Document:

Employment Agreement

 

EXHIBIT
10.1

EMPLOYMENT AGREEMENT

          THIS AGREEMENT (“Agreement”) is made as of November 21, 2005 between Spanish
Broadcasting System, Inc., a corporation existing under the laws of Delaware with offices
located at 2601 South Bayshore Drive, PH #2, Coconut Grove, Florida 33133 (“SBS”), and
Cynthia Hudson-Fernandez (hereinafter referred to as “Employee”), an individual whose
principal place of residence and mailing address is 9025 SW 59th Court, Pinecrest,
FL 33156.

RECITALS

          WHEREAS, SBS is the owner and/or operator of certain Spanish-language radio stations
serving key Hispanic markets throughout the country; and

          WHEREAS, SBS plans to expand its business to include production and distribution of
Spanish language television programming through the acquisition of one or more television
stations including WSBS-TV in Miami, Florida (the “Miami Station”) and elsewhere; and

          WHEREAS, SBS also owns and operates La Musica.com, a Spanish-language Internet portal
and other internet websites (“New Media”); and

          WHEREAS, SBS wishes to engage Employee, and Employee wishes to become engaged to perform
services for SBS as Executive Vice President and Chief Creative Officer of the Miami Station
and New Media during the term of and pursuant to the terms and conditions set forth in this
Agreement;

          NOW THEREFORE, in consideration of the promises and the mutual covenants contained
herein, the parties understand and agree as follows:

     1. Employment. Employee shall be employed to perform services as Executive Vice
President and Chief Creative Officer for the Miami Station and New Media. Employee shall
report to and be directed by SBS’ Chief Executive Officer (“CEO”) and/or his designee.
Employee’s services will be rendered subject to and in accordance with the policies, controls,
rules and procedures of SBS, and Employee shall be based in Miami, Florida during the Term of
this Agreement.

     2. Specific Duties and Services. Employee shall devote all of her business
time, effort and energy exclusively to the business of SBS and the Miami Station and New
Media, and shall not serve as an active principal or a director, officer, employee or
consultant of any other company or entity or undertake any duties or projects not directly
related to the businesses referenced above without the prior written consent of SBS’ CEO.
Notwithstanding the foregoing, the parties agree that Employee owns prior copyrighted work, as
detailed in Schedule 6.1 attached hereto as Exhibit B, and incorporated herein (the “Excluded
Intellectual Property”), which may be sold during the term of this Agreement, and that such
work does not form part of this Agreement, and is owned solely by Employee and the Companies
(as defined in paragraph 6

 

 

herein). Employee shall be responsible for: administrative oversight of the Miami Station and New
Media; overseeing content conceptualization, creation, production, distribution and development
planning for the Miami Station; formulating and implementing strategies for the synergistic sharing
of content among the various SBS units, particularly radio and television; utilizing and
repackaging of proprietary content for the explicit purpose of creating new business opportunities,
particularly for New Media and/or other technological applications; achieving scale through
increased outlets/distribution; exploiting all available internal (SBS) and external modes of
promoting and advancing SBS’ proprietary content, including industry functions; and implementing
sales strategies designed to maximize profitability. It is agreed and understood that only the
department heads, managers and directors of the various divisions comprising the Miami Station and
New Media will have direct reporting responsibilities to the EVP/CCO of SBS.

     3. Term. The term of this agreement shall be from January 3, 2006 through and
including July 2, 2006 (the “Initial Term”); provided however, that the Company shall have the
option, at its sole discretion, of extending the Initial Term for an additional period of two and a
half years commencing July 3, 2006 through and including January 2, 2009 (the “Option Term”) by
providing written notice of such to Employee before the expiration of the Initial Term. If the
Company decides not to extend the Initial Term, the Company shall pay Employee a lump sum severance
payment in an amount equal to six (6) months of salary as such salary in detailed in Exhibit A. In
addition to the foregoing, Company shall have the option, at its sole discretion, of extending the
Option Term for an additional one (1) year period (the “Renewal Term”) by providing Employee
written notice of such to Employee six (6) months before the expiration of the Option Term. For
sake of convenience only, the Initial Term, the Option Term and the Renewal Term are hereinafter
collectively referred to herein as the (“Term”).

     4. Compensation and Benefits.

          (a) Base Salary: See Compensation Rider “Exhibit A” attached hereto and made
a part hereof.

          (b) Bonus Compensation: See Compensation Rider “Exhibit A” attached hereto and made
a part hereof.

          (c) Employee Stock Options: See Compensation Rider “Exhibit A” attached hereto
and made a part hereof.

          (d) Benefits. Upon execution of this Agreement, Employee shall be provided
comparable health care coverage, vacation four (4) weeks vacation, sick leave, and a personal
assistant chosen by the Employee with an initial base salary not to exceed $ 45,000.00 US Dollars,
eligibility to participate in the company’s 401(k) and other benefits extended to management level
employees of SBS; however the personal assistant to be chosen shall not be entitled to management
level benefits.

          
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          (e) Expenses. SBS shall reimburse Employee for reasonable business and
entertainment expenses that she incurs including a cell phone and its monthly usage charges,
subject to the approval of SBS’s CFO, which approval shall not be unreasonably withheld.

          (f) Business Travel. Any airline travel required by Employee in her
representation of the Company shall be booked exclusively through SBS’ corporate office in business
class with no cost to Employee.

     5. Covenants.

          (a) Restrictive Covenant. During the Term, and for a period of twelve (12) months
after the earlier termination of this Agreement for any reason, Employee shall not render services
in any capacity, including but not limited to rendering services as corporate officer or executive,
general manager, sales manager, account executive, on-air talent, host, producer, program director,
program executive or consultant, of any media entity or network (including radio, television,
cable, internet, satellite, wireless), for any “Competitive Business,” (i) in any area in which SBS
owns, leases or programs a media outlet, at any time during Employee’s employment with SBS (the
“Territory”) and (ii) that broadcasts or transmits its content primarily in the Spanish-language.
Competitive Business shall also include all over-the-air, satellite, cable and Internet radio and
television providers. It is specifically understood by Employee that SBS, the SBS Stations and
SBS-affiliated television facilities or stations, if any, within the Territory are intended
beneficiaries of the restrictive covenants contained in this Section.

          The parties agree that it will be deemed a violation of this section for Employee to render
services, directly or indirectly, to any company that is in the business of owning, leasing or
programming radio or television stations that broadcast primarily in the Spanish language, if
Employee’s duties or activities include responsibility for or relate in any significant manner to
one or more of that company’s stations that are competitive with one or more of the SBS Stations.

          Notwithstanding the foregoing, it is agreed and understood that this restrictive covenant
does not apply to the Initial Term of this Agreement. In addition, as compensation for this
restrictive covenant, if Employee is terminated under this Agreement, after the Initial Term, by
the Company for any reason except termination for death, the Company will (a) pay a lump-sum
severance in an amount equal to one (1) year of the Employee’s then current salary as set forth in
Exhibit A and any bonus earned at the time of termination.

          (b) Solicitation or Interference. During the term of this Agreement or for a period
of twelve (12) months after the earlier termination hereof by either party for any reason, Employee
shall not:

               (i) in any manner hire, attempt to hire or otherwise induce any employee, agent,
representative, customer, former customer, or any other person or concern, dealing with or in any
way, directly or indirectly, associated with SBS or the SBS Stations, to terminate such dealings
or association nor;

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               (ii) do anything, directly or indirectly, to interfere in any fashion with such relationship
between SBS or the SBS Stations, on the one hand, and any such person or concern, on the other.

          (c) Non-Disclosure of Proprietary Information. Employee shall not disclose the
trade secrets or confidential and proprietary information of SBS or SBS Stations (“Confidential
Information”), whether during the employment term or thereafter. The parties understand and
agree, moreover, that nothing contained herein shall prevent Employee from disclosing: (1)
information required to be disclosed pursuant to compulsory legal process, provided that Employee
shall give SBS immediate notice of such process prior to disclosure; (2) information which was in
Employee’s lawful possession at the time of or prior to its submission to Employee by SBS; or (3)
information which is in the public domain. For purposes of this paragraph, Confidential
Information shall mean information which is treated as confidential by SBS or any of the SBS
Stations, and is not generally known or available in or to the public.

          (d) SBS’s Right of First Refusal to Match Competing Offer. Without compromising in
any way SBS’s rights under this Section 5 or under law, SBS shall have a right of first refusal to
match all bona fide competing offers (and if Employee shall be ready, willing, and able to accept
such competing offer) for Employee’s services at any non-SBS entity wherever located (“competing
offers”) after the expiration of this Agreement. No less than forty-five days (45) prior to the
expiration of this Agreement, Employee shall provide to SBS written notification of the terms and
conditions of offers for her services after the expiration of this Agreement. No less than thirty
(30) days prior to the expiration of this Agreement SBS shall provide to Employee written
notification of whether it intends to match each and every material term of each and every bona
fide competing offer. If SBS declines to match each and every material term of a bona fide
competing offer, Employee shall be free to accept that competing offer and to begin employment
after the period of time as described in Section 3 has expired. The right of first refusal
contained in this Section 5(d) shall not apply to any conduct other than the performance of
“services” as defined in Section 1. For purposes of this Agreement, the phrase “material term”
shall mean any and all conditions of the engagement of Employee contained in or contemplated by,
this Agreement.

          (e) Employee Fidelity. Employee agrees that during the term of this Agreement
Employee will not, directly or through third-party intermediaries, initiate or invite contact with,
or solicit or entertain offers or proposals of employment from, employers that compete with SBS or
the SBS Stations, wherever located. Employee expressly acknowledges that a breach of this covenant
of fidelity shall constitute grounds for termination for cause under Section 10.

          (f) Injunctive Relief. Employee acknowledges that by virtue of her position with SBS,
Employee will be given access to SBS’s and the SBS Stations’ trade secrets and Confidential
Information. Employee further acknowledges that any breach of this Section 5 shall cause
irreparable injury to SBS and the SBS Stations, and that in the event of such breach SBS and the
SBS Stations shall be entitled to temporary and permanent injunctive relief against Employee and
any persons or entities acting in concert with Employee in addition to any other legal and
equitable remedies to which SBS and the SBS Stations may be entitled. Employee

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further acknowledges that the covenants contained in this Section 5 are reasonable and necessary
to protect the legitimate business interests, trade secrets and Confidential Information of SBS
and the SBS Stations, that SBS and the SBS Stations expend significant time and expense in
developing and protecting their trade secrets and Confidential Information, and that SBS’
willingness to employ Employee is contingent upon Employee agreeing to this Section 5.

          (g) Construction and Survival. Employee hereby agrees that each provision in this
section shall be treated as a separate and independent clause, and the unenforceability of any one
clause shall in no way impair the enforceability of any of the other clauses herein. Moreover, if
one or more of the provisions contained in this Section 5 shall for any reason be held to be
excessively broad as to geography, time, activity or subject so as to be illegal or unenforceable
at law or equity, such provision or provisions shall be construed by the appropriate judicial body
by limiting and reducing it or them so as to be enforceable to the maximum extent comparable with
applicable law. It is the intent of the parties that this section be enforced to the greatest
extent allowable in law or equity. The terms of this Section 5, shall survive the termination or
expiration of Employee’s employment and this Agreement, but only to the extent of the time
limitations as set forth herein.

          (h) Possession of Confidential Information. Employee covenants that she has not
removed any confidential or trade secret documents from her prior employer, that she does not have
in her possession any such documents, and that she will not disclose to SBS or any of the SBS
Stations any trade secret or Confidential Information of her prior employer.

     6. Property Rights.

          (a) All broadcasts, airchecks, recordings, streamings or transmissions, prerecorded or
otherwise, whether by radio, television, internet, satellite, cable, wireless, or other electronic
media, of any and all programming of SBS or the SBS Stations’ and its commercials, data, copy,
written and recorded materials, as well as all recordings, characters, personalities, and all
content if applicable, created by Employee at any time during the term of this Agreement or any
extension thereof, including without limitation the Employee’s work product, are and shall be the
exclusive property of SBS and the SBS Stations (“Property Rights”). SBS and the SBS Stations own or
shall own all right, title and interest throughout the Universe in any of Employee’s and SBS’ and
the SBS Stations’ work product and all copyright, trademark and other intellectual property rights
in and related thereto (“Intellectual Property”). Programs, formats material, characters,
personalities and skits created by or for Employee during her employment with SBS may only be used
by Employee during the Term of this Agreement or any extension thereof, although SBS, as owner of
the Property Rights and Intellectual Property, may use them in any manner at any time in SBS’s sole
discretion. All documents or other tangible property and concepts or inventions, including
internet, television, and other electronic media, relating in any way to the business of SBS or the
SBS Stations which are conceived or generated by Employee or come into Employee’s possession during
or by virtue of her employment with SBS shall be and remain the property of SBS and the SBS
Stations. Employee must return all such documents and tangible property to SBS on termination of
this Agreement for any reason or at such earlier time as SBS may request in writing.

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          (b) Employee acknowledges and agrees that Employee is and has been retained by SBS to create
work product and on a work-made-for-hire basis for SBS. Insofar as the authorship and ownership of
all right, title and interest in and to any part of the work product and any portion of the
Intellectual Property are not deemed to vest in or be owned by SBS as a work-made-for-hire or by
operation of law or otherwise, Employee agrees to and hereby does during the term hereof assign,
sell, transfer, grant and convey to SBS (without the necessity of any further consideration,
documentation or further acts by either party) the entirety of whatever right, title and interest
Employee has in the Intellectual Property in any and in all media throughout the Universe and in
perpetuity. At SBS’ request, Employee shall execute any documents reasonably required by SBS to
confirm, establish, record, file applications for, renew or maintain SBS’ rights and ownership in
the Intellectual Property worldwide and will cooperate fully with SBS in connection with any or all
of these efforts.

          (c) Employee waives any right and claim Employee may have in any jurisdiction
throughout the Universe in or to any moral rights or rights of “droit moral” with respect to any
portion of the Intellectual Property and confirms that SBS shall have the right, in addition to
other rights and notwithstanding the termination of Employee’s employment for any reason, to make
or have made and to own enhancement, derivative works and other modifications to any
part of the Intellectual Property in any and all media in perpetuity.

          NOTWITHSTANDING THE FOREGOING, it is agreed and understood that the Employee is an inactive
shareholder in So Be It! Films, a film and production company and an inactive shareholder in
Hyphen Strategy Media, a Marketing and PR agency, both of which have certain proprietary creative
projects (“Projects”) including novella treatments and story ideas, film scripts, T.V. treatments
and book and magazine projects -all of which are set forth more fully in Schedule 6.1 herein
below-that are being represented by the above-mentioned Florida Corporations (the “Companies”) and
will remain the sole property of the Employee and the Companies.

     7. Resolution of Disputes.

          Employee acknowledges and agrees that the provisions of Section 6 are reasonable and
necessary for protection of SBS and the SBS Stations, and that SBS and the SBS Stations will be
irrevocably damaged if such provisions are not specifically enforced. Accordingly, money damages
from Employee’s breach of Section 6 would be difficult, if not impossible, to calculate and the
most appropriate relief in the event of Employee’s breach would be injunctive relief. Nothing
contained herein shall be deemed to prohibit SBS or the SBS Stations, for any such breach, from
instituting or prosecuting any other proceeding in any court of competent jurisdiction, in either
law or equity, to obtain damages for any breach of this Agreement. All remedies given to SBS and
the SBS Stations by this Agreement shall be construed as cumulative remedies and shall not be
alternative or exclusive remedies.

     8. Compliance with Section 508 of the Communications Act of 1934.

          Employee shall comply with the provisions of Section 508 of the Communications Act of
1934, as amended, in that she will not accept money or any valuable

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consideration, including services, for the broadcast of any matter by the Stations and in that
she will promptly complete the Annual Statement and Questionnaire and promptly return it to
SBS. Without limiting SBS’s right to terminate for any other cause, SBS shall have the right,
upon violation of this provision by Employee, immediately to terminate this Agreement and
Employee’s employment hereunder for cause.

     9. Termination.

     (a) Without Cause. SBS may terminate the Agreement, during the Option and Renewal
Terms, and Employee’s employment hereunder, without “Cause” (as defined below) at any time for any
reason upon written notice, in which event SBS shall pay to Employee in one lump sum, on the
effective date of such termination, as liquidated damages an the amount equivalent to twelve (12)
months of Employee’s then current Base Salary and any Bonuses earned to the date of Employee’s
notice of termination.

     (b) For Cause by SBS. SBS may terminate this Agreement, and Employee’s employment
hereunder, For Cause at any time upon two (2) week’s prior written notice (or in the alternative,
upon the tender of two (2) week’s Base Salary, less applicable withholdings, in lieu of such
written notice), in which event SBS’ sole obligations to Employee shall be to pay to Employee in
one lump sum, on the effective date of such termination, any unpaid Base Salary and any Bonuses
earned to the date of the termination.

     The term “For Cause” shall be defined to include, but shall not be limited to the
following:

     (i) death of Employee;

     (ii) Employee disability which prevents Employee from performing his duties
hereunder for twelve (12) consecutive weeks or for a total of sixteen (16) weeks in any
one-year period (a “Disability”);

     (iii) failure to comply with any of the material terms and conditions of this
Agreement;

     (iv) failure to perform any reasonable duties assigned to Employee by SBS’ CEO;

     (v) failure to comply with any rule, regulation, guideline or policy of the FCC or
other governmental agency with jurisdiction over SBS;

     (vi) repeated or sustained absence from her place of employment (not due to a
Disability or an SBS approved vacation or other absence or leave);

     (vii) conviction of any felony or misdemeanor, other than a traffic violation,
involving moral turpitude;

     (viii) engaging in “payola” or “plugola” practices;

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     (ix) use of illegal drugs or alcohol at any time on any property owned or leased
by SBS or any SBS Station;

     (x) broadcasting or transmitting, or allowing the broadcast or transmission, of any
obscene, prurient, indecent or highly inappropriate material, including the posting of any
such obscene, prurient, indecent or inappropriate material on the Miami Station or New Media
that have the effect of injuring third parties or subjecting SBS to public ridicule or
liability;

     (xi) any violation of company policies prohibiting harassment of any kind.

     10. Miscellaneous.

          (a) Assignment. SBS shall be entitled to assign this Agreement to any assignee;
provided, however, that such assignee must agree to be bound by the terms and conditions in this
Agreement. Employee may not assign her obligations under this Agreement.

          (b) Notice. Any notice or other communication under this Agreement shall be in writing
and shall be considered given when mailed by registered or certified mail, return receipt requested
or by a reputable overnight courier or service (i.e., Federal Express) to the parties at the
address set forth below (or any other such address as one party may specify by notice to the
other).

	 	 	 
	          As to SBS:

	 	Spanish Broadcasting System, Inc.
	 

	 	2601 South Bayshore Drive
	 

	 	Penthouse II
	 

	 	Coconut Grove, Florida 33133
	 

	 	Attn: James A. Cueva, Esq.
	 
	 	 
	 

	 	With a copy to:
	 
	 	 
	 

	 	Kaye Scholer LLP
	 

	 	425 Park Avenue
	 

	 	New York, NY 10022-3598
	 

	 	Attn: William Zifchak, Esq.
	 
	 	 
	As to Employee:

	 	Cynthia Hudson-Fernandez
	 

	 	9025 SW 59th Court,
	 

	 	Pinecrest, FL 33156
	 
	 	 
	With a copy to:

	 	Lissette B. Ortiz, P.A.
	 

	 	2121 Ponce de Leon Blvd, Ste 330
	 

	 	Coral Gables, FL 33134

          (c) No Waiver. The failure of either party hereto to object to the
failure on the part of the other party to perform any of the terms, provisions, or conditions of
this Agreement or

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to exercise any option or remedy herein given or to require at any time performance on the part of
the other party of any term, provision, or condition hereof, or any delay in doing so, or any
custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver
or modification thereof or of any subsequent breach of the same or a different nature nor affect
the validity of this Agreement or any part thereof nor the right of either party thereafter to
enforce the same not constitute a novation or laches.

          (d) Conformity to Law. If any one or more provisions of this Agreement should ever be
determined to be illegal, invalid, or otherwise unenforceable by a court of competent jurisdiction
or be invalid or invalidated or unenforceable by reason of any law or statute, then to the extent
and within the jurisdiction invalid or unenforceable, it shall be limited, construed or severed and
deleted therefrom, and the remaining portions of this Agreement shall survive, remain in full force
and effect, and continue to be binding and shall not be affected and shall be interpreted to give
effect to the intention of the parties insofar as that is possible.

          (e) Attorney’s Fees. In the event of any action involving this Agreement, the
prevailing party shall be entitled to reimbursement of its reasonable attorney’s fees and
disbursements, in addition to any damages.

          (f) Headings. The Headings used in this Agreement are for the convenience of the
parties and for reference purposes only and shall not form a part of or affect the interpretation
of this Agreement.

          (g) Construction. This Agreement shall be construed without regard to any presumption
or other rule requiring construction against the party causing this Agreement to be drafted, since
the attorneys for the respective parties have submitted revisions to the text hereof.

          (h) Governing Law. The validity of this Agreement, its interpretation and any
disputes arising from, or relating in any way to, this Agreement or the relationship of the
parties, shall be governed by the law of the State of Florida without regard to conflicts of law
principles thereof and any legal action relating to or arising out of this Agreement shall be
commenced and maintained exclusively in the State of Florida in any state court sitting in Dade
County, Florida. Employee submits to the exclusive personal jurisdiction of the Florida state
court for this purpose, and agrees not to contest the application of the substantive law of the
state of Florida to any dispute with SBS under this Agreement.

          (i) Entire Agreement. The Agreement shall constitute the entire agreement concerning
the subject matter hereof between the parties, superseding all previous agreements, memoranda of
understanding, negotiations, and representations made prior to the effective date of this
Agreement. This Agreement shall be modified or amended only by written agreement executed by
Employee and SBS.

          (j) Jury Trial Waiver. SBS AND EMPLOYEE SHALL AND HEREBY DO WAIVE A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTER-CLAIM BROUGHT OR ASSERTED BY EITHER OF THE PARTIES HERETO

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AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF THIS AGREEMENT.

          (k) Counterparts. This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed to be an original copy of this Agreement and all of
which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day
and year first written above.

	 	 	 	 	 	 	 
	 	 	SPANISH BROADCASTING SYSTEM, INC.	 	   
	 
	 	 	 	 	 	 
	 

	 	By:	 	        /s/
Raúl Alarcón, Jr.	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	        Raúl
Alarcón, Jr.	 	 
	 

	 	 	 	        President/CEO	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	        EMPLOYEE	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	        /s/ Cynthia Hudson-Fernandez	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	        Cynthia Hudson-Fernandez	 	 

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EXHIBIT A

COMPENSATION RIDER

Cynthia Hudson-Fernandez

     1. Base Salary: Upon execution of this Agreement by both parties, SBS shall pay
employee an annual salary in bi-weekly installments as follows (the “Base Salary”):

	 	 	 	 	 
	1st Year
	 	$	300,000	 
	2nd Year
	 	$	315,000	 
	3rd Year
	 	$	330,750	 

     2. Incentive Compensation: Employee shall be eligible for certain Incentive
Compensation as follows:

     A. SBS shall pay Employee a quarterly bonus of Twelve Thousand Five Hundred Dollars
($12,500) in each quarter during the Term of this Agreement only if the Miami Station’s
average prime time 18 to 49 ratings Monday through Sunday exceeds WJAN-TV Channel 41’s
average prime time 18 to 49 ratings Monday through Sunday in any one of the Nielsen Ratings
Sweeps periods (February, May, July or November sweeps periods each a “Sweep Period” and
collectively the “Sweeps Periods”) as reported in the Neilson Station Index published by
Nielsen Media Research (the “Nielsen Reports”); or if the Miami Station achieves a #3
ranking in Prime time Monday through Sunday among Spanish-language television stations in
the Miami-Ft. Lauderdale television market as reported by the Nielsen Reports at any time
during the Term of this Agreement; or

     B. SBS shall pay Employee a quarterly bonus of Thirty Seven Thousand Five Hundred
Dollars ($37,500) in each quarter during the Term of this Agreement only if the Miami
Station’s average prime time 18 to 49 ratings Monday through Sunday exceeds WSCV-TV Channel
51’s average prime time 18 to 49 ratings Monday through Sunday in any one of the Nielsen
Ratings Sweeps periods, or if the Miami Station achieves a #2 ranking in prime time Monday
through Sunday among Spanish-language television stations in the Miami-Ft. Lauderdale
television market as reported in the Neilson Reports at any time during the Term of this
Agreement; or

     C. SBS shall pay Employee a quarterly bonus of Fifty Thousand Dollars
($50,000) in each quarter during the Term of this Agreement only if the Miami Station’s
average prime time 18 to 49 ratings Monday through Sunday exceeds WLTV-TV Channel 23’s
average prime time 18 to 49 ratings Monday through Sunday in any one of the Nielsen Ratings
Sweeps periods, or if the Miami Station achieves a #1 ranking in prime time Monday through
Sunday among Spanish-language television stations in the Miami-Ft. Lauderdale television
market as reported in the Neilson Reports; and

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     D.
SBS shall pay Employee a one-time bonus of Fifty Thousand Dollars ($50,000) upon the successful launch of viable New Media units, which includes but is not limited to the revamping of
the existing La Musica.com website, revamping of existing station websites and new business
entities, as determined by SBS’ CEO in his sole discretion.

     E. For the avoidance of any doubt, the Incentive Compensation set forth in Paragraphs 2A, 2B,
and 2C hereinabove are not cumulative.

     3. Multi-Market Expansion

             A. Stock Options.

                         (i) Upon the successful multi-market expansion of SBS’ Miami Station (including, but not
limited to, cable, satellite or over-the-air broadcast) as determined by SBS’ CEO, in his sole
discretion, and the recommendation of SBS’ CEO to the Compensation Committee of SBS’s Board of
Directors (the “Compensation Committee”), Employee shall be eligible to receive, upon approval by
the Compensation Committee, stock options (“Options”), to purchase up to 25,000 shares of SBS
Class A Common Stock (the “Shares”) pursuant to the terms and conditions of SBS’s 1999 Stock
Option Plan. The Options shall have an exercise price equal to the closing price of the Shares on
the date on which the Compensation Committee approves the grant of such Option (the “Grant Date”).
Subject to the provisions in Paragraph 3.A.(ii) below, the Options shall vest one third l/3rd on
each anniversary date hereafter.

                         (ii) In the event the Initial Term, as defined in Paragraph 3 of this Agreement, is not
extended, or in the case Employee’s employment with the Company is terminated for any reason, all
unexercised options granted pursuant to Section 3.A.(ii) of this Exhibit, whether vested or
unvested, shall expire immediately and be rendered null and void.

             B. Salary Increase. In addition to the foregoing, upon the successful multi-market
expansion of SBS’ Miami Station (including, but not limited to, cable, satellite or over-the-air
broadcast) as determined by SBS’ CEO, in his sole discretion, and the recommendation of SBS’ CEO to
the Compensation Committee, SBS shall increase Employee’s Base Salary to Five Hundred Thousand
Dollars ($500,000) per year; provided however that in such case the bonuses referred to in
Paragraphs 2.A., 2.B., and 2.C. of this Exhibit shall be discontinued effective immediately upon
such increase in Base Salary.

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EXHIBIT B

Schedule 6.1

Excluded Intellectual Property Not Subject to this Employment Agreement

	 	 	 
	Novella Stories and Treatments:

	 	Reality Formats:
	 
	 	 
	1313 Ocean Drive

	 	SoBe Lives
	 
	 	 
	A Little Deceit

	 	Miami Girls
	 
	 	 
	The Fashion Wars

	 	A& M — reality Series
	 
	 	 
	625 Biscayne

	 	Love Guru
	 
	 	 
	Camelia

	 	How to Marry the Man of Your Dreams
	 
	 	 
	La Casa de Las Munecas

	 	The Bawl
	 
	 	 
	La Villana

	 	Maria Garza
	 
	 	 
	Beach Girls

	 	The Room Stylist
	 
	 	 
	The Sisterhood

	 	Latino Icons
	 
	 	 
	Blending In
	 	 
	 
	 	 
	Stolen Moments

	 	Trademarks Pending
	 
	 	 
	 

	 	Celebrate Latino Living Magazine
	 
	 	 
	Series/Film Treatments:

	 	Vaqueros
	 
	 	 
	Steven X

	 	SOMOS
	 
	 	 
	Valfierno- the man who stole the Mona Lisa

	 	Latino Icons
	 
	 	 
	Samantha’s Home Videos

	 	Fishi- Fashion
	 
	 	 
	Famous
	 	 
	 
	 	 
	Flesh
	 	 
	 
	 	 
	Runaways
	 	 
	 
	 	 
	The Dynamics
	 	 
	 
	 	 
	Melba Moore Biopicexv10w1

 

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.

 

 

     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.

3

 

     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

4

 

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.

5

 

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.

6

 

          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

7

 

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

8

 

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.

9

 

     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-

10

 

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

11

 

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

12

 

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

13

 

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

15

 

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

17

 

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

18

 

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.

20

 

               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

21

 

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.

23

 

          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

A-1.

 

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.

A-2.

 

          (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

A-3.

 

          (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

A-4.

 

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

A-5.

 

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.

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