NORTHSTAR HEALTH SERVICES INC, DEFR14A, 1997-08-11

NORTHSTAR HEALTH SERVICES INC
DEFR14A, 1997-08-11
MISC HEALTH & ALLIED SERVICES, NEC

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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
[ ] Confidential, for Use of the Commission (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12

Northstar Health Services, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

Northstar Health Services, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X] No Fee required.

[ ] 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: _______________

2) Aggregate number of securities to which transaction
applies: _____________

3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):

4) Proposed maximum aggregate value of
transaction: _______________

5) Total fee paid: _____________________

[ ] Fee paid previously with preliminary materials.

[ ] 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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NORTHSTAR HEALTH SERVICES, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

MEETING DATE: September 11, 1997

To the Stockholders of Northstar Health Services, Inc.:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of Northstar Health Services, Inc., a Delaware corporation
(the "Company"), will be held at The Indiana Country Club, 495 Country Club
Road, Indiana, Pennsylvania 15701, on Thursday, September 11, 1997, at 10:30
a.m., Eastern time, or at any postponement or adjournment thereof for the
following purposes:

1. To elect six members to the Board of Directors of the Company
(the "Board") to serve until the next annual meeting of
stockholders to be held in 1998 (the "1998 Annual Meeting") or
until their successors are duly elected;

2. To consider and act upon a proposal to adopt the Northstar
Health Services, Inc. 1997 Stock Option Plan, which authorizes
options to purchase 1,000,000 shares of Common Stock;

3. To appoint independent public accountants of the Company for
the 1997 fiscal year to serve until the 1998 Annual Meeting or
until their successors are duly elected; and

4. To act upon such other business as may properly come before
the Annual Meeting.

In accordance with the provisions of the Company's By-Laws, the Board
of Directors has fixed the close of business on July 15, 1997 as the record date
for the determination of the holders of Common Stock entitled to notice of, and
to vote at, the Annual Meeting.

To ensure that your shares are represented at the Annual Meeting, you
are urged to complete, sign, date and return the accompanying proxy card
promptly in the enclosed postage paid envelope. Please sign the accompanying
proxy card exactly as your name appears on your share certificate(s). You may
revoke your proxy at any time before it is voted at the Annual Meeting. If you
attend the Annual Meeting, you may vote your shares in person.

Your attention is directed to the accompanying Proxy Statement.

By Order of the Board of Directors

Thomas W. Zaucha

Chairman, President and
Chief Executive Officer
August 7, 1997

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NORTHSTAR HEALTH SERVICES, INC.
665 Philadelphia Street
Indiana, Pennsylvania 15701
--------------------------

ANNUAL MEETING OF STOCKHOLDERS

MEETING DATE: September 11, 1997
--------------------------

GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors (the "Board") of Northstar Health
Services, Inc. ("Northstar" or the "Company"), a Delaware corporation, to be
voted at the Annual Meeting of Stockholders of the Company (the "Annual
Meeting") to be held at The Indiana Country Club, 495 Country Club Road,
Indiana, Pennsylvania 15701 on Thursday, September 11, 1997, at 10:30 a.m.,
Eastern time, or at any postponement or adjournment thereof. This Proxy
Statement, the Notice of Annual Meeting and the accompanying form of proxy are
first being mailed to stockholders on or about August 11, 1997.

Only holders of record of the Company's common stock, par value $.01
per share ("Common Stock"), at the close of business on July 15, 1997 (the
"Record Date"), are entitled to vote on the matters to be presented at the
Annual Meeting. The number of shares of Common Stock outstanding on such date
and entitled to vote was 5,867,153. Holders of Common Stock are entitled to one
vote on each matter to be voted upon by the stockholders at the Annual Meeting
for each share held.

At the Annual Meeting, stockholders will be asked (1) to elect six
directors (the "Nominees") to the Board to serve until the next annual meeting
of stockholders of the Company to be held in 1998 (the "1998 Annual Meeting") or
until their successors are duly elected (the "Board Proposal"), (2) to consider
and act upon a proposal to adopt the Northstar Health Services, Inc. 1997 Stock
Option Plan, which authorizes options to purchase 1,000,000 shares of Common
Stock (the "Stock Option Proposal") and (3) to appoint the firm of Arthur
Andersen LLP, independent public accountants, to serve as the Company's
independent public accountants for the 1997 fiscal year until the 1998 Annual
Meeting (the "Independent Public Accountants Proposal"). At the Annual Meeting,
stockholders may also be asked to consider and take action with respect to such
other matters as may properly come before the Annual Meeting.

QUORUM AND VOTE REQUIREMENTS

The presence, in person or by proxy, of holders of record of a majority
of the shares of Common Stock issued and outstanding and entitled to vote is
required for a quorum to transact business at the Annual Meeting, but if a
quorum should not be present, the Annual Meeting may be adjourned from time to
time until a quorum is obtained. The Board Proposal will be determined by the
affirmative vote of the holders of a plurality, and the Stock Option and
Independent Public Accountants Proposals will be determined by the affirmative
vote of the holders of a majority, of the shares of Common Stock present, in
person or by proxy, and entitled to vote at the Annual Meeting. Broker
"non-votes" (i.e., proxies from brokers or nominees indicating that such persons
have not received instructions from the beneficial owner or other persons

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entitled to vote shares as to a matter with respect to which the brokers or
nominees do not have discretionary power to vote) and shares for which duly
executed proxies have been received but with respect to which holders of shares
have abstained from voting will be treated as present for purposes of
determining the presence of a quorum at the Annual Meeting. Broker "non-votes"
are only counted for purposes of determining whether a quorum is present and,
therefore, will not be included in vote totals and will have no effect on the
outcome of the votes on the proposals to be acted upon at the Annual Meeting.
Abstentions will be counted as present and entitled to vote, and will have the
effect of a negative vote at the Annual Meeting, whereas instructions to
withhold voting on the election of any nominee for director will have no effect
on the outcome of the vote.

SOLICITATION AND REVOCATION

PROXIES IN THE FORM ENCLOSED ARE BEING SOLICITED BY, OR ON BEHALF OF,
THE BOARD. THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY HAVE BEEN
DESIGNATED AS PROXIES BY THE BOARD. Any stockholder desiring to appoint another
person to represent him or her at the Annual Meeting may do so either by
inserting such person's name in the blank space provided on the accompanying
form of proxy, or by completing another form of proxy and, in either case,
delivering an executed proxy to Continental Stock Transfer & Trust Company, the
Company's transfer agent, located at 2 Broadway, New York, New York 10004,
before the time of the Annual Meeting. It is the responsibility of the
stockholder appointing such other person to represent him or her to inform such
person of this appointment.

All Common Stock represented by properly executed proxies which are
returned and not revoked prior to the time of the Annual Meeting will be voted
in accordance with the instructions, if any, given thereon. If no instructions
are provided in an executed proxy, it will be voted (1) FOR the Board Proposal,
(2) FOR the Stock Option Proposal and (3) FOR the Independent Public Accountants
Proposal, and in accordance with the proxyholder's best judgment as to any other
business raised at the Annual Meeting. If a stockholder appoints a person other
than the persons named in the enclosed form of proxy to represent him or her,
such person will vote the shares in respect of which he or she is appointed
proxyholder in accordance with the directions of the stockholder appointing him
or her. Any stockholder who executes a proxy may revoke it at any time before it
is voted by delivering to the Company a written statement revoking such proxy,
by executing and delivering a later dated proxy, or by voting in person at the
Annual Meeting. Attendance at the Annual Meeting by a stockholder who has
executed and delivered a proxy to the Company shall not in and of itself
constitute a revocation of such proxy.

The Company has retained MacKenzie Partners, Inc. ("MacKenzie") to
assist in the solicitation of proxies. MacKenzie will be paid a fee of
approximately $4,000 for its services by the Company. Proxies will be solicited
initially by mail. Further solicitation may be made by directors, officers and
employees of the Company personally, by telephone or otherwise, but such persons
will not be specifically compensated for such services. The Company also intends
to make, through bankers, brokers or other persons, a solicitation of proxies of
beneficial holders of the Common Stock. Upon request, the Company will reimburse
brokers, dealers, banks or similar entities acting as nominees for reasonable
expenses incurred in forwarding copies of the proxy materials relating to the
Annual Meeting to the beneficial owners of Common Stock which such persons hold
of record.

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PRIOR CONSENT SOLICITATION

On February 6, 1997, Thomas W. Zaucha, the Chairman of the Board of
Directors, President and Chief Executive Officer of the Company, commenced a
solicitation of Northstar stockholder consents (i) to remove and replace the
other members of the Northstar Board of Directors which at the time consisted of
Messrs. Brody, Jarrett, Pesci, Smallacombe and Watson (the "Brody Board") and
(ii) to effectuate related changes in Northstar's by-laws (the "Consent
Solicitation"). On March 24, 1997, Mr. Zaucha delivered executed consents
representing the votes of 61% of the outstanding shares in favor of his
proposals and, following confirmation of the vote by the Delaware Chancery Court
on May 8, 1997, Mr. Zaucha resumed his duties as the Company's Chief Executive
Officer. On August 1, 1997, the ruling of the Delaware Chancery Court was
unanimously affirmed by the Delaware Supreme Court.

Mr. Zaucha has been a director of the Company since November 1995; all
of the other nominees have been directors since March 1997, when they were
elected by written consent of the stockholders pursuant to the Consent
Solicitation. See "Certain Relationships and Related Transactions."

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PROPOSAL 1--THE BOARD PROPOSAL

The Board presently consists of six directors (with five vacancies) who
are elected to serve until the next annual general meeting of stockholders or
until their successors are duly elected and qualified. The Board, at the
recommendation of the Nominating Committee, has designated the Nominees listed
below for election as directors to the Board to serve until the 1998 Annual
Meeting or until their successors are duly elected and qualified. If any Nominee
shall, prior to the Annual Meeting, become unavailable for election as a
director, the persons named in the accompanying proxy card will vote for such
other nominee, if any, in their discretion as may be recommended by the
Nominating Committee.

NOMINEES
<TABLE>
<CAPTION>

Name Age Position
- ------------------------------------------------- ------- -------------------------------------
<S> <C> <C>

Thomas W. Zaucha.......................... 51 Chairman of the Board of Directors,
President and Chief Executive Officer
Lawrence F. Jindra, M.D................... 38 Director
James H. McElwain......................... 50 Director
Mark G. Mykityshyn........................ 39 Director
Roger J. Reschini......................... 59 Director
David B. White............................ 41 Director
</TABLE>

Recommendation and Vote

Approval of the election of the Nominees to the Board requires the
affirmative vote of a plurality of the shares of Common Stock present, in person
or by proxy, and entitled to vote at the Annual Meeting.

The Board unanimously recommends a vote FOR the election of
the Nominees to the Board.

PROPOSAL 2--THE STOCK OPTION PROPOSAL

As approved by the Board of Directors on July 23, 1997, the Company
proposes that the stockholders adopt the Northstar Health Services, Inc. 1997
Stock Option Plan which authorizes options to purchase 1,000,000 shares of
Common Stock (the "1997 Stock Option Plan"). The 1997 Stock Option Plan is
designed to assist the Company in the recruitment, retention and motivation of
directors, officers, key employees and consultants who are both highly qualified
and in a position to make significant contributions to the Company's success.

Recommendation and Vote

Approval of the Stock Option Proposal requires the affirmative vote of
a majority of the shares of Common Stock present, in person or by proxy, at the
Annual Meeting.

The Board unanimously recommends a vote FOR the approval of
the Stock Option Proposal.

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PROPOSAL 3--THE INDEPENDENT PUBLIC ACCOUNTANTS PROPOSAL

Upon recommendation of the Audit Committee of the Board, the Board
proposes that the stockholders appoint the firm of Arthur Andersen LLP ("Arthur
Andersen") to serve as the independent public accountants of the Company for the
1997 fiscal year until the 1998 Annual Meeting. Arthur Andersen served as the
Company's independent public accountants for the 1996 fiscal year. A
representative of Arthur Andersen will attend the Annual Meeting, and will be
available to respond to questions and may make a statement if he or she so
desires.

Recommendation and Vote

Approval of the Independent Public Accountants Proposal requires the
affirmative vote of a majority of the shares of Common Stock present, in person
or by proxy, at the Annual Meeting.

The Board unanimously recommends a vote FOR the approval
of the Independent Public Accountants Proposal.

DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS

Stockholder proposals to be included in the Company's proxy statement
with respect to the 1998 Annual Meeting of Stockholders must be received by the
Company at its executive offices located at the Atrium, 665 Philadelphia Street,
Indiana, Pennsylvania 15701 no later than January 1, 1998.

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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The table below sets forth the names, ages and titles of the persons
who were directors and executive officers of the Company as of July 1, 1997,
each of whom was elected by shareholder consent on March 24, 1997 as a result of
the Consent Solicitation.

Directors and Officers
<TABLE>
<CAPTION>

Name Age Position
- ------------------------------------------------- ------- -----------------------------------------
<S> <C> <C>

Thomas W. Zaucha (51) is the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Mr. Zaucha founded
Keystone Rehabilitation Systems, Inc. ("Keystone") in 1981 and served as its
Chairman, President and Chief Executive Officer until Keystone merged with
Northstar in 1995. Mr. Zaucha has approximately 28 years of experience in health
care and physical therapy related industries. Mr. Zaucha is also a member of
numerous professional and community organizations. His business address is that
of the Company.

Lawrence F. Jindra, M.D. (38) has served as a Director of the Company
since being elected by shareholder consent in March 1997. Dr. Jindra has served
as the Independent Scientific/Technical Consultant to Biomedical Venture Finance
since 1982. Dr. Jindra has also served as the Assistant Chief of Ophthalmology
and as the Founder and Director of the Glaucoma Consultation Unit of the United
States Department of Veterans Affairs Medical Center, Northport, New York, since
1994 and 1989, respectively. From 1992 to 1993, Dr. Jindra served as a White
House Fellow, Office of Science & Technology Policy and President's Task Force
for National Health Care Reform. Dr. Jindra has rendered consulting service to
Commonwealth Associates, the Company's financial advisor, from time to time. His
business address is 124 Cisney Avenue, Floral Park, New York 11001.

James H. McElwain (50) has served as a Director of the Company since
being elected by shareholder consent in March 1997. Mr. McElwain has served as
the Chief Operating Officer of S. W. Jack Drilling Company since January 1995.
From September 1988 until December 1994, Mr. McElwain

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served as the Vice President of Finance of Keystone, which merged with the
Company in 1995. His business address is 57 South Ninth Street, Indiana,
Pennsylvania 15701.

Mark G. Mykityshyn (39) has served as a Director of the Company since
being elected by shareholder consent in March 1997. Mr. Mykityshyn has served as
a Technical and Financial Consultant with High Technology Venture Finance since
1995. Mr. Mykityshyn has also served as a Management and Technology Consultant
with Booz Allen & Hamilton, Inc. since 1993 and was an Adjunct Professor of
Aeronautics at The George Washington University from 1994-1995. Prior to 1993,
Mr. Mykityshyn served as an aviator in the United States Marine Corps
(1982-1989) and earned the Degree of Engineer of Aeronautical and Astronautical
Engineering and the Degree of Master of Science in Aeronautical and
Astronautical Engineering from the Massachusetts Institute of Technology and a
Masters Degree in Public Administration (Science and Technology Policy
concentration) from Harvard University (1990-1993). His business address is 1100
Circle 75 Parkway, Suite 770, Atlanta, Georgia 30339.

Roger J. Reschini (59) has served as a Director of the Company since
being elected by shareholder consent in March 1997. Mr. Reschini founded the
Reschini Agency, Inc. (the "Reschini Agency"), a multiple line insurance agency,
in 1979 and founded TFID, Inc., a real estate development company, in 1984. Mr.
Reschini has also been the recipient of a Benjamin Rush Award and a Paul Harris
Fellowship. The Reschini Agency acts as the Company's broker for professional
and general liability insurance for which the Company pays premiums of
approximately $300,000 annually and the agency retains customary commissions.
His business address is Reschini Agency, Inc., Laurel Place, 922 Philadelphia
Street, Indiana, Pennsylvania 15701.

David B. White (41) has served as a Director of the Company since being
elected by shareholder consent in March 1997. Mr. White is a member of Burns,
White & Hickton (Pittsburgh, PA). Mr. White was admitted to the practice of law
in 1982, and he is currently a member of the Allegheny County, Pennsylvania and
American Bar Associations; the Hospital Association of Pennsylvania; the
National Order of Barristers; and the Academy of Trial Lawyers. Mr. White's
principal practice areas are general and commercial litigation, insurance law
and health care law. His business address is Burns, White & Hickton, 2400 Fifth
Avenue Place, 120 Fifth Avenue, Pittsburgh, Pennsylvania 15222.

Michael S. Delaney (47) has served as corporate counsel of the Company
since November 15, 1995, and as its Assistant Secretary and Assistant Treasurer
since March 24, 1997. Mr. Delaney has also served as corporate counsel to
Keystone since 1981. Mr. Delaney is a name partner in Delaney & Delaney
(Indiana, Pennsylvania). Mr. Delaney was admitted to the practice of law in
1977, and is currently a member of the Indiana County, Pennsylvania and American
Bar Associations. His business address is Delaney & Delaney, 936 Philadelphia
Street, Indiana, Pennsylvania, 15701.

BOARD OF DIRECTORS; BOARD COMMITTEES

Board of Directors Meetings; Board Committee Meetings

During 1996, the Board met 13 times with action taken by unanimous
written consent on three occasions; the Nominating Committee met twice; the
Audit Committee met 10 times; and the Compensation Committee met 6 times. Each
of the Company's Directors attended 100% of the total number of meetings of the
Board and Committees on which he served during 1996.

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Nominating Committee

The Nominating Committee of the Board, which presently consists of
Messrs. Jindra, Mykityshyn, Reschini and White (effective May 19, 1997)
identifies and submits on an annual basis to the full Board nominees to be
placed on the ballot for election to the Board at each annual meeting of
stockholders. The Nominating Committee will consider suggested nominees to be
placed on the ballot for election to the Board at each annual meeting of
stockholders in accordance with applicable rules and regulations promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
rules and regulations provide that the Company is not required to include a
stockholder proposal in its proxy materials unless it is received by a specified
date. Accordingly, all recommended nominations to be placed on the ballot for
election to the Board at the 1998 Annual Meeting of Stockholders must be in
writing and must be received by the Company on or before its close of business
on January 1, 1998. During 1996, the Nominating Committee, which was formed on
November 4, 1996, consisted of Messrs. Steven N. Brody, Robert J. Smallacombe
and David D. Watson, each of whom was removed from office as a result of the
Consent Solicitation.

Audit Committee

The Audit Committee of the Board, which presently consists of Messrs.
McElwain, Reschini and White (effective March 24, 1997), provides oversight of
the Company's financial reporting process, reviews the services provided by the
Company's independent public accountants, consults with such independent public
accountants on audits and proposed audits, reviews the need for internal
auditing procedures and assesses the adequacy of internal controls. During 1996,
the Audit Committee, which was formed on May 20, 1996, consisted of Messrs.
Brody and Smallacombe, both of whom were removed from office as a result of the
Consent Solicitation.

Compensation Committee; Compensation Committee Interlocks and
Insider Participation

The Compensation Committee of the Board, which presently consists of
Messrs. Jindra, Mykityshyn, Reschini and White (effective May 19, 1997),
establishes, reviews and approves compensation programs of the Company
generally, and approves salaries and bonuses for officers and certain other
salaried employees of the Company. In addition, the Compensation Committee
administers the Company's 1992 Stock Option Plan and 1994 Non-Employee Director
Stock Option Plan and determines which eligible employees and consultants of the
Company may participate in the Plans and the type, extent and terms of the
equity-based awards to be granted to them. During 1996, the Compensation
Committee, which was formed on May 20, 1996, consisted of Messrs. Brody, Jarrett
and Smallacombe, each of whom was removed from office as a result of the Consent
Solicitation.

Special Committee

The Special Committee of the Board, which presently consists of Messrs.
Jindra and Mykityshyn (effective May 19, 1997), has been formed to review
proposals regarding the restructuring of the subordinated debt held by Mr.
Zaucha and to review the Company's obligations to Mr. Zaucha (i) under certain
earn out provisions of the Northstar/Keystone merger agreement and (ii) under
lease agreements applicable to certain real property owned by Mr. Zaucha and his
family which are leased to the Company.

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1997 STOCK OPTION PLAN

Purpose

The Company's 1997 Stock Option Plan, which is attached hereto as
EXHIBIT A, is intended as an incentive and to encourage stock ownership by
officers, consultants, directors and certain other key employees of the Company
and its subsidiaries in order to increase their proprietary interest in the
Company's success and to encourage them to remain in the employ or service of
the Company.

Administration

The 1997 Stock Option Plan is administered by the Compensation
Committee (the "Committee"), which is appointed by the Board of Directors, as
described in the Plan. The Committee, subject to the provisions of the 1997
Stock Option Plan, in its sole discretion, may grant options under the Plan, and
has the power to construe the Plan, to determine all questions thereunder and to
adopt and amend such rules and regulations for the administration of the 1997
Stock Option Plan as it may deem desirable.

Eligibility, Grant of Options

Pursuant to the 1997 Stock Option Plan, key persons of the Company and
its subsidiaries who have been selected by the Committee as participants are
eligible to receive stock options. In addition, under the 1997 Stock Option
Plan, certain directors of the Company who are not employees of the Company may
be eligible to receive limited stock options pursuant to a formula grant to be
determined and instituted at the discretion of the Committee.

Options granted under the 1997 Stock Option Plan may be "incentive
stock options" ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options
("NQSOs"); provided, however, that ISOs may only be granted to participants who
are also employees of the Company and its subsidiaries. The exercise price of
the options will be determined by the Committee when the options are granted,
subject to a minimum price in the case of ISOs of the Fair Market Value (as
defined in the 1997 Stock Option Plan) of the Common Stock on the date of grant
and a minimum price in the case of NQSOs of 85% of the Fair Market Value of the
Common Stock on the date of grant. Options vest and become exercisable as
determined by the Committee. The option exercise price may be paid in cash, by
check, by delivery to the Company shares of Common Stock already owned by the
option holder for at least six months, or by such other method as the Committee
may permit from time to time.

Amount of Shares

The aggregate number of shares of Common Stock that may be issued
pursuant to a stock option under the 1997 Stock Option Plan may not exceed
1,000,000. The maximum number of shares which may be subject to options in any
calendar year to an option holder shall not exceed 100,000 shares.

<PAGE>

Effect of Change in Control of the Company

In the event of a Change in Control (as defined in the 1997 Stock
Option Plan) of the Company, all options will become immediately vested and
exercisable.

Term of Options

No options may be granted under the 1997 Stock Option Plan after
September 11, 2007.

Market Value

The market value of the Common Stock as determined by the closing price
of July 15, 1997 was $3.00 per share.

Federal Tax Consequences

Set forth below is a brief description of the federal income tax
consequences applicable to ISOs and NQSOs granted under the 1997 Stock Option
Plan.

ISOs

No taxable income is realized by the optionee upon the grant or
exercise of an ISO. If Common Stock is issued to an optionee pursuant to the
exercise of an ISO, and if no disqualifying disposition of such shares is made
by such optionee within two years after the date of grant or within one year
after the transfer of such shares to such optionee, then (1) upon sale of such
shares, any amount realized in excess of the option price will be taxed to such
optionee as a long-term capital gain and any loss sustained will be a long-term
capital loss, and (2) no deduction will be allowed to the optionee's employer
for federal income tax purposes.

If the Common Stock acquired upon the exercise of an ISO is disposed of
prior to the expiration of either holding period described above, generally (1)
the optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the fair market value of such shares at
exercise (or, if less, the amount realized on the disposition of such shares)
over the option price paid for such shares, and (2) the optionee's employer will
be entitled to deduct such amount for federal income tax purposes if the amount
represents an ordinary and necessary business expense. Any further gain (or
loss) realized by the optionee will be taxed as short-term or long-term capital
gain (or loss), as the case may be, and will not result in any deduction by the
employer.

Subject to certain exceptions for disability or death, if an ISO is
exercised more than three months following termination of employment, the
exercise of the option will generally be taxed as the exercise of an NQSO.

For purposes of determining whether an optionee is subject to any
alternative minimum tax liability, an optionee who exercises an ISO generally
would be required to increase his or her alternative minimum taxable income, and
compute the tax basis in the stock so acquired, in the same manner as if the
optionee had exercised an NQSO. Each optionee is potentially subject to the
alternative minimum tax. In substance, a taxpayer is required to pay the higher
of his/her alternative minimum tax liability or his/her

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"regular" income tax liability. As a result, a taxpayer has to determine his/her
potential liability under the alternative minimum tax.

In general, for purposes of the alternative minimum tax, the exercise
of an ISO will be treated essentially as if it were the exercise of an NQSO. As
a result, the rules of Section 83 of the Code relating to transfers of property,
including restricted property, will apply in determining the optionee's
alternative minimum taxable income. Consequently, an optionee exercising an ISO
with respect to unrestricted Common Stock will have income, for purposes of
determining the base for the application of the alternative minimum tax, in an
amount equal to the spread between the option price for the shares and the fair
market value of the shares on the date of exercise.

NQSOs

With respect to NQSOs: (1) no income is realized by the optionee at the
time the Option is granted; (2) generally, at exercise, ordinary income is
realized by the optionee in an amount equal to the difference between the option
price paid for the shares and the fair market value of the shares, if
unrestricted, on the date of exercise, and the optionee's employer is generally
entitled to a tax deduction in the same amount subject to applicable tax
withholding requirements; and (3) at sale, appreciation (or depreciation) after
the date of exercise is treated as either short-term or long-term capital gain
(or loss) depending on how long the shares have been held.

Section 162(m) Deductibility Limitation

Section 162(m) of the Code provides that the deduction by a
publicly-held corporation for compensation paid in a taxable year to the chief
executive officer and the four other most highly compensated executive officers
of the corporation is limited to $1 million per each individual officer. For
purposes of Section 162(m) of the Code, compensation which is performance-based
is not counted as subject to the deductibility limitation. Income pursuant to
options granted is intended to be fully deductible by the Company, by qualifying
such income as performance-based compensation and, therefore, exempt from the
limitations of Section 162(m) of the Code.

The foregoing summary with respect to Federal income taxation does not
purport to be complete and reference is made to the applicable provisions of the
Code.

<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
MANAGEMENT AND DIRECTORS

The following table sets forth information as of July 15, 1997 with respect to
the beneficial ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock; (ii) each person serving as a director of the Company; (iii) the
Company's Chief Executive Officer and each of the three remaining most highly
compensated executive officers (collectively, the "Named Executive Officers")
and (iv) all executive officers and directors of the Company as a group. Unless
otherwise indicated, all shares are owned directly and the indicated owner has
sole voting and dispositive power with respect thereto.
<TABLE>
<CAPTION>

Common Stock Beneficially Owned(1)
--------------------------------------------
Beneficial Owner Number(2) Percent
---------------------------------------------------- ------------------ -------------------
<S> <C> <C>

Thomas W. Zaucha(3) 949,958 16.2%
Lawrence F. Jindra, M.D.(4)........................ 25,000 *
James H. McElwain(4)............................... 25,000 *
Mark G. Mykityshyn(4).............................. 25,000 *
Roger J. Reschini(4)............................... 25,000 *
David B. White(4).................................. 25,000 *
Michael S. Delaney(5).............................. 43,500 *
Mellon Bank Corporation(6)......................... 476,000 8.1%
All Current Directors and Executive Officers as a
group (total 6 persons)........................ 1,099,958 18.7%
---------
*Less than 1% of the outstanding Common Stock.
</TABLE>

(1) Pursuant to the regulations of the Securities and Exchange Commission
(the "Commission"), shares are deemed to be "beneficially owned" by a
person if such person directly or indirectly has or shares (i) the power
to vote or dispose of such shares, whether or not such person has any
pecuniary interest in such shares, or (ii) the right to acquire the power
to vote or dispose of such shares within 60 days, including any right to
acquire through the exercise of any option, warrant or right.

(2) Represents total number of shares of Common Stock owned by each person,
which each named person or group has the right to acquire, through the
exercise of options within sixty (60) days, together with Common Stock
currently owned, as a percentage of the total number of shares of Common
Stock outstanding as of July 15, 1997. In accordance with the
Commission's rules, the ownership percentage of each person or group is
calculated treating all shares beneficially owned by such person or group
as issued and outstanding shares.

(3) Includes 667,201 shares of Common Stock owned directly by Mr. Zaucha and
his wife, Alice L. Zaucha, as joint tenants, 207,757 shares of Common
Stock are held by the Zaucha Family Limited Partnership whose sole and
general partners are currently Mr. Zaucha, Mrs. Zaucha and their four
children, and 75,000 shares of Common Stock which are held by Mr.
Zaucha as sole beneficial owner. Pursuant to the terms of the

12
<PAGE>

Northstar/Keystone merger agreement, Mr. Zaucha has the right to seek
stockholder approval for the conversion of certain of the debt owned to
him by the Company into Common Stock of the Company. If such conversion
is sought and subsequently approved by stockholders, Mr. Zaucha's
beneficial ownership of Common Stock would increase significantly.

(4) Comprised entirely of Options to purchase shares of Common Stock,
which Options were granted on March 24, 1997 upon election to the
Board of Directors.

(5) Includes 25,000 Options to purchase shares of Common Stock,
which Options were granted on March 24, 1997 upon appointment as
an officer of the Company.

(6) Mellon Bank, N.A. shares voting and dispositive power with respect
to the number of shares listed as beneficially owned by Mellon Bank
Corporation.

Former Directors and Officers*
<TABLE>
<CAPTION>

Common Stock Beneficially Owned(1)
--------------------------------------------
Beneficial Owner** Number(2) Percent
---------------------------------------------------- ----------------- -------------------
<S> <C> <C>

Steven N. Brody.................................... 157,500 2.6%
Robert J. Smallacombe.............................. 100,000 1.7%
David D. Watson.................................... 90,230 1.5%
Charlie B. Jarrett, Jr............................. 25,000 *
Timothy C. Pesci................................... 25,000 *
John A. Lombardi................................... 75,000 1.3%
</TABLE>

---------
* Messrs. Brody, Smallacombe, Jarrett and Pesci were removed
from their respective positions with the Company on March 24,
1997 as a result of the Consent Solicitation. Mr. Watson was
removed as a Director and an officer on March 24, 1997 and as
an employee as of July 5, 1997. Mr. Lombardi was removed from
his positions as Executive Vice President, Chief Financial
Officer and Treasurer of the Company on May 20, 1997 by action
of the Board of Directors.

** Messrs. Brody, Smallacombe and Watson as well as the other
former directors and officers listed above may make claims to
certain options to purchase the common stock of the Company.

Mr. Brody is entitled to receive (1) 7,500 options at $6.13
per share granted on December 16, 1995, (2) 50,000 options at
$5.25 per share granted pursuant to written consent of the
Board on February 2, 1996, (3) 25,000 options allegedly at
$1.75 per share granted by the Board in May 1996 and (4)
75,000 options at $1.00 per share pursuant to his April 2,
1996 contract. In addition, Mr. Brody may make a claim (which
the Company would dispute) to 200,000 options at $1.75
pursuant to a draft resolution presented to the Board on
January 15, 1997.

Mr. Smallacombe may make a claim to be entitled to receive (1)
25,000 options at $2.00 per share pursuant to an Independent
Consulting Contract, dated August 20, 1996, (2) 25,000 options
allegedly at $1.75 per share pursuant to a resolution adopted
by the Board in May 1996 and (3) 50,000 options at $1.75 per
share pursuant to an Independent Consulting Contract, dated
January 20, 1997. In addition, Mr. Smallacombe may make a
claim (which the Company would dispute) to (i) an additional
100,000 options at $1.75 per share under the Independent
Consulting Contract,

13
<PAGE>

dated January 20, 1997 and (ii) 200,000 options at $1.75 per
share pursuant to a draft resolution presented to the Board on
January 15, 1997.

Mr. Watson holds options to purchase 50,000 shares at $5.50
per share pursuant to an Employment Agreement, dated November
15, 1995. In addition, Mr. Watson may make a claim (which the
Company would dispute) to (i) 205,000 options at $1.75
pursuant to a draft resolution presented to the Board on
January 15, 1997 and (ii) 205,000 options at $1.75 per share
pursuant to an alleged Amended and Restated Employment
Agreement, dated as of March 13, 1997.

The Company believes that some or all of the options claimed
by the Company's former executive officers have expired or
were improperly or invalidly granted and intends to contest
the validity of these options in whole or in part. (All
Company options by their terms expire between three months and
one year after the optionee's termination of employment or
directorship.) The Company may, as a result of litigation or
settlement, honor these options in whole or in part.

Executive Compensation

The following table shows, for the fiscal years ended December 31, 1994,
1995 and 1996, the cash compensation paid by the Company and its subsidiaries,
as well as certain other compensation paid or accrued for those years, to each
of the most highly compensated executive officers of the Company in 1996 (the
"Named Executive Officers") in all capacities in which they served.

Summary Compensation Table
<TABLE>
<CAPTION>

Annual Compensation Long Term Compensation(1)
--------------------------------------- ---------------------------
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation(2) Options (#) sation
- --------------------------- ---- ------- ----- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>

Thomas W. Zaucha 1996 $ 125,000 $ 0 $ 0 0 $ 300
Chairman, President and CEO (3) 1995 17,308 $ 0 $ 0 0 $ 300
1994 N/A N/A N/A N/A N/A

Ralph C. Sweithelm 1996 $ 85,531 $ 182,538 $ 0 0 $ 300
Former President Keystone 1995 $ 6,338 $ 8,957 $ 0 0 $ 300
Rehabilitation Systems (4) 1994 N/A N/A N/A N/A N/A

</TABLE>

14
<PAGE>

Former Executive Officers*
<TABLE>
<CAPTION>

Annual Compensation Long Term Compensation(1)
-------------------------------------------------- -------------------------

Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Principal Position Year Salary Bonus sation(2) Options (#) sation
- --------------------------- ---- ------- ----- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>

David D. Watson 1996 $ 75,000 $ 0 $ 0 0 $ 300
Former President and COO (5) 1995 $ 6,635 $ 0 $ 0 50,000 $ 300
1994 N/A N/A N/A N/A N/A

John A. Lombardi 1996 $ 30,156 $ 0 $ 0 75,000 $ 0
Former Executive V.P., CFO and 1995 N/A N/A N/A N/A N/A
Treasurer (6) 1994 N/A N/A N/A N/A N/A

</TABLE>

-----------

* Mr. Watson was removed as a director and an officer of the Company on
March 24, 1997 and as an employee as of July 5, 1997. Mr. Lombardi was
removed from his positions with the Company on May 20, 1997.

(1) The Company has a 401(k) plan which is being merged with the Keystone
401(k) plan. The plans call for certain matching contributions by the
employer equal to 50% of the participant's contribution up to a maximum
employer contribution of $300 per year. The plan also calls for
discretionary employer contributions, none of which were made after the
November 1995 merger of Northstar and Keystone.

(2) During the year ended December 31, 1996, the Named Executives received
medical benefits under the Company's group insurance policy, including
disability and life insurance benefits which are equivalent to such
benefits paid to all other full-time employees. The aggregate amount of
all perquisite compensation was less than 10% of the total annual salary
and bonus reported for each Named Executive with the exception of Mr.
Zaucha, for whom the Company made payments of $14,400 in respect of a
leased automobile in addition to his other benefits.

(3) During each of 1996 and the applicable period of 1995, Mr. Zaucha
received annual cash compensation in the amount of $125,000, which
consisted entirely of salary pursuant to his employment contract which is
summarized herein. Mr. Zaucha also receives funds from the Company in the
form of lease payments, note payments and other related-party
transactions which relate to the merger with Keystone. See, "Certain
Relationships and Related Transactions." Lease payments to Mr. Zaucha for
1996 and 1995 were $470,364 and $59,000, respectively. In conjunction
with the merger with Keystone, the Company is required to make earn out
payments to Mr. Zaucha, Alice Zaucha and the Zaucha Family Limited
Partnership in certain events, none of which have been made to date. The
Company also paid $86,320 in 1996 and $9,156 in 1995 for real estate
maintenance and housekeeping services to Impulse Development Corporation,
a company controlled by Mr. Zaucha.

15
<PAGE>

(4) Because Mr. Sweithelm was the president of the Company's largest
revenue-generating subsidiary during 1996, he performed policy-making
functions for Northstar and is included as a Named Executive.

(5) Mr. Watson holds a note payable by the Company resulting from the merger
with Keystone under which he receives $75,000 annually.

(6) Mr. Lombardi was hired by the Company in September 1996 pursuant to an
employment contract which is summarized herein. His annual salary
pursuant to such contract was $112,000.

Stock Option Grants Table

The following table sets forth information concerning individual grants
of options to purchase Common Stock made to Named Executive Officers during 1996
and through the fiscal period ended March 31, 1997.
<TABLE>
<CAPTION>

Number of Potential Realizable
Securities % of Total Value at Assumed
Underlying Options Exercise Annual Rates of Stock
Options Granted to or Base Expiration Price Appreciation for
Name Granted Employees Price Date Option Term
- ---- ---------- ---------- -------- ---------- ----------------------
5% 10%
--------- ---------
<S> <C> <C> <C> <C> <C> <C>

Thomas W. Zaucha............ 0 0% $-- -- -- --
Lawrence F. Jindra, M.D. 25,000 4.7% 2.375 3/24/07 $37,341 $94,628
James H. McElwain 25,000 4.7% 2.375 3/24/07 $37,341 $94,628
Mark G. Mykityshyn 25,000 4.7% 2.375 3/24/07 $37,341 $94,628
Roger J. Reschini 25,000 4.7% 2.375 3/24/07 $37,341 $94,628
David B. White 25,000 4.7% 2.375 3/24/07 $37,341 $94,628
Michael S. Delaney.......... 25,000 4.7% 2.375 3/24/07 $37,341 $94,628

</TABLE>

Former Executive Officers*
<TABLE>
<CAPTION>

Number of Potential Realizable
Securities % of Total Value at Assumed
Underlying Options Exercise Annual Rates of Stock
Options Granted to or Base Expiration Price Appreciation for
Name Granted Employees Price Date Option Term
- ---- ---------- ---------- -------- ---------- ------------------------------------
0% 5% 10%
--------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>

Steven N. Brody............. 7,500 29.6% $6.13 3/24/98 -- $ 28,913 $ 73,272
50,000 $5.25 3/24/98 -- $ 165,085 $ 418,357
25,000 $1.75 3/24/98 -- $ 27,514 $ 69,726
75,000 $1.00(1) 3/24/98 $159,375 $ 306,772 $532,908
Robert J. Smallacombe....... 25,000 18.8% $2.00 3/24/98 -- $ 31,445 $ 79,687
25,000 $1.75 3/24/98 -- $ 27,514 $ 69,726
50,000 $1.75 3/24/98 -- $ 55,028 $ 139,452
David D. Watson............. 50,000 9.4% $5.50 10/05/97 -- $ 172,946 $ 438,279
John A. Lombardi............ 25,000 14.1% $1.75 8/20/97 -- $ 27,514 $ 69,726
50,000 $2.00 8/20/97 -- $ 62,889 $ 159,374

</TABLE>

16
<PAGE>

-----------

* Messrs. Brody and Smallacombe were removed from their
respective positions with the Company on March 24, 1997. Mr.
Watson was removed as a Director and an officer of the Company
on March 24, 1997 and as an employee as of July 5, 1997. Mr.
Lombardi was removed from his positions with the Company on
May 20, 1997.

(1) The closing price of the Company's Common Stock on April 2, 1996
was $3.125 per share.

Aggregate Stock Option Exercise Table

The following table sets forth information regarding the exercise of
Options by Named Executive Officers during 1996. The table also shows the number
and value of unexercised Options which were held by the Named Executive Officers
as of December 31, 1996 and through the fiscal period ended March 31, 1997.
<TABLE>
<CAPTION>

Number of
Securities
Underlying
Unexercised
Number of Options Value of Unexercised
Shares Acquired Value Realized Exercisable/ In-the-Money Options
Name on Exercise Unexercisable Exercisable/Unexercisable(1)
---- --------------- -------------- ------------- ----------------------------
<S> <C> <C> <C> <C>

Thomas W. Zaucha........... 0 $0 0 $ 0/0
Lawrence F. Jindra, M.D. 0 $0 25,000 $ 15,625
James H. McElwain.......... 0 $0 25,000 $ 15,625
Mark G. Mykityshyn......... 0 $0 25,000 $ 15,625
Roger J. Reschini.......... 0 $0 25,000 $ 15,625
David B. White............. 0 $0 25,000 $ 15,625
Michael S. Delaney......... 0 $0 25,000 $ 15,625
</TABLE>

17
<PAGE>

Former Officers and Directors*
<TABLE>
<CAPTION>

Steven N. Brody............. 0 0 157,500 $ 181,250
Robert J. Smallacombe....... 100,000 $ 118,750
David D. Watson............. 0 0 50,000 $ 0/0
John A. Lombardi............ 0 0 25,000/50,000 $ 31,250/50,000
</TABLE>

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

(1) Based on the closing price of the Company's Common Stock on
July 15, 1997 of $3.00 per share.

Director Compensation

Each Director who is not an employee of the Company receives a
quarterly retainer fee of $3,000 and an attendance fee of $1,000 for each Board
of Director meeting or committee meeting at which he is present in person or via
telephonic means. In addition, Directors receive options to purchase 25,000
shares, at market value, upon joining the board, unless they own more than 10%
of the outstanding common stock.

Employment Agreements

The Company has an employment contract with its Named Executives Thomas
W. Zaucha and Ralph C. Sweithelm. During 1996, the Company had employment
agreements with David D. Watson and John A. Lombardi, both of which agreements
have since been terminated. On March 26, 1997, Messrs. Brody, Smallacombe,
Watson, Jarrett and Pesci, all former directors of the Company, purported to
have the Company enter into employment agreements with each of Messrs. Lombardi,
Sweithelm, Watson, Edward Banos and Brian K. Strong and with Ms. Elaine
Professori. The current Board of Directors

18
<PAGE>

believes these agreements, and any options to purchase the common stock of the
Company contained therein, are invalid.

Mr. Zaucha

Mr. Zaucha's contract with the Company is dated November 15, 1995 and
has a five-year term. Pursuant to the contract, Mr. Zaucha is to serve as the
Company's CEO with a base salary of $125,000. The contract contains
confidentiality and non-compete provisions. See "Certain Relationships and
Related Transactions." On February 13, 1997, the former Board removed Mr. Zaucha
from his office as Chairman of the Board and Chief Executive Officer. On March
24, 1997, Mr. Zaucha was re-elected to the Board by written consent of
stockholders and thereupon appointed as the Company's Chairman of the Board and
Chief Executive Officer.

Mr. Sweithelm

Mr. Sweithelm entered into an employment contract with the Company in
January 1995. On March 26, 1997, the former Board purported to enter into a new
employment agreement with Mr. Sweithelm, dated as of March 1, 1997, pursuant to
which he was to serve as the president of Keystone, a subsidiary of the Company.
The Company believes this agreement to be invalid.

Mr. Watson

Mr. Watson's contract with the Company was dated November 15, 1995 and
had a five-year term. Pursuant to the contract, Mr. Watson was to serve as the
Company's President with a base salary of $75,000. The contract contained
confidentiality and non-compete provisions. On March 26, 1997, the former Board
purported to enter into a Restated and Amended Employment Agreement with Mr.
Watson. The Company believes the agreement to be invalid. The Board terminated
Mr. Watson's employment agreement with the Company as of July 5, 1997.

Mr. Lombardi

Mr. Lombardi's contract with the Company was dated September 16, 1996
and had a renewable one-year term. Pursuant to the contract, Mr. Lombardi was to
serve as the Company's Executive Vice President, Chief Financial Officer and
Treasurer with an annual salary of $112,000. The contract also entitled Mr.
Lombardi to options to purchase 25,000 shares of common stock at a price of
$1.75 per share (the prevailing market price) on the effective date of his
employment contract, and options to purchase 50,000 shares of common stock at a
price of $2.00 per share; however, such options were not exercisable until the
Company's common stock is listed and trades at a price in excess of $5.93 per
share for a period of ten consecutive trading days. None of the options have
been issued as of the date of this filing. The contract contained
confidentiality provisions and a non-compete clause. On March 26, 1997, the
former Board purported to enter into a Restated and Amended Employment Agreement
with Mr. Lombardi. The Company believes the agreement to be invalid. The Board
terminated Mr. Lombardi's employment agreement with the Company on May 20, 1997.

<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Consent Solicitation Expenses

Since the decision of the Delaware Chancery Court confirming the
results of the Consent Solicitation was affirmed by the Delaware Supreme Court
on August 1, 1997, the Company will reimburse Mr. Zaucha for the expenses he
incurred in connection with the Consent Solicitation. To date, those expenses,
which primarily consist of investment advisory fees, legal fees, printing and
proxy solicitor costs and incidental expenses, approximate $1,600,000.

Transactions with Former Board Members

In 1996, Brody Associates, a consulting firm wholly-owned by Mr. Brody
was retained to perform a variety of consulting services for the Company related
to its investigation of former management and related to the corporate
restructuring of the Company. During 1996, the Company paid $223,795 to Brody
Associates for these services and related business expenses. At December 31,
1996, the Company had a liability to Brody Associates of $25,586. Mr. Brody was
removed from his positions with the Company on March 24, 1997, as confirmed by
the Delaware Chancery Court on May 8, 1997.
See "Legal Proceedings."

In 1996, the Company retained Executive Advisory Group, Ltd., whose
sole owner is Mr. Smallacombe, to serve as a management consultant and to aid in
the corporate restructuring. For these services and related business expenses,
the Company paid $189,503 to Executive Advisory Group, Ltd. As of December 31,
1996, the Company owed $9,750 to Executive Advisory Group, Ltd. Mr. Smallacombe
was removed from his respective positions with the Company on March 24, 1997, as
confirmed by the Delaware Chancery Court on May 8, 1997. See "Legal
Proceedings."

In conjunction with the investigation of former management, the Company
retained Plowman, Speigel & Lewis, P.C. in order to assist in understanding
certain corporate governance and securities litigation issues. Charles B.
Jarrett, Jr., formerly a Director of the Company, is also a member of that firm.
During 1996, but prior to Mr. Jarrett's appointment to the Board of Directors,
the Company paid to Plowman, Speigel & Lewis, P.C. $32,548 for professional
services rendered.

The Company also has certain contractual obligations due to employees.
One such employee is the wife of Mr. Watson, an officer and director of the
Company. As of December 31, 1996, Mrs. Watson had provided $126,354 to the
Company in contractual deposits. The corresponding maximum amount payable to
Mrs. Watson as of December 31, 1996 in accordance with terms of those
contractual obligations is approximately $182,000.

Keystone Acquisition

Mr. Zaucha was the founder and principal owner of Keystone, which
merged with the Company in November 1995 and is now the Company's principal
operating subsidiary.

As part of the acquisition of Keystone, the Company paid cash of
$450,000 and issued 150,000 shares of Common Stock with a market value of
$937,500 to Commercial Financial Corporation ("CFC")

20
<PAGE>

for services rendered. CFC is wholly-owned by Nichlaus P. Horoczko who is a
personal friend and business associate of Mark A. DeSimone, the Chairman and
Chief Executive Officer of Northstar at the time of the merger with Keystone,
and might be deemed a related party. Additionally, the Company has made certain
guarantees to CFC that the aforementioned shares will be able to be sold with
net proceeds of at least $937,500. These costs were expensed during 1995.

The Company believes that these shares of Common Stock were sold on
February 12, 1996 for approximately $840,000. No additional compensation has
been requested by CFC for the shortfall in share proceeds. Mr. Horoczko is a
defendant in the Company's suit as discussed in the Company's Annual Report.

In connection with the Keystone acquisition, Messrs. Zaucha and Watson,
who both sold interests in the former Keystone, and are now or were officers
with Northstar, have gross debt and other amounts due directly to them of
$3,919,500 and $293,750, respectively, as of December 31, 1996 and $7,897,500
and $368,750 as of December 31, 1995. In addition, Mr. Zaucha's Family Limited
Partnership is due $1,105,500 and $2,227,500 as of December 31, 1996 and 1995,
respectively.

As required under the Merger Agreement, immediately prior to the
merger, Keystone transferred to the Zaucha Family Limited Partnership, of which
Mr. Zaucha is a general partner, all of the real estate previously owned by
Keystone in return for a payment of $5,215,568. The parcels of such real estate
used in Keystone's business were then leased to Keystone. At the request of Mr.
Zaucha, the Company has formed a Special Committee of the Board to evaluate the
fairness of the lease agreements as well as certain other financial arrangements
Mr. Zaucha has with the Company. See "Board of Directors; Board Committees."

The leases are for a period of ten years, and commenced November 15,
1995. Lease payments for 1996 and 1995 were $470,364 and $59,000, respectively.
Future minimum lease payments under these leases are as follows:

1997 $ 470,364
1998 470,364
1999 470,364
2000 470,364
2001 546,156
Thereafter 2,184,624
---------
Total $4,612,236

The Company also paid to Impulse Development Corporation, a company
controlled by Mr. Zaucha, certain sums related to housekeeping, maintenance and
leasehold improvement construction. In addition, a family member of the
Company's former Chief Financial Officer was employed by Impulse Development
Corporation. These payments totaled $86,320 in 1996 and $9,156 in 1995.

Transactions With Mark A. DeSimone

Mr. DeSimone was the Chairman of the Board and Chief Executive Officer
of Northstar from October 1991 until the merger with Keystone in November 1995.
Mr. DeSimone was removed from his

21
<PAGE>

respective positions with the Company in March 1996 after Mr. Zaucha uncovered a
series of what appeared to be irregular, self-interested transactions between
the Company and Mr. DeSimone.

During the year ended December 31, 1995, Mr. DeSimone reimbursed the
Company for $220,000 of expenses. During 1995 he also paid 7% interest of
$29,000 to the Company on this obligation. Conversely, the Company repaid a loan
of $162,000 to Mr. DeSimone on May 30, 1995 along with 8% per annum interest of
$6,000.

As of July 18, 1995, in consideration for Mr. DeSimone entering into an
extended non-compete agreement with the Company, fixing his compensation over
the term of the agreement and for returning to the Company options covering
250,000 shares of Common Stock, the Company amended, restated and replaced Mr.
DeSimone's previous employment agreement. In addition to annual compensation and
certain benefits, Mr. DeSimone received 30,000 shares of Common Stock with a
fair market value of $198,000, a one-time bonus of $175,000 and the repayment of
a personal loan to PNC Bank in the amount of $150,000. In connection with this
loan repayment, for each year Mr. DeSimone remained as an employee or consultant
to the Company, the Company agreed to waive repayment by Mr. DeSimone to the
Company of one-seventh of this loan satisfaction.

In September 1995, the Company received approximately $253,000 from Mr.
DeSimone for payment of third party receivables that the Company had recorded.

In February 1996, Mr. DeSimone terminated his employment with the
Company but continued to work as a consultant to the Company. His employment
contract was changed to a consulting arrangement with similar terms. The Company
paid him $47,000 under the terms of this agreement during 1996. In March 1996,
Mr. DeSimone resigned from the Board of Directors and the Company terminated its
relationship with him.

Mr. DeSimone personally guaranteed a facility with Integra Bank and
received a 5% guarantee fee totaling $325,000.

Mr. DeSimone was a director of SMT Health Services, Inc. (SMT) during
1995. Mr. DeSimone also had a five-year consulting arrangement with SMT from
which he received $75,000 for consulting service. Mr. DeSimone sold his
consulting business to the Company prior to 1995. Current management believes
that these and possibly other fees for consulting services should have been
remitted to the Company and is seeking to recover such fees.

Transactions With Med-Bill Corporation, Inc., Med Consulting and Med-Stat, Inc.

Med-Bill Corporation, Inc. (Med-Bill), which is a company located in
Western Pennsylvania, is a related party. Mr. James P. Shields, a cousin of Mr.
DeSimone is an officer and the sole owner of Med-Bill. Additionally, Mr.
DeSimone and his wife, Leslie M. DeSimone, are believed by current management to
be associated with Med-Bill and to have principal financial interests in
Med-Bill. Likewise, Med Consulting and Med-Stat, Inc. are believed by current
management to have relationships similar to that of Med-Bill.

22
<PAGE>

In 1994 the Company agreed to pay Med-Bill a financing fee of $250,000
in connection with the receipt of a loan. On May 29, 1995, the Company paid the
final installment of $150,000 toward the aforementioned financing fee.

Prior to 1995, Med-Bill purchased certain obligations of the Company
totaling $930,000. This obligation was paid in full during 1995. No interest was
paid on this note.

In the first quarter of 1995, the Company loaned Med-Bill and Med
Consulting $41,000 and $25,000, respectively, pursuant to a demand note that
bears interest at the rate of 9% per annum. At December 31, 1995, these amounts
were deemed uncollectible and were written-off.

On July 1, 1995, the Company entered into a lease agreement with
Med-Stat, Inc. for two pieces of ultrasound equipment in the amount of $225,000
and paid a deposit of $30,000. On August 31, 1995, the lease was bought-out by a
reduction in amounts due from Med-Bill of $167,500. Current management believes
that the equipment leased/purchased may have been used and may not have been
acquired at fair market value.

White Oak Diagnostics Systems

In November 1993, the Company acquired an interest in White Oak
Diagnostic Systems ("White Oak") from Northern Diagnostics Services, Inc.
("Northern Diagnostics"), an entity which was purportedly owned by Mr. James
Shields.

In connection with the acquisition, the Company agreed to make certain
contingent payments to either Northern Diagnostics or Med-Bill if gross
collected revenues exceeded $400,000 for 1995. The 1995 revenues exceeded the
aforementioned threshold and a contingent payment was made to Med-Bill during
the year of $85,000. Given the related party nature of the transaction, this
payment was treated as a disproportionate dividend as the Company was required
to record its investment in White Oak at the same basis as that of the related
parties' investment in White Oak.

Northern Diagnostics acquired White Oak from a group of physicians. In
August 1995, White Oak made payments to the former physician owners of
approximately $150,000. Current management believes that these payments by White
Oak represent amounts due to these physicians by Northern Diagnostics for the
acquisition.

On May 30, 1995, the Company paid $350,000 to Med-Bill to satisfy
amounts recorded as due Med-Bill.

PVL Acquisition

In connection with the purchase of Penn Vascular Labs, P.C. ("PVL") and
Vascusonics, Inc. ("Vascusonics"), the Company transferred to Ultrasonics, Inc.
("Ultrasonics"), all the receivables of PVL and Vascusonics as of December 1,
1995, with a value as stated in the acquisition agreement of $350,000 for no
known consideration. Ultrasonics is a related party and is owned by Mr. James
Shields and/or Mr. Jeff D. Bergman, the CEO and Chairman of the Board of SMT.

23
<PAGE>

The purchase agreement stated that certain equipment lease obligations
would be transferred to Ultrasonics. White Oak and Vascusonics then agreed to
sublease the equipment from Ultrasonics such that the Sellers (as defined in the
purchase agreement) would have no future liability under the leases. Also, White
Oak and the Company jointly and severally indemnified the Sellers from and
against any liability resulting from the failure of Ultrasonics to discharge all
obligations to the lessors after the date of the sale. Current management is not
aware of any consideration received by the Company from Ultrasonics in exchange
for the lease contracts, which current management believes yielded lease
payments to Ultrasonics which were in excess of fair market value for the leased
equipment, or issuance of the previously mentioned indemnification.

During 1996, the Company paid $53,341 in lease payments. Further,
although the lessor paid approximately $155,000 for the equipment which it
leased to the Company, the Company is scheduled to make lease payments totaling
approximately $1,333,000. After March 1996, the Company refused to pay any
further amounts under this contract, believing the payment to be excessive. The
Company is vigorously contesting this obligation.

In connection with this acquisition, the Company paid a brokerage fee
of $350,000 to Mr. James Shields.

Shields Management Agreement

Throughout 1995 the Company paid fees to Mr. James Shields or Med-Bill
in connection with certain management services that he provided at White Oak.
Additionally, upon the acquisition of PVL, Mr. Shields began providing such
services at PVL. In total, management fees of approximately $270,000 were paid
to Mr. Shields/Med-Bill during 1995. As of December 31, 1995, the Company had
approximately $37,000 due to Mr. Shields or Med-Bill. The Company severed its
relationship with Mr. Shields during the first quarter of 1996.

During 1996, the Company paid Mr. Shields $59,106 under the terms of
this contract. After March 1996, the Company refused to pay any further amounts
under this contract, believing the payments to be excessive. The Company is
vigorously contesting this obligation.

Other

During 1995, the Company paid $13,500 to Ogg Jones DeSimone &
Igneizi, a law firm in which Mr. DeSimone was a partner.

24
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the Exchange Act, the Company's directors and executive officers,
and any persons holding more than 10% of the outstanding Common Stock are
required to report their initial ownership of Common Stock and any subsequent
changes in that ownership to the Commission. Specific due dates for these
reports have been established by the Commission, and the Company is required to
disclose in this Proxy Statement any failure by such persons to file these
reports in a timely manner during the 1996 fiscal year. Based solely upon the
Company's review of copies of such reports furnished to it, the Company believes
that during the 1996 fiscal year and through the period ended July 15, 1997 its
executive officers and directors and the holders of more than 10% of the
outstanding Common Stock complied with all reporting requirements of Section
16(a) under the Exchange Act with the following exceptions: Mr. Smallacombe did
not timely file a Statement of Changes of Beneficial Ownership of Securities on
Form 4 in connection with certain open-market purchases of Common Stock; the
current Directors, with the exception of Mr. Zaucha, did not timely file a
Statement of Initial Beneficial Ownership on Form 3 in connection with their
election as directors of the Company; and Mr. Zaucha did not timely file a
Statement of Changes of Beneficial Ownership of Securities on Form 4 in
connection with the purchase of 75,000 shares of Common Stock in December 1996.

25
<PAGE>

EXECUTIVE COMPENSATION

Compensation Committee Report on Executive Compensation

Executive Compensation Policy. The Company's compensation policy for
all of its executive officers is formulated and administered by the Compensation
Committee of the Board. The Compensation Committee also administers the
Company's 1992 Stock Option Plan and its 1994 Non-Employee Director Stock Option
Plan, under which the Compensation Committee periodically grants Options to the
directors, executive officers and other employees of the Company. If approved by
stockholders, the Compensation Committee will also administer the Company's 1997
Stock Option Plan.

The primary goals of the Company's compensation policy are to attract,
retain and motivate skilled executive officers and to encourage them to act in
the best interests of the Company's stockholders. In determining the level of
executive compensation, certain quantitative and qualitative factors, including,
but not limited to, the Company's operating and financial performance, the
individual's level of responsibilities, experience, commitment, leadership and
accomplishments relative to stated objectives, and marketplace conditions are
taken into consideration.

Chief Executive Officer's Compensation. For 1996, the compensation of
Mr. Zaucha, the Chief Executive Officer of the Company, was set by the terms of
his employment agreement. A summary of the key provisions of Mr. Zaucha's
employment agreement is included elsewhere in this Proxy Statement. See
"--Employment Agreements." Mr. Zaucha also participates in benefit programs that
are generally available to employees of the Company, including medical benefits
and a 401(k) savings plan. Mr. Zaucha has not participated in the Company's
Stock Option Plans to date.

Executive Officer Compensation. During 1996, the Company also had
employment agreements with Messrs. Watson, Lombardi and Sweithelm. A summary of
the key provisions of these employment agreements are included elsewhere in this
Proxy Statement. See "--Employment Agreements." For the year ended December 31,
1996, compensation paid to the executive officers of the Company was determined
primarily pursuant to the terms of the employment agreements negotiated by the
Company with the executives. For discretionary compensation paid to executive
officers that is not set by employment agreements, the Compensation Committee
made subjective determinations on a case-by-case basis based on recommendations
of the Chief Executive Officer as to each executive's merit and contribution to
the success of the Company.

Section 162(m) of the Code. Section 162(m) of the Internal Revenue Code
of 1986, as amended (the "Code"), generally limits to $1 million the
deductibility by the Company of compensation paid in any one year to any
executive officer named in the Summary Compensation Table below. As none of the
executive officers of the Company are currently paid compensation in excess of
$1 million, the Company has not yet developed a policy with respect to Section
162(m) of the Code.

As submitted by the
Compensation Committee,
Lawrence F. Jindra, M.D.
Mark G. Mykityshyn
Roger J. Reschini
David B. White

26
<PAGE>

Performance Graph

The following graph compares the cumulative return on the Common Stock
from January 1, 1996, the first day of trading of the Common Stock on the Nasdaq
National Market (the "NNM"), to December 31, 1996 with such return for the NNM
Composite Index (the "NNM Index") and The Standard & Poor's Midcap Health Care
Services Index, a capitalization-weighted index that measures the performance of
the health care services sector of the Standard & Poor's Midcap Index (the
"Health Care Index"). The performance graph assumes (a) $100 was invested on
January 1, 1996 and (b) reinvestment of dividends. Each measurement point on the
graph below represents the cumulative stockholder return as measured by the
closing price at the end of each period during the period from January 1, 1996
through December 31, 1996. As depicted in the graph below, during this period,
the cumulative total return (i) for the Common Stock was (76.60)%, (ii) for the
NNM Index was 23.04% and (iii) for the Peer Group was (9.96)%.

Comparison of Cumulative Total Return (1)

[GRAPHIC OMITTED - information from the omitted line chart is presented in
the table below]

1/1/96 3/29/96 6/28/96 9/30/96 12/31/96
------ ------- ------- ------- --------
NNM Index 100 104.47 112.51 116.96 123.04

Health Care Index 100 102.63 91.35 90.75 90.04

Northstar 100 50.00 34.04 29.79 23.40

- ----------
(1) The Company's Common Stock was delisted by the NNM on May 31, 1996.

27
<PAGE>

OTHER BUSINESS OF THE MEETING

The Company is not aware of any matters to come before the Annual
Meeting other than those stated in this Proxy Statement. However, inasmuch as
matters of which management of the Company is not now aware may come before the
Annual Meeting or any adjournment, the proxies confer discretionary authority
with respect to acting thereon, and the persons named in such proxies intend to
vote, act and consent in accordance with their best judgment with respect
thereto. Upon receipt of such proxies (in the form enclosed and properly signed)
in time for voting, the shares represented thereby will be voted as indicated
thereon and in this Proxy Statement.

COPIES OF THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS, DATED AUGUST 6,
1997, MAY BE OBTAINED WITHOUT CHARGE BY ANY STOCKHOLDER TO WHOM THIS PROXY
STATEMENT IS SENT, UPON WRITTEN REQUEST TO INVESTOR RELATIONS, NORTHSTAR HEALTH
SERVICES, INC., THE ATRIUM, 665 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA
15701.

By Order of the Board of Directors

Thomas W. Zaucha

Chairman, President and
Chief Executive Officer

August 7, 1997

<PAGE>
NORTHSTAR HEALTH SERVICES, INC.
665 Philadelphia Street
Indiana, Pennsylvania 15701

PROXY FOR THE ANNUAL MEETING OF
STOCKHOLDERS 10:30 a.m., Eastern time, on
September 11, 1997

The undersigned hereby appoints Thomas W. Zaucha and Michael S.
Delaney, and each of them, with full power of substitution, as proxies of the
undersigned to vote all shares of stock which the undersigned is entitled in any
capacity to vote at the above-stated annual meeting, and at any and all
adjournments or postponements thereof (the "Annual Meeting"), on the matters set
forth on this Proxy Card, and, in their discretion, upon all matters incident to
the conduct of the Annual Meeting and upon such other matters as may properly be
brought before the Annual Meeting. This proxy revokes all prior proxies given by
the undersigned.

All properly executed proxies will be voted as directed. If no
instructions are indicated on a properly executed proxy, such proxy will be
voted FOR approval of Proposals 1, 2 and 3. All ABSTAIN votes will be counted in
determining the existence of a quorum at the Annual Meeting, but will have the
same effect as a vote AGAINST Proposals 2 and 3.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NORTHSTAR HEALTH SERVICES, INC. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
PROPOSALS 1, 2 AND 3.

Please mark boxes in blue or black ink.

1. Election of Directors FOR [ ] AGAINST [ ] ABSTAIN [ ]

Nominees: Thomas W. Zaucha, Lawrence F. Jindra, M.D., James H. McElwain, Mark G.
Mykityshyn, Roger J. Reschini and David B. White

INSTRUCTION: If you wish to withhold authority to vote for any individual
nominee, write that nominee's name on the line provided below:

- --------------------------------------------------------------------------------
PLEASE SIGN AND DATE ON THE REVERSE SIDE AND MAIL THIS PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE.

<PAGE>

2. Proposal to adopt the Northstar Health Services, Inc. 1997 Stock Option Plan.

FOR [ ] AGAINST [ ] ABSTAIN [ ]

3. Proposal to ratify the appointment of Arthur Andersen LLP as the independent
public accountants of the Company for the fiscal year ending December 31,
1997.

FOR [ ] AGAINST [ ] ABSTAIN [ ]

4. In the discretion of the proxies with respect to any other matters that may
properly come before the Annual Meeting.

Receipt of the Notice and the Proxy Statement, dated August 7, 1997 (the "Proxy
Statement"), is hereby acknowledged.

---------------------------------------------
(Title or Authority)

---------------------------------------------
(Signature)

Dated: _______________________, 1997

(Joint owners should EACH sign. Please sign
EXACTLY as your name(s) appears on this card.
When signing as attorney, trustee, executor,
administrator, guardian or corporate officer,
please give your FULL title below.)

YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.

<PAGE>

NORTHSTAR HEALTH SERVICES, INC.
1997 STOCK OPTION PLAN

* * *

ARTICLE I

Purpose

This 1997 Stock Option Plan (the "Plan") is intended as an
incentive and to encourage stock ownership by officers, consultants, directors
and certain other key employees of Northstar Health Services, Inc. (the
"Company") and its subsidiaries in order to increase their proprietary interest
in the Company's success and to encourage them to remain in the employ or
service of the Company.

The word "Company", when used in the Plan with reference to
employment or service, shall include subsidiaries of the Company. The word
"subsidiary", when used in the Plan, shall mean any subsidiary of the Company
within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code").

It is intended that certain options granted under this Plan
will qualify as "incentive stock options" under Section 422 of the Code.

ARTICLE II

Administration

The Plan shall be administered by a Committee appointed by the
Board of Directors (the "Board"), each member of which shall consist of at least
two or more persons who are (i) "non-employee directors," as defined in Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor rule or regulation, and (ii) an "outside directors"
within the meaning of Section 162(m) of the Code (hereinafter referred to as the
"Committee"). Subject to the provisions of the Plan, the Committee shall have
sole authority, in its absolute discretion: (a) to determine which of the
eligible employees or consultants of the Company and its subsidiaries shall be
granted options; (b) to authorize the

<PAGE>

granting of both incentive stock options and non-qualified stock options; (c) to
authorize the grant of non-qualified stock options to directors of the Board who
are not employees of the Company pursuant to a formula award determined by the
Committee; (d) to determine the times when options shall be granted and the
number of shares to be optioned; (e) to determine the option price of the shares
subject to each option, which price shall be not less than the minimum specified
in ARTICLE V; (f) to determine the time or times when each option becomes
exercisable, the duration of the exercise period and any other restrictions on
the exercise of options issued hereunder; (g) to accelerate the exercisability
of any outstanding options; (h) to prescribe the form or forms of the option
agreements under the Plan (which forms shall be consistent with the terms of the
Plan but need not be identical); (i) to adopt, amend and rescind such rules and
regulations as, in its opinion, may be advisable in the administration of the
Plan; and (j) to construe and interpret the Plan, the rules and regulations and
the option agreements under the Plan and to make all other determinations deemed
necessary or advisable for the administration of the Plan. All decisions,
determinations and interpretations of the Committee shall be final and binding
on all optionees.

ARTICLE III

Stock

The stock to be optioned under the Plan shall be shares of
authorized but unissued Common Stock of the Company, $.01 par value, or
previously issued shares of Common Stock reacquired by the Company (the
"Stock"). Under the Plan, the total number of shares of Stock which may be
purchased pursuant to options granted hereunder shall not exceed, in the
aggregate, 1,000,000 shares, except as such number of shares shall be adjusted
in accordance with the provisions of ARTICLE X hereof. The maximum number of
shares of Stock with respect to which options may be granted to any single
optionee during any calendar year shall not exceed 100,000, except as such
number of shares shall be adjusted in accordance with the provisions of ARTICLE
X.

The number of shares of Stock available for grant of options
under the Plan shall be decreased by the sum of the number of shares with
respect to which options have been issued and are then outstanding and the
number of shares issued upon exercise of options. In the event that any
outstanding option under the Plan for any reason expires, is terminated, or is
canceled prior to the end of the period during which options may be granted, the
shares of Stock called for by the unexercised

2
<PAGE>

portion of such option may again be subject to an option under the Plan.

ARTICLE IV

Eligibility of Participants

Subject to ARTICLE VII, officers and other key employees of
the Company or of its subsidiaries shall be eligible to receive options under
the Plan. In addition, options which are not incentive stock options may be
granted to directors, consultants, or other key persons who the Committee
determines shall receive options under the Plan.

ARTICLE V

Option Price

In the case of each incentive stock option granted under the
Plan, the option price shall be not less than the fair market value of the Stock
at the time the incentive stock option was granted. In the case of options other
than incentive stock options, the option price shall not be less than 85% of the
fair market value of the stock at the time the option was granted. The fair
market value shall be deemed for all purposes of the Plan to be the mean between
the highest and lowest sale prices reported as having occurred on any exchange
with which the Company's Stock may be listed and traded on the date the option
is granted, or, if there is no such sale on that date, then on the last
preceding date on which such a sale was reported. If the Company's Stock is not
listed on any exchange but the Stock is quoted in the National Market System of
the National Association of Securities Dealers Automated Quotation System on a
last sale basis then the fair market value of the Stock shall be deemed to be
the mean between the high and low price reported on the date the option is
granted, or, if there is no such sale on that date, then on the last preceding
date on which a sale was reported. If the Stock is not quoted in the National
Market System of the National Association of Securities Dealers Automated
Quotation System on a last sale basis, then the fair market value of the Stock
shall mean the amount determined by the Committee to be the fair market value
based upon a good faith attempt to value the Stock accurately and computed in
accordance with applicable regulations of the Internal Revenue Service. In no
event shall the option price be less than the par value per share of Stock on
the date an option is granted.

ARTICLE VI

Exercise and Terms of Options

The Committee shall determine the dates after which options
may be exercised, in whole or in part. If an option is exercisable in
installments, installments or portions thereof which are exercisable and not
exercised shall remain exercisable.

Any other provision of the Plan to the contrary
notwithstanding and subject to ARTICLE VII, no option shall be exercised after
the date ten years from the date of grant of such option (the "Termination
Date").

3
<PAGE>

Except as otherwise provided by the Committee at the time an
option is granted or by any amendment to an outstanding option:

(i) If prior to the Termination Date, an optionee shall cease
to be employed by or in the service of the Company or any subsidiary thereof by
reason of a disability within the meaning of Section 22(e)(3) of the Code, the
option may remain exercisable for a period not extending beyond one year after
the date of cessation of employment or service to the extent it was exercisable
at the time of cessation of employment of service.

(ii) In the event of the death of an optionee prior to the
Termination Date and while employed by or in the service of the Company or a
subsidiary thereof or while entitled to exercise an option pursuant to the
preceding paragraph, the optionee's options may remain exercisable at any time
prior to the Termination Date but in no event later than one year from the date
of death, by the person or person to whom the optionee's rights under the option
pass by will or the applicable laws of descent and distribution to the extent
that the optionee was entitled to exercise it on the date of death.

(iii) If an optionee voluntarily terminates employment or
service with the Company for reasons other than death, disability, or retirement
on or after the normal retirement age set forth in the Company's policies (a
"Voluntary Termination"), or if an optionee's employment or service with the
Company is terminated for Cause, as hereinafter defined, unless otherwise
provided by the Committee, all options previously granted to such optionee which
have not been exercised prior to such termination shall lapse and be canceled.
If at the time of a Voluntary Termination the Company was entitled to terminate
the optionee's employment or service for Cause, as hereinafter defined, all
shares of Stock received pursuant to options exercised after the Company was so
entitled shall be purchased by the Company for the

4
<PAGE>

exercise price of such shares paid by the optionee. If the Company terminates an
optionee's employment or service without Cause, as hereinafter defined, unless
otherwise provided by the Committee, all options previously granted to such
optionee which were exercisable immediately prior to such termination shall
continue to be exercisable for period not extending beyond three months after
the date of such termination.

For purposes of the Plan, the Company shall have "Cause" to
terminate an optionee's employment or service if the Company has cause to
terminate the optionee's employment or service under any existing employment
agreement between the optionee and the Company or, in the absence of an
employment agreement between the optionee and the Company, upon (A) the
determination by the Board that the optionee has ceased to perform his duties to
the Company (other than as a result of his incapacity due to physical or mental
illness or injury), which failure amounts to an intentional and extended neglect
of his duties to the Company, (B) the Board's determination that the optionee
has engaged or is about to engage in conduct materially injurious to the
Company, or (C) the optionee having been convicted of a felony.

ARTICLE VII

Special Provisions Applicable to
Incentive Stock Options Only

The aggregate fair market value (determined as of the time the
option is granted) of the Stock with respect to which any incentive stock
options may be exercisable for the first time by the optionee in any calendar
year (under this Plan or any other stock option plan of the Company or any
parent or subsidiary thereof) shall not exceed $100,000. To the extent that such
aggregate fair market value exceeds $100,000 such options or portions thereof
shall be non-qualified stock options.

No incentive stock option may be granted to an individual who,
at the time the option is granted, owns directly, or indirectly within the
meaning of Section 424(d) of the Code, stock possessing more than 10 percent of
the total combined voting power of all classes of stock of the Company or of any
parent or subsidiary thereof, unless such option (i) has an option price of at
least 110 percent of the fair market value of the Stock on the date of the grant
of such option; and (ii) such option cannot be exercised more than five years
after the date it is granted.

<PAGE>

ARTICLE VIII

Payment for Shares

Payment for shares of Stock purchased under an option granted
hereunder shall be made in full upon exercise of the option, by certified or
bank cashier's check payable to the order of the Company, by the surrender or
delivery to the Company of shares of its stock which have been held by the
optionee for at least six months, or by any other means acceptable to the
Company and designated by the Committee. The Stock purchased shall thereupon be
promptly delivered; provided, however, that the Company may, in its discretion,
require that an optionee pay to the Company, at the time of exercise, such
amount as the Company deems necessary to satisfy its obligation to withhold
Federal, state or local income or other taxes incurred by reason of the exercise
or the transfer of shares thereupon.

ARTICLE IX

Non-Transferability of Option Rights

Except as otherwise determined by the Committee with respect
to the grant of options, no option shall be transferable except by will or the
laws of descent and distribution. During the lifetime of the optionee, the
option shall be exercisable only by him.

ARTICLE X

Adjustment for Recapitalization, Merger, Etc.

The aggregate number of shares of Stock which may be issued
pursuant to options granted hereunder, the maximum number of shares of Stock
which may be granted to any single optionee during any calendar year, the number
of shares of Stock covered by each outstanding option and the price per share
thereof in each such option shall be appropriately adjusted for any increase or
decrease in the number of outstanding shares of Stock resulting from a Stock
split or other subdivision or consolidation of shares of Stock or for other
capital adjustments or payments of Stock dividends or distributions or other
increases or decreases in the outstanding shares of Stock without receipt of
consideration by the Company.

In the event of any change in the outstanding shares of Stock
by reason of any recapitalization, merger, consolidation, spin-off, combination
or exchange of shares or other corporate

6
<PAGE>

change, or any distributions to common shareholders other than cash dividends,
the Committee shall make such substitution or adjustment, if any, as it deems to
be equitable, as to the number or kind of shares of Stock or other securities
issued or reserved for issuance pursuant to the Plan, and the number or kind of
shares of Stock or other securities covered by outstanding options, and the
option price thereof. In instances where another corporation or other business
entity is being acquired by the Company, and the Company has assumed outstanding
employee option grants and/or the obligation to make future or potential grants
under a prior existing plan of the acquired entity, similar adjustments are
permitted at the discretion of the Committee. The Committee shall notify
optionees of any intended sale of all or substantially all of the Company's
assets within a reasonable time prior to such sale.

The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an option.

ARTICLE XI

Change in Control

Except to the extent stated otherwise in any individual option
agreement, upon the occurrence of a Change in Control all outstanding options
shall become immediately exercisable in full. For purposes of the foregoing, a
"Change in Control" shall, unless in the case of a particular option, the
applicable option agreement states otherwise, be deemed to occur if:

(i) the Company enters into any agreement to engage in a transaction,
the consummation of which would result in any "person," as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 (the "Exchange Act") (other than (A) the Company, (B)
any Subsidiary or (C) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any
Subsidiary) becoming the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing forty percent (40%) or more
of the combined voting power of the Company's then outstanding
securities, provided that such transaction actually does occur;

7
<PAGE>

(ii) individuals who constitute the Board, and any new director (other
than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
clause (i), (iii) or (iv) of this Article XI)) whose election by
the Board or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for
election was previously so approved (unless the approval of the
election or nomination for election of such new directors was in
connection with an actual or threatened election or proxy contest),
cease for any reason to constitute at least a majority thereof;

(iii) the Company enters into any agreement to engage in a transaction,
the consummation of which would result in, or the stockholders of
the Company approve, a merger or consolidation of the Company with
any other corporation, and such merger or consolidation actually
does occur other than (a) a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined
voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no "person" (as defined above in (i),
including the exemptions thereto) acquires forty percent (40%) or
more of the combined voting power of the Company's then outstanding
securities; or

(iv) the Company enters into any agreement to engage in a transaction,
the consummation of which would result in, or the stockholders of
the Company approve, a complete liquidation of the Company or the
sale or disposition by the Company of all or substantially all of
the Company's assets of any transaction having a

8
<PAGE>

similar effect, provided that such liquidation, sale or disposition
actually does occur.

ARTICLE XII

No Obligation to Exercise Option

Granting of an option shall impose no obligation on the
recipient to exercise such option.

ARTICLE XIII

Use of Proceeds

The proceeds received from the sale of Stock pursuant to the
Plan shall be used for general corporate purposes.

ARTICLE XIV

Rights as a Stockholder

An optionee or a transferee of an option shall have no rights
as a stockholder with respect to any share covered by his option until he shall
have become the holder of record of such share, and he shall not be entitled to
any dividends or distributions or other rights in respect of such share for
which the record date is prior to the date on which he shall have become the
holder of record thereof.

ARTICLE XV

Employment or Service Rights

Nothing in the Plan or in any option granted hereunder shall
confer on any optionee any right to continue in the employ or service of the
Company or any of its subsidiaries, or to interfere in any way with the right of
the Company or any of its subsidiaries to terminate the optionee's employment or
service at any time.

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ARTICLE XVI

Compliance with the Law

The Company is relieved from any liability for the
non-issuance or non-transfer or any delay in issuance or transfer of any shares
of Stock subject to options under the Plan which results from the inability of
the Company to obtain or in any delay in obtaining from any regulatory body
having jurisdiction all requisite authority to issue or transfer shares of Stock
of the Company either upon exercise of the options under the Plan or shares of
Stock issued as a result of such exercise if counsel for the Company deems such
authority necessary for lawful issuance or transfer of any such shares.
Appropriate legends may be placed on the Stock certificates evidencing shares
issued upon exercise of options to reflect such transfer restrictions.

ARTICLE XVII

Cancellation of Options

The Committee, in its discretion, may, with the consent of any
optionee, cancel any outstanding option hereunder.

ARTICLE XVIII

Expiration Date of Plan

No option shall be granted hereunder after September 11, 2007.

ARTICLE XIX

Amendment or Discontinuance of Plan

The Board may, without the consent of the Company's
stockholders or optionees under the Plan, at any time terminate the Plan
entirely and at any time or from time to time amend or modify the Plan, provided
that no such action shall adversely affect options theretofore granted hereunder
without the optionee's consent, and provided further that no such action by the
Board, without approval of the stockholders, may (a) increase the total number
of shares of Stock which may be purchased pursuant to options granted under the
Plan, except as contemplated in ARTICLE X or (b) decrease the minimum option
price.