, M.D.(3)........................................... 8,073 *
William G. Davis(4).................................................... 1,642,370 11.1%
3532 Bay Road So. Drive
Indianapolis, IN 46240
Kathleen G. Murray, M.S.N.............................................. 6,667 *
Howard D. Palefsky(5).................................................. 1,609,888 10.9%
Collagen Corporation
2500 Faber Place
Palo Alto, California 94303
Richard D. Randall..................................................... 16,710 *
John C. Villforth(3)................................................... 24,000 *
Gary R. Bang(6)........................................................ 217,166 1.4%
Erik T. Engelson(7).................................................... 138,740 *
Abhijit Acharya, Ph.D.(8).............................................. 37,240 *
Edward R. LeMoure(9)................................................... 106,405 *
Timothy C. Mills, Ph.D.(10)............................................ 44,163 *
All directors and executive officers as a group (19 persons)(11)....... 2,371,787 15.5%
</TABLE>

- ---------------
* Less than one percent.

(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the other footnotes to this table.

(2) As of May 31, 1996, 14,782,718 shares were issued and outstanding.

(3) Includes 7,000 shares issuable upon exercise of options exercisable within
60 days of May 31, 1996.

(4) Includes 1,605,888 shares held by Collagen which Mr. Davis could be deemed
to own beneficially by virtue of his position as a director of Collagen.
Mr. Davis disclaims beneficial ownership of such shares. Also includes
16,482 shares issuable upon exercise of options exercisable within 60 days
of May 31, 1996.

(5) Includes 1,605,888 shares held by Collagen which Mr. Palefsky could be
deemed to own beneficially by virtue of his position as Chairman, Chief
Executive Officer and a director of Collagen. Mr. Palefsky disclaims
beneficial ownership of such shares.

(6) Includes 214,302 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1996.

21
<PAGE> 24

(7) Includes 42,073 shares issuable upon exercise of options exercisable within
60 days of May 31, 1996.

(8) Includes 24,740 shares issuable upon exercise of options exercisable within
60 days of May 31, 1996.

(9) Includes 41,499 shares issuable upon exercise of options exercisable within
60 days of May 31, 1996.

(10) Includes 28,673 shares issuable upon exercise of options exercisable within
60 days of May 31, 1996.

(11) Includes an aggregate of 513,612 shares issuable upon exercise of options
exercisable within 60 days of May 31, 1996. Also includes 1,605,888 shares
held by Collagen. See footnotes (4) and (5).

COMPENSATION OF EXECUTIVE OFFICERS

All share amounts and per share figures set forth in the following tables
have been adjusted, where necessary, to reflect the Stock Split.

SUMMARY COMPENSATION TABLE

The following table shows the compensation received by the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company for the fiscal year ended March 31, 1996 and the compensation
received by each such individual for the Company's two prior fiscal years.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION(1) SECURITIES ALL OTHER
--------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(2) ($)(3)(4)
- ------------------------------------------ ----- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Gary R. Bang.............................. 1996 $227,865 $168,000 62,100 $ --
President, Chief Executive Officer 1995 198,195 114,000 87,100 --
and Director 1994 155,776 49,875 225,000 82,878
Erik T. Engelson.......................... 1996 156,624 90,000 32,100 --
Senior Vice President, Operations 1995 143,270 68,569 52,100 --
and Research and Development 1994 136,781 45,000 25,000 --
Abhijit Acharya, Ph.D..................... 1996 148,758 78,400 22,800 --
Vice President, Regulatory, Quality 1995 116,879 47,000 72,800 96,200
and Clinical Affairs 1994 -- -- -- --
Edward R. LeMoure......................... 1996 131,606 68,700 22,000 --
Vice President and General Manager, 1995 124,063 53,000 32,000 --
International 1994 114,973 45,000 28,000 --
Timothy C. Mills, Ph.D.................... 1996 127,842 67,200 21,000 --
Vice President, New Business Development 1995 113,314 50,000 61,000 70,932
and Chief Scientific Officer 1994 -- -- -- --
</TABLE>

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

(1) Mr. Bang, Dr. Acharya and Dr. Mills commenced employment with the Company on
May 3, 1993, June 27, 1994 and April 11, 1994, respectively. Bonus amounts
include $84,000, $48,400 and $68,700 deferred at the election of Mr. Bang,
Dr. Acharya and Mr. LeMoure, respectively.

(2) The Company's stock option grants are often based in part upon an officer's
performance in the prior fiscal year.

(3) The value of certain perquisites or personal benefits is not included in the
amounts disclosed because they did not exceed for any named individual the
lesser of either $50,000 or ten percent of total salary and bonus reported
for such individual in the Summary Compensation Table.

(4) Amounts shown consist of (i) relocation expenses paid for or reimbursed by
the Company with respect to Mr. Bang, Dr. Acharya and Dr. Mills, (ii) a
bonus and relocation payment to Mr. Bang of $75,000 upon the commencement of
his employment with the Company, and (iii) a bonus payment to Dr. Acharya of
$10,000 upon commencement of his employment with the Company.

22
<PAGE> 25

STOCK OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information for the named executive officers
with respect to grants of options to purchase Common Stock of the Company made
during the fiscal year ended March 31, 1996.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL
---------------------------------------------------- REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE 10-YEAR OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR(2) ($/SH) DATE 5% 10%
- ---------------------------------- ---------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gary R. Bang...................... 20,700 3.6% $ 17.50 5/8/05 $227,817 $ 577,333
41,400(4) 7.3 31.8125 11/7/05 828,278 2,099,019
Erik T. Engelson.................. 10,700 1.9 17.50 5/8/05 117,761 298,428
21,400(4) 3.7 31.8125 11/7/05 428,144 1,085,000
Abhijit Acharya, Ph.D............. 7,600 1.3 17.50 5/8/05 83,643 211,968
15,200(4) 2.7 31.8125 11/7/05 304,102 770,654
Edward R. LeMoure................. 7,000 1.2 17.50 5/8/05 77,040 195,233
15,000(4) 2.6 31.8125 11/7/05 300,101 760,514
Timothy C. Mills, Ph.D............ 7,000 1.2 17.50 5/8/05 77,040 195,233
14,000(4) 2.5 31.8125 11/7/05 280,094 709,813
</TABLE>

- ---------------
(1) Consist of stock options granted pursuant to the Company's 1988 Stock Option
Plan, which generally become exercisable at a rate of 12.50 percent of the
shares subject to the option at the end of the first six month period from
the date of grant and 6.25 percent quarterly thereafter. The maximum term of
each option granted is ten years from the date of grant. The exercise price
is equal to the market value of the stock on the grant date.

(2) Based on an aggregate of 570,945 stock options granted to employees during
fiscal 1996.

(3) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the future performance of the Common Stock and overall market
conditions. There is no assurance that the amounts reflected will be
realized.

(4) These options vested in full during fiscal 1996 upon the Company's
achievement of certain market valuation criteria.

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

The following table sets forth information for the named executive officers
with respect to exercises of options to purchase Common Stock of the Company in
the fiscal year ended March 31, 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE) UNEXERCISABLE)
- ---------------------------------- ------------- -------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
Gary R. Bang...................... 28,000 $1,149,470 194,527/151,673 $9,486,024/$6,779,532
Erik T. Engelson.................. 40,290 1,367,791 51,089/ 54,111 2,397,299/ 2,268,538
Abhijit Acharya, Ph.D............. 24,500 935,563 19,414/ 51,686 872,495/ 2,245,580
Edward R. LeMoure................. 20,332 1,066,972 36,561/ 37,439 1,745,506/ 1,571,057
Timothy C. Mills, Ph.D............ 15,000 551,250 22,797/ 44,203 1,037,100/ 1,888,150
</TABLE>

- ---------------
(1) The fair market value of Target's Common Stock at the close of business on
March 31, 1996 was $60.625.

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following report and
the Performance Graph on page 27 shall not be incorporated by reference into any
such filings.

23
<PAGE> 26

COMPENSATION COMMITTEE REPORT

The following is a report of the Compensation Committee of the Board of
Directors (the "Committee") describing the compensation policies applicable to
the Company's executive officers during the fiscal year ended March 31, 1996.
The Committee recommends salaries, incentives and other forms of compensation
for directors, officers and other employees of the Company, administers the
Company's various incentive compensation and benefit plans (including stock
plans) and recommends policies relating to such incentive compensation and
benefit plans. Executive officers who are also directors have not participated
in deliberations or decisions involving their own compensation.

EXECUTIVE OFFICER COMPENSATION

Compensation Policy

The Company's executive officer compensation policies are designed to
attract, motivate and retain senior management by providing an opportunity for
competitive, performance-based compensation. Under the Company's Compensation
Policy, adopted in fiscal 1993, executive officer compensation consists of
competitive base salaries, stock-based incentive opportunities in the form of
options to purchase the Company's Common Stock and a bonus plan tied to
individual and corporate performance goals. During fiscal 1996, the Company
contributed an aggregate of approximately $119,000 in matching 401(k)
contributions (up to an aggregate of $400 per participating employee), but the
Company currently does not contribute to any other retirement programs on behalf
of its employees, including executive officers. The Company has also adopted a
plan under which certain employees, including the Company's executive officers,
may defer receipt of portions of their salary and bonus until future periods.

Base Salaries for Fiscal 1995

In establishing compensation guidelines with respect to base salary, the
Company utilized data prepared by an independent consultant to assist it in
setting salary levels competitive with those of other medical industry
companies, several of which are included in the peer group index in the
Company's Performance Graph on page 26. The Company's Compensation Policy is
designed to maintain the base salary of its executive officers within a range
that approximates the median of such salary data. Generally, salaries paid to
the Company's executive officers in fiscal 1996 were within the targeted range.
While it is the Committee's intent to continue to review periodically base
salary information to monitor competitive ranges within the applicable market,
including consideration of the Company's geographic location and individual job
responsibilities, it is further the intent of the Committee to maintain a close
relationship between the Company's performance and the base salary component of
its executive officers' compensation.

Stock Option Awards for Fiscal 1996

The Company's 1988 Stock Option Plan provides for the issuance of stock
options to officers and employees of the Company to purchase shares of the
Company's Common Stock at an exercise price equal to the fair market value of
such stock on the date of grant. The Company's stock options typically vest over
a 48-month period in increments of 12.5% after the initial six months and 6.25%
quarterly thereafter. Stock options are granted to the Company's executive
officers and other employees both as a reward for past individual and corporate
performance and as an incentive for future performance. The Committee believes
that stock-based performance compensation arrangements are essential in aligning
the interests of management and the stockholders in enhancing the value of the
Company's equity.

During fiscal 1996 the Company granted incentive stock options to certain
employees, including executive officers, pursuant to the attainment of certain
corporate objectives and which awards were based substantially upon individual
and departmental performance during fiscal 1995 and the first half of fiscal
1996 and tenure with the Company. Stock options were granted subsequent to the
end of fiscal 1996 to certain employees, including executive officers, on a
similar basis with respect to corporate, individual and departmental performance
during fiscal 1996 and tenure with the Company.

24
<PAGE> 27

In addition, during fiscal 1996 the Company granted incentive stock options
to certain key employees, including executive officers, that were to vest at the
end of six years or upon the Company's achievement of certain market valuation
criteria, which criteria were met prior to the end of the fiscal year.

Bonus Awards for Fiscal 1996

In conjunction with the establishment of a fiscal 1996 bonus pool early in
the fiscal year, the Committee established certain performance objectives,
including corporate profit and departmental goals, which, when met, would result
in bonus payments to employees, including executive officers, in varying amounts
based upon the degree of achievement of the established objectives and
compensation level. In April 1996, the Committee approved bonuses for executive
officers and employees in recognition of their efforts in contributing to the
Company's fiscal 1996 performance. Bonuses earned by the Company's executive
officers in fiscal 1996 ranged from 49.5 percent to 73.7 percent of their
respective base salary amounts.

Compensation of the Chief Executive Officer

The fiscal 1996 compensation of Gary R. Bang, the Company's Chief Executive
Officer ("CEO"), consisted of base salary, a bonus and stock option grants. As
with other executive officers of the Company, the amounts of the CEO's stock
option and bonus awards are based on attainment of a combination of corporate
and individual performance objectives. Mr. Bang's fiscal year-end bonus of
$168,000, or 73.7 percent of his base salary, and stock options of 41,400 shares
granted in November 1995 and 21,000 shares granted in May 1996, partially in
recognition of Mr. Bang's fiscal 1996 performance, reflect the Committee's
judgment as to Mr. Bang's personal performance during the fiscal year as well as
his role in the attainment of the Company's overall objectives.

Deductibility of Executive Compensation

The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993, which
section disallows a deduction for any publicly held corporation for individual
compensation exceeding $1 million in any taxable year for the CEO and four other
most highly compensated executive officers, unless such compensation meets the
requirements for the "performance-based" exception to the general rule. Since
the cash compensation paid by the Company to each of its executive officers is
expected to be well below $1 million and the Committee believes that options
granted under the Company's 1988 Stock Option Plan will meet the requirements
for qualifying as performance-based, the Committee believes that this section
will not affect the tax deductions available to the Company. It will be the
Committee's policy to qualify, to the extent reasonable, the executive officers'
compensation for deductibility under applicable tax law.

Submitted by the Compensation
Committee
of the Board of Directors

William G. Davis

Kathleen G. Murray, M.S.N.

COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION

Ms. Murray and Messrs. Davis, Randall and Villforth each served on the
Company's Compensation Committee during the past fiscal year. Mr. Bang, an ex
officio member of the Compensation Committee, assisted the Compensation
Committee in assessing the Company's executive compensation structure, other
than with respect to himself, for the fiscal year ended March 31, 1996. Mr.
Randall is a former President and Chief Executive Officer of the Company.

25
<PAGE> 28

PERFORMANCE GRAPH

The following graph compares the cumulative total stockholder return,
assuming reinvestment of all dividends, for the Company's Common Stock at March
31, 1996 since January 24, 1992 (the date on which the Company's stock was first
registered under Section 12 of the Securities Exchange Act of 1934) to the
cumulative return over such period of (i) the Total Return Index for the Nasdaq
National Market and (ii) the S&P Health Care Composite Index. The graph assumes
that $100 was invested on January 24, 1992, the date on which the Company
completed its initial public offering of Common Stock, in the Common Stock of
the Company and in each of the comparative indices. The graph further assumes
that such amount was initially invested in the Common Stock of the Company at a
price per share of $9, the price to which such stock was first offered to the
public by the Company on that date, as adjusted to reflect the Stock Split. The
stock price performance on the following graph is not necessarily indicative of
future stock price performance.

COMPARISON OF TOTAL RETURN

<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P HLTH CARE
(FISCAL YEAR COVERED) TARGET NASDAQ COMP
<S> <C> <C> <C>
1/24/92 100 100 100
3/31/92 126 103 87
3/31/93 108 119 72
3/31/94 135 127 68
3/31/95 203 143 96
3/31/96 674 193 142
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with Collagen Corporation

The Company was formed in 1985 as a joint venture between Collagen and Eli
Lilly and Company ("Lilly") to develop micro-catheters and related devices to
deliver collagen-based products to treat cancer, stroke and other diseases
accessible through small vessels of the circulatory system. In 1988, Lilly sold
its interest in the Company to Collagen, and in 1989 the Company sold all of its
assets related to collagen-based products to an entity affiliated with John R.
Daniels, M.D., a former director of the Company. As of May 31, 1996, Collagen
holds approximately 10.9 percent of the Company's outstanding Common Stock.

The Company and Collagen have entered into certain agreements for the
purpose of defining the ongoing relationship between the two companies. At the
times such agreements were entered into, Collagen was the majority stockholder
of the Company. Accordingly, these agreements were not the result of arm's
length negotiations between independent parties.

Collagen and the Company have entered into a Stockholder Agreement (the
"Agreement") providing that all transactions between the Company and Collagen or
any affiliate of Collagen must be approved by a

26
<PAGE> 29

special committee of the Company's Board of Directors comprised of directors who
are not officers, directors, employees or affiliates of Collagen. The current
members of this committee are Mr. Randall and Dr. Strother. During the effective
term of the Agreement, Collagen may not vote to eliminate from the Company's
Certificate of Incorporation provisions requiring cumulative voting for the
election of directors. In addition, the Agreement provides that Collagen will
not sell any of its Target Common Stock at a premium over the average market
price over the three day period preceding such sale, except for premiums which
may be simultaneously received by all of the Company's stockholders in the event
of a tender offer, merger or reorganization. Moreover, the Agreement requires
that affiliates of Collagen purchasing Target Common Stock from Collagen agree
to the preceding restrictions. The provisions of the Agreement became effective
upon the consummation of the Company's initial public offering in January 1992
and terminate on the earlier of seven years from the date of the Agreement or on
the date Collagen beneficially owns less than five percent of the Company's
Common Stock.

Certain Transactions

In December 1992, the Company received 2,000,000 shares of Preferred Stock
of Conceptus, Inc. ("Conceptus"), a corporation on whose Board of Directors Mr.
Randall currently sits and with whom Mr. Randall served as Chief Executive
Officer and acting Chief Financial Officer from December 1992 until July 1993,
along with a warrant to purchase up to 3,000,000 shares of Conceptus Common
Stock, in return for the grant of a license to the Company's technology for use
in fields associated with reproductive physiology. In March 1994, the Company
purchased 156,250 additional shares of Conceptus Preferred Stock for an
aggregate of $250,000. Also in March 1994, the Company entered into a Master
Lease Agreement pursuant to which the Company extended to Conceptus a lease line
of credit in the amount of up to $300,000 and received a warrant to purchase
36,000 shares of Conceptus Common Stock. In connection with the extension of the
lease line, the Company loaned Conceptus approximately $200,000, secured by
certain of Conceptus' tangible assets and repayable monthly through March 1998.
In May 1995, the Company purchased an additional 147,059 shares of Conceptus
Preferred Stock for an aggregate of $250,000. In connection with Conceptus's
initial public offering in February 1996, (i) all outstanding shares of
Conceptus Preferred Stock were automatically converted into an equivalent
numbers of shares of Conceptus Common Stock, (ii) Conceptus effected a
one-for-three share reverse stock split, and (iii) the Company acquired 904,857
post-split shares of Conceptus Common Stock upon the exercise or conversion of
its two outstanding Conceptus warrants. As of May 31, 1996, the Company held an
approximate 18 percent equity interest in Conceptus. During fiscal 1996,
Conceptus made payments of approximately $29,000 to the Company for the purchase
of finished products and raw materials. Although negotiated at arm's length, the
terms and conditions for the purchase of such products and materials were not
available to non-affiliated third parties. In addition, Conceptus made certain
payments to the Company, primarily for the repayment of certain amounts under
the lease line and secured loan, totalling approximately $172,000.

In May 1993, the Company received 2,333,333 shares of Preferred Stock of
Cardima, Inc. ("Cardima"), a corporation on whose Board of Directors Mr. Bang
currently sits, in return for the grant of a license to the Company's technology
for use in fields associated with heart disease, primarily electrophysiology. In
December 1993, the Company entered into a Master Lease Agreement pursuant to
which the Company extended to Cardima a lease line of credit in the amount of up
to $1 million and received a warrant to purchase up to 76,600 shares of Cardima
Preferred Stock. In December 1994, the Company purchased an additional 162,514
shares of Cardima Preferred Stock for an aggregate of approximately $245,000 and
acquired a warrant to purchase up to a further 172,267 shares of Cardima
Preferred Stock. Also in December 1994, in connection with the extension of a
bridge loan to Cardima (which loan was later converted into a portion of the
Preferred Stock purchased by the Company at such time), the Company was granted
a warrant to purchase an additional 21,627 shares of Cardima Preferred Stock. In
December 1995 and February 1996, the Company acquired an aggregate of 1,780,822
additional shares of Cardima Preferred Stock in return for total consideration
of approximately $1,300,000, consisting of the conversion of the outstanding
balance owed under the lease line as well as certain accounts receivable and an
additional infusion of cash by the Company. As of May 31, 1996, the Company held
an approximate 16 percent equity interest in Cardima. During fiscal 1996,
Cardima made certain payments to the Company, primarily for the purchase of
products and materials,

27
<PAGE> 30

totaling approximately $24,000. Although negotiated at arm's length, the terms
and conditions for the purchase of such products and materials were not
available to non-affiliated third parties. In addition, the Company currently
subleases from Cardima certain space for the Company's shipping and finished
goods storage, pursuant to which the Company made certain rental payments to
Cardima during the fiscal year totaling approximately $101,000.

In July 1993, each of the Company and Collagen purchased 900,000 shares of
Preferred Stock of Prograft Medical, Inc. ("Prograft"), a corporation on whose
Board of Directors Mr. Palefsky, Dr. Strother and Timothy C. Mills, Ph.D., an
executive officer of the Company, currently sit, in return for payments of
$200,000 by each company to Prograft and the grant of a license to use each
company's technology in the field of vascular prostheses. The Company and
Collagen were also granted warrants to purchase additional shares of Prograft
Preferred Stock in this transaction. Between November 1993 and July 1994, each
of Target and Collagen purchased an additional 850,000 shares of Prograft
Preferred Stock for an aggregate of $187,500 each pursuant to the exercise of
such warrants. In July 1994 and March 1995, each of Target and Collagen
purchased an additional aggregate of 1,293,103 shares of Prograft Preferred
Stock for an aggregate of $750,000 each. Dr. Strother is currently a minority
stockholder of Prograft. As of May 31, 1996, each of the Company and Collagen
held an approximate 21 percent equity interest in Prograft.

Pursuant to a Letter Agreement dated as of April 25, 1993, the Company has
agreed to maintain Mr. Bang's salary for up to six months after termination by
the Company unless his employment is terminated by the Company for cause, which
severance arrangement, based on Mr. Bang's fiscal 1996 salary, is valued at
approximately $114,000. Pursuant to a Letter Agreement dated as of March 9,
1994, the Company has agreed to maintain Dr. Acharya's salary for up to nine
months after termination by the Company unless his employment is terminated by
the Company for cause, which severance arrangement, based on Dr. Acharya's
fiscal 1996 salary, is valued at approximately $112,000. Pursuant to an
Employment Agreement effective as of May 23, 1996, the Company has agreed to
maintain the salary of Ray H. Dormandy, Jr., the Company's Vice President,
Silicone and PVA Technologies, for the duration of the twenty-four month period
following the effective date of such Employment Agreement in the event that Mr.
Dormandy's employment is terminated by the Company other than for cause.
Pursuant to such Employment Agreement, Mr. Dormandy's annual salary is $120,000
during such two-year term.

The Company has adopted certain "change of control" arrangements with its
executive officers pursuant to which such officers would be entitled to
severance and other compensation in the event that (i) a person acquired more
than fifteen percent of the Company's outstanding Common Stock without the
approval of the Company's Board of Directors, (ii) a majority of the Board of
Directors is replaced, (iii) the Company is acquired by means of merger or sale
of assets or (iv) the Company is liquidated (each an "Event"). In the event of
the involuntary or constructive termination of the officer's employment within
twenty-four months following an Event (other than for cause), such benefits
include salary, target bonus and benefit continuation for a twenty-four month
period in the case of the Chief Executive Officer and a twelve-month period in
the case of any Vice President, along with immediate acceleration of stock
option vesting. Furthermore, under the arrangements, certain acceleration of
stock option vesting would occur upon an Event (in varying amounts based upon
the nature of the Event) regardless of employment status following the Event.
Based upon fiscal 1996 compensation levels, the salary continuation and target
bonus benefits under these arrangements would have an aggregate value of
approximately $791,000 for Mr. Bang (twenty-four month period) and approximately
$247,000, $227,000, $200,306 and $195,000 for Mr. Engelson, Dr. Acharya, Mr.
LeMoure and Dr. Mills, respectively (twelve month periods). In addition, each
such person could receive significant benefit upon the acceleration of
outstanding options. See "Compensation of Executive Officers."

The Company has entered into separate indemnification agreements with its
officers and directors which may require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors or officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.

28
<PAGE> 31

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

Under the securities laws of the United States, the Company's directors,
its officers, and any persons holding more than ten percent of the Company's
Common Stock are required to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission ("SEC"). Specific filing deadlines of these reports have
been established and the Company is required to disclose in this Proxy Statement
any failure to file by these dates during the fiscal year ended March 31, 1996.
To the best of the Company's knowledge, all of these filing requirements have
been satisfied except that officer John Meyer was late in filing his initial
report in connection with the commencement of his employment. In making this
statement, the Company has relied solely on written representations of its
directors and officers and any ten percent holders and copies of the reports
that they filed with the SEC.

OTHER MATTERS

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

BY ORDER OF THE BOARD OF DIRECTORS

Michael W. Hall

Secretary

Dated: July 22, 1996

29
<PAGE> 32

APPENDIX A

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

TARGET THERAPEUTICS, INC.

1996 ANNUAL MEETING OF STOCKHOLDERS

P
R
0 The undersigned stockholder of TARGET THERAPEUTICS, INC., a
X Delaware corporation, hereby acknowledges receipt of the notice of
Y annual meeting of stockholders and proxy statement, each dated July 22,
1996, and hereby appoints Charles M. Strother, M.D. and Gary R. Bang,
and each of them, with full power of substitution, as proxies, and
authorizes them to represent and to vote, as designated below, all the
stock of TARGET THERAPEUTICS, INC. that the undersigned is entitled to
vote at the Annual Meeting of its stockholders to be held on September
4, 1996 and at any adjournment or postponement thereof, as follows:

If no direction is made, this proxy will be voted in the
Election of Directors in the manner described in the Proxy Statement,
FOR the proposal to approve an amendment to the 1988 Stock Option Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 1,500,000 shares, FOR the proposal to approve amendments
to the 1991 Director Option Plan to make certain changes to the
formulas pursuant to which options are granted thereunder and to the
provisions regarding adjustments necessitated by changes in the
Company's capital structure, FOR the proposal to approve amendments to
the 1991 Employee Stock Purchase Plan to increase the number of shares
of Common Stock reserved for issuance thereunder by 100,000 shares and
make certain other changes to participation standards and offering
periods, FOR to approve an amendment to the Certificate of
Incorporation to increase the number of authorized shares of Common
Stock from 25,000,000 to 120,000,000 and FOR the proposal to ratify the
selection of Ernst & Young LLP as the Company's independent auditors
for the current fiscal year. If this proxy is executed in such manner
as not to withhold authority to vote for the election of any nominee to
the Board of Directors, it shall be deemed to grant such authority.

CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
<PAGE> 33

PLEASE MARK YOUR
/X/ VOTES AS IN THIS
EXAMPLE

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER(S)

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ALL NOMINEES FOR
DIRECTORS AND PROPOSALS 2, 3, 4, 5 AND 6.

1. ELECTION OF DIRECTORS
NOMINEES: GARY R. BANG, WILLIAM G. DAVIS, KATHLEEN G. MURRAY, M.S.N., HOWARD D.
PALEFSKY, RICHARD D. RANDALL, CHARLES M. STROTHER, M.D., JOHN C. VILLFORTH

FOR WITHHELD

/ / / /

MARK ADDRESS
CHANGES AND NOTE / /
BELOW

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

FOR AGAINST ABSTAIN
2. To approve an amendment to the 1988
Stock Option Plan to increase the number / / / / / /
of shares of Common Stock reserved for
issuance thereunder by 1,500,000 shares.

FOR AGAINST ABSTAIN
3. To approve amendments to the 1991
Director Option Plan to make
certain changes to the formulas pursuant
to which options are granted thereunder / / / / / /
and to the provisions regarding
adjustments necessitated by changes in
the Company's capital structure.

FOR AGAINST ABSTAIN
4. To approve amendments to the 1991
Employee Stock Purchase Plan to increase
the number of shares of Common Stock
reserved for issuance thereunder by / / / / / /
100,000 shares and make certain other
changes to participation standards and
offering periods.

FOR AGAINST ABSTAIN

5. To approve an amendment to the
Certificate of Incorporation to increase / / / / / /
the number of authorized shares of Common
Stock from 25,000,000 to 120,000,000.

FOR AGAINST ABSTAIN

6. To ratify the appointment of Ernst &
Young LLP as independent auditors of the / / / / / /
Company for the fiscal year ending March
31, 1997.

and, in their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting or any postponement or
adjournment thereof.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.

SIGNATURE DATE SIGNATURE DATE
----------------- --------- ---------------- ---------