MATRIDIGM CORPORATION


                         ------------------------------
                            SERIES A PREFERRED STOCK
                               PURCHASE AGREEMENT
                         ------------------------------





                                 NOVEMBER 17, 1995




                        CONFIDENTIAL TREATMENT REQUESTED




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                                TABLE OF CONTENTS

                                                                           PAGE

1.       AGREEMENT TO SELL AND PURCHASE..................................     1
         1.1      Authorization of Shares................................     1
         1.2      Sale and Purchase......................................     1

2.       CLOSING, DELIVERY AND PAYMENT...................................     1
         2.1      Closing................................................     1

3.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................     2
         3.1      Organization and Standing..............................     2
         3.2      Corporate Power........................................     2
         3.3      Capitalization.........................................     2
         3.4      Authorization..........................................     2
         3.5      Compliance with Other Instruments......................     2
         3.6      Litigation, etc........................................     3
         3.7      Governmental Consent, etc..............................     3
         3.8      Offering...............................................     3
         3.9      Subsidiaries...........................................     3
         3.10     Employees..............................................     3
         3.11     Proprietary Rights.....................................     3

4.       REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.................     3
         4.1      Authorization..........................................     3
         4.2      Investment.............................................     4
         4.3      Rule 144 and Rule 144A.................................     4
         4.4      No Public Market.......................................     4
         4.5      Access to Data.........................................     4
         4.6      Experience.............................................     4

5.       CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING................     4
         5.1      Representations and Warranties Correct.................     4
         5.2      Covenants..............................................     5
         5.3      Proceedings and Documents..............................     5
         5.4      License Agreement......................................     5
         5.5      Restricted Stock Repurchase Agreements.................     5
         5.6      Employment Agreements..................................     5

6.       CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING..................     5
         6.1      Representations Correct................................     5
         6.2      Qualifications, Legal Investment.......................     5
         6.3      Covenants..............................................     5



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                                TABLE OF CONTENTS
                                   (CONTINUED)

                                                                           PAGE

         6.4      Sublease...............................................     5
         6.5      Administrative Services................................     6
         6.6      License Agreement......................................     6

7.       COVENANTS OF THE COMPANY........................................     6
         7.1      Basic Financial Information and Reporting..............     6
         7.2      Inspection Rights......................................     6
         7.3      Confidentiality of Records.............................     6
         7.4      Reservation of Common Stock............................     6
         7.5      Termination of Covenants...............................     7
         7.6      Confidentiality Of [REDACTED] License..................     7

8.       REGISTRATION RIGHTS.............................................     7
         8.1      Piggyback Registration Rights..........................     7
                  (a)      Notice Of Registration........................     7
                  (b)      Underwriting Requirements.....................     7
         8.2      "Market Stand-Off" Agreement...........................     8
         8.3      Transfer...............................................     8

9.       RIGHT OF FIRST REFUSAL..........................................     8
         9.1      Initiation of Right of First Refusal...................     8
         9.2      Mechanics..............................................     9

10.      DEATH AND DISABILITY BENEFITS...................................    10

11.      MISCELLANEOUS...................................................    11
         11.1     Governing Law..........................................    11
         11.2     Successors and Assigns.................................    11
         11.3     Entire Agreement; Amendment............................    11
         11.4     Notices, etc...........................................    11
         11.5     Delays or Omissions....................................    11
         11.6     California Corporate Securities Law....................    12
         11.7     Expenses...............................................    12
         11.8     Severability...........................................    12


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                                INDEX OF EXHIBITS


Restated Articles                                               Exhibit A

Employment Contract of Franklin Chiang                          Exhibit B-1

Employment Contract of James T. Brady                           Exhibit B-2



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                        CONFIDENTIAL TREATMENT REQUESTED



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                              MATRIDIGM CORPORATION

                   SERIES A PREFERRED STOCK PURCHASE AGREEMENT


         THIS SERIES A PREFERRED STOCK PURCHASE  AGREEMENT (the  "Agreement") is
entered into as of November  17, 1995,  by and among  MATRIDIGM  CORPORATION,  a
California  corporation  (the "Company"),  FRANKLIN CHIANG  ("Chiang") and ZITEL
CORPORATION, a California corporation ("Purchaser").

                                    RECITALS

         A.    The Company has  authorized the sale and issuance to Purchaser of
up to 9,600,000 shares of its Series A Preferred Stock (the "Shares").

         B.  Purchaser  desires to purchase the Shares in the amounts and on the
terms and conditions set forth herein, and the Company desires to issue and sell
the Shares to Purchaser on the terms and conditions set forth herein.

         In  consideration  of the  foregoing  recitals and the mutual  promises
hereinafter set forth, the parties hereto agree as follows:

1.       AGREEMENT TO SELL AND PURCHASE.

         1.1  AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in
Section 2 below), the Company shall have authorized the sale and issuance of the
Shares having the rights, preferences,  privileges and restrictions set forth in
the Amended and Restated  Articles of Incorporation of the Company,  as amended,
in the form attached hereto as Exhibit A (the "Restated Articles").  The Company
has, or prior to the Closing will have,  adopted and filed the Restated Articles
with the Secretary of State of the State of California.

         1.2 SALE AND PURCHASE.  Subject to the terms and conditions hereof, the
Company hereby agrees to issue and sell to Purchaser and each  Purchaser  agrees
to purchase  from the Company,  the Shares,  at a purchase  price of $.34896 per
Share.

2.       CLOSING, DELIVERY AND PAYMENT.

         2.1 CLOSING.  The closing of the sale and purchase of Shares under this
Agreement (the "Closing")  shall take place at such time or place as the Company
and  Purchaser  mutually  agree.  At  the  Closing,  subject  to the  terms  and
conditions   hereof,  the  Company  will  deliver  to  Purchaser  a  certificate
representing  the Shares  against  payment by or on behalf of  Purchaser  of the
purchase price therefor,  by wire transfer or check made payable to the order of
the Company,  cancellation  of  indebtedness  or by such other means as shall be
mutually agreeable to Purchaser and the Company.


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3.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         The  Company  and Chiang  individually  as to Section  3.11 only hereby
jointly and generally represent to Purchaser as follows:

         3.1  ORGANIZATION  AND  STANDING.  The  Company is a  corporation  duly
organized, validly existing, and in good standing under the laws of the State of
California. The Company has all requisite corporate power to own and operate its
properties and assets,  and to carry on its business as presently  conducted and
as  proposed  to be  conducted.  The  Company is  qualified  to do business as a
foreign corporation in each jurisdiction in which such qualification is required
and where the failure to be so qualified would have a material adverse effect on
the Company's business.

         3.2 CORPORATE  POWER. The Company has all requisite legal and corporate
power to execute and deliver this Agreement and any other agreement contemplated
hereby,  to sell and issue the Shares hereunder and to carry out and perform its
obligations   under  the  terms  of  this  Agreement  and  any  other  agreement
contemplated hereby.

         3.3  CAPITALIZATION.  The  authorized  capital  stock  of  the  Company
consists of  32,000,000  shares of Common Stock (the "Common  Stock"),  of which
16,000,000  shares are issued and  outstanding  and 6,400,000 have been reserved
for employee  incentive plans, and 9,6000,000  shares of Preferred Stock, all of
which have been designated "Series A Preferred Stock",  none of which shares are
issued and  outstanding.  All such issued and outstanding  shares have been duly
authorized and validly issued, and are fully paid and nonassessable. The rights,
restrictions,  privileges and preferences of the Series A Preferred Stock are as
stated in the Restated Articles.  The Company by appropriate action by the Board
of  Directors  has  reserved  (or  shall  have  reserved  prior to the  Closing)
9,6000,000  shares of Common Stock for issuance upon  conversion of the Series A
Preferred Stock.

         3.4 AUTHORIZATION. All corporate action on the part of the Company, its
directors  and  stockholders  necessary for the sale and issuance of the Shares,
and the Common Stock  issuable upon  conversion  of the Shares (the  "Underlying
Stock") and the  performance  of the Company's  obligations  hereunder and under
each of the other  agreements  contemplated  hereby and the  reservation  of the
Underlying  Stock have been taken or will be taken  prior to the  Closing.  This
Agreement  and the other  agreements  contemplated  hereby are valid and binding
obligations  of the Company,  enforceable  in accordance  with their  respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors. The Shares (and the Underlying Stock), when issued in
compliance  with the  provisions of this  Agreement,  will be validly issued and
will be  fully  paid  and  nonassessable,  and  will be  free  of any  liens  or
encumbrances;  provided, however, that the Shares (and the Underlying Stock) may
be subject to  restrictions  on transfer under state and/or  federal  securities
laws.

         3.5 COMPLIANCE  WITH OTHER  INSTRUMENTS The Company is not in violation
of any term of its Restated Articles of Incorporation,  Bylaws, any agreement to
which the Company


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                        CONFIDENTIAL TREATMENT REQUESTED

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or  Franklin  Chiang  is a party,  or any  order,  statute,  rule or  regulation
applicable to the Company where such  violation  would  materially and adversely
affect the Company.  The execution,  delivery and  performance of and compliance
with this  Agreement  and the issuance of the Shares and the  Underlying  Stock,
have not resulted and will not result in any material  violation of, or conflict
with, or constitute a material default under, the Company's Restated Articles of
Incorporation or Bylaws.

         3.6  LITIGATION,   ETC.  There  is  no  action,  suit,   proceeding  or
investigation pending against the Company or its properties.

         3.7 GOVERNMENTAL  CONSENT,  ETC. No consent,  approval or authorization
of, or designation,  declaration or filing with, any  governmental  authority on
the part of the  Company is  required in  connection  with the valid  execution,
delivery and performance of this Agreement and any other agreement  contemplated
hereby,  or the offer,  sale or  issuance  of the  Shares (or of the  Underlying
Stock)  except  the  filing  of a Notice  with the  California  Commissioner  of
Corporations  pursuant to Section 25102(f) of the California  Corporations  Code
which filing shall be made within 15 days of the Closing.

         3.8 OFFERING.  Based in part on the  representations  of the Purchasers
set forth in Section 4 hereof,  the offer,  sale and issuance of the Shares (and
the Underlying Stock) in conformity with the terms of this Agreement  constitute
transactions  exempt  from the  registration  requirements  of  Section 5 of the
Securities Act of 1933, as amended (the "Securities Act").

         3.9  SUBSIDIARIES.  The  Company  does not  presently  own or  control,
directly or indirectly, and has no stock or other interest as owner or principal
in, any other  corporation or partnership,  joint venture,  association or other
business venture or entity.

         3.10   EMPLOYEES.   Each   employee  of  the  Company  with  access  to
confidential or proprietary  information has executed a proprietary  information
agreement with the Company.

         3.11 PROPRIETARY  RIGHTS.  The Company owns the entire right, title and
interest in all of the  technology  licensed by Company to Purchaser  under that
certain License Agreement of even date (the "License  Agreement") free and clear
of all liens, claims,  encumbrances and licenses except the rights of [REDACTED]
under that certain Option and License  Agreement  between  [REDACTED] and Chiang
dated as of October 1, 1995 [REDACTED];  [REDACTED] has not exercised any option
under the  [REDACTED]  License.  To the best  knowledge  of the  offices  of the
Company,  [REDACTED]  has not undertaken any  development  effort  utilizing its
rights under the [REDACTED] License.

4.       REPRESENTATIONS  AND  WARRANTIES  OF THE  PURCHASER.   Purchaser hereby
represents and warrants to the Company as follows:

         4.1  AUTHORIZATION.  Purchaser has all the requisite  power and is duly
authorized  to execute  and  deliver  this  Agreement  and each other  agreement
contemplated hereby and has taken


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all necessary  action to consummate  the  transactions  contemplated  hereby and
thereby.  This Agreement and each other agreement  contemplated hereby have been
duly  executed  and  delivered  by Purchaser  and  constitute  valid and binding
obligations of Purchaser,  enforceable in accordance with their respective terms
subject to laws of general  application  relating to bankruptcy,  insolvency and
the relief of debtors.

         4.2  INVESTMENT.  Purchaser is acquiring the Shares for  investment for
its own account and not with a view to, or for resale in  connection  with,  any
distribution thereof, and it has no present intention of selling or distributing
the Shares or the Underlying Stock.  Purchaser  understands that the Shares (and
the Underlying  Stock) to be purchased by it have not been registered  under the
Securities  Act  by  reason  of  a  specific  exemption  from  the  registration
provisions of the  Securities  Act which depends upon,  among other things,  the
bona fide nature of the investment intent as expressed herein.

         4.3 RULE 144 AND RULE 144A.  Purchaser  acknowledges that, because they
have  not  been  registered  under  the  Securities  Act,  the  Shares  (and the
Underlying Stock) it is purchasing must be held indefinitely unless subsequently
registered  under the Securities Act or an exemption from such  registration  is
available.  Purchaser  is aware  of the  provisions  of Rule  144 and Rule  144A
promulgated  under the  Securities  Act,  which rules permit  limited  resale of
securities  purchased  in a private  placement  subject to the  satisfaction  of
certain conditions.

         4.4 NO PUBLIC MARKET.  Purchaser  understands that no public market now
exists for any of the securities  issued by the Company and that it is uncertain
whether a public market will ever exist for the Shares or the Underlying Stock.

         4.5  ACCESS  TO  DATA.   Purchaser   has  received  and  reviewed  such
information that such Purchaser  deemed  necessary to make an informed  decision
concerning  the purchase of the Shares and has had an opportunity to discuss the
Company's business,  management and financial affairs with its management and to
obtain  any  additional  information  necessary  to verify the  accuracy  of the
information given to such Purchaser.

         4.6 EXPERIENCE. Purchaser is experienced in evaluating and investing in
start up  companies  with little or no  operating  history  such as the Company.
Purchaser by reason of its business or financial  experience has the capacity to
protect its own interests in connection  with the  transaction  contemplated  by
this Agreement.

5.       CONDITIONS  TO  PURCHASER'S  OBLIGATIONS  AT  CLOSING.      Purchaser's
obligations   to  purchase  the  Shares  at  the  Closing  are  subject  to  the
satisfaction, at or prior to the Closing, of the following conditions:

         5.1  REPRESENTATIONS  AND WARRANTIES  CORRECT.  The representations and
warranties  made in Section 3 hereof  shall be true and correct  when made,  and
shall be true and correct as of the Closing.



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         5.2 COVENANTS.  All covenants,  agreements and conditions  contained in
this  Agreement to be performed by the Company on or prior to the Closing  shall
have been performed or complied with in all respects.

         5.3 PROCEEDINGS AND DOCUMENTS.  All corporate and other  proceedings in
connection  with the  transactions  contemplated  at the Closing  hereby and all
documents  and  instruments  incident to such  transactions  shall be reasonably
satisfactory in substance and form to the Purchasers,  and the Purchasers  shall
have  received  all such  counterpart  originals or certified or other copies of
such documents as they may reasonably request.

         5.4 LICENSE  AGREEMENT.  The License Agreement in the agreed form shall
have  been  duly  authorized  and  executed  by the  Company  and  delivered  to
Purchaser.

         5.5 RESTRICTED STOCK REPURCHASE AGREEMENTS.  The shares of common stock
purchased by Chiang,  James T. Brady ("Brady") and Larry Thoman ("Thoman") shall
be subject to restrictive  covenants and repurchase rights  satisfactory in form
and substance to Purchaser.

         5.6 EMPLOYMENT AGREEMENTS.  Chiang, Brady and Thoman shall have entered
into employment agreements with the Company on terms and conditions satisfactory
to Purchaser.

6.       CONDITIONS  TO  COMPANY'S  OBLIGATIONS  AT  CLOSING.      The Company's
obligation  to issue  and sell the  Shares  at the  Closing  is  subject  to the
satisfaction, on or prior to Closing, of the following conditions:

         6.1 REPRESENTATIONS  CORRECT. The representations made by the Purchaser
in Section 4 hereof shall be true and correct  when made,  and shall be true and
correct as of the Closing.

         6.2 QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or
permits, if any, of any governmental  authority or regulatory body of the United
States or of any state that are required in connection  with the lawful sale and
issuance of the Shares  pursuant to this Agreement shall have been duly obtained
and  shall  be  effective  prior  to or as of the  Closing.  At the  time of the
Closing,  the sale and issuance of the Shares and the  proposed  issuance of the
Underlying Stock shall be legally permitted by all laws and regulations to which
the Purchasers and the Company are subject.

         6.3 COVENANTS.  All covenants,  agreements and conditions  contained in
this  Agreement to be  performed  by Purchaser on or prior to the Closing  shall
have been performed or complied with in all respects.

         6.4 SUBLEASE.  Purchaser  shall have duly  authorized  and executed and
shall  have  delivered  to the  Company a Sublease  of a portion of  Purchaser's
premise in the agreed form.


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         6.5 ADMINISTRATIVE  SERVICES.  Purchaser shall have duly authorized and
shall have  executed and shall have  delivered to the Company an  Administrative
Services Agreement in the agreed form.

         6.6 LICENSE  AGREEMENT.  The License Agreement in the agreed form shall
have  been  duly  authorized,  executed  and  delivered  to the  Company  by the
Purchaser.

7.       COVENANTS OF THE COMPANY.

         7.1      BASIC FINANCIAL INFORMATION AND REPORTING.

                  (A) The  Company  will  maintain  true  books and  records  of
account  in which  full and  correct  entries  will be made of all its  business
transactions pursuant to a system of accounting  established and administered in
accordance with generally accepted accounting  principles  consistently applied,
and will set aside on its books all such proper  accruals  and reserves as shall
be required under generally accepted accounting principles consistently applied.

                  (B) As soon as  practicable  after the end of each fiscal year
of the  Company,  and in any event within 45 days  thereafter,  the Company will
furnish Purchaser a consolidated  balance sheet of the Company, as at the end of
such fiscal year,  and a  consolidated  statement  of income and a  consolidated
statement  of cash  flows  of the  Company,  for  such  year,  all  prepared  in
accordance with generally accepted accounting principles.

                  (C) The Company will furnish Purchaser, as soon as practicable
after the end of the first,  second and third  quarterly  accounting  periods in
each fiscal year of the Company,  and in any event within 30 days thereafter,  a
consolidated  balance sheet of the Company as of the end of each such  quarterly
period, and a consolidated  statement of income and a consolidated  statement of
cash flows of the Company  for such  period and for the  current  fiscal year to
date, prepared in accordance with generally accepted accounting principles.

         7.2  INSPECTION  RIGHTS.  Purchaser  shall  have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries,  and to
discuss  the  affairs,  finances  and  accounts  of  the  Company  or any of its
subsidiaries with its officers, all at such reasonable times and as often as may
be reasonably requested.

         7.3 CONFIDENTIALITY OF RECORDS. Purchaser agrees to use, and to use its
best efforts to insure that its authorized  representatives use, the same degree
of care as Purchaser  uses to protect its own  confidential  information to keep
confidential  any  information  furnished to it which the Company  identifies as
being  confidential  or proprietary  (so long as such  information is not in the
public domain).

         7.4 RESERVATION OF COMMON STOCK.  The Company will at all times reserve
and keep available,  solely for issuance and delivery upon the conversion of the
Preferred  Stock,  all  Common  Stock  issuable  from  time  to time  upon  such
conversion.



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         7.5 TERMINATION OF COVENANTS. All covenants of the Company contained in
Sections  7.1-7.3  of this  Agreement  shall  expire  and  terminate  as to each
Purchaser upon the date that the Company first becomes  subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended.

         7.6  CONFIDENTIALITY OF [REDACTED]  LICENSE.  Purchaser and the Company
each  acknowledges  that it has received  disclosure of the  [REDACTED]  License
under conditions of confidentiality  and agrees not to disclose the existence or
terms thereof without the express written consent of [REDACTED].

8.       REGISTRATION RIGHTS.

         8.1      PIGGYBACK REGISTRATION RIGHTS.

                  (A) NOTICE OF REGISTRATION.  If (but without any obligation to
do so) the Company  proposes to  register  any of its stock or other  securities
under the federal  Securities Act of 1993 ("Act") in connection  with the public
offering  of such  securities  solely for cash  (other  than (i) a  registration
relating  solely to the sale of securities to employees of the Company  pursuant
to a stock option,  stock purchase or similar plan,  (ii) a registration  on any
form which  does not  include  substantially  the same  information  as would be
required to be included in a  registration  statement  covering  the sale of the
common  shares into which the shares are  convertible,  or (iii) a  registration
relating  solely to Securities  and Exchange  Commission  Rule 145), the Company
shall, each such time,

                           (1)  promptly  give the Purchaser  written  notice of
                                such registration; and

                           (2)  include   in  such   registration   and  in  any
                                underwriting  involved therein any of the shares
                                of common stock  specified in a written  request
                                or requests of Purchaser made within thirty (30)
                                days after such written  notice was given by the
                                Company to the Purchaser.

                   (B) UNDERWRITING  REQUIREMENTS.  If the registration of which
the Company gives notice pursuant to Subsection 8.1(a) above is for a registered
public  offering  involving  an  underwriting,  the Company  shall so advise the
Purchaser  as part of the  written  notice.  In  connection  with  any  offering
involving  an  underwriting  of  shares  initiated  by the  Company  or by other
shareholders of the Company having registration rights, the Company shall not be
required under Subsection 8.1(a) to include any of Purchaser's  common shares in
such underwriting  unless the Purchaser accepts the terms of the underwriting as
agreed upon  between the Company and the  underwriters  selected by it, and then
only  in  such  quantity  as  will  not,  in the  opinion  of the  underwriters,
jeopardize  the  success  of the  offering  by  the  Company  or  the  Company's
shareholders demanding such registration. If the total amount of securities that
all  shareholders of the company request to be included in such offering exceeds
(when  combined  with  the  securities  being  offered  by  the  Company  or its
shareholders demanding such



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registration) the amount of securities that the underwriters  reasonably believe
compatible with the success of the offering,  then the Company shall be required
to include in the offering only that number of securities  pursuant to piggyback
registration  rights  which the  underwriters  believe will not  jeopardize  the
success of the  offering  (the  securities  so included  pursuant  to  piggyback
registration rights to be apportioned among the selling shareholders,  including
the  Purchaser,  according to the total number of securities  which each selling
shareholder  elected to include in the registration or in such other proportions
as shall mutually be agreed to by the selling shareholders.

         8.2  "MARKET  STAND-OFF"  AGREEMENT.  The  Purchaser  shall not, to the
extent  requested by the Company,  sell or otherwise  transfer or dispose of any
Shares  during the one hundred  eighty (180) day period  following the effective
date of a registration  statement of the Company filed under the Act;  provided,
however,  that such agreement shall only be applicable to the Company's  initial
registration  statement (the "First  Registration  Statement") and  registration
statements  filed within three (3) years after the  effective  date of the First
Registration  Statement,  and if all officers  and  directors of the Company and
other holders of registration rights enter into similar agreements.  In order to
enforce  the   foregoing   covenant,   the  Company  may  impose   stop-transfer
instructions  with respect to the Shares until the end of the one hundred eighty
(180) day period.

         8.3  TRANSFER.   The  rights   granted  under  Section  8.1(a)  may  be
transferred to a transferee of not less than  1,000,000  shares who agrees to be
bound by the  restrictions  in Section 8.2 or to a third  party  approved by the
Company in its sole discretion who likewise agrees.

9.       RIGHT OF FIRST REFUSAL.

         9.1 INITIATION OF RIGHT OF FIRST REFUSAL.  Until the  consummation of a
firm  commitment or best efforts  underwritten  public offering of the Company's
equity  registered  with the  Securities  and  Exchange  Commission  with  gross
proceeds to the Company of five million  dollars or more,  the Purchaser and the
Purchaser's  successors  and  assigns  (each a  "Shareholder"),  shall not sell,
pledge,  assign, or otherwise transfer any of the Shareholder's  interest in any
of the Shares (or in any of the Shares of common stock of the Company into which
any of the shares may be converted) to any person  without first offering to the
Company  or its  designees  the right  and  option to  purchase  said  shares as
provided  hereinafter  in  this  Article  9  (the  "Right  of  First  Refusal").
Notwithstanding  the above,  the  Purchaser may sell or transfer any interest in
any of said shares to any purchaser of all or substantially all of the assets of
Purchaser or to any  corporation  controlled by or under common control with the
Purchaser  without first  offering said shares to the Company or its  designees,
provided any such  transferees  agree in writing to be bound by the restrictions
set forth in this Article 9. In the event of a pledge or other  hypothecation of
said  shares,  or the  granting  of an option or other  right to  purchase  said
shares, then the Right of First Refusal shall come into existence at the time of
any sale or transfer of ownership of said shares  pursuant to foreclosure  under
such pledge or  hypothecation  or exercise of such option or right,  as the case
may be; provided, however, that



                                        8
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



the Shareholder may not pledge or hypothecate  said shares or grant an option or
right to purchase the shares unless the pledge holder or option or right holder,
as the case may be,  agrees in writing at the time of the pledge or grant of the
option or right to be bound by the Right of First  Refusal as  contained in this
Article 9, and to cause any proposed  assignee or  transferee  of such pledge or
right of option to execute and deliver to the Company a similar writing prior to
such assignment or transfer.

         9.2  MECHANICS.  Any  Shareholder  desiring  to sell  any or all of the
Shares during the term of the Right of First  Refusal shall give written  notice
to the Secretary of the Company of the Shareholder's bona fide intention to sell
the Shares pursuant to a bona fide written offer of a third party other than the
Company (the "Proposed Purchaser").  The notice shall include a photocopy of the
written  offer which shall specify the identity of the Proposed  Purchaser,  the
number of Shares proposed to be sold (the "Offered  Shares"),  and the price and
payment terms of the proposed offer to buy the Offered Shares. The payment terms
of the contemplated sale to the Proposed  Purchaser from the Shareholder (and of
the  Shareholder  to the  Company)  must be  expressed  in terms  of cash,  cash
equivalents (such as certificates of deposit, shares of stock in publicly traded
companies, and the like), or a promissory note of the Proposed Purchaser payable
on date(s)  specified  or  ascertained  by passage of time.  The  Company or its
designees shall have the right and option to purchase all of the Offered Shares,
at the price and on the payment terms specified in the Shareholder's notice, for
a period of sixty (60) days from  receipt of said notice  from the  Shareholder;
that is, the  Shareholder's  notice shall constitute an irrevocable offer by the
Shareholder to sell all of the Offered Shares to the Company or its designees at
the price and on the payment  terms  specified in the notice for sixty (60) days
from the date of the Company's receipt of the notice.

         The Company shall  exercise its option by giving  written notice of its
election to do so (the "Exercise  Notice") to the  Shareholder.  The Company may
exercise its option as to any or all of the Offered Shares.

         The  Shareholder  shall  deliver  to the  Company  a share  certificate
representing  those Offered  Shares being  purchased by the Company within sixty
(60) days of the Exercise  Notice against payment by the Company for the account
of Shareholder of the purchase price specified in the Exercise Notice.

         Any  Offered  Shares for which the Company  and its  designees  fail to
exercise  their  option  as  provided  in  this  section,  may  be  sold  by the
Shareholder  to the  Proposed  Purchaser  within a period  of  ninety  (90) days
following the end of the Company's sixty (60)-day option period,  provided that:
(1) the sale is made at the  price and on the  payment  terms  specified  in the
original  notice from  Shareholder  to the Company or not more  favorable to the
Proposed Purchaser; (2) the Proposed Purchaser delivers a written undertaking to
the Secretary of the Company to be bound by the  restrictions  on the Shares set
forth in this  Article  9; and (3) the  Company  receives  an opinion of counsel
reasonably  satisfactory to it that the sale to the Proposed  Purchaser complies
with applicable federal and state corporate securities laws.




                                        9
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



         Upon  receipt  of the  appropriate  undertaking  from  Shareholder  and
Proposed  Purchaser as specified in the previous  paragraph,  the Company  shall
transfer  the  ownership of record to the  Proposed  Purchaser  (and reissue the
applicable certificate).

         If within this ninety (90)-day  period the  Shareholder  does not enter
into an agreement  for such a sale of Offered  Shares to the Proposed  Purchaser
which is consummated within thirty (30) days of the execution thereof, the Right
of First  Refusal  shall be revived as to the Offered  Shares,  which  thereupon
shall not be sold or transferred unless the Shareholder first offers the Company
the right and option to repurchase  any and all such Shares in  accordance  with
this Article 9.

         Any transfer or purposed transfer of the Shares or any interest therein
shall be null and void  unless the terms and  conditions  of this  Article 9 are
observed or are waived by the Company's Board of Directors.

10.      DEATH AND DISABILITY BENEFITS.

         10.1  Reference  is  made to the  Amendments  to  Employment  Agreement
between  the  Company  and each of  Franklin  C.  Chiang and James T. Brady (the
"Employees") in substantially  the forms attached hereto as Exhibits B-1 and B-2
(the  "Amendments"),  providing for distributions to be made to the Employees or
to their respective heir(s),  beneficiary(ies),  personal  representative(s)  or
successor(s) in interest as disability or death benefits,  in  consideration  of
the Company's  repurchase of up to an aggregate  maximum of 15,000,000 shares of
Common Stock of the Company.

         10.2 Purchaser hereby  consents,  for purposes of Sections 502, 503 and
506 of the California  Corporations  Code and Paragraphs  2(a), 3(a), 4(j), 6(5)
and 6(6) of Article IV of the Company's  Articles of Incorporation (as in effect
on the date  hereof and in any similar  successor  provisions  in any  amendment
thereto), to the distributions provided for in the Amendments.  Purchaser agrees
that  payments  of  such  distributions  out of  funds  of the  Company  legally
available  therefor shall take precedence  over any liquidation  distribution or
redemption  obligation  of the  Company  relative  to Shares  held by  Purchaser
pursuant to the  Company's  Articles of  Incorporation.  Purchaser  specifically
waives notice of any such distribution,  all rights to any preferential dividend
or  distribution  with respect  thereto,  and the  priority of any  preferential
liquidation  distribution  or  redemption  payment  over any  such  distribution
pursuant to the Company's  Articles of Incorporation.  Purchaser hereby consents
and agrees to provide  its consent to an  amendment  and/or  restatement  of the
Company's  Articles of  Incorporation  to reflect and  effectuate  the foregoing
consent,  agreement and waiver,  if the company shall deem such amendment and/or
restatement necessary upon advice of counsel.

         10.3  Purchaser  shall  instruct  and use its best efforts to cause any
directors  of the Company  elected by it or subject to its control to consent to
and  approve  such  distributions  as  provided  pursuant  to the  terms  of the
applicable Amendment.


                                       10
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
                                                                    


         10.4 It shall be a condition  of any  transfer  of Shares by  Purchaser
that the transferee  shall agree in writing to be likewise bound by the consent,
waiver and agreement set forth in this section. The certificate(s)  representing
any Shares shall bear a legend adverting to the provisions of this section.

11.      MISCELLANEOUS.

         11.1 GOVERNING  LAW. This Agreement  shall be governed by and construed
in accordance  with the laws of the State of California  applicable to contracts
between  California  residents entered into and to be performed  entirely within
the State of California.

         11.2 SUCCESSORS AND ASSIGNS.  Except as otherwise  provided herein, the
provisions  hereof  shall  inure to the  benefit  of, and be binding  upon,  the
successors, assigns, heirs, executors and administrators of the parties hereto.

         11.3  ENTIRE  AGREEMENT;   AMENDMENT.  This  Agreement  and  the  other
documents delivered pursuant hereto constitute the full and entire understanding
and  agreement  between  the  parties  with  regard to the  subjects  hereof and
thereof.  Any term of this  Agreement  may be amended and the  observance of any
term of this  Agreement  may be  waived  (either  generally  or in a  particular
instance and either retroactively or prospectively), with the written consent of
the Company and the holders of a majority of the outstanding  Shares (including,
for such purposes,  on a proportional basis, any shares of Underlying Stock that
have  not  been  sold to the  public).  Any  amendment  or  waiver  effected  in
accordance with this section shall be binding upon each holder of any securities
purchased  under this Agreement at the time  outstanding  (including  securities
into which such securities have been converted),  each future holder of all such
securities, and the Company.

         11.4  NOTICES,  ETC. All notices and other  communications  required or
permitted  hereunder  shall be in writing and shall be effective five days after
mailed by first-class,  registered,  or certified mail, postage prepaid, or upon
delivery if  delivered  by hand,  facsimile,  telecopy,  messenger  or a courier
delivery service,  addressed (a) if to Purchaser, at the address set forth below
or at such other  address as  Purchaser  shall have  furnished to the Company in
writing,  or (b) if to the Company, at the address set forth below the Company's
name on the  signature  page to this  Agreement or at such other  address as the
Company shall have furnished to Purchaser and each such other holder in writing.

         11.5 DELAYS OR  OMISSIONS.  No delay or omission to exercise any right,
power or remedy  accruing to any holder of any Shares upon any breach or default
of the Company under this Agreement shall impair any such right, power or remedy
of such  holder nor shall it be  construed  to be a waiver of any such breach or
default,  or an acquiescence  therein, or of or in any similar breach or default
thereunder  occurring;  nor shall any waiver of any single  breach or default be
deemed a waiver  of any  other  breach  or  default  theretofore  or  thereafter
occurring.  Any waiver,  permit, consent or approval of any kind or character on
the part of any  holder of any breach or default  under this  Agreement,  or any
waiver on the part of any holder of any


                                       11
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



provisions  or  conditions  of this  Agreement,  must be in writing and shall be
effective  only to the  extent  specifically  set  forth  in such  writing.  All
remedies,  either under this Agreement,  or by law or otherwise  afforded to any
holder, shall be cumulative and not alternative.

         11.6  CALIFORNIA  CORPORATE  SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH  ARE THE  SUBJECT  OF THIS  AGREEMENT  HAS NOT  BEEN  QUALIFIED  WITH  THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE  CONSIDERATION  THEREFOR
PRIOR  TO  SUCH  QUALIFICATION  OR IN THE  ABSENCE  OF AN  EXEMPTION  FROM  SUCH
QUALIFICATION  IS UNLAWFUL.  PRIOR TO  ACCEPTANCE OF SUCH  CONSIDERATION  BY THE
COMPANY,  THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY  CONDITIONED
UPON SUCH  QUALIFICATION  BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION
BEING AVAILABLE.

         11.7  EXPENSES.  The Company and Purchaser  shall bear its own expenses
and legal fees  incurred on its behalf with  respect to this  Agreement  and the
transactions contemplated hereby.

         11.8 SEVERABILITY. In the case any provision of this Agreement shall be
invalid, illegal or unenforceable,  the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.




                                       12
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



         IN WITNESS  WHEREOF,  the parties  hereto have  executed  this Series A
Preferred  Stock  Purchase  Agreement  as of the  date set  forth  in the  first
paragraph hereof.

COMPANY:

MATRIDIGM CORPORATION
47211 Bayside Drive
Fremont, CA 94538


By:  /s/ Franklin C. Chiang
   --------------------------------
         Franklin C. Chiang
         President


CHIANG:


/s/ Franklin C. Chiang
-----------------------------------
Franklin C. Chiang


PURCHASER:

ZITEL CORPORATION
47211 Bayside Drive
Fremont, CA 94538


By:  /s/ Henry C. Harris
   ---------------------------------
         Henry C. Harris
         Chief Financial Officer




                                       13
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



                                    EXHIBIT A

                                RESTATED ARTICLES






<PAGE>
                                    EXHIBIT A

                                   AMENDED AND
                                RESTATED ARTICLES
                               OF INCORPORATION OF
                              MATRIDIGM CORPORATION



         FRANKLIN C. CHIANG and ARTHUR K. LUND certify that:

         FIRST:   They are President and  Secretary, respectively,  of MatriDigm
Corporation, a California corporation (the "Corporation").

         SECOND:  The Articles of  Incorporation of this Corporation are amended
and restated to read in their entirety as follows:


                                       I.

         The name of this Corporation is MatriDigm Corporation.


                                       II.

         The  purpose  of this  Corporation  is to engage in any  lawful  act or
activity for which a corporation may be organized under the General  Corporation
Law of California other than the banking business, the trust company business or
the practice of a  profession  permitted to be  incorporated  by the  California
Corporations Code.


                                      III.

         This  Corporation  is  authorized  to issue two  classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is forty-one  million six
hundred thousand  (41,600,000)  shares.  Thirty two million  (32,000,000) shares
shall be Common Stock with no par value (the "Common  Stock"),  and nine million
six hundred  thousand  (9,600,000)  shares shall be Preferred  Stock with no par
value.


                                       IV.

         The relative rights, preferences,  privileges, and restrictions granted
to or imposed upon the Corporation's  Series A Preferred and Common Stock or the
holders thereof are as follows:



                                       1.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>




1.       DESIGNATION OF SERIES A STOCK.

         Nine million six hundred thousand (9,600,000) shares of Preferred Stock
are designated Series A Preferred Stock (the "Series A Preferred"),  such series
having the rights, preferences, privileges and restrictions specified herein.

2.       DIVIDENDS AND DISTRIBUTIONS.

         (a) Dividends and Distributions. Dividends shall accrue on the Series A
Preferred  at the rate of $.05234  per share per annum from the date of issuance
appropriately  adjusted for any stock splits,  combinations,  consolidations  or
stock  distributions  or dividends  with respect to such shares,  payable out of
funds legally  available  therefor upon declaration by the Board of Directors of
this  Corporation.  Dividends on the Series A Preferred shall be cumulative.  No
dividend,  other  than a stock  dividend,  shall be paid on any  share of Common
Stock nor shall any  distribution  be made on the  Common  Stock,  nor shall any
share of Common Stock be acquired by the Corporation,  other than as provided in
Paragraph 2(b) below,  unless (1) all  accumulated  but unpaid  dividends on the
Series A Preferred plus (2) a dividend per share equal to the per share dividend
to be paid on the Common Stock, have first been paid on the Series A Stock.

         (b) Deemed  Consent.  Each holder of shares of Series A Preferred shall
be deemed to have  consented,  for purposes of Sections 502, 503, and 506 of the
California Corporations Code and Paragraph 2(a) above, to distributions approved
by the Board of Directors of this  Corporation  and made by this  Corporation in
connection  with the  repurchase  of shares of Common Stock issued to or held by
officers,   directors,   employees  or  consultants  of  this  Corporation  upon
termination of their employment or services pursuant to agreements providing for
such repurchase.

3.       LIQUIDATION PREFERENCE.

         (a) In the event of any liquidation, dissolution, or winding up of this
Corporation,  either  voluntary  or  involuntary  (hereinafter  referred to as a
"liquidation"), the holders of shares of Series A Preferred shall be entitled to
receive,  prior and in  preference to any  distribution  of any of the assets of
this Corporation to the holders of the Common Stock by reason of their ownership
thereof,  an amount  per share of Series A  Preferred  held  equal to $.34896 as
appropriately  adjusted for any stock splits,  combinations,  consolidations  or
stock  distributions  or  dividends  with  respect to such shares (the "Series A
Original Issue Price"), plus (i) the Series A Contributed Capital (as defined in
Paragraph  3( )) of all  outstanding  shares of Series A Preferred  and (ii) all
accumulated but unpaid dividends per share on the Series A Preferred.

         (b) If,  upon  the  occurrence  of a  liquidation,  the  assets  of the
Corporation  legally available for distribution  shall be insufficient to permit
the payment to the holders of the Series A  Preferred  of the full  preferential
amount  provided  for  in  paragraph  3(a),  then  the  entire  assets  of  this
Corporation  legally  available for  distribution  shall be distributed  ratably
among the



                                       2.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



holders of the Series A Preferred in proportion to the preferential  amount each
such holder is otherwise would be entitled to receive thereunder.

         (c) Upon completion of the distribution provided for in paragraph 3(b),
all of the assets  remaining in this  Corporation,  if any, shall be distributed
pro rata to the holders of the Common Stock.

         (d) (i) A consolidation  or merger of this Corporation with or into any
other  corporation  (other than a merger to  reincorporate  this  Corporation in
another  state  or  a  merger  with  another   corporation  owned  by  the  same
stockholders, in the same proportions, as this Corporation prior to such merger)
or  corporations  or  a  sale,  conveyance,  or  other  disposition  of  all  or
substantially all of this Corporation's property,  assets or business,  shall be
deemed to be a liquidation within the meaning of this paragraph 3.

             (ii) In any of such events, if the  consideration  received by this
Corporation  is other than cash, its value shall be deemed to be its fair market
value. In the case of publicly traded  securities,  fair market value shall mean
the closing  market price for such  securities  on the date such  consolidation,
merger,  or sale is consummated.  If the  consideration  is in a form other than
publicly  traded  securities,  its fair market value shall be determined in good
faith by the Board of Directors of this  Corporation;  provided,  however,  that
such value shall be determined by an independent appraiser reasonably acceptable
to the  Corporation if reasonably  requested by the holders of a majority of the
Series A Preferred.

             (iii)  From  and  after  the  date of any  event  giving  rise to a
distribution  pursuant to clause (i) of this  subparagraph  (e) in the course of
which the  Series A  Preferred  is not  converted  into  shares  of a  surviving
corporation other than this Corporation or otherwise canceled, all rights of the
holders of shares of Series A Preferred as holders thereof,  except the right to
receive such  distribution,  shall cease with  respect to such shares,  and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be  outstanding  for any  purpose  whatsoever.  Such  shares  shall be
canceled and shall not resume the status of  authorized  but unissued  shares of
Preferred Stock.

         (e) The aggregate  amount of all  contributions  to the capital of this
Corporation made by any and all holders of shares of Series A Preferred during a
time when the  contributing  holder  holds any such  shares  shall be termed the
"Total Series A  Contributions".  Subject to adjustment as provided  below,  the
Total Series A Contributions, divided by all of the shares of Series A Preferred
outstanding  at any given  time,  shall be the "Series A  Contributed  Capital."
Effective  upon the  conversion,  redemption  or  cancellation  of any shares of
Series A Preferred,  the Total Series A Contributions  as in effect  immediately
prior to that  transaction  shall  be  adjusted  by  subtracting  therefrom  the
aggregate  Series A  Contributed  Capital  of all such  converted,  redeemed  or
canceled  shares;  and the  Series A  Contributed  Capital  shall  thereupon  be
recomputed to reflect the adjusted Total Series A Contributions as divided among
all  shares  of  Series  A  Preferred   that  remain   outstanding   immediately
thereafter."




                                       3.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



4.       CONVERSION.

         The  holders  of the  Series  A  Preferred  shall  have  the  following
conversion rights (the "Conversion Rights"):

         (a) CONVERSION.

             (i) RIGHT TO CONVERT.  Subject to  subparagraphs  (c), (d), (e) and
(g) of this  paragraph  4, each share of Series A Preferred  shall  initially be
convertible into one (1) fully paid and  nonassessable  share of Common Stock at
the option of the holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent for such stock. The
applicable  number of shares of Common  Stock  into  which one share of Series A
Preferred  may  be  converted  is  hereinafter  referred  to as  the  "Series  A
Conversion Rate."

             (ii) AUTOMATIC  CONVERSION.  Each share of Series A Preferred shall
automatically  be converted  into shares of Common  Stock at the then  effective
Series A  Conversion  Rate upon the  first to occur of:  (A) in the event of the
closing with the underwriter of a firm commitment  underwritten  public offering
pursuant to an  effective  registration  statement  (other  than a  registration
statement  with  respect to any  securities  offered  pursuant  to any  employee
purchase,   savings,  option,  bonus,  appreciation,   profit  sharing,  thrift,
incentive, or similar plan of the Corporation) under the Securities Act of 1933,
as  amended,  covering  the offer and sale of the  Corporation's  Common  Stock,
whether  for the  account of the  Corporation  or for the account of one or more
shareholders  of the  Corporation,  in which the  aggregate  price to the public
equals or exceeds  $15,000,000  and in which the public offering price per share
of Common  Stock  offered  equals  or  exceeds  $1.00,  subject  to  appropriate
adjustments for stock splits,  stock dividends,  combinations of shares or other
similar  events  occurring  subsequent  to the Series A  Original  Issue Date as
defined below (an "Initial Public Offering"); such automatic conversion shall be
deemed to have  occurred at the closing  with the  Underwriter  of such  Initial
Public  Offering;  or (B) upon the vote or written  consent of the  holders of a
majority  of the shares of Series A Preferred  outstanding;  or (C) such time as
there remain outstanding less than 1,000,000 shares of Series A Preferred.

         (b)  MECHANICS OF  CONVERSION.  Before any holder of Series A Preferred
shall be entitled to convert the same into shares of Common  Stock,  such holder
shall surrender the certificate or certificates for such shares,  duly endorsed,
at the office of the  Corporation or of any transfer  agent for such stock,  and
shall give  written  notice to the  Corporation  at such office that such holder
elects to  convert  the same and shall  state in the notice the name or names in
which such holder wishes the  certificate or  certificates  for shares of Common
Stock to be issued. The Corporation shall then, as soon as is practicable, issue
and  deliver  at such  office to such  holder,  or to such  holder's  nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled.  Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender of
the shares to be  converted,  and the person or persons  entitled to receive the
shares of



                                       4.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



Common Stock issuable upon such conversion  shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.

         (c) ADJUSTMENT FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event the  Corporation at any time or from time to time after the effective date
of a written  agreement  by the  Corporation  for the  initial  sale of Series A
Preferred  (hereinafter  referred  to as the  "Series A  Original  Issue  Date")
effects a subdivision  or  combination  of its  outstanding  Common Stock into a
greater  or lesser  number of  shares,  then and in each such event the Series A
Conversion Rate shall be increased or decreased proportionately.

         (d) ADJUSTMENT FOR CERTAIN DIVIDENDS,  DISTRIBUTIONS,  AND COMMON STOCK
EQUIVALENTS. In the event the Corporation at any time or from time to time after
the Series A Original Issue Date, as  applicable,  shall make,  issue,  or fix a
record date for the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock or
other   securities  or  rights   (hereinafter   referred  to  as  "Common  Stock
Equivalents")  convertible  into or entitling  the holder to receive  additional
shares of Common Stock,  without payment of any consideration by such holder for
the additional shares of Common Stock or the Common Stock Equivalents (including
the  additional  shares of Common Stock  issuable upon  conversion or exercise),
then, and in each such event,  the maximum number of shares (as set forth in the
instrument  relating thereto without regard to any provisions  contained therein
for subsequent adjustment of such number) of Common Stock issuable in payment of
such  dividend or  distribution  or upon  conversion  or exercise of such Common
Stock Equivalents shall be deemed to be issued and outstanding as of the time of
such issuance or, in the event such record date shall have been fixed, as of the
close of business on such record date, subject to subparagraph  4(d)(ii)(A).  In
each such event the Series A  Conversion  Rate shall be increased as of the time
of such  issuance or, in the event such a record date shall have been fixed,  as
of the close of  business  on such  record  date,  by  multiplying  the Series A
Conversion Rate by a fraction,

             (i) the  numerator  of which shall be the total number of shares of
Common Stock issued and  outstanding,  plus the number of shares of Common Stock
subject to outstanding and vested stock options immediately prior to the time of
such  issuance or the close of business on such record date,  plus the number of
shares of Common Stock issuable in payment of such dividend or  distribution  or
upon conversion or exercise of such Common Stock Equivalents; and

             (ii) the  denominator  of which shall be the total number of shares
of Common  Stock  issued  and  outstanding,  plus the number of shares of Common
Stock subject to outstanding and vested stock options  immediately  prior to the
time of such issuance or the close of business on such record date;

provided, however,

(A) if such  record  date shall have been fixed and such  dividend  is not fully
paid or if such  distribution  is not  fully  made on the  date  fixed  for such
dividend or distribution, then the




                                       5.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



Series A Conversion  Rate shall be  recomputed  retroactively  as if such record
date had not been  fixed and the  Series A  Conversion  Rate  shall be  adjusted
pursuant  to this  subparagraph  4(d) as of the time of actual  payment  of such
dividends or distributions;

(B) if such  Common  Stock  Equivalents  provide,  with the  passage  of time or
otherwise,  for any  decrease in the number of shares of Common  Stock  issuable
upon  conversion  or  exercise  (or upon the  occurrence  of a record  date with
respect thereto),  and any subsequent  adjustments  based thereon,  the Series A
Conversion Rate shall, upon any such decrease becoming effective,  be recomputed
to reflect  such  decrease  insofar as it affects  the rights of  conversion  or
exercise of the Common Stock Equivalents then outstanding;

(C) upon the  expiration  of any  rights of  conversion  or  exercise  under any
unexercised Common Stock Equivalents, the Series A Conversion Rate computed upon
the  original  issue  (or upon the  occurrence  of a record  date  with  respect
thereto),  and any  subsequent  adjustments  based  thereon,  shall,  upon  such
expiration,  be  recomputed  as if the only  additional  shares of Common  Stock
issued  were  the  shares  of such  stock,  if any,  actually  issued  upon  the
conversion or exercise of such Common Stock Equivalents; and

(D) in the case of Common Stock  Equivalents that expire by their terms not more
than sixty (60) days after the date of issuance,  no  adjustment of the Series A
Conversion  Rate  shall be made until the  expiration  or  exercise  of all such
Common Stock Equivalents,  whereupon such adjustment shall be made in the manner
provided in clause (C).

         (e)  Adjustment of Series A Conversion  Rate for Diluting  Issues.  For
purposes of this  paragraph 4, the amount  obtained by dividing  $0.34896 by the
Series A Conversion Rate shall, unless adjusted pursuant to this paragraph 4(e),
be the  "Series A  Conversion  Price."  Except  as  otherwise  provided  in this
subparagraph 4(e), in the event the Corporation sells or issues any Common Stock
or Common Stock Equivalents  subsequent to the Series A Original Issue Date at a
per share  consideration  (as defined  below) less than the Series A  Conversion
Price then the Series A Conversion  Price and Series A  Conversion  Rate then in
effect shall be adjusted by (i)  reducing  the Series A Conversion  Price to the
per share price received for such Common Stock or Common Stock  Equivalents  and
(ii)  increasing  the  Series A  Conversion  Rate by  multiplying  the  Series A
Conversion  Rate in  effect  immediately  prior to such  sale or  issuance  by a
fraction,  the  numerator  of which is the Series A  Conversion  Price in effect
immediately  prior to such sale or issuance and the  denominator of which is the
adjusted Series A Conversion  Price, as adjusted pursuant to clause (i). For the
purposes of the foregoing,  the per share consideration with respect to the sale
or  issuance  of Common  Stock  shall be the price  per  share  received  by the
Corporation (or if such shares are offered by the Corporation for  subscription,
the  subscription  price,  or if such shares are sold to underwriters or dealers
for  public  offering,  without a  subscription  offering,  the  initial  public
offering price), prior to the payment of any expenses,  commissions,  discounts,
and other applicable costs. With respect to the sale or issuance of Common Stock
Equivalents  that are convertible  into or exchangeable for Common Stock without
further  consideration,  the  per  share  consideration  shall  be the  quotient
obtained by dividing (w) the aggregate consideration received by the Corporation
upon the sale or




                                       6.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



issuance of such Common Stock Equivalents by (x) the maximum number of shares of
Common Stock  issuable  with respect to such Common  Stock  Equivalents  (as set
forth in the  instrument  relating  thereto  without  regard  to any  provisions
contained therein for subsequent adjustment of such number). With respect to the
issuance of other Common Stock Equivalents, the per share consideration shall be
the quotient obtained by dividing (y) the total aggregate consideration received
by the  Corporation  upon the sale or issuance of such Common Stock  Equivalents
plus the minimum aggregate amount of additional  consideration receivable by the
Corporation upon the conversion or exercise of such Common Stock  Equivalents by
(z) the maximum  number of shares of Common Stock  issuable with respect to such
Common  Stock  Equivalents.  The  issuance  of  Common  Stock  or  Common  Stock
Equivalents  for no  consideration  (other than in connection with a dividend or
other  distribution  treated  under  paragraph  4(d)  shall be  deemed  to be an
issuance at a per share  consideration  of $.01. In connection  with the sale or
issuance  of  Common  Stock  and/or   Common  Stock   Equivalents   for  noncash
consideration,  the amount of consideration shall be determined in good faith by
the Board of Directors of this Corporation.

         As used herein,  "Additional  Shares of Common Stock" shall mean either
shares of Common Stock issued subsequent to the Series A Original Issue Date, as
applicable,  or, with respect to the issuance of Common Stock  Equivalents,  the
maximum  number of shares  of  Common  Stock  issuable  in  exchange  for,  upon
conversion of, or upon exercise of such Common Stock  Equivalents  subsequent to
the Series A Original Issue Date, as applicable.

         Once any Additional  Shares of Common Stock have been treated as having
been issued for the purpose of this subparagraph  4(e), they shall be treated as
issued  and   outstanding   shares  of  Common  Stock  whenever  any  subsequent
calculations must be made pursuant hereto;  provided,  that on the expiration of
any options,  warrants, or rights to purchase Additional Shares of Common Stock,
the  termination of any rights to convert or exchange for  Additional  Shares of
Common  Stock,  or the  expiration  of any  options  or rights  related  to such
convertible or exchangeable  securities on account of which an adjustment in the
Series A Conversion Rate has been made previously  pursuant to this subparagraph
4(e), the Series A Conversion Rate, as applicable, shall forthwith be readjusted
to such  conversion rate as would have obtained had the adjustment made upon the
issuance of such options,  rights, or securities or options or rights related to
such  securities  been made upon the basis of the issuance of only the number of
shares of Common  Stock  actually  issued upon the  exercise of such  options or
rights, upon the conversion or exchange of such securities, or upon the exercise
of the options or rights related to such securities.

         The foregoing notwithstanding, no adjustment of the Series A Conversion
Rate and Series A Conversion  Price shall be made pursuant to this  subparagraph
4(e) as a result of the issuance of:

             (i) any  shares  of Common  Stock  pursuant  to which the  Series A
Conversion  Rate or Series A Conversion  Price are adjusted under  subparagraphs
(c), (d), or (g) of this paragraph 4;





                                       7.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



             (ii)  any  shares  of  Common  Stock   pursuant  to  the  exchange,
conversion,  or exercise of any Common Stock  Equivalents  that have  previously
been incorporated into computations hereunder on the date when such Common Stock
Equivalents were issued;

             (iii) Common Stock issued or issuable upon conversion of the Series
A Preferred; or

             (iv) Not more than 6,400,000 shares of Additional  Shares of Common
Stock issued to officers, directors, employees or consultants of the Corporation
pursuant  to a stock  option  or  restricted  stock  purchase  plan or  plans or
agreement or agreements approved by the Board of Directors of this Corporation.

         (f) DE MINIMIS CHANGES;  WAIVER. No adjustment in the respective Series
A Conversion Rate and Series A Conversion Price shall be made if such adjustment
would result in a change in such  conversion  price per share of less than $.01.
Any  adjustment of less than $.01 that is not made shall be carried  forward and
shall be made at the time of and together with any subsequent  adjustment  that,
on a  cumulative  basis,  amounts  to an  adjustment  of  $.01  or  more in such
conversion prices. No adjustment in the Series A Conversion Rate or the Series A
Conversion Price shall be made with respect to any sale or issuance  pursuant to
subparagraph  (e) of this paragraph 4 to the extent such adjustment is expressly
waived in writing by the holders of a majority of the then outstanding shares of
Series A Preferred.

         (g)   ADJUSTMENTS   FOR   OTHER   RECLASSIFICATIONS,    DIVIDENDS   AND
DISTRIBUTIONS.   If   there   occurs   any   capital   reorganization   or   any
reclassification of the capital stock of the Corporation, each share of Series A
Preferred  shall  thereafter  be  convertible  into the same kind and amounts of
securities or other assets,  or both, that were issuable or distributable to the
holders  of shares of  outstanding  Common  Stock of the  Corporation  upon such
reorganization  or  reclassification,  in  respect  of that  number of shares of
Common  Stock  into  which  such  shares of Series A  Preferred  might have been
converted  immediately prior to such reorganization or reclassification;  and in
any such case, appropriate  adjustments (as determined by the Board of Directors
of this  Corporation)  shall be made in the application of the provisions herein
set forth with respect to the rights and interests  thereafter of the holders of
Series A  Preferred  to the end  that the  provisions  of these  Articles  shall
thereafter be  applicable,  as nearly as  reasonably  may be, in relation to any
securities or other assets  thereafter  deliverable  upon the  conversion of the
Series A Preferred.

         (h)  NO   IMPAIRMENT.   The   Corporation   will   not,   through   any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities,  or any other voluntary  action,  avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed  under
this Article by the  Corporation,  but will at all times in good faith assist in
the carrying out of all the  provisions of this paragraph 4 and in the taking of
all such  action as may be  necessary  or  appropriate  in order to protect  the
Conversion Rights of the holders of the Series A Preferred.





                                       8.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



         (i)  CERTIFICATE  AS  TO  ADJUSTMENTS.  Upon  the  occurrence  of  each
adjustment  or  readjustment  of the Series A Conversion  Rate  pursuant to this
paragraph  4,  the  Corporation   shall  promptly  compute  such  adjustment  or
readjustment  in  accordance  with the terms of this  Article  and  prepare  and
furnish to each holder of Series A Preferred,  a certificate  setting forth such
adjustment  or  readjustment  and  showing  in detail  the facts upon which such
adjustment or readjustment is based.  The  Corporation  shall,  upon the written
request at any time of any holder of Series A Preferred,  furnish or cause to be
furnished to such holder a like  certificate  setting forth (i) such adjustments
and readjustments,  (ii) the Series A Conversion Rate in effect at the time, and
(iii) the  number of shares of Common  Stock and the  amount,  if any,  of other
property that at the time would be received upon the  conversion of the Series A
Preferred.

         (j)  NOTICES  OF  RECORD  DATE.  In  the  event  of any  taking  by the
Corporation  of a record  of the  holders  of any  class of  securities  for the
purpose of  determining  the  holders of such  securities  who are  entitled  to
receive any distribution  (other than a dividend in which the Series A Preferred
shares  pursuant to Paragraph 2(a) above),  any Common Stock  Equivalents or any
right to subscribe for,  purchase,  or otherwise  acquire any shares of stock of
any class or any other  securities  or property,  or to receive any other right,
the Corporation  shall mail to each holder of Series A Preferred at least twenty
(20) days prior to the date  specified in such notice,  a notice  specifying the
date on which any such record is to be taken for the  purpose of such  dividend,
distribution,  or  rights,  and the  amount  and  character  of  such  dividend,
distribution, or right.

         (k)  RESERVATION OF STOCK  ISSUABLE UPON  CONVERSION.  The  Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred  such  number of its shares of Common  Stock as
shall  from  time  to  time  be  sufficient  to  effect  the  conversion  of all
outstanding  shares  of the  Series A  Preferred.  If at any time the  number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the  conversion  of all then  outstanding  shares of the Series A Preferred  the
Corporation  will use its best efforts to take such corporate  action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient  for such
purpose.

         (l)  FRACTIONAL  SHARES.  No fractional  share shall be issued upon the
conversion  of any share or shares of Series A  Preferred.  All shares of Common
Stock (including  fractions)  issuable upon conversion of more than one share of
Series A Preferred by a holder of such stock shall be aggregated for purposes of
determining  whether  the  conversion  would  result  in  the  issuance  of  any
fractional  share.  If, after  aggregation,  the conversion  would result in the
issuance of a fractional share of Common Stock,  the Corporation  shall, in lieu
of issuing any fractional share but only to the extent legally permissible,  pay
the holder  otherwise  entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion  (as  determined in good
faith by the Board of Directors of this Corporation).




                                       9.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



         (m) NOTICES.  Any notice required by the provisions of this paragraph 4
to be given to the holders of shares of Series A Preferred shall be deemed given
if deposited in the United States mail,  postage prepaid,  and addressed to each
holder of record at the  address of such  holder  appearing  on the books of the
Corporation.

5.       VOTING RIGHTS.

         Except as otherwise required by law, respectively, each share of Common
Stock  issued and  outstanding  shall have one vote,  and each share of Series A
Preferred  issued and  outstanding  shall have the number of votes  equal to the
number  of  shares  of  Common  Stock  into  which  the  Series A  Preferred  is
convertible  as adjusted from time to time  pursuant to paragraph 4 hereof,  and
the holders of the Series A Preferred  shall vote  together  with the holders of
the  Common  Stock and not as a  separate  class;  provided,  however,  that the
holders of the Series A Preferred  voting  together as a class shall be entitled
to elect two (2) directors, the holders of the Common Stock voting together as a
class shall be entitled to elect two (2) directors and the fifth  director shall
be elected by vote or written  consent of both (a) the  holders of a majority of
the  outstanding  shares of Common  Stock (b) the  holders of a majority  of the
outstanding Series A Preferred.

6.       PROTECTIVE PROVISIONS.

         So long as 2,000,000 shares of Series A Preferred are outstanding, this
Corporation  shall not, without first obtaining the approval of the holders of a
majority of the outstanding Series A Preferred, take any action that:

         (1) materially and adversely alters or changes the rights,  preferences
and privileges of the Series A Preferred;

         (2) increases the authorized number of shares of Series A Preferred;

         (3)  creates  any  new  class  or  series  of  shares  having   rights,
preferences and privileges senior to or on a parity with the Series A Preferred;

         (4)  results in any merger or  consolidation  of the  Corporation,  any
acquisition of all or substantially  all of the assets of any other company,  or
any  transaction  in  which  all or any  material  part  of  the  assets  of the
Corporation  are  sold  or  any  reorganization  of  the  Corporation's  capital
structure;

         (5) redeems or otherwise  repurchases any of the outstanding  shares of
Common  Stock or Preferred  Stock  (other than shares of such stock  redeemed or
repurchased  (1) from any  officer,  director,  employee  or  consultant  of the
Corporation  at a price per share not greater  than that paid for such shares by
such officer, director,  employee or consultant, and which shares are subject to
vesting requirements and have not vested as of the date of such redemption or



                                       10.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



repurchase  or (2) pursuant to paragraph 7 or (3) upon exercise of a contractual
right of first refusal approved by one or two directors  elected by the Series A
Preferred);

         (6)  consists of a loan of money to any  officer,  director,  holder of
more than 10% of the Corporation's  outstanding  capital stock, or any affiliate
of any such  person or  entity,  or permit  any such  person or entity to become
indebted to the  Corporation,  other than in the  ordinary  course of  business,
which loan has not been  approved  by a  disinterested  majority of the Board of
Directors;

         (7) would  result in  taxation of the holders of the Series A Preferred
under section 305 of the Internal  Revenue Code of 1986, as amended (the "Code")
or any comparable provision of the Code; or

         (8) increases the number of directors of the  Corporation  to more than
five (5).

7.       REDEMPTION OF SERIES A PREFERRED.

         Subject to the  provisions of this  paragraph 7, the Series A Preferred
shall be redeemable as follows:

         (a) REDEMPTION AT THE OPTION OF THE  CORPORATION.  The Corporation may,
at its option at any time prior to November 1, 1999 and upon written notice (the
"Call Notice"),  redeem all but not less than all of the  outstanding  shares of
Series A Preferred at the then applicable Call Price (defined  below).  The Call
Notice  shall  be given to each  holder  of  record  (at such  holder's  address
appearing on the stock transfer books of the  Corporation) of Series A Preferred
whose  shares  are to be  redeemed  and shall  state the  number of shares to be
redeemed,  the  effective  date (the "Call  Effective  Date") of the  redemption
(which shall not be less than  forty-five (45) days from the date of delivery of
such  notice) and the Call Price to be paid.  The Call Price shall be payable in
cash by the  Corporation  on the Call  Effective  Date and shall be equal to the
Series  A  Initial   Issue   Price  plus  the  Series  A   Contributed   Capital
(appropriately adjusted for stock dividends,  splits or similar events occurring
subsequent  to the  Series  A  Original  Issue  Date),  but  not  including  any
accumulated but unpaid dividends.

         (b)  REDEMPTION  AT THE OPTION OF THE SERIES A HOLDERS.  Each holder of
Series A Preferred may, at the option of such holder upon written notice (a "Put
Notice")  given to the  Corporation  at any time  during the  twelve  (12) month
period  commencing  November 1, 1999 and ending  October 31,  2000,  require the
Corporation to redeem up to a maximum or one third (1/3) of the shares of Series
A Preferred held by the holder as of November 1, 1999.  Each such holder may, at
its option  upon a Put Notice  given to the  Corporation  at any time during the
twelve (12) month period  commencing  November 1, 2000,  and ending  October 31,
2001,  require  the  Corporation  to redeem up to a maximum of the lesser of one
third  (1/3) of the  shares  of  Series A  Preferred  held by the  holder  as of
November  1,  1999 or one half  (1/2) of such  shares  held by the  holder as of
November 1, 2000. Each such holder may, at its option upon a Put Notice given to
the Corporation at any time during the twelve (12) month period commencing



                                       11.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



November 1, 2001, and ending October 31, 2002, require the Corporation to redeem
up to a  maximum  of the  lesser of one  third  (1/3) of the  shares of Series A
Preferred  held by the holder as of  November 1, 1999 or all of such shares held
by the holder as of  November 1, 2001.  In each case the Put Notice  shall state
the number of shares to be redeemed and the effective  date (the "Put  Effective
Date")  of the  redemption  (which  shall not be less than 90 days from the date
such notice is received by the Corporation).  The Put Price shall mean the price
per share (appropriately adjusted for stock dividends,  splits or similar events
occurring  subsequent  to the Series A Original  Issue Date) equal to the sum of
(i) the Series A Original Issue Price, (ii) the Series A Contributed Capital and
(iii) accrued but unpaid  dividends.  The Put Price shall be payable in cash out
of funds  legally  available  therefor  as  follows:  one fourth  (1/4) shall be
payable on the Put  Effective  Date and one fourth (1/4) shall be payable at the
end of the third,  sixth and ninth  months  after the Put  Effective  Date (with
interest at 10% per annum from such date).

         (c) SURRENDER OF STOCK.  Subject to the last sentence of this paragraph
7(c), on or before each Put Effective Date or Call Effective Date, as applicable
("Redemption Date"), each holder of shares of Series A Preferred to be redeemed,
unless the holder has  exercised its rights to convert the shares as provided in
paragraph 4 hereof, shall surrender the certificate or certificates representing
such shares to the Secretary of the Corporation, and thereupon the Call Price or
the Put Price per share, as applicable, (the "Redemption Price") for such shares
shall be payable in the manner set forth above to the order of the person  whose
name appears on such certificate or certificates as the owner thereof,  and each
certificate to be redeemed  shall be canceled and retired.  If less than all the
shares  represented by a certificate are to be redeemed,  the Corporation  shall
issue a new certificate for the unredeemed  shares to the holder of such shares.
Subject  to the last  sentence  of this  paragraph  7(c),  from and  after  each
Redemption  Date,  unless  there  shall  have been a default  in  payment of the
Redemption  Price,  all rights of the  holders  of shares of Series A  Preferred
designated for redemption in the Call Notice or Put Notice,  as applicable  (the
"Redemption  Notice"),  as holders of Series A  Preferred  (except  the right to
receive the Redemption  Price upon surrender of its certificate or certificates)
shall cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the  Corporation or be deemed to be outstanding  for
any purpose whatsoever. In the event of a redemption pursuant to paragraph 7(b),
the holders of the Series A Preferred so redeemed  shall,  if they so elect,  be
entitled  to retain the shares so  redeemed  and for which the Put Price has not
been paid  pursuant  to a stock  pledge  agreement  approved by the holders of a
majority of the shares of Series A Preferred  then  outstanding  and  reasonably
acceptable to the Corporation which agreement shall provide, among other things,
that upon,  but only upon,  any  default in the payment of the Put Price of such
shares of Series A Preferred  pursuant to the terms of paragraph  7(b) and until
but only until  such  default  is cured,  the number of such  shares of Series A
Preferred  as to which the Put Price has not been paid  shall have the status of
issued and  outstanding  shares of Series A  Preferred  and the  holders of such
shares of Series A Preferred shall be entitled to exercise any and all rights of
holders with respect to such shares as set forth in these  Articles,  including,
without limitation,  dividend rights,  liquidation rights, voting rights and the
right to give consent pursuant to paragraph 6 and shall have all other rights



                                       12.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



of a secured creditor under California law and upon the cure of such default all
such rights shall cease.

         (d) LEGAL  FUNDS.  For the  purpose of  determining  whether  funds are
legally  available for  redemption  of shares of Series A Preferred  pursuant to
paragraph 7(b), the value of the assets of this Corporation  shall be determined
in good faith by the Board of Directors of this Corporation;  provided that such
value shall be determined by an independent  appraiser reasonably  acceptable to
this  Corporation  if  reasonably  requested by the holders of a majority of the
shares of Series A Preferred  which have been  redeemed but for which funds were
not legally  available for redemption.  Holders of Series A Preferred shall have
no right to bring a legal action against the  Corporation  for failure to redeem
shares of Series A  Preferred  to the  extent  funds are not  legally  available
therefor,  provided  the  Corporation  complies  with  the  provisions  of  this
Paragraph  (d). The  Corporation  shall not give a Call Notice  unless funds are
legally available to redeem all outstanding Shares of Series A Preferred.

         (e)  PARTIAL  REDEMPTION.  If  the  funds  of the  Corporation  legally
available for redemption of shares of Series A Preferred on any Redemption  Date
are  insufficient to redeem the total number of such shares that the Corporation
had become  obligated  to redeem on such  date,  those  funds  that are  legally
available  will be used to redeem the  maximum  possible  number of such  shares
ratably among the holders of such shares to be redeemed.  The shares of Series A
Preferred not redeemed shall remain  outstanding  and entitled to all the rights
and preferences  provided herein. As of any month end thereafter when additional
funds of the Corporation are legally  available for the redemption of 100,000 or
more shares of Series A Preferred, such funds will immediately be used to redeem
the balance of the shares that the Corporation has become obligated to redeem on
any Redemption Date but that it has not redeemed because of such lack of legally
available funds;  redemptions shall be effected in the order of Redemption Dates
if there be more than one.

8.       STATUS OF CONVERTED OR REDEEMED STOCK.

         In case any shares of Series A Preferred shall be converted pursuant to
paragraph 4 or redeemed pursuant to paragraph 7 hereof,  the shares so converted
shall be canceled  and shall not resume the status of  authorized  but  unissued
shares of Preferred Stock.

9.       RESIDUAL RIGHTS.

         All rights  accruing to the  outstanding  shares of the Corporation not
expressly  provided  for to the  contrary  herein  shall be vested in the Common
Stock.


                                       V.

         The liability of the directors of the Corporation for monetary  damages
shall be eliminated to the fullest extent  permissible under California law. Any
repeal or modification of this Article




                                       13.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>


shall only be prospective  and shall not effect the rights under this Article in
effect at the time of the  alleged  occurrence  of any action or omission to act
giving rise to liability.


                                       VI.

         The Corporation is authorized to provide  indemnification of agents (as
defined  in Section  317 of the  California  Corporations  Code)  through  bylaw
provisions,  agreements  with  agents,  vote of  shareholders  or  disinterested
directors or otherwise, in excess of the indemnification  otherwise permitted by
Section 317 of the California  Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the Corporation and its shareholders.

         THIRD:  The foregoing  Amended and Restated  Articles of  Incorporation
have been duly approved by the Board of Directors of this Corporation.

         FOURTH:  The foregoing  Amended and Restated  Articles of Incorporation
have been duly approved by the required vote of  shareholders in accordance with
the  Articles  of  Incorporation  of this  Corporation  and  Section  902 of the
California  Corporations  Code. The total number of  outstanding  shares of this
Corporation is 16,000,000 shares of Common Stock. The number of shares voting in
favor of the amendment and  restatement  equalled or exceeded the vote required.
The percentage vote required was more than 50% of the holders of the outstanding
shares of each of the Common Stock.

         We further declare under penalty of perjury under the laws of the State
of  California  that the  matters  set  forth in this  certificate  are true and
correct of our own knowledge.

Dated:  November 8, 1995



                                                     /s/ Franklin C. Chiang 
                                                 ------------------------------
                                                 Franklin C. Chiang, President


                                                       /s/ Arthur K. Lund
                                                 ------------------------------
                                                 Arthur K. Lund, Secretary




                                       14.
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>

                                 EXHIBIT B-1


                              MATRIDIGM CORPORATION

                              EMPLOYMENT AGREEMENT


         THIS  AGREEMENT is entered  into as of the 1st day of October,  1995 by
and between MatriDigm  Corporation,  a California  corporation  ("Employer") and
Franklin C. Chiang ("Employee").

         Employer desires to employ Employee as its Chief Technical  Officer and
Employee desires to accept such employment on the terms and conditions set forth
herein.

         NOW THEREFORE, the parties agree as follows:

I.       DUTIES.

         1.1 Employer shall employ Employee as its Chief  Technical  Officer and
Employee  accepts such  employment,  effective  October 1, 1995 (the  "Effective
Date") subject to the terms and conditions set forth herein.

         1.2  Employee   shall  have  general   supervision   of  the  technical
development  aspects of the business of Employer,  subject to the control of the
Employer's Board of Directors (the "Board").

         1.3 Employee  shall  perform his duties  faithfully,  diligently,  in a
businesslike  manner,  and for the best interests of Employer during the term of
employment.

         1.4      Employee shall report directly to the President of Employer.

         1.5 All technical staff personnel of Employer shall report to Employee.

         1.6  Employee  and  Employer,  by the  Board  or the  President,  shall
establish  expected  goals,  objectives  and outcomes by mutual  agreement on an
annual  basis,  no later than the first day of  January of each year  during the
term of employment hereunder.

         1.7  Employee  shall be  entitled  to continue to engage in his private
consulting  business  provided that such  activities  do not interfere  with his
duties and  responsibilities  to Employer  hereunder  and provided that Employee
shall not act as consultant or contractor  for any actual or potential  business
competitor or customer of, or vendor to, Employer,  or any person or entity that
reasonably  could be  construed  to be  interested  in  obtaining  knowledge  of
Employer's employees,  business plans or programs, during the term of employment
hereunder.

II.      TERMINATION; SEVERANCE AND DEATH BENEFITS.

         2.1 AT WILL EMPLOYMENT.   The  employment  of  Employee  shall  have no
specified  term and may be  terminated  at the will of either party on notice to
the other as defined in Section 2922 of the

                                        1
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



California  Labor Code.  Nothing herein shall imply or be construed to promise a
specified term of employment.

         2.2  SEVERANCE  AND  DEATH  BENEFITS.  In the event of  termination  of
Employee's  employment  for any reason or for no  reason,  or  Employee's  death
during Employee's employment,  Employee or his legal successors,  as applicable,
shall be entitled to receive the compensation that otherwise would have been due
to Employee  hereunder had Employee's  employment  continued for a period of six
months  following  the  month in which  his  termination  or death  occurs.  The
quarterly performance bonuses that otherwise would have been payable to Employee
under  subsection 3.6  applicable to that six month period  following such event
shall be paid in amounts equal to the average of the last four quarterly bonuses
paid to Employee immediately  preceding the date of notice of the termination or
death.

III.     BENEFITS; PERFORMANCE BONUS.

         3.1 Employer  shall pay Employee a base salary of [REDACTED]  per year.
The base  salary  shall be paid in  biweekly  installments  in  accordance  with
Employer's normal administrative procedures.

         3.2 Employer shall  reimburse  such  expenses,  incurred by Employee in
furtherance of or in connection  with the business of Employer,  as Employer and
Employee may mutually agree upon.  Employee shall account for such expenses in a
manner satisfactory to Employer.

         3.3 Employer shall withhold  federal and state taxes,  social  security
taxes,  state  disability  and  unemployment  taxes  and  such  other  taxes  or
government-mandated   withholdings  in  accordance   with  Employer's   standard
administrative practices as applied to other employees.

         3.5  Employer  shall  provide  Employee  with  a  package  of  benefits
("Executive Package"),  including disability insurance,  life insurance,  health
insurance,  vacation  (four  weeks  per  year  initially;  five  weeks  per year
beginning with the third year of Employee's employment hereunder), participation
in any  applicable  profit-sharing,  retirement or 401-K  programs  Employer may
offer,  and other benefits,  at least  equivalent to that provided or offered by
Employer to other administrative  officers employed by Employer.  Employer shall
ensure that at all times the disability  insurance provided to Employee provides
for  payment  of at least  60% of the  income  earned  by  Employee  during  the
immediately preceding twelve month period.

         3.6 The  Board or the  President  of  Employer  shall  set  performance
targets and criteria for each year, in its reasonable  discretion,  in congruity
with the annual  goals,  objectives  and outcomes  agreed  between  Employee and
Employer  pursuant to  subsection  1.6 hereof.  The targets and  criteria set by
Employer  shall  provide  for  full  or  partial  fulfillment,   or  degrees  of
performance,   thereof.  Employer  shall  award  Employee  an  annual  bonus  in
accordance  with the degree to which  Employee  has  fulfilled  or achieved  the
annual targets and criteria. The target amount of the bonus for full fulfillment
or performance of the targets and criteria shall be set initially at [REDACTED],
and shall be

                                        2
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



adjusted annually on the anniversary  hereof on the basis of such factors as the
Board of Directors may deem appropriate.

IV.      MISCELLANEOUS.

         4.1 Neither  party shall assign its rights or delegate its  obligations
under this Agreement without the prior written consent of the other party.

         4.2 Except as provided in that certain Founders  Agreement of even date
herewith by and among Employee, Employer and certain other persons named therein
as  Founders,  and the  agreements  executed  pursuant  thereto  (including  the
Confidentiality  and  Intellectual  Property  Agreement  set forth as an exhibit
thereto) and the Indemnification  Agreement between the Employer and Employee of
even date  herewith,  this  Agreement  comprises  the sole and entire  agreement
between  Employer  and  Employee,  and  supersedes  and  replaces  all  previous
agreements or understandings  between the parties,  written or oral, with regard
to the subject matter hereof.

         4.3  This  Agreement  may be  modified  or  amended  only by a  written
agreement signed by both parties hereto.

         4.4 In the event  that  litigation  is  brought  in any court of law to
determine  any  rights,   obligations  or  damages  under  this  Agreement,  the
prevailing  party shall be entitled to recover  reasonable  costs and attorneys'
fees related to such litigation.

         4.5 This  Agreement  shall be governed by and  construed in  accordance
with the laws of the State of California.

         4.6 Any notice under this  Agreement  shall be deemed to be received at
the time of delivery, if delivered  personally,  or three days after the date of
posting with the United States  Postal  Service,  first class  postage  prepaid,
addressed to the applicable party at the address set forth below:

         To Employer:
                          Chairman, Board of Directors
                              MatriDigm Corporation
                              47211 Bayside Parkway
                                Fremont, CA 94538

         To Employee:
                             Mr. Franklin C. Chiang
                               532 College Avenue
                               Palo Alto, CA 95306



                                        3
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



     IN WITNESS WHEREOF, the parties have executed this Agreement, effective for
all purposes as of the date first above written.


MATRIDIGM CORPORATION



By:         Barry Lee Katzman                        Franklin C. Chiang
   -----------------------------------        ---------------------------------
Name: Assistant Secretary                            Franklin C. Chiang


                                        4
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>

                                  EXHIBIT B-1

                              MATRIDIGM CORPORATION

                        AMENDMENT OF EMPLOYMENT AGREEMENT


         This  Amendment of Employment  Agreement (the  "Amendment")  is entered
into this 15th day of November,  1995, by and between MatriDigm  Corporation,  a
California corporation ("Employer") and Franklin C. Chiang ("Employee").

         Reference is made to that certain Employment Agreement dated October 1,
1995, by and between Employer and Employee (the "Agreement").  Capitalized terms
used herein without definition shall have the meanings attributed to them in the
Agreement.

         The parties deem it to be in their  mutual best  interests to amend the
Agreement as set forth herein.

         NOW THEREFORE, the parties agree as follows:

         1. Section 2.2 of the Agreement is amended to exclude  death  benefits,
and to apply only to termination of Employee's  employment with Employer for any
reason or for no reason, excluding death and disability.

         2. Section 3.5 of the Agreement is amended to provide that:

                  (a) In  lieu  of  health  insurance,  Employer  shall  provide
Employee with a supplemental monthly cash payment in the amount of $300.00.

                  (b) In lieu of disability and life  insurance,  Employer shall
provide Employee the following arrangement:

                      In the  event of  death  of  Employee  while  employed  by
Employer,  or  termination  of such  employment  resulting from a disability (as
defined in the Americans with Disabilities Act) (a "Triggering Event"), Employee
(in the case of Employee's  disability)  or (in the event of  Employee's  death)
Employee's heir(s), personal representative(s) or, if specified by Employee, the
designated  beneficiary(ies),  as applicable (in any case,  "Beneficiary") shall
have the right to require Employer to purchase shares of Employer's Common Stock
("Shares") held by Beneficiary, as follows:

                      (i) Not  more  than  once  during  the  period  of 90 days
following the Triggering  Event, and once during the period of 90 days following
each of the first through the ninth anniversaries of the Triggering Event (total
of ten  years),  Beneficiary  shall  have the  right to give  written  notice to
Employer  that  Beneficiary  wishes  to  receive  disability  or  death  benefit
proceeds,  as applicable,  from the sale of the Shares. The notice shall specify
the amount of proceeds which Beneficiary wishes to receive.



                                        1
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>


                      (ii) Subject to  subparagraph  (v), the maximum  amount of
proceeds indicated on any such notice shall be forty percent (40%) of Employee's
annual  base  salary  at the time of the  Triggering  Event.  The  total  amount
indicated on all such notices in the  aggregate  shall not exceed four (4) times
Employee's annual base salary at the time of the Triggering Event.

                      (iii)  Within  thirty  (30) days  after  receipt of such a
notice, Employer shall effectuate the purchase from Beneficiary of the number of
Shares, the aggregate purchase price of which is equal to the amount of proceeds
requested  by  Beneficiary  in the notice,  subject to the  maximum  provided in
subparagraph  (ii).  The purchase price per Share to be paid by Employer for the
Shares  shall be the  greater  of (A) the fair  market  value of the  Shares (as
reasonably  determined  by the Board of Directors of Employer in its  discretion
exercised  in good  faith) in effect on the date of the notice  or, if  greater,
that in effect on the date that Employer effectuates the purchase of the Shares;
or (B) the  quotient  obtained by dividing  forty  percent  (40%) of  Employee's
annual base salary at the time of the Triggering Event by 900,000.

                      (iv) Employer may require Beneficiary to provide the stock
certificate  representing  the  Shares to be  purchased  as a  condition  of the
purchase,  provided  that  Beneficiary  may  substitute  an  affidavit  of  lost
certificate in form reasonably  acceptable to Employer if appropriate.  Employer
shall cause a new stock certificate reflecting unpurchased shares represented by
original  certificate  to be reissued to  Beneficiary  as promptly as reasonably
practicable after effectuating the purchase.

                      (v) In the event of liquidation of Employer  subsequent to
any  Triggering  Event,  Employer's  obligations  under  this  section  shall be
accelerated  and Employer  shall  provide  Beneficiary  the entire amount of all
proceeds  remaining  available  (up to the  aggregate  maximum of four (4) times
Employee's  annual  base  salary  at  the  time  of  the  Triggering  Event)  as
consideration  for the purchase of the requisite  number of Shares,  as computed
pursuant  to  subparagraph   (iii),   prior  and  in  preference  to  any  other
distribution   to   shareholders   pursuant   to  the   Company's   Articles  of
Incorporation.  A  consolidation  or merger of  Employer  with or into any other
corporation or corporations or a sale,  conveyance,  or other disposition of all
or substantially all of Employer's property,  assets or business shall be deemed
to be a liquidation for purposes of this subparagraph.

                      (vi)  Employer's  obligation  to  repurchase  Shares  from
Beneficiary pursuant to a notice from Beneficiary under subparagraph (i) of this
section shall take  precedence  and priority over any  obligation of Employer to
redeem  shares of capital stock of Employer  pursuant to Employer's  Articles of
Incorporation.  In the event that Employer shall have  inadequate  funds legally
available to effectuate the repurchase required by this section,  Employer shall
purchase  the  number  of  Shares  for which  Employer  then has  funds  legally
available,  and shall  purchase the balance of the Shares to be  purchased  upon
each month end thereafter, to the extent of funds then legally available,  until
the purchase has been completed. Pending purchases, including purchases pursuant
to  notices  from  other  employees  of  Employer  pursuant  to  provisions  for
disability  or  death  benefits  substantially  similar  to this  one,  shall be
completed in the order of applicable notice dates if there be more than one.


                                        2
                        CONFIDENTIAL TREATMENT REQUESTED


<PAGE>


                      (vii)  Employer may  designate an assignee to purchase the
applicable Shares pursuant to this section,  provided that Employer shall remain
liable in the event the assignee fails to purchase the Shares as required.

                      (viii) Employer shall use commercially  reasonable efforts
to obtain, at a price reasonably acceptable to Employer,  insurance to provide a
source  of funds for the  purchase  price of the  Shares  that  Employer  may be
required to purchase under this section.


         IN WITNESS WHEREOF,  the parties have executed this Amendment effective
for all purposes as of the date first set forth above.


MATRIDIGM CORPORATION



By:
    --------------------------------             ------------------------------
Name:                                            Franklin C. Chiang


                                        3
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
                                  EXHIBIT B-2

                              MATRIDIGM CORPORATION

                              EMPLOYMENT AGREEMENT


         THIS  AGREEMENT is entered  into as of the 1st day of October,  1995 by
and between MatriDigm  Corporation,  a California  corporation  ("Employer") and
James T. Brady ("Employee").

         Employer  desires  to  employ  Employee  as  its  President  and  Chief
Executive  Officer and Employee  desires to accept such  employment on the terms
and conditions set forth herein.

         NOW THEREFORE, the parties agree as follows:

I.       DUTIES.

         1.1 Subject to termination of Employee's  employment with IBM, Employer
shall employ Employee as its President and Chief Executive  Officer and Employee
accepts such employment,  effective on or about October 15, 1995 (the "Effective
Date") subject to the terms and conditions set forth herein.

         1.2  Employee  shall  have  general  supervision  of  the  business  of
Employer,  subject to the  control of the  Employer's  Board of  Directors  (the
"Board"). Employee shall be a voting member of all standing committees and shall
have such other  powers and  duties as usually  are vested in a chief  executive
officer and as may be  assigned  to him by the Board or  pursuant to  Employer's
bylaws.

         1.3 Employee  shall  perform his duties  faithfully,  diligently,  in a
businesslike  manner,  and for the best interests of Employer during the term of
employment.

         1.4 Employee shall report directly to the Board.

         1.5 All  management  and staff  personnel  of Employer  shall report to
Employee.

         1.6 Employee shall have full authority to hire and terminate personnel.

         1.7 Employee  shall have full  authority to develop and  implement  the
budget for Employer, subject to the approval of the Board.

         1.8   Employee   and   Employer,   by  the  Board  or  its   designated
representative,  shall  establish  expected  goals,  objectives  and outcomes by
mutual  agreement on an annual basis,  no later than the first day of January of
each year during the term of employment hereunder.

         1.9 Employee shall be authorized to spend up to $10,000 per transaction
without obtaining special approval or authorization.


                                        1
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



         1.10 Employee  shall not act as consultant or contractor for any actual
or potential business  competitor of or customer of, or vendor to, Employer,  or
any person or entity that  reasonably  could be  construed to be  interested  in
obtaining knowledge of Employer's employees,  business plans or programs, during
the term of employment hereunder.

II.      TERMINATION; SEVERANCE AND DEATH BENEFITS.

         2.1 AT WILL  EMPLOYMENT.  The  employment  of  Employee  shall  have no
specified  term and may be  terminated  at the will of either party on notice to
the other as defined in  Section  2922 of the  California  Labor  Code.  Nothing
herein shall imply or be construed to promise a specified term of employment.

         2.2  SEVERANCE  AND  DEATH  BENEFITS.  In the event of  termination  of
Employee's  employment  for any reason or for no  reason,  or  Employee's  death
during Employee's employment,  Employee or his legal successors,  as applicable,
shall be entitled to receive the compensation that otherwise would have been due
to Employee  hereunder had Employee's  employment  continued for a period of six
months  following  the  month in which  his  termination  or death  occurs.  The
quarterly performance bonuses that otherwise would have been payable to Employee
under  subsection 3.6  applicable to that six month period  following such event
shall be paid in amounts equal to the average of the last four quarterly bonuses
paid to Employee immediately  preceding the date of notice of the termination or
death.

III.     BENEFITS; PERFORMANCE BONUS.

         3.1 Employer  shall pay Employee a base salary of [REDACTED]  per year.
The base  salary  shall be paid in  biweekly  installments  in  accordance  with
Employer's normal administrative procedures.

         3.2 Employer shall provide  Employee  $200.00 per month as an allowance
for automobile expenses. Employer shall reimburse Employee for reasonable mobile
telephone expenses incurred in the course of Employer's business.

         3.3  Employer  shall  reimburse  reasonable  entertainment  expenses of
Employee and such other  expenses,  incurred by Employee in furtherance of or in
connection with the business of Employer,  as Employer and Employee may mutually
agree upon. Employee shall account for such expenses in a manner satisfactory to
Employer.

         3.4 Employer shall withhold  federal and state taxes,  social  security
taxes,  state  disability  and  unemployment  taxes  and  such  other  taxes  or
government-mandated   withholdings  in  accordance   with  Employer's   standard
administrative practices as applied to other employees.

         3.5  Employer  shall  provide  Employee  with  a  package  of  benefits
("Executive Package"),  including disability insurance,  life insurance,  health
insurance, vacation (four weeks per year initially;

                                        2
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>


five  weeks per year  beginning  with the third  year of  Employee's  employment
hereunder), participation in any applicable profit-sharing,  retirement or 401-K
programs  Employer may offer,  and other benefits,  at least  equivalent to that
provided  or offered by Employer to other  administrative  officers  employed by
Employer.  Employer  shall  ensure  that at all times the  disability  insurance
provided to Employee  provides for payment of at least 60% of the income  earned
by Employee during the immediately preceding twelve month period.

         3.6 The Board shall set performance targets and criteria for each year,
in its reasonable discretion in congruity with the annual goals,  objectives and
outcomes agreed between Employee and Employer pursuant to subsection 1.8 hereof.
The targets  and  criteria  set by the Board  shall  provide for full or partial
fulfillment, or degrees of performance,  thereof. The Board shall award Employee
an annual bonus in accordance with the degree to which Employee has fulfilled or
achieved such quarterly targets and criteria. The target amount of the bonus for
full  fulfillment  or  performance  of the  targets  and  criteria  shall be set
initially  at  [REDACTED],  and shall be adjusted  annually  on the  anniversary
hereof  on the  basis  of such  factors  as the  Board  of  Directors  may  deem
appropriate.

         3.7 Pursuant to that certain  Founders  Agreement of even date herewith
among  Employer,  Employee and the other  Founders  named therein (the "Founders
Agreement"),  as partial  consideration for the purchase of shares of Employer's
Common Stock,  Employee  will deliver to Employer a promissory  note executed by
Employee in favor of Employer in the amount of [REDACTED]  (the  "Note"),  which
shall be payable in annual  installments of [REDACTED] of principal plus accrued
interest due October 1, 1996,  1997,  1998,  1999 and 2000. On each such payment
due date under the Note,  and (except to the extent that Employer  exercises any
right to repurchase the shares purchased  pursuant to the Founders  Agreement by
cancellation  of all or any portion of the amount  remaining due under the Note)
upon any  acceleration  of the Note  pursuant to its terms,  and  regardless  of
whether  Employee  is then an  employee  of  Employer,  Employer  shall grant to
Employee a bonus equal to 167% of the amount of the Note payment then due (which
such  167%  gross up is made in order to  offset  Employee's  federal  and state
income tax liability  for such bonus based on Employee's  situation in the forty
percent  (40%)  income tax  bracket),  which bonus shall be applied  against the
payment then due under the Note.

IV.      MISCELLANEOUS.

         4.1 Neither  party shall assign its rights or delegate its  obligations
under this Agreement without the prior written consent of the other party.

         4.2 Except as provided in the  Founders  Agreement  and the  agreements
executed  pursuant  thereto  (including  the  Confidentiality  and  Intellectual
Property  Agreement  set forth as an exhibit  thereto)  and the  Indemnification
Agreement  between  the  Employer  and  Employee  of even  date  herewith,  this
Agreement comprises the sole and entire agreement between Employer and Employee,
and supersedes and replaces all previous  agreements or  understandings  between
the parties, written or oral, with regard to the subject matter hereof.


                                        3
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>


         4.3  This  Agreement  may be  modified  or  amended  only by a  written
agreement signed by both parties hereto.

         4.4 In the event  that  litigation  is  brought  in any court of law to
determine  any  rights,   obligations  or  damages  under  this  Agreement,  the
prevailing  party shall be entitled to recover  reasonable  costs and attorneys'
fees related to such litigation.

         4.5 This  Agreement  shall be governed by and  construed in  accordance
with the laws of the State of California.

         4.6 Any notice under this  Agreement  shall be deemed to be received at
the time of delivery, if delivered  personally,  or three days after the date of
posting with the United States  Postal  Service,  first class  postage  prepaid,
addressed to the applicable party at the address set forth below:

         To Employer:
                          Chairman, Board of Directors
                              MatriDigm Corporation
                              47211 Bayside Parkway
                                Fremont, CA 94538

         To Employee:
                               Mr. James T. Brady
                             1060 Queensbridge Court
                             San Jose, CA 95120-4215


         IN WITNESS WHEREOF, the parties have executed this Agreement, effective
for all purposes as of the date first above written.


MATRIDIGM CORPORATION



By:      Franklin C. Chiang                            James T. Brady
    -----------------------------            -----------------------------------
Name:                                                  James T. Brady


                                        4
                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>

                                   EXHIBIT B-2

                              MATRIDIGM CORPORATION

                        AMENDMENT OF EMPLOYMENT AGREEMENT


         This  Amendment of Employment  Agreement (the  "Amendment")  is entered
into this 15th day of November,  1995, by and between MatriDigm  Corporation,  a
California corporation ("Employer") and James T. Brady ("Employee").

         Reference is made to that certain Employment Agreement dated October 1,
1995, by and between Employer and Employee (the "Agreement").  Capitalized terms
used herein without definition shall have the meanings attributed to them in the
Agreement.

         The parties deem it to be in their  mutual best  interests to amend the
Agreement as set forth herein.

         NOW THEREFORE, the parties agree as follows:

         1.  Section  1.1 of the  Agreement  is  amended  to  provide  that  the
Effective Date of Employee's employment with Employer shall be December 1, 1995.

         2. Section 1.9 of the  Agreement  is amended to provide  that  Employee
shall be authorized  to spend up to $25,000 per  transaction  without  obtaining
special approval or authorization.

         3. Section 2.2 of the Agreement is amended to exclude  death  benefits,
and to apply only to termination of Employee's  employment with Employer for any
reason or for no reason, excluding death and disability.

         4.  Section 3.5 of the Agreement is amended to provide that:

             (a) In lieu of health  insurance,  Employer shall provide  Employee
with a supplemental monthly cash payment in the amount of $400.00.

             (b) In  lieu of  disability  and  life  insurance,  Employer  shall
provide Employee the following arrangement:

                 In the event of death of Employee  while  employed by Employer,
or termination of such employment resulting from a disability (as defined in the
Americans with Disabilities Act) (a "Triggering  Event"),  Employee (in the case
of  Employee's  disability)  or (in the event of  Employee's  death)  Employee's
heir(s), personal representative(s) or, if specified by Employee, the designated
beneficiary(ies),  as  applicable  (in any case,  "Beneficiary")  shall have the
right to  require  Employer  to  purchase  shares  of  Employer's  Common  Stock
("Shares") held by Beneficiary, as follows:

                 (i) Not more than once  during the period of 90 days  following
the  Triggering  Event,  and once during the period of 90 days following each of
the first through the ninth  anniversaries of the Triggering Event (total of ten
years), Beneficiary shall have the right to give written notice to Employer that
Beneficiary wishes to receive disability or death benefit proceeds, as

                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



applicable,  from the sale of the Shares. The notice shall specify the amount of
proceeds which Beneficiary wishes to receive.

                 (ii)  Subject  to  subparagraph  (v),  the  maximum  amount  of
proceeds indicated on any such notice shall be forty percent (40%) of Employee's
annual  base  salary  at the time of the  Triggering  Event.  The  total  amount
indicated on all such notices in the  aggregate  shall not exceed four (4) times
Employee's annual base salary at the time of the Triggering Event.

                 (iii) Within  thirty (30) days after  receipt of such a notice,
Employer shall effectuate the purchase from Beneficiary of the number of Shares,
the  aggregate  purchase  price of which is  equal  to the  amount  of  proceeds
requested  by  Beneficiary  in the notice,  subject to the  maximum  provided in
subparagraph  (ii).  The purchase price per Share to be paid by Employer for the
Shares  shall be the  greater  of (A) the fair  market  value of the  Shares (as
reasonably  determined  by the Board of Directors of Employer in its  discretion
exercised  in good  faith) in effect on the date of the notice  or, if  greater,
that in effect on the date that Employer effectuates the purchase of the Shares;
or (B) the  quotient  obtained by dividing  forty  percent  (40%) of  Employee's
annual base salary at the time of the Triggering Event by 600,000.

                 (iv)  Employer  may  require  Beneficiary  to provide the stock
certificate  representing  the  Shares to be  purchased  as a  condition  of the
purchase,  provided  that  Beneficiary  may  substitute  an  affidavit  of  lost
certificate in form reasonably  acceptable to Employer if appropriate.  Employer
shall cause a new stock certificate reflecting unpurchased shares represented by
original  certificate  to be reissued to  Beneficiary  as promptly as reasonably
practicable after effectuating the purchase.

                 (v) In the event of liquidation  of Employer  subsequent to any
Triggering Event, Employer's obligations under this section shall be accelerated
and  Employer  shall  provide  Beneficiary  the  entire  amount of all  proceeds
remaining  available (up to the aggregate  maximum of four (4) times  Employee's
annual base salary at the time of the Triggering Event) as consideration for the
purchase of the requisite number of Shares, as computed pursuant to subparagraph
(iii),  prior  and in  preference  to any  other  distribution  to  shareholders
pursuant to the Company's  Articles of Incorporation.  A consolidation or merger
of  Employer  with or into any  other  corporation  or  corporations  or a sale,
conveyance,  or other  disposition  of all or  substantially  all of  Employer's
property, assets or business shall be deemed to be a liquidation for purposes of
this subparagraph.

                 (vi)   Employer's   obligation   to   repurchase   Shares  from
Beneficiary pursuant to a notice from Beneficiary under subparagraph (i) of this
section shall take  precedence  and priority over any  obligation of Employer to
redeem  shares of capital stock of Employer  pursuant to Employer's  Articles of
Incorporation.  In the event that Employer shall have  inadequate  funds legally
available to effectuate the repurchase required by this section,  Employer shall
purchase  the  number  of  Shares  for which  Employer  then has  funds  legally
available,  and shall  purchase the balance of the Shares to be  purchased  upon
each month end thereafter, to the extent of funds then legally available,  until
the purchase has been completed. Pending purchases, including purchases pursuant
to  notices  from  other  employees  of  Employer  pursuant  to  provisions  for
disability  or  death  benefits  substantially  similar  to this  one,  shall be
completed in the order of applicable notice dates if there be more than one.

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                        CONFIDENTIAL TREATMENT REQUESTED

<PAGE>



                 (vii)  Employer  may  designate  an assignee  to  purchase  the
applicable Shares pursuant to this section,  provided that Employer shall remain
liable in the event the assignee fails to purchase the Shares as required.

                 (viii) Employer shall use  commercially  reasonable  efforts to
obtain,  at a price  reasonably  acceptable to Employer,  insurance to provide a
source  of funds for the  purchase  price of the  Shares  that  Employer  may be
required to purchase under this section.


         IN WITNESS WHEREOF,  the parties have executed this Amendment effective
for all purposes as of the date first set forth above.


MATRIDIGM CORPORATION



By:
   ------------------------------         -------------------------------------
Name:                                     James T. Brady

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