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                                                                   EXHIBIT 10.29

                                 PMR CORPORATION

                             INCENTIVE STOCK OPTION


DANIEL L. FRANK, Optionee:

        PMR CORPORATION (the "Company"), pursuant to its 1997 Equity Incentive
Plan (the "Plan"), has granted to you, the optionee named above, an option to
purchase shares of the common stock of the Company ("Common Stock"). This option
is intended to qualify as an "incentive stock option" to the extent possible
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").

        The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants. Defined terms not explicitly
defined in this agreement but defined in the Plan shall have the same
definitions as in the Plan.

        The details of your option are as follows:

        1. TOTAL NUMBER OF SHARES SUBJECT TO THIS OPTION. The total number of
shares of Common Stock subject to this option is One Hundred Fifty Thousand
(150,000).

        2. VESTING. Subject to the limitations contained herein, all of the
shares subject to this option will vest (become exercisable) on September 8,
2003; provided, however, that portions of the shares subject to this option will
vest immediately on the date of each event set forth below, in the corresponding
number of shares set forth below:

               (a) Fifty Thousand (50,000) shares will vest and become
exercisable upon the enrollment in any managed care program operated by the
Company of any patient suffering from a serious mental illness.

               (b) Fifty Thousand (50,000) shares will vest and become
exercisable on the first day following the ten consecutive trading days over
which the average closing price of the Company's Common Stock quoted on the
Nasdaq National Market or listed on any national securities exchange is at least
$25.00 per share.

               (c) Fifty Thousand (50,000) shares will vest and become
exercisable on the first day following the delivery of the audited financial
statements for the first fiscal year of the Company in which the division of the
Company which operates its managed care programs has a positive gross margin for
such fiscal year as reflected in the Company's audited financial statements for
such year (as determined in accordance with generally accepted accounting
principles consistently applied).

The Company shall notify you of the satisfaction of any of the events set forth
above within five (5) business days of the occurrence of such event. The
Company's determination that any such event is satisfied shall be conclusive.
Notwithstanding anything herein to the contrary, all of the


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shares subject to this option shall vest and become immediately exercisable as
described in the attached Change in Control Vesting Policy.

        3. EXERCISE PRICE AND METHOD OF PAYMENT.

               (a) EXERCISE PRICE. The exercise price of this option is six and
63/100 dollars ($6.63) per share, being not less than one hundred percent (100%)
of the fair market value of the Common Stock on the date of grant of this
option.

               (b) METHOD OF PAYMENT. Payment of the exercise price per share is
due in full upon exercise of all or any part of each installment which has
accrued to you. You may elect, to the extent permitted by applicable statutes
and regulations, to make payment of the exercise price under one of the
following alternatives:

                      (i) Payment of the exercise price per share in cash
(including check) at the time of exercise;

                      (ii) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;

                      (iii) Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings, and owned free
and clear of any liens, claims, encumbrances or security interests, which Common
Stock shall be valued at its fair market value on the date of exercise; or

                      (iv) Payment by a combination of the methods of payment
permitted by subparagraph 3(b)(i) through 3(b)(iii) above.

        4. WHOLE SHARES. This option may only be exercised for whole shares.

        5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, this option may not be exercised unless the shares issuable
upon exercise of this option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act.

        6. TERM. The term of this option commences on September 8, 1998, the
date of grant, and expires on September 7, 2008 (the "Expiration Date"), which
date shall be no more than ten (10) years from the date this option is granted,
unless this option expires sooner as set forth below or in the Plan. In no event
may this option be exercised on or after the Expiration Date. This option shall
terminate prior to the Expiration Date as follows: three (3) months after the
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or an Affiliate of the Company unless one of the following
circumstances exists:


                                       2.


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               (a) Your termination of Continuous Status as an Employee,
Director or Consultant is due to your disability. This option will then expire
on the earlier of the Expiration Date set forth above or twelve (12) months
following such termination of Continuous Status as an Employee, Director or
Consultant.

               (b) Your termination of Continuous Status as an Employee,
Director or Consultant is due to your death or your death occurs within three
(3) months following your termination of Continuous Status as an Employee,
Director or Consultant for any other reason. This option will then expire on the
earlier of the Expiration Date set forth above or twelve (12) months after your
death.

               (c) If during any part of such three (3)-month period you may not
exercise your option solely because of the condition set forth in paragraph 5
above, then your option will not expire until the earlier of the Expiration Date
set forth above or until this option shall have been exercisable for an
aggregate period of three (3) months after your termination of Continuous Status
as an Employee, Director or Consultant.

               (d) If your exercise of the option within three (3) months after
termination of your Continuous Status as an Employee, Director or Consultant
with the Company or with an Affiliate of the Company would result in liability
under section 16(b) of the Securities Exchange Act of 1934, then your option
will expire on the earlier of (i) the Expiration Date set forth above, (ii) the
tenth (10th) day after the last date upon which exercise would result in such
liability or (iii) six (6) months and ten (10) days after the termination of
your Continuous Status as an Employee, Director or Consultant with the Company
or an Affiliate of the Company.

        However, this option may be exercised following termination of
Continuous Status as an Employee, Director or Consultant only as to that number
of shares as to which it was exercisable on the date of termination of
Continuous Status as an Employee, Director or Consultant under the provisions of
paragraph 2 of this option.

        In order to obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
date of grant of the option and ending on the day three (3) months before the
date of the option's exercise, you must be an employee of the Company or an
Affiliate of the Company, except in the event of your death or permanent and
total disability. The Company has provided for continued vesting or extended
exercisability of your option under certain circumstances (for example,
disability) for your benefit, but cannot guarantee that your option will
necessarily be treated as an "incentive stock option" if you provide services to
the Company or an Affiliate of the Company as a consultant or exercise your
option more than three (3) months after the date your employment with the
Company and all Affiliates of the Company terminates.

        7. EXERCISE.

               (a) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during


                                       3.


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regular business hours, together with such additional documents as the Company
may then require pursuant to subsection 11(e) of the Plan.

               (b) By exercising this option you agree that, as a precondition
to the completion of any exercise, the Company may require you to enter an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
this option; (2) the lapse of any substantial risk of forfeiture to which the
shares are subject at the time of exercise; or (3) the disposition of shares
acquired upon such exercise. You also agree that the exercise of this option has
not been completed and that the Company is under no obligation to issue any
shares of Common Stock to you until such an arrangement is established or the
Company's tax withholding obligations are satisfied, as determined by the
Company.

        8. TRANSFERABILITY. This option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise this
option.

        9. REDUCTION FOR DISQUALIFIED INDIVIDUALS.

               (a) If this option becomes fully vested in connection with
Optionee's termination following a Change in Control as described in the Plan,
and if Optionee is deemed to be a "disqualified individual" as defined in
Section 280G of the Code (which includes certain officers and highly compensated
employees of the Company), then if the aggregate of the Optionee's gain upon the
exercise of the option with respect to shares that became fully vested because
of a Change in Control and all other payments made to Optionee in connection
with a Change in Control would constitute a "parachute payment" within the
meaning of Section 280G of the Code and would, but for this subsection (a),
subject Optionee to liability for the twenty percent (20%) excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of
subsection (b) hereof, the option exercise shall be reduced to the largest
amount which the Company determines would result in no portion of such exercise
being subject to the Excise Tax (but in no event shall the option exercise be
reduced below the number of shares vested prior to acceleration in connection
with a Change in Control). The Company's determination of any required deduction
pursuant to this subsection (a) shall be conclusive and binding upon Optionee.
However, if the Internal Revenue Service ("IRS") nevertheless determines that an
exercise is subject to the Excise Tax, then subsection (b) hereof shall apply.

               (b) If notwithstanding the reduction described in subsection (a)
hereof (or in the absence of any such reduction), the IRS determines that
Optionee is liable for the Excise Tax as a result of the exercise, then Optionee
shall be obligated to rescind within thirty (30) days after final IRS
determination, the exercise of shares that subject the Optionee to the Excise
Tax; provided, however, that Optionee shall not be obligated to rescind the
exercise of shares that were vested prior to acceleration in connection with a
Change in Control. The rescinded amount shall be the smallest such amount, if
any, as shall be required so that no portion of Optionee's exercise shall be
subject to the Excise Tax. In the event of any rescission hereunder, the


                                       4.


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Company shall return to Optionee the full exercise price paid by Optionee for
the shares being rescinded.

        10. OPTION NOT A SERVICE CONTRACT. This option is not an employment
contract and nothing in this option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in this option shall obligate the Company or any Affiliate of the
Company, or their respective shareholders, Board of Directors, officers or
employees to continue any relationship which you might have as a Director or
Consultant for the Company or Affiliate of the Company.

        11. NOTICES. Any notices provided for in this option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after deposit
in the United States mail, postage prepaid, addressed to you at the address
specified below or at such other address as you hereafter designate by written
notice to the Company.

        12. GOVERNING PLAN DOCUMENT. This option is subject to all the
provisions of the Plan, a copy of which is attached hereto and its provisions
are hereby made a part of this option, including without limitation the
provisions of Section 6 of the Plan relating to option provisions, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the
event of any conflict between the provisions of this option and those of the
Plan, the provisions of the Plan shall control.

        Dated the 8th day of September, 1998.

                                            Very truly yours,


                                            PMR CORPORATION


                                            By:  /s/ Allen Tepper
                                              -------------------------------
                                            Title: Chief Executive Officer
ATTACHMENTS:

        1997 Equity Incentive Plan
        Notice of Exercise
        Change in Control Vesting Policy


                                       5.


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The undersigned:

               (a) Acknowledges receipt of the foregoing option and the
attachments referenced therein and understands that all rights and liabilities
with respect to this option are set forth in the option and the Plan; and

               (b) Acknowledges that as of the date of grant of this option, it
sets forth the entire understanding between the undersigned optionee and the
Company and its Affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:

               NONE
                                    (Initial)

               OTHER
                    -------------------------------

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

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




                                    /s/ Daniel L. Frank
                                    -------------------------------
                                    DANIEL L. FRANK

                                    Address:
                                    10231 Bothwell
                                   -------------------------------
                                    Northridge, CA 91324
                                   -------------------------------

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


                                       6.


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                               NOTICE OF EXERCISE


PMR Corporation
501 Washington Street
Fifth Floor
San Diego, CA 92103

                                                   Date of Exercise: ___________

Ladies and Gentlemen:

        This constitutes notice under my incentive stock option that I elect to
purchase the number of shares for the price set forth below.

<TABLE>
<S>                                                                             <C>
        Stock option dated:                                                     ___________

        Number of shares as to which option is exercised:

        Certificates to be issued in name of:                                   ___________

        Total exercise price:                                                   $__________

        Cash payment delivered herewith:                                        $__________

        Value of ______ shares of common stock delivered herewith1:             $__________
</TABLE>


        By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1997 Equity incentive
Plan and (ii) to provide for the payment by me to you (in the manner designated
by you) of your withholding obligation, if any, relating to the exercise of this
option.

                                             Very truly yours,


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


--------
1 Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.


<PAGE>   8
                                 PMR CORPORATION

                 CHANGE IN CONTROL VESTING POLICY (THE "POLICY")

        In the event the employment or relationship as a consultant to the
Company of a person holding an option under the 1997 Equity Incentive Plan (the
"Optionee") is, within one (1) year following a "Change in Control," (i)
terminated by the Company other than for "Cause," or (ii) terminated in a
"Constructive Termination," then the option held by such Optionee shall be fully
vested. Moreover, all options held by directors shall become fully vested
immediately upon the occurrence of a Change in Control.

        For purposes of this Policy, the following definitions shall apply:

        "CHANGE IN CONTROL" shall mean the occurrence of any of the following
events:

               (a) The Company is merged, consolidated or reorganized into or
with another corporation, partnership, limited liability company, or other
entity or person, and as a result of such merger, consolidation or
reorganization less than 70% of the combined voting power of the
then-outstanding securities of such corporation, partnership, limited liability
company, or other entity or person immediately after such transaction are held
in the aggregate by holders of voting securities of the Company immediately
prior to such transaction;

               (b) The Company sells all or substantially all of its assets to
any other corporation, partnership, limited liability company, or other entity
or person, and thereafter, less than 70% of the combined voting power of the
then-outstanding voting securities of the acquiring or consolidated entity are
held in the aggregate by the holders of voting securities of the Company
immediately prior to such sale;

               (c) There is a report filed after the date on which the option is
granted on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or
report), each as promulgated pursuant to the Securities Exchange Act of 1934
(the "Exchange Act") disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act)
representing 30% or more of the combined voting power of the then-outstanding
voting securities of the Company;

               (d) The Company shall file a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing in
response to Item 1 of Form 8-K thereunder or Item 5(b) or Item 14 of Schedule
14A thereunder (or any successor schedule, form or report or item therein) that
a change in control of the Company has or may have occurred or will or may occur
in the future pursuant to any then-existing contract or transaction; or

               (e) During any period of two (2) consecutive years, individuals
who at the beginning of any such period constitute the directors of the Company
cease for any reason to constitute at least a majority of the Board of Directors
of the Company unless the election or the nomination for election by the
Company's shareholders of each director of the Company first


<PAGE>   9
elected during such period was approved by a vote of at least two-thirds of the
directors of the Company then still in office who were directors of the Company
at the beginning of such two (2)-year period.

        "CAUSE" shall mean termination due to the occurrence of any of the
following: (a) any intentional action or intentional failure to act by Optionee
which was performed in bad faith and to the material detriment of the Company;
(b) Optionee intentionally refuses or intentionally fails to act in accordance
with any lawful direction or order of the Company; (c) Optionee willfully and
habitually neglects his duties of employment; (d) Optionee's engaging or
participating in any activity which is competitive with or injurious to the
Company in the judgment of the Board of Directors; (e) Optionee's commission of
any fraud against the Company or use or appropriation for his personal use and
benefit of any funds, assets or properties of the Company not authorized by the
Company to be so used or appropriated; or (f) Optionee is convicted of a felony
crime involving moral turpitude.

        "CONSTRUCTIVE TERMINATION" means that the Optionee voluntarily
terminates his or her employment with the Company after any of the following are
undertaken, following a Change in Control, without Optionee's express written
consent:

               (a) the assignment to Optionee of any duties or responsibilities
which are inconsistent with, or result in any diminution or adverse change of,
Optionee's position, status or circumstances of employment as in effect
immediately prior to a Change in Control; an adverse change in Optionee's
titles, offices, benefits and/or perquisites as in effect immediately prior to a
Change in Control; any removal of Optionee from or any failure to re-elect
Optionee to any offices held by Optionee immediately prior to a Change in
Control, including, but not limited to, Optionee's membership on the Board,
except in connection with the termination of his employment for death,
disability, retirement, Cause, or any voluntary termination of employment by
Optionee other than a Constructive Termination;

               (b) a reduction by the Company in Optionee's annual base salary
by greater than five percent (5%) from that which was in effect immediately
prior to a Change in Control;

               (c) a relocation of Optionee, or the Company's principal
executive offices if Optionee's principal office is at such offices, to a
location more than forty (40) miles from the location at which Optionee was
performing his duties prior to a Change in Control, except for required travel
by Optionee on the Company's business to an extent substantially consistent with
Optionee's business travel obligations at the time of a Change in Control;

               (d) any material breach by the Company of any material provision
of Optionee's Stock Award Agreement following a Change in Control; or

               (e) any failure by the Company to obtain the assumption of
Optionee's Stock Award Agreement by any successor or assign of the Company.


                                       2.