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 March 31, 2005 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 May 2, 2005, there are outstanding 4,828,840 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. Changes in 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 and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.18A
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		Mar. 31, 2005				Dec. 31, 2004
Current assets:
Cash and cash equivalents	$		7,842,000		$		8,121,000
Restricted cash			50,000				50,000
Securities			967,000				957,000
Accounts receivable, net of allowance for doubtful accounts of $170,000 in 2005 and $170,000 in 2004			2,735,000				2,950,000
Prepaid expenses and other assets			585,000				594,000
Deferred tax assets			263,000				0
Total current assets			12,442,000				12,672,000
Property and equipment:
Medical equipment and facilities			52,346,000				49,282,000
Office equipment			439,000				492,000
Deposits and construction in progress			3,695,000				4,499,000
			56,480,000				54,273,000
Accumulated depreciation and amortization			(21,240,000	)			(20,001,000	)
Net property & equipment			35,240,000				34,272,000
Other assets			159,000				162,000
Total assets	$		47,841,000		$		47,106,000

LIABILITIES AND		(unaudited)			(audited)
SHAREHOLDERS’ EQUITY		Mar. 31, 2005			Dec. 31, 2004
Current liabilities:
Accounts payable	$		261,000	$		282,000
Accrued dividends			218,000			215,000
Other accrued liabilities			968,000			896,000
Current portion of long-term debt			6,406,000			6,562,000
Current portion of obligations under capital leases			271,000			0
Total current liabilities			8,124,000			7,955,000
Long-term debt, less current portion			16,643,000			18,924,000
Obligations under capital leases, less current portion			2,085,000			0
Deferred income taxes			761,000			366,000
Minority interest			2,418,000			2,315,000
Shareholders’ equity:
Common stock, without par value:
authorized shares - 10,000,000; issued
& outstanding shares, 4,828,840 in 2005 and 4,776,173 in 2004			9,247,000			9,238,000
Additional paid-in capital			4,488,000			4,410,000
Retained earnings			4,075,000			3,898,000
Total shareholders’ equity			17,810,000			17,546,000
Total liabilities and shareholders’ equity	$		47,841,000	$		47,106,000

See accompanying notes

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

		Three Months ended March 31,
		2005				2004
Medical services revenue	$		4,449,000		$		4,229,000
Costs of revenue:
Maintenance and supplies			255,000				203,000
Depreciation and amortization			1,292,000				1,178,000
Other direct operating costs			610,000				653,000
			2,157,000				2,034,000
Gross Margin			2,292,000				2,195,000
Selling and administrative expense			921,000				766,000
Interest expense			535,000				612,000
Operating income			836,000				817,000
Interest and other income			43,000				23,000
Minority interest expense			(274,000	)			(251,000	)
Income before income taxes			605,000				589,000
Income tax expense			210,000				219,000
Net income	$		395,000		$		370,000
Net income per share:
Earnings per common share — basic	$		0.08		$		0.09
Earnings per common share — assuming dilution	$		0.08		$		0.07
Basic shares			4,829,000				3,923,000
Diluted shares			5,130,000				5,104,000

See accompanying notes

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AMERICAN SHARED HOSPITAL SERVICES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months ended March 31,
		2005				2004
Operating activities:
Net income	$		395,000		$		370,000
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization			1,315,000				1,198,000
Deferred income taxes			210,000				153,000
Minority interest in consolidated subsidiaries			274,000				251,000
Changes in operating assets and liabilities:
Receivables			215,000				36,000
Prepaid expenses and other assets			5,000				(147,000	)
Accounts payable and accrued liabilities			51,000				(17,000	)
Net cash from operating activities			2,465,000				1,844,000
Investing activities:
Purchase of property and equipment (net of financing)			(503,000	)			(176,000	)
Investment in securities			(10,000	)			0
Net cash from investing activities			(513,000	)			(176,000	)
Financing activities:
Payment of dividends			(215,000	)			(157,000	)
Payment received for exercise of options			9,000				13,000
Distribution to minority owners			(171,000	)			(38,000	)
Payment for repurchase of stock			0				(45,000	)
Principal payments on long-term debt and capitalized leases			(1,854,000	)			(1,691,000	)
Net cash from financing activities			(2,231,000	)			(1,918,000	)
Net change in cash and cash equivalents			(279,000	)			(250,000	)
Cash and cash equivalents at beginning of period			8,121,000				10,312,000
Cash and cash equivalents at end of period	$		7,842,000		$		10,062,000
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$		535,000		$		599,000
Income taxes	$		77,000		$		66,000
Schedule of non-cash investing and financing activities
Acquisition of equipment with lease/debt financing	$		1,773,000		$		0
Accrued dividends	$		218,000		$		157,000
Income tax benefit from exercise of stock options	$		78,000		$		52,000

See accompanying notes

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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 March 31, 2005 and the results of its operations for the three month periods ended March 31, 2005 and 2004, which results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31, 2004 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, 2004 included in the Company’s 10-K 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 nineteen medical centers as of March 31, 2005 in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Tennessee, Ohio, Pennsylvania, Texas and Wisconsin.

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

     Certain reclassifications have been made to the 2004 balances to conform with the 2005 presentation.

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 months ended March 31, 2005 basic earnings per share was computed using 4,829,000 common shares and diluted earnings per share was computed using 5,130,000 common shares and equivalents. For the three months ended March 31, 2004 basic earnings per share was computed using 3,923,000 common shares and diluted earnings per share was computed using 5,104,000 common shares and equivalents. The increase in common shares used in the basic earnings per shared calculation in 2005 compared to 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.

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Note 3. Stock-based Compensation

     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.

	Quarter Ended March 31
	2005			2004
Net income, as reported	$	395,000		$	370,000
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,000	)		0
Pro forma net income	$	393,000		$	370,000
Earnings per share:
Basic-as reported	$	0.08		$	0.09
Basic-pro forma	$	0.08		$	0.09
Diluted-as reported	$	0.08		$	0.07
Diluted-pro forma	$	0.08		$	0.07

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 for the year ended December 31, 2004 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 16, 2005.

     Medical services revenue increased $220,000 to $4,449,000 for the three month period ended March 31, 2005 from $4,229,000 for the three month period ended March 31, 2004. The increase is primarily due to the addition of one new Gamma Knife unit that commenced operation during first quarter 2005 and the addition of one new Gamma Knife unit that

6

commenced operation in third quarter 2004, and was partially offset by an 8% decrease in revenue at Gamma Knife centers in operation more than one year.

     The Company had nineteen Gamma Knife units in operation at March 31, 2005 compared to seventeen at March 31, 2004. Fourteen of the Company’s customers are under fee-per-use contracts, and five customers are under retail arrangements. Retail arrangements are further classified as either turn-key or net revenue sharing. Revenue from fee per use contracts is recorded on a gross basis as determined by each hospital’s contracted rate. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and is responsible for paying all the operating costs of the Gamma Knife. Revenue is recorded on a gross basis and estimated based on historical experience and hospital contacts with third party payors. For net revenue sharing arrangements the Company receives a contracted percentage of the reimbursement received by the hospital less the operating expenses of the Gamma Knife. Revenue is recorded on a net basis and estimated based on historical experience.

     The number of Gamma Knife procedures increased by 12 to 575 in first quarter 2005 from 563 in the same quarter in the prior year. This increase was due to the addition of one new Gamma Knife unit that commenced operation during first quarter 2005 and one new Gamma Knife unit that commenced operation during third quarter 2004, and was partially offset by a decrease of 7% in procedures at Gamma Knife units in operation more than one year.

     Total costs of revenue increased $123,000 to $2,157,000 for the three month period ended March 31, 2005 from $2,034,000 for the three month period ended March 31, 2004. Maintenance and supplies increased by $52,000 for the three month period ended March 31, 2005 compared to the same period in the prior year, primarily due to an increase in the number of Gamma Knife units covered under maintenance contract. There were seventeen Gamma Knife units covered under maintenance contract as of March 31, 2005 compared to fourteen as of March 31, 2004. Depreciation and amortization increased by $114,000 for the three month period ended March 31, 2005 compared to the same period in the prior year due to the addition of one new Gamma Knife unit that started during first quarter 2005 and one new Gamma Knife unit that started during third quarter 2004. Other direct operating costs decreased $43,000 for the three month period ended March 31, 2005 compared to the same period in the prior year primarily due to lower site specific marketing and promotion costs which offset increased operating costs related to the addition of a new retail Gamma Knife site in first quarter 2005.

     Selling and administrative costs increased by $155,000 to $921,000 for the three month period ended March 31, 2005 from $766,000 for the three month period ended March 31, 2004. This increase was primarily due to increased marketing and business development costs, the Company’s second Gamma Knife User’s Group meeting which was held in February 2005, and an increase in contributions.

     Interest expense decreased by $77,000 to $535,000 for the three month period ended March 31, 2005 from $612,000 for the three month period ended March 31, 2004 primarily due to lower interest expense on the debt relating to the more mature Gamma Knife units, partially offset by additional interest expense relating to the financing of the two new Gamma Knife units

7

in first quarter 2005 and third quarter 2004. 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 increased by $20,000 to $43,000 for the three month period ended March 31, 2005 from $23,000 for the three month period ended March 31, 2004 primarily due to increased interest income as a result of higher interest rates on invested cash balances.

     Minority interest increased by $23,000 to $274,000 for the three month period ended March 31, 2005 from $251,000 for the three month period ended March 31, 2004 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 $9,000 to $210,000 in the first quarter 2005 compared to $219,000 in the first quarter 2004. The Company recorded a 40% income tax provision in both first quarter 2005 and first quarter 2004, however income tax expense was less in 2005 because of a larger tax benefit recognized in 2005 due to the exercise of previously expensed options to purchase common stock. The effective income tax rate was reduced to approximately 35% in first quarter 2005 due to an income tax benefit of $32,000 that was recorded for the exercise of 50,000 previously expensed options compared to an effective income tax rate of approximately 37% in first quarter 2004 due to a similar exercise of 25,000 options. 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 $395,000 ($0.08 per diluted share) for the three month period ended March 31, 2005 compared to net income of $370,000 ($0.07 per diluted share) in the same period in the prior year. The increase was primarily due to the addition of the two new Gamma Knife units in first quarter 2005 and third quarter 2004 and lower interest expense, partially offset by increased selling and administrative costs.

Liquidity and Capital Resources

     The Company had cash and cash equivalents of $7,842,000 at March 31, 2005 compared to $8,121,000 at December 31, 2004. The Company’s cash position decreased by $279,000 primarily due to capital expenditures of $503,000 and payment of shareholder dividends of $215,000.

     During first quarter 2005, the Company paid quarterly dividends of $215,000, or $0.045 per share, that had been declared in fourth quarter 2004. On March 17, 2005 the Company declared a quarterly dividend of $0.045 per share to shareholders of record on April 4, 2005, which resulted in a reduction in retained earnings of $217,000 in first quarter 2005. The dividends are payable to shareholders on April 15, 2005.

8

     The Company as of March 31, 2004 had shareholders’ equity of $17,810,000, working capital of $4,318,000 and total assets of approximately $47,841,000.

     The Company has scheduled interest and principal payments under its debt obligations of approximately $8,445,000 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.

     In the first quarter 2005, the Company entered into a capital lease obligation collateralized by Gamma Knife equipment and construction. This obligation has a stated interest rate of 7.94%, is payable in 84 monthly payments of $37,335 and matures in January 2012.

     The Company invests its cash primarily in money market or similar funds and high quality short to intermediate-term fixed income securities in order to maximize current income while minimizing the potential for principal erosion. A portion of these investments are classified as securities on the balance sheet and are considered held-to-maturity investments because it is the company’s ability and intent to hold these securities until maturity.

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 “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. Changes in 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.

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Item 6. Exhibits and Reports on Form 8-K.

             (a) Exhibits

                  The following exhibits are filed herewith:

Exhibit Number	Description
10.18a	Amendment to Lease Agreement for a Gamma Knife unit effective December 13, 2003 by and between Methodist Healthcare System of San Antonio, Ltd., d/b/a Southwest Texas Methodist Hospital and GK Financing, LLC.
31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.

             (b) Reports on Form 8-K

                 None.

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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: May 13, 2005	/s/ Ernest A. Bates, M.D.
	Ernest A. Bates, M.D.
	Chairman of the Board and Chief Executive Officer
Date: May 13, 2005	/s/ Craig K. Tagawa
	Craig K. Tagawa
	Senior Vice President
	Chief Operating and Financial Officer

11

EX-10.18A

Exhibit 10.18a

AMENDMENT TO
LEASE AGREEMENT FOR A GAMMA KNIFE UNIT

     This AMENDMENT TO LEASE AGREEMENT FOR A GAMMA KNIFE UNIT (this “Amendment”) is made effective December 13, 2003 (the “Effective Date”), by and between Methodist Healthcare System of San Antonio, Ltd., d/b/a Southwest Texas Methodist Hospital, a Texas Corporation (“Hospital”), and GK Financing, LLC, a California limited liability company (“GKF”).

RECITALS

     WHEREAS, on October 29, 1996, GKF and Hospital executed a Lease Agreement for a Gamma Knife Unit, and an Addendum dated October 31, 1996 (collectively, the “Original Lease”);

     WHEREAS, the parties desire to amend the terms and provisions of the Original Lease as set forth herein.

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

AGREEMENT

     1.     Defined Terms. Unless otherwise defined herein, the capitalized terms used herein shall have the same meaning set forth in the Original Lease.

     2.     Lease Extension. The original ten (10) year Gamma Knife Service Term set forth in Paragraph 3 of the Original Lease shall be extended for an additional two (2) years plus the number of days the Equipment is not available for clinical use during Cobalt reloading (the “Cobalt Reloading Period”). The Commencement Date of the Gamma Knife Service Term was March 17, 1998, and the Cobalt Reloading Period consisted of twenty-two (22) days.. Accordingly, the date on which the Gamma Knife Service Term expires shall be extended from March 16, 2008 to April 7, 2010, (which includes the Cobalt Reloading Period).

     3.     Cobalt Reload. The existing Cobalt-60 was removed from, and new Cobalt-60 reloaded into, the Equipment during the Cobalt Reloading Period commencing on or about December 13, 2003. The costs to remove and reload Cobalt-60 on the Equipment shall be the sole responsibility of GKF.

     4.     Paragraph 5 of the Original Lease shall be deleted in its entirety.

     5.     Marketing Support. Paragraph 6 of the Original Lease shall be deleted in its entirety and replaced with the following:

-1-

Per Procedure Payments. As its sole consideration for the lease of the Equipment and the provision of administrative support, Hospital shall pay GKF the per procedure payment of * for each procedure that is performed using the Equipment during the first five (5) years of this Agreement starting from the Commencement Date (i.e., from March 17, 1998 through March 16, 2003).

“The per procedure payments during the sixth (6^th) year of this Agreement as extended by the Cobalt Reloading Period (i.e., from March 17, 2003 through April 7, 2004) shall be determined as follows:

“Annual Procedures	Per Procedure Payment
*	*
*	*
*	*
*	*

“The per procedure payments during the seventh (7^th) year of this Agreement and during each subsequent year thereafter through the expiration of this Agreement (i.e., from April 8, 2004 through April 7, 2010) shall be determined as follows:

“Annual Procedures	Per Procedure Payment
*	*
*	*
*	*
*	*

“Notwithstanding anything to the contrary set forth herein, (a) for purposes of determining the per procedure payment, the number of annual procedures performed shall be reset to zero (0) on March 17, 2003, on April 8, 2004, and on each April 8^th thereafter through the expiration of this Agreement; and (b) there shall be no retroactive adjustment of the per procedure payment irrespective of whether the number of procedures performed reaches a lower per procedure payment level. For example, if * procedures are performed during the eighth year, Hospital would pay * for each of the first * procedures, and * for each of the next *.

“If no procedures are performed utilizing the Equipment, no charges shall be incurred by Hospital.

“A procedure shall be defined as a single patient treatment session that may include one or more isocenters during that session. Hospital shall be billed on the fifteenth (15th) and the last day of each month for the actual number of procedures performed during the first and second half of the month, respectively. Hospital shall

-2-

pay the procedures invoiced within thirty (30) days after being invoiced. Interest shall accrue at the rate of 1-1/2% per month on all invoices remaining unpaid after 45 days.”

6.   Paragraph 8(e) of the Original Lease shall be deleted in its entirety and replaced with the following:

(e)   Use best efforts to develop and implement an ongoing marketing program that is specific to the Equipment (the “Marketing Program”), which shall include, without limitation (i) providing reasonable and customary marketing materials (i.e., brochures, announcements, seminars for physicians by neurosurgeons and radiation therapists, etc.) for the Gamma Knife service to be operated by the Hospital; and (ii) employing an individual, who shall be employed only after consultation with GKF, whose primary responsibility shall be to provide marketing services for the Gamma Knife service to be operated by the Hospital (the “Marketing Employee”). All of the costs and expenses of the Marketing Program, including, without limitation, all compensation paid to the Marketing Employee, shall be borne solely by Hospital.

The Marketing Program including, without limitation, all advertisements, brochures and other marketing materials, shall be subject to review by GKF prior to their use. Hospital and GKF shall discuss the Marketing Program on a regular basis, which shall be not less than once per month. In the event Hospital materially fails to provide marketing efforts under the Marketing Program generally consistent with the level and scope of such efforts, as made by Hospital during its 2003 fiscal year, and such material failure continues for at least thirty (30) calendar days, GKF at is option may either (i) terminate this Agreement upon providing Hospital with thirty (30) calendar days written notice; or (ii) upon providing fifteen (15) calendar days written notice to Hospital, increase the per procedure payments owed by Hospital from * per procedure to * per procedure for each of the * procedures during the seventh (7^th) year of this Agreement and during each subsequent year thereafter through the expiration of this Agreement (i.e., from April 8, 2004 through April 7, 2010) subject to the procedures set forth in Section 6 of this Agreement.

          6.     Paragraph 17 of the Original Lease shall be deleted in its entirety and replaced with the following:

-3-

“17. Options.

     ”(a) Hospital shall have the option, exercisable as set forth below to:

     ”(i) Renegotiate this Agreement on terms mutually agreeable to GKF for a specified renewal term taking into account the first twelve (12) years of activity of the Equipment at the Site. Pursuant to Paragraph 17(a)(ii), if terms and conditions of an extension are not executed by both parties by the end of the eleventh (11th) year of the Gamma Knife Service Term (as extended by the Cobalt Reloading Period (i.e., April 7, 2009), this Agreement shall terminate. Both parties shall negotiate in good faith on the terms and conditions of an extension of this Agreement.

     ”(ii) Terminate this Agreement. If Hospital fails to renew this Agreement as provided in Paragraph 17(a)(i) above, GKF shall, at its sole expense remove the Gamma Knife within a reasonable period of time after the expiration of the Gamma Knife Service Term. Hospital shall cooperate in good faith in such removal.

     ”(iii) Purchase the Equipment from GKF at the end of the Gamma Knife Service Term, at a price equal to * if at least * paid procedures have been performed during the Gamma Knife Service Term.

     ”(iv) Purchase the Equipment from GKF at the end of the Gamma Knife Service Term at a price equal to * of its Fair Market Value. Should Hospital pay for the cost to reload the Cobalt on the Equipment during the original Gamma Knife Service Term, any increase in Equipment value attributed to Cobalt reloading will be excluded from determining the Equipment’s Fair Market Value.

     “Hospital shall exercise one (1) of the four (4) options referred to above, by mailing an irrevocable written notice thereof to GKF at Four Embarcadero Center, Suite 3700, San Francisco, California, 94111, by certified mail, return receipt requested, postmarked on or before the end of the eleventh (11th) year of the Gamma Knife Service Term (as extended by the Cobalt Reloading Period (i.e., April 7, 2009). Any such notice shall be sufficient if it states in substance that Hospital elects to exercise its option and states which of the four (4) options referred to above Hospital is exercising.

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          7.     Full Force and Effect. Except as otherwise amended hereby or provided herein, all of the terms and provisions of the Original Lease shall remain in full force and effect. Notwithstanding the foregoing, to the extent of any conflict or inconsistency between the terms and provisions of this Amendment and that of the Original Lease, the terms and provisions of this Amendment shall prevail and control.

          IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the Effective Date.

“HOSPITAL”	“GKF”
Methodist Healthcare System of San Antonio, Ltd, d/b/a Southwest Texas Methodist Hospital	GK Financing, LLC
By: /s/ James C. Scoggin, Jr.	By: /s/ Craig K. Tagawa
Name: James C. Scoggin, Jr.	Craig K. Tagawa
Title: Executive Vice President	Chief Executive Officer
Approved as to Form:
By: /s/ Elizabeth Henry
Elizabeth Henry
General Counsel

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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.

May 13, 2005

/s/ Craig K. Tagawa

Craig K. Tagawa

Chief Financial Officer

12

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.

May 13, 2005

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

Ernest A. Bates, M.D.

Chief Executive Officer

13

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 March 31, 2005 (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.

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

Ernest A. Bates, M.D.

Chief Executive Officer

/s/ Craig K. Tagawa

Craig K. Tagawa

Chief Financial Officer

14