10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

________________________

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004 or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number 1-8789
________________________

American Shared Hospital Services

(Exact name of registrant as specified in its charter)

California	94-2918118
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification No.)

Four Embarcadero Center, Suite 3700, San Francisco, California	94111
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 788-5300

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2). Yes o No þ

As of October 29, 2004, there are outstanding 4,755,173 shares of the Registrant’s common stock.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4.   Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings.
	Item 2.   Unrestricted Sales of Equity Securities and Use of Proceeds.
	Item 3. Defaults Upon Senior Securities.
	Item 4. Submission of Matters to a Vote of Securities Holders.
	Item 5. Other Information.
	Item 6. Exhibits.
SIGNATURES
EXHIBIT 10.45
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEETS

	(unaudited)			(audited)
ASSETS	9/30/2004			12/31/2003
Current assets:
Cash and cash equivalents	$	9,512,000		$	10,312,000
Restricted cash		50,000			50,000
Accounts receivable, net of allowance for for doubtful accounts of $170,000 in 2004 and $170,000 in 2003		3,081,000			2,467,000
Prepaid expenses and other assets		463,000			473,000
Total current assets		13,106,000			13,302,000
Property and equipment:
Medical equipment and facilities		49,221,000			46,072,000
Office equipment		492,000			430,000
Deposits and construction in progress		1,907,000			1,463,000
		51,620,000			47,965,000
Accumulated depreciation and amortization		(18,737,000	)		(15,137,000	)
Net property & equipment		32,883,000			32,828,000
Other assets		169,000			174,000
Total assets	$	46,158,000		$	46,304,000

LIABILITIES AND	(unaudited)		(audited)
SHAREHOLDERS' EQUITY	9/30/2004		12/31/2003
Current liabilities:
Accounts payable	$	170,000	$	371,000
Accrued interest		4,000		145,000
Employee compensation and benefits		228,000		126,000
Other accrued liabilities		927,000		539,000
Income taxes payable		50,000		50,000
Current portion of long-term debt		6,775,000		6,803,000
Total current liabilities		8,154,000		8,034,000
Long-term debt, less current portion		18,298,000		20,114,000
Deferred income taxes		189,000		1,096,000
Minority interest		2,191,000		1,731,000
Shareholders’ equity:
Common stock, without par value:
authorized shares - 10,000,000; issued & outstanding shares, 4,755,173 in 2004 and 3,918,203 in 2003		9,218,000		9,198,000
Additional paid-in capital		4,381,000		3,461,000
Retained earnings		3,727,000		2,670,000
Total shareholders’ equity		17,326,000		15,329,000
Total liabilities and shareholders’ equity	$	46,158,000	$	46,304,000

See accompanying notes

2

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months ended Sept. 30,						Nine Months ended Sept. 30,
	2004			2003			2004			2003
Revenue:
Medical services	$	4,136,000		$	4,011,000		$	12,479,000		$	11,785,000
Costs and expenses:
Costs of operations:
Maintenance and supplies		203,000			222,000			625,000			533,000
Depreciation and amortization		1,199,000			1,085,000			3,555,000			3,061,000
Other		504,000			588,000			1,756,000			1,719,000
Total costs of operations		1,906,000			1,895,000			5,936,000			5,313,000
Selling and administrative		817,000			702,000			2,345,000			2,367,000
Interest		553,000			656,000			1,727,000			1,908,000
Total costs and expenses		3,276,000			3,253,000			10,008,000			9,588,000
Operating income		860,000			758,000			2,471,000			2,197,000
Interest and other income		21,000			27,000			64,000			99,000
Minority interest		(267,000	)		(224,000	)		(764,000	)		(699,000	)
Income before income taxes		614,000			561,000			1,771,000			1,597,000
Income tax (benefit) expense		(226,000	)		192,000			172,000			558,000
Net income	$	840,000		$	369,000		$	1,599,000		$	1,039,000
Net income per share:
Earnings per common share — basic	$	0.18		$	0.10		$	0.38		$	0.27
Earnings per common share — assuming dilution	$	0.16		$	0.07		$	0.31		$	0.20

See accompanying notes

3

AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Nine Months ended Sept. 30,
	2004			2003
Operating activities:
Net income	$	1,599,000		$	1,039,000
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization		3,621,000			3,130,000
Deferred income taxes		58,000			559,000
Minority interest in consolidated subsidiaries		764,000			699,000
Changes in operating assets and liabilities:
Receivables		(614,000	)		(297,000	)
Prepaid expenses and other assets		(6,000	)		423,000
Accounts payable and accrued liabilities		91,000			88,000
Net cash from operating activities		5,513,000			5,641,000
Investing activities:
Purchase of property and equipment		(3,655,000	)		(4,510,000	)
Net cash from investing activities		(3,655,000	)		(4,510,000	)
Financing activities:
Payment of dividends		(485,000	)		(454,000	)
Payment received for exercise of stock options		20,000			25,000
Distribution to minority owners		(304,000	)		(455,000	)
Payment for repurchase of stock		(45,000	)		(14,000	)
Financing on purchase of property and equipment		3,790,000			4,913,000
Principal payments on long-term debt and capitalized leases		(5,634,000	)		(4,188,000	)
Net cash from financing activities		(2,658,000	)		(173,000	)
Net change in cash and cash equivalents		(800,000	)		958,000
Cash and cash equivalents at beginning of period		10,312,000			9,924,000
Cash and cash equivalents at end of period	$	9,512,000		$	10,882,000
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest paid	$	1,868,000		$	1,938,000
Income taxes paid	$	120,000		$	81,000

See accompanying notes

4

AMERICAN SHARED HOSPITAL SERVICES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.   Basis of Presentation

     In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly American Shared Hospital Services’ consolidated financial position as of September 30, 2004 and the results of its operations for the three and nine month periods ended September 30, 2004 and 2003, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2003 have been derived from audited financial statements.

     These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003 included in the Company’s 10-K and 10-KA filed with the Securities and Exchange Commission.

     These financial statements include the accounts of American Shared Hospital Services (the “Company”) and its wholly-owned subsidiaries: OR21, Inc. (“OR21”); MedLeader.com, Inc. (“MedLeader”); American Shared Radiosurgery Services (“ASRS”); and ASRS majority-owned subsidiary, GK Financing, LLC (“GK Financing”).

     The Company through its majority-owned subsidiary, GK Financing, provided Gamma Knife units to eighteen medical centers as of September 30, 2004 in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas and Wisconsin.

     All significant intercompany accounts and transactions have been eliminated in consolidation.

Note 2.   Per Share Amounts

     Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. For the three and nine months ended September 30, 2004 basic earnings per share was computed using 4,755,000 and 4,214,000 common shares, respectively, and diluted earnings per share was computed using 5,119,000 and 5,097,000 common shares and equivalents, respectively. For the three and nine months ended September 30, 2003 basic earnings per share was computed using 3,871,000 and 3,827,000 common shares, respectively, and diluted earnings per share was computed using 5,081,000 and 5,072,000 common shares and equivalents, respectively. The increase in common shares used in the basic earnings per share calculation during 2004 is the result of stock options exercised, primarily in third quarter 2004. This is explained in more detail in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note 3.   Stock-based Compensation

5

     The Company has two stock-based employee compensation plans, the 1995 and 2001 Stock Option Plans. The Company accounts for those plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price greater than or equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. For pro forma purposes, the estimated fair value of the Company’s options is amortized over the options’ vesting period.

	Three months ended Sept. 30					Nine Months Ended Sept. 30
	2004		2003			2004		2003
Net income, as reported	$	840,000	$	369,000		$	1,599,000	$	1,039,000
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	$	0		($1,000	)	$	0		($1,000	)
Pro forma net income	$	840,000	$	368,000		$	1,599,000	$	1,038,000
Earnings per share:
Basic-as reported	$	0.18	$	0.10		$	0.38	$	0.27
Basic-pro forma	$	0.18	$	0.10		$	0.38	$	0.27
Diluted-as reported	$	0.16	$	0.07		$	0.31	$	0.20
Diluted-pro forma	$	0.16	$	0.07		$	0.31	$	0.20

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services, which involve risks and uncertainties including, but not limited to, the risks of the Gamma Knife business. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K and 10-KA for the year ended December 31, 2003, the Quarterly Report on Form 10-Q for the periods ended March 31, 2004 and June 30, 2004 and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 17, 2004.

     Medical services revenue increased $125,000 and $694,000 to $4,136,000 and $12,479,000 for the three month and nine month periods ended September 30, 2004, from $4,011,000 and $11,785,000 for the three and nine month periods ended September 30, 2003, respectively. The increase in revenue for the three month period ended September 30, 2004 was due to the addition of one new Gamma Knife unit that began operating during third quarter 2004, and one Gamma Knife center that began operating during late third quarter 2003, which was offset during third quarter 2004 by a 10% decrease in revenue at Gamma Knife centers in operation more than one year. The revenue increase for the nine month period was due to the inclusion of one new Gamma Knife unit that began operating during 2004 and three Gamma

6

Knife units that began operation during 2003, and was partially offset by a 13% revenue decrease at Gamma Knife centers in operation for longer than one year. The Company had 18 Gamma Knife units in operation at September 30, 2004 compared to 17 at September 30, 2003. Fourteen of the Company’s customers are under fee-per-use contracts, and four customers are under revenue sharing agreements (“retail”). For retail units the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer, and is responsible for all or a percentage of the operating expenses of the Gamma Knife.

     The number of Gamma Knife procedures increased by 8% to 552 and by 4% to 1,628 for the three and nine month periods ended September 30, 2004 from 510 and 1561 for the three and nine month periods ended September 30, 2003, respectively. The addition of one new Gamma Knife unit in 2004 and increases in procedures from three new Gamma Knife units that began operation during 2003 were offset during third quarter 2004 by decreases in procedures performed at Gamma Knife units in operation more than one year of 4% and 9% for the three and nine month periods ended September 30, 2004, respectively. The Company believes that the decrease in procedures performed at Gamma Knife units in operation more than one year is primarily due to personnel staffing issues at certain Gamma Knife sites and normal fluctuations in disease incidence and related factors.

     Total costs of operations increased $11,000 and $623,000 to $1,906,000 and $5,936,000 for the three and nine month periods ended September 30, 2004, from $1,895,000 and $5,313,000 for the three and nine month periods ended September 30, 2003, respectively. Maintenance and supplies decreased by $19,000 and increased by $92,000 for the three and nine month periods ended September 30, 2004 compared to the same periods in the prior year. The decrease for the three month period is primarily due to credits associated with the renewal of maintenance contracts on certain Gamma Knife units. The increase for the nine month period is primarily due to an increase in the number of Gamma Knife contracts covered under maintenance contract. There were 16 Gamma Knife units covered under maintenance contract as of September 30, 2004 compared to 14 as of September 30, 2003. Depreciation and amortization increased by $114,000 and $494,000 for the three and nine month periods ended September 30, 2004 compared to the same periods in the prior year due to the inclusion of one new Gamma Knife unit that started operating during third quarter 2004 and three new Gamma Knife units that started operating during 2003. Other operating costs decreased $84,000 and increased $37,000 for the three and nine month periods ended September 30, 2004 compared to the same periods in the prior year. For the three month period the decrease is due to a reduction in operating expenses in connection with the Company’s retail Gamma Knife units, primarily due to a reduced number of retail procedures performed. For the nine month period, the increase is primarily due to an increase in marketing related costs and property taxes, partially offset by a reduction in operating expenses related to the Company’s retail units.

     Selling and administrative costs increased by $115,000 and decreased by $22,000 to $817,000 and $2,345,000 for the three and nine month periods ended September 30, 2004 from $702,000 and $2,367,000 for the three and nine month periods ended September 30, 2003, respectively. The increase for the quarter was primarily due to increased payroll related costs and business development costs partially due to the addition of a Director of Sales during 2004. In addition, approximately $46,000 in employer paid payroll taxes were expensed during third

7

quarter 2004 due to income earned by the Company’s Chairman and Chief Executive Officer upon his exercise of 730,000 options to purchase Company stock. For the year the decrease was primarily due to the write-off in second quarter 2003 of Brazil development costs and a reduction in contributions during 2004, and was partially offset by an increase in business development costs.

     Interest expense decreased by $103,000 and $181,000 to $553,000 and $1,727,000 for the three and nine month periods ended September 30, 2004 from $656,000 and $1,908,000 for the three and nine month periods ended September 30, 2003, respectively. These decreases are primarily due to lower interest expense on the debt relating to the more mature Gamma Knife units, partially offset by additional interest expense on the financing of one new Gamma Knife unit that began operation during third quarter 2004 and three new Gamma Knife units that began operation during 2003. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced. In addition, the financing on the more recent Gamma Knife units is at lower interest rates than the older loans.

     Interest and other income decreased by $6,000 and $35,000 to $21,000 and $64,000 for the three and nine month periods ended September 30, 2004 from $27,000 and $99,000 for the three and nine month periods ended September 30, 2003, respectively, primarily due to lower invested cash balances. For the nine month period, the reduction is also due to interest income of approximately $17,000 in first quarter 2003 relating to a state sales/use tax refund.

     Minority interest increased by $43,000 and $65,000 to $267,000 and $764,000 for the three and nine month periods ended September 30, 2004 from $224,000 and $699,000 for the three and nine month periods ended September 30, 2003, respectively, due to increased profitability of GK Financing. Minority interest represents the 19% interest of GK Financing owned by a third party.

     Income tax expense decreased by $418,000 and $386,000 to a benefit of $226,000 and an expense of $172,000 for the three and nine month periods ended September 30, 2004 compared to expense of $192,000 and $558,000 for the three and nine month periods ended September 30, 2003, respectively. The Company recorded a 40% income tax provision in the three and nine month periods ended September 30, in both 2004 and 2003, and the provision for both the three and nine month periods increased due to greater profitability. The decrease for the three month period was due to an income tax benefit of $472,000 that was recorded for the exercise of 730,000 previously expensed options, which offset the income tax provision. In third quarter 2003, the effective income tax rate was reduced to 34% due to an income tax benefit of $33,000 that was recorded for the exercise of 50,000 previously expensed options. For the nine month period ended September 30, 2004, the effective income tax rate was reduced to 10% compared to 35% for the same period in the prior year. This is due to an income tax benefit on the exercise of previously expensed options of $537,000 (830,000 shares) compared to $81,000 (125,000 shares) in the prior year. These income tax benefits are the result of compensation expense that was recognized when the options were granted in 1995.

     The Company had net income of $840,000 ($0.16 per diluted share) and $1,599,000 ($0.31 per diluted share) for the three and nine month periods ended September 30, 2004

8

compared to net income of $369,000 ($0.07 per diluted share) and $1,039,000 ($0.20 per diluted share) in the same period in the prior year. The increase for both the three and nine month periods was primarily due to an income tax benefit as a result of the exercise of stock options, the addition of one new Gamma Knife unit that began operation during 2004 and three new Gamma Knife units that began operation during 2003, and lower interest expense.

Liquidity and Capital Resources

     The Company had cash and cash equivalents of $9,512,000 at September 30, 2004 compared to $10,312,000 at December 31, 2003. The Company’s cash position decreased by $800,000 primarily due to the payment of dividends of $485,000 and an increase in accounts receivable of $614,000.

     During the first three quarters of 2004 the Company paid quarterly dividends totaling $485,000. In September 2004, the Company declared a quarterly dividend of $0.045 per share to shareholders of record on October 1, 2004, which resulted in a reduction in retained earnings of $214,000 in third quarter 2004. The dividends were paid to shareholders of record on October 15, 2004.

     The Company as of September 30, 2004 had shareholders’ equity of $17,326,000, working capital of $4,952,000 and total assets of $46,158,000.

     The Company has scheduled interest and principal payments under its debt obligations of approximately $8,670,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt obligations during the next 12 months.

     The Company’s primary lender for its Gamma Knife projects, DVI Financial Services Inc. (“DVI”), filed for Chapter 11 bankruptcy protection in August 2003. This will not materially affect the financing that has been committed to existing projects. The Company has secured alternative financing for its pending projects and continues to seek other financing options for future projects. Financing has been secured at lower interest rates than had historically been obtained from DVI, however certain debt covenants are more restrictive than required by DVI. In addition, DVI did not require a parent company guarantee, but one alternative financing lender has required a parent guarantee on leasehold improvements only.

     Through June 30, 2004 the Company invested its cash in an institutionally priced money market fund pending use in the Company’s operations. During July 2004 the Company converted its invested cash primarily to short to intermediate-term fixed income securities. The objective of the fixed income investments is to maximize current income while preserving principal value.

Item 4.   Controls and Procedures

     (a)   Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s

9

“disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Exchange Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

     (b)   Changes in internal control over financial reporting.   There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings.

     None.

Item 2.   Unrestricted Sales of Equity Securities and Use of Proceeds.

     None.

Item 3.   Defaults Upon Senior Securities.

     None.

Item 4.   Submission of Matters to a Vote of Securities Holders.

     None.

Item 5.  Other Information.

     None.

Item 6.   Exhibits.

     The following exhibits are filed herewith:

Exhibit Number	Description
10.45	Lease Agreement for a Gamma Knife Unit dated as of May 28, 2003 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)
31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10

Exhibit Number	Description
31.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

11

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN SHARED HOSPITAL SERVICES
Registrant

Date: November 12, 2004	/s/ Ernest A. Bates
	Ernest A. Bates, M.D.
	Chairman of the Board and Chief Executive Officer
Date: November 12, 2004	/s/ Craig K. Tagawa
	Craig K. Tagawa
	Senior Vice President Chief Operating and Financial Officer

12

EX-10.45

Exhibit 10.45

EQUIPMENT LEASE AGREEMENT

     THIS EQUIPMENT LEASE AGREEMENT (“Agreement”) is made and entered into on May 28, 2003, by and between GK FINANCING, LLC, a California limited liability company (“GKF”), and Lehigh Valley Hospital (“Hospital”), a not for profit Pennsylvania corporation, with reference to the following facts:

R E C I T A L S

     WHEREAS, Hospital wants to lease a Leksell Stereotactic Gamma Unit, model C with Automatic Positioning System, manufactured by Elekta Instruments, Inc., as specified in Exhibit A of the LGK Agreement (hereinafter referred to as the “Equipment”); and

     WHEREAS, GKF is willing to lease the Equipment which GKF has acquired from Elekta Instruments, Inc., a Georgia corporation (hereinafter referred to as “Elekta”), to Hospital, pursuant to the terms and conditions of this Agreement.

A G R E E M E N T

     NOW, THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and for such other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1.  Lease.  Subject to and in accordance with the covenants and conditions set forth in this Agreement, GKF hereby leases to Hospital, and Hospital hereby leases from GKF, the Equipment. The Equipment to be leased to Hospital pursuant to this Agreement shall include the Gamma Knife technology as specified in Exhibit 1, including all hardware and software related thereto.

     2.  LGK Agreement.  Simultaneously with the execution of this Agreement, Hospital and Elekta shall enter into that certain LGK Agreement (the “LGK Agreement”), a copy of which is attached hereto as Exhibit 1. Hospital shall perform, satisfy and fulfill all of its obligations arising under the LGK Agreement when and as required thereunder. Hospital acknowledges that GKF is a third party beneficiary of the LGK Agreement and, in that capacity, GKF shall be entitled to enforce Hospital’s performance, satisfaction and fulfillment of its obligations thereunder.

     3.  Term of the Agreement.  The initial term of this Agreement (the “Term”) shall commence as of the date hereof and, unless earlier terminated or extended in accordance with the provisions of this Agreement, shall continue for a period of ten (10) years following the date of the performance of the first clinical Gamma Knife procedure (the “First Procedure Date”) at the

Site. Hospital’s obligation to make the rental payments to GKF for the Equipment described in Section 8 below shall commence as of the First Procedure Date.

     4.  User License.

          4.1  Hospital shall apply for and obtain in a timely manner a User License from the Nuclear Regulatory Commission and, if necessary, from the applicable state agency authorizing it to take possession of and maintain the Cobalt supply required in connection with the use of the Equipment during the term of this Agreement. Hospital also shall apply for and obtain in a timely manner all other licenses, permits, approvals, consents and authorizations which may be required by state or local governmental or other regulatory agencies for the development, construction and preparation of the Site, the charging of the Equipment with its Cobalt supply, the conduct of acceptance tests with respect to the Equipment, and the use of the Equipment during the Term, as more fully set forth in Article 2.2 of the LGK Agreement.

     5.  Delivery of Equipment; Site.

          5.1  GKF shall coordinate with Elekta and Hospital to have the Equipment delivered to Hospital at Lehigh Valley Hospital-Muhlenberg (the “Site”) on or prior to the delivery date agreed upon by Hospital, GKF and Elekta in writing. GKF makes no representations or warranties concerning delivery of the Equipment to the Site or the actual date thereof.

          If the Equipment is not delivered by the scheduled delivery date specified in a separate written agreement plus a sixty (60) day grace period (other than by reasons of force majeure as provided in Paragraph 23.16 below) (the “Late Delivery Date”), GKF shall reimburse Hospital upon written request for Hospital’s actual financing costs (which financing costs shall not exceed interest at the prime interest rate of Bank of America plus 2%) based upon Hospital’s cost to install the Equipment (cost is estimated at approximately $500,000) for the period between the Late Delivery Date and the date that the Equipment is delivered to the Site.

          5.2  Hospital, at its cost and expense, shall provide a safe, convenient and properly prepared Site for the Equipment in accordance with Elekta’s guidelines, specifications, technical instructions and site planning criteria (which site planning criteria are attached as Exhibit B to the LGK Agreement) (collectively the “Site Planning Criteria”). The location of the Site shall be subject to the prior approval of GKF.

     6.  Site Preparation and Installation of Equipment.

          6.1  Hospital, at its cost, expense and risk, shall prepare all plans and specifications required to construct and improve the Site for the installation, use and operation of the Equipment during the Term. The plans and specifications shall comply in all respects with

the Site Planning Criteria and with all applicable federal, state and local laws, rules and regulations. All plans and specifications prepared by or on behalf of Hospital (and all material changes thereto following approval by GKF and Elekta) shall be subject to the written approval of GKF and Elekta prior to commencement of construction at the Site. Hospital shall provide GKF and Elekta with a reasonable period of time for the review and consideration of all plans and specifications following the submission thereof for approval. Following approval of the plans and specifications by GKF and Elekta, Hospital, at its cost and expense, shall obtain all permits, certifications, approvals or authorizations required by applicable federal, state or local laws, rules or regulations necessary to construct and improve the Site for the installation, use and operation of the Equipment.

          6.2  Based upon the plans and specifications approved by GKF and Elekta, Hospital, at its cost, expense and risk, shall prepare, construct and improve the Site as necessary for the installation, use and operation of the Equipment during the Term, including, without limitation, providing all temporary or permanent shielding required for the charging of the Equipment with the Cobalt supply and for its subsequent use, selecting and constructing a proper foundation for the Equipment and the temporary or permanent shielding, aligning the Site for the Equipment, and installing all electrical systems and other wiring required for the Equipment. In connection with the construction of the Site, Hospital, at its cost and expense, shall select, purchase and install all radiation monitoring equipment, devices, safety circuits and radiation warning signs required at the Site in connection with the use and operation of the Equipment, all in accordance with applicable federal, state and local laws, rules, regulations or custom.

          6.3  In addition to construction and improvement of the Site, Hospital, at its cost, expense and risk, shall be responsible for the installation of the Equipment at the Site, including the positioning of the Equipment on its foundation at the Site in compliance with the Site Planning Criteria.

          6.4  Upon completion of construction, the Site shall (a) comply in all respects with the Site Planning Criteria and all applicable federal, state and local laws, rules and regulations, and (b) be safe and suitable for the ongoing use and operation of the Equipment during the Term.

          6.5  Hospital shall use its reasonable efforts to satisfy its obligations under this Section 6 in a timely manner. Hospital shall keep GKF informed in a timely manner of its progress in the design of the Site, the preparation of plans and specifications, the construction and improvement of the Site, and the satisfaction of its other obligations under this Section 6. In all events, Hospital shall complete all construction and improvement of the Site required for the installation, positioning and testing of the Equipment on or prior to the delivery date described in Section 5.1 above. If the Site is not complete as of the delivery date described in Section 5.1 above plus a sixty (60) day grace period (other than by reasons of force majeure as provided in Section 23 below) (the “late completion date”), Hospital shall reimburse GKF for its out-of-pocket financing costs incurred with respect the Equipment at the Bank of America prime

interest rate (which rate is sometimes referred to by the Bank as its “reference rate”) plus 2% based upon GKF’s cost of the Equipment for the period between the late completion date and the date that the Site is completed to the extent necessary to allow for the installation, positioning and testing of the Equipment.

          If the Equipment is not delivered by the scheduled delivery date specified in a separate written agreement plus a sixty (60) day grace period (other than by reasons of force majeure as provided in Paragraph 23.16 below) (the “Late Delivery Date”), GKF shall reimburse Hospital upon written request for Hospital’s actual financing costs (which financing costs shall not exceed interest at the prime interest rate of Bank of America plus 2%) based upon Hospital’s direct costs incurred to prepare and construct the Site for the Equipment for the period between the Late Delivery Date and the date the Equipment is actually delivered to the Site.

          6.6  During the Term, Hospital, at its cost and expense, shall maintain the Site in a good working order, condition and repair, reasonable wear and tear excepted.

          6.7  Hospital shall be liable for, and shall indemnify GKF in the manner described in Section 22 below from and against, all damage to the Equipment caused by (a) defects in construction of the Site or in installation or positioning the Equipment at the Site; (b) defects arising out of materials or parts provided, modified or designed by Hospital for or with respect to the Site; (c) negligent, intentional or wrongful acts or omissions by Hospital or any of its officers, directors, agents, contractors (or their subcontractors), or employees in connection with the construction and preparation of the Site; and (d) negligent or intentional and wrongful operation of the Equipment at the Site. Further, neither the review and approval of Site plans, specifications and/or positioning plans by GKF and/or Elekta, nor the construction of any other Site preparation, shall relieve Hospital for liability for damages to the Equipment caused by the failure to comply with applicable federal, state or local laws or regulations, including building codes, or those portions of the Site Planning Criteria relating to the load bearing capacity of the floor of the treatment room and to radiation protection.

     7.  Marketing Support.  GKF, in coordination with Hospital, shall provide marketing support for the Gamma Knife service to be provided by Hospital. Not less than ninety (90) days prior to the First Procedure Date and the commencement of each succeeding twelve (12) month period during the Term, GKF and Hospital shall develop a mutually agreed upon marketing budget and plan for the clinical service to be supported by the Equipment for the succeeding twelve (12) month period of the Term. Once approved, the marketing budget and plan shall be implemented by Hospital in accordance with its terms. As funds are expended by Hospital in accordance with the marketing budget and plan, Hospital shall submit invoices (together with documentary evidence supporting the invoices) for its expenditures and, promptly following the receipt of such invoices, GKF shall reimburse Hospital for * of the expenditures up to an annual maximum of *. It is acknowledged by the parties that such expenses to be reimbursed by GKF as provided in this Section 7 have been included in GKF’s calculation of Hospital’s Lease Payments so as to allow GKF to recover such GKF reimbursed expenses during the Term of this Agreement.

     8.  Per Procedure Payments.  As rent for the lease of the Equipment to Hospital pursuant to this Agreement, Hospital shall pay to GKF the sum of * for each Procedure. Hospital shall pay GKF this amount (the “Lease Payment”) for each “Procedure” that is performed by Hospital or its representatives or its employees or affiliated health care entities, irrespective of whether the Procedure is performed on the Equipment or using any other equipment or devices. It is acknowledged that a physician that is not employed by Hospital shall not be deemed to be a representative or affiliated health care entity of Hospital. As used herein, a “Procedure” means any treatment that involves stereotactic, external, single fraction, conformal radiation, commonly called radiosurgery, that may include one or more isocenters during the patient treatment session, delivered to any site(s) superior to the foramen magnum.

     Within ten (10) days following the end of each month (or portion thereof) during the term of this Agreement, Hospital shall inform GKF in writing as to the number of Procedures performed during that month utilizing the Equipment and any other devices. If no Procedures are performed by Hospital or any other person utilizing the Equipment or any other equipment or devices, no Lease Payments shall be owing by Hospital to GKF. GKF shall submit a rent invoice to Hospital on the last day of each calendar month (or portion thereof) for the actual number of Procedures performed during the calendar month. Hospital shall pay the rent invoice within forty five (45) days after submission by GKF to Hospital. All or any portion of a rent invoice which is not paid in full within sixty (60) days after submission shall bear interest at the rate of one and one-half percent (1.50%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) until the unpaid rent invoice together with all accrued interest thereon is paid in full. If GKF shall at any time accept a rent payment from Hospital after it shall become due, such acceptance shall not constitute or be construed as a waiver of any or all of GKF’s rights under this Agreement, including the rights of GKF set forth in Section 20 hereof.

     In the event the Equipment cannot perform Gamma Knife procedures for fourteen (14) consecutive days due to Equipment malfunction, the Hospital will not be required to pay Lease Payments for Procedures performed on alternative Equipment during the period subsequent to the 14th day until the Equipment malfunction is repaired by GKF.

     Within ten (10) days after Hospital’s receipt of written request by GKF, GKF shall have the right to audit Hospital’s books and records (including, without limitation, the books and records pertaining to any other radiosurgery equipment or devices) to verify the number of Procedures that have been performed by Hospital, and Hospital shall provide GKF with access to such books and records; provided that any patient names or identifiers shall not be disclosed.

     9.  Use of the Equipment.

          9.1  The Equipment shall be used by Hospital only at the Site and shall not be removed therefrom. Hospital shall use the Equipment only in the regular and ordinary course of Hospital’s business operations and only within the capacity of the Equipment as determined by Elekta’s specifications. Hospital shall not use nor permit the Equipment to be used in any

manner nor for any purpose which, in the opinion of Elekta or GKF, the Equipment is not designed or reasonably suitable.

          9.2  This is an agreement of lease only. Nothing herein shall be construed as conveying to Hospital any right, title or interest in or to the Equipment, except for the express leasehold interest granted to Hospital for the Term. All Equipment shall remain personal property (even though said Equipment may hereafter become attached or affixed to real property) and the title thereto shall at all times remain exclusively in GKF.

          9.3  During the Term, upon the request of GKF, Hospital shall promptly affix to the Equipment in a prominent place, or as otherwise directed by GKF, labels, plates, insignia, lettering or other markings supplied by GKF indicating GKF’s ownership of the Equipment, and shall keep the same affixed for the entire Term. Hospital hereby authorizes GKF to cause this Lease or any statement or other instrument showing the interest of GKF in the Equipment to be filed or recorded, or refiled or re-recorded, with all governmental agencies considered appropriate by GKF, at GKF’s cost and expense. Hospital also shall promptly execute and deliver, or cause to be executed and delivered, to GKF any statement or instrument requested by GKF for the purpose of evidencing GKF’s interest in the Equipment, including financing statements and waivers with respect to rights in the Equipment from any owners or mortgagees of any real estate where the Equipment may be located.

          9.4  At Hospital’s cost and expense, Hospital shall (a) protect and defend GKF’s ownership of and title to the Equipment from and against all persons claiming against or through Hospital, (b) at all times keep the Equipment free from any and all liens, encumbrances, attachments, levies, executions, burdens, charges or legal processes imposed against Hospital, (c) give GKF immediate written notice of any matter described in clause (b), and (d) in the manner described in Section 22 below indemnify GKF harmless from and against any loss, cost or expense (including reasonable attorneys’ fees) with respect to any of the foregoing.

     10.  Additional Covenants of Hospital. In addition to the other covenants of Hospital contained in this Agreement, Hospital shall, at its cost and expense:

          10.1  Provide properly trained professional, technical and support personnel and supplies required for the proper performance of Gamma Knife procedures utilizing the Equipment. In this regard, Hospital shall maintain on staff a minimum of one (1) Gamma Knife trained team comprised of a neurosurgeon, radiation oncologist and physicist. Hospital will use its best efforts to have two (2) Gamma Knife trained teams during the term of the Agreement. The Gamma Knife shall be available for use by all credentialed neurosurgeons and radiation oncologists.

          10.2  Direct, supervise and administer the diagnosis, treatment and care of all patients who receive Gamma Knife procedures.

          10.3  Provide reasonable and customary marketing materials (i.e. brochures, announcements, etc.) together with administrative and physician support (e.g., seminars for physicians by neurosurgeons and radiation therapists, etc.) for the Gamma Knife service to be operated by the Hospital.

          10.4  Keep and maintain the Equipment and the Site fully protected, secure and free from unauthorized access or use by any person.

     11.  Additional Covenants of GKF. In addition to the other covenants of GKF contained in this Agreement, GKF, at its cost and expense, shall:

          11.1  Use its best efforts to require Elekta to meets its contractual obligations to GKF and Hospital upon delivery of the Equipment and put the Equipment, as soon as reasonably possible, into good, safe and serviceable condition and fit for its intended use in accordance with the manufacturer’s specifications, guidelines and field modification instructions.

          11.2  Cause Hospital to enjoy the use of the Equipment, free of the rights of any other persons except for those rights reserved by GKF or granted to Elekta under the LGK Agreement or the Purchase Agreement.

     12.  Maintenance of Equipment; Damage or Destruction of Equipment.

          12.1  During the Term and except as otherwise provided in this Agreement, GKF, at its cost and expense, shall (a) maintain the Equipment in good operating condition and repair, reasonable wear and tear excepted, and (b) maintain in full force and effect a Service Agreement with Elekta and any other service or other agreements required to fulfill GKF’s obligation to repair and maintain the Equipment under this Section 12. Hospital shall promptly notify GKF in the event of any damage or destruction to the Equipment or of any required maintenance or repairs to the Equipment, regardless of whether such repairs or maintenance are covered or not covered by the Service Agreement. GKF shall pursue all remedies available to it under the Service Agreement and under any warranties made by Elekta with respect to the Equipment so that the Equipment will be free from defects in design, materials and workmanship and will conform to Elekta’s technical specifications concerning the Equipment.

          12.2  GKF and Elekta shall have the right to access the Equipment for the purpose of inspection and the performance of repairs at all reasonable times, upon reasonable advance notice and with a minimum of interference or disruptions to Hospital’s regular business operations.

          12.3  Hospital shall be liable for, and in the manner described in Section 22 below shall indemnify GKF from and against, any damage to or destruction of the Equipment caused by the misuse, improper use, or other intentional and wrongful or negligent acts or omissions of Hospital’s officers, employees, agents, contractors and physicians. In the event the Equipment is damaged as a result of the misuse, improper use, or other intentional and wrongful

or negligent acts or omissions of Hospital officers, employees, agents, contractors and physicians, to the extent such damage is not covered by the Service Agreement or any warranties or insurance, GKF may service or repair the Equipment as needed and the cost thereof shall be paid by Hospital to GKF immediately upon written request together with interest thereon at the rate of one and one-half percent (1.50%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) and reasonable attorneys’ fees and costs incurred by GKF in collecting such amount from Hospital. Any work so performed by GKF shall not deprive GKF of any of its rights, remedies or actions against Hospital for such damages.

          12.4  If the Equipment is rendered unusable as a result of any physical damage to or destruction of the Equipment, Hospital shall give GKF written notice thereof. GKF shall determine, within thirty (30) days after it is given written notice of such damage or destruction, whether the Equipment can be repaired. In the event GKF determines that the Equipment cannot be repaired (a) GKF, at its cost and expense, shall replace the Equipment as soon as reasonably possible taking into account the availability of replacement equipment from Elekta, Elekta’s other then existing orders for equipment, and the then existing limitations on Elekta’s manufacturing capabilities, and (b) this Agreement shall continue in full force and effect as though such damage or destruction had not occurred. In the event GKF determines that the Equipment can be repaired, GKF shall cause the Equipment to be repaired as soon as reasonably possible thereafter. Hospital shall fully cooperate with GKF to effect the replacement of the Equipment or the repair of the Equipment (including, without limitation, providing full access to the Site) following the damage or destruction thereof.

     13.  Alterations and Upgrades to Equipment.

          13.1  Hospital shall not make any modifications, alterations or additions to the Equipment (other than normal operating accessories or controls) without the prior written consent of GKF. Hospital shall not, and shall not permit any person other than representatives of Elekta or any other person authorized by GKF to, effect any inspection, adjustment, preventative or remedial maintenance, or repair to the Equipment without the prior written consent of GKF. All modifications, alterations, additions, accessories or operating controls incorporated in or affixed to the Equipment (herein collectively called “additions” and included in the definition of “Equipment”) shall become the property of the GKF upon termination of this Agreement.

          13.2  The necessity and financial responsibility for modifications, additions or upgrades to the Equipment, including the reloading of the Cobalt-60 source, shall be mutually agreed upon by GKF and Hospital. In the event GKF and Hospital agree to reload the Cobalt-60 source (i.e., in approximately the seventh (7th) year of the Term), and GKF pays certain costs associated therewith, notwithstanding any provisions to the contrary herein, the initial Term shall be automatically extended for a period of two (2) years. It is the intent of the parties that GKF shall be responsible for Equipment related costs and expenses and that Hospital shall be responsible for Site related costs and expenses for modifications, additions or upgrades to the

Equipment, including the reloading of the Cobalt-60 source that are mutually agreed upon by GKF and Hospital.

     14.  Financing of Equipment by GKF. GKF, in its sole discretion, may finance the Equipment. Financing may be in the form of an installment loan, a capitalized lease or other commercially available debt or financing instrument. If GKF finances the Equipment through an installment loan, GKF shall be required to provide the Equipment as collateral for the loan. If GKF finances the Equipment through a capitalized lease, title shall vest with the lessor until such time as GKF exercises its buy-out option under the lease, if any. If required by the lender, lessor or other financing entity (the “Lender”), GKF may assign its interest under this Agreement as security for the financing. Hospital interest under this Agreement shall be subject to the interests of the Lender.

     15.  Equipment Operational Costs. Except as otherwise expressly provided in this Agreement, Hospital shall be responsible and liable for all costs and expenses incurred, directly or indirectly, in connection with the operation and use of the Equipment during the Term, including, without limitation, the costs and expenses required to provide trained physicians, professionals, and technical and support personnel, supplies and other items required to properly operate the Equipment and perform Gamma Knife procedures. Between Hospital and GKF, Hospital shall be fully liable for, and in the manner described in Section 22 below shall indemnify and hold GKF harmless from and against, all negligent, intentional or wrongful acts or omissions of such physicians, professional, technical and support personnel.

     16.  Taxes. GKF shall pay all sales or use taxes imposed or assessed in connection with the purchase of the Equipment and all personal property taxes imposed, levied or assessed on the ownership and possession of the Equipment during the Term. All other taxes, assessments, licenses or other charges imposed, levied or assessed on the Equipment during the Term shall be paid by Hospital before the same shall become delinquent, whether such taxes are assessed or would ordinarily be assessed against GKF or Hospital; provided, however, Hospital shall not be required to pay any federal, state or local income, franchise, corporation or excise taxes imposed upon GKF’s net income realized from the lease of the Equipment. In case of a failure by Hospital to pay any taxes, assessments, licenses or other charges when and as required under this Section, GKF may pay all or any part of such taxes, in which event the amount paid by GKF shall be immediately payable by Hospital to GKF upon written request together with interest thereon at the rate of at the rate of one and one-half percent (1.50%) per month (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) and reasonable attorneys’ fees and costs incurred by GKF in collecting such amount from Hospital.

     17.  No Warranties by GKF. Hospital warrants that as of the First Procedure Date, it shall have (a) thoroughly inspected the Equipment, (b) determined that the Equipment is consistent with the size, design, capacity and manufacture selected by it, and (c) satisfied itself that to the best of its knowledge the Equipment is suitable for Hospital intended purposes and is

good working order, condition and repair. GKF SUPPLIES THE EQUIPMENT UNDER THIS AGREEMENT IN ITS “AS IS” CONDITION. GKF, NOT BEING THE MANUFACTURER OF THE EQUIPMENT OR THE MANUFACTURER’S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, AS TO THE EQUIPMENT’S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR USE, DESIGN, CONDITION, DURABILITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE. As between GKF and Hospital, Hospital shall bear all risks with respect to the foregoing warranties. GKF shall not be liable for any direct, indirect and consequential losses or damages suffered by Hospital or by any other person, and Hospital expressly waives any right to hold GKF liable hereunder for, any claims, demands and liabilities arising out of or in connection with the design, manufacture, possession or operation of the Equipment, including injury to persons or property resulting from the failure of, defective or faulty design, operation, condition, suitability or use of the Equipment. All warranty or other similar claims with respect to the Equipment shall be made by Hospital solely and exclusively against persons other than GKF, including Elekta or any other manufacturers or suppliers. In this regard and with prior written approval of GKF, Hospital may, in GKF’s name, but at Hospital sole cost and expense, enforce all warranties, agreements or representations, if any, which may have been made by Elekta or manufacturers, suppliers or other third parties regarding the Equipment to GKF or Hospital. GKF shall not be responsible for the delivery, installation or operation of the Equipment or for any delay or inadequacy of any or all of the foregoing.

     18.  Termination for Economic Justification. If, following the initial twenty four (24) months after the First Procedure Date and following each subsequent 12 month period thereafter during the Term, based upon the utilization of the Equipment, within a reasonable period of time after GKF’s written request, Hospital does not provide GKF with a reasonable economic justification to continue this Agreement and the provision of Gamma Knife services at the Hospital, then and in that event, GKF shall have the option to terminate this Agreement by giving a written notice thereof to Hospital not less than ninety (90) days prior to the effective date of the termination designated in GKF’s written notice. Such termination shall take place without penalty to Hospital.

     19.  Options to Extend Agreement. As of the end of the Term, Hospital shall have the option either to:

          19.1  Extend the Term of this Agreement for a specified period of time and upon such other terms and conditions as may be agreed upon by GKF and Hospital;

          19.2  Terminate this Agreement as of the expiration of the Term.

Hospital shall exercise one (1) of the two (2) options referred to above by giving an irrevocable written notice thereof to GKF at least nine (9) months prior to the expiration of the initial Term. Any such notice shall be sufficient if it states in substance that Hospital elects to exercise its option and states which of the three (2) options referred to above Hospital is exercising. If

Hospital fails to exercise the option granted herein at least nine (9) months prior to the expiration of the initial Term, the option shall lapse and this Agreement shall expire as of the end of the initial Term. Further, if Hospital exercises the option specified in Section 19.1 above and the parties are unable to mutually agree upon the length of the extension of the Term or any other terms or conditions applicable to such extension prior to the expiration of the Term, this Agreement shall expire as of the end of the initial Term.

     20.  Events of Default by Hospital and Remedies.

          20.1  The occurrence of any one of the following shall constitute an event of default under this Agreement (an “Event of Default”):

               20.1.1  Hospital fails to pay any rent payment when due pursuant to Paragraph 8 above and such failure continues for a period of fifteen (15) days after written notice thereof is given by GKF or its assignee to Hospital; however, if Hospital cures the rent payment default within the applicable fifteen (15) day period, such default shall not constitute an Event of Default.

               20.1.2  Hospital attempts to remove, sell, transfer, encumber, assign, sublet or part with possession of the Equipment or any items thereof, except as expressly permitted herein.

               20.1.3  Hospital fails to observe or perform any of its covenants, duties or obligations arising under this Agreement or the LGK Agreement and such failure continues for a period of thirty (30) days after written notice thereof by GKF to Hospital; however, if Hospital cures the default within the applicable thirty (30) day period or if the default reasonably requires more than thirty (30) days to cure, Hospital commences to cure the default during the initial thirty (30) day period and Hospital diligently completes the cure as soon as reasonably possible following the end of the thirty (30) day period, such default shall not constitute an Event of Default.

               20.1.4  Hospital ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a voluntary petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation or files an answer admitting the material allegations of a petition filed against it in any such proceeding, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator of it or of all or any substantial part of its assets or properties, or it or its shareholders shall take any action looking to its dissolution or liquidation.

               20.1.5  Within sixty (60) days after the commencement of any proceedings against Hospital seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceedings shall not

have been dismissed, or if within thirty (30) days after the appointment without Hospital consent or acquiescence of any trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties, such appointment shall not be vacated.

               20.1.6  Hospital is suspended or terminated from participation in the Medicare program.

          20.2  Upon the occurrence of an Event of Default with respect to Hospital as defined in Sections 20.1.1, 20.1.2 and 20.1.3, GKF may at its option do any or all of the actions described in Section 20.2.1, 20.2.2, 20.2.3, 20.2.4 and 20.2.5. Upon the occurrence of an Event of Default with respect to the Hospital as defined in Sections 20.1.4, 20.1.5 and 20.1.6, GKF may at its option exercise any or all of the actions described in Sections 20.2.1, 20.2.3, 20.2.4 and 20.2.5.

               20.2.1  By written notice to Hospital, immediately terminate this Agreement as to the Equipment, wherever situated. As a result of the termination, at Hospital’s sole cost and expense, GKF may enter upon the Site and remove the Equipment or GKF may demand that Hospital remove and return the Equipment to GKF. Other than for GKF’s negligence or willful misconduct, GKF shall have no liability of any kind or nature in connection with any such removal or restoration.

               20.2.2  Recover from Hospital as liquidated damages for the loss of the bargain represented by this Agreement and not as a penalty an amount equal to the present value of the unpaid estimated future rent payments to be made by Hospital to GKF through the end of the Term discounted at the rate of nine percent (9%), which liquidated damages shall become immediately due and payable. The unpaid estimated future lease payments shall be based on the prior twelve (12) months rent payments made by Hospital to GKF hereunder with an annual five (5%) percent increase thereof through the end of the Term. Hospital and GKF acknowledge that the liquidated damages formula set forth in this Section 20.2.2 constitutes a reasonable method to calculate GKF’s damages resulting from an Event of Default arising under Section 20.1.1, 20.1.2 and 20.1.3 under the circumstances existing as of the date of this Agreement.

               20.2.3  Sell, dispose of, hold, use or lease the Equipment, as GKF in its sole and absolute discretion may determine (and GKF shall not be obligated to give preference to the sale, lease or other disposition of the Equipment over the sale, lease or other disposition of similar Equipment owned or leased by GKF).

               20.2.4  Exercise any other right or remedy which may be available to GKF under the Uniform Commercial Code or any other applicable law or proceed by appropriate court action, without affecting GKF’s title or right to possession of the Equipment, to enforce the terms hereof or to recover damages for the breach hereof or to cancel this Agreement as to the Equipment.

               20.2.5  In addition to the foregoing remedies, Hospital shall be liable to GKF for all reasonable attorneys fees, costs and expenses incurred by GKF as a result of the Event of Default or the exercise of GKF’s remedies.

          20.3  Upon termination of this Agreement or the exercise of any other rights or remedies under this Agreement or available under applicable law following an Event of Default, Hospital shall, without further request or demand, pay to GKF all rent payments and other sums owing under this Agreement. In the event that Hospital shall pay the liquidated damages referred to in Section 20.2.2 above to GKF, GKF shall pay to Hospital within thirty (30) days after receipt thereof all rentals or proceeds received from the reletting or sale of the Equipment during the balance of the initial Term (after deduction of all costs and expenses, including reasonable attorneys fees and costs, incurred by GKF as a result of the Event of Default), said amount never to exceed the amount of the liquidated damages paid by Hospital. However, Hospital acknowledges that GKF shall have no obligation to sell the Equipment. Hospital shall in any event remain fully liable for all damages as may be provided by law and for all costs and expenses incurred by GKF on account of such default, including but not limited to, all court costs and reasonable attorneys’ fees. The rights and remedies afforded GKF under this Agreement shall be deemed cumulative and not exclusive, and shall be in addition to any other rights or remedies to GKF provided by law or in equity.

     21.  Insurance.

          21.1  During the Term, GKF shall, at its cost and expense, purchase and maintain in effect an all risk property and casualty insurance policy covering the Equipment. The all risk property and casualty insurance policy shall be for an amount not less than the replacement cost of the Equipment. Hospital shall be named as an additional insured party on the all risk property and casualty insurance policy to the extent of its interest in the Equipment arising under this Agreement. The all risk property and casualty insurance policy maintained by GKF shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by GKF to Hospital upon request following the commencement of this Agreement and as of each annual renewal of such policy during the Term.

          21.2  During the Term, Hospital shall, at its cost and expense, purchase and maintain in effect general liability and professional liability insurance policies covering the Site (together with all premises where the Site is located) and the use or operation of the Equipment by Hospital or its officers, directors, agents, employees, contractors or physicians. The general liability insurance policy shall provide coverage in amounts not less than One Million Dollars ($1,000,000.00) per occurrence and Five Million Dollars ($5,000,000.00) annual aggregate. GKF shall be a certificate holder for general liability insurance. Professional liability insurance shall be as required by Pennsylvania Law Act 111 as amended by Act 135. Currently the limits are $500,000 per occurrence and $2,500,000 in the aggregate for institutional liability which covers those employees such as nurses, physicists, etc. and the physician individual limits are $500,000 per occurrence and $1,500,000 in the aggregate. In addition, coverage is provided by

the MCARE Fund with limits for each of these provides in the amount of $500,000 per occurrence and $2,100,000 in the aggregate. Evidence of current insurance is required by the Medical Staff Bylaws. The policies to be maintained by Hospital hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by Hospital to GKF no later than the First Procedure Date and as of each annual renewal of such policies during the Term.

          21.3  During the construction of the Site and prior to the First Procedure Date, Hospital, at its cost and expense, shall purchase and maintain a general liability insurance policy which conforms with the coverage amounts and other requirements described in Section 21.2 above and which names GKF as an additional insured party. The policy to be maintained by Hospital hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by Hospital to GKF prior to the commencement of any construction at the Site.

          21.4  During the Term, Hospital shall purchase and maintain all workers compensation insurance to the maximum extent required by applicable law.

     22.  Indemnification.

          22.1  Hospital shall indemnify, defend, protect and hold GKF and its members, managers, officers, employees, agents and contractors (collectively “GKF”) harmless from and against all losses, claims, damages, liabilities, assessments, deficiencies, actions, proceedings, orders, judgments, liens, costs and other expenses (including reasonable attorney’s fees) of any nature or kind whatsoever asserted against or incurred by GKF (collectively “Damages”) which in any manner arise out of or relate to (a) the failure by Hospital to fully perform, observe or satisfy its covenants, duties or obligations contained in this Agreement or in the LGK Agreement; (b) the use and operation of the Equipment resulting from the negligence or willful misconduct of Hospital and its employees, contractors, agents, or representatives and or affiliates during the Term; (c) the design, construction and preparation of the Site by Hospital or the maintenance of the Site during the Term by Hospital; (d) Damages to the Equipment from the defective, faulty or improper design, construction or preparation of the Site or the installation and positioning of the Equipment; (e) Damages to the Equipment (including any Damages arising out of or related to violations by Hospital, its agents, officers, physicians, employees or contractors of the Service Agreement) caused by the negligent or wrongful acts or omissions of Hospital, its agents, officers, physicians, employees or contractors (in the event the Equipment is destroyed or rendered unusable, subject to Section 22.6 below, this indemnity shall extend up to (but not exceed) the full replacement value of the Equipment at the time of its destruction less salvage value, if any); (f) the events or occurrences described in Article 7.3 of the LGK Agreement to the same extent that Hospital agrees to indemnify Elekta thereunder; and (g) any other matters for which Hospital has specifically agreed to indemnify GKF pursuant to this Agreement.

          22.2  Upon the occurrence of an event for which GKF is entitled to indemnification under this Agreement, GKF shall give written notice thereof to Hospital setting forth the type and amount of Damages. If the indemnity relates to a Third Party Claim (as defined in Section 22.3 below), the matter shall be subject to Section 22.3 below. If the indemnity relates to any Damages other than a Third Party Claim, not more than thirty (30) days after GKF’s written notice is given, Hospital either shall acknowledge in writing to GKF its obligation to indemnify hereunder and pay the Damages in full to GKF or dispute its obligation to indemnify in a written notice delivered to GKF. If Hospital disputes the obligation to indemnify, the parties shall meet and negotiate in good faith to mutually resolve the disagreement regarding indemnification.

          22.3  GKF shall give written notice to Hospital as soon as reasonably possible after it has knowledge of any third party claim or legal proceedings (“Third Party Claim”) for which GKF is entitled to indemnification under this Section 22. Hospital shall (a) immediately assume, at its sole cost and expense, the defense of the Third Party Claim with legal counsel approved by GKF (which approval will not be unreasonably withheld, delayed or conditioned), and (b) as soon as reasonably possible after GKF’s written notice is given to Hospital, acknowledge in writing to GKF its obligation to indemnify GKF in accordance with the terms of this Agreement. If Hospital fails to assume the defense of a Third Party Claim or fails to timely acknowledge in writing its obligation to indemnify GKF, GKF may assume the defense of the Third Party Claim in the manner described in Section 22.4 below. GKF shall cooperate with Hospital in the defense of any Third Party Claim. Any settlement or compromise of a Third Party Claim to which GKF is a party shall be subject to the express written approval of GKF, which approval shall not be unreasonably withheld, delayed or conditioned as long as an unconditional term of the settlement or compromise is the full and absolute release of GKF from all Damages arising out of the Third Party Claim. GKF, at its own cost and expense, may participate on its own behalf with legal counsel of its own selection in the defense of any Third Party Claim which may have a material impact on GKF.

          22.4  If Hospital fails to promptly assume the defense of any Third Party Claim, GKF may assume the defense of the Third Party Claim with legal counsel selected by GKF, all at Hospital cost and expense. The defense of an action by GKF under this Section 22.4 shall not impair, limit or otherwise restrict Hospital indemnification obligations arising under this Section 22 or GKF’s right to enforce such obligations.

          22.5  The indemnity obligations under this Section 22 shall survive the termination of this Lease with respect to events occurring during or relating to the Term.

          22.6  The indemnification obligations set forth in this Agreement are intended to supplement, and not supersede, supplant or replace, any coverage for Damages which may be available under any insurance policies that may be maintained by GKF or Hospital. In the event any Damages may be covered by insurance policies, the parties shall exercise good faith and use their best efforts to obtain the benefits of and apply the available insurance coverage to the

Damages subject to indemnification under this Agreement. In the event that an insurer provides coverage under an insurance policy on the basis of a “reservation of rights”, the indemnification obligations under this Agreement shall apply to all Damages which are finally determined as not being covered under the insurance policy.

     23.  Miscellaneous.

          23.1  Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Hospital shall not assign this Agreement or any of its rights hereunder or sublease the Equipment without the prior written consent of GKF, which consent shall not be unreasonably withheld. An assignment or sublease shall not relieve Hospital of any liability for performance of this Agreement during the remainder of the Term. Any purported assignment or sublease made without GKF’s prior written consent shall be null, void and of no force or effect.

          23.2  Agreement to Perform Necessary Acts. Each party agrees to perform any further acts and execute and deliver any further documents which may be reasonably necessary or otherwise reasonably required to carry out the provisions of this Agreement.

          23.3  Validity. If for any reason any clause or provision of this Agreement, or the application of any such clause or provision in a particular context or to a particular situation, circumstance or person, should be held unenforceable, invalid or in violation of law by any court or other tribunal of competent jurisdiction, then the application of such clause or provision in contexts or to situations, circumstances or persons other than that in or to which it is held unenforceable, invalid or in violation of law shall not be affected thereby, and the remaining clauses and provisions hereof shall nevertheless remain in full force and effect.

          23.4  Attorney’s Fees and Costs. In the event of any action, arbitration or other proceedings between or among the parties hereto with respect to this Agreement, the non-prevailing party or parties to such action, arbitration or proceedings shall pay to the prevailing party or parties all costs and expenses, including reasonable attorneys’ fees, incurred in the defense or prosecution thereof by the prevailing party or parties. The party which is a “prevailing party” shall be determined by the arbitrator(s) or judge(s) hearing the matter and shall be the party who is entitled to recover his, her or its costs of suit, whether or not the matter proceeds to a final judgment, decree or determination. A party not entitled to recover his, her or its costs of suit shall not recover attorneys’ fees. If a prevailing party or parties shall recover a decision, decree or judgment in any action, arbitration or proceeding, the costs and expenses awarded to such party may be included in and as part of such decision, decree or judgment.

          23.5  Entire Agreement; Amendment. This Agreement together with the Exhibits attached hereto constitutes the full and complete agreement and understanding between the parties hereto concerning the subject matter hereof and shall supersede any and all prior written and oral agreements with regard to such subject matter. This Agreement may be modified or amended only by a written instrument executed by all of the parties hereto.

          23.6  Number and Gender. Words in the singular shall include the plural, and words in a particular gender shall include either or both additional genders, when the context in which such words are used indicates that such is the intent.

          23.7  Effect of Headings. The titles or headings of the various paragraphs hereof are intended solely for convenience or reference and are not intended and shall not be deemed to modify, explain or place any construction upon any of the provisions of this Agreement.

          23.8  Counterparts. This Agreement may be executed in one or more counterparts by the parties hereto. All counterparts shall be construed together and shall constitute one agreement.

          23.9  Governing Law. This Agreement shall be interpreted and enforced in accordance with the internal laws, and not the law of conflicts, of the State of Pennsylvania applicable to agreements made and to be performed in that State.

          23.10  Exhibits. All exhibits attached hereto and referred to in this Agreement are hereby incorporated by reference herein as though fully set forth at length.

          23.11  Ambiguities. The general rule that ambiguities are to be construed against the drafter shall not apply to this Agreement. In the event that any provision of this Agreement is found to be ambiguous, each party shall have an opportunity to present evidence as to the actual intent of the parties with respect to such ambiguous provision.

          23.12  Representations. Each of the parties hereto represents (a) that no representation or promise not expressly contained in this Agreement has been made by any other party hereto or by any of its agents, employees, representatives or attorneys; (b) that this Agreement is not being entered into on the basis of, or in reliance on, any promise or representation, expressed or implied, other than such as are set forth expressly in this Agreement; (c) that it has been represented by counsel of its own choice in this matter or has affirmatively elected not to be represented by counsel; (d) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (e) it has full power and authority to execute, deliver and perform this Agreement, and (f) the execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate or other similar action.

          23.13 Non-Waiver. No failure or delay by a party to insist upon the strict performance of any term, condition, covenant or agreement of this Agreement, or to exercise any right, power or remedy hereunder or under law or consequent upon a breach hereof or thereof shall constitute a waiver of any such term, condition, covenant, agreement, right, power or remedy or of any such breach or preclude such party from exercising any such right, power or remedy at any later time or times.

          23.14  Notices. All notices, requests, demands or other communications required or permitted to be given under this Agreement shall be in writing and shall be delivered to the party to whom notice is to be given either (a) by personal delivery (in which case such notice shall be deemed to have been duly given on the date of delivery), (b) by next business day air courier service (e.g., Federal Express or other similar service) (in which case such notice shall be deemed given on the business day following deposit with the air courier service), or (c) by United States mail, first class, postage prepaid, registered or certified, return receipt requested (in which case such notice shall be deemed given on the third (3rd) day following the date of mailing), and properly addressed as follows:

To GKF:	Craig K. Tagawa
	Chief Executive Officer
	GK Financing, LLC
	Four Embarcadero Center, Suite 3700
	San Francisco, CA 94111
To Hospital:	Teri Guidi
	Lehigh Valley Hospital
	Vice President Cancer Services
	1200 South Cedar Crest Blvd.
	Allentown, PA 18103

A party to this Agreement may change his, her or its address for purposes of this Section by giving written notice to the other parties in the manner specified herein.

          23.15  Special Provisions Respecting Medicare and Medicaid Patients

               23.15.1  Hospital and GKF shall generate such records and make such disclosures as may be required, from time to time, by the Medicare, Medicaid and other third party payment programs with respect to this Agreement in order to meet all requirements for participation and payment associated with such programs, including but not limited to the matters covered by Section 1861(v)(1)(I) of the Social Security Act.

               23.15.2  For the purpose of compliance with Section 1861(v)(1)(I) of the Social Security Act, as amended, and any regulations promulgated pursuant thereto, both parties agree to comply with the following statutory requirements (a) Until the expiration of four (4) years after the termination of this Agreement, both parties shall make available, upon written request to the Secretary of Health and Human Services or, upon request, to the Comptroller General of the United States, or any of their duly authorized representatives, the contract, and books, documents and records of such party that are necessary to certify the nature and extent of such costs, and (b) if either party carries out any of the duties of the contract through a subcontract with a value or cost of $10,000 or more over a twelve month period, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four

(4) years after the furnishing of such services pursuant to such subcontract, the related organization shall make available, upon written request to the Secretary, or upon request to the Comptroller General, or any of their duly authorized representatives the subcontract, and books, documents and records of such organization that are necessary to verify the nature and extent of such costs.

          23.16  Force Majeure. Failure to perform by either party will be excused in the event of any delay or inability to perform its duties under this Agreement directly or indirectly caused by conditions beyond its reasonable control, including, without limitation, fires, floods, earthquakes, snow, ice, disasters, acts of God, accidents, riots, wars, operation of law, strikes, governmental action or regulations, shortages of labor, fuel, power, materials, manufacturer delays or transportation problems. Notwithstanding the foregoing, all parties shall make good faith efforts to perform under this Agreement in the event of any such circumstance. Further, once such an event is resolved, the parties shall again perform their respective obligations under this Agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above.

“GKF”	GK Financing, LLC,
	a California limited liability company

By:	/s/ Craig K. Tagawa
	Craig K. Tagawa,
	Chief Executive Officer

“Hospital”	Lehigh Valley Hospital,
	a not for profit Pennsylvania corporation

By:	/s/ Teri U. Guidi
	Teri U. Guidi,
	Vice President, Cancer Services
By:	/s/ Louis L. Liebhaber
	Louis L. Liebhaber,
	Chief Operating Officer

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Craig K. Tagawa, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986;] and

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

November 12, 2004

/s/ Craig K. Tagawa

Craig K. Tagawa

Chief Financial Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ernest A. Bates, M.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Shared Hospital Services;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986;] and

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during registrant’s most recent fiscal quarter (or the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

November 12, 2004

/s/ Ernest A. Bates, M.D.

Ernest A. Bates, M.D.

Chief Executive Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q of American Shared Hospital Services for the quarterly period ended September 30, 2004 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

     Ernest A. Bates, M.D., the Chief Executive Officer and Craig K. Tagawa, the Chief Financial Officer of American Shared Hospital Services, each certifies that, to the best of his knowledge:

     1.   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     2.   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of American Shared Hospital Services.

November 12, 2004

/s/ Ernest A. Bates, M.D.
Ernest A. Bates, M.D.
Chief Executive Officer

/s/ Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer