AMERICAN SHARED HOSPITAL SERVICES, DEF 14A, 1995-08-31

AMERICAN SHARED HOSPITAL SERVICES
DEF 14A, 1995-08-31
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the registrant /x/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/x/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

American Shared Hospital Services
------------------------------------------------
(Name of Registrant as Specified in Its Charter)

American Shared Hospital Services
------------------------------------------------
(Name of Person Filing Proxy Statement)

Payment of filing fee (Check the appropriate box):
/x/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

Not applicable.
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(2) Aggregate number of securities to which transactions applies:

Not applicable.
-------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:

Not applicable.
------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

Not applicable.
------------------------------------------------------------------

/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.

(1) Amount previously paid:

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

(2) Form, schedule or registration statement no.:

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

(3) Filing party:

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

(4) Date filed:

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<PAGE> 2

[American Shared Hospital Services Letterhead]

Dear Shareholder:

On behalf of the Board of Directors, I cordially invite you to attend the
1995 Annual Meeting of Shareholders of American Shared Hospital Services (the
"Company") to be held at 9:00 a.m. (Pacific Time) on Friday, October 6, 1995 at
the Ritz-Carlton Hotel, located at 600 Stockton Street at California, San
Francisco, California.

At the Annual Meeting, you will be asked to consider and vote upon (1) the
election of six directors, (2) the Company's 1995 Stock Option Plan, (3) the
proposed grant of a non-qualified option to purchase 1,495,000 common shares,
without par value (the "Common Shares") to the Company's Chairman and Chief
Executive Officer, and (4) such other business as may properly come before the
Annual Meeting. The Notice of Meeting and Proxy Statement accompanying this
letter describe more fully the matters to be acted upon.

The Board of Directors has approved the 1995 Stock Option Plan and the
grant of a non-qualified option to purchase 1,495,000 Common Shares to the
Company's Chairman and Chief Executive Officer, subject to approval by the
Company's shareholders, and recommends that you vote "FOR" these items
(Proposals 2 and 3 in the Proxy Statement).

You are urged to carefully consider all the material in the Proxy Statement
and mark, sign, date and return the enclosed proxy as soon as possible,
regardless of whether you expect to attend the Annual Meeting. Your giving of a
proxy will not prevent you from voting in person at the Annual Meeting.

Very truly yours,

/s/ ERNEST A. BATES, M.D.
Ernest A. Bates, M.D.
Chairman and Chief Executive Officer

Dated: August 25, 1995
<PAGE> 3

AMERICAN SHARED HOSPITAL SERVICES
FOUR EMBARCADERO CENTER, SUITE 3620
SAN FRANCISCO, CALIFORNIA 94111-4155

NOTICE OF 1995 ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON OCTOBER 6, 1995

TO THE SHAREHOLDERS OF AMERICAN SHARED HOSPITAL SERVICES:

NOTICE IS HEREBY GIVEN that, pursuant to a call of the Board of Directors,
the 1995 Annual Meeting (the "Annual Meeting") of Shareholders of American
Shared Hospital Services, a California corporation (the "Company"), will be held
at the Ritz-Carlton Hotel, located at 600 Stockton Street at California, San
Francisco, California on Friday, October 6, 1995 at 9:00 a.m. (Pacific Time), to
consider and act upon the following matters, all as set forth in the Proxy
Statement.

1. ELECTION OF DIRECTORS. To elect the following six nominees to the Board
of Directors to serve until the next Annual Meeting of Shareholders and until
their successors are elected and have qualified.

<TABLE>
<S> <C>
Ernest A. Bates, M.D. John F. Ruffle
Willie R. Barnes Augustus A. White, III, M.D.
Willie L. Brown, Jr. Charles B. Wilson, M.D.
</TABLE>

2. 1995 STOCK OPTION PLAN. To consider and act upon the recommendation of
the Board of Directors to approve the Company's 1995 Stock Option Plan. Under
the 1995 Stock Option Plan, officers, key employees and non-employee directors,
consultants and advisors of the Company will be eligible to receive
non-qualified options and incentive stock options covering up to 330,000 Common
Shares.

3. GRANT OF OPTION. To consider and act upon the recommendation of the
Board of Directors to grant a non-qualified option to purchase 1,495,000 Common
Shares to the Company's Chairman and Chief Executive Officer in consideration of
his continued service to the Company and his personal guarantee of $6,500,000 of
indebtedness of the Company. The option will have a term of ten years and will
entitle the holder to acquire Common Shares at an initial exercise price of
$0.01 per share.

4. OTHER BUSINESS. To transact such other business and to consider and
take action upon any and all matters that may properly come before the Annual
Meeting and any and all adjournments thereof.

The Board of Directors knows of no matters, other than those set forth in
paragraphs (1), (2) and (3) above (discussed in greater detail in the
accompanying Proxy Statement), that will be presented for consideration at the
Annual Meeting.

The Board of Directors has fixed the close of business on August 22, 1995
as the record date for the determination of shareholders entitled to vote at the
Annual Meeting.

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE
DATE, SIGN AND MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED AS PROMPTLY AS
POSSIBLE. THE PROXY IS REVOCABLE AND WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IF YOU ATTEND THE MEETING. IN ORDER TO FACILITATE THE PROVISION OF
ADEQUATE ACCOMMODATIONS, PLEASE INDICATE ON THE PROXY WHETHER YOU PLAN TO ATTEND
THE MEETING IN PERSON.

By Order of the Board of Directors

/s/ WILLIE R. BARNES
WILLIE R. BARNES
Corporate Secretary

Dated: August 25, 1995
San Francisco, California
<PAGE> 4

AMERICAN SHARED HOSPITAL SERVICES
FOUR EMBARCADERO CENTER, SUITE 3620
SAN FRANCISCO, CALIFORNIA 94111-4115

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

PROXY STATEMENT
1995 ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 6, 1995
------------------------

INTRODUCTION

This Proxy Statement is being furnished to shareholders of American Shared
Hospital Services, a California corporation (the "Company"), in connection with
the solicitation of proxies by the Company's Board of Directors for use at the
1995 Annual Meeting of Shareholders scheduled to be held on Friday, October 6,
1995 and at any adjournment or adjournments thereof (the "Annual Meeting"). It
is anticipated that this Proxy Statement and the Proxy will first be sent to
shareholders on or about August 28, 1995.

The matters to be considered and voted upon at the Annual Meeting will be:

(1) To elect six persons to the Board of Directors to serve until the
next Annual Meeting of Shareholders and until their successors are elected
and have qualified.

(2) Approval of the Company's 1995 Stock Option Plan (the "Stock
Option Plan") providing for the issuance of options covering up to 330,000
Common Shares to officers, key employees and non-employee directors,
consultants and advisors of the Company.

(3) The grant of a non-qualified ten-year option to acquire for $0.01
per share 1,495,000 common shares, without par value (the "Common Shares")
to the Company's Chairman and Chief Executive Officer in consideration of
his continuing service to the Company and his personal guarantee of
$6,500,000 of indebtedness of the Company.

(4) To transact such other business as may properly be brought before
the Annual Meeting and any and all adjournments thereof.

Only shareholders of record at the close of business on August 22, 1995
(the "Record Date") are entitled to notice of and to vote at the Annual Meeting.

REVOCABILITY OF PROXIES

A proxy for use at the Annual Meeting is enclosed. Any shareholder who
executes and delivers such proxy may revoke it at any time prior to its use by
filing with the Secretary of the Company either written instructions revoking
such proxy or a duly executed proxy bearing a later date. Written notice of the
death of the person executing a proxy, before the vote is counted, is tantamount
to revocation of such proxy. A proxy may also be revoked by attending the Annual
Meeting and voting in person.

SOLICITATION OF PROXIES

This proxy solicitation is being made by the Board of Directors of the
Company. The expense of the solicitation will be paid by the Company. To the
extent necessary to assure sufficient representation at the Annual Meeting,
proxies may be solicited by any appropriate means by directors, officers,
regular employees of the Company and the stock transfer agent for the Common
Shares, who will not receive any additional compensation therefor. The Company
will request that banks, brokers and other fiduciaries solicit their customers
who own beneficially the Common Shares listed of record in names of nominees
and, although there is no formal arrangement to do so, the Company will
reimburse such persons the reasonable expenses of such solicitation. The Company
has engaged Shareholder Communications Corporation ("SCC") to
<PAGE> 5

distribute the proxy materials through the mail and, if the Company deems it
necessary, to contact shareholders by telephone to ensure sufficient
representation at the meeting. SCC will receive a flat fee for its services in
distributing the proxy materials and will be reimbursed for its related
out-of-pocket expenses. If, at the Company's direction, SCC makes follow-up
contacts with shareholders, SCC will receive additional compensation on a per
completed contact basis. The Company estimates that compensation paid to SCC for
its services will be approximately $8,000.

OUTSTANDING SECURITIES

The Board of Directors has fixed August 22, 1995 as the Record Date for the
determination of shareholders entitled to notice of, and to vote at, the Annual
Meeting. At the close of business on the Record Date, there were outstanding and
entitled to vote 3,870,401 Common Shares. The Common Shares are the only class
of securities entitled to vote at the Annual Meeting.

VOTE REQUIRED AND VOTING PROCEDURES

Each holder of Common Shares will be entitled to one vote, in person or by
proxy, for each share standing in its name on the books of the Company as of the
Record Date for the Annual Meeting on each of the matters duly presented for
vote at the Annual Meeting, except that under applicable California law the
1,191,000 Common Shares owned by the Company's Chairman and Chief Executive
Officer are not entitled to vote on Proposal No. 3. In connection with the
election of directors, shares are permitted to be voted cumulatively, if (i) a
shareholder present at the Annual Meeting has given notice at the Annual
Meeting, prior to the voting, of such shareholder's intention to vote its shares
cumulatively and (ii) the names of the candidates for whom such shareholder
desires to cumulate votes have been placed in nomination prior to the voting. If
a shareholder has given such notice, all shareholders may cumulate their votes
for candidates in nomination. Cumulative voting allows a shareholder to give one
nominee as many votes as is equal to the number of directors to be elected,
multiplied by the number of shares owned by such shareholder or to distribute
votes on the same principle between two or more nominees. In the election of
directors, the six candidates receiving the highest number of votes will be
elected directors of the Company. Discretionary authority to cumulate votes is
hereby solicited by the Board of Directors.

In connection with the solicitation by the Board of Directors of proxies
for use at the Annual Meeting, the Board of Directors has designated Ernest A.
Bates, M.D and Richard Magary as proxies. Common Shares represented by all
properly executed proxies will be voted at the Annual Meeting in accordance with
the instructions specified thereon. If no instructions are specified, the Common
Shares represented by any properly executed proxy will be voted FOR the (1)
election of the six nominees for the Board of Directors named herein, (2)
approval and adoption of the Stock Option Plan and (3) approval of the grant of
a non-qualified option to purchase 1,495,000 Common Shares to the Company's
Chairman and Chief Executive Officer.

The Board of Directors is not aware of any matters that will come before
the Annual Meeting other than as described above. However, if such matters are
presented, the named proxies will, in the absence of instructions to the
contrary, vote such proxies in accordance with the judgment of such named
proxies with respect to any such other matter properly coming before the Annual
Meeting.

A majority of the Common Shares outstanding on the Record Date must be
represented in person or by proxy at the Annual Meeting in order to constitute a
quorum for the transaction of business. Assuming the presence of a quorum, the
affirmative vote of the holders of a majority of the Common Shares represented
in person or by proxy and entitled to vote (which shares voting affirmatively
also constitute at least a majority of the required quorum) is required for the
approval of Proposals No. 2 and 3. While the 1,191,000 Common Shares
beneficially owned by the Company's Chairman and Chief Executive Officer are not
entitled to vote on Proposal No. 3, such shares will be counted to determine
whether a quorum is present.

A proxy submitted by a shareholder may indicate that all or a portion of
the Common Shares represented by such proxy are not being voted by such
shareholder with respect to a particular matter. This could occur, for example,
when a broker is not permitted to vote Common Shares held in street name on
certain matters in

2
<PAGE> 6

the absence of instructions from the beneficial owner of the such shares. The
Common Shares subject to any such proxy which are not being voted with respect
to a particular matter (the "non-voted shares") will be considered Common Shares
not present and entitled to vote on such matter, although such Common Shares may
be considered present and entitled to vote for other purposes and will count for
purposes of determining the presence of a quorum. In the election of directors,
the six nominees receiving the highest number of votes of Common Shares
represented in person or by proxy at the Annual Meeting will be elected
directors of the Company. Accordingly, non-voted shares will not affect the
outcome of the election of directors. With respect to Proposals No. 2 and 3,
abstentions will be treated as "no" votes, while non-voted shares will be
disregarded.

The Board of Directors has appointed Geraldine Zarbo of American Stock
Transfer & Trust Company, the registrar and transfer agent for the Common
Shares, or her designee, as the Inspector of Elections for the Annual Meeting.
The Inspector of Elections will determine the number of Common Shares
represented in person or by proxy at the Annual Meeting, whether a quorum
exists, the authenticity, validity and effect of proxies and will receive and
count the votes. The election of directors will not be by ballot unless a
shareholder demands election by ballot at the Annual Meeting before the voting
begins.

NO DISSENTERS' RIGHTS

Dissenters' rights will not be available under California law to any
shareholder voting against Proposals No. 2 and 3.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Shares as of August 10, 1995 of (i) each
person known to the Company to own beneficially 5% or more of the Common Shares,
(ii) each director of the Company, (iii) the chief executive officer and each
other executive officer named in the Summary Compensation Table, (iv) all
directors and executive officers as a group, and (v) each nominee for director
who is not currently a director.

<TABLE>
<CAPTION>
COMMON SHARES OWNED BENEFICIALLY
-----------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(2) PERCENT OF CLASS(8)
- ------------------------------------------------------- ----------------------- -------------------
<S> <C> <C>
Total Number of Shares................................. 3,870,401 100.0%
Ernest A. Bates, M.D.(1)............................... 1,191,000 30.8%
SunAmerica Inc. ....................................... 557,923(3) 14.0%
1 SunAmerica Center
Los Angeles, CA 90067
Lion Advisors.......................................... 381,135(4) 9.6%
1301 Avenue of the Americas
New York, NY 10019
General Electric Company............................... 225,000(5) 5.5%
c/o GE Medical Systems
20825 Swenson Drive
Waukesha, WI 53186
Willie R. Barnes(1).................................... 3,000(6) *
Willie L. Brown, Jr.(1)................................ 2,000(6) *
John F. Ruffle(1)...................................... 21,200(7) *
Augustus A. White, III, M.D.(1)........................ 14,000(6) *
Charles B. Wilson, M.D.(1)............................. 4,800(6) *
Craig K. Tagawa(1)..................................... 37,600(6) *
Senior Vice President --
Chief Financial Officer
</TABLE>

3
<PAGE> 7

- ---------------
* Less than 1%

(1) The address of each such individual is c/o American Shared Hospital
Services, Four Embarcadero Center, Suite 3620, San Francisco, California
94111-4155.

(2) Each person directly or indirectly has sole voting and investment power with
respect to the shares listed under this column as being owned by such
person.

(3) Based on information contained in the Schedule 13D dated May 17, 1995 and
filed with the Securities and Exchange Commission by SunAmerica Inc. and its
direct and indirect subsidiaries, Sun Life Insurance Company of America and
Anchor National Life Insurance Company, such entities own beneficially
557,923 Common Shares, including immediately exercisable warrants to acquire
116,436 Common Shares.

(4) Based on information contained in the Schedule 13D dated May 17, 1995 and
filed jointly with the Securities and Exchange Commission by Lion Advisors,
L.P. and AIF II, L.P., such entities own beneficially 381,135 Common Shares,
including immediately exercisable warrants to acquire 79,541 Common Shares.

(5) Represents immediately exercisable warrants to acquire 225,000 Common
Shares.

(6) Includes shares underlying options that are currently exercisable or which
will become exercisable within 60 days following August 10, 1995: Mr.
Barnes, 2,000 shares; Mr. Brown, 2,000 shares; Dr. White, 12,000 shares; Dr.
Wilson, 4,800 shares; Mr. Tagawa, 35,000 shares; Mr. Neally, 5,050 shares;
Mr. Pape, 8,000 shares; and Directors and Executive Officers as a group,
105,350 shares. The table does not include options granted under the 1995
Stock Option Plan.

(7) Mr. Ruffle was elected to the Board of Directors effective May 18, 1995.

(8) Shares that any person or group of persons is entitled to acquire upon the
exercise of options or warrants within 60 days after August 10, 1995 are
treated as issued and outstanding for the purpose of computing the percent
of the class owned by such person or group of persons but not for the
purpose of computing the percent of the class owned by any other person.

4
<PAGE> 8

PROPOSAL NO. 1

ELECTION OF DIRECTORS

BOARD OF DIRECTORS

The Company's Bylaws provide that there shall be not fewer than six nor
more than 11 directors and the exact number shall be fixed from time to time by
a resolution of the Board of Directors. The number of directors currently is
fixed at six.

The Board of Directors is proposing the persons named below for election to
the Board of Directors. Each of the persons identified below will be nominated
for election to serve until the next Annual Meeting of Shareholders and until
their successors shall be elected and qualified. Votes will be cast pursuant to
the enclosed proxy in such a way as to effect the election of each of the
persons named below or as many of them as possible under applicable voting
rules. If a nominee shall be unable or unwilling to accept nomination for
election as a director, it is intended that the proxy holders will vote for the
election of such substitute nominee, if any, as shall be designated by the Board
of Directors. Each of the nominees named below has notified the Board of
Directors that, if elected, he is willing to serve as a Director if elected.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES
NAMED BELOW. PROXIES RETURNED TO THE COMPANY WILL BE VOTED "FOR" THE NOMINEES
NAMED BELOW UNLESS OTHERWISE INSTRUCTED.

Set forth below is certain information regarding each of the nominees.

ERNEST A. BATES, M.D. has been a director, the Chairman of the Board and
Chief Executive Officer of the Company since it was incorporated in 1983. He
founded the Company's predecessor limited partnership in 1980. Dr. Bates is 58
years old.

WILLIE R. BARNES has been a director and Secretary of the Company since
1984. He has been a partner in the law firm of Musick, Peeler & Garrett since
June 1992, was in solo practice from February 1992 until June 1992, was a
partner in the law firm of Katten, Muchin, Zavis & Weitzman from March 1991
until January 1992, was a partner in the law firm of Wyman, Bautzer, Kuchel &
Silbert from April 1989 until its dissolution effective March 14, 1991, and was
a partner in the law firm of Manatt, Phelps, Rothenberg & Phillips from April
1979 until March 1989. Mr. Barnes is 63 years old.

WILLIE L. BROWN, JR. has been a director of the Company since 1984. He has
been a member of the Assembly of the State of California since 1964, was Speaker
of the Assembly from 1980 until May 1995, and was named Speaker Emeritus in May
1995. He is the sole proprietor of the Law Offices of Willie L. Brown, Jr. in
San Francisco, California, which began operations in 1978. He also is of counsel
to the law firm of Christensen, White, Miller, Fink & Jacobs in Los Angeles,
California since July 1994. Mr. Brown is 61 years old.

JOHN F. RUFFLE was elected a Director of the Company on May 18, 1995. He
retired in 1993 as Vice-Chairman of the Board of J.P. Morgan & Co. Incorporated.
He also is a Director of Bethlehem Steel Corporation; a Director of J.P.M.
Advisor Funds; a Director of Trident Corp.; a Trustee of the Johns Hopkins
University; a Trustee of the Overlook Hospital Foundation Summit, N.J.; and a
Trustee of the Madison, N.J. YMCA. He is a graduate of The Johns Hopkins
University, with an M.B.A. in finance from Rutgers University, and is a
Certified Public Accountant. Mr. Ruffle is 58 years old.

AUGUSTUS A. WHITE III, M.D. has been a director of the Company since 1990.
He has been a Professor of Orthopaedic Surgery at Harvard Medical School since
1978. He was Orthopaedic Surgeon-in-Chief at Beth Israel Hospital, Boston, MA
from 1978 to 1991. Dr. White is 58 years old.

CHARLES B. WILSON, M.D. has most recently been a director of the Company
since June 1993. He also was a director of the Company from March 1984 until
March 1989. He has been a Professor and Director of the Brain Tumor Research
Foundation at the University of California Medical Center, San Francisco since
1968,

5
<PAGE> 9

and from 1968 until April 1, 1994 was the Chief of its Department of
Neurosurgery. Dr. Wilson is 65 years old.

MEETINGS OF THE BOARD OF DIRECTORS

The Board of Directors of the Company held three (3) meetings during 1994,
and it took one action by Unanimous Written Consent. Dr. Bates attended all
three of the meetings. Each of the other directors attended (i) two (2) out of
the total three (3) meetings plus (ii) all meetings held by the respective
committees of the Board of which such director was a member.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has standing Audit, Compensation, Stock Option and Nominating
Committees, each of which is described below.

Members of the Audit Committee include Mr. Ruffle (Chairman) and Dr. White.
The purpose of the Audit Committee is to review the financial records of the
Company, to recommend to the Board of Directors the appointment of independent
auditors and to review the reports of such auditors. During 1994, the Audit
Committee held one meeting.

Members of the Compensation Committee include Dr. White (Chairman) and Mr.
Barnes. The function of the Compensation Committee is to recommend to the Board
of Directors the compensation of the Company's executive officers. The
Compensation Committee did not meet during 1994.

Dr. Bates (Chairman) and Mr. Ruffle are members of the Stock Option
Committee. The purpose of the Stock Option Committee is to administer the
Company's 1984 Stock Option Plan and 1995 Stock Option Plan, and to determine
recipients of awards pursuant to such plans and the terms of such awards. No
member of the Stock Option Committee received a discretionary grant or award
under an option plan of the Company while serving on such committee or during
the year preceding such service. There were no meetings of the Stock Option
Committee during 1994.

Members of the Nominating Committee include Willie L. Brown, Jr. (Chairman)
and Mr. Ruffle. The purpose of the Nominating Committee is to recommend
candidates for election to the Board of Directors. The Nominating Committee did
not meet during 1994. The Nominating Committee will consider nominations
submitted by shareholders. A shareholder who wishes to have a nomination for
director considered by such committee must submit the name of the nominee and a
brief description of such person's professional background. Such information
must be delivered in writing to the Company, attention Secretary, at its
principal executive offices on or prior to April 1 of a given year to be
considered in connection with the annual meeting to be held in such year.

DIRECTOR COMPENSATION

During 1994, non-employee directors were scheduled to receive an annual
retainer fee of $5,000 each. The non-employee directors agreed to defer payment
of the retainer fee during 1994, to assist the Company with its cash flow. The
1994 retainer fees were paid in February 1995. Non-employee directors also were
entitled to receive $1,000 for attendance in person at each regular and special
meeting of the Board of Directors. In addition, non-employee directors who were
members of a committee of the Board of Directors were entitled to receive $200
for attendance in person at each committee meeting. Non-employee directors are
not entitled to any fee for Board of Directors or committee meetings held by
conference telephone at which they are not present in person. Of the three Board
meetings held during 1994, one was a regular meeting which directors attended in
person, and three were special meetings which were held by conference telephone.
Non-employee directors also received reimbursement of expenses incurred in
attending meetings. No payment is made for attendance at meetings by any
director who is an employee of the Company.

6
<PAGE> 10

PROPOSAL NO. 2

APPROVAL OF 1995 STOCK OPTION PLAN

GENERAL

The Board of Directors is proposing for shareholder approval the 1995 Stock
Option Plan (the "1995 Plan"). The purposes of the 1995 Plan are to align the
interests of the Company's shareholders and recipients of options under the 1995
Plan by increasing the proprietary interest of such recipients in the Company's
growth and success and to advance the interests of the Company by attracting and
retaining officers, other key employees and non-employee directors, consultants
and advisors. Under the 1995 Plan, the Company may grant non-qualified stock
options and "incentive stock options" (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")). Non-qualified options
to purchase 4,000 Common Shares will also be granted automatically to
non-employee directors (up to an aggregate of 12,000 options granted to each
non-employee director under any plan of the Company) on the date of each annual
meeting of shareholders of the Company (including the Annual Meeting to which
this Proxy Statement relates) and, on the date a person first becomes a
non-employee director, such non-employee director will be granted a number of
options pro-rated for the period of time until the next annual meeting of
shareholders. Approximately six employees and five non-employee directors are
eligible to participate in the 1995 Plan. Any person who beneficially owns more
than 15% of the outstanding Common Shares shall not be eligible to participate
in the 1995 Plan. Reference is made to Exhibit A to this Proxy Statement for the
complete text of the 1995 Plan, which is summarized below.

Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR approval of the 1995 Plan. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR APPROVAL OF THE 1995 STOCK OPTION PLAN.

DESCRIPTION OF THE 1995 PLAN

Administration. The 1995 Plan will be administered by a committee of the
Board of Directors (the "Committee") consisting of not less than two directors
who are not eligible to receive discretionary awards under the 1995 Plan or any
other plan of the Company.

Subject to the express provisions of the 1995 Plan, and except for options
granted to non-employee directors, the Committee has the authority to select
eligible officers, other key employees and non-employee consultants and advisors
who will receive awards and determine all of the terms and conditions of each
award. All awards will be evidenced by a written agreement containing such
provisions not inconsistent with the 1995 Plan as the Committee shall approve.
No option may be transferred by the optionee other than by will or by the laws
of descent or distribution or pursuant to beneficiary designation procedures
specified in the 1995 Plan. Each option may be exercised during the lifetime of
the optionee only by such optionee. The Committee will determine when options
become exercisable.

The Committee will also have authority to prescribe rules and regulations
for administering the 1995 Plan and to decide questions of interpretation or
application of any provision of the 1995 Plan. Except with respect to grants to
executive officers of the Company, the Committee may delegate some or all of its
power and authority to administer the 1995 Plan to the Chief Executive Officer
or other executive officer of the Company.

Available Shares. Under the 1995 Plan, 330,000 Common Shares are available
for awards to officers, other key employees and non-employee directors,
consultants and advisors, subject to adjustment in the event of a stock split,
stock dividend, recapitalization, reorganization, merger or other similar event
or change in capitalization. In general, shares covered by an option that
expires or terminates unexercised or is cancelled or forfeited would again be
available for awards under the 1995 Plan.

On August 15, 1995, the Committee granted 275,500 non-qualified options to
certain officers of the Company and other eligible persons, subject to approval
of the Stock Option Plan by the Company's shareholders. The number of options
granted to key officers of the Company were: 90,000 to Craig K. Tagawa; 45,000
each to Gregory Pape, David Neally and Richard Magary; and 4,500 to James R.
Brock. Each such

7
<PAGE> 11

option has an initial exercise price of $1.625 per Common Share, which was the
closing price of the Common Shares on the American Stock Exchange on the date of
grant, and will vest immediately. At its meeting on August 15, 1995, the
Committee amended the terms of substantially all options outstanding under the
Company's 1984 Option Plan (covering an aggregate of approximately 165,000
Common Shares) to reduce the initial exercise price to $1.625 per Common Share,
which was the closing price of Common Shares on the American Stock Exchange on
such date.

Change in Control. In the event of certain acquisitions of 25% or more of
the Common Shares, a change in the majority of the Board of Directors, or the
approval by shareholders of a reorganization, merger or consolidation (unless
the Company's shareholders receive 60% or more of the stock of the surviving
company) or the approval by shareholders of a liquidation, dissolution or sale
of all or substantially all of the Company's assets, all awards will become
fully vested and be "cashed-out" by the Company except, in the case of a merger
or similar transaction in which the shareholders receive publicly traded common
stock, all outstanding options will become exercisable in full, and each option
will represent a right to acquire the appropriate number of shares of common
stock received in the merger or similar transaction.

Effective Date, Termination and Amendment. If approved by shareholders,
the 1995 Plan will become effective as of August 15, 1995 (the date of initial
option grants) and will terminate ten years thereafter, unless terminated
earlier by the Board of Directors. The Board of Directors may amend the 1995
Plan at any time except that, without the approval of the shareholders of the
Company, no amendment may, among other things, (i) increase the number of Common
Shares available under the 1995 Plan, (ii) reduce the minimum purchase price of
a Common Share subject to an option or (iii) extend the term of the 1995 Plan.

Non-Qualified Stock Options. The period for the exercise of a
non-qualified stock option and the option exercise price will be determined by
the Committee, provided that no option shall be exercisable later than ten years
after its date of grant. The exercise price of all non-qualified stock options
must be no less than 25% of the fair market value of the Common Shares on the
date of the grant.

In the event of termination of employment by reason of death or permanent
and total disability (as defined in Section 22(e)(3) of the Code), each
non-qualified stock option will become exercisable to the extent that the option
is exercisable on the effective date of such termination of employment for a
period of no more than one year after such date, but in no event after the
expiration of such option. In the event of termination of employment for any
other reason, each nonqualified stock option will be exercisable to the extent
it is exercisable on the effective date of such termination of employment for a
period of no more than three months after such termination, but in no event
after the expiration of such option. If a holder dies during the one-year period
following termination of employment by reason of permanent and total disability
or during the three-month period, if any, following termination of employment
for any other reason, each non-qualified stock option will be exercisable only
to the extent that such option was exercisable on the date of the holder's
death, and may thereafter be exercised for a period of no more than one year
from the date of death, but in no event after the expiration of such option.

Incentive Stock Options. No incentive stock option will be exercisable
more than ten years after its date of grant, unless the recipient of the
incentive stock option owns greater than ten percent of the voting power of all
shares of capital stock of the Company (a "ten percent holder"), in which case
the option must be exercised within five years after its date of grant. The
option exercise price of an incentive stock option will not be less than the
fair market value of the Common Shares on the date of grant of such option,
unless the recipient of the incentive stock option is a ten percent holder, in
which case the option exercise price will be the price required by the Code,
currently 110% of fair market value.

In the event of a termination of employment by reason of death or permanent
and total disability, each incentive stock option will be exercisable to the
extent that such option is exercisable on the date of termination of employment
for a period of no more than one year after such date, but in no event after the
expiration of the incentive stock option. In the event of a termination of
employment for any other reason, incentive stock options will be exercisable to
the extent exercisable on the date of termination of employment for a period of
three months after such date, but in no event after the expiration of the
incentive stock option. If the holder of an incentive stock option dies during
the one-year period following termination of employment

8
<PAGE> 12

by reason of permanent and total disability, or during the three-month period
following termination of employment for any other reason, each incentive stock
option will be exercisable only to the extent such option was exercisable on the
date of the holder's death, and may thereafter be exercised for a period of no
more than one year from the date of death, but in no event after expiration of
the incentive stock option.

Non-Employee Director Options. Beginning on the date of the Annual
Meeting, non-employee directors will automatically be granted, on the date of
each annual meeting of shareholders, non-qualified options to purchase 4,000
Common Shares (up to an aggregate of 12,000 options granted under any plan of
the Company) at an option exercise price equal to the fair market value of a
Common Share on the date of grant. Such options will be fully exercisable one
year after their date of grant and will expire ten years after the date of
grant.

If a non-employee director ceases to be a director by reason of death or
permanent and total disability, each option will become exercisable on the
effective date of such cessation for a period of no more than one year after
such date, but in no event after the expiration of the option. If a non-employee
director ceases to be a director for any other reason, each option will be
exercisable to the extent it is exercisable on the effective date of such
cessation for a period of no more than three months after such cessation, but in
no event after the expiration of such option. In the event a non-employee
director dies during the one-year period following cessation of his directorship
by reason of permanent and total disability or during the three-month period, if
any, following cessation of his directorship for any other reason, then each
option will be exercisable only to the extent that such option was exercisable
on the date of death, and may thereafter be exercised for a period of no more
than one year from the date of death, but in no event after the expiration of
such option.

STOCK OPTION PLAN TABLE

The following table sets forth (i) the number of Common Shares underlying
options that were granted to the Chairman and Chief Executive Officer and each
executive officer named in the Summary Compensation Table, all executive
officers as a group and to all persons (other than non-employee directors and
executive officers) eligible to receive awards under the 1995 Stock Option Plan
and the value of such Common Shares at August 15, 1995, and (ii) the number of
Common Shares underlying options that would be granted to non-employee directors
on the date of each annual meeting of shareholders beginning with the 1995
Annual Meeting.

<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
UNDERLYING DOLLAR
NAME AND POSITION OPTIONS VALUE(S)(5)($)
- --------------------------------------------------------------- ------------- --------------
<S> <C> <C>
Ernest A. Bates, M.D........................................... 0 $ 0
Chairman and Chief Executive Officer
Craig K. Tagawa................................................ 90,000(1) 146,250
Senior Vice President -- Chief Financial Officer
David Neally................................................... 45,000(1) 73,125
Senior Vice President -- Operations
Gregory Pape................................................... 45,000(1) 73,125
Senior Vice President -- Sales and Marketing
Executive Group................................................ 261,500(2) 424,937
Non-Executive Officer Employee Group........................... 4,500(3) 7,312
Non-Executive Director Group (3 persons)....................... 8,000(4) 13,000
</TABLE>

- ---------------
(1) Represents options granted on August 15, 1995, subject to shareholder
approval of the 1995 Stock Option Plan, at an exercise price equal to
$1.625, which was the closing price of the Common Shares on the American
Stock Exchange on such date.

(2) Comprises five individuals who were granted options on August 15, 1995,
subject to shareholder approval of the 1995 Stock Option Plan, at an
exercise price equal to $1.625, which was the closing price of the Common
Shares on the American Stock Exchange on such date.

9
<PAGE> 13

(3) Comprises one individual who was granted options on August 15, 1995, subject
to shareholder approval of the 1995 Stock Option Plan, at an exercise price
equal to $1.625, which was the closing price of the Common Shares on the
American Stock Exchange on such date. In addition, options to acquire 9,500
Common Shares at an exercise price of $1.625 per share were granted to an
advisor of the Company on August 15, 1995, subject to shareholder approval
of the 1995 Stock Option Plan.

(4) The option exercise price per share would be the closing sale price of the
Common Shares on the American Stock Exchange on the date of grant. On August
15, 1995, the closing sale price of Common Shares on the American Stock
Exchange was $1.625 per share. Each option would be fully exercisable one
year after the date of grant and would expire ten years after the date of
grant.

(5) Dollar value of options granted is calculated as the number of Common Shares
underlying the options multiplied by the closing sale price of the Common
Shares on the American Stock Exchange on the date of the grant. The taxable
benefit received by each grantee upon exercise of the options will consist
of any increase in the price of the Common Shares on the American Stock
Exchange on the date of exercise from the closing price on the date of
grant.

Federal Income Tax Consequences. The following is a brief overview of the
U.S. federal income tax consequences generally arising with respect to awards
under the 1995 Stock Option Plan.

A participant receiving a non-qualified stock option under the 1995 Stock
Option Plan, including a non-employee director, will not recognize taxable
income upon the grant of the option, but will recognize taxable compensation at
the time of exercise in the amount of the difference between the purchase price
and the fair market value of the shares purchased on the date of exercise. At
that time, the Company will be entitled to a deduction as compensation expense
in an amount equal to the amount taxable to the participant as income.

A participant receiving an incentive stock option will not recognize income
at the time of grant or exercise of the option, but will recognize income or
loss upon disposition of the shares, which may be ordinary income or capital
gain (or loss), depending on the length of time the shares have been held. The
Company will not be entitled to any deduction with respect to the grant or
exercise of a participant's incentive stock option. However, if the participant
disposes of the shares acquired pursuant to the exercise of the option before
the later of two years from the date of grant and one year from the date of
exercise, the Company will be entitled to a deduction as compensation expense in
an amount taxable to the participant as ordinary income and not capital gain.

10
<PAGE> 14

PROPOSAL NO. 3

GRANT OF NON-QUALIFIED STOCK OPTION TO CHAIRMAN
AND CHIEF EXECUTIVE OFFICER

GENERAL

The Board of Directors has approved the terms of a Non-Qualified Stock
Option Agreement (the "Option Agreement") between the Company and Ernest A.
Bates, M.D., the Chairman of the Board and Chief Executive Officer of the
Company ("Dr. Bates"). The Option Agreement grants Dr. Bates the right to
purchase, initially at an exercise price of $0.01 per share, 1,495,000 Common
Shares (the "Option Shares"), subject to the approval of the shareholders. Under
the Option Agreement, Dr. Bates will have the right to acquire any or all of the
Option Shares from and after the date of shareholder approval of the Option
Agreement until the date that is ten years after such approval.

Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR approval of the Option Agreement (Proposal No. 3). In
addition, the beneficial owners of 819,000 Common Shares received in the
restructuring described below have agreed to vote their Common Shares FOR
Proposal No. 3. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF
PROPOSAL NO. 3.

BACKGROUND

On May 17, 1995, the Company repurchased (the "Notes Repurchase")
$17,694,000 principal amount of its Senior Subordinated Notes (the "Notes") from
four holders for $3,892,681 in cash, 819,000 Common Shares and Warrants to
purchase an additional 216,000 Common Shares, representing 20% and 5%,
respectively, of the issued and outstanding Common Shares. On the same date, the
Company entered into three new credit facilities totalling $8,000,000, which
provided funds for the Notes Repurchase and working capital, as well as term
debt reduction and certain equipment refinancing. As a result, the Company was
able to cure all existing defaults on its debt and equipment leases.

The Notes Repurchase described above was the final event in an overall
restructuring of the Company's capital structure that commenced in mid-1992. As
part of the restructuring, the Company was able to amend the capital and
operating leases covering its medical equipment to reduce monthly payments,
eliminate $26,548,000 of indebtedness (including principal and accrued and
unpaid interest) under the Notes and replace its operating line of credit.

Prior to consummating the Notes Repurchase, the Company sought shareholder
approval for a restructuring (the "Prior Restructuring") in which the four
holders of Notes would have become the beneficial owners of approximately 89.4%
of the Company's Common Shares. Consummation of the Prior Restructuring would
have reduced the ownership of the Company's shareholders (including Dr. Bates)
from 96.7% to 7.2% of the outstanding Common Shares.

The ability of the Company to conclude the Notes Repurchase significantly
reduced the dilution experienced by shareholders, as demonstrated by the table
below.

COMPARISON OF DILUTION OF SHAREHOLDERS
PRIOR RESTRUCTURING VS. NOTES REPURCHASE

<TABLE>
<CAPTION>
JANUARY 1, 1995 PRIOR RESTRUCTURING(2) NOTES REPURCHASE
--------------------- ---------------------- ---------------------
COMMON PERCENT COMMON PERCENT COMMON PERCENT
SHARES OF SHARES OF SHARES OF
BENEFICIAL OWNER OWNED CLASS OWNED CLASS OWNED CLASS
- -------------------------- --------- ------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Ernest A. Bates, M.D. .... 1,005,000 33.9% 1,005,000 2.5% 1,191,000(3) 27.6%
Other Shareholders........ 1,862,401 62.8% 1,862,401 4.7% 1,860,401 43.2%
Holders of Notes.......... -- -- 35,669,569 89.4% 1,035,000(4) 24.0%
GE Medical(1)............. 97,853 3.3% 1,368,181 3.4% 225,000 5.2%
</TABLE>

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

(1) Represents Common Shares underlying immediately exercisable warrants.

11
<PAGE> 15

(2) Information derived from the Company's Proxy Statement dated February 14,
1995.

(3) Includes 184,000 Common Shares issued to Dr. Bates on May 17, 1995 in
partial consideration of his personal guarantee of $6,500,000 of
indebtedness of the Company and 2,000 Common Shares purchased in an open
market transaction in May 1995.

(4) Includes 819,000 Common Shares and warrants to purchase an additional
216,000 Common Shares.

The funding for the Notes Repurchase was provided by two lenders whose
loans are secured by accounts receivable and certain equipment of the Company
and its affiliates and the personal guarantee of Dr. Bates. The total amount of
these loans is $6,500,000. The Company was informed by the lenders that they
would provide these credit facilities only if Dr. Bates agreed to guarantee
their repayment. According to the lenders, a primary purpose of such guarantee
was to assure that Dr. Bates would continue to be involved in the affairs of the
Company during the full term of the loans. Dr. Bates entered into the required
personal guarantees on the condition that the Company compensate him with
additional equity that would enhance his ability to control fundamental
decisions of the Company. The Company issued 184,000 Common Shares to Dr. Bates
on May 17, 1995 at the closing of the Notes Repurchase. An additional 1,495,000
Common Shares are proposed to be made available to Dr. Bates under the Option
Agreement, subject to shareholder approval of Proposal No. 3.

PROPOSAL TO GRANT NON-QUALIFIED STOCK OPTION

The Company has entered into the Option Agreement with Dr. Bates, a copy of
which is attached to this Proxy Statement as Exhibit B. The Option Agreement
grants Dr. Bates the right to purchase for an initial exercise price of $0.01
per share 1,495,000 Common Shares in consideration of Dr. Bates's continued
service to the Company and his personal guarantee of $6,500,000 of indebtedness
of the Company (see "Background" above). The grant of options to Dr. Bates under
the Option Agreement is subject to shareholder approval, which is being sought
in this Proxy Statement. The Option Agreement will become effective only if such
shareholder approval is obtained.

The Option Agreement provides that in the event of termination of Dr.
Bates's employment by reason of death or permanent and total disability (as
defined in Section 22(e)(3) of the Code), the options will be exercisable for a
period of one year following the date of such termination of employment, but in
no event after the expiration date of the options. In the event Dr. Bates's
employment by the Company terminates for any other reason, the options will be
exercisable for a period of three months after such termination, but in no event
after the expiration of the option. If Dr. Bates's employment is terminated for
"cause", the option will terminate automatically on the date of termination. In
the event that Dr. Bates dies during the one-year period following termination
of his employment by reason of permanent and total disability or during the
three-month period following termination of his employment for any other reason,
then the options will be exercisable for a period of one year from the date of
death, but in no event after the expiration of the option.

The Company is seeking shareholder approval of the Option Agreement because
of the requirements of California law and of the American Stock Exchange.
Section 310(a) of the California General Corporation Law generally provides that
no contract between a corporation and one or more of its directors will be void
or voidable if the terms of the contract and the facts regarding such director's
interest are fully disclosed to shareholders and the contract is approved by the
shareholders in good faith with the interested director's shares not voting
thereon. The rules of the American Stock Exchange generally require the approval
of shareholders for a transaction in which a director or key employee is to be
issued more than 5% of the outstanding common stock of a listed corporation. The
Company intends that shareholder approval of Proposal No. 3 pursuant to this
Proxy Statement will satisfy the above-described requirements of the California
General Corporation Law and the American Stock Exchange.

Existing shareholders of the Company will experience substantial dilution
of their ownership in the Company if they approve the Option Agreement. In
addition to the potential dilution caused by the issuance of the Option Shares,
additional dilution of the ownership of existing shareholders will occur as a
result of contractual provisions benefitting the former holders of Notes. These
contractual provisions obligate the Company to issue an additional 374,000
Common Shares and warrants to acquire 98,000 Common Shares (an

12
<PAGE> 16

aggregate of 472,000 Common Shares) to former holders of Notes if shareholders
approve the Option Agreement. The purpose of this provision is to enable the
former Noteholders to maintain their proportionate ownership of the fully
diluted outstanding Common Shares. The following table summarizes the impact on
the ownership of existing shareholders if Proposal No. 3 is adopted.

DILUTION OF OWNERSHIP OF EXISTING SHAREHOLDERS
RESULTING FROM OPTION AGREEMENT

<TABLE>
<CAPTION>
AT AUGUST 10, 1995 IF PROPOSAL NO. 3 IS APPROVED
--------------------------- ---------------------------------------------
PERCENT OF OPTION SHARES TOTAL SHARES PERCENT OF
SHARES OWNED CLASS ISSUABLE OWNED CLASS(4)
------------ ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders (other than
Dr. Bates)..................... 1,860,401 43.2% 0 1,860,401 29.6%
Ernest A. Bates, M.D. ........... 1,191,000 27.6% 1,495,000 2,686,000 42.8%
Former Holders of Notes.......... 1,035,000(2) 24.0% 472,000(3) 1,507,000 24.0%
GE Medical(1).................... 225,000 5.2% 0 225,000 3.6%
</TABLE>

- ---------------
(1) Represents Common Shares underlying immediately exercisable warrants.

(2) Includes 819,000 Common Shares and Warrants to purchase an additional
216,000 Common Shares.

(3) Based on anti-dilution provisions for the benefit of former Noteholders in
the Company. Includes 374,000 additional Common Shares and warrants to
purchase an additional 98,000 Common Shares.

(4) Each individual or entity will experience additional dilution if
shareholders approve the 1995 Stock Option Plan (Proposal No. 2), which
provides for options covering 5% of the fully diluted Common Shares
(assuming approval of the Option Agreement).

In addition to the dilution of the ownership of existing shareholders,
approval of the Option Agreement will result in a substantial one-time charge to
the Company's earnings in the fourth quarter of the current fiscal year. The
amount of the charge will be equal to the difference between the exercise price
and the market price of the Common Stock on the date that the Option Agreement
is approved, multiplied by the number of Option Shares. If the market value of
Common Shares on the approval date is $1.625 (which was the price on August 15,
1995), then the charge to earnings would be $2,414,425. In addition, the
availability of the Option Shares at an exercise price of $0.01 per share means
that the Option Shares must be considered outstanding in computing the Company's
earnings per share on a fully-diluted basis. This will have the effect of
lowering the earnings per share reported by the Company in the future, which may
adversely affect the price at which Common Shares will trade in the market.

Approval of the Option Agreement will result in a substantial economic
benefit to Dr. Bates. The Board of Directors believes that the willingness of
Dr. Bates to personally guarantee $6,500,000 of indebtedness of the Company and
to continue to serve as Chairman and Chief Executive Officer was a material
inducement to the lenders to provide the financing necessary to consummate the
Notes Repurchase. In addition, the Board believes that Dr. Bates's willingness
to remain employed in his current capacities is important to the Company's
ability to maintain financial and operational viability in the future.
Nevertheless, the Board has not attempted to quantify the value of Dr. Bates's
guarantee and continued services or to compare it to the value of the Option
Shares. In addition, Dr. Bates is already a substantial shareholder and he has
not stated to the Board that he will terminate his relationship with the Company
if the Option Agreement is not approved. On balance, the Board has determined
that the Option Agreement is an appropriate recognition of the importance to the
Company's new lenders of Dr. Bates's continuing involvement in the affairs of
the Company, the role of his personal guarantee in achieving the Notes
Repurchase and avoiding the materially higher dilution inherent in the Prior
Restructuring, and will provide an additional inducement to Dr. Bates to perform
significant services for the Company in the future. In addition, the Board
believes that it is appropriate to grant Dr. Bates substantial control over the
future course of the Company in recognition of the substantial economic
commitment he has made as a result of his personal guarantee.

13
<PAGE> 17

The following table summarizes the value of (i) the 184,000 Common Shares
issued to Dr. Bates at the closing of the Notes Repurchase and (ii) the Option
Shares as if they were fully exercised on the date hereof.

VALUE OF SHARES ISSUED TO
ERNEST A. BATES, M.D.

<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE PER AGGREGATE
DATE OF ISSUE SHARES ISSUED SHARE(1) BENEFIT
------------------------------------------------- ------------- --------- ----------
<S> <C> <C> <C>
May 17, 1995..................................... 184,000 $1.4375 $ 262,660
August 15, 1995.................................. 1,495,000 $ 1.625 $2,414,425
----------
Total.................................. $2,677,085
==========
</TABLE>

- ---------------
(1) Based on closing price of Common Shares on the American Stock Exchange on
the date indicated.

In addition, the ability of Dr. Bates to purchase the Option Shares for a
nominal amount will significantly increase the degree of control that he will be
able to have over corporate decisions. As is indicated in the table on page 14
above, if the Option Shares are issued, Dr. Bates' percentage voting control
will increase from 27.6% to approximately 42.8%. This will virtually assure that
Dr. Bates will have the power to elect the entire Board of Directors and to
direct all fundamental corporate transactions. In addition, Dr. Bates will
effectively be able to block any transactions, such as a merger or sale of the
Company, which require an approving vote of greater than a majority of
shareholders under applicable law. This may have the effect of denying
shareholders an opportunity to sell their Common Shares at a premium in a change
of control transaction that is not acceptable to Dr. Bates.

VOTE REQUIRED AND BOARD RECOMMENDATION

Assuming the presence of a quorum, the affirmative vote of the holders of a
majority of the Common Shares represented in person or by proxy and entitled to
vote (which shares voting affirmatively also constitute at least a majority of
the required quorum) is required for the approval of Proposal No. 3. The
1,191,000 Common Shares owned by Dr. Bates will be counted toward the quorum
requirement, but are not entitled to vote on Proposal No. 3. The former
Noteholders have agreed contractually to vote their 819,000 Common Shares FOR
Proposal No. 3. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 3.

EXECUTIVE OFFICERS

The following table provides certain information, as of August 10, 1995,
concerning those persons who served as executive officers of the Company in
1994. The executive officers were appointed by the Board of Directors and serve
at the discretion of the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Ernest A. Bates, M.D................. 58 Chairman of the Board of Directors, Chief
Executive Officer, and Acting President and Chief
Operating Officer
Craig K. Tagawa...................... 42 Senior Vice President -- Chief Financial Officer
Richard Magary....................... 54 Senior Vice President -- Administration
James R. Brock....................... 62 Senior Vice President -- Special Projects
Gregory Pape......................... 39 Senior Vice President -- Sales and Marketing
David Neally......................... 43 Senior Vice President -- Operations
</TABLE>

Dr. Bates, founder of the Company, has served in the positions listed above
since the incorporation of the Company, except for the periods May 1, 1991
through November 6, 1992 and February 1989 through August 1989 during which time
Dr. Bates did not serve in the capacity of President and Chief Operating
Officer. Dr. Bates is a graduate of Johns Hopkins University and the University
of Rochester. He is currently an Assistant Clinical Professor of Neurosurgery at
the University of California Medical Center at San Francisco, and a member of
the Board of Trustees of Johns Hopkins University and the University of
Rochester.

14
<PAGE> 18

Mr. Tagawa has served as Chief Financial Officer since January 1992.
Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice
President on February 28, 1993. From September 1988 through January 1992, Mr.
Tagawa served in various positions with the Company. From 1982 through August
1988, Mr. Tagawa served as Vice President of Finance and Controller of Medical
Ambulatory Care, Inc., the Dialysis division of National Medical Enterprises,
Inc. (owner, operator of hospitals and other health care businesses). Mr. Tagawa
received his Undergraduate degree from the University of California at Berkeley
and his MBA from Cornell University.

Mr. Magary has served as Senior Vice President -- Administration since
February 28, 1993. From April 1987 through February 1993, Mr. Magary served as a
Vice President in the same capacity. From 1982 through March 1987, he served as
Chief Financial Officer of the Company and its predecessor. Mr. Magary is a
graduate of the University of San Francisco.

Mr. Brock has served as Senior Vice President -- Special Projects since
August 1, 1995. From January 1, 1995 until July 31, 1995 he served as Senior
Vice President -- Cardiovascular Services. From May 29, 1994 to December 1994 he
served as a Regional Sales Manager. From May 1992 through February 1993, he
served as a Vice President -- Corporate Development. Prior to May 1992, Mr.
Brock served in a variety of sales and operational positions with the Company
since its inception. Mr. Brock holds a Bachelor of Science Degree in Accounting
and Economics from the University of Denver, with postgraduate work in law and
health care management.

Mr. Pape has served as Senior Vice President -- Sales and Marketing since
June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice
President -- Sales and Marketing for the Company. Mr. Pape served in the
capacity of Regional Sales manager for the Company for the period from March
1991 through January 1993. From September 1989 through February 1991, Mr. Pape
was a Regional Sales Manager for Medical Imaging Corporation of America, Inc.
Mr. Pape earned his undergraduate degree at the University of Miami, with
postgraduate work in law at the University of Dayton, Ohio.

Mr. Neally has served as Senior Vice President -- Operations since May
1994. From January 1993 through May 1994, Mr. Neally was a Zone Vice President
for Operations. Prior to January 1993, Mr. Neally had served in a variety of
sales and operations positions since joining the Company in 1990. Mr. Neally
received his undergraduate degree from John Wood College in Quincy, Illinois and
is also a graduate of St. Mary's School of Cardiopulmonary Technology in Quincy,
Illinois.

EXECUTIVE OFFICER COMPENSATION

The following table sets forth the cash compensation paid by the Company
during 1994 or paid in 1994 for services rendered in all capacities during 1993
to the Chief Executive Officer and each executive officer,

15
<PAGE> 19

other than the Chief Executive Officer, who served as an executive officer at
December 31, 1994, and earned cash compensation of $100,000 or more during 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) UNDERLYING OPTIONS
- ---------------------------- ---- --------- ------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Ernest A. Bates(3).......... 1994 $225,218
Chairman of the Board, 1993 $235,010 -- -- --
Chief Executive Officer 1992 $229,133 -- -- --
Craig K. Tagawa(4).......... 1994 $119,426 $ 700(5)
Senior Vice President 1993 $122,237 -- --
Chief Financial Officer 1992 $113,902 -- 15,000
David Neally................ 1994 $ 92,827 $17,322 --
Senior Vice President 1993 $ 73,692 $ 5,137 -- 8,250
Operations 1992 $ 68,824 $13,009 -- 750
Gregory Pape................ 1994 $238,186 -- -- --
Senior Vice President 1993 $196,177 -- -- 20,000
Sales and Marketing 1992 $110,001 -- -- --
</TABLE>

- ---------------
(1) Each amount under this column includes amounts accrued in 1992, 1993 and
1994 that would have been paid to such persons in such years, except that
such amounts were instead deferred pursuant to the Retirement Plan for
Employees of American Shared Hospital Services and CuraCare, a defined
contribution plan available to employees of the Company generally.

(2) The Company has determined that with respect to the executive officers named
in the Summary Compensation Table, the aggregate amount of other benefits
does not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported in the Summary Compensation Table as paid to such executive
officer in the relevant year.

(3) The lower salary in 1992 compared with 1993 for Dr. Bates reflects a 10%
salary reduction which was in effect during the first three months of 1992.
Dr. Bates' salary again was reduced by 5%, effective February 6, 1994.

(4) The lower salary in 1992 compared with 1993 for Mr. Tagawa reflects an 8%
salary reduction which was in effect during the first three months on 1992.
Mr. Tagawa's salary again was reduced by 5%, effective February 6, 1994.

(5) Represents the fair market value of 100 shares of the Company's Common
Shares granted to Mr. Tagawa pursuant to the American Shared Hospital
Services 1991 Employee Stock Bonus Plan. Pursuant to such Plan, 100 Common
Shares were granted to each employee, other than the Chief Executive
Officer, who was employed by the Company from June 21, 1991 through February
26, 1992 and whose basic employment compensation was reduced by 2% or more
during that time period.

OPTION GRANTS IN LAST FISCAL YEAR

The "Option Grants in the Last Fiscal Year" table has been omitted because
no options were granted during 1994 to the Company's executive officers named in
the Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth the number of shares acquired on exercise of
stock options and the aggregate gains realized upon exercise of such options
during 1994, by the Company's executive officers named in the Summary
Compensation Table. The following table also sets forth the number of shares
underlying exercisable and unexercisable options held by such executive officers
on December 31, 1994. The table does not include the aggregate gains that would
have been realized had those options been exercised on

16
<PAGE> 20

December 31, 1994 because the option exercise price for each option exceeded the
market price per Common Share on such date.

1984 STOCK OPTION PLAN
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS
----------------------------- -----------------------------
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ernest A. Bates, M.D. ... -- -- -- -- -- --
Craig K. Tagawa.......... -- -- 30,000 5,000 -- --
David Neally............. -- -- 4,800 5,200 -- --
Gregory Pape............. -- -- 8,000 12,000 -- --
</TABLE>

EMPLOYMENT AGREEMENTS

In 1984, the Company entered into employment agreements with Ernest A.
Bates, M.D. (the Company's Chairman and Chief Executive Officer) and James R.
Brock (then the Company's Vice President -- Marketing) each of which was
automatically extended for successive one-year periods through January 1994 when
such agreements terminated in accordance with their terms. Each of the
agreements provided that, in the event of a change in control or sale of all or
substantially all of the assets of the Company, the employment agreements would
not terminate and the surviving, resulting or acquiring corporation would be
bound by the terms of the agreements. Each of these employment agreements
provided for salary increases to be determined by the Board of Directors and
certain other benefits.

BOARD OF DIRECTORS AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The following Report of the Board of Directors and Stock Option Committee
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.

This Report of the Board of Directors and Stock Option Committee describes
the Company's method of compensating its executive officers, and describes the
basis on which 1994 compensation was paid to such executive officers, including
those named in the Summary Compensation Table.

The Board of Directors determined that compensation paid in 1994 by the
Company to its Chief Executive Officer and other executive officers would be
based on policies in effect in recent prior years. As a result, it was
unnecessary for the Compensation Committee to meet, and it did not meet, during
1994.

The Company's compensation program seeks to establish compensation that is
competitive in both the healthcare industry and among entrepreneurial,
growth-oriented companies in order to attract and retain high quality employees.
Compensation is linked to each employee's level of responsibility and personal
achievements with respect to operational and financial goals established by the
Chief Executive Officer and the Board of Directors. Depending on the individual
officer's area of responsibility, such goals may include new business and
revenue acquisition, operating expense reduction and control, operating
efficiencies, etc. In addition, the compensation system seeks to develop and
encourage employee ownership of the Company's stock through stock options.

The primary component of executive compensation for the Company is base
salary, except in the case of the Senior Vice President -- Sales and Marketing
where sales commissions are a substantial component of compensation and are
included under "salary" in the table above. Discretionary bonuses may be paid,
based on a formula, if financial and other results of the individual executive's
area of responsibility meet or exceed

17
<PAGE> 21

financial and operational targets established at the beginning of the fiscal
year. No bonuses have been paid by the Company during the last three fiscal
years, except in the case of bonuses paid pursuant to pre-established formulae
based on goals and targets of a specific business area.

Base salary was established for the Chief Executive Officer and other
executive officers with the assistance of an outside consulting firm in 1991.
Such compensation was designed to fall in the mid-range for the relevant
executive position or compensation paid by a group of entrepreneurial,
growth-oriented companies believed by the Company to be comparable in their
stage of development and business condition, based on information provided by
the independent compensation consulting organization. The companies surveyed
were not identical to those reflected in the performance graph set forth in this
Proxy Statement. The compensation of most of the Company's senior executives,
including the Chief Executive Officer, was reduced by up to 10% during the
period from June 1991 through March 1992. Such executive officers were
compensated throughout 1993 at the level in effect prior to the reductions. Any
other increases in base compensation during the past three fiscal years have
been made only to reflect the increased responsibilities of the particular
executive officer. The compensation of certain of the Company's executive
officers again was reduced, beginning in February 1994, by 5%.

In addition to base compensation, the Company has used grants of stock
options to retain senior executives (other than the Chief Executive Officer) and
to motivate them to improve long-term stock market performance. No new options
were granted during 1994. The number of options granted in the past was
determined by reference to the level of responsibility of the particular
executive in the Company and such executive's proposed role in the Company's
future operations.

<TABLE>
<CAPTION>
BOARD OF DIRECTORS STOCK OPTION COMMITTEE
----------------------------------- -----------------------
<S> <C>
Ernest A. Bates, M.D., Chairman Ernest A. Bates, M.D.
Willie R. Barnes John F. Ruffle
Willie L. Brown, Jr.
Augustus A. White III, M.D.
Charles B. Wilson, M.D.
John F. Ruffle
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION; CERTAIN
RELATIONSHIPS AND
RELATED TRANSACTIONS

On April 6, 1994, the Company entered into settlement agreements with each
of Elekta Instruments, Inc. ("Elekta"), the manufacturer of the Gamma Knife, and
NME Hospitals, Inc., d/b/a USC University Hospital ("USC Hospital"), the lessor
of a Gamma Knife, to resolve disputes arising out of the Company's inability to
make a required progress payment under the agreement to purchase such Gamma
Knife. The settlement agreements required that the Company terminate its
original agreement to purchase the Gamma Knife from Elekta and to lease the
Gamma Knife to USC Hospital. Further conditions to execution of the settlement
agreements included that Dr. Bates, the Company's Chairman and Chief Executive
Officer, enter into a purchase agreement and lease agreement with Elekta and USC
Hospital, respectively, substantially identical to the respective terminated
agreements.

Pursuant to the new purchase agreement, Dr. Bates was entitled to purchase
the Gamma Knife from Elekta for an aggregate purchase price of $2,900,000 plus
sales tax. Dr. Bates obtained financing for the Gamma Knife purchase from a
third party. Dr. Bates' lender has financed the total purchase price, less
$290,000 advanced by the Company, pursuant to an interest bearing installment
note and security agreement. The Company has advanced $290,000 of the purchase
price, to be repaid by Dr. Bates over the term of the new lease agreement,
pursuant to a promissory note bearing interest at 6% per annum and repayable
over 60 months.

The Company and Dr. Bates have entered into an option agreement entitling
the Company to purchase the Gamma Knife from Dr. Bates for an amount equal to
the remaining debt obligations associated with the Gamma Knife plus costs and
losses, if any, incurred by the Chief Executive Officer, when the Company is
able

18
<PAGE> 22

to obtain financing for this purchase. It is the Company's intent to exercise
the option to purchase the Gamma Knife from Dr. Bates as soon as the Company is
able to obtain the required funds.

Willie R. Barnes, the Secretary and a director of the Company, is a partner
in the law firm of Musick, Peeler & Garrett. That law firm performed legal
services for the Company during 1994. The Company anticipates that Mr. Barnes'
law firm will perform legal services for the Company in 1995. The management of
the Company is of the opinion that the fees paid to Mr. Barnes' law firm are
comparable to those fees that would have been paid for comparable legal services
from a law firm not affiliated with the Company.

It is proposed that the Company enter into the Option Agreement with its
Chairman and Chief Executive Officer. Under the Option Agreement, Dr. Bates
would be granted a ten-year option to purchase 1,495,000 Common Shares for an
initial exercise price of $0.01 per share. In addition, on May 17, 1995, as part
of the Notes Repurchase, the Company issued 184,000 Common Shares to Dr. Bates
in partial consideration of his personal guarantee of $6,500,000 of indebtedness
of the Company. See "Proposal No. 3 -- Grant of Non-Qualified Stock Option to
Chairman and Chief Executive Officer" above.

COMPLIANCE WITH SECTION 16(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934

Reports filed under the Exchange Act and received by the Company on or
after January 1, 1994 indicate that during 1994 and 1995 executive officers of
the Company did not file timely reports as follows: James R. Brock, David Neally
and Gregory Pape each did not file an Initial Statement of Beneficial Ownership
of Securities within the required period following such person's appointment as
an Executive Officer of the Company. Each such person filed the required report
in June 1995. John F. Ruffle did not file an Initial Statement of Beneficial
Ownership of Securities within the required period following his appointment as
a Director of the Company. He filed the required report on June 20, 1995. John
Westergaard did not file a Statement of Changes in Beneficial Ownership within
the required period following his resignation as a Director of the Company. He
filed the required report on April 15, 1994.

19
<PAGE> 23

PERFORMANCE GRAPH, TOTAL RETURN TO SHAREHOLDERS

The following graph and table compare cumulative total shareholder return
on the Company's Common Shares with the cumulative total return of the Standard
& Poor's 500 Stock Index and a group of peer companies in the diagnostic imaging
industry during the five years ended December 31, 1994.

<TABLE>
<CAPTION>
Measurement Period American Shared S&P 500
(Fiscal Year Covered) Hospital Services Index Peer Group
<S> <C> <C> <C>
1989 100.00 100.00 100.00
1990 33.33 96.90 97.96
1991 148.15 126.42 77.73
1992 88.89 136.05 48.71
1993 77.78 149.76 20.80
1994 14.81 151.74 23.39
</TABLE>

<TABLE>
<CAPTION>
RETURN (AS A PERCENTAGE INCREASE OR DECREASE)
--------------------------------------------------
COMPANY/INDEX NAME 1990 1991 1992 1993 1994
- ---------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
American Shared Hospital Services............. -66.67 344.44 -40.00 -12.50 -80.95
S&P 500 Index................................. -3.11 30.47 7.62 10.08 1.32
Peer Group.................................... -2.04 -20.65 -37.34 -57.30 12.46
</TABLE>

INDEXED CUMULATIVE RETURNS

<TABLE>
<CAPTION>
BASE RETURN
PERIOD --------------------------------------------------
COMPANY/INDEX NAME 1989 1990 1991 1992 1993 1994
- -------------------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
American Shared Hospital Services..... 100.00 33.33 148.15 88.89 77.78 14.81
S&P 500 Index......................... 100.00 96.90 126.42 136.05 149.76 151.74
Peer Group............................ 100.00 97.96 77.73 48.71 20.80 23.39
</TABLE>

PEER GROUP POPULATION

<TABLE>
<S> <C>
Alliance Imaging Inc........................ (included in the 1992-1994 returns only)
American Health Services.................... (excluded in the 1993, 1994 returns (no price
information available))
Health Images Inc...........................
Maxum Health Corp........................... (included in the 1992 return only)
Medalliance Inc............................. (included in the 1993, 1994 returns only
(previously ImageAmerica Corp.))
Medical Diagnostics Inc..................... (included in the 1993, 1994 returns only)
Medical Imaging Centers of America..........
Medical Resources Inc....................... (included in the 1993, 1994 returns only)
NMR of America Inc..........................
This total shareholders return model assumes reinvested dividends.
Fiscal year basis: December
Prepared by Standard & Poor's Compustat, a division of McGraw-Hill Inc.
</TABLE>

20
<PAGE> 24

INDEPENDENT AUDITORS

The Company's consolidated financial statements have been audited by Ernst
& Young or its predecessor from 1983 through the fiscal year ended December 31,
1994. The Board of Directors intends to appoint Ernst & Young to be the
Company's independent auditors for the fiscal year ending December 31, 1995.
Representatives of Ernst & Young are expected to be present at the Annual
Meeting to respond to appropriate questions and will be given an opportunity to
make a statement if they so desire.

SHAREHOLDER PROPOSALS

Under certain circumstances, shareholders are entitled to present proposals
at shareholders meetings. To be eligible for inclusion in the Proxy Statement
for the Company's next Annual Meeting of Shareholders, a shareholder proposal
must be received at the Company's principal executive offices prior to April 1,
1996.

OTHER BUSINESS

Management knows of no business, other than as stated in the Notice of
Annual Meeting, which will be presented for consideration at the Annual Meeting.
If, however, other matters properly are brought before the Annual Meeting, it is
the intention of the persons named in the accompanying form of proxy to vote the
shares represented thereby on such matters in accordance with their best
judgment and in their discretion.

AMERICAN SHARED HOSPITAL SERVICES
By Order of the Board of Directors

/s/ WILLIE R. BARNES
Willie R. Barnes
Corporate Secretary

Dated: August 25, 1995

21
<PAGE> 25

EXHIBIT A

AMERICAN SHARED HOSPITAL SERVICES
1995 STOCK OPTION PLAN

I. INTRODUCTION

1.1 Purposes. The purposes of the 1995 Stock Option Plan (the "Plan") of
American Shared Hospital Services (the "Company") and its subsidiaries from time
to time (individually a "Subsidiary" and collectively the "Subsidiaries") are to
align the interests of the Company's shareholders and the recipients of options
under this Plan by increasing the proprietary interest of such recipients in the
Company's growth and success and to advance the interests of the Company by
attracting and retaining officers and other key employees and well-qualified
persons who are not officers or employees of the Company for service as
directors ("non-employee directors"), consultants and advisors of the Company.
For purposes of this Plan, references to employment by the Company shall also
mean employment by a Subsidiary, which shall mean an entity in which the Company
directly or indirectly owns a majority of the voting interests or, whether by
contract or otherwise, has the power to control the policies of such entity.

1.2 Administration. This Plan shall be administered by a committee (the
"Committee") designated by the Board of Directors of the Company (the "Board")
consisting of two or more members of the Board. No member of the Committee,
during the one year prior to service on the Committee or during such service,
shall have been granted or awarded shares of Common Stock or options to purchase
shares of Common Stock pursuant to this Plan or any other plan of the Company or
any affiliate of the Company except as provided in Section III and except for a
grant or award which would not result in such member ceasing to be a
"disinterested person" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").

The Committee shall, subject to the terms of this Plan, select eligible
officers and other key employees for participation in this Plan and shall
determine the number of shares of Common Stock subject to each option granted
hereunder, the exercise price of such option, the time and conditions of
exercise of such option and all other terms and conditions of such option,
including, without limitation, the form of the option agreement. The Committee
shall, subject to the terms of this Plan, interpret this Plan and the
application thereof, establish rules and regulations it deems necessary or
desirable for the administration of this Plan and may impose, incidental to the
grant of an option, conditions with respect to the grant, such as limiting
competitive employment or other activities. All such interpretations, rules,
regulations and conditions shall be conclusive and binding on all parties. Each
option hereunder shall be evidenced by a written agreement (an "Agreement")
between the Company and the optionee setting forth the terms and conditions
applicable to such option.

The Committee may delegate some or all of its power and authority hereunder
to the Chief Executive Officer or other executive officer of the Company as the
Committee deems appropriate; provided, however, that the Committee may not
delegate its power and authority with regard to (i) the grant of an award under
this Plan to any person who is a "covered employee" within the meaning of
Section 162(m) of the Code or who, in the Committee's judgment, is likely to be
a covered employee at any time during the period an option granted hereunder to
such employee would be outstanding or (ii) the selection for participation in
this Plan of an officer or other person subject to Section 16 of the Exchange
Act or decisions concerning the timing, pricing or amount of an option grant to
such an officer or other person.

No member of the Board of Directors or Committee, and neither the Chief
Executive Officer nor other executive officer to whom the Committee delegates
any of its power and authority hereunder, shall be liable for any act, omission,
interpretation, construction or determination made in connection with this Plan
in good faith, and the members of the Board of Directors and the Committee and
the Chief Executive Officer or other executive officer shall be entitled to
indemnification and reimbursement by the Company in respect of any claim, loss,
damage or expense (including attorneys' fees) arising therefrom to the full
extent permitted by law and under any directors' and officers' liability
insurance that may be in effect from time to time.

A-1
<PAGE> 26

A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (i) acts of a majority of the members of the Committee
present at any meeting at which a quorum is present or (ii) acts approved in
writing by a majority of the members of the Committee without a meeting.

1.3 Eligibility. Participants in this Plan shall consist of such officers
and other key employees of the Company and its Subsidiaries, and such
non-employee consultants and advisors, as the Committee in its sole discretion
may select from time to time; provided, however, that any officer who
beneficially owns more than 15% of the outstanding shares of Common Stock shall
not be eligible to participate in the Plan. The Committee's selection of a
person to participate in this Plan at any time shall not require the Committee
to select such person to participate in this Plan at any other time.
Non-employee directors of the Company shall be eligible to participate in this
Plan in accordance with Section III.

1.4 Shares Available. Subject to adjustment as provided in Section 4.7,
330,000 common shares, without par value, of the Company ("Common Stock"), shall
be available for grants of options under this Plan, reduced by the sum of the
aggregate number of shares of Common Stock which become subject to outstanding
options. To the extent that shares of Common Stock subject to an outstanding
option are not issued or delivered by reason of the expiration, termination,
cancellation or forfeiture of such option or by reason of the delivery or
withholding of shares of Common Stock to pay all or a portion of the exercise
price of such option, if any, or to satisfy all or a portion of the tax
withholding obligations relating to such option, then such shares of Common
Stock shall again be available under this Plan.

Shares of Common Stock to be delivered under this Plan shall be made
available from authorized and unissued shares of Common Stock, or authorized and
issued shares of Common Stock reacquired and held as treasury shares or
otherwise or a combination thereof.

II. STOCK OPTIONS

2.1 Grants of Stock Options. The Committee may, in its discretion, grant
options to purchase shares of Common Stock to such eligible persons as may be
selected by the Committee. Each option, or portion thereof, that is not an
incentive stock option, shall be a non-qualified stock option. An incentive
stock option shall mean an option to purchase shares of Common Stock that meets
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, which is intended by the Committee to
constitute an incentive stock option. Each incentive stock option shall be
granted within ten years of the effective date of this Plan. To the extent that
the aggregate Fair Market Value (determined as of the date of grant) of shares
of Common Stock with respect to which options designated as incentive stock
options are exercisable for the first time by a participant during any calendar
year (under this Plan or any other plan of the Company, or any parent or
Subsidiary) exceeds the amount (currently $100,000) established by the Code,
such options shall constitute non-qualified stock options. "Fair Market Value"
shall mean the closing transaction price of a share of Common Stock as reported
in the American Stock Exchange Composite Transactions on the date as of which
such value is being determined or, if there shall be no reported transaction on
such date, on the next preceding date for which a transaction was reported;
provided that if Fair Market Value for any date cannot be determined as above
provided, Fair Market Value shall be determined by the Committee by whatever
means or method as the Committee, in the good faith exercise of its discretion,
shall at such time deem appropriate.

2.2 Terms of Stock Options. Options shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem advisable:

(a) Number of Shares and Purchase Price. The number of shares of
Common Stock subject to an option and the purchase price per share of
Common Stock purchasable upon exercise of the option shall be determined by
the Committee; provided, however, that the purchase price per share of
Common Stock purchasable upon exercise of a non-qualified stock option
shall not be less than 25% of the Fair Market Value of a share of Common
Stock on the date of grant of such option and the purchase price per share
of Common Stock purchasable upon exercise of an incentive stock option
shall not be less than 100% of the

A-2
<PAGE> 27

Fair Market Value of a share of Common Stock on the date of grant of such
option; provided further, that if an incentive stock option shall be
granted to any person who, at the time such option is granted, owns capital
stock possessing more than ten percent of the total combined voting power
of all classes of capital stock of the Company (a "Ten Percent Holder"),
the purchase price per share of Common Stock shall be the price (currently
110% of Fair Market Value) required by the Code in order to constitute an
incentive stock option.

(b) Option Period and Exercisability. The period during which an
option may be exercised shall be determined by the Committee; provided,
however, that no option shall be exercised later than ten years after its
date of grant; provided further, that if an incentive stock option shall be
granted to a Ten Percent Holder, such option shall not be exercised later
than five years after its date of grant. The Committee shall determine
whether an option shall become exercisable in cumulative or non-cumulative
installments and in part or in full at any time. An exercisable option, or
portion thereof, may be exercised only with respect to whole shares of
Common Stock.

(c) Method of Exercise. An option may be exercised (i) by giving
written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full
(or arrangement made for such payment to the Company's satisfaction) either
(A) in cash, (B) by delivery of previously owned whole shares of Common
Stock (which the optionee has held for at least six months prior to the
delivery of such shares and for which the optionee has good title, free and
clear of all liens and encumbrances) having a Fair Market Value, determined
as of the date of exercise, equal to the aggregate purchase price payable
by reason of such exercise, (C) by authorizing the Company to withhold
whole shares of Common Stock which would otherwise be delivered upon
exercise of the option having a Fair Market Value, determined as of the
date of exercise, equal to the aggregate purchase price payable by reason
of such exercise, (D) in cash by a broker-dealer acceptable to the Company
to whom the optionee has submitted an irrevocable notice of exercise
together with irrevocable instructions to sell a sufficient portion of the
shares and deliver the sale proceeds to the Company, or (E) a combination
of (A), (B) and (C), in each case to the extent set forth in the Agreement
relating to the option and (ii) by executing such documents as the Company
may reasonably request. The Committee shall have sole discretion to
disapprove of an election pursuant to any of clauses (B)-(E) and in the
case of an optionee who is subject to Section 16 of the Exchange Act, the
Company may require that the method of making such payment be in compliance
with Section 16 and the rules and regulations thereunder. Any fraction of a
share of Common Stock which would be required to pay such purchase price
shall be disregarded and the remaining amount due shall be paid in cash by
the optionee. No certificate representing Common Stock shall be delivered
until the full purchase price therefor has been paid.

(d) Additional Options. The Committee shall have the authority to
include in any Agreement relating to an option a provision entitling the
optionee to an additional option in the event such optionee exercises the
option represented by such option agreement, in whole or in part, by
delivering previously owned whole shares of Common Stock in payment of the
purchase price in accordance with this Plan and such Agreement. Any such
additional option shall be for a number of shares of Common Stock equal to
the number of delivered shares, shall have a purchase price determined by
the Committee in accordance with this Plan, shall be exercisable on the
terms and subject to the conditions established by the Committee at the
time of grant of such additional option, and shall be subject to such other
terms and conditions as the Committee shall determine in accordance with
this Plan.

2.3 Termination of Employment or Directorship.

(a) Permanent and Total Disability. Subject to Section 4.8 and unless
otherwise specified in the Agreement relating to an option, if an optionee's
employment or directorship with the Company terminates by reason of Permanent
and Total Disability (as defined in Section 22(e)(3) of the Code), each option
held by such optionee shall be exercisable only to the extent that such option
is exercisable on the effective date of such termination and may thereafter be
exercised by such optionee (or such optionee's legal representative or similar
person) until and including the earliest to occur of (i) the date which is one
year (or such shorter

A-3
<PAGE> 28

period as set forth in the Agreement relating to such option) after the
effective date of such termination and (ii) the expiration date of the term of
such option.

(b) Death. Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to an option, if an optionee's employment or directorship
with the Company terminates by reason of death, each option held by such
optionee shall be exercisable only to the extent that such option is exercisable
on the date of such optionee's death and may thereafter be exercised by such
optionee's executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until and including the earliest to occur of (i) the
date which is one year (or such shorter period as set forth in the Agreement
relating to such option) after the date of death and (ii) the expiration date of
the term of such option.

(c) Other Termination. Subject to Section 4.8 and unless otherwise
specified in the Agreement relating to an option, if an optionee's employment or
directorship with the Company terminates for any reason other than Permanent or
Total Disability or death, each option held by such optionee shall be
exercisable only to the extent that such option is exercisable on the effective
date of such optionee's termination and may thereafter be exercised by such
optionee (or such optionee's legal representative or similar person) until and
including the earliest to occur of (i) the date which is three months (or such
shorter period as set forth in the Agreement relating to such option) after the
effective date of such optionee's termination and (ii) the expiration date of
the term of such option; provided that if such optionee's employment is
terminated for Cause, all options held by such optionee shall terminate
automatically on the effective date of such optionee's termination of
employment. For purposes of this Plan, "Cause" shall mean termination for
commission of an act of dishonesty, theft, fraud, embezzlement, falsification of
books and records, continued or prolonged intoxication, both alcohol and drug
related, and conviction of a felony or a crime involving moral turpitude, and in
any event, the determination of the Committee with respect thereto shall be
final and conclusive.

(d) Death Following Termination of Employment. Subject to Section 4.8 and
unless otherwise specified in the Agreement relating to an option, if an
optionee dies during the one-year period following termination by reason of
Permanent and Total Disability, or if an optionee dies during the three-month
period following termination for any reason other than Permanent or Total
Disability or death (or, in each case, such shorter period as the Committee may
specify in the Agreement relating to an option), each option held by such
optionee shall be exercisable only to the extent that such option is exercisable
on the date of such optionee's death and may thereafter be exercised by such
optionee's executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until and including the earliest to occur of (i) the
date which is one year (or such shorter period as set forth in the Agreement
relating to such option) after the date of death and (ii) the expiration date of
the term of such option.

III. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS

3.1 Eligibility. Each member of the Board of Directors of the Company who
is not an employee, either full-time or part-time, of the Company or a
Subsidiary shall be granted options to purchase shares of Common Stock in
accordance with this Section III. All options granted under this Section III
shall be non-qualified stock options.

3.2 Grants of Stock Options. Each non-employee director shall be granted
non-qualified stock options as follows:

(a) Time of Grant. On October 6, 1995, the date of the 1995 Annual
Meeting, (or, if later, on the date on which a person is first elected or
begins to serve as a non-employee director other than by reason of
termination of employment), and, thereafter, on the date of each annual
meeting of stockholders of the Company, each person who is a non-employee
director after such meeting of stockholders shall be granted an option to
purchase 4,000 shares of Common Stock (which amount shall be pro-rated if
such person is first elected or begins to serve as a non-employee director
on a date other than the date of an annual meeting of stockholders) at a
purchase price per share equal to the Fair Market Value of the Common Stock
on the date of grant of such option; provided, that the aggregate number of
options granted to any person hereunder or under any other plan of the
Company shall not exceed 12,000.

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(b) Option Period and Exercisability. Each option granted under this
Article III shall be fully exercisable one year after its date of grant and
shall expire ten years after its date of grant. An exercisable option, or
portion thereof, may be exercised in whole or in part only with respect to
whole shares of Common Stock. Options granted under this Article III shall
be exercisable in accordance with Section 2.2(c) and shall be subject to
the provisions of Sections 2.3(a) through (d) in the event of the
termination of a director's service on the Board.

IV. GENERAL

4.1 Effective Date and Term of Plan. This Plan shall be submitted to the
stockholders of the Company for approval and, if approved by the affirmative
vote of the holders of a majority of the shares of Common Stock represented in
person or by proxy and voting (which shares voting affirmatively also constitute
at least a majority of the required quorum) at the 1995 annual meeting of
stockholders, shall become effective as of the date of the initial grant of
options hereunder. In the event that this Plan is not approved by the
stockholders of the Company on or before December 31, 1995, this Plan and any
options granted hereunder shall be null and void. This Plan shall terminate ten
years after its effective date unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any option
granted prior to termination. Options may be granted hereunder at any time prior
to the termination of this Plan, provided that no award may be made later than
ten years after the effective date of this Plan.

4.2 Amendments. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation including Rule 16b-3 under the Exchange Act and Section
162(m) of the Code; provided, however, that no amendment shall be made without
stockholder approval if such amendment would (a) increase the maximum number of
shares of Common Stock available under this Plan (subject to Section 4.7), (b)
reduce the minimum purchase price per share of Common Stock subject to an
option, (c) effect any change inconsistent with Section 422 of the Code, or (d)
extend the term of this Plan or the maximum period during which an option may be
exercised; provided, further, that this Plan shall not be amended in a manner
which fails to comply with Rule 16b-3(c)(2)(ii)(B) under Section 16 of the
Exchange Act. No amendment may impair the rights of a holder of an outstanding
option without the consent of such holder.

4.3 Agreement. No option shall be valid until an Agreement is executed by
the Company and the optionee and, upon execution by the Company and the optionee
and delivery of the Agreement to the Company, such option shall be effective as
of the effective date set forth in the Agreement.

4.4 Non-Transferability. No option hereunder shall be transferable other
than (i) by will or the laws of descent and distribution or pursuant to the
beneficiary designation procedures set forth in Section 4.11 or (ii) as
otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the
Agreement relating to such option. Each option may be exercised during the
optionee's lifetime only by the optionee or the optionee's legal representative
or similar person. Except as permitted by the second preceding sentence, no
option hereunder shall be sold, transferred, assigned, pledged, hypothecated,
encumbered or otherwise disposed of (whether by operation of law or otherwise)
or be subject to execution, attachment or similar process. Upon any attempt to
so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of
any option hereunder, such option and all rights thereunder shall immediately
become null and void.

4.5 Tax Withholding. The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock, payment by the optionee
of any Federal, state, local or other taxes which may be required to be withheld
or paid in connection with an option hereunder. An Agreement may provide that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered upon exercise of the option having an aggregate Fair
Market Value determined as of the date the obligation to withhold or pay taxes
arises in connection with the option (the "Tax Date") in the amount necessary to
satisfy any such obligation or (ii) the optionee may satisfy any such obligation
by any of the following means: (A) a

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cash payment to the Company, (B) delivery to the Company of previously owned
whole shares of Common Stock (which the optionee has held for at least six
months prior to the delivery of such shares and for which the optionee has good
title, free and clear of all liens and encumbrances) having an aggregate Fair
Market Value determined as of the Tax Date, equal to the amount necessary to
satisfy any such obligation, (C) authorizing the Company to withhold whole
shares of Common Stock which would otherwise be delivered upon exercise of the
option having an aggregate Fair Market Value determined as of the Tax Date, (D)
a cash payment by a broker-dealer acceptable to the Company to whom the optionee
has submitted an irrevocable notice of exercise together with irrevocable
instructions to sell a sufficient portion of the shares and deliver the sale
proceeds to the Company or (E) any combination of (A), (B) and (C), in each case
to the extent set forth in the Agreement relating to the option; provided,
however, that the Committee shall have sole discretion to disapprove of an
election pursuant to any of clauses (B)-(E) and that in the case of an optionee
who is subject to Section 16 of the Exchange Act, the Company may require that
the method of satisfying any such obligation be in compliance with Section 16
and the rules and regulations thereunder. An Agreement may provide for shares of
Common Stock to be delivered or withheld having a Fair Market Value in excess of
the minimum amount required to be withheld. Any fraction of a share of Common
Stock which would be required to satisfy such an obligation shall be disregarded
and the remaining amount due shall be paid in cash by the optionee.

4.6 Restrictions on Shares. Each option hereunder shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any option hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.

4.7 Adjustment. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding option, the purchase
price per security, and the number of securities subject to each option to be
granted to non-employee directors pursuant to Article III shall be appropriately
adjusted by the Committee, such adjustments to be made in the case of
outstanding options without an increase in the aggregate purchase price. The
decision of the Committee regarding any such adjustment shall be final, binding
and conclusive. If any adjustment would result in a fractional security being
(i) available under this Plan, such fractional security shall be disregarded, or
(ii) subject to an option under this Plan, the Company shall pay the optionee,
in connection with the first exercise of the option in whole or in part,
occurring after such adjustment, an amount in cash determined by multiplying (A)
the fraction of such security (rounded to the nearest hundredth) by (B) the
excess, if any, of (x) the Fair Market Value on the exercise date over (y) the
exercise price of the option.

4.8 Change in Control.

(a) (1) Notwithstanding any provision in this Plan or any Agreement, in the
event of a Change in Control pursuant to Section (b)(3) or (4) below in
connection with which the holders of Common Stock receive shares of common
stock that are registered under Section 12 of the Exchange Act, there shall
be substituted for each share of Common Stock available under this Plan,
whether or not then subject to an outstanding option, the number and class
of shares into which each outstanding share of Common Stock shall be
converted pursuant to such Change in Control. In the event of any such
substitution, the purchase price per share of each option shall be
appropriately adjusted by the Committee, such adjustments to be made
without an increase in the aggregate purchase price or base price.

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(2) Notwithstanding any provision in this Plan or any Agreement, in
the event of a Change in Control pursuant to Section (b)(1) or (2) below,
or in the event of a Change in Control pursuant to Section (b)(3) or (4)
below in connection with which the holders of Common Stock receive
consideration other than shares of common stock that are registered under
Section 12 of the Exchange Act, each outstanding option shall be
surrendered to the Company by the holder thereof, and each such option
shall immediately be cancelled by the Company, and the holder shall
receive, within ten days of the occurrence of a Change in Control pursuant
to Section (b)(1) or (2) below or within ten days of the approval of the
stockholders of the Company contemplated by Section (b)(3) or (4) below, a
cash payment from the Company in an amount equal to the number of shares of
Common Stock then subject to such option, multiplied by the excess, if any,
of (i) the greater of (A) the highest per share price offered to
stockholders of the Company in any transaction whereby the Change in
Control takes place or (B) the Fair Market Value of a share of Common Stock
on the date of occurrence of the Change in Control over (ii) the purchase
price per share of Common Stock subject to the option. The Company may, but
is not required to, cooperate with any person who is subject to Section 16
of the Exchange Act to assure that any cash payment in accordance with the
foregoing to such person is made in compliance with Section 16 and the
rules and regulations thereunder.

(b) "Change in Control" shall mean:

(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2)
of the Exchange Act, of beneficial ownership within the meaning of Rule
13d-3 promulgated under the Exchange Act, of 25% or more of either (i) the
then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then
outstanding securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
excluding, however, the following: (A) any acquisition directly from the
Company (excluding any acquisition resulting from the exercise of an
exercise, conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from the Company),
(B) any acquisition by the Company, (C) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii)
and (iii) of subsection (3) of this Section 3.8(b);

(2) individuals who, as of the effective date of the Plan, constitute
the Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided that any individual
who becomes a director of the Company subsequent to the effective date of
the Plan whose election, or nomination for election by the Company's
stockholders, was approved by the vote of at least a majority of the
directors then comprising the Incumbent Board shall be deemed a member of
the Incumbent Board; and provided further, that any individual who was
initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any
Person other than the Board shall not be deemed a member of the Incumbent
Board;

(3) approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Corporate Transaction");
excluding, however, a Corporate Transaction pursuant to which (i) all or
substantially all of the individuals or entities who are the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such Corporate
Transaction will beneficially own, directly or indirectly, more than 60%
of, respectively, the outstanding shares of common stock, and the combined
voting power of the outstanding securities of such corporation entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly
or indirectly) in substantially the same proportions relative to each other
as their ownership, immediately

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prior to such Corporate Transaction, of the Outstanding Company Common
Stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than: the Company; any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; the corporation resulting from such Corporate
Transaction; and any Person which beneficially owned, immediately prior to
such Corporate Transaction, directly or indirectly, 25% or more of the
Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) will beneficially own, directly or
indirectly, 25% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding securities of such corporation
entitled to vote generally in the election of directors and (iii)
individuals who were members of the Incumbent Board will constitute at
least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or

(4) approval by the stockholders of the Company of a plan of complete
liquidation or dissolution of the Company.

4.9 No Right of Participation or Employment. No person shall have any
right to participate in this Plan. Neither this Plan nor any option granted
hereunder shall confer upon any person any right to continued employment by the
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment of any person at any time without liability hereunder.

4.10 Rights as Stockholder. No person shall have any right as a
stockholder of the Company with respect to any shares of Common Stock which are
subject to an option hereunder until such person becomes a stockholder of record
with respect to such shares of Common Stock.

4.11 Designation of Beneficiary. Each optionee may file with the Committee
a written designation of one or more persons as such optionee's beneficiary or
beneficiaries (both primary and contingent) in the event of the optionee's
death. To the extent an outstanding option granted hereunder is exercisable,
such beneficiary or beneficiaries shall be entitled to exercise such option.

Each beneficiary designation shall become effective only when filed in
writing with the Committee during the optionee's lifetime on a form prescribed
by the Committee. The spouse of a married optionee domiciled in a community
property jurisdiction shall join in any designation of a beneficiary other than
such spouse. The filing with the Committee of a new beneficiary designation
shall cancel all previously filed beneficiary designations.

If an optionee fails to designate a beneficiary, or if all designated
beneficiaries of an optionee predecease the optionee, then each outstanding
option hereunder held by such optionee, to the extent exercisable, may be
exercised by such optionee's executor, administrator, legal representative or
similar person.

4.12 Governing Law. This Plan, each option hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of California and construed in
accordance therewith without giving effect to principles of conflicts of laws.

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EXHIBIT B

AMERICAN SHARED HOSPITAL SERVICES
STOCK OPTION AGREEMENT FOR
ERNEST A. BATES, M.D.

American Shared Hospital Services, a California corporation (the
"Company"), hereby grants to Ernest A. Bates, M.D. (the "Optionee") as of August
15, 1995 (the "Option Date"), a non-qualified option to purchase from the
Company (the "Option") 1,495,000 shares of its Common Stock, without par value
("Stock"), at the price of $0.01 per share upon and subject to the terms and
conditions set forth below.

1. Option Subject to Acceptance of Agreement.

The Option shall become null and void unless (i) the Optionee shall accept
this Agreement by executing it in the space provided below and returning such
original execution copy to the Company and (ii) the grant of options hereunder
is approved by the required vote at the 1995 annual meeting of the Company's
shareholders.

2. Time and Manner of Exercise of Option.

2.1. Maximum Term of Option. In no event may the Option be exercised, in
whole or in part, after August 15, 2005 (the "Expiration Date").

2.2. Exercise of Option.

(a) The Option shall become exercisable immediately following the
approval by the Company's shareholders of the grant of the Option described
herein, and as otherwise provided pursuant to Sections 2.2(b) through (e)
hereof.

(b) If the Optionee's employment with the Company terminates by reason
of Permanent or Total Disability, the Option may thereafter be exercised by
the Optionee or the Optionee's Legal Representative until and including the
earliest to occur of (i) the date which is one year after the effective
date of such termination and (ii) the Expiration Date.

(c) If the Optionee's employment with the Company terminates by reason
of death, the Option may thereafter be exercised by the Optionee's Legal
Representative or Permitted Transferees, as the case may be, until and
including the earliest to occur of (i) the date which is one year after the
date of death and (ii) the Expiration Date.

(d) If the Optionee's employment with the Company terminates for any
reason other than Permanent or Total Disability or death, the Option may
thereafter be exercised by the Optionee or the Optionee's Legal
Representative until and including the earliest to occur of (i) the date
which is three months after the effective date of such termination and (ii)
the Expiration Date, provided that if the Optionee's employment is
terminated for "Cause", the Option shall terminate automatically on the
effective date of the Optionee's termination of employment. For the
purposes hereof, "Cause" shall mean termination for commission of an act of
dishonesty, theft, fraud, embezzlement, falsification of books and records,
continued or prolonged intoxication, both alcohol and drug related, and
conviction of a felony or a crime involving moral turpitude, and in any
event, the determination of the Company's Board of Directors with respect
thereto shall be final and conclusive.

(e) If the Optionee dies during the one-year period following
termination by reason of Permanent or Total Disability, or if the Optionee
dies during the three-month period following termination for any reason
other than Permanent Disability or death, the Option may thereafter be
exercised by the Optionee's Legal Representative or Permitted Transferees,
as the case may be, until and including the earliest to occur of (i) the
date which is one year after the date of death and (ii) the Expiration
Date.

2.3. Method of Exercise.

(a) Subject to the limitations set forth in this Agreement, the Option
may be exercised by the Optionee (1) by giving written notice to the
Company specifying the number of whole shares of Stock to

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<PAGE> 34

be purchased and accompanied by payment therefor in full (or arrangement
made for such payment to the Company's satisfaction) either (i) in cash,
(ii) in previously owned whole shares of Stock (which the Optionee has held
for at least six months prior to the delivery of such shares or which the
Optionee purchased on the open market and for which the Optionee has good
title, free and clear of all liens and encumbrances) having a Fair Market
Value, determined as of the date of exercise, equal to the aggregate
purchase price payable pursuant to the Option by reason of such exercise,
(iii) by authorizing the Company to withhold whole shares of Stock which
would otherwise be delivered upon exercise of the Option having a Fair
Market Value, determined as of the date of exercise, equal to the aggregate
purchase price payable pursuant to the Option by reason of such exercise,
(iv) in cash by a broker-dealer acceptable to the Company to whom the
Optionee has submitted an irrevocable notice of exercise together with
irrevocable instructions to sell a sufficient portion of the shares and
deliver the sale proceeds to the Company, or (v) a combination of (i), (ii)
and (iii), and (2) by executing such documents as the Company may
reasonably request. The Board of Directors shall have sole discretion to
disapprove of an election pursuant to any of clauses (ii) - (v). Any
fraction of a share of Stock which would be required to pay such purchase
price shall be disregarded and the remaining amount due shall be paid in
cash by the Optionee. No certificate representing a share of Stock shall be
delivered until the full purchase price therefor has been paid.

(b) If the Optionee is subject to Section 16 of the Securities
Exchange Act of 1934 (the "Exchange Act"), the following provisions shall
apply to the Optionee's election to authorize the Company to withhold whole
shares of Stock purchasable upon exercise of the Option in payment of all
or a portion of the option price:

(1) Such election may apply only to the Option or any or all
options held by the Optionee, shall be filed with the Senior Vice
President -- Administration at least six months prior to the exercise
date of the Option and may not take effect during the six-month period
beginning on the date of grant of the Option (other than in the event of
the Optionee's death) or

(2) such election (i) shall be subject to approval by the Board of
Directors, (ii) may not take effect during the six-month period
beginning on the date of grant of the Option (other than in the event of
the Optionee's death), (iii) must be filed with the Senior Vice
President -- Administration during (or must be filed with the Senior
Vice President -- Administration in advance of, but take effect during)
the ten business day period beginning on the third business day
following the date of release of the Company's quarterly or annual
summary statements of sales and earnings and (iv) the exercise of the
Option must occur during such ten business day period. Unless the Board
of Directors otherwise determines, any election pursuant to clause (1)
may be revoked or changed only if such revocation or change is made at
least six months prior to the exercise of the Option. Any election made
pursuant to clause (2) may be revoked or changed prior to the exercise
of the Option during the ten business day period.

2.4. Termination of Option.

(a) In no event may the Option be exercised after it terminates as set
forth in this Section 2.4. The Option shall terminate, to the extent not
exercised pursuant to Section 2.3 or earlier terminated pursuant to Section
2.2, on the Expiration Date.

(b) In the event that rights to purchase all or a portion of the
shares of Stock subject to the Option expire or are exercised, cancelled or
forfeited, the Optionee shall promptly return this Agreement to the Company
for full or partial cancellation, as the case may be. Such cancellation
shall be effective regardless of whether the Optionee returns this
Agreement. If the Optionee continues to have rights to purchase shares of
Stock hereunder, the Company shall, within 10 days of the Optionee's
delivery of this Agreement to the Company, either (i) mark this Agreement
to indicate the extent to which the Option has expired or been exercised,
cancelled or forfeited or (ii) issue to the Optionee a substitute option
agreement applicable to such rights, which agreement shall otherwise be
substantially similar to this Agreement in form and substance.

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<PAGE> 35

3. Additional Terms and Conditions of Option.

3.1. Nontransferability of Option. The Option may not be transferred by
the Optionee other than by will, the laws of descent and distribution or
pursuant to a written designation of one or more persons as beneficiaries in the
event of the Optionee's death. During the Optionee's lifetime the Option is
exercisable only by the Optionee or the Optionee's Legal Representative. Except
as permitted by the foregoing, the Option may not be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of the Option, the Option and all rights hereunder
shall immediately become null and void.

3.2. Investment Representation. The Optionee hereby represents and
covenants that (a) any share of Stock purchased upon exercise of the Option will
be purchased for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), unless such purchase has been registered under the Securities Act and any
applicable state securities law; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Optionee shall submit a written
statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of purchase of any shares
hereunder or (y) is true and correct as of the date of any sale of any such
shares, as applicable. As a further condition precedent to any exercise of the
Option, the Optionee shall comply with all regulations and requirements of any
regulatory authority having control of or supervision over the issuance or
delivery of the shares and, in connection therewith, shall execute any documents
which the Company shall in its sole discretion deem necessary or advisable.

3.3. Withholding Taxes.

(a) As a condition precedent to the delivery of Stock upon exercise of
the Option, the Optionee shall, upon request by the Company, pay to the
Company in addition to the purchase price of the shares, such amount of
cash as the Company may be required, under all applicable federal, state,
local or other laws or regulations, to withhold and pay over as income or
other withholding taxes (the "Required Tax Payments") with respect to such
exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its
discretion, deduct any Required Tax Payments from any amount then or
thereafter payable by the Company to the Optionee.

(b) The Optionee may elect to satisfy his obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to
the Company pursuant to Section 3.3(a), (2) delivery to the Company of
previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and for which the Optionee has good title,
free and clear of all liens and encumbrances) having a Fair Market Value,
determined as of the date the obligation to withhold or pay taxes first
arises in connection with the Option (the "Tax Date"), equal to the
Required Tax Payments, (3) authorizing the Company to withhold whole shares
of Stock which would otherwise be delivered to the Optionee upon exercise
of the Option having a Fair Market Value, determined as of the Tax Date,
equal to the Required Tax Payments, (4) a cash payment by a broker-dealer
acceptable to the Company to whom the Optionee has submitted an irrevocable
notice of exercise together with irrevocable instructions to sell a
sufficient portion of the shares and deliver the sale proceeds to the
Company or (5) any combination of (1), (2) and (3). The Board of Directors
shall have sole discretion to disapprove of an election pursuant to any of
clauses (2) - (5). Shares of Stock to be delivered or withheld may have a
Fair Market Value in excess of the minimum amount of the Required Tax
Payments. Any fraction of a share of Stock which would be required to
satisfy any such obligation shall be disregarded and the remaining amount
due shall be paid in cash by the Optionee. No certificate representing a
share of Stock shall be delivered until the Required Tax Payments have been
satisfied in full.

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<PAGE> 36

(c) If the Optionee is subject to Section 16 of the Exchange Act, the
following provisions shall apply to the Optionee's election to deliver to
the Company whole shares of Stock or to authorize the Company to withhold
whole shares of Stock purchasable upon exercise of the Option in payment of
all or a portion of the Optionee's tax liability in connection with such
exercise:

(1) The Optionee may deliver to the Company previously owned whole
shares of Stock in accordance with Section 3.3(b), if such delivery is
in connection with the delivery of shares of Stock in payment of the
exercise price of the Option.

(2) The Optionee may authorize the Company to withhold whole shares
of Stock purchasable upon exercise of the Option in accordance with
Section 3.3(b); provided, that the following provisions shall apply to
such election:

(i) Such election may apply only to the Option or any or all
options held by the Optionee, shall be filed with the Senior Vice
President -- Administration at least six months prior to the exercise
date of the Option and may not take effect during the six-month
period beginning on the date of grant of the Option (other than in
the event of the Optionee's death) or (ii) such election (A) shall be
subject to approval by the Company, (B) may not take effect during
the six-month period beginning on the date of grant of the Option
(other than in the event of the Optionee's death), (C) must be filed
with the Senior Vice President -- Administration during (or must be
filed with the Senior Vice President -- Administration in advance of,
but take effect during) the ten business day period beginning on the
third business day following the date of release of the Company's
quarterly or annual summary statements of sales and earnings and (D)
the exercise of the Option must occur during such ten business day
period. Unless the Board of Directors otherwise determines, any
election pursuant to clause (i) may be revoked or changed only if
such revocation or change is made at least six months prior to the
exercise of the Option. Any election made pursuant to clause (ii) may
be revoked or changed prior to the exercise of the Option during the
ten business day period.

3.4. Adjustment. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Board of
Directors without an increase in the aggregate purchase price, other than an
increase resulting from rounding. If any adjustment would result in a fractional
security being subject to the Option, the Company shall pay the Optionee, in
connection with the first exercise of the Option, in whole or in part, occurring
after such adjustment, an amount in cash determined by multiplying (i) the
fraction of such security (rounded to the nearest hundredth) by (ii) the excess,
if any, of (A) the Fair Market Value on the exercise date over (B) the exercise
price of the Option. The decision of the Board of Directors regarding any such
adjustment shall be final, binding and conclusive.

3.5. Compliance with Applicable Law. The Option is subject to the
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company. The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.

3.6. Delivery of Certificates. Upon the exercise of the Option, in whole
or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.

3.7. Option Confers No Rights as Stockholder. The Optionee shall not be
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon

B-4
<PAGE> 37

the exercise of the Option, in whole or in part, and the Optionee becomes a
stockholder of record with respect to such delivered shares; and the Optionee
shall not be considered a stockholder of the Company with respect to any such
shares not so purchased and delivered.

3.8. Option Confers No Rights to Continued Employment. In no event shall
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by the Company.

3.9. Decisions of Board of Directors. The Board of Directors shall have
the right to resolve all questions which may arise in connection with the Option
or its exercise. Any interpretation, determination or other action made or taken
by the Board of Directors regarding the Plan or this Agreement shall be final,
binding and conclusive.

3.10. Company to Reserve Shares. The Company shall at all times prior to
the expiration or termination of the Option reserve and keep available, either
in its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.

4. Miscellaneous Provisions.

4.1. Designation of Stock Option. The Option is hereby designated as not
constituting an "incentive stock option" within meaning of section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"); this Agreement shall be
interpreted and treated consistently with such designation.

4.2. Meaning of Certain Terms.

(a) As used herein, employment by the Company shall include employment
by a corporation which is a subsidiary (that is, any entity in which the
Company directly or indirectly owns a majority of the voting interests or,
whether by contract or otherwise, has the power to control the policies of
such entity). References in this Agreement to sections of the Code shall be
deemed to refer to any successor section of the Code or any successor
internal revenue law.

(b) As used herein, the term "Legal Representative" shall include an
executor, administrator, guardian, legal representative or other person
acting in a similar capacity and the term "Permitted Transferee" shall
include any transferee (i) pursuant to a transfer permitted under Section
3.1 hereof or (ii) designated pursuant to the beneficiary designation form
available from the Company.

4.3. Successors. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement.

4.4. Notices. All notices, requests or other communications provided for
in this Agreement shall be made, if to the Company, to the Senior Vice
President -- Administration of the Company at Four Embarcadero Center, Suite
3620, San Francisco, California 94111-4155, and if to the Optionee, to
- ----------or to such other address as either party shall provide in writing to
the other from time to time. All notices, requests or other communications
provided for in this Agreement shall be made in writing either (a) by personal
delivery to the party entitled thereto, (b) by facsimile with confirmation of
receipt, (c) by mailing in the United States mails to the last known address of
the party entitled thereto or (d) by express courier service. The notice,
request or other communication shall be deemed to be received upon personal
delivery, upon confirmation of receipt of facsimile transmission or upon receipt
by the party entitled thereto if by United States mail or express courier
service; provided, however, that if a notice, request or other communication is
not received during regular business bonus, it shall be deemed to be received on
the next succeeding business day of the Company.

4.5. Governing Law. The Option, this Agreement, and all determinations
made and actions taken pursuant hereto and thereto, to the extent not governed
by the laws of the United States, shall be governed by the laws of the State of
California and construed in accordance therewith without giving effect to
principles of conflicts of laws.

B-5
<PAGE> 38

4.6. Counterparts. This Agreement may be executed in two counterparts each
of which shall be deemed an original and both of which together shall constitute
one and the same instrument.

AMERICAN SHARED HOSPITAL SERVICES

By:
---------------------------------
Title:
------------------------------

Accepted this day of
August, 1995.

- --------------------------------------
Optionee

B-6
<PAGE> 39
AMERICAN SHARED HOSPITAL SERVICES
For the Annual Meeting of Shareholders to be Held October 6, 1995
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby nominate(s), constitute(s) and appoint(s) Ernest A.
Bates, M.D. and Richard Magary, and each of them, the attorneys, agents and
proxies of the undersigned, with full powers of substitution to each, to attend
and act as proxy or proxies of the undersigned at the Annual Meeting of
Shareholders (the "Meeting") of AMERICAN SHARED HOSPITAL SERVICES (the
"Company") to be held at the Ritz Carlton Hotel, 600 Stockton at California
Street, San Francisco, California on Friday, October 6, 1995, at 9:00 a.m., or
at any adjournments thereof, and vote as specified herein the number of shares
which the undersigned, if personally present, would be entitled to vote.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" (i) THE ELECTION OF THE PERSONS
NOMINATED FOR ELECTION TO THE BOARD OF DIRECTORS, (ii) THE PROPOSAL TO APPROVE
AND ADOPT THE 1995 STOCK OPTION PLAN AND (iii) THE PROPOSAL TO APPROVE AND
ADOPT THE GRANT OF A NON-QUALIFIED OPTION TO PURCHASE 1,495,000 COMMON SHARES
TO THE COMPANY'S CHAIRMAN AND CHIEF EXECUTIVE OFFICER, THE PROXY WHEN PROPERLY
EXECUTED WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE VOTED,
SUBJECT TO THE PROXY HOLDER'S DISCRETIONARY AUTHORITY TO CUMULATE VOTES, "FOR"
THE ELECTION OF THE PERSONS NOMINATED ON THE REVERSE SIDE, AND WILL HAVE THE
EFFECT OF WITHHOLDING DISCRETIONARY AUTHORITY TO CUMULATE VOTES, "FOR" THE
PROPOSAL TO APPROVE AND ADOPT THE 1995 STOCK OPTION PLAN AND "FOR" THE PROPOSAL
TO APPROVE AND ADOPT THE GRANT OF THE OPTION. THIS PROXY MAY BE REVOKED PRIOR
TO ITS EXERCISE BY FILING WITH THE SECRETARY OF THE COMPANY AN INSTRUMENT IN
WRITING REVOKING THE PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE. THIS
PROXY MAY ALSO BE REMOVED BY ATTENDANCE AT THE MEETING AND ELECTION TO VOTE IN
PERSON.
<PAGE> 40
[reverse side]

/x/ Please mark your
votes as in this
example.

FOR all nominees WITHHOLD
(except as AUTHORITY
indicated to to vote
the contrary for all
below). nominees

1. Election of Directors. To elect the / / / /
six persons named below to the
Board of Directors to serve until
the 1996 Annual Meeting of
Shareholders and until their
successors are elected and have
qualified.

Nominees: Ernest A. Bates, M.D.,
Willie L. Brown, Jr., Willie R.
Barnes, John F. Ruffle, Augustus
A. White, III, M.D. and Charles B.
Wilson, M.D.

(Instruction: To withhold
authority for any individual
nominee, write that nominee's
name in the space below.)

I PLAN TO / /
ATTEND MEETING

FOR AGAINST ABSTAIN
2. 1995 Stock Option Plan.
Approval and adoption of the / / / / / /
Company's 1995 Stock Option
Plan pursuant to which officers,
key employees and non-employee
directors, consultants and advisors
of the Company will be eligible to
receive non-qualified options and
incentive stock options covering
up to 330,000 Common Shares.

FOR AGAINST ABSTAIN
3. Grant of Option. Approval and
adoption of the grant of a non- / / / / / /
qualified option to purchase
1,495,000 Common Shares to the
Company's Chairman and Chief
Executive Officer having a term of
ten years and entitling the holder
to acquire Common Shares at an
initial exercise price of $0.01 per
share.

4. Other Business. In their
discretion, the Proxy Holders are
authorized to vote upon such
other business as properly may
come before the Meeting and at
any and all adjournments thereof.
The Board of Directors at present
knows of no other business.

The undersigned hereby ratifies and confirms all that said attorneys and
proxies, or any of them, or their substitutes, shall lawfully do or cause to be
done by virtue hereof, and hereby revokes any and all proxies heretofore given
by the undersigned to vote at the Meeting. The undersigned acknowledges receipt
of the Notice of the Annual Meeting and the Proxy Statement accompanying such
Notice.

SIGNATURE_________________ DATE______ SIGNATURE________________ DATE_________
IF HELD JOINTLY

NOTE: Please date this proxy and sign as your name(s) appear(s) on this
document. Joint owners should each sign personally. Corporate proxies should
be signed by an authorized officer. Executors, administrators, trustees, etc.
should give their full titles.

-2-