This paper describes the basis for the reform in mental health care system in Israel as presented in the report of the Netanyahu Commission (State Commission for Investigation of Functioning and Efficiency of the Health Care System in Israel, 1990) and the report of the State Comptroller's office (State Comptroller, 1991). These reports pointed to seven major problem areas in the mental health care system: (1) segregation of mental health and general health care systems, (2) variations in availability of services across the country, (3) conflict of interests within Ministry of Health which provides services and oversight, (4) overuse of hospital based care and under use of community based care, (5) reliance on hospitals for custodial care, (6) lack of appreciation of mental health service needs of non-severely mentally ill, and (7) lack of regional service planning. The article describes these problems and the proposed solutions.