10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

þ Annual Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act of 1934

For The Fiscal Year Ended December 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 1-08789

American Shared Hospital Services

(Exact name of registrant as specified in its charter)

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

Four Embarcadero Center, Suite 3700, San Francisco, California
(Address of Principal Executive Offices) 94111-4107
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock No Par Value	American Stock Exchange
	Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer  o           Accelerated Filer  o           Non-accelerated Filer  þ

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of June 30, 2005, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $21,993,000.

Number of shares of common stock of the registrant outstanding as of March 10, 2006: 5,018,885.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

	Page
PART I:
Item 1 Business		3
Item 1a Risk Factors		12
Item 2 Properties		14
Item 3 Legal Proceedings		14
Item 4 Submission of Matters to a Vote of Security Holders		14
PART II:
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6 Selected Financial Data		16
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7a Quantitative and Qualitative Disclosure about Market Risk		26
Item 8 Financial Statements and Supplementary Data		26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		26
Item 9a Controls and Procedures		26
Item 9b Other Information		27
PART III:
Item 10 Directors and Executive Officers of the Registrant		27
Item 11 Executive Compensation		28
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		28
Item 13 Certain Relationships and Related Transactions		28
Item 14 Principal Accountant Fees and Services		28
PART IV:
Item 15 Exhibits and Financial Statement Schedules		28
EXHIBIT 10.23A
EXHIBIT 10.50
EXHIBIT 10.50A
EXHIBIT 21
EXHIBIT 31.(A)
EXHIBIT 31.(B)
EXHIBIT 32

2

PART I

ITEM 1.

BUSINESS

GENERAL

American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides Gamma Knife stereotactic radiosurgery services to twenty-one (21) medical centers in eighteen (18) states. The Company provides these services through its 81% indirect interest in GK Financing, LLC, a California limited liability company (“GKF”). The remaining 19% of GKF is owned by GKV Investments, Inc., a wholly owned U.S. subsidiary of Elekta AG, a Swedish company (“Elekta”). Elekta is the manufacturer of the Leksell Gamma Knifeâ (the “Gamma Knife”). GKF is a non-exclusive provider of alternative financing services for Elekta in the United States and Brazil. Gamma Knife services accounted for 100% of the Company’s revenue in 2005.

At present, the Company is developing its design and business model for “The Operating Room for the 21^st Century”â (“OR21”â). OR21 is not expected to generate significant revenue within the next twelve months.

The Company was incorporated in the State of California in 1983 and its predecessor, Ernest A. Bates, M.D., Ltd. (d/b/a American Shared Hospital Services), a California limited partnership, was formed in June 1980.

GAMMA KNIFE OPERATIONS

Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an alternative to conventional brain surgery or can be an adjunct to conventional brain surgery. Compared to conventional surgery, Gamma Knife surgery usually involves shorter patient hospitalization, lower risk of complications and can be provided at a lower cost. Typically, Gamma Knife patients resume their pre-surgical activities one or two days after treatment. The Gamma Knife treats patients with 201 single doses of gamma rays that are focused with great precision on small and medium size, well circumscribed and critically located structures in the brain. The Gamma Knife delivers the concentrated dose of gamma rays from 201 sources of Cobalt-60 housed in the Gamma Knife. The 201 Cobalt-60 sources converge at the target area and deliver a dose that is high enough to destroy the diseased tissue without damaging surrounding healthy tissue.

The Gamma Knife treats selected malignant brain tumors, benign brain tumors, trigeminal neuralgia (facial pain) and arteriovenous malformations. Research is being conducted to determine whether the Gamma Knife can be effective in the treatment of epilepsy and other functional disorders.

3

As of December 31, 2005, there were 103 Gamma Knife sites in the United States and 234 units in operation worldwide. An estimated percentage breakdown of Gamma Knife procedures performed in the U.S. by indications treated is as follows: malignant (44%) and benign (29%) brain tumors, functional disorders (14%) and vascular disorders (13%).

The Company, as of March 10, 2006, has twenty-one (21) Gamma Knife units operating at twenty-one (21) sites in the United States. The Company’s first Gamma Knife commenced operation in September 1991. The Company’s Gamma Knife units performed approximately 2,400 procedures in 2005 for a cumulative total of approximately 14,000 procedures through December 31, 2005.

Gamma Knife revenue for the Company during the five (5) years ended December 31, and the percentage of total revenue of the Company represented by the Gamma Knife for each of the last five years, are set forth below:

Year Ended	Total Gamma Knife		Gamma Knife/
December 31,	Revenue (in thousands)		Total Revenue
2005	$	18,231		100.0	%
2004	$	16,389		100.0	%
2003	$	16,178		100.0	%
2002	$	13,366		100.0	%
2001	$	11,758		100.0	%

The Company conducts its Gamma Knife business through its 81% indirect interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF, formed in October 1995, is managed by its policy committee. The policy committee is composed of one representative from the Company, Ernest A. Bates, M.D., ASHS’s Chairman and CEO, and one representative from Elekta. The policy committee sets the operating policy for GKF. The policy committee may act only with the unanimous approval of both of its members. The policy committee selects a manager to handle GKF’s daily operations. Craig K. Tagawa, Chief Executive Officer of GKF and Chief Operating and Financial Officer of ASHS, serves as GKF’s manager.

GKF’s profits and/or losses and any cash distributions are allocated based on membership interests. GKF’s Operating Agreement requires that it have a cash reserve of at least $50,000 before cash distributions are made to its members. From inception to December 31, 2005, GKF has distributed $17,010,000 to the Company and $3,990,000 to the minority partner.

Additional information on our operations can be found in Item 6–“Selected Financial Data”, Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 of our consolidated financial statements beginning on page [A-8] of this report.

CUSTOMERS

The Company’s current business is the outsourcing of Gamma Knife stereotactic radiosurgery

4

services. The Company typically provides the Gamma Knife equipment, as well as planning, installation, reimbursement and marketing support services. Customers usually pay the Company on a fee per use basis. The market for these services primarily consists of major urban medical centers. The Gamma Knife business is capital intensive. The total cost of a Gamma Knife facility usually ranges from $3 million to $4 million, including equipment, site construction and installation. The Company pays for the Gamma Knife and the medical center generally pays for site and installation costs. The following is a listing of the Company’s current sites as of March 10, 2006:

5

Customer	Original Term	Year Contract
Existing sites	of Contract	Began		Basis of Payment
UCSF Medical Center	10 years (1)		1991	Fee per use
San Francisco, California
Hoag Memorial Hospital Presbyterian	10 years		1997	Fee per use
Newport Beach, California
Southwest Texas Methodist Hospital	10 years		1998	Fee per use
San Antonio, Texas
Yale New Haven Ambulatory Services Corporation	10 years		1998	Revenue sharing
New Haven, Connecticut
Kettering Medical Center	10 years		1999	Fee per use
Kettering, Ohio
New England Medical Center	10 years		1999	Fee per use
Boston, Massachusetts
University of Arkansas for Medical Sciences	15 years		1999	Revenue sharing
Little Rock, Arkansas
Froedtert Memorial Lutheran Hospital	10 years		1999	Fee per use
Milwaukee, Wisconsin
JFK Medical Center	10 years		2000	Fee per use
Edison, New Jersey
Sunrise Hospital and Medical Center	10 years		2001	Fee per use
Las Vegas, Nevada
Central Mississippi Medical Center	10 years		2001	Fee per use
Jackson, Mississippi
OSF Saint Francis Medical Center	10 years		2001	Fee per use
Peoria, Illinois
Bayfront Medical Center	10 years		2002	Fee per use
St. Petersburg, Florida
Mercy Medical Center	10 years		2002	Fee per use
Rockville Center, New York
The Johns Hopkins Hospital	10 years		2003	Revenue Sharing
Baltimore, Maryland
Baptist Medical Center	8 years		2003	Revenue Sharing
Jacksonville, Florida
Albuquerque Regional Medical Center	10 years		2003	Fee per use
Albuquerque, New Mexico
Lehigh Valley Hospital	10 years		2004	Fee per use
Allentown, Pennsylvania
Baptist Hospital of East Tennessee	10 years		2005	Revenue Sharing
Knoxville, Tennessee
Northern Westchester Hospital	10 years		2005	Fee per use
Mt. Kisco, New York
Mercy Health Center	10 years		2005	Revenue Sharing
Oklahoma City, Oklahoma

6

(1) The UCSF contract has been extended with a current expiration date in 2011.

The Company currently has no sites under development.

The Company’s fee per use agreement is typically for a ten-year term. The fixed fee per use reimbursement amount that the Company receives from the customer is based on the Company’s cost to provide the service and the anticipated volume of the customer. The contracts signed by the Company typically call for a fee ranging from $7,500 to $9,000 per procedure. There are no minimum volume guarantees required of the customer. Typically, GKF is responsible for providing the Gamma Knife and related ongoing Gamma Knife equipment expenses (i.e., personal property taxes, insurance, equipment maintenance) and also helps fund the customer’s Gamma Knife marketing. The customer generally is obligated to pay site and installation costs and the costs of operating the Gamma Knife. The customer can either renew the agreement or terminate the agreement at the end of the contractual term. If the customer chooses to terminate the agreement, then GKF removes the equipment from the medical center for possible placement at another site.

The Company’s revenue sharing agreements (“retail”) are for a period of eight to fifteen years. Instead of receiving a fixed fee, the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer less the operating expenses of the Gamma Knife. The Company is at risk for any reimbursement rate changes for Gamma Knife services by the government or other third party payors. The Company is also at risk if it inefficiently operates the Gamma Knife. There are no minimum volume guarantees required of the customer.

No individual customers accounted for more than 10% of the Company’s revenue in 2005, 2004 and 2003.

MARKETING

The Company markets its services through its preferred provider status with Elekta and a direct sales effort. From April 2003 to March 2004, the direct sales effort was executed by the Company’s Chief Executive and Chief Operating Officers. Since March 2004, the Company has had a Director of Sales to lead the direct sales effort. The major advantages to a health care provider in contracting with the Company for Gamma Knife services include:

• The medical center avoids the high cost of owning the equipment. By not acquiring the Gamma Knife unit, the medical center is able to allocate the funds required to purchase and/or finance the Gamma Knife to other projects.

• The medical center avoids the risk of Gamma Knife under-utilization. The Company does not have minimum volume requirements. The medical center pays the Company only for each Gamma Knife procedure performed on a patient.

• The medical center transfers the risk of technological obsolescence to the Company. The medical center and its physicians are not under any obligation to utilize technologically obsolete equipment.

7

• The Company provides planning, installation, operating and marketing assistance and support to its Gamma Knife customers.

FINANCING

The Company’s Gamma Knife business is operated through GKF. Through 2003, GKF funded its existing Gamma Knife units with loans from a single lender, DVI Financial Services Inc. (“DVI”), for 100% of the cost of each Gamma Knife, plus any sales tax, customs and duties. Alternative lenders were utilized for financing the Company’s Gamma Knife units that opened during 2004 and 2005. The loans are predominantly fully amortized over an 84-month period. The loans are collateralized by the Gamma Knife, customer contracts and accounts receivable, and are without recourse to the Company and Elekta.

DVI filed for Chapter 11 bankruptcy protection during 2003, and all the Company’s loans with DVI were subsequently assumed by another lender as successor servicer. The Company continues to make payments to the successor servicer on these outstanding note balances. Management believes that the financial condition of DVI has not had a materially adverse effect on the Company’s financial position or results of operations.

COMPETITION

Conventional neurosurgery is the primary competitor of Gamma Knife radiosurgery. Gamma Knife surgery is gaining acceptance as an alternative and/or adjunct to conventional surgery due to its more favorable morbidity outcomes for certain procedures as well as its non-invasiveness. Utilization of the Company’s Gamma Knife units is contingent on the acceptance of Gamma Knife radiosurgery by the customer’s neurosurgeons, radiation oncologists and referring physicians. In addition, the utilization of the Company’s Gamma Knife units is impacted by the proximity of competing Gamma Knife centers and providers using other radiosurgery modalities.

The Company’s ability to secure additional customers for Gamma Knife services is dependent on its ability to effectively compete against (i) Elekta, the manufacturer of the Gamma Knife, (ii) manufacturers of other radiosurgery devices (primarily modified linear accelerators), and (iii) other companies that outsource Gamma Knife services. The Company does not have an exclusive relationship with Elekta and has previously lost sales to customers that chose to purchase a Gamma Knife directly from Elekta. The Company may continue to lose future sales to such customers and may also lose sales to the Company’s competitors.

GOVERNMENT REGULATION

The Company’s Gamma Knife customers receive payments for patient care from federal government and private insurer reimbursement programs. Currently in the United States, Gamma Knife services are performed on an in-patient and on an out-patient basis. Gamma Knife patients with Medicare as their primary insurer and treated on either an in-patient or out-patient basis, comprise an estimated 20% to 35% of the total Gamma Knife patients treated.

8

A Prospective Payment System (“PPS”) is utilized to reimburse hospitals for care given to hospital in-patients covered by federally funded reimbursement programs. Patients are classified into a Diagnosis Related Group (“DRG”) in accordance with the patient’s diagnosis, necessary medical procedures and other factors. Patient reimbursement is limited to a predetermined amount for each DRG. The reimbursement payment may not necessarily cover the cost of all medical services actually provided because the payment is predetermined. Effective October 1, 1997, Gamma Knife services for Medicare hospital in-patients are predominantly reimbursed under either DRG 7 or DRG 8.

In 1986 and again in 1990, Congress enacted legislation requiring the Department of Health and Human Services (“DHHS”) to develop proposals for a PPS for Medicare out-patient services. DHHS proposed a new payment system, Ambulatory Product Classifications (“APC”), which affects all out-patient services performed in a hospital based facility. APC implementation took place in the third quarter of 2000.

The APC consists of 346 clinically, homogenous classifications or groupings of codes that are typically used in out-patient billing. Out-patient services are bundled with fixed rates of payment determined according to specific regional and national factors, similar to that of the in-patient PPS.

The Gamma Knife APC rate is modified periodically but the total reimbursement amount has remained fairly constant. However, effective January 1, 2006, the Medicare outpatient reimbursement rate for Gamma Knife procedures is scheduled to increase approximately 28% compared to the 2005 rate of reimbursement. The Company has four contracts from which its revenue is directly affected by changes in payment rates under the APC system. Some of the Company’s fee per use customers treat patients on an out-patient basis and may also experience an increase in Medicare payment in 2006.

The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the “federal anti-kickback statute”) provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as “Stark II”, bans physician self-referrals to providers of designated health services with which the physician has a financial relationship. The term “designated health services” includes, among others, radiation therapy services and in-patient and out-patient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services, including radiation oncology, if the physician (or the physician’s immediate family) concurrently has a financial

9

interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations.

A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant is the Federal False Claims Act, which prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices which violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government, through a “whistleblower” or “qui tam” action. The Company believes that it is in compliance with the Federal False Claims Act; however, because such actions are filed under seal and may remain secret for years, there can be no assurance that the Company or one of its affiliates is not named in a material qui tam action.

Legislation in various jurisdictions requires that health facilities obtain a Certificate of Need (“CON”) prior to making expenditures for medical technology in excess of specified amounts. Four of the Company’s existing customers were required to obtain a CON or its equivalent. The CON procedure can be expensive and time consuming and may impact the length of time before Gamma Knife services commence. CON requirements vary from state to state in their application to the operations of both the Company and its customers. In some jurisdictions the Company is required to comply with CON procedures to provide its services and in other jurisdictions customers must comply with CON procedures before using the Company’s services.

The Company’s Gamma Knife units contain Cobalt 60 radioactive sources. The medical centers that house the Company’s Gamma Knife units are responsible for obtaining possession and user’s licenses for the Cobalt 60 source.

The Company believes it is in substantial compliance with the various rules and regulations that affect its businesses.

INSURANCE AND INDEMNIFICATION

The Company’s contracts with equipment vendors generally do not contain indemnification provisions. The Company maintains a comprehensive insurance program covering the value of its property and equipment, subject to deductibles, which the Company believes are reasonable.

The Company’s customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance. The Company is not involved in the practice of medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business.

10

EMPLOYEES

At December 31, 2005, the Company employed twelve (12) people on a full-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes that its employee relations are good.

EXECUTIVE OFFICERS OF THE COMPANY

The following table provides current information concerning those persons who serve as executive officers of the Company. The executive officers were appointed by the Board of Directors and serve at the discretion of the Board of Directors.

Name:	Age:		Position:
Ernest A. Bates, M.D.		69	Chairman of the Board of Directors and Chief Executive Officer
Craig K. Tagawa		52	Senior Vice President — Chief Operating and Financial Officer

Ernest A. Bates, M.D., founder of the Company, has served in the positions listed above since the incorporation of the Company. He is currently Vice Chairman of the Board of Trustees of The Johns Hopkins University, a member of the Board of Trustees at the University of Rochester, a member of the Board of Overseers of the University of California at San Francisco School of Nursing, a member of the Board of Directors of Copia and the Capital Campaign Chairman and a Board Member of the Museum of African Diaspora. Dr. Bates is also a member of the State of California Commission for Jobs and Economic Growth, a member of the Board of Directors of Salzburg Seminar, a board member of the Center for Fastercures-Milken Institute and a member of the Brookings Institution. Dr. Bates is a graduate of The Johns Hopkins University and the University of Rochester School of Medicine.

Craig K. Tagawa has served as Chief Operating Officer since February 1999 in addition to serving as Chief Financial Officer since May 1996. Mr. Tagawa also served as Chief Financial Officer from January 1992 through October 1995. Previously a Vice President in such capacity, Mr. Tagawa became a Senior Vice President on February 28, 1993. He is also the Chief Executive Officer of GKF. From September 1988 through January 1992, Mr. Tagawa served in various positions with the Company. He is currently a Chair of the Industrial Policy Advisory Committee of the Engineering Research Center for Computer-Integrated Surgical Systems and Technology at The Johns Hopkins University. He received his Undergraduate degree from the University of California at Berkeley and his M.B.A from Cornell University.

AVAILABLE INFORMATION

Our Internet address is www.ashs.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed

11

with or furnished to the SEC. The information contained on our Internet website is not part of this document.

ITEM 1a.

RISK FACTORS

In addition to the other information in this report, the following factors could affect our future business, results of operations, cash flows or financial position, and could cause future results to differ materially from those expressed in any of the forward-looking statements contained in this report.

The Company’s Capital Investment in Each Gamma Knife Unit is Substantial

Each Gamma Knife unit requires a substantial capital investment. In some cases, we contribute additional funds for capital costs and/or annual operating and equipment related costs such as marketing, maintenance, insurance and property taxes. Due to the structure of our contracts with medical centers, there can be no assurance that these costs will be fully recovered or that we will earn a satisfactory return on our investment.

The Market for the Gamma Knife is Limited

There is a limited market for the Gamma Knife. Due to the substantial costs of acquiring a Gamma Knife unit, we must identify medical centers that possess neurosurgery and radiation oncology departments capable of performing a large number of Gamma Knife procedures. As of December 31, 2005 there were 103 operating Gamma Knife units in the United States, of which 21 units are owned by us, and 234 units in operation worldwide. There can be no assurance that we will be successful in placing additional units at a significant number of sites in the future.

The Company Has a High Level of Debt

The Company’s business is capital intensive and it has traditionally financed each Gamma Knife with debt. The combined long term debt and present value of capital leases totals $25,082,000 and is collateralized by the Gamma Knife units and other assets, including accounts receivable and future proceeds from any contract between the Company and any end user of the financed equipment. This high level of debt may adversely affect the Company’s ability to secure additional credit in the future, and as a result may affect operations and profitability. If default on debt occurs in the future, the Company’s creditors would have the ability to accelerate the defaulted loan, to seize the Gamma Knife unit with respect to which default has occurred, and to apply any collateral they may have at the time to cure the default.

The Market is Competitive

There are currently three companies (in addition to our company) that actively provide alternative, non-conventional Gamma Knife financing to potential customers. We believe there are no competitor companies that currently have more than six Gamma Knife units in operation. The Company’s relationship with Elekta, the manufacturer of the Leksell Gamma Knife unit, is non-exclusive, and in the past the Company has lost sales to customers that chose to purchase a Gamma Knife unit directly from Elekta. In addition, the Company may continue to lose future sales to such customers and may also lose future sales to its competitors. There can be no

12

assurance that the Company will be able to successfully compete against others in placing future units.

There Are Alternatives to the Gamma Knife

There are several methods of radiosurgery (including the modified linear accelerator) as well as conventional neurosurgery that compete against the Gamma Knife. Each of the medical centers targeted by the Company could decide to acquire another radiosurgery modality instead of a Gamma Knife. In addition, neurosurgeons who are primarily responsible for referring patients for Gamma Knife surgery may not be willing to make such referrals for various reasons, instead opting for invasive surgery. There can be no assurance that the Company will be able to secure a sufficient number of future sites or Gamma Knife procedures to sustain its profitability and growth.

The Company’s Revenue Could Decline if Federal Reimbursement Rates are Lowered

The amount reimbursed to medical centers for each Gamma Knife treatment may decline in the future. The reimbursement decrease may come from federally mandated programs (i.e., Medicare and Medicaid) or other third party payor groups. Fifteen of the Company’s existing contracts are reimbursed by the medical center to the Company on a fee per use basis. The primary risk under this type of contract is that the actual volume of procedures could be less than projected. However, a significant reimbursement rate reduction may result in the Company restructuring certain of its existing contracts. There are also six contracts where the Company receives revenue based directly on the amount of reimbursement received for procedures performed. Revenue under those contracts and any future contracts with revenue based directly on reimbursement amounts will be impacted by any reimbursement rate change. Some of the Company’s future contracts for Gamma Knife services may have revenue based on such reimbursement rates instead of a fee for service basis. There can be no assurance that future changes in healthcare regulations and reimbursement rates will not directly or indirectly adversely affect the Company’s Gamma Knife revenue.

New Technology and Products Could Result in Equipment Obsolescence

There is constant change and innovation in the market for highly sophisticated medical equipment. New and improved medical equipment can be introduced that could make the Gamma Knife technology obsolete and that would make it uneconomical to operate. During 2000, Elekta introduced an upgraded Gamma Knife which costs approximately $3.6 million plus applicable tax and duties. This upgrade includes an Automatic Positioning System™ (“APS”), and therefore involves less health care provider intervention. In early 2005, Elekta introduced a new upgrade, the model 4C. Twelve of our existing Gamma Knife units include APS and eight of our existing Gamma Knife units are upgradeable. The cost to upgrade existing units to the new model 4C Gamma Knife with APS is estimated to be approximately $200,000 to $1,000,000, depending on the current Gamma Knife configuration. The failure to acquire or use new technology and products could have a material adverse effect on our business and results of operations.

Our Contract With Elekta May Limit Our Activities

ASHS owns 81% of GKF and the minority interest is owned by Elekta. The operating agreement governing GKF contains restrictions on our ability to engage in financing

13

“...alternative stereotactic radiosurgery equipment to the Gamma Knife.” In the past, we and Elekta have had different interpretations of the scope of this restriction in the operating agreement. If Elekta’s position were to prevail, this provision may limit the activities that ASHS undertakes in the future.

ITEM 2.

PROPERTIES

The Company’s corporate offices are located at Four Embarcadero Center, Suite 3700, San Francisco, California, where it subleases approximately 4,100 square feet for $24,258 per month. This sublease runs through May 2006. A portion of the office space is subleased through May 2006 to two third parties for approximately $2,000 per month. The Company anticipates that it will remain in its current office space through a new direct lease upon the expiration of its current sublease.

For the year ended December 31, 2005 the Company’s aggregate net rental expenses for all properties and equipment were approximately $386,000.

ITEM 3.

LEGAL PROCEEDINGS

There are no material pending legal proceedings involving the Company or any of its property. The Company knows of no legal or administrative proceedings against the Company contemplated by governmental authorities.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s security holders through the solicitation of proxies or otherwise during the fourth quarter of 2005.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common shares, no par value (the “Common Shares”), are currently traded on the American Stock Exchange and the Pacific Exchange. The table below sets forth the high and low closing sale prices of the Common Shares of the Company on the American Stock Exchange Consolidated Reporting System for each full quarter for the last two fiscal years.

14

	Prices for Common Shares
Quarter Ending	High		Low
March 31, 2004	$	7.79	$	5.55
June 30, 2004	$	7.24	$	5.35
September 30, 2004	$	5.62	$	4.25
December 31, 2004	$	6.15	$	4.70
March 31, 2005	$	6.23	$	5.40
June 30, 2005	$	6.28	$	5.23
September 30, 2005	$	6.17	$	5.71
December 31, 2005	$	7.35	$	5.80

The Company estimates that there were approximately 2,500 beneficial holders of its Common Shares at December 31, 2005.

The Board of Directors authorized in March 1999 the repurchase of up to 500,000 shares of the Company’s Common Stock in the open market from time to time at prevailing prices. Approximately 484,000 shares have been repurchased in the open market pursuant to that authorization at a cost of approximately $1,213,000, although no shares have been repurchased in the open market since 2001. The Board of Directors on February 2, 2001 authorized the repurchase of up to another 500,000 shares of the Company’s common stock in the open market from time to time at prevailing prices. No shares have been repurchased under this additional authorization.

During 2005 holders of options to acquire the Company’s common stock exercised their respective rights pursuant to such securities, resulting in the Company issuing 243,000 new shares of common stock for approximately $68,000.

On March 22, 1999 the Company adopted a Shareholder Rights Plan (“Plan”). Under the Plan, the Company made a dividend distribution of one Right for each outstanding share of the Company’s common stock as of the close of business on April 1, 1999. The Rights become exercisable only if any person or group, with certain exceptions, becomes an “acquiring person” (acquires 15 percent or more of the Company’s outstanding common stock) or announces a tender or exchange offer to acquire 15 percent or more of the Company’s outstanding common stock. The Company’s Board of Directors adopted the Plan to protect shareholders against a coercive or inadequate takeover offer. The Board of Directors is not aware that any person or group intends to make a takeover offer for the Company.

At December 31, 2005 the Company had 5,018,885 issued and outstanding common shares, 396,530 common shares reserved for options, and 5,165 shares reserved pursuant to the Company’s Shareholder Rights Plan.

15

In fourth quarter 2005, the Board of Directors declared a quarterly dividend of $.0475 per common share to shareholders of record on January 3, 2006, paid on January 18, 2006. During 2005, shareholders of record as of January 3, 2005, April 4, 2005, July 1, 2005 and October 3, 2005 were paid quarterly dividends respectively as follows: $0.045 on January 14, 2005 and April 15, 2005, and $0.0475 on July 15, 2005 and October 17, 2005. During 2004, shareholders of record as of January 2, 2004, April 2, 2004, July 2, 2004 and October 1, 2004 were paid quarterly dividends respectively as follows: $0.04 on January 15, 2004 and April 16, 2004, $0.0425 on July 15, 2004 and $0.045 on October 15, 2004. The Board of Directors anticipates declaring and paying quarterly cash dividends in similar amounts in the future subject to evaluation of the Company’s level of earnings, balance sheet position and availability of cash. The Company did not pay cash dividends prior to 2001.

ITEM 6.

SELECTED FINANCIAL DATA

Summary of Operations

	Year Ended December 31,
	(Amounts in thousands except per share data)
	2005			2004			2003			2002			2001
Medical services revenue	$	18,231		$	16,389		$	16,178		$	13,366		$	11,758
Costs of operations		9,072			7,887			7,400			5,399			4,285
Selling and administrative expense		3,613			2,963			3,255			3,313			3,245
Interest expense		2,075			2,261			2,547			2,437			2,456
Total costs and expenses		14,760			13,111			13,202			11,149			9,986
Income from operations		3,471			3,278			2,976			2,217			1,772
Interest and other income		202			102			121			171			480
Minority interest expense		(1,126	)		(983	)		(928	)		(831	)		(751	)
Income before income taxes		2,547			2,397			2,169			1,557			1,501
Income tax expense		(780	)		(412	)		(787	)		(455	)		(433	)
Net income	$	1,767		$	1,985		$	1,382		$	1,102		$	1,068
Net income per common share:
Basic	$	0.36		$	0.46		$	0.36		$	0.30		$	0.30
Diluted	$	0.35		$	0.39		$	0.27		$	0.22		$	0.21
Cash dividend declared per common share	$	0.1875		$	0.1725		$	0.2000		$	0.1200		$	0.1000
Dividend payout ratio (paid and declared)		0.54			0.44			0.74			0.55			0.48

See accompanying note

16

Balance Sheet Data

	As of December 31,
	(Amounts in thousands)
	2005		2004		2003		2002		2001
Cash & cash equivalents	$	1,298	$	8,121	$	10,312	$	9,924	$	11,580
Securities- current		4,537		957		0		0		0
Restricted cash		50		50		50		50		50
Working capital		2,423		4,978		5,268		7,175		9,351
Securities- long-term		2,797		0		0		0		0
Total assets		48,668		47,367		46,304		44,830		42,385
Current portion of long-term debt/capital leases		6,377		6,562		6,803		5,490		4,305
Long-term debt/capital leases, less current portion		18,705		18,924		20,114		22,006		21,615
Shareholders’ equity	$	18,320	$	17,546	$	15,329	$	14,540	$	13,785

See accompanying note

(1) In October 1995, the Company entered into an operating agreement granting to American Shared Radiosurgery Services (a California corporation and a wholly-owned subsidiary of the Company) an 81% ownership interest in GK Financing, LLC. ASHS incorporated a new wholly-owned subsidiary, OR21, Inc. (“OR21”) in November 1999, and a new wholly-owned subsidiary, MedLeader.com, Inc. (“MedLeader”) in April 2000. Accordingly, the financial data for the Company presented above include the results of GKF, OR21 and MedLeader for 2001 through 2005.

This financial data as of December 31, 2003, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page A-1 of this report and with Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation

17

reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

The most significant accounting policies followed by the Company are presented in Note 2 to the consolidated financial statements. These policies along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for doubtful accounts and revenue recognition to be two areas that required the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. The following are our critical accounting policies in which management’s estimates, assumptions and judgments most directly and materially affect the financial statements:

Revenue Recognition

The Company has only one revenue-generating activity, which is the operation of Gamma Knife units by GK Financing, LLC (“GKF”), an 81% owned subsidiary of the Company.

Revenue is recognized when services have been rendered and collectibility is reasonably assured, on either a fee per use or revenue sharing basis. The Company has contracts with 15 fee per use hospitals and six retail hospitals. Under both of these types of agreements, the hospital is responsible for billing patients and collection of fees for services performed. Revenue associated with installation of the Gamma Knife units, if any, is a part of the negotiated lease amount and not a distinctly identifiable amount. The costs, if any, associated with installation of the units are amortized over the period of the related lease to match revenue recognition of these costs.

For fee per use agreements, revenue is not estimated because these contracts provide for a fixed fee per procedure, and are typically for a ten year term. Revenue is recognized at the time the procedures are performed, based on each hospital’s contracted rate. There is no guaranteed minimum payment. Costs related to operating the units are charged to costs of operations as incurred, which approximates the recognition of the related revenue. Revenues under fee per use agreements are recorded on a gross basis.

GKF has six agreements that are based on revenue sharing. These can be further classified as either “turn-key” arrangements or “net revenue sharing” arrangements. For the four turn-key sites, GKF is solely responsible for the costs to acquire and install the Gamma Knife. In return, GKF receives payment from the hospital in the amount of its reimbursement from third party payors. Revenue is recognized by the Company during the period in which the procedure is performed, and is estimated based on what can be reasonably expected to be paid by the third party payor to the hospital. The estimate is primarily determined from historical experience and

18

hospital contracts with third party payors. These estimates are reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount. The Company also records an estimate of operating costs associated with each procedure during the period in which the procedure is performed. Costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company’s estimated operating costs are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. Revenue for turn-key sites is recorded on a gross basis, and the operating expenses the Company reimburses to the hospital are recorded in other operating costs.

Under net revenue sharing arrangements the hospital shares in the responsibility and risk with GKF for the capital investment to acquire and install the Gamma Knife. Unlike our turn-key arrangement, GKF’s lease payment under a net revenue sharing arrangement is a percentage of revenue less operating costs. Payments are made by the hospital, generally on a monthly basis, to GKF based on an agreed upon percentage allocation of income remaining after all operating expenses are deducted from cash collected. Revenue is recognized during the period in which the procedure is performed, and is determined based on the net reimbursement amount that GKF expects to receive from the hospital for each Gamma Knife procedure. Under the net revenue sharing arrangement, the percent of revenue received by GKF is recorded net of costs to provide a Gamma Knife treatment. This estimate is reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount.

Revenue from retail arrangements amounted to approximately 29%, 25% and 24% of revenue for the years ended December 31 2005, 2004 and 2003, respectively.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on possible losses relating to the Company’s revenue sharing customers. The Company receives reimbursement from the customer based on the customer’s collections from individuals and third-party payors such as insurance companies and Medicare. Receivables are charged against the allowance in the period that they are deemed uncollectible.

If the Company’s net accounts receivable estimates for revenue sharing customers as of December 31, 2005 changed by as much as 10% based on actual collection information, it would have the effect of increasing or decreasing revenue by approximately $252,000.

GENERAL

During the years ended December 31, 2005, 2004 and 2003, 100% of the Company’s revenue was derived from its Gamma Knife business.

TOTAL REVENUE

19

			Increase					Increase
	2005		(Decrease)			2004		(Decrease)			2003
Medical services revenue (in thousands)	$	18,231		11.2	%	$	16,389		1.3	%	$	16,178
Number of Gamma Knife procedures		2,410		12.6	%		2,140		1.1	%		2,116
Average revenue per procedure	$	7,565		(1.2	)%	$	7,658		0.2	%	$	7,646

Medical services revenue increased 11.2% in 2005 compared to 2004 and increased 1.3% in 2004 compared to 2003. The increase in both 2005 and 2004 is due to an increase in the number of Gamma Knife units in operation. The Company had twenty-one, eighteen and seventeen Gamma Knife units in operation at December 31, 2005, 2004 and 2003, respectively.

Gamma Knife revenue increased $1,842,000 and $211,000 in 2005 and 2004, respectively, compared to the prior years. The 2005 increase was due to three new Gamma Knife units that began operation during 2005 and the full year inclusion of one new Gamma Knife unit that began operation during 2004, which offset a 4% decrease in revenue from Gamma Knife units in operation more than one year. The 2004 increase compared to 2003 was primarily due to one new Gamma Knife units that began operation during 2004 and the full year inclusion of three new Gamma Knife units that began operation during 2003, which offset a 14% decrease in revenue for Gamma Knife units in operation more than one year.

The number of Gamma Knife procedures in 2005 increased by 270 compared to 2004 due to the increase in the number of Gamma Knife units in operation, as well as a 3% increase in procedures from Gamma Knife units in operation more than one year. The increase in the number of Gamma Knife procedures in 2004 compared to 2003 was due to the increase in the number of Gamma Knife units in operation, which offset a 10% decrease in procedures from Gamma Knife units in operation more than one year.

Revenue per procedure decreased $93 in 2005 and increased $12 in 2004 compared to the prior years. The Company’s contracts generally have different procedure rates because their investment basis varies, so revenue per procedure can vary year to year depending primarily on the mix of procedures performed at certain locations. The decrease per procedure in 2005 is primarily due to lower average procedure rates collected at two of the Company’s retail sites.

COSTS OF OPERATIONS

(In thousands)	2005			Increase			2004			Increase			2003
Costs of operations	$	9,072			15.0	%	$	7,887			6.6	%	$	7,400
Percentage of revenue		49.8	%					48.1	%					45.7	%

The Company’s costs of operations, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and other fees) increased $1,185,000 in 2005 compared to 2004, and increased $487,000 in 2004 compared to 2003.

20

The Company’s maintenance and supplies costs were 6%, 5% and 5% of medical service revenue in 2005, 2004 and 2003, respectively. Maintenance and supplies costs increased $150,000 in 2005 compared to 2004, and increased $139,000 in 2004 compared to 2003. The increase in 2005 compared to 2004 was primarily due to the expiration of the warranty period on one Gamma Knife unit and the full year inclusion of maintenance on two Gamma Knife units whose warranty period expired during the previous year. The increase in 2004 compared to 2003 was primarily due to the expiration of the warranty period on two Gamma Knife units and the full year inclusion of three Gamma Knife units whose warranty period expired during 2003.

Depreciation and amortization increased $593,000 in 2005 compared to 2004, and increased $577,000 in 2004 compared to 2003. The increase in 2005 was primarily due to the addition of three new Gamma Knife units that commenced operation during first, second and third quarters of 2005 and a full year of depreciation on one new Gamma Knife units that started operation during 2004. The increase in 2004 was due to the addition of one new Gamma Knife unit that commenced operation during third quarter 2004 and a full year’s depreciation on three Gamma Knife units that started operation in 2003.

Other direct operating costs as a percentage of medical services revenue were 14%, 13% and 15% in 2005, 2004 and 2003, respectively. The increase of $442,000 in 2005 compared to 2004 was primarily due to increased operating costs related to the Company’s two additional retail Gamma Knife units that started operation during 2005 and higher insurance costs due to additional Gamma Knife units in operation, which were partially offset by lower marketing and promotion costs. The decrease of $229,000 in 2004 compared to 2003 was primarily due to lower operating costs related to a lower number of procedures performed at one of the Company’s retail locations.

SELLING AND ADMINISTRATIVE

(In thousands)	2005			Increase			2004			(Decrease)			2003
Selling and administrative costs	$	3,613			21.9	%	$	2,963			(9.0	)%	$	3,255
Percentage of revenue		19.8	%					18.1	%					20.1	%

The Company’s selling and administrative costs increased $650,000 in 2005 compared to 2004, and decreased $292,000 in 2004 compared to 2003. The increase in 2005 compared to 2004 was primarily due to increased payroll and business development costs of approximately $441,000, which included costs of the Company’s second Gamma Knife User’s Meeting of approximately $42,000 and OR21 business development costs of approximately $151,000. In addition, legal, accounting and consulting fees increased approximately $119,000 and contributions increased approximately $55,000 over the prior year. The decrease in 2004 was primarily due to lower payroll and business development costs of approximately $142,000, recruiting fees of $42,000 and insurance of $26,000. Also, during 2003 there was a non-recurring write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil, and the Company’s Gamma Knife User’s Meeting of approximately $45,000.

21

INTEREST EXPENSE

				Increase						Increase
(In thousands)	2005			(Decrease)			2004			(Decrease)			2003
Interest expense	$	2,075			(8.2	)%	$	2,261			(11.2	)%	$	2,547
Percentage of revenue		11.4	%					13.8	%					15.7	%

The Company’s interest expense decreased $186,000 in 2005 compared to 2004, and decreased $286,000 in 2004 compared to 2003. The decrease in 2005 was due to lower interest expense on the Company’s more mature Gamma Knife units and the completion of debt service on two Gamma Knife units. This was partially offset by additional interest expense on the financing of the Company’s three new Gamma Knife units that started operation during 2005, and the refinancing of one Gamma Knife unit that had previously been paid off. The decrease in 2004 was primarily due to lower interest expense on the Company’s more mature Gamma Knife units and final payment on the debt for one Gamma Knife unit. This decrease was partially offset by additional interest expense on the financing of the Company’s new Gamma Knife unit in 2004. Fourteen of the Company’s twenty-one Gamma Knife units have been in operation for more than three years and generally have significantly lower interest expense than newer units because interest expense decreases with each principal payment.

OTHER INCOME AND EXPENSE

				Increase						Increase
(In thousands)	2005			(Decrease)			2004			(Decrease)			2003
Interest and other income	$	202			98.0	%	$	102			(15.7	)%	$	121
Percentage of revenue		1.1	%					0.6	%					0.7	%
Minority interest expense	$	(1,126	)		14.5	%	$	(983	)		5.9	%	$	(928	)
Percentage of revenue		(6.2	)%					(6.0	)%					(5.7	)%

Interest and other income increased $100,000 in 2005 compared to 2004 and decreased $19,000 in 2004 compared to 2003. The increase in 2005 was primarily due to investment in longer term holdings with higher interest rates available compared to 2004. The decrease in 2004 was primarily due to lower invested cash balances during 2004.

Minority interest increased $143,000 in 2005 and $55,000 in 2004 compared to the prior year, respectively. Minority interest represents the pre-tax income earned by the minority partner’s 19% interest in GKF. The increase in minority interest reflects the increased profitability of GKF.

INCOME TAXES

22

				Increase						Increase
(In thousands)	2005			(Decrease)			2004			(Decrease)			2003
Income tax expense	$	780			89.3	%	$	412			(47.6	%)	$	787
Percentage of revenue		4.3	%					2.5	%					4.9	%

Income tax expense increased $368,000 in 2005 compared to 2004, and decreased $375,000 in 2004 compared to 2003. The Company’s estimated 37% effective income tax provision for 2005 was reduced by a $193,000 income tax benefit from the exercise of options to purchase 264,000 common shares. The Company’s 40% income tax provision for 2004 was reduced by a $547,000 income tax benefit from the exercise of options to purchase 846,000 common shares. The income tax benefit is a result of compensation expense that was recognized when these options for common shares were granted in 1995.

The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are minimal income tax payments required due to net operating loss carryforwards and other deferred tax assets available for tax purposes.

The Company had a net operating loss carryforward for federal income tax return purposes at December 31, 2005 of approximately $12,556,000.

NET INCOME

(In thousands,			Increase					Increase
except per share amounts)	2005		(Decrease)			2004		(Decrease)			2003
Net income	$	1,767		(11.0	)%	$	1,985		43.6	%	$	1,382
Net income per share, diluted	$	0.35		(10.3	)%	$	0.39		44.4	%	$	0.27

The Company had net income of $1,767,000 in 2005 compared to $1,985,000 in 2004 and $1,382,000 in 2003. Net income for 2005 included increased operating income of $193,000 compared to 2004, which was primarily due to the addition of three new Gamma Knife units during 2005. This was offset by an increase in income tax expense of $368,000 due to reduced income tax benefits available on the exercise of options to purchase common stock. Net income for 2004 included increased income from operations compared to 2003 of $302,000 which was primarily due to lower selling and administrative costs and interest expense. In addition, income tax expense was $375,000 less than 2003 due to an income tax benefit of $547,000 on the exercise of options to purchase common stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and cash equivalents of $1,298,000 at December 31, 2005 compared to $8,121,000 at December 31, 2004. This decrease in cash resulted primarily from the Company’s decision during 2005 to invest an additional $6,377,000 of its available cash into marketable

23

securities. The Company’s expected primary cash needs on both a short and long-term basis are for capital expenditures, business expansion, working capital, payment of quarterly dividends and other general corporate purposes.

Securities represents a portion of the Company’s cash that is invested in high-quality short to long-term fixed income marketable securities in order to maximize income on its available cash. Securities with maturity dates between three and twelve months in the amount of $4,537,000 are classified as current assets. Securities in the amount of $2,797,000 have maturities in excess of one year and are classified as long-term. It is the Company’s intent to hold these securities until maturity.

Restricted cash of $50,000 at December 31, 2005 reflects cash that may only be used for the operations of GKF.

Operating activities provided cash of $8,480,000 in 2005. Net income of $1,767,000, depreciation and amortization of $5,502,000 and an increase in the minority interest of $1,126,000 were the primary reasons for the increase in operating cash flow. The Company’s trade accounts receivable increased to $3,832,000 at December 31, 2005 from $2,793,000 at December 31, 2004, which was primarily due to the addition of three new Gamma Knife contracts during 2005, two of which were retail contracts, and an increase in the number of days revenue outstanding (“DSO”) in accounts receivable for some of the Gamma Knife contracts. The DSO was 76 and 66 days as of December 31, 2005 and December 31, 2004, respectively. We expect DSO to fluctuate in the future depending on timing of customer payments received and the mix of fee per use vs. retail customers.

Investing activities used $12,572,000 of cash in 2005 primarily due to an investment in short to long-term securities of $7,334,000 and for the acquisition of property and equipment of $6,195,000, primarily for the three Gamma Knife units that became operational during 2005.

Financing activities used $2,731,000 of cash during 2005, primarily due to principal payments on long-term debt of $7,419,000, distributions to minority owners of $912,000 and the payment of dividends of $902,000. This was partially offset by financing on the acquisition of property and equipment of $7,015,000, primarily for the three Gamma Knife units that became operational during 2005.

Working capital decreased $2,555,000 to $2,423,000 at December 31, 2005 from $4,978,000 at December 31, 2004 primarily due to a decrease in cash and current securities of $3,243,000 which was partially offset by an increase in trade accounts receivable of $1,039,000.

The Company primarily invests its cash in money market or similar funds and high quality short to long-term securities in order to minimize the potential for principal erosion. Cash is invested in these funds pending use in the Company’s operations. The Company believes its cash position combined with its working capital is adequate to service the Company’s cash requirements in 2006.

24

The Company finances all of its Gamma Knife units, and anticipates that it will continue to do so with future contracts. During 2003 the Company’s primary lender, DVI, filed for Chapter 11 bankruptcy protection. The principal balance of notes held by DVI were transferred to a third party lender as successor servicer, and the Company continues to make payments on the outstanding note balances serviced by this third party lender. The Company has secured financing for its recent projects from other lenders and anticipates that it will be able to secure financing on future projects from these or other lending sources, but there can be no assurance that financing will continue to be available on acceptable terms. The Company meets all debt covenants required under notes with its lenders, and expects that any covenants required by future lenders will be acceptable to the Company.

IMPACT OF INFLATION AND CHANGING PRICES

The Company does not believe that inflation has had a significant impact on operations because a substantial majority of the costs that it incurs under its customer contracts are fixed through the term of the contract.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABLILITES AND OFF BALANCE SHEET ARRANGEMENTS

The following table presents, as of December 31, 2005, the Corporation’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

	Payments Due by Period
	Total amounts		Less than
Contractual Obligations	committed		1 year		1-3 years		4-5 years		After 5 years
Long-term debt	$	20,884,000	$	5,631,000	$	12,619,000	$	2,634,000
Capital leases		4,198,000		746,000		2,331,000		1,013,000		108,000
Future Gamma Knife purchases (1)		2,109,000				2,109,000
Operating leases		235,000		208,000		27,000
Total contractual obligations	$	27,426,000	$	6,585,000	$	17,086,000	$	3,647,000	$	108,000

(1) The Company has deposits toward the upgrade and reload of certain Gamma Knife units already in service. The term financing for these upgrades will not be finalized until 2006, and therefore an accurate determination of payments by period cannot be made as of December 31, 2005. For purposes of this table, these commitments are listed in the 1-3 year category.

Further discussion of the long-term debt commitment is included in Note 4, capital leases in Note 9, and operating leases in Note 10 of the consolidated financial statements.

The Company has no significant off-balance sheet arrangements.

25

ITEM 7a.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below presents information about certain market-sensitive financial instruments as of December 31, 2005. The fair values were determined based on quoted market prices for the same or similar instruments.

We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

	Maturity Date, Year ending December 31
(amounts in thousands)	2006			2007			2008			2009			2010			Thereafter			Total			Fair Value
Fixed-rate long-term debt and present value of capital leases	$	6,377		$	5,674		$	4,732		$	4,544		$	2,477		$	1,278		$	25,082		$	25,088
Average interest rates		8.6	%		8.4	%		8.2	%		8.1	%		7.9	%		7.8	%		8.3	%

At December 31, 2005, we had no significant long-term, market-sensitive investments.

We have no affiliation with partnerships, trust or other entities whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements, and therefore have no exposure to the financing, liquidity, market or credit risks associated with such entities.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Index to Consolidated Financial Statements and Financial Statement Schedules included at page A-1 of this report.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9a.

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

26

Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2005 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures (as required by paragraph (b) of the Securities and Exchange Act of 1934 Rules 13a-15 or 15d-15) were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

(b)	Changes in internal controls over financial reporting.
	There were no significant changes in our internal controls over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9b.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders (the “2006 Proxy Statement”). Information regarding executive officers of the Company, included herein under the caption “Executive Officers of the Registrant” in Part I, Item 1 above, is incorporated herein by reference.

Information concerning the identification of our standing audit committee required by this Item is incorporated by reference from the 2006 Proxy Statement.

Information concerning our audit committee financial experts required by this Item is incorporated by reference from the 2006 Proxy Statement.

Information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference from the 2006 Proxy Statement.

We have adopted a Code of Ethics that is incorporated by reference from the 2006 Proxy Statement.

27

ITEM 11.

EXECUTIVE COMPENSATION

Incorporated herein by reference from the 2006 Proxy Statement.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated herein by reference from the 2006 Proxy Statement.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the 2006 Proxy Statement.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference from the 2006 Proxy Statement.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	Financial Statements and Schedules.
	The following Financial Statements and Schedules are filed with this Report:

Report of Independent Registered Public Accounting Firm

Audited Consolidated Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Financial Statement Schedules

          Valuation and Qualifying Accounts

28

(All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.)

(b)	Exhibits.
	The following Exhibits are filed with this Report.

Exhibit
Number:	Description:
2.1	Securities Purchase Agreement, dated as of March 12, 1999, by and among Alliance Imaging, Inc.; Embarcadero Holding Corp. I; Embarcadero Holding Corp. II; American Shared Hospital Services; and MMRI, Inc. (1)
3.1	Articles of Incorporation of the Company, as amended. (2)
3.2	By-laws of the Company, as amended. (3)
4.6	Form of Common Stock Purchase Warrant of American Shared Hospital Services. (3)
4.8	Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems. (3)
4.9	Rights Agreement dated as of March 22, 1999 between American Shared Hospital Services and American Stock Transfer & Trust Company as Rights Agent. (25)
10.1	The Company’s 1984 Stock Option Plan, as amended. (4)
10.2	The Company’s 1995 Stock Option Plan, as amended. (5)
10.3	Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (4)
10.4	Ernest A. Bates Stock Option Agreement dated as of August 15, 1995. (6)
10.5	Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (3)

29

Exhibit
Number:	Description:
10.6	Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (7)
10.7	Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (1)
10.8	Amendment dated as of March 31, 1999 (“Fourth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.9	Amendment dated as of March 31, 1999 (“Fifth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.10	Amendment dated as of June 5, 1999 to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.11a	Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (8)
10.11b	Assignment and Assumption Agreement, dated as of November 1, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee). (4)
10.11c	Amendment Number One dated as of August 1, 1995 to the Lease Agreement for a Gamma Knife Unit between The Regents of the University of California and American Shared Hospital Services. (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.) (8)
10.11d	Lease Agreement dated as of July 3, 1990 for a Gamma Knife Unit between American Shared Hospital Services and The Regents of the University of California. (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.) (8)
10.12	Amendment Number Two dated as of February 6, 1999 to the Lease Agreement for a Gamma Knife Unit between UCSF-Stanford Health Care and GK Financing, LLC. (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

30

Exhibit
Number:	Description:
	the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.13	Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (4)
10.14	Lease Agreement for a Gamma Knife Unit dated as of April 6, 1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University 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.) (8)
10.15	Assignment and Assumption and Agreement dated as of February 1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC with respect to the Lease Agreement for a Gamma Knife dated as of April 6, 1994 between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (8)
10.16	Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (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.) (8)
10.17	Addendum to Lease Agreement for a Gamma Knife Unit dated as of December 1, 1999 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (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.) (8)
10.18	Lease Agreement for a Gamma Knife Unit dated as of October 29, 1996 between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (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.) (8)

31

Exhibit
Number:	Description:
10.18a	Amendment to Lease Agreement for a Gamma Knife Unit effective December 13, 2003 by and between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (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.) (22)
10.19	Lease agreement for a Gamma Knife Unit dated as of April 10, 1997 between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (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.) (8)
10.20	Lease Agreement for a Gamma Knife Unit dated as of June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (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.) (9)
10.21	Addendum to Contract with GKF and KMC/WKNI, dated June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (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.) (9)
10.22	Lease Agreement for a Gamma Knife Unit dated as of October 5, 1999 between GK Financing, LLC and New England Medical Center Hospitals, Inc. (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.) (9)
10.22a	Addendum to Lease Agreement for a Gamma Knife unit effective April 1, 2005 between GK Financing, LLC and New England Medical Center Hospitals, Inc. (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.) (24)

32

Exhibit
Number:	Description:
10.23	Equipment Lease Agreement dated as of October 29, 1999 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (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.) (9)
10.23a	Amendment to Lease Agreement effective as of September 15, 2005 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (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.)
10.24	First Amendment to Lease Agreement for a Gamma Knife Unit effective as of August 2, 2000 between GK Financing, LLC and Tenet HealthSystems Hospitals, Inc. (formerly known as NME Hospitals, Inc.) dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.25	Addendum Two, dated as of October 1, 2000, to Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (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.) (10)
10.26	Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (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.) (10)

33

Exhibit
Number:	Description:
10.27	Addendum dated June 24, 2000 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.28	Amendment dated July 12, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.29	Amendment dated August 24, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.30	Lease Agreement for a Gamma Knife Unit dated as of December 11, 1996 between The Community Hospital Group, Inc. dba JFK Medical Center and GK Financing, LLC. (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.) (11)
10.31	Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (12)
10.32	Addendum to Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (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.) (12)
10.33	Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (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.) (13)

34

Exhibit
Number:	Description:
10.34	Addendum to Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (13)
10.35	Lease Agreement for a Gamma Knife Unit dated as of February 18, 2000 between GK Financing, LLC and OSF HealthCare System. (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.) (13)
10.36	American Shared Hospital Services 2001 Stock Option Plan. (14)
10.37	Amendment Number Three to Lease Agreement for a Gamma Knife Unit dated as of June 22, 2001 between GK Financing, LLC and The Regents of the University of California. (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.) (15)
10.38	Addendum Three to Lease Agreement for a Gamma Knife Unit dated as of October 1, 2000 between GK Financing, LLC and Hoag Memorial Hospital Presybterian. (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.) (15)
10.39	Lease Agreement for a Gamma Knife Unit dated as of July 18, 2001 between GK Financing, LLC and Bayfront Medical Center, Inc.. (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.) (16)
10.40	Lease Agreement for a Gamma Knife Unit dated as of September 13, 2001 between GK Financing, LLC and Mercy Medical Center. (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.) (17)
10.41	Addendum Number One to Contract with GKF and Mercy Medical Center, dated September 13, 2001 between GK Financing, LLC and

35

Exhibit
Number:	Description:
	Mercy Medical Center. (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.) (17)
10.42	Lease Agreement for a Gamma Knife Unit dated as of May 22, 2002 between GK Financing, LLC and The Johns Hopkins 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.) (18)
10.43	Lease Agreement for a Gamma Knife Unit dated as of July 11, 2002 between GK Financing, LLC and Southern Baptist Hospital of Florida, Inc. D/B/A Baptist Medical Center. (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.) (19)
10.44	Lease Agreement for a Gamma Knife Unit dated as of February 13, 2003 between GK Financing, LLC and AHS Albuquerque Regional Medical Center LLC. (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.) (20)
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.) (21)
10.46	Lease Agreement for a Gamma Knife Unit dated as of March 21, 2003 between GK Financing, LLC and Northern Westchester Hospital Center. (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.) (23)

36

Exhibit
Number:	Description:
10.47	Amendment Four to Lease Agreement for a Gamma Knife Unit effective as of December 1, 2002 between GK Financing, LLC and Hoag Memorial Hospital Presbyterian. (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.) (23)
10.48	Line of credit agreement between American Shared Hospital Services and Bank of America dated July 1, 2004 and related amendments No. 1 and No. 2 dated June 23, 2005. (23)
10.49	Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Mercy Health Center. (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.) (24)
10.50	Lease Agreement for a Gamma Knife Unit dated as of August 7, 2003 between GK Financing, LLC and Baptist Hospital of East Tennessee. (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.)
10.50a	Amendment No. 1 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Baptist Hospital of East Tennessee.
21.	Subsidiaries of American Shared Hospital Services.
31.	Rule 13a-14(a)/15d-14(a) Certifications.
32.	Section 1350 Certifications (furnished and not to be considered filed as part of the Form 10-K).

(1)	These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, which is incorporated herein by this reference.
(2)	This document was filed as Exhibit 3.1 to registrant’s Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference.

37

(3)	These documents were filed as Exhibits 3.2, 4.6 and 4.8, respectively, to registrant’s Registration Statement on Form S-1 (Registration No. 33-63721) filed on October 26, 1995, which is incorporated herein by this reference.
(4)	These documents were filed as Exhibits 10.24 and 10.35 respectively, to registrant’s Registration Statement on Form S-2 (Registration No. 33-23416), which is incorporated herein by this reference.
(5)	This document was filed as Exhibit A to registrant’s Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference.
(6)	This document was filed as Exhibit B to registrant’s Proxy Statement, filed on August 31, 1995, which is incorporated herein by this reference.
(7)	These documents were filed as Exhibits 4.14 and 10.13, respectively, to the registrant’s Pre-Effective Amendment No. 1 to registrant’s Registration Statement on Form S-1 (Registration No. 33-63721) filed on March 29, 1996, which is incorporated herein by this reference.
(8)	These documents were filed as Exhibits 10.8, 10.9, 10.10, 10.11a, 10.11c, 10.11d, 10.12, 10.14, 10.15, 10.16, 10.17, 10.18 and 10.19, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, which is incorporated herein by this reference.
(9)	These documents were filed as Exhibits 10.20, 10.21, 10.22, 10.23, and 10.24, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which is incorporated herein by this reference.
(10)	These documents were filed as Exhibits 10.25, 10.26, 10.27, 10.28 and 10.29, respectively, to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which is incorporated herein by this reference.
(11)	This document was filed as Exhibit 10.30 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, which is incorporated herein by this reference.
(12)	These documents were filed as Exhibits 10.31 and 10.32, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, which is incorporated herein by this reference.
(13)	These documents were filed as Exhibits 10.33, 10.34 and 10.35, respectively, to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, which is incorporated herein by this reference.

38

(14)	This document was filed as Exhibit 10.36 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, which is incorporated herein by this reference.
(15)	These documents were filed as Exhibits 10.37 and 10.38 to the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, which is incorporated herein by this reference.
(16)	This document was filed as Exhibit 10.39 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, which is incorporated herein by this reference.
(17)	These documents were filed as Exhibit 10.40 and 10.41 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002, which is incorporated herein by this reference.
(18)	This document was filed as Exhibit 10.42 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, which is incorporated herein by this reference.
(19)	This document was filed as Exhibit 10.43 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, which is incorporated herein by this reference.
(20)	This document was filed as Exhibit 10.44 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, which is incorporated herein by this reference.

39

(21)	This document was filed as Exhibit 10.45 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, which is incorporated herein by this reference.
(22)	This document was filed as Exhibit 10.18a to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, which is incorporated herein by this reference.
(23)	These documents were filed as Exhibit 10.46, 10.47 and 10.48 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, which is incorporated herein by this reference.
(24)	These documents were filed as Exhibit 10.22a and 10.49 to the registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, which is incorporated herein by this reference.
(25)	This document was filed as Exhibit 4 to the registrant’s Current Report on Form 8-K filed on April 1, 1999, which is incorporated herein by this reference.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)
March 31, 2006	By:	Ernest A. Bates, M.D.
		Ernest A. Bates, M.D.
		Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
Ernest A. Bates Ernest A. Bates	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	March 31, 2006
Ernest R. Bates Ernest R. Bates	Director	March 31, 2006
Olin C. Robison Olin C. Robison	Director	March 31, 2006
John F. Ruffle John F. Ruffle	Director	March 31, 2006
Stanley S. Trotman, Jr. Stanley S. Trotman, Jr.	Director	March 31, 2006
Craig K. Tagawa Craig K. Tagawa	Chief Operating Officer and Chief Financial Officer (Principal Accounting Officer)	March 31, 2006

41

AMERICAN SHARED HOSPITAL SERVICES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
and
CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 and 2003

Contents

	PAGE
Report of Independent Registered Public Accounting Firm		1
Consolidated Financial Statements Balance sheets		2
Statements of income		3
Statement of shareholders’ equity		4
Statements of cash flows		6–7
Notes to financial statements		8–22

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
American Shared Hospital Services

We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board of the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposed of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Shared Hospital Services at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

/S/ MOSS ADAMS LLP

San Francisco, California
March 29, 2006

1

American Shared Hospital Services

American Shared Hospital Services

Consolidated Balance Sheets

	DECEMBER 31,
	2005		2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,298,000	$	8,121,000
Securities		4,537,000		957,000
Restricted cash		50,000		50,000
Trade accounts receivable, net of allowance for doubtful accounts of $170,000 in 2005 and $170,000 in 2004		3,832,000		2,793,000
Other receivables		187,000		157,000
Prepaid expenses and other current assets		464,000		594,000
Current deferred tax assets		341,000		261,000
Total current assets		10,709,000		12,933,000
PROPERTY AND EQUIPMENT, net		34,990,000		34,272,000
SECURITIES		2,797,000		—
OTHER ASSETS		172,000		162,000
	$	48,668,000	$	47,367,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	555,000	$	282,000
Accrued interest and other liabilities		996,000		808,000
Employee compensation and benefits		120,000		88,000
Accrued dividends		238,000		215,000
Current portion of long-term debt		5,631,000		6,562,000
Current portion of long-term capital leases		746,000		—
Total current liabilities		8,286,000		7,955,000
LONG-TERM DEBT, less current portion		15,253,000		18,924,000
LONG-TERM CAPITAL LEASES, less current portion		3,452,000		—
DEFERRED INCOME TAXES		828,000		627,000
MINORITY INTEREST		2,529,000		2,315,000
SHAREHOLDERS’ EQUITY
Common stock, no par value
Authorized – 10,000,000 shares; Issued and outstanding shares – 5,019,000 in 2005 and 4,776,000 in 2004		9,306,000		9,238,000
Additional paid-in capital		4,274,000		4,410,000
Retained earnings		4,740,000		3,898,000
Total shareholders’ equity		18,320,000		17,546,000
	$	48,668,000	$	47,367,000

See accompanying notes

2

American Shared Hospital Services

Consolidated Statements of Income

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
REVENUE:
Medical services	$	18,231,000		$	16,389,000		$	16,178,000
COSTS AND EXPENSES:
Costs of revenue:
Maintenance and supplies		1,035,000			885,000			746,000
Depreciation and amortization		5,395,000			4,802,000			4,225,000
Other direct operating costs		2,642,000			2,200,000			2,429,000
		9,072,000			7,887,000			7,400,000
Gross margin		9,159,000			8,502,000			8,778,000
Selling and administrative expense		3,613,000			2,963,000			3,255,000
Interest expense		2,075,000			2,261,000			2,547,000
Operating income		3,471,000			3,278,000			2,976,000
Interest and other income		202,000			102,000			121,000
Minority interest expense		(1,126,000	)		(983,000	)		(928,000	)
Income before income taxes		2,547,000			2,397,000			2,169,000
Income tax expense		(780,000	)		(412,000	)		(787,000	)
NET INCOME	$	1,767,000		$	1,985,000		$	1,382,000
Earnings per common share – basic	$	0.36		$	0.46		$	0.36
Earnings per common share – diluted	$	0.35		$	0.39		$	0.27

See accompanying notes

3

American Shared Hospital Services

Consolidated Statement of Shareholders’ Equity

	THREE YEARS ENDED DECEMBER 31, 2005
							Additional
	Common			Common			Paid-in			Retained
	Shares			Stock			Capital			Earnings			Total
Balances at January 1, 2003		3,783,000		$	9,173,000		$	3,312,000		$	2,055,000		$	14,540,000
Options exercised		135,000			25,000			163,000			—			188,000
Repurchase of stock options		—			—			(14,000	)		—			(14,000	)
Dividends		—			—			—			(767,000	)		(767,000	)
Net income		—			—			—			1,382,000			1,382,000
Balances at December 31, 2003		3,918,000			9,198,000			3,461,000			2,670,000			15,329,000
Options exercised		858,000			40,000			994,000			—			1,034,000
Repurchase of stock options		—			—			(45,000	)		—			(45,000	)
Dividends		—			—			—			(757,000	)		(757,000	)
Net income		—			—			—			1,985,000			1,985,000
Balances at December 31, 2004		4,776,000			9,238,000			4,410,000			3,898,000			17,546,000
Options exercised		357,000			157,000			445,000			—			602,000
Common stock withheld on option exercises		(114,000	)		(89,000	)		(581,000	)		—			(670,000	)
Dividends		—			—			—			(925,000	)		(925,000	)
Net income		—			—			—			1,767,000			1,767,000
Balances at December 31, 2005		5,019,000		$	9,306,000		$	4,274,000		$	4,740,000		$	18,320,000

See accompanying notes

4

Consolidated Statements of Cash Flows

American Shared Hospital Services

Consolidated Statements of Cash Flows

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
OPERATING ACTIVITIES
Net income	$	1,767,000		$	1,985,000		$	1,382,000
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		5,502,000			4,892,000			4,313,000
Deferred income tax		121,000			264,000			669,000
Minority interest in consolidated subsidiaries		1,126,000			983,000			928,000
Changes in operating assets and liabilities:
Receivables		(1,069,000	)		(483,000	)		104,000
Prepaid expenses and other assets		95,000			(137,000	)		426,000
Accounts payable and accrued liabilities		938,000			104,000			318,000
Net cash from operating activities		8,480,000			7,608,000			8,140,000
INVESTING ACTIVITIES
Payment for purchase of property and equipment		(6,195,000	)		(6,308,000	)		(5,929,000	)
Proceeds from sales and maturities of marketable securities		957,000			—			—
Investment in marketable securities		(7,334,000	)		(957,000	)		—
Net cash from investing activities		(12,572,000	)		(7,265,000	)		(5,929,000	)

6

American Shared Hospital Services
Consolidated Statements of Cash Flows

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
FINANCING ACTIVITIES
Principal payments on long-term debt		(7,122,000	)		(7,371,000	)		(5,777,000	)
Principal payments on capital leases		(297,000	)		—			—
Long term debt financing on purchase of property and equipment		5,275,000			5,940,000			5,198,000
Capital lease financing		1,740,000			—			—
Payment of dividends		(902,000	)		(699,000	)		(610,000	)
Distributions to minority owners		(912,000	)		(399,000	)		(645,000	)
Proceeds from exercise of stock options		157,000			40,000			25,000
Repurchase of stock options		(670,000	)		(45,000	)		(14,000	)
Net cash from financing activities		(2,731,000	)		(2,534,000	)		(1,823,000	)
Net increase (decrease) in cash and cash equivalents		(6,823,000	)		(2,191,000	)		388,000
CASH AND CASH EQUIVALENTS, beginning of year		8,121,000			10,312,000			9,924,000
CASH AND CASH EQUIVALENTS, end of year	$	1,298,000		$	8,121,000		$	10,312,000
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	2,075,000		$	2,500,000		$	2,692,000
Income taxes paid	$	229,000		$	129,000		$	88,000
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Accrued dividends	$	238,000		$	215,000		$	157,000
Income tax benefit from stock option exercise recorded to Additional paid-in capital	$	445,000		$	994,000		$	163,000

See accompanying notes

7

American Shared Hospital Services

Notes to Consolidated Financial Statements

Note 1 – Business and Basis of Presentation

Business – American Shared Hospital Services (the “Company”), a California corporation, provides Leksell Gamma Knife ^® (“Gamma Knife”) units to twenty-one medical centers in Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Mississippi, Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas and Wisconsin.

The Company (through American Shared Radiosurgery Services (“ASRS”)) and Elekta AB, the manufacturer of the Gamma Knife (through its wholly owned United States subsidiary GKV Investments, Inc. (“GKV”)), entered into an operating agreement and formed GK Financing, LLC (“GKF”). GKF provides alternative financing of Gamma Knife units and is the preferred provider for Elekta AB of alternative financing arrangements, such as fee-for-service lease arrangements with health care institutions in the United States and Brazil.

OR21, Inc., is a wholly-owned subsidiary of the Company that will provide the product “The Operating Room for the 21st Century^®”, which is currently under development.

MedLeader.com, Inc., is a wholly-owned subsidiary of the Company that will provide continuing medical education online and through videos for doctors, nurses and other healthcare workers. This subsidiary is not operational at this time.

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, OR21, Inc., MedLeader.com, Inc., ASRS and its majority-owned subsidiary, GK Financing, LLC.

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

Note 2 – Accounting Policies

Use of estimates in the preparation of financial statements – In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents – The Company considers all liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted cash is not considered a cash equivalent for purposes of the consolidated statements of cash flows.

Securities – The Company invests excess cash in short to long term fixed income marketable securities. It is the Company’s intent and ability to hold these securities until maturity and they are therefore regarded as held-to-maturity investments. As of December 31, 2005, the cost of these securities approximated fair market value, and they ranged in maturity up to approximately

8

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 2 – Accounting Policies (Continued)

eighteen months. The value of those securities with maturity dates greater than one year are considered long-term securities and are classified accordingly on the balance sheet.

Restricted cash – Restricted cash represents the minimum cash that, by agreement, must be maintained in GKF to fund operations.

Business and credit risk – The Company maintains its cash balances, which exceed federally insured limits, in financial institutions. Additionally the Company’s securities are invested in short to long term fixed income securities that are not insured. The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash, cash equivalents and securities.

All of the Company’s revenue is provided by twenty-one customers. These customers constitute accounts receivable at December 31, 2005. The Company performs credit evaluations of its customers and generally does not require collateral. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular geographic area.

Accounts receivable and doubtful accounts – Accounts receivable are recorded at net realizable value. An allowance for doubtful accounts is estimated based on historical collections plus an allowance for probable losses. Receivables are considered past due based on contractual terms and are charged off in the period that they are deemed uncollectible. Recoveries of receivables previously charged off are recorded when received.

Accounting for majority-owned subsidiary – The Company accounts for GKF as a consolidated entity due to its 81% majority-equity interest.

Property and equipment – Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which for medical and office equipment is generally 3 – 15 years. The Company capitalized interest of $17,000 and $94,000 in 2005 and 2004, respectively, as costs of medical equipment.

The Company leases Gamma Knife equipment to its customers under arrangements accounted for as operating leases. At December 31, 2005, the Company held equipment under operating lease contracts with customers with an original cost of $55,348,000 and accumulated depreciation of $24,074,000. At December 31, 2004, the Company held equipment under operating lease contracts with customers with an original cost of $46,915,000 and accumulated depreciation of $19,010,000.

Revenue recognition - Revenue is recognized when services have been rendered and collectibility is reasonably assured. There are no guaranteed minimum payments. The Company’s contracts are typically for a ten year term and are classified as either fee per use or

9

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 2 – Accounting Policies (Continued)

retail. 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 hospitalin 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 contracts 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. Any revenue estimates are reviewed periodically and adjusted as necessary. Revenue recognition is consistent with guidelines provided under EITF 99-19.

Income taxes – The Company accounts for income taxes in accordance with SFAS No 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Earnings per share – Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of options or warrants. The following table illustrates the computations of basic and diluted earnings per share for the years ended December 31, 2005, 2004 and 2003.

	2005		2004		2003
Numerator for basic and diluted earnings per share	$	1,767,000	$	1,985,000	$	1,382,000
Denominator:
Denominator for basic earnings per share – weighted-average shares		4,931,000		4,351,000		3,850,000
Effect of dilutive securities
Employee stock options		160,000		750,000		1,238,000
Denominator for diluted earnings per share – adjusted weighted- average shares	$	5,091,000	$	5,101,000	$	5,088,000
Earning per share – basic	$	0.36	$	0.46	$	0.36
Earning per share – diluted	$	0.35	$	0.39	$	0.27

10

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 2 – Accounting Policies (Continued)

In 2005, options outstanding to purchase 76,000 shares of common stock at an exercise price of $6.16 — $6.45 per share were not included in the calculation of diluted earnings per share as the exercise price of the options was greater than the average market price of common stock during the year.

In 2004 options outstanding to purchase 16,500 shares of common stock at an exercise price of $5.50 per share were not included in the calculation of diluted earnings per share as the exercise price of the options was greater than the average market price of common stock during the year.

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

Stock-based compensation – The Company had in effect two stock-based employee compensation plans during 2005, which are described more fully in Note 7. The Company accounts for those plans under the recognition and measurement principles of 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, which is generally from one to five years.

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
Net income, as reported	$	1,767,000		$	1,985,000		$	1,382,000
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards (Note 7), net of related tax effects		(36,000	)		(9,000	)		(3,000	)
Proforma net income	$	1,731,000		$	1,976,000		$	1,379,000
Earnings per share:
Basic – as reported	$	0.36		$	0.46		$	0.36
Basic – pro forma	$	0.35		$	0.45		$	0.36
Diluted – as reported	$	0.35		$	0.39		$	0.27
Diluted – pro forma	$	0.34		$	0.39		$	0.27

11

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 2 – Accounting Policies (Continued)

Fair value of financial instruments – The carrying amounts of financial instruments, including cash and cash equivalents, securities, restricted cash, accounts receivable, accounts payable, and other accrued liabilities approximated their fair value as of December 31, 2005 and 2004 because of the relatively short maturity of these instruments. The fair value of the Company’s various debt obligations, discounted at currently available interest rates was approximately $25,088,000 and $25,637,000 at December 31, 2005 and 2004, respectively.

Business segment information - The Company, which engages in the business of leasing equipment to health care providers, has one reportable segment, the Gamma Knife that non-invasively treats malignant and benign brain tumors, vascular malformations and trigeminal neuralgia.

Recent accounting pronouncements – In December 2003, the FASB issued FIN 46(R): Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIE). This Interpretation addresses consolidation by business enterprises of Variable Interest Entities. It defines a VIE as a corporation, partnership, trust, or any other legal structure used for the business purpose that either: a) the equity investment is not sufficient to allow the entity to finance its activities without additional financial support, b) the equity investors lack one or more of the following: 1. the ability to make decisions; 2. the obligation to absorb expected losses of the entity; or 3. the right to receive any returns of the entity, and, c) the equity investors have voting rights disproportionate to their economic interest, and the activities of the entity are conducted on behalf of an investor with a disproportionately small voting interest. This interpretation requires that existing unconsolidated VIE’s be consolidated by their primary beneficiaries. The Company does not have any VIE entities and accordingly the implementation of the Interpretation did not result in an impact on its financial statements.

In December 2004, the FASB issued Statement No. 123R, Share-Based Payment. This statement replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement amends FASB Statement No. 95, Statement of Cash Flows. This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This statement requires that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. This Statement establishes fair value as the measurement objective in accounting for the cost of share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. This cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). The Company is required to adopt FASB Statement No. 123R in first quarter 2006. Based on the Company’s historical stock option awards, adoption of this statement will have minimal impact on the Company’s financial statements.

12

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 3 – Property and Equipment

Property and equipment consists of the following:

	DECEMBER 31,
	2005			2004
Medical equipment and facilities	$	59,147,000		$	49,336,000
Office equipment		549,000			438,000
Deposits and construction in progress		703,000			4,499,000
		60,399,000			54,273,000
Accumulated depreciation		(25,409,000	)		(20,001,000	)
Net property and equipment	$	34,990,000		$	34,272,000

As of December 31, 2005, the Company has equipment that is secured under capitalized leases with a total cost of approximately $8,545,000, which is included in Medical equipment and facilities, and associated accumulated depreciation totaling approximately $4,027,000.

Note 4 – Long-Term Debt

Long-term debt consists primarily of 19 notes with financing companies, related to Gamma Knife construction and installation, totaling $20,884,000. These notes accrue interest at fixed annual rates between 7.98% and 10.95%, are payable in 60 to 84 monthly installments, mature between March 2006 and April 2012, and are collateralized by the respective Gamma Knife units. As of December 31, 2005 and December 31, 2004 the Company was in compliance with all debt covenants required under notes with its lenders. The following are contractual maturities of long-term debt by year at December 31, 2005:

Year ending December 31,
2006	$	5,631,000
2007		4,867,000
2008		3,859,000
2009		3,893,000
2010		1,990,000
Thereafter		644,000
	$	20,884,000

13

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 5 – Income Taxes

Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:

	DECEMBER 31,
	2005			2004
Deferred tax liabilities:
Fixed assets	$	(5,641,000	)	$	(5,548,000	)
Total deferred tax liabilities		(5,641,000	)		(5,548,000	)
Deferred tax assets:
Net operating loss carryforwards		4,307,000			4,418,000
Accrued reserves		276,000			263,000
Other – net		571,000			501,000
Total deferred tax assets		5,154,000			5,182,000
Net deferred tax liabilities	$	(487,000	)	$	(366,000	)

These amounts are presented in the financial statements as follows:

	DECEMBER 31,
	2005			2004
Current deferred tax assets	$	341,000		$	261,000
Deferred income taxes (non-current)		(828,000	)		(627,000	)
	$	(487,000	)	$	(366,000	)

The 2005 and 2004 tax provision reflects the deduction for tax purposes of non-qualified stock options exercised by the Company’s Chairman and Chief Executive Officer. The benefit of the tax deduction is reflected as a direct increase to equity and an increase in the deferred tax asset of $616,000 and $1,540,000 for 2005 and 2004 respectively, which is described more fully in Note 7.

14

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 5 – Income Taxes (Continued)

The components of the provision for income taxes consist of the following:

	YEARS ENDED DECEMBER 31,
	2005			2004		2003
Current:
Federal	$	449,000		$	—	$	—
State		210,000			47,000		38,000
Total current		659,000			47,000		38,000
Deferred:
Federal		(74,000	)		296,000		649,000
State		195,000			69,000		100,000
Total deferred		121,000			365,000		749,000
	$	780,000		$	412,000	$	787,000

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2005, 2004 and 2003) to income before taxes as follows:

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
Computed expected tax	$	866,000		$	815,000		$	741,000
State income taxes, net of federal benefit		167,000			144,000			127,000
Stock options		(193,000	)		(547,000	)		(81,000	)
Other		(60,000	)		—			—
	$	780,000		$	412,000		$	787,000

At December 31, 2005, the Company had a net operating loss carryforward for federal income tax return purposes of approximately $12,800,000 and for state purposes $1,900,000 which expire between 2006 and 2024. A substantial part of this carryforward is subject to separate return limitations. The Company’s ability to utilize its net operating loss carryforwards and other deferred tax assets may be limited in the event of a 50% or more ownership change within any three-year period. Future federal net operating losses generated by the Company can be carried forward for 20 years.

15

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 6 — Minority Interest

The Minority interest liability reflects the 19% interest by the minority partner in the Company’s GK Financing, LLC subsidiary. The balance increases (decreases) by the minority partner’s share of the earnings (losses) in GK Financing, LLC, and is reduced by any cash distributions made to the minority partner, per the following table:

	YEARS ENDED DECEMBER 31,
	2005			2004			2003
Beginning balance	$	2,315,000		$	1,731,000		$	1,448,000
Minority interest in GKF net income		1,126,000			983,000			928,000
Less: cash distributions		(912,000	)		(399,000	)		(645,000	)
Minority interest	$	2,529,000		$	2,315,000		$	1,731,000

Note 7 – Shareholders’ Equity

1995 Stock Option Plan

The Company’s 1995 Stock Option Plan (the “1995 Plan”) provided for nonqualified stock options and “incentive stock options.” Under the 1995 Plan, 330,000 common shares were authorized for grant to officers and other key employees, non-employee directors, and advisors. The 1995 Plan terminated according to its terms on August 15, 2005. Provisions of the 1995 Plan included an automatic grant to each non-employee director of options to purchase up to 4,000 shares annually on the date of the Company’s Annual Shareholder Meeting, at an exercise price equal to the market price of the Company’s common shares on that date, until the non-employee director has options for a total of 12,000 shares of the Company’s common stock in all Company stock option plans. Directors who are appointed or elected to the Company’s Board of Directors on a date other than that of the Annual Shareholder Meeting received a pro-rata grant of such options, at an exercise price equal to the market price of the Company’s common shares on the date of grant. There were approximately 140,000 options issued and exercisable as of December 31, 2005.

2001 Stock Option Plan

The Company’s 2001 Stock Option Plan (the “2001 Plan”), provides for nonqualified stock options and “incentive stock options.” Under the 2001 Plan, 250,000 common shares are reserved for awards to officers of the Company, other key employees, non-employee directors, and advisors. Provisions of the 2001 Plan include an automatic grant to each non-employee director of options to purchase up to 4,000 shares annually on the date of the Company’s Annual Shareholder Meeting, at an exercise price equal to the market price of the Company’s common shares on that date, until the non-employee director has options for a total of 12,000 shares of the

16

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 7 – Shareholders’ Equity (Continued)

Company’s common stock in all Company stock option plans. Directors who are appointed or elected to the Company’s Board of Directors on a date other than that of the Annual Shareholder Meeting receive a pro-rata grant of such options, at an exercise price equal to the market price of the Company’s common shares on the date of grant. As of December 31, 2005, approximately 7,000 stock options had been granted under the 2001 Plan.

Changes in options outstanding under the Stock Option Plans from January 1, 2003 to December 31, 2005 are as follows :

				Weighted
	Number			Average
	of Options			Exercise Price
Balance at January 1, 2003		188,000		$	1.943
Granted		11,000		$	5.272
Exercised		(10,000	)	$	2.400
Forfeited		(5,000	)	$	4.100
Repurchased		(5,000	)	$	3.000
Balance at December 31, 2003		179,000		$	2.156
Granted		26,000		$	5.475
Exercised		(15,000	)	$	2.478
Forfeited		(10,000	)	$	5.717
Repurchased		(12,000	)	$	3.494
Balance at December 31, 2004		168,000		$	2.269
Granted		83,000		$	6.123
Exercised		(93,000	)	$	1.665
Forfeited		(11,000	)	$	4.065
Balance at December 31, 2005		147,000		$	5.029

The weighted average fair value of the options granted in 2005 was $1.52.

17

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 7 – Shareholders’ Equity (Continued)

Shares and Options Issued to Officer

On August 15, 1995, the Company’s Chairman and Chief Executive Officer was granted a ten-year, immediately exercisable option to purchase 1,495,000 common shares for an exercise price of $.01 per share for which the Company recorded compensation expense of $2,414,000. These options were granted to the officer as final consideration for personal guarantees of credit facilities and for continued employment with the Company. The officer exercised 264,000, 846,000 and 125,000 options during 2005, 2004 and 2003 respectively. The exercise in 2005 resulted in a $445,000 increase in paid in capital and a $616,000 increase in deferred tax assets. The exercise in 2004 resulted in a $994,000 increase to additional paid in capital and a $1,540,000 increase in deferred tax assets, and in 2003 the exercise resulted in a $163,000 increase to additional paid in capital and a $244,000 increase in deferred tax assets. All options granted under the plan were exercised prior to the termination of the plan according to its terms on August 15, 2005.

The following table summarizes information about all options outstanding at December 31, 2005:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of	Number		Contractual		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price
1.625 — 1.688		6,000		0.83		1.646		6,000		1.646
3.000 — 4.100		41,000		3.79		3.201		41,000		3.201
4.570 — 5.500		24,000		8.23		5.318		13,000		5.173
6.160 — 6.450		76,000		9.54		6.185		—	—
$    1.625 — 6.450		147,000		7.37	$	5.029		60,000	$	3.473

At December 31, 2005 and 2004, 60,000 and 411,000 options, respectively, were vested and exercisable. Automatic option awards issued to non-employee directors vest one year after their issuance. The vesting period for all other options issued under the Company’s plans is determined by the Board of Directors at the time the options are issued. Discretionary options awarded during 2005 and 2004 vest over a five year period.

Pro Forma Information related to Option Grants

Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1995, as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company’s stock-based awards to employees was estimated using a Black-Scholes option pricing model.

18

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 7 – Shareholders’ Equity (Continued)

The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The effects of applying SFAS No. 123 in the proforma disclosure are not indicative of future amounts. The fair value of the Company’s option grants under the 1995 and 2001 Plans was estimated assuming the following weighted-average assumptions:

	2005			2004			2003
Expected life (years)		10.0			10.0			10.0
Expected volatility		25.0	%		37.0	%		29.0	%
Dividend yield		3.1	%		3.0	%		3.0	%
Risk-free interest rate		4.3	%		4.5	%		4.3	%

Repurchase of Common Stock, Common Stock Warrants and Stock Options

In 1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares of its own stock on the open market. There have been no shares repurchased on the open market since the year ending December 31, 2001.

During 2005, the Company withheld 114,000 shares upon the exercise of options by two officers of the Company, to pay the exercise price of the shares and the withholding taxes associated with the exercises. The value of the exercise price is recorded as a reduction to common stock, and the difference between the exercise price and the market price at the time of exercise is recorded as a reduction to paid-in-capital.

In 2004 and 2003, the Company repurchased 12,000 and 5,000 options respectively under the 1995 stock option plan from former employees. The repurchase of the options is recorded as a reduction in additional paid-in-capital.

Dividends

In December 2005 the Company declared dividends of $0.0475 per share, payable in January 2006. In January, April, July and October of 2005 the Company paid dividends of $0.045, $0.045, $0.0475 and $0.0475 per share respectively. In January, April, July and October of 2004 the Company paid dividends of $0.04, $0.04, $0.0425 and $0.045 per share respectively. The Company paid dividends of $0.16 per share in the year ended December 31, 2003.

19

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 8 – Retirement Plan

The Company has a defined-contribution retirement plan (the “Plan”) that allows for a matching safe harbor contribution. For 2005, the Board of Directors elected to match participant deferred salary contributions up to a maximum of 4% of the participant’s annual compensation. Matching contributions must be invested in shares of the Company’s stock. Discretionary profit sharing contributions are allowed under the Plan in years that the Board does not elect a safe harbor match. The Company contributed $33,000 and $35,000 to the Plan for the safe harbor match for each of the years ended December 31, 2004 and December 31, 2003, respectively. The Company has accrued $44,000 for the estimated safe harbor matching contribution for the year ended December 31, 2005.

Note 9 – Obligations Under Capital Leases

During 2005 the Company entered into three capital lease obligations with three financing companies, collateralized by Gamma Knife equipment having an aggregate net book value of approximately $4,518,000 at December 31, 2005. These obligations have stated interest rates ranging between 7.74% and 7.99%, are payable in 42 to 84 monthly installments, and mature between June 2009 and September 2012.

Future minimum lease payments, together with the present value of the net minimum lease payments under capital leases at December 31, 2005, are summarized as follows:

	Net Present Value
	of Minimum
	Lease Payments
Year ending December 31,
2006	$	1,050,000
2007		1,050,000
2008		1,050,000
2009		762,000
2010		557,000
Thereafter		668,000
Total capital lease payments		5,137,000
Less imputed interest		939,000
		4,198,000
Less current portion		746,000
	$	3,452,000

20

American Shared Hospital Services
Notes to Consolidated Financial Statements

Note 10 – Operating Leases

The Company leases office space and equipment under operating leases expiring at various dates through 2009.

Future minimum payments under noncancelable operating leases having initial terms of more than one year consisted of the following at December 31, 2005:

Year ending December 31,
2006		208,000
2007		9,000
2008		9,000
2009		9,000
	$	235,000

Payments for repair and maintenance agreements incorporated in operating lease agreements are included in the future minimum operating lease payments shown above.

Rent expense was $386,000, $323,000, and $315,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and includes the above operating leases as well as month-to-month rental and certain executory costs.

The Company subleases a portion of its office space to two third parties for approximately $2,000 per month under sub-sublease agreements that expire in May 2006.

Note 11 – Commitments and Contingencies

Under the terms of existing Gamma Knife quotation agreements, the Company is committed to purchase upgrades and cobalt reloads to certain existing Gamma Knife equipment for $2,109,000 when the equipment is upgraded at each customer location. At December 31, 2005, the Company had $677,000 in deposits related to these purchase commitments which are classified as construction in progress.

Note 12 – Major Customers

Revenues from the Company’s Gamma Knife segment were provided by twenty-one customers in 2005, eighteen customers in 2004, and seventeen customers in 2003. No individual customer exceeded 10% of the Company’s total revenue in any of these years.

21

EX-10.23A

Exhibit 10.23a

AMENDMENT TO EQUIPMENT LEASE AGREEMENT

     This AMENDMENT TO EQUIPMENT LEASE AGREEMENT (this “Amendment”) is made effective as of the 15th day of September, 2005, and is entered into by and between (i) the BOARD OF TRUSTEES OF THE UNIVERSITY OF ARKANSAS on behalf of THE UNIVERSITY OF ARKANSAS FOR MEDICAL SCIENCES (“Hospital”), and (ii) GK FINANCING, LLC, a California limited liability company (“GKF”),

Recitals:

     WHEREAS, GKF and Hospital executed an Equipment Lease Agreement dated October 29th, 1998 (the “Lease”), and desire to amend the Lease as set forth herein.

     NOW THEREFORE, for valuable consideration received, the receipt and sufficiency of which are acknowledged, the parties agree as follows:

Agreement:

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

     2. Hospital’s Direct Cost Component. Effective as of the date of this Amendment, Exhibit 8.1 of the Lease shall be deleted and replaced with Exhibit 8.1 attached hereto.

     3. Full Force and Effect. Except as amended by this Amendment, all of the terms and provisions of the Lease shall remain in full force and effect.

     IN WITNESS WHEREOF, the parties have this Amendment executed as of the date first written above.

GK FINANCING, LLC		BOARD OF TRUSTEES OF THE
		UNIVERSITY OF ARKANSAS on behalf of
		THE UNIVERSITY OF ARKANSAS FOR MEDICAL SCIENCES
By: Name: Title:	Craig K. Tagawa Craig K. Tagawa Chief Executive Officer	By: Name: Title:	Richard A. Pierson Richard A. Pierson Vice Chancellor for Clinical Programs

1

Exhibit 8.1

HOSPITAL’S DIRECT COST COMPONENT

Registered nurse	*
Recovery room	*
Hospital daily charge	*
Hospital, including ventilator daily charge	*
MRI procedure	*
CT procedure	*
Angiography procedure	*
Physicist	*
Locum tenens expense	*

2

EX-10.50

Exhibit 10.50

EQUIPMENT LEASE AGREEMENT

          This EQUIPMENT LEASE AGREEMENT (“Agreement”) is made and entered into on August 7, 2003, by and between GK FINANCING, LLC, a California limited liability company (“GKF”) and BAPTIST HOSPITAL OF EAST TENNESSEE, a Tennesse not for profit corporation (“Hospital”), with reference to the following facts:

R E C I T A L S

          A. GKF owns a Leksell Stereotactic Gamma Knife Unit (the “Equipment”) which it acquired from Elekta Instruments, Inc., a Georgia corporation (“Elekta”).

          B. Hospital wishes to lease the Equipment from GKF, and GKF is willing to lease the Equipment to Hospital, upon the terms, covenants, conditions and agreements set forth in 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 latest approved Gamma Knife technology available as of the date of this Agreement (i.e., Model C with Automatic Positioning System), including all standard 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 A. 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 earlier of July 1, 2005 or 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 payments to GKF for the Equipment described in Section 8 below shall commence as of the First Procedure Date.

     4. Certificate of Need; User License; GKF Policy Committee.

          4.1 GKF acknowledges that Hospital will require a certificate of need (“CON”) issued by the Tennessee Health Services and Development Agency in order to install

and operate the Equipment at the Site. As soon as reasonably possible following the date of this Agreement, Hospital shall apply for and use its best efforts to obtain in a timely manner a CON for the installation and use of the Equipment at the Site, and shall be reimbursed by GKF upon presentation of invoices not to exceed an agreed upon budget for all costs and expenses relating thereto, including all legal fees and expenses. GKF and Hospital shall agree in writing on a CON cost budget prior to the preparation of the CON application. The application for the CON shall be prepared in coordination with GKF, and shall require the prior written approval of both GKF and Hospital prior to its submission to the applicable authorities, which approval shall not be unreasonably withheld. If either party has not approved or disapproved such CON application in writing within thirty (30) days following its submission to such party for approval, such party shall be deemed to have approved the same. The CON shall be filed and owned by Hospital. In the event Hospital’s application for a CON is denied, this Agreement shall automatically terminate and all parties shall be released from the further performance of any obligations or duties arising under this Agreement. If the CON application is denied, GKF and Hospital agree to evenly share the costs of the CON application.

          4.2 Hospital shall, at its sole cost and expense, 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, at its sole cost and expense, 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 2.1 of the LGK Agreement. GKF shall reimburse Hospital for its direct costs to obtain a User License and any other licenses, permits, approvals, consents and authorizations required by this Section 4.2 upon presentation of invoices.

          4.3 This Agreement is subject to approval by the Policy Committee of GKF. In the event GKF’s Policy Committee does not approve this Agreement, this Agreement shall automatically terminate and all parties shall be released from the further performance of any obligations or duties arising under this Agreement.

     5. Delivery of Equipment; Site.

          5.1 GKF shall coordinate with Elekta and Hospital to have the Equipment delivered to Hospital at 137 Blount Avenue, Knoxville, Tennessee (the “Site”) on or prior to the delivery date agreed upon by Hospital and Elekta in the LGK Agreement. GKF makes no representations or warranties concerning delivery of the Equipment to the Site or the actual date thereof.

          5.2 Subject to Section 6 below, Hospital, at its cost and expense, shall provide a safe, convenient Site for the Equipment. The location of the Site shall be subject to the prior approval of GKF.

     6. Site Preparation and Installation of Equipment.

          6.1 GKF, at its cost and expense, shall prepare all plans and specifications required to prepare, construct and improve the Site for the installation, use and operation of the Equipment during the Term. GKF’s Site improvement responsibilities may include creation of several walls to assist in the relocation of the department currently located in the Site. It is not anticipated that GKF’s costs to assist in relocation of the department currently located in the Site will be material. The plans and specifications (i) shall be approved by Hospital, which approval shall not be unreasonably withheld or delayed; (ii) shall comply in all respects with the site planning criteria attached as Exhibit E to the LGK Agreement (collectively the “Site Planning Criteria”); and (iii) to the extent required by applicable law, shall be submitted to all state and federal agencies for their review and approval. GKF, at its cost and expense, shall obtain and maintain all permits, certifications, approvals or authorizations required by applicable federal, state or local laws, rules or regulations necessary to prepare, construct and improve the Site as provided above during the term of this agreement.

          6.2 GKF, at its cost and expense, 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, GKF, 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. GKF shall be responsible for the shipment, storage, placement and removal of all Cobalt and depleted Cobalt. Any depleted Cobalt supply shall be properly disposed of by GKF at such time as GKF shall deem necessary, in GKF’s sole and absolute judgment.

          6.3 In addition to construction and improvement of the Site, GKF, at its cost and expense, 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 During the Term, GKF, at its cost and expense, shall maintain the Site in a good working order, condition and repair, reasonable wear and tear excepted.

     7. Marketing Support.

          7.1 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 jointly develop an annual marketing plan, budget and timeline, which shall be implemented by Hospital with the support of GKF, based on the approved budget and timeline. Hospital’s approval of such plan, budget and timeline shall not be unreasonably withheld or delayed. If Hospital has not approved or disapproved the same within thirty (30) days following its receipt, Hospital shall be deemed to have approved the same. GKF shall be * responsible for any out-of-pocket marketing expenses paid to unrelated third parties that are included in the marketing plan budget. Any marketing efforts conducted independently by Hospital shall be at Hospital’s expense, and subject to coordination with GKF.

          7.2 The Gamma Knife program at the Hospital shall be given a name mutually agreed to by GKF and Hospital (the “Program”). All communications to the public regarding the Program may identify the Program as being associated with GKF and Hospital, provided that all such communications are in accordance with the communications and marketing plan adopted or approved by Hospital and GKF. Hospital shall use its best efforts to promote the Program and to encourage the use thereof by the Public and medical community.

     8. Lease Payments.

          8.1 In consideration for, and as compensation to, GKF for (i) the lease of the Equipment by GKF to Hospital pursuant to this Agreement; (ii) payment of “Startup Costs”, (iii) the preparation by GKF of all plans and specifications required to prepare, construct and improve the Site for the installation, use and operation of the Equipment; (iv) the preparation, construction and improvement of the Site as necessary for the installation, use and operation of the Equipment; (v) the installation by GKF of the Equipment at the Site; (vi) the marketing of the services to be provided using the Equipment; and (vii) the maintenance by GKF of the Site and the Equipment in a good working order, condition and repair, on a monthly basis, Hospital shall pay the “Lease Payment” to GKF for each “Procedure” that is performed by Hospital or its representatives or affiliates, that are directly or indirectly owned and/or controlled, in whole or in part, by Hospital irrespective of whether the Procedure is performed on the Equipment or using any other equipment or devices. As used herein:

     (1) For each Procedure that is performed using the Equipment, “Lease Payment” shall be equal to *. For each Procedure using any other equipment or devices, Lease Payment shall be equal to the Technical Component Collections for any other equipment or devices during each such month.

     (2) “Technical Component Collections” means the total amount actually collected by Hospital or its representatives or affiliates during each month from any and all payor sources, including, without limitation, patients, insurance companies, state or federal government programs or any other third party payors, as reimbursement for the technical component of each Procedure, irrespective of whether the Procedure is performed on the Equipment or using any other equipment or devices. The technical fees to be billed for Procedures performed utilizing the Equipment during the Term of this Agreement shall be an amount which is economically justifiable based upon GKF’s direct operating expenses and its total project costs, together with a return thereon. Hospital shall consult and mutually agree with GKF from time to time regarding the amount of the technical fees to be billed by Hospital for Procedures that are performed utilizing the Equipment and any revisions thereto. Subject to compliance with the standard described in the preceding sentence, Hospital and GKF shall mutually agree on the setting or revision of the amount of the technical fees and the acceptance of technical fee component amounts with third party payors prior to their implementation.

     (3) “Cost Component” means the costs incurred by Hospital during the corresponding month for services and personnel associated with the

performance of Procedures, excluding (i) Lease Payments, (ii) physician and other professional fees, and (iii) direct or indirect administrative overhead expenses. Hospital’s Cost Component shall be limited to those costs set forth in the schedule attached hereto, as Exhibit 8.1, irrespective of whether the Procedures are performed on an inpatient or outpatient basis.

     (4) “Procedure” shall mean 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.

If no Procedures are performed utilizing the Equipment or any other equipment or devices during any month, no Lease Payments shall be owing by Hospital to GKF for such month. If Technical Component Collections relating to the Equipment are less than Hospital’s Cost Component relating to the Equipment in any given month, GKF shall reimburse Hospital for said shortfall, provided that Hospital has complied with its obligations regarding the timely submission of claims as set forth in Section 8.2 below, and provided, further, that GKF shall have no obligation to reimburse Hospital for any shortfalls relating to any other equipment or devices. No costs comprising Hospital’s Cost Component shall be permitted to cumulate. All or any portion of any Cost Component which is not paid in full by GKF to Hospital within thirty (30) days after GKF’s receipt of Hospital’s invoice shall bear interest at the annual rate of five percent (5%) in excess of the Federal Reserve discount rate then in effect as published in the Wall Street Journal or similar publication (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) until the unpaid Cost Component payment, together with all accrued interest thereon is paid in full. If no Procedures are performed in a given month, the only Hospital Cost Component incurred will be for physical facility space, standard staffing costs and miscellaneous operating costs as set forth in Exhibit 8.1.

          8.2 Within ten (10) business days following the end of each month (or portion thereof) during the term of this Agreement, Hospital shall pay the Lease Payments to GKF and shall concurrently inform GKF in writing as to the number of Procedures performed during that month utilizing the Equipment and any other equipment or devices. To facilitate Hospital’s billing and collection for Procedures performed, within three (3) business days after any Procedure using the Equipment is performed, the administrative support individual referenced in Section 11.3 below shall provide Hospital with written confirmation of the names of the patients treated. Hospital shall submit claims for reimbursement to the appropriate payors for each Procedure within ten (10) days after the patient receiving the treatment is discharged. Such claims shall be submitted under Hospital’s provider numbers and license. Hospital shall also diligently follow up any unpaid or denied claims and re-bill and/or contest the same where appropriate so as to maximize Technical Component Collections. All or any portion of any Lease Payment which is not paid in full within thirty (30) days after its due date (date of Hospital’s cash receipt from payors) shall bear interest at the annual rate of five percent (5%) in excess of the Federal Reserve Discount Rate then in effect as published in the Wall Street Journal or similar publication (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) until the unpaid Lease Payment, together with all accrued interest thereon is paid in full. If GKF shall at any time

accept a Lease 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.

          8.3 Within thirty (30) days after the close of each month, Hospital shall provide GKF with a written report indicating the status of billings and collections for each Procedure performed during that month, including, without limitation, the amount of the claim submitted, the amount received or denied for each such procedure, and copies of the corresponding explanation of benefits (EOB). Upon request by GKF, Hospital shall furnish to GKF information regarding reimbursement rates from any or all payor sources for Procedures (applicable to Procedures performed either on an inpatient or outpatient basis). If such reimbursement rates should change at any time or from time to time after the date hereof, in each instance, Hospital shall provide written notice thereof to GKF within thirty (30) days of Hospital receiving notice thereof. Prior to entering into or renewing any third party payor contracts for the provision of Procedures utilizing the Equipment, Hospital shall consult with GKF regarding the terms and provisions thereof, including the technical component reimbursement rates. GKF shall maintain the confidentiality of all information provided to GKF by Hospital with regard to Procedure charges, billing and reimbursement rates.

          8.4 The parties acknowledge that the Lease Payments to GKF and Hospital’s Cost Component reflect their respective fair market value, and are not determined in a manner that takes into account the volume or the value of any referral or other business generated between the parties.

          8.5 Within ten (10) days after Hospital’s receipt of written request from 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 and devices) during normal business hours to verify the Technical Component Collections and Hospital’s Costs Component, and Hospital shall provide GKF with access to such books and records on Hospital’s premises.

          8.6 Risk Sharing Option. Hospital shall have the option in its sole discretion to restructure the Lease Payments by amending this Agreement as set forth in Exhibit 8.6 attached hereto (“the Option”). Hospital may exercise the Option only if (a) no “Event of Default” (as defined in Section 20 below) (and no act or omission which, with the giving of notice and/or the passage of time, would constitute an Event of Default) shall then have occurred; and (b) Hospital has complied with all of the requirements set forth in this Section. The Option may be exercised not more than once by Hospital (i) at any time prior to the First Procedure Date, (ii) on the First Procedure Date, or (iii) on any anniversary of the First Procedure Date (the “Option Exercise Date”). If Hospital elects to exercise the Option, Hospital shall give written notice thereof to GKF not less than thirty (30) days prior to the Option Exercise Date, and shall specify the “Hospital Percentage” (as defined below). In addition, Hospital shall concurrently execute and deliver to GKF an Amendment to Equipment Lease Agreement in the form attached hereto as Exhibit 8.6 (the “Amendment”).

               (a) Exercise of the Option Prior to the First Procedure Date. If Hospital exercises the Option prior to the First Procedure Date, Hospital shall pay to GKF an

amount equal to *. Such payment shall be made by Hospital to GKF in immediately available funds within five (5) days of presentment of an invoice by GKF.

               (b) Exercise of the Option On or After the First Procedure Date. If Hospital exercises the Option on the First Procedure Date or on any anniversary of such date, Hospital shall pay to GKF an amount equal to *. Such payment shall be made by hospital to GKF in immediately available funds within five (5) days of presentment of an invoice by GKF.

               (c) Appraisal to Determine the Fair Market Valuation. If Hospital exercises the Option on or after the First Procedure Date, within five (5) days following Hospital’s exercise of the Option, GKF and Hospital shall each select an appraiser to determine the Fair Market Valuation, which appraisers shall each have not less than ten (10) years’ experience in appraising the value of healthcare businesses. In such event, the Fair Market Valuation shall be the average of the valuations of the two appraisers so long as the two valuations are within fifteen percent (15%) of each other. Should the two valuations not be within fifteen percent (15%) of each other, then the two appraisers shall mutually select a third appraiser who shall have the same qualifications set forth above. Following the valuation by the third appraiser, the two valuations that are closest to each other will be averaged to determine the Fair Market Valuation. GKF and Hospital shall retain their own appraisers and shall jointly retain the third appraiser; provided that, within five (5) days following the issuance of the Fiar Market Valuation, Hospital shall reimburse GKF for all costs and expenses incurred by GKF in connection with such appraisers (including the third appraiser).

               (d) Definitions. As used herein:

     (1) “Fair Market Valuation” means the fair market value as of the applicable Option Exercise Date of the projects * (as defined in and calculated pursuant to the Amendment) over the remaining Term of the Agreement, without taking into account the costs of the Equipment.

     (2) “GKF Amount” shall mean the sum of GKF’s actual costs and/or losses incurred in connection with (a) the “Startup Costs”, (b) the construction and improvement of the site for the installation of the Equipment and the purchase of the Equipment (which costs shall not include associated with progress payments of the purchase of the Equipment); (c) the shipment of the Equipment to the Site, including, without limitation, freight, insurance, customs, import taxes and duties, interest costs, permit fees, Equipment storage costs (both prior and subsequent to shipment), and all other costs and expenses pertaining thereto; (d) the installation of the Equipment, including, without limitation, rigging costs; (e) any upgrading of the Equipment as deemed necessary by GKF; (f) any reloading of the Cobalt in the Equipment; and (g) any and all operating losses incurred by GKF through the effective date of the Option’s exercise in connection with the lease of the Equipment to Hospital hereunder (excluding any administrative or overhead costs or expenses); plus interest accrued on all of the foregoing from the date incurred by GKF at the floating rate of three percent (3%)

above the prime rate as established by Bank of American from time-to-time, which floating rate shall change as and when changed by Bank of America,

     (3) “Hospital Percentage” means a fixed percentage selected by Hospital in its sole discretion which shall not *.

     (4) “Startup Costs” means the actual costs incurred by Hospital and reimbursed by GKF to Hospital (which costs shall not include any administrative or overhead costs or expenses) to obtain the CON and other regulatory approvals needed for the installation and use of the Equipment. All such Startup Costs shall be at their actual cost without administrative overhead or markup. Within ten (10) days following Hospital’s written notice to GKF of Hospital’s election to exercise the Option, GKF shall submit to Hospital a detailed statement of the GKF Amount, and Hospital shall submit to GKF a detailed statement of Hospital’s Startup Costs. Such detailed statements shall include documentary proof of expenditures to justify the amounts claimed for such costs. A final cost accounting of these aforementioned costs shall be completed no later than six (6) months following the Option Exercise Date which shall be used for purposes of calculating the GKF Percentage.

     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 the Equipment is not designed or reasonably suitable as indicated to Hospital by Elekta or GKF.

          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, and (c) give GKF immediate written notice of any matter described in clause (b).

     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, technical and support personnel and supplies required for the proper performance of Gamma Knife procedures utilizing the Equipment. The cost of technical and support personnel and supplies required for the proper performance of Gamma Knife procedures utilizing the Equipment shall be reimbursed to Hospital by GKF. In this regard, Hospital shall use its best efforts to maintain on staff a minimum of two (2) Gamma Knife trained teams comprised of neurosurgeons, radiation oncologists and physicists.

          10.2 Direct, supervise and administer the provision of all hospital services relating to Gamma Knife Procedures in accordance with all applicable laws, rules and regulations.

          10.3 Use best efforts to 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 Ensure Hospital’s quiet enjoyment and 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.

          11.3 GKF and Hospital shall mutually select an individual to be located at the Site to provide Gamma Knife administrative and marketing support services. The individual’s duties shall include but not be limited to scheduling Gamma Knife patients and coordinating professional and technical personnel and support services to perform said Gamma Knife treatment. This individual shall also verify patient insurance. The individual shall also assist with marketing activities on an as needed basis. This individual is provided by the Hospital and GKF shall reimburse Hospital for the cost of the individual. GKF and Hospital shall mutually agree on individual.

     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, (b) subject to Hospital’s compliance with its obligations under the LGK Agreement and under Sections 4, 5, 9, 10, 12, 13 and 16 hereunder, cause the equipment to be in compliance with all applicable state and federal regulations, and (c) 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, and GKF shall, or shall cause its agent to, respond to any such maintenance request within 24 hours and either repair or replace the equipment within 24 hours or as soon as possible and practical. In addition, 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 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, and contractors. 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’s officers, employees, agents and contractors (other than GKF and Elekta), 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; provided that, if GKF’s charges and costs for such service or repair are not paid in full by Hospital within sixty (60) days after GKF’s request therefore, in addition to such charges and costs, Hospital shall pay interest thereon to GKF until paid in full at the annual rate of five percent (5%) in excess of the Federal Reserve Discount Rate then in effect, as published in the Wall Street Journal or similar publication (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) and costs incurred by GKF in collecting such amount from Hospital (other than attorneys’ fees). 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 failure of, 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. Subject to Section 12.3 above, in the event GKF determines that the Equipment cannot be repaired, at the election of GKF in GKF’s sole and absolute discretion, (a) GKF, at its cost and expense, may 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) in such event, this Agreement shall continue in

full force and effect as though such damage or destruction had not occurred. If GKF elects not to replace the Equipment, GKF shall provide written notice of such election to Hospital, and this Agreement shall terminate on the date that is ninety (90) days following the date of such notice. 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. 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.

     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’s interest under this Agreement shall be subject to the interests of the Lender and Hospital shall execute such documentation as the Lender shall reasonably require in furtherance of this Section; provided, however, such assignment shall not relieve GKF of its obligation to Hospital under this Agreement.

     15. Equipment Operational Costs. GKF shall be responsible for all costs and expenses for the operation and use of the Equipment. Significant costs and expenses are enumerated in Exhibit 8.1. Between Hospital and GKF, Hospital shall be fully liable for all negligent, intentional or wrongful acts or omissions of Hospital, its officers, directors, employees and agents.

     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 (in GKF’s sole and absolute discretion) 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; provided that, if GKF is not repaid in full by Hospital within sixty (60) days after GKF’s request therefor, in addition to the repayment of the amounts paid by GKF, Hospital shall pay interest thereon to GKF until paid in full at the annual rate of five percent (5%) in excess of the Federal Reserve Discount Rate then in effect, as published in the Wall Street Journal or similar publication (or the maximum monthly interest rate permitted to be charged by law between an unrelated, commercial borrower and lender, if less) and costs incurred by GKF in collecting such amount from Hospital (other than attorneys’ fees).

     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’s intended purposes and is good working order, condition and repair at the time of acceptance. 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 for, 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 or 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’s 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 operation of the Equipment, however it shall be GKF’s responsibility that the equipment be properly maintained. GKF and Hospital shall mutually agree to an acceptable delivery date for the Equipment.

     18. Termination for Economic Justification.

          18.1 Following the initial twenty-four (24) months after the First Procedure Date and following each subsequent 12 month period thereafter during the Term, GKF shall have the option to terminate this Agreement if, 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. GKF’s determination shall be based upon the utilization of the Equipment and other factors considered relevant by GKF in the exercise of its discretion. If GKF elects to terminate pursuant to this Section, GKF shall give 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.

          18.2 Notwithstanding the provisions of Section 18.1, if at any time during the Term of this Agreement, Hospital is suspended or terminated from participation in the Medicare program, GKF shall have the option to terminate this Agreement immediately by giving written notice thereof to Hospital.

          18.3 As a result of any termination of this Agreement pursuant to this Section, GKF may enter upon the Site under Hospital supervision and remove the Equipment and any improvements made by GKF to the Site without liability of any kind or nature for appropriate removal or GKF may demand that Hospital remove and return the Equipment and such improvements to GKF, all at GKF’s sole cost and expense. GKF shall restore the Site to a similar pre-deinstallation appearance and condition.

     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 five (5) year period of time upon the terms and conditions of this Agreement; or

          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 twelve (12) 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 two (2) options referred to above Hospital is exercising. If Hospital fails to exercise the option granted herein at least twelve (12) 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 to extend the Term 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 Lease Payment when due pursuant to Paragraph 8 above and such failure continues for a period of thirty (30) 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 thirty (30) 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’s 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.

          20.2 Upon the occurrence of an Event of Default with respect to Hospital, GKF may at its option do any or all of the following:

               20.2.1 By written notice to Hospital, immediately terminate this Agreement as to the Equipment, wherever situated. As a result of the termination, GKF may enter upon the Site and remove the Equipment and any improvements made by GKF to the Site without liability of any kind or nature for so doing or GKF may demand that Hospital remove and return the Equipment and such improvements to GKF, all at Hospital’s sole cost and expense.

               20.2.2 Recover damages from Hospital as may be awarded by a court of competent jurisdiction for the loss of the bargain represented by this Agreement. For purposes of determining such damages, the parties agree that the following methodology shall be used: (a) the amount of such damages shall be equal to the present value of the unpaid estimated future Lease Payments to be made by Hospital to GKF through the end of the Term discounted at the rate of nine percent (9%); and (b) the unpaid estimated future Lease Payments shall be based on the historical trend of payments made by Hospital to GKF hereunder taking into account known factors which could impact the historical trend through the end of the Term. Hospital and GKF acknowledge that the methodology set forth in this Section constitutes a reasonable method to calculate GKF’s damages resulting from an Event of Default under the circumstances existing as of the date of this Agreement. GKF shall use reasonable commercial efforts to mitigate its damages by attempting to sell or lease the Equipment; provided that (i) GKF shall not be obligated to give preference to the sale or lease of the Equipment over the sale, lease or other

disposition of similar equipment or improvements owned or leased by GKF, (ii) GKF shall have no obligation to sell or lease any improvements made by GKF to the Site, and (iii) GKF’s inability in good faith to mitigate damages shall not limit or otherwise affect the foregoing methodology for determining damages as set forth in this Section.

               20.2.3 Sell, dispose of, hold, use or lease the Equipment or any improvements made by GKF to the Site, 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 or improvements over the sale, lease or other disposition of similar Equipment or improvements 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 or improvements, to enforce the terms hereof or to recover damages for the breach hereof or to cancel this Agreement as to the Equipment.

In addition to the foregoing remedies, Hospital shall be liable to GKF for all reasonable 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 Lease Payments and other sums then owing under this Agreement. 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. 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. Removal of Equipment. Upon expiration of the Term, GKF, at its cost and expense, shall remove the Equipment from the Site not more than one hundred (120) days following the last day of the Term; provided that all of GKF’s right, title and interest in and to the improvements made by GKF to the Site pursuant to Section 6 above shall thereupon transfer to Hospital.

     22. Insurance.

          22.1 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. 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.

          22.2 During the Term, Hospital shall, at its cost and expense, purchase and maintain in effect general and professional liability insurance covering the use or operation of the Equipment by Hospital’s employees and agents. The general and professional liability insurance policies shall each provide coverage in amounts not less than One Million Dollars ($1,000,000.00) per occurrence and One and Five Million Dollars ($5,000,000.00) annual aggregate. 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. Hospital shall require any physicians using the equipment to show evidence of professional liability insurance consistent with Hospital’s Medical Staff Bylaws.

          22.3 During the construction of the Site and prior to the First Procedure Date, GKF, 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 22.2 above and which names Hospital as an additional insured party. The policy to be maintained by GKF hereunder shall be evidenced by a certificate of insurance or other reasonable documentation which shall be delivered by GKF to Hospital prior to the commencement of any construction at the Site.

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

     23. Indemnification.

          23.1 Hospital and GKF each hereby covenants and agrees that it will defend, indemnify and hold the other party and the other party’s officers, directors, members, employees and agents at all times harmless from and against any loss, damage and expense (including reasonable attorneys’ fees and other costs of defense) caused by or arising out of: (i) any liability or obligation related to the business of the indemnifying party prior to the date hereof; (ii) any obligation or liability arising from services provided under this Agreement by the indemnifying party to the extent any such liability or obligation directly results from the negligence or intentional misconduct of the indemnifying party, it’s employees or agents ; or (iii) any obligation or liability resulting from a breach of any provision of this Agreement by the indemnifying party, it’s employees or agents. The obligations of the parties under this Section shall survive the expiration or earlier termination of this Agreement.

          23.2 Any party that intends to enforce an indemnity obligation shall give the indemnifying party notice of any claim as soon as possible, but the failure to give such notice shall not constitute a waiver or release of the indemnifying party and shall not affect the rights of the indemnified party to recover under this indemnity, except to the extent the indemnifying party is materially prejudiced thereby. In connection with any claim giving rise to indemnity under this Section resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party, at its sole cost and expense, may, upon

written notice to the indemnified party, assume control of the defense of such claim or legal proceeding, to the extent that the indemnifying party admits in writing its indemnification liability to the indemnified party with respect to all material elements thereof. If the indemnifying party assumes the defense of any such claim or legal proceeding, the obligations of the indemnifying party hereunder as to such claim or legal proceeding shall be to take all steps necessary in the defense or settlement thereof and to hold the indemnified party harmless from and against any losses, damages, expenses or liability caused by or arising out of any settlement approved by the indemnifying party and the indemnified party or any judgment in connection with such claim or legal proceeding. Each indemnified party shall cooperate with the indemnifying party in the defense of any such action, the defense of which is assumed by the indemnifying party. Except with the consent of the indemnified party, which consent may be withheld at the indemnified party’s sole discretion, the indemnifying party shall not consent to any settlement or the entry of any judgment arising from any such claim or legal proceeding which, in each case, does not include as an unconditional term thereof the delivery by the claimant or the plaintiff to the indemnified party of a release from all liability in respect thereof. If the indemnifying party does not assume the defense of any claim or litigation, any indemnified party may defend against such claim or litigation in such manner as it may deem appropriate, including but not limited to settling such claim or litigation, after giving notice of the same to the indemnifying party, on such terms as the indemnified party may deem appropriate. The indemnifying party will, promptly after any of the same is incurred, reimburse the indemnified party in accordance with the provisions hereof for all damages, losses, liabilities, costs and expenses incurred by the indemnified party.

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

     24. Restrictive Covenant.

          24.1 During the Term of this Agreement, neither GKF nor American Shared Radiosurgery Services (“ASRS”) shall, directly or indirectly, within the * of Baptist Health System, own, operate or sell any Gamma Knife system.

          24.2 GKF and ASRS acknowledge that; (i) the terms contained in this Section are necessary for the commercially reasonable and proper protection of the Hospital’s interests; (ii) each and every covenant and restriction contained in this Section is reasonable in respect of such matter, length of time and geographical area; and (iii) the Hospital is relying on the representations of the parties contained in this Section that they shall abide by and be bound by each of the aforesaid covenants and restrictions.

          24.3 If any court or tribunal of competent jurisdiction determines that the duration, geographical limit or any other aspect of the provisions of this Section is unenforceable in accordance with its terms in a particular jurisdiction, the provisions of this Section shall not terminate, but shall be deemed amended to the extent required to render them valid and

enforceable in such jurisdiction and such court or tribunal is hereby authorized and directed to amend this Agreement only to the extent that such court or tribunal determines such an amendment is necessary to make it valid and enforceable in said jurisdiction.

          24.4 Each of GKF and ASRS further agree that damages at law would be an insufficient remedy for the Hospital in the event that any of them violate the provisions of this Section, and that the Hospital shall be entitled to make an application to a court of competent jurisdiction to obtain injunctive relief.

          24.5 The restrictive covenants contained in this Section shall automatically terminate and be of no further force and effect upon the termination of this Agreement for any reason.

     25. Miscellaneous.

          25.1 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither party shall assign this Agreement nor any of its respective rights hereunder and Hospital shall not sublease the Equipment without the prior written consent of the other party, which consent shall not be unreasonably withheld. An assignment or sublease shall not relieve the assigning party or sublessor of any liability for performance of this Agreement during the remainder of the Term. Any purported assignment or sublease made without the other party’s prior written consent shall be null, void and of no force or effect.

          25.2 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.

          25.3 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.

          25.4 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, each party shall pay for their own attorneys’ fees and related costs and expenses, irrespective of which party is deemed to be the prevailing party.

          25.5 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.

          25.6 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.

          25.7 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.

          25.8 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.

          25.9 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 Florida applicable to agreements made and to be performed in that State.

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

          25.11 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.

          25.12 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 by such party or individual, 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.

          25.13 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.

          25.14 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:

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.

          25.15 Special Provisions Respecting Medicare and Medicaid Patients

               25.15.1 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.

               25.15.2 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.

          25.16 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.

          25.17 Independent Contractor Status. With respect to the performance of the duties and obligations arising under this Agreement, nothing in this Agreement is intended nor shall be construed to create a partnership, an employer/employee relationship, a joint venture relationship, or a lease or landlord/tenant relationship between GKF and Hospital. GKF acknowledges that physicians practicing at Hospital are not employees or agents of Hospital, but independent community practitioners.

          25.18 Incidental Access. All information, written, electronic and oral, regarding patients of Hospital, whether demographic, clinical, or financial is confidential and protected health information (PHI) under state law and federal regulation. As a covered entity as defined by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Hospital holds all information pertaining to its patients as privileged and confidential. The parties are committed to complying with the Privacy Standards of HIPAA and other state and federal regulations. In the course of performing functions in relation to Hospital you may be exposed to or acquire confidential information including but not limited to data, reports, records, summaries, tables and studies whether written or oral, fixed in hard copy or contained in any computer database. GKF (i) understands and acknowledges that patient information is confidential and protected by law, (ii) understands that patient information should be kept confidential and that any dissemination, distribution or copy of protected health information is strictly prohibited, (iii) shall not disclose confidential information to any third party, (iv) shall advise each of their employees, agents or representatives of their obligations to keep such information confidential, (v) breaches, including wrongful disclosure or intentional misuse of patient information could result in civil and/or criminal penalties resulting in monetary fines and/or imprisonment pursuant to federal regulations and (vi) agrees to establish and maintain appropriate safeguards to protect patient information.

     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”	BAPTIST HOSPITAL OF EAST TENNESSEE,
	a Tennessee not for profit corporation
	By: Name:	/s/ Stephen N. Clapp Stephen N. Clapp
	Title:	Senior Vice President
	By: Name:	/s/ Caryn Hawthorne Caryn Hawthorne
	Title:	Chief Financial Officer

Exhibit A

LGK AGREEMENT

Exhibit 8.1

HOSPITAL’S COST COMPONENT

Physical facility space	*
Registered nurse	*
Physicist	*
Clinical coordinator (Section 11.3)	*
Recovery room	*
Hospital per diem charge	*
MRI procedure with contrast	*
MRI procedure without contrast	*
CT procedure with contrast	*
CT procedure without contrast	*
Angiography procedure	*
Billing and collection fee	*

On each anniversary of the first procedure date, Hospital may adjust these cost components up or down, which increases or decreases shall directly correlate to increases or decreases in Hospitals direct cost (excluding administrative or overhead expenses) supported by documentation reasonably satisfactory to GKF.

Any other billable hospital services (i.e., medical supplies, lab tests, office supplies, etc.) necessary to perform a Gamma Knife procedure not expressly set forth in this exhibit will be reimbursed to Hospital at Hospital’s costs (excluding administrative or overhead expenses).

Exhibit 8.6

AMENDMENT TO EQUIPMENT LEASE AGREEMENT

AMENDMENT TO EQUIPMENT LEASE AGREEMENT

     This AMENDMENT TO EQUIPMENT LEASE AGREEMENT (this “Amendment”) is made and entered into effective as of the 7th day of August, 2003, by and between GK FINANCING, LLC, a California limited liability company (“GKF”), and BAPTIST HOSPITAL OF EAST TENNESSEE, a Tennessee non-profit corporation (“Hospital”), with reference to the following facts:

R E C I T A L S

A. GKF and Hospital have entered into a certain Equipment Lease Agreement dated August 7, 2003 (the “Agreement”).

B. Pursuant to Section 8.6 of the Agreement, Hospital has the option to amend the Agreement in accordance with the provisions of such Section 8.6. Hospital desires to exercise its option by agreeing to execute and deliver this Amendment to GKF.

C. GKF desires to amend the Agreement as provided in Section 8.6 thereof.

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 Defined Terms. Unless otherwise defined herein, the capitalized terms used herein shall have the same meanings given to them in the Agreement.

     2 Extension of the Lease Term. The Term of the Agreement shall be extended to the date that is ten (10) years following the Option Exercise Date.

     3 Lease Payments. The Lease Payments payable by Hospital under the Agreement shall be restructured and redefined as follows:

     (a) For Procedures that are performed using the Equipment, “Lease Payment” shall be amended to mean an amount equal to (a) the *, times (b) the arithmetical total of the * relating to the Equipment minus the * (as each of such terms is defined below) during each month. For Procedures that are performed using any other equipment or devices, “Lease Payments” shall be equal to the * relating to such other equipment or devices during each such month.

     (b) “GKF Percentage” means *.

     (c) “Technical Component Collections” shall be amended to mean the total amount * by Hospital or its representatives or affiliates during each month from any and all payor sources, including, without limitation, patients, insurance companies, state or federal government programs or any other third party payors, as reimbursement for the technical component of each Procedure irrespective of whether the Procedure is performed on the Equipment or using any other equipment or devices. The technical fees

to be billed for Procedures performed utilizing the Equipment during the Term of this Agreement shall be an amount which is economically justifiable based upon each party’s “Direct Operating Expenses” and the “Total Project Cost” (as defined below), together with a return thereon. Hospital shall consult and mutually agree with GKF from time to time regarding the amount of the technical fees to be billed by Hospital for Procedures that are performed utilizing the Equipment and any revisions thereto. Subject to compliance with the standard described in the preceding sentence, Hospital and GKF shall mutually agree on the setting or revision of the amount of the technical fees and the acceptance of technical fee component amounts with third party payors prior to their implementation.

     (d) “Direct Operating Expenses” means *.

     (e) “Hospital’s Direct Operating Expenses” means the costs incurred by Hospital during the subject month for services and personnel associated with the performance of Procedures utilizing the Equipment, excluding (i) Lease Payments, (ii) physician and other professional fees, and (iii) direct or indirect administrative overhead expenses. Hospital’s Cost Component shall be limited to those costs set forth in Exhibit 8.1 of the Agreement, irrespective of whether the Procedures are performed on an inpatient or outpatient basis.

     (f) “GKF’s Direct Operating Expenses” means the following expenses incurred by GKF during the subject month in connection with the Equipment: Maintenance and repairs, personal property taxes, sales and use tax on Lease Payments made to GKF, marketing, insurance and all other direct expenses. All Direct Operating Expenses of either party shall be at their actual cost without administrative overhead or markup. Within ten (10) days following the implementation of this Amendment, and on each anniversary date thereafter, GKF shall submit to the Hospital an estimate of GKF’s Direct Operating Expenses, which shall be subject to the reasonable approval of Hospital. All Hospital Direct Operating Expenses and GKF Direct Operating Expenses shall be at their actual cost without administrative overhead or markup.

          3.1 Monthly Calculation of Lease Payment. Within ten (10) days after the last day of each month during the Term (and upon the termination or expiration of the Term with respect to a period shorter than a calendar month), each party shall submit to the other a statement setting forth such party’s respective “Direct Operating Expenses” with respect to such month (or portion thereof). The parties shall also calculate the Technical Component Collections (determined on a cash basis) with respect to cash receipts for Procedures performed utilizing the Equipment collected in such month, and within ten (10) days after the conclusion of such month or portion thereof Hospital shall provide to GKF all revenue data necessary to perform such calculation.

          3.2 Timing of Lease Payments. The Lease Payments shall be due and payable by Hospital on a monthly basis within fifteen (15) days after GKF submits to Hospital its statement setting forth its portion of Direct Operating Expenses for such month. Furthermore, Lease Payments shall be due and payable within fifteen (15) days after the close of each month following the termination or expiration of this Agreement to the extent any Technical

Component Collections associated with Procedures performed utilizing the Equipment during the Term are collected after the termination or expiration of this Agreement; provided that no Direct Operating Expenses shall be deducted in calculating such Lease Payments following the termination or expiration of the Agreement since such Direct Operating Expenses would already have been deducted in calculating the Lease Payments made during the Term of the Agreement. The terms and provisions of this Section shall survive the expiration or earlier termination of this Agreement.

          3.3 Payment Priority for Direct Operating Expenses. Notwithstanding anything to the contrary contained herein, all * shall be paid from the Technical Component Collections prior to making any Lease Payments to GKF. If the Technical Component Collections during any month are less than the Direct Operating Expenses during such month, GKF and Hospital shall be reimbursed for their respective Direct Operating Expenses incurred by them during such month in an amount equal to the GKF Percentage or the Hospital Percentage (as applicable) multiplied by the Technical Component Collections for such month. Any unpaid shortfall shall be carried over to subsequent month(s) and receive priority in payment as provided above until paid in full.

          3.4 Right to Inspect Books. Throughout the Term and thereafter until final settlement of all amounts owed to or claimed by either party under this Agreement, each party shall have the right to inspect, audit and copy the other party’s books and records which relate to the accounting for and calculation of Lease Payments, Technical Component Collections and Direct Operating Expenses.

          3.5 Survival. All of the terms and provisions of this Section 3 shall survive the termination or expiration of this Agreement.

     4. Effectiveness. This Amendment shall become effective on the Option Exercise Date provided that the conditions and requirements set forth in Section 8.6 of the Agreement have been met and/or satisfied.

     5. Conflicts. To the extent any of the provisions of this Amendment conflict with any of the provisions of the Agreement, the provisions of this Amendment shall prevail and control.

[Document continued on next page]

     6. Full Force and Effect. Except as amended herein, all of the terms and provisions of the Agreement shall remain unchanged and in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date.

“GKF”:	GK FINANCING, LLC,
	a California limited liability company
	By:	/s/ Craig K. Tagawa
		Craig K. Tagawa,
		Chief Executive Officer
“Hospital”:	BAPTIST HOSPITAL OF EAST
	TENNESSEE, a Tennessee not for
	profit corporation
	By: Name:	/s/ Stephen N. Clapp Stephen N. Clapp
	Title:	Senior Vice President
	By:	/s/ Caryn Hawthorne
	Name:	Caryn Hawthorne
	Title:	Chief Financial Officer

EX-10.50A

Exhibit 10.50a

AMENDMENT NO. 1 TO EQUIPMENT LEASE AGREEMENT

This AMENDMENT NO. 1 TO EQUIPMENT LEASE AGREEMENT (this “Amendment”) in made and entered into effective as of the 28 day of May, 2004, by and between GK FINANCING, LLC a California limited liability company (“GKF”), and BAPTIST HOSPITAL OF EAST TENNESSEE, a Tennessee non-profit corporation (“Hospital”), with reference to the following facts:

R E C I T A L S

     A. GKF and Hospital have entered into a certain Equipment Lease Agreement dated August 7, 2003 (the “Agreement”).

     B. Pursuant to Section 25.5 of the Agreement, GKF and Hospital desire to amend the Agreement as provided below .

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. Governing Law, Section 25.9 is hereby deleted in its entirety and replaced with the following: “This Agreement shall be interpreted and enforced in accordance with the internal laws, and not the law of conflicts, of the State of Tennessee applicable to agreements made and to be performed in that State.”

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date.

“GKF”:		“Hospital”:
GK FINANCING, LLC		BAPTIST HOSPITAL OF EAST TENNESSEE,
a California limited liability company		a Tennessee not for profit
		Corporation
By:	/s/ Craig K. Tagawa Craig K. Tagawa	By: Name:	/s/ Stephen N. Clapp Stephen N. Clapp
	Chief Executive Officer	Title:	Senior Vice President

EX-21

Exhibit 21

The subsidiaries of American Shared Hospital Services are:

American Shared Radiosurgery Services
A California corporation

GK Financing, LLC
A California limited liability company

MedLeader.com, Inc.
A California corporation

OR21, Inc.
A California corporation

EX-31.(A)

Exhibit 31 (a)

CERTIFICATION

I, Ernest A. Bates, M.D., as chief executive officer of American Shared Hospital Services, certify that:

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2005 of American Shared Hospital Services;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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;

b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986 and SEC Release Nos. 33-8618 and 34-52492;] 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.

March 31, 2006

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

EX-31.(B)

Exhibit 31 (b)

CERTIFICATION

I, Craig K. Tagawa, as chief financial officer of American Shared Hospital Services, certify that:

1. I have reviewed this annual report on Form 10-K for the period ended December 31, 2005 of American Shared Hospital Services;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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;

b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986 and SEC Release Nos. 33-8618 and 34-52492;] 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.

March 31, 2006

Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer

EX-32

Exhibit 32

March 31, 2006

Securities and Exchange Commission
450 Fifth Street, N.W
Washington, D.C. 20549

Ladies and Gentlemen:

     The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not to be deemed filed pursuant to the Securities Exchange Act of 1934 and does not constitute a part of the Annual Report on Form 10-K (the “Report”) accompanying this letter.

     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.

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

Craig K. Tagawa
Craig K. Tagawa
Chief Financial Officer