Exhibit 10.1
AMERICAN SHARED HOSPITAL SERVICES
2006 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
     I. PURPOSE OF THE PLAN
          This 2006 Stock Incentive Plan is intended to promote the interests of
American Shared Hospital Services, a California corporation, by providing
eligible persons in the Corporation’s service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in such service.
          Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
     II. STRUCTURE OF THE PLAN
          A. The Plan shall be divided into three separate equity incentive
programs:
          - the Discretionary Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock or stock appreciation rights tied to the value of such Common
Stock,
          - the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock pursuant
to restricted stock awards, restricted stock units or other stock-based awards
which vest upon the completion of a designated service period or the attainment
of pre-established performance milestones, or such shares of Common Stock may be
issued through direct purchase or as a bonus for services rendered the
Corporation (or any Parent or Subsidiary), and
          - the Automatic Grant Program under which eligible non-employee Board
members will automatically receive grants at designated intervals over their
period of continued Board service.
          B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.

 

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     III. ADMINISTRATION OF THE PLAN
          A. The Compensation Committee shall have sole and exclusive authority
to administer the Discretionary Grant and Stock Issuance Programs with respect
to Section 16 Insiders. Administration of the Discretionary Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board’s discretion, be vested in the Compensation
Committee or a Secondary Board Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any Awards
made to the members of the Compensation Committee other than pursuant to the
Automatic Grant Program must be authorized by a disinterested majority of the
Board.
          B. Members of the Compensation Committee or any Secondary Board
Committee shall serve for such period of time as the Board may determine and may
be removed by the Board at any time. The Board may also at any time terminate
the functions of any Secondary Board Committee and reassume all powers and
authority previously delegated to such committee.
          C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Grant and Stock
Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding Awards
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Grant and Stock Issuance Programs under its jurisdiction or any
Award thereunder.
          D. Service as a Plan Administrator by the members of the Compensation
Committee or the Secondary Board Committee shall constitute service as Board
members, and the members of each such committee shall accordingly be entitled to
full indemnification and reimbursement as Board members for their service on
such committee. No member of the Compensation Committee or the Secondary Board
Committee shall be liable for any act or omission made in good faith with
respect to the Plan or any Award made thereunder..
          E. Administration of the Automatic Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
Award made under that program, except that the Compensation Committee shall have
the express authority to establish from time to time the specific number of
shares to be subject to the initial and annual Awards made to the non-employee
Board members under such program.

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     IV. ELIGIBILITY
          A. The persons eligible to participate in the Discretionary Grant and
Stock Issuance Programs are as follows:
          (i) Employees,
          (ii) non-employee members of the Board or the board of directors of
any Parent or Subsidiary, and
          (iii) consultants and other independent advisors who provide services
to the Corporation (or any Parent or Subsidiary).
          B. The Plan Administrator shall have full authority to determine,
(i) with respect to Awards made under the Discretionary Grant Program, which
eligible persons are to receive such Awards, the time or times when those Awards
are to be made, the number of shares to be covered by each such Award,, the time
or times when the Award is to vest and become exercisable, the maximum term for
which such Award is to remain outstanding and the status of a granted option as
either an Incentive Option or a Non-Statutory Option and (ii) with respect to
Awards made under the Stock Issuance Program, which eligible persons are to
receive such Awards, the time or times when the Awards are to be made, the
number of shares subject to each such Award, the vesting and issuance schedules
applicable to the shares which are the subject of such Award and the cash
consideration (if any) payable for those shares.
          C. The Plan Administrator shall have the absolute discretion either to
grant options or stock appreciation rights in accordance with the Discretionary
Grant Program or to effect stock issuances and other stock-based awards in
accordance with the Stock Issuance Program.
          D. The individuals who shall be eligible to participate in the
Automatic Grant Program shall be limited to (i) those individuals who first
become non-employee Board members on or after the Plan Effective Date, whether
through appointment by the Board or election by the Corporation’s shareholders,
and (ii) those individuals who continue to serve as non-employee Board members
on or after the Plan Effective Date. A non-employee Board member who has
previously been in the employ of the Corporation (or any Parent or Subsidiary)
shall not be eligible to receive an Award under the Automatic Grant Program at
the time he or she first becomes a non-employee Board member, but shall be
eligible to receive periodic Awards under the Automatic Grant Program while he
or she continues to serve as a non-employee Board member.

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     V. STOCK SUBJECT TO THE PLAN
          A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall be limited to seven
hundred fifty thousand (750,000) shares. Such share reserve is comprised of
(i) the number of shares of Common Stock available for issuance under the
Predecessor Plans on the Plan Effective Date, including the shares subject to
options outstanding at that time under the Predecessor Plans, and (ii) an
additional increase of approximately three hundred sixty thousand (360,000)
shares of Common Stock. The Plan shall serve as the successor to the Predecessor
Plans, and no further stock option grants or stock issuances shall be made under
those Predecessor Plans on or after the Plan Effective Date. All options
outstanding under the Predecessor Plans on the Plan Effective Date shall be
transferred to this Plan as part of the initial share reserve hereunder and
shall continue in full force and effect in accordance with their terms, and no
provision of this Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of those options with respect to their acquisition
of shares of Common Stock thereunder. To the extent any options outstanding
under the Predecessor Plans on the Plan Effective Date expire or terminate
unexercised, the number of shares of Common Stock subject to those expired or
terminated options at the time of expiration or termination shall be available
for one or more Awards made under this Plan.
          B. No one person participating in the Plan may receive Awards for more
than one hundred fifty thousand (150,000) shares of Common Stock in the
aggregate per calendar year.
          C. Shares of Common Stock subject to outstanding Awards made under the
Plan (including the options transferred from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those Awards
expire or terminate for any reason prior to the issuance of the shares of Common
Stock subject to those Awards. Unvested shares issued under the Plan and
subsequently forfeited or repurchased by the Corporation, at a price per share
not greater than the original issue price paid per share, pursuant to the
Corporation’s repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for subsequent reissuance. Should the exercise price of
an option under the Plan be paid with shares of Common Stock, then the
authorized reserve of Common Stock under the Plan shall be reduced by the gross
number of shares for which that option is exercised, and not by the net number
of shares issued under the exercised stock option. If shares of Common Stock
otherwise issuable under the Plan are withheld by the Corporation in
satisfaction of the withholding taxes incurred

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in connection with the issuance, exercise or vesting of an Award, then the
number of shares of Common Stock available for issuance under the Plan shall be
reduced by the gross number of shares issued, exercised or vesting under such
Award, calculated in each instance prior to any such share withholding.
          D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation’s receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may receive Awards under the Plan per
calendar year, (iii) the maximum number and/or class of securities for which
stock option grants and restricted stock unit awards may subsequently be made
under the Automatic Grant Program to new and continuing non-employee Board
members, (iv) the number and/or class of securities and the exercise or base
price per share in effect under each outstanding Award under the Discretionary
Grant Program and (v) the number and/or class of securities subject to each
outstanding Award under the Stock Issuance Program and the cash consideration
(if any) payable per share. To the extent the foregoing adjustments are to be
made to outstanding Awards, such adjustments shall be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under those
Awards. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
          E. Outstanding Awards under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.

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ARTICLE TWO
DISCRETIONARY GRANT PROGRAM
     I. OPTION TERMS
          Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
          A. Exercise Price.
               1. The exercise price per share shall be fixed by the Plan
Administrator; provided, however, that such exercise price shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the grant date.
               2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of the documents evidencing
the option, be payable in one or more of the forms specified below:
               (i) cash or check made payable to the Corporation,
               (ii) shares of Common Stock valued at Fair Market Value on the
Exercise Date and held for the requisite period (if any) necessary to avoid any
additional charges to the Corporation’s earnings for financial reporting
purposes, or
               (iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the Optionee
shall concurrently provide instructions to (a) a brokerage firm (reasonably
satisfactory to the Corporation for purposes of administering such procedure in
compliance with the Corporation’s pre-clearance/pre-notification policies) to
effect the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus all
applicable income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm on such
settlement date in order to complete the sale.
          Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

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          B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of seven (7) years
measured from the grant date.
          C. Effect of Termination of Service.
               1. The following provisions shall govern the exercise of any
options granted pursuant to the Discretionary Grant Program that are outstanding
at the time of the Optionee’s cessation of Service or death:
               (i) Any option outstanding at the time of the Optionee’s
cessation of Service for any reason shall remain exercisable for such period of
time thereafter as shall be determined by the Plan Administrator and set forth
in the documents evidencing the option, but no such option shall be exercisable
after the expiration of the option term.
               (ii) Any option held by the Optionee at the time of the
Optionee’s death and exercisable in whole or in part at that time may be
subsequently exercised by the personal representative of the Optionee’s estate
or by the person or persons to whom the option is transferred pursuant to the
Optionee’s will or the laws of inheritance or by the Optionee’s designated
beneficiary or beneficiaries of that option.
               (iii) Should the Optionee’s Service be terminated for Misconduct
or should the Optionee otherwise engage in Misconduct while holding one or more
outstanding options granted under this Article Two, then all of those options
shall terminate immediately and cease to be outstanding.
               (iv) During the applicable post-Service exercise period, the
option may not be exercised for more than the number of vested shares for which
the option is at the time exercisable. No additional shares shall vest under the
option following the Optionee’s cessation of Service, except to the extent (if
any) specifically authorized by the Plan Administrator in its sole discretion
pursuant to an express written agreement with the Optionee. Upon the expiration
of the applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for any
shares for which the option has not been exercised.
          2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
               (i) extend the period of time for which the option is to remain
exercisable following the Optionee’s cessation of Service from the limited
exercise period otherwise in effect for that option to such greater period of
time as

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the Plan Administrator shall deem appropriate, but in no event beyond the
expiration of the option term,
               (ii) include an automatic extension provision whereby the
specified post-Service exercise period in effect for any option granted under
this Article Two shall automatically be extended by an additional period of time
equal in duration to any interval within the specified post-Service exercise
period during which the exercise of that option or the immediate sale of the
shares acquired under such option could not be effected in compliance with
applicable federal and state securities laws, but in no event shall such an
extension result in the continuation of such option beyond the expiration date
of the term of that option, and/or
               (iii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of the
Optionee’s cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested had the Optionee continued
in Service.
          D. Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
          E. Repurchase Rights. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while such shares are unvested, the
Corporation shall have the right to repurchase any or all of those unvested
shares at a price per share equal to the lower of (i) the exercise price paid
per share or (ii) the Fair Market Value per share of Common Stock at the time of
repurchase. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
          F. Transferability of Options. The transferability of options granted
under the Plan shall be governed by the following provisions:
               (i) Incentive Options: During the lifetime of the Optionee,
Incentive Options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or the laws of inheritance
following the Optionee’s death.
               (ii) Non-Statutory Options. Non-Statutory Options shall be
subject to the same limitation on transfer as Incentive Options, except that the
Plan Administrator may structure one or more Non-Statutory Options so that the
option may be assigned in whole or in part during the Optionee’s lifetime to one
or more Family Members of the Optionee or to a trust

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established exclusively for the Optionee and/or one or more such Family Members,
to the extent such assignment is in connection with the Optionee’s estate plan
or pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
               (iii) Beneficiary Designations. Notwithstanding the foregoing,
the Optionee may designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding options under this Article Two (whether
Incentive Options or Non-Statutory Options), and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee’s death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee’s death.
     II. INCENTIVE OPTIONS
          The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
          A. Eligibility. Incentive Options may only be granted to Employees.
          B. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000).
          To the extent the Employee holds two (2) or more such options which
become exercisable for the first time in the same calendar year, then for
purposes of the foregoing limitations on the exercisability of those options as
Incentive Options, such options shall be deemed to become first exercisable in
that calendar year on the basis of the chronological order in which they were
granted, except to the extent otherwise provided under applicable law or
regulation.
          C. 10% Shareholder. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

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     III. STOCK APPRECIATION RIGHTS
          A. Authority. The Plan Administrator shall have full power and
authority, exercisable in its sole discretion, to grant stock appreciation
rights in accordance with this Section III to selected Optionees or other
individuals eligible to receive option grants under the Discretionary Grant
Program.
          B. Types. Two types of stock appreciation rights shall be authorized
for issuance under this Section III: (i) tandem stock appreciation rights
(“Tandem Rights”) and (ii) stand-alone stock appreciation rights (“Stand-alone
Rights”).
          C. Tandem Rights. The following terms and conditions shall govern the
grant and exercise of Tandem Rights.
               1. One or more Optionees may be granted a Tandem Right,
exercisable upon such terms and conditions as the Plan Administrator may
establish, to elect between the exercise of the underlying option for shares of
Common Stock or the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (i) the Fair Market Value
(on the option surrender date) of the number of shares in which the Optionee is
at the time vested under the surrendered option (or surrendered portion thereof)
over (ii) the aggregate exercise price payable for such vested shares.
               2. No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall accordingly become entitled under this
Section III shall be made in shares of Common Stock valued at Fair Market Value
on the option surrender date.
               3. If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
(i) five (5) business days after the receipt of the rejection notice or (ii) the
last day on which the option is otherwise exercisable in accordance with the
terms of the instrument evidencing such option, but in no event may such rights
be exercised more than seven (7) years after the date of the option grant.
          D. Stand-Alone Rights. The following terms and conditions shall govern
the grant and exercise of Stand-alone Rights:
               1. One or more individuals eligible to participate in the
Discretionary Grant Program may be granted a Stand-alone Right not tied to any
underlying option under this Discretionary Grant Program. The Stand-alone Right
shall relate to a specified number of shares of Common Stock and shall be
exercisable upon such terms and conditions as the Plan Administrator may
establish. In no event, however, may the Stand-alone Right have a maximum term
in excess of seven (7) years measured from the grant date. Upon exercise of the
Stand-

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alone Right, the holder shall be entitled to receive a distribution from the
Corporation in an amount equal to the excess of (i) the aggregate Fair Market
Value (on the exercise date) of the shares of Common Stock underlying the
exercised right over (ii) the aggregate base price in effect for those shares.
               2. The number of shares of Common Stock underlying each
Stand-alone Right and the base price in effect for those shares shall be
determined by the Plan Administrator in its sole discretion at the time the
Stand-alone Right is granted. In no event, however, may the base price per share
be less than the Fair Market Value per underlying share of Common Stock on the
grant date. In the event outstanding Stand-alone Rights are to be assumed in
connection with a Change in Control transaction or otherwise continued in
effect, the shares of Common Stock underlying each such Stand-alone Right shall
be adjusted immediately after such Change in Control so as to apply to the
number and class of securities into which those shares of Common Stock would
have been converted in consummation of such Change in Control had those shares
actually been outstanding at that time. Appropriate adjustments to reflect such
Change in Control shall also be made to the base price per share in effect under
each outstanding Stand-alone Right, provided the aggregate base price shall
remain the same. To the extent the actual holders of the Corporation’s
outstanding Common Stock receive cash consideration for their Common Stock in
consummation of the Change in Control, the successor corporation may, in
connection with the assumption or continuation of the outstanding Stand-alone
Rights under the Discretionary Grant Program, substitute, for the securities
underlying those assumed rights, one or more shares of its own common stock with
a fair market value equivalent to the cash consideration paid per share of
Common Stock in the Change in Control transaction.
               3. Stand-alone Rights shall be subject to the same
transferability restrictions applicable to Non-Statutory Options and may not be
transferred during the holder’s lifetime, except if such assignment is in
connection with the holder’s estate plan and is to one or more Family Members of
the holder or to a trust established for the holder and/or one or more such
Family Members or pursuant to a domestic relations order covering the
Stand-alone Right as marital property. In addition, one or more beneficiaries
may be designated for an outstanding Stand-alone Right in accordance with
substantially the same terms and provisions as set forth in Section I.F of this
Article Two.
               4. The distribution with respect to an exercised Stand-alone
Right shall be made in shares of Common Stock valued at Fair Market Value on the
exercise date.
               5. The holder of a Stand-alone Right shall have no shareholder
rights with respect to the shares subject to the Stand-alone Right unless and
until such person shall have exercised the Stand-alone Right and become a holder
of record of the shares of Common Stock issued upon the exercise of such
Stand-alone Right.
          E. Post-Service Exercise. The provisions governing the exercise of
Tandem and Stand-alone Rights following the cessation of the recipient’s Service
shall be substantially the same as those set forth in Section I.C of this
Article Two for the options granted under the

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Discretionary Grant Program, and the Plan Administrator’s discretionary
authority under Section I.C.2 of this Article Two shall also extend to any
outstanding Tandem or Stand-alone Appreciation Rights.
          F. Gross Counting. Upon the exercise of any Tandem or Stand-alone
Right under this Section III, the share reserve under Section V of Article One
shall be reduced by the gross number of shares as to which such right is
exercised, and not by the net number of shares actually issued by the
Corporation upon such exercise.
     IV. CHANGE IN CONTROL/HOSTILE TAKE-OVER
          A. In the event of a Change in Control, each outstanding Award under
the Discretionary Grant Program shall automatically accelerate so that each such
Award shall, immediately prior to the effective date of that Change in Control,
become exercisable as to all the shares of Common Stock at the time subject to
such Award and may be exercised as to any or all of those shares as fully vested
shares of Common Stock. However, an outstanding Award under the Discretionary
Grant Program shall not become exercisable on such an accelerated basis if and
to the extent: (i) such Award is to be assumed by the successor corporation (or
parent thereof) or is otherwise to continue in full force and effect pursuant to
the terms of the Change in Control transaction or (ii) such Award is to be
replaced with a cash retention program of the successor corporation which
preserves the spread existing at the time of the Change in Control on any shares
as to which the Award is not otherwise at that time vested and exercisable and
provides for subsequent payout of that spread in accordance with the same
exercise/vesting schedule in effect for that Award or (iii) the acceleration of
such Award is subject to other limitations imposed by the Plan Administrator.
          B. All outstanding repurchase rights under the Discretionary Grant
Program shall automatically terminate, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of a Change
in Control, except to the extent: (i) those repurchase rights are to be assigned
to the successor corporation (or parent thereof) or are otherwise to continue in
full force and effect pursuant to the terms of the Change in Control transaction
or (ii) such accelerated vesting is precluded by other limitations imposed by
the Plan Administrator.
          C. Immediately following the consummation of the Change in Control,
all outstanding Awards under the Discretionary Grant Program shall terminate and
cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof) or otherwise continued in full force and effect
pursuant to the terms of the Change in Control transaction.
          D. Each option which is assumed in connection with a Change in Control
or otherwise continued in effect shall be appropriately adjusted, immediately
after such Change in Control, to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments to reflect such Change in

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Control shall also be made to (i) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same, (ii) the maximum number and/or class of
securities available for issuance over the remaining term of the Plan (iii) the
maximum number and/or class of securities which may be issued without cash
consideration under the Stock Issuance Program and (iv) the maximum number
and/or class of securities for which any one person may receive Awards under the
Plan per calendar year. To the extent the actual holders of the Corporation’s
outstanding Common Stock receive cash consideration for their Common Stock in
consummation of the Change in Control, the successor corporation may, in
connection with the assumption or continuation of the outstanding options under
the Discretionary Grant Program, substitute one or more shares of its own common
stock with a fair market value equivalent to the cash consideration paid per
share of Common Stock in such Change in Control transaction.
          E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding Awards rights under the Discretionary Grant
Program so that those Awards shall, immediately prior to the effective date of a
Change in Control, become exercisable as to all the shares of Common Stock at
the time subject to those Awards and may be exercised as to any or all of those
shares as fully vested shares of Common Stock, whether or not those Awards are
to be assumed in the Change in Control transaction or otherwise continued in
effect. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation’s repurchase rights under
the Discretionary Grant Program so that those rights shall immediately terminate
upon the consummation of the Change in Control transaction, and the shares
subject to those terminated rights shall thereupon vest in full.
          F. The Plan Administrator shall have full power and authority to
structure one or more outstanding Awards under the Discretionary Grant Program
so that those Awards shall become exercisable as to all the shares of Common
Stock at the time subject to those Awards in the event the Optionee’s Service is
subsequently terminated by reason of an Involuntary Termination within a
designated period following the effective date of any Change in Control
transaction in which those Awards do not otherwise fully accelerate. In
addition, the Plan Administrator may structure one or more of the Corporation’s
repurchase rights so that those rights shall immediately terminate with respect
to any shares held by the Optionee at the time of such Involuntary Termination,
and the shares subject to those terminated repurchase rights shall accordingly
vest in full at that time.
          G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding Awards under the Discretionary Grant Program
so that those Awards shall, immediately prior to the effective date of a Hostile
Take-Over, become exercisable as to all the shares of Common Stock at the time
subject to those Awards and may be exercised as to any or all of those shares as
fully vested shares of Common Stock. In addition, the Plan Administrator shall
have the discretionary authority to structure one or more of the Corporation’s
repurchase rights under the Discretionary Grant Program so that those rights
shall terminate automatically upon the consummation of such Hostile Take-Over,
and the shares subject to those terminated rights shall thereupon vest in full.
Alternatively, the Plan Administrator may

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condition the automatic acceleration of one or more outstanding Awards under the
Discretionary Grant Program and the termination of one or more of the
Corporation’s outstanding repurchase rights under such program upon the
subsequent termination of the Optionee’s Service by reason of an Involuntary
Termination within a designated period following the effective date of such
Hostile Take-Over.
          H. The portion of any Incentive Option accelerated in connection with
a Change in Control or Hostile Take-Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-statutory Option under the Federal tax laws.
     V. PROHIBITION ON REPRICING PROGRAMS
          The Plan Administrator shall not (i) implement any
cancellation/regrant program pursuant to which outstanding options or stock
appreciation rights under the Plan are cancelled and new options or stock
appreciation rights are granted in replacement with a lower exercise price per
share, (ii) cancel outstanding options or stock appreciation rights under the
Plan with exercise prices per share in excess of the then current Fair Market
Value per share of Common Stock for consideration payable in equity securities
of the Corporation or (iii) otherwise directly reduce the exercise price in
effect for outstanding options or stock appreciation rights under the Plan,
without in each such instance obtaining shareholder approval.

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ARTICLE THREE
STOCK ISSUANCE PROGRAM
     I. STOCK ISSUANCE TERMS
          Shares of Common Stock may be issued under the Stock Issuance Program,
either as vested or unvested shares, through direct and immediate issuances
without any intervening option grants. Each such stock issuance shall be
evidenced by a Stock Issuance Agreement which complies with the terms specified
below. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards or restricted stock units which entitle
the recipients to receive the shares underlying those awards or units upon the
attainment of designated performance goals or the satisfaction of specified
Service requirements or upon the expiration of a designated time period
following the vesting of those awards or units.
          A. Issue Price.
               1. The issue price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
               2. Shares of Common Stock may be issued under the Stock Issuance
Program for any of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
               (i) cash or check made payable to the Corporation,
               (ii) past services rendered to the Corporation (or any Parent or
Subsidiary); or
               (iii) any other valid consideration under the California
Corporation Code.
          B. Vesting Provisions.
               1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant’s period of Service or upon the attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to

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share right awards or restricted stock units which entitle the recipients to
receive the shares underlying those awards or units upon the attainment of
designated performance goals or the satisfaction of specified Service
requirements or upon the expiration of a designated time period following the
vesting of those awards or units, including (without limitation) a deferred
distribution date following the termination of the Participant’s Service.
               2. The Plan Administrator shall also have the discretionary
authority, consistent with Code Section 162(m), to structure one or more Awards
under the Stock Issuance Program so that the shares of Common Stock subject to
those Awards shall vest (or vest and become issuable) upon the achievement of
certain pre-established corporate performance goals based on one or more of the
following criteria: (1) return on total shareholder equity; (2) earnings per
share of Common Stock; (3) net income or operating income (before or after
taxes); (4) earnings before interest, taxes, depreciation and amortization;
(5) earnings before interest, taxes, depreciation, amortization and charges for
stock-based compensation, (6) sales or revenue targets; (7) return on assets,
capital or investment; (8) cash flow; (9) market share; (10) cost reduction
goals; (11) budget comparisons; (12) measures of customer satisfaction; (13) any
combination of, or a specified increase in, any of the foregoing; (14) new
product development or successful completion of research and development
projects; and (15) the formation of joint ventures, research or development
collaborations, or the completion of other corporate transactions intended to
enhance the Corporation’s revenue or profitability or enhance its customer base.
In addition, such performance goals may be based upon the attainment of
specified levels of the Corporation’s performance under one or more of the
measures described above relative to the performance of other entities and may
also be based on the performance of any of the Corporation’s business units or
divisions or any Parent or Subsidiary. Performance goals may include a minimum
threshold level of performance below which no award will be earned, levels of
performance at which specified portions of an award will be earned and a maximum
level of performance at which an award will be fully earned. The performance
goals may, at the time they are established for one or more Awards under the
Stock Issuance Program, be subject to adjustment for one or more of the
following items: extraordinary, unusual or non-recurring items of gain, loss or
expense; items of gain, loss or expense related to (a) the disposal of a
business or discontinued operations or (b) the operations of any business
acquired by Corporation; accruals for reorganization and restructuring cost and
expenses; and items of gain, loss or expense attributable to changes in tax laws
and regulations, accounting principles or other applicable laws or regulations.
               3. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant’s
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant’s unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

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               4. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant’s interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any dividends paid on such shares, subject to any applicable
vesting requirements. The Participant shall not have any shareholder rights with
respect to the shares of Common Stock subject to a restricted stock unit or
share right award until that award vests and the shares of Common Stock are
actually issued thereunder. However, dividend-equivalent units may be paid or
credited, either in cash or in actual or phantom shares of Common Stock, on
outstanding restricted stock unit or share right awards, subject to such terms
and conditions as the Plan Administrator may deem appropriate.
               5. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further shareholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent, the Corporation
shall repay to the Participant the lower of (i) the cash consideration paid for
the surrendered shares or (ii) the Fair Market Value of those shares at the time
of cancellation.
               6. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant’s Service or the
non-attainment of the performance objectives applicable to those shares. Any
such waiver shall result in the immediate vesting of the Participant’s interest
in the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant’s cessation of
Service or the attainment or non-attainment of the applicable performance
objectives. However, no vesting requirements tied to the attainment of
performance objectives may be waived with respect to shares which were intended
at the time of issuance to qualify as performance-based compensation under Code
Section 162(m), except in the event of the Participant’s Involuntary Termination
or as otherwise provided in Section II of this Article Three.
               7. Outstanding share right awards or restricted stock units under
the Stock Issuance Program shall automatically terminate, and no shares of
Common Stock shall actually be issued in satisfaction of those awards or units,
if the performance goals or Service requirements established for such awards or
units are not attained or satisfied. The Plan Administrator, however, shall have
the discretionary authority to issue vested shares of Common Stock under one or
more outstanding share right awards or restricted stock units as to which the
designated performance goals or Service requirements have not been attained or
satisfied. However, no vesting requirements tied to the attainment of
performance goals may be waived with respect to awards or units which were
intended, at the time those awards or units were granted, to qualify as
performance-based compensation under Code Section 162(m), except in

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the event of the Participant’s Involuntary Termination or as otherwise provided
in Section II of this Article Three.
     II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
          A. All of the Corporation’s outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Change in Control, except to the extent (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) or
are otherwise to continue in full force and effect pursuant to the terms of the
Change in Control transaction or (ii) such accelerated vesting is precluded by
other limitations imposed in the Stock Issuance Agreement.
          B. Each outstanding Award under the Stock Issuance Program which is
assumed in connection with a Change in Control or otherwise continued in effect
shall be adjusted immediately after the consummation of that Change in Control
so as to apply to the number and class of securities into which the shares of
Common Stock subject to that Award immediately prior to the Change in Control
would have been converted in consummation of such Change in Control had those
shares actually been outstanding at that time, and appropriate adjustments shall
also be made to the cash consideration (if any) payable per share thereunder,
provided the aggregate amount of such consideration shall remain the same. To
the extent the actual holders of the Corporation’s outstanding Common Stock
receive cash consideration for their Common Stock in consummation of the Change
in Control, the successor corporation may, in connection with the assumption or
continuation of the outstanding Awards, substitute one or more shares of its own
common stock with a fair market value equivalent to the cash consideration paid
per share of Common Stock in such Change in Control transaction.
          C. If an Award under the Stock Issuance Program is not assumed or
otherwise continued in effect or replaced with a cash retention program of the
successor corporation which preserves the Fair Market Value of the underlying
shares of Common Stock at the time of the Change in Control and provides for the
subsequent payout of that value in accordance with the same vesting schedule
applicable to those shares, then such Award shall vest, and the shares of Common
Stock subject to that Award shall be issued as fully-vested shares, immediately
prior to the consummation of the Change in Control.
          D. The Plan Administrator shall have the discretionary authority to
structure one or more unvested Awards under the Stock Issuance Program so that
the shares of Common Stock subject to those Awards shall automatically vest (or
vest and become issuable) in whole or in part immediately upon the occurrence of
a Change in Control or upon the subsequent termination of the Participant’s
Service by reason of an Involuntary Termination within a designated period
following the effective date of that Change in Control transaction.
          E. The Plan Administrator shall also have the discretionary authority
to structure one or more unvested Awards under the Stock Issuance Program so
that the shares of Common Stock subject to those Awards shall automatically vest
(or vest and become issuable) in

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whole or in part immediately upon the occurrence of a Hostile Take-Over or upon
the subsequent termination of the Participant’s Service by reason of an
Involuntary Termination within a designated period following the effective date
of that Hostile Take-Over.
          F. The Plan Administrator’s authority under Paragraphs D and E of this
Section II shall also extend to any Awards under the Stock Issuance Program
which are intended to qualify as performance-based compensation under Code
Section 162(m), even though the automatic vesting of those issuances, units or
awards pursuant to Paragraph D or E of this Section II may result in their loss
of performance-based status under Code Section 162(m).

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ARTICLE FOUR
AUTOMATIC GRANT PROGRAM
     I. TERMS
          A. Grant Dates. Grants shall be made pursuant to the Automatic Grant
Program in effect under this Article Four as follows:
               1. Each individual who is first elected or appointed as a
non-employee Board member at any time on or after the date of the 2006 Annual
Meeting shall automatically be granted, on the date of such initial election or
appointment, a Non-Statutory Option to purchase not more than ten thousand
(10,000) shares of Common Stock and restricted stock units covering not more
than three thousand (3,000) shares of Common Stock, provided that individual has
not previously been in the employ of the Corporation or any Parent or
Subsidiary. The actual number of shares for which such initial option grant and
restricted stock unit award shall be made shall (subject to the respective ten
thousand (10,000) and three thousand (3,000)-share limits) be determined by the
Plan Administrator at the time of each such grant.
               2. On the date of each annual shareholders meeting, beginning
with the 2006 Annual Meeting, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
re-election to the Board at that particular annual meeting, shall automatically
be granted a Non-Statutory Option to purchase not more than three thousand
(3,000) shares of common stock and restricted stock units covering up to not
more than an additional one thousand (1,000) shares of Common Stock, provided
that such individual has served as a non-employee Board member for a period of
at least six (6) months. There shall be no limit on the number of such option
grants and restricted stock unit awards any one continuing non-employee Board
member may receive over his or her period of Board service, and non-employee
Board members who have previously been in the employ of the Corporation (or any
Parent or Subsidiary) shall be eligible to receive one or more such annual
option grants and restricted stock unit awards over their period of continued
Board service. The actual number of shares for which such annual option grants
and restricted stock unit awards are made to each continuing non-employee Board
member shall (subject to the respective three thousand (3,000) and one thousand
(1,000)-share limits) be determined by the Plan Administrator on or before the
date of the annual shareholders meeting on which those grants are to be made.
          B. Exercise Price.
               1. The exercise price per share for each option granted under
this Article Four shall be equal to one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

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               2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Grant Program. Except to
the extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
          C. Option Term. Each option granted under this Article Four shall have
a maximum term of seven (7) years measured from the option grant date, subject
to earlier termination following the Optionee’s cessation of Service.
          D. Exercise and Vesting of Options. Each option granted under this
Article Four shall be immediately exercisable for any or all of the option
shares. However, any unvested shares purchased under the option shall be subject
to repurchase by the Corporation, at the lower of (i) the exercise price paid
per share or (ii) the Fair Market Value per share of Common Stock at the time of
repurchase, upon the Optionee’s cessation of Service prior to vesting in those
shares. The shares subject to each initial ten thousand (10,000)-share-or-less
grant shall vest, and the Corporation’s repurchase right shall lapse, in four
(4) successive equal annual installments upon the Optionee’s completion of each
year of service as a non-employee Board member over the four (4)-year period
measured from the option grant date. The shares subject to each annual three
thousand (3,000)-share-or-less grant made to a non-employee Board member for his
or her continued Board service shall vest, and the Corporation’s repurchase
right shall lapse, in one installment upon the earlier of (i) the Optionee’s
completion of one (1)-year of service as a non-employee Board member measured
from the grant date or (ii) the Optionee’s continuation in such Board service
through the day immediately preceding the next annual shareholders meeting
following such grant date.
          E. Vesting of Restricted Stock Units and Issuance of Shares. Each
restricted stock unit award for up to three thousand (3,000) shares shall vest
in a series of four (4) successive equal annual installments upon the
individual’s completion of each year of service as a non-employee Board member
over the four (4)-year period measured from the date that award is made. Each
restricted stock unit award for up to one thousand (1,000) shares shall vest in
one installment upon the earlier of (i) the individual’s completion of one
(1)-year of service as a non-employee Board member measured from the date that
award is made or (ii) the individual’s continuation in such Board service
through the day immediately preceding the next annual shareholders meeting
following such grant date. However, each restricted stock unit award held by an
individual under the Automatic Grant Program will immediately vest in full upon
his or her cessation of Board service by reason of death or Permanent
Disability. As the restricted stock units under the Automatic Grant Program vest
in one or more installments, the shares of Common Stock underlying those vested
units shall be promptly issued.
          F. Limited Transferability of Options. Each option under this
Article Four may be assigned in whole or in part during the Optionee’s lifetime
to one or more of his or her Family Members or to a trust established
exclusively for the Optionee and/or one or more such Family Members, to the
extent such assignment is in connection with the Optionee’s estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the

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person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate. The Optionee may also designate one or more persons as the
beneficiary or beneficiaries of his or her outstanding options under this
Article Four, and the options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee’s death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee’s death.
          G. Termination of Service. The following provisions shall govern the
exercise of any options held by the Optionee at the time the Optionee ceases
Service:
               (i) The Optionee (or, in the event of Optionee’s death while
holding the option, the personal representative of the Optionee’s estate or the
person or persons to whom the option is transferred pursuant to the Optionee’s
will or the laws of inheritance or the designated beneficiary or beneficiaries
of such option) shall have a twelve (12)-month period following the date of such
cessation of Service in which to exercise such option.
               (ii) During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares of
Common Stock for which the option is exercisable at the time of the Optionee’s
cessation of Service. However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may, during the
twelve (12)-month exercise period following such cessation of Board service, be
exercised for any or all of those shares as fully vested shares of Common Stock.
               (iii) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall, immediately
upon the Optionee’s cessation of Service for any reason (other than cessation of
Board service by reason of death or Permanent Disability), terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.

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     II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
          A. In the event of any Change in Control while the individual remains
in Service, the following provisions shall apply:
          (i) Should a Change in Control occur prior to the Optionee’s cessation
of Service, then the shares of Common Stock at the time subject to each
outstanding option held by such Optionee under this Automatic Grant Program but
not otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the option shares as fully vested shares of Common Stock and
may be exercised for any or all of those vested shares. Immediately following
the consummation of the Change in Control, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) or otherwise continued in effect
pursuant to the terms of the Change in Control transaction.
          (ii) The shares of Common Stock which are at the time of such Change
in Control subject to any outstanding restricted stock units awarded to such
individual under the Automatic Grant Program shall, immediately prior to the
effective date of the Change in Control, vest in full and be issued to such
individual as soon as administratively practicable thereafter, but in no event
later than fifteen (15) business days.
          B. In the event of a Hostile Take-Over while the individual remains in
Service, the following provisions shall apply:
          (i) The shares of Common Stock at the time subject to each outstanding
option held by such Optionee under this Automatic Grant Program but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Hostile Take-Over, become
exercisable for all the option shares as fully vested shares of Common Stock and
may be exercised for any or all of those vested shares. Each such option shall
remain exercisable for such fully vested option shares until the expiration or
sooner termination of the option term.
          (ii) The shares of Common Stock which are at the time of the Hostile
Take-Over subject to any restricted stock units awarded to such individual under
this Automatic Grant Program shall, immediately prior to the effective date of
the Hostile Take-Over, vest in full and be issued to such individual as soon as
administratively practicable thereafter, but in no event later than fifteen (15)
business days.

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          C. All outstanding repurchase rights under this Automatic Grant
Program shall automatically terminate, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control or Hostile Take-Over.
          D. Each option which is assumed in connection with a Change in Control
or otherwise continued in effect shall be appropriately adjusted, immediately
after such Change in Control, to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, provided the aggregate exercise
price payable for such securities shall remain the same. To the extent the
actual holders of the Corporation’s outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Change in Control,
the successor corporation may, in connection with the assumption or continuation
of the outstanding options under the Automatic Grant Program, substitute one or
more shares of its own common stock with a fair market value equivalent to the
cash consideration paid per share of Common Stock in such Change in Control
transaction.
     III. REMAINING TERMS
          The remaining terms of each grant shall be the same as the terms in
effect for option grants made under the Discretionary Grant Program, including
the prohibition on repricing contained in Section V of Article Two.
     IV. ALTERNATIVE AWARDS
          The Compensation Committee shall have full power and authority to
award, in lieu of one or more initial or annual automatic option grants under
this Article Four, unvested shares of Common Stock or restricted stock units
which in each instance have an aggregate Fair Market Value substantially equal
to the fair value (as determined for financial reporting purposes in accordance
with Financial Accounting Standard 123R or any successor standard) of the
automatic option grant which such award replaces. Any such alternative award
shall be made at the same time the automatic option grant or restricted stock
unit award which it replaces would have been made, and the vesting provisions
(including vesting acceleration) applicable to such award shall be substantially
the same as in effect for the automatic option grant or restricted stock unit
award so replaced.

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ARTICLE FIVE
MISCELLANEOUS
     I. TAX WITHHOLDING
          A. The Corporation’s obligation to deliver shares of Common Stock upon
the issuance, exercise or vesting of an Award under the Plan shall be subject to
the satisfaction of all applicable income and employment tax withholding
requirements.
          B. The Plan Administrator may, in its discretion, provide any or all
Optionees and Participants to whom Awards are made under the Plan (other than
the Awards made under the Automatic Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such individuals may become subject in connection with the issuance, exercise or
vesting of those Awards. Such right may be provided to any such holder in either
or both of the following formats:
               Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the issuance, exercise
or vesting of such Award, a portion of those shares with an aggregate Fair
Market Value equal to the percentage of the Withholding Taxes (not to exceed one
hundred percent (100%)) designated by such individual. The shares of Common
Stock so withheld shall reduce the number of shares of Common Stock authorized
for issuance under the Plan.
               Stock Delivery: The election to deliver to the Corporation, at
the time of the issuance, exercise or vesting of the Award, one or more shares
of Common Stock previously acquired by such holder (other than in connection
with the issuance exercise or vesting of the shares triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
individual. The shares of Common Stock so delivered shall not be added to the
shares of Common Stock authorized for issuance under the Plan.
     II. SHARE ESCROW/LEGENDS
          Unvested shares may, in the Plan Administrator’s discretion, be held
in escrow by the Corporation until the Participant’s interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
     III. EFFECTIVE DATE AND TERM OF THE PLAN
          A. The Plan shall become effective on the Plan Effective Date.

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          B. The Plan shall serve as the successor to the Predecessor Plans, and
no further option grants or stock issuances shall be made under the Predecessor
Plans if this Plan is approved by the stockholders at the 2006 Annual Meeting.
Such stockholder approval be obtained, then all options outstanding under the
Predecessor Plans at the time of the 2006 Annual Meeting shall be transferred to
this Plan.
          C. The Plan shall terminate upon the earliest to occur of
(i) February 22, 2016, (ii) the date on which all shares available for issuance
under the Plan shall have been issued as fully vested shares or (iii) the
termination of all outstanding Awards in connection with a Change in Control.
Should the Plan terminate on February 22, 2016, then all Awards outstanding at
that time shall continue to have force and effect in accordance with the
provisions of the documents evidencing those Awards.
     IV. AMENDMENT OF THE PLAN
          A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
Awards at the time outstanding under the Plan unless the Optionee or the
Participant consents to such amendment or modification. In addition, amendments
to the Plan will be subject to stockholder approval to the extent required under
applicable law or regulation or pursuant to the listing standards of the stock
exchange (or the Nasdaq National Market) on which the Common Stock is at the
time primarily traded.
          B. The Compensation Committee of the Board shall have the
discretionary authority to adopt and implement from time to time such addenda or
subplans to the Plan as it may deem necessary in order to bring the Plan into
compliance with applicable laws and regulations of any foreign jurisdictions in
which grants or awards are to be made under the Plan and/or to obtain favorable
tax treatment in those foreign jurisdictions for the individuals to whom the
grants or awards are made.
          C. Awards may be made under the Plan that involve shares of Common
Stock in excess of the number of shares then available for issuance under the
Plan, provided no shares shall actually be issued pursuant to those Awards until
the number of shares of Common Stock available for issuance under the Plan is
sufficiently increased by shareholder approval of an amendment of the Plan
authorizing such increase. If shareholder approval is required and is not
obtained within twelve (12) months after the date the first excess Award is
made, then all Awards granted on the basis of such excess shares shall terminate
and cease to be outstanding.
     V. USE OF PROCEEDS
          Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

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     VI. REGULATORY APPROVALS
          A. The implementation of the Plan, the grant of any Award and the
issuance of shares of Common Stock in connection with the issuance, exercise or
vesting of any Award made under the Plan shall be subject to the Corporation’s
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the Awards made under the Plan and the shares
of Common Stock issuable pursuant to those Awards.
          B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of applicable securities laws, including the filing
and effectiveness of the Form S-8 registration statement for the shares of
Common Stock issuable under the Plan, and all applicable listing requirements of
any Stock Exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
     VII. NO EMPLOYMENT/SERVICE RIGHTS
          Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person’s Service at any time for any reason, with or without
cause.

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APPENDIX
          The following definitions shall be in effect under the Plan:
          A. Annual Meeting shall mean the annual meeting of the Corporation’s
shareholders.
          B. Automatic Grant Program shall mean the automatic option grant
program in effect under Article Four of the Plan.
          C. Award shall mean any of the following stock or stock-based awards
authorized for issuance or grant under the Plan: stock option, stock
appreciation right, direct stock issuance, restricted stock or restricted stock
unit award or other stock-based award.
          D. Board shall mean the Corporation’s Board of Directors.
          E. Change in Control shall mean a change in ownership or control of
the Corporation effected through any of the following transactions:
          (i) a merger, consolidation or other reorganization approved by the
Corporation’s shareholders, unless securities representing more than fifty
percent (50%) of the total combined voting power of the voting securities of the
successor corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the Corporation’s outstanding voting securities immediately
prior to such transaction,
          (ii) a shareholder-approved sale, transfer or other disposition
(including in whole or in part through one or more licensing arrangements) of
all or substantially all of the Corporation’s assets, or
          (iii) the closing of any transaction or series of related transactions
pursuant to which any person or any group of persons comprising a “group” within
the meaning of Rule 13d-5(b)(1) of the 1934 Act (other than the Corporation or a
person that, prior to such transaction or series of related transactions,
directly or indirectly controls, is controlled by or is under common control
with, the Corporation) becomes directly or indirectly the beneficial owner
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing (or
convertible into or exercisable for securities possessing) more than fifty
percent (50%) of the total combined voting power of the Corporation’s securities
(as measured in terms of the power to vote with respect to the election of Board
members) outstanding immediately after the consummation of such transaction or

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series of related transactions, whether such transaction involves a direct
issuance from the Corporation or the acquisition of outstanding securities held
by one or more of the Corporation’s existing shareholders.
          F. Code shall mean the Internal Revenue Code of 1986, as amended.
          G. Common Stock shall mean the Corporation’s common stock.
          H. Compensation Committee shall mean the Compensation Committee of the
Board comprised of two (2) or more non-employee Board members.
          I. Corporation shall mean American Shared Hospital Services, a
California corporation, and any corporate successor to all or substantially all
of the assets or voting stock of American Shared Hospital Services which has by
appropriate action assumed the Plan.
          J. Discretionary Grant Program shall mean the discretionary grant
program in effect under Article Two of the Plan pursuant to which stock options
and stock appreciation rights may be granted to one or more eligible
individuals.
          K. Eligible Director shall mean a non-employee Board member eligible
to participate in the Automatic Grant Program in accordance with the eligibility
provisions of Articles One and Four.
          L. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary, whether now existing or subsequently
established), subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.
          M. Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.
          N. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
          (i) If the Common Stock is at the time traded on the NASDAQ National
Market, then the Fair Market Value shall be the closing selling price per share
of Common Stock at the close of regular hours trading (i.e., before after- hours
trading begins) on the NASDAQ National Market on the date in question, as such
price is reported by the National Association of Securities Dealers. If there is
no closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.

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          (ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock at the close of regular hours trading (i.e., before after-hours
trading begins) on the date in question on the Stock Exchange determined by the
Plan Administrator to be the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
          O. Family Member means, with respect to a particular Optionee or
Participant, any child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law.
          P. Hostile Take-Over shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
          (i) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time the Board approved such election or nomination, or
          (ii) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation’s outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation’s shareholders which
the Board does not recommend such shareholders to accept.
          Q. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
          R. Involuntary Termination shall mean the termination of the Service
of any individual which occurs by reason of:
          (i) such individual’s involuntary dismissal or discharge by the
Corporation (or any Parent or Subsidiary) for reasons other than Misconduct, or

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          (ii) such individual’s voluntary resignation following (A) a change in
his or her position with the Corporation (or any Parent or Subsidiary) which
materially reduces his or her duties and responsibilities or the level of
management to which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual’s place of employment by
more than fifty (50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation (or any Parent or Subsidiary) without
the individual’s consent.
          S. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not in any way preclude or restrict the right of the Corporation (or any
Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other
person in the Service of the Corporation (or any Parent or Subsidiary) for any
other acts or omissions, but such other acts or omissions shall not be deemed,
for purposes of the Plan, to constitute grounds for termination for Misconduct.
          T. 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
          U. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
          V. Optionee shall mean any person to whom an option is granted under
the Discretionary Grant or Automatic Grant Program.
          W. Parent shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
          X. Participant shall mean any person who is issued shares of Common
Stock or restricted stock units or other stock-based awards under the Stock
Issuance Program.
          Y. Permanent Disability or Permanently Disabled shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Grant
Program, Permanent Disability or Permanently Disabled shall mean the

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inability of the non-employee Board member to perform his or her usual duties as
a Board member by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
          Z. Plan shall mean the Corporation’s 2006 Stock Incentive Plan, as set
forth in this document.
          AA. Plan Administrator shall mean the particular entity, whether the
Compensation Committee, the Board or the Secondary Board Committee, which is
authorized to administer the Discretionary Grant and Stock Issuance Programs
with respect to one or more classes of eligible persons, to the extent such
entity is carrying out its administrative functions under those programs with
respect to the persons under its jurisdiction.
          BB. Plan Effective Date shall mean the date on which the Plan is
approved by the shareholders at the 2006 Annual Meeting.
          CC. Predecessor Plans shall mean (i) the Corporation’s 2001 Stock
Option Plan and (ii) the Corporation’s 1995 Stock Option Plan, as each such Plan
is in effect immediately prior to the 2006 Annual Meeting.
          DD. Secondary Board Committee shall mean a committee of one or more
Board members appointed by the Board to administer the Discretionary Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
          EE. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
          FF. Service shall mean the performance of services for the Corporation
(or any Parent or Subsidiary, whether now existing or subsequently established)
by a person in the capacity of an Employee, a non-employee member of the board
of directors or a consultant or independent advisor, except to the extent
otherwise specifically provided in the documents evidencing the option grant or
stock issuance. For purposes of the Plan, an Optionee or Participant shall be
deemed to cease Service immediately upon the occurrence of the either of the
following events: (i) the Optionee or Participant no longer performs services in
any of the foregoing capacities for the Corporation or any Parent or Subsidiary
or (ii) the entity for which the Optionee or Participant is performing such
services ceases to remain a Parent or Subsidiary of the Corporation, even though
the Optionee or Participant may subsequently continue to perform services for
that entity. Service shall not be deemed to cease during a period of military
leave, sick leave or other personal leave approved by the Corporation; provided,
however, that should such leave of absence exceed three (3) months, then for
purposes of determining the period within which an Incentive Option may be
exercised as such under the federal tax laws, the Optionee’s Service shall be
deemed to cease on the first day immediately following the expiration of such
three (3)-month period, unless Optionee is provided with the right to return to

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Service following such leave either by statute or by written contract. Except to
the extent otherwise required by law or expressly authorized by the Plan
Administrator or by the Corporation’s written policy on leaves of absence, no
Service credit shall be given for vesting purposes for any period the Optionee
or Participant is on a leave of absence.
          GG. Stock Exchange shall mean either the American Stock Exchange or
the New York Stock Exchange.
          HH. Stock Issuance Agreement shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
          II. Stock Issuance Program shall mean the stock issuance program in
effect under Article Three of the Plan.
          JJ. Subsidiary shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
          KK. 10% Shareholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
          LL. Withholding Taxes shall mean the applicable income and employment
withholding taxes to which to which the Optionee or Participant may become
subject in connection with the issuance, exercise or vesting of the Award made
to him or her under the Plan.

A-6.