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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 1-8789

American Shared Hospital Services

Four Embarcadero Center, Suite 3700, San Francisco, California  94111-4107

Registrant’s telephone number, including area code:

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

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

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

      As of June 30, 2003, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $14,548,000.

      Number of shares of common stock of the registrant outstanding as of March 8, 2004: 3,925,173.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

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PART I

General

      American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides Gamma Knife stereotactic radiosurgery services to seventeen (17) medical centers in fifteen (15) 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 Knife® (the “Gamma Knife”). GKF is a non-exclusive provider of alternative financing services for Elekta. Gamma Knife services accounted for 100% of the Company’s revenue in 2003.

      At present, the Company is developing its business model for “The Operating Room for the 21st Century”® (“OR21”®). 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 normal activities one or two days after treatment. The Gamma Knife treats the patient with 201 single doses of gamma rays that are focused with great precision on small and medium, 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 tumors (i.e., solitary and multiple metastatic tumors, gliomas, nasopharyngeal carcinomas and ocular melanoma), benign brain tumors (i.e., meningiomas, pituitary and acoustic neuromas, craniopharyngiomas), arteriovenous malformations and trigeminal neuralgia (facial pain). Research is being conducted to determine whether the Gamma Knife can be effective in the treatment of epilepsy, Parkinson’s Disease and other functional disorders.

      As of December 31, 2003, there were 82 Gamma Knife sites in the United States and 193 units in operation worldwide. As of December 31, 2003, more than 250,000 procedures had been performed worldwide. An estimated percentage breakdown of these 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 8, 2004, has seventeen (17) Gamma Knife units operating at seventeen (17) sites in the United States. In addition, the Company has three (3) more hospitals that are currently under development. The Company’s first Gamma Knife commenced operation in September 1991. The Company’s Gamma Knife units performed approximately 2,100 procedures in 2003 for a cumulative total of approximately 9,500 procedures through December 31, 2003.

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      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:

      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 the 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, 2003, GKF distributed $11,421,000 to the Company and $2,679,000 to the minority partner.

Risks of Gamma Knife Business

      There are significant risks involved in the Company’s Gamma Knife business, including the following:

	•	Each Gamma Knife unit requires a substantial capital investment. Historically our cost for a Gamma Knife unit, exclusive of upgrades, has been approximately $2,600,000. 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.
	•	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. We have identified approximately 200 such medical centers in the United States as potential future sites. As of December 31, 2003 there were 82 operating Gamma Knife units in the United States, of which 17 units are owned by us, and 193 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.
	•	Our business is capital intensive and we have traditionally financed each Gamma Knife with debt. Our long term debt totals $26,917,000 and is collateralized by the Gamma Knife units and other assets, including our accounts receivable and future proceeds from any contract between us and any end user of the financed equipment. This high level of debt may adversely affect our ability to secure additional credit in the future, and as a result may affect our operations and profitability. If default occurs in the future, our 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.
	•	There are currently three companies (in addition to our company) that actively provide alternative, non-conventional Gamma Knife financing to potential customers. There are no competitor companies

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		that currently have more than six Gamma Knife units in operation. Our relationship with Elekta, the manufacturer of the Leksell Gamma Knife unit, is non-exclusive, and in the past we have lost sales to customers that chose to purchase a Gamma Knife unit directly from Elekta. In addition, we may continue to lose future sales to such customers and may also lose future sales to our competitors. There can be no assurance that we will be able to successfully compete against others in placing future units.
	•	There are several methods of radiosurgery (including the modified linear accelerator) as well as conventional neurosurgery that compete against the Gamma Knife. Currently, there are approximately 250 medical centers in the United States with modified linear accelerators. Each of the medical centers targeted by us 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 we will be able to secure a sufficient number of future sites or Gamma Knife procedures to sustain its profitability and growth.
	•	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. Thirteen of our existing contracts are reimbursed by the medical center to us on a fee per use basis. The primary risk to us 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. We also have four contracts where we receive 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 our 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 our Gamma Knife revenue.
	•	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 SystemTM (“APS”), and therefore involves less health care provider intervention. Six of our existing Gamma Knife units include APS and ten of our existing Gamma Knife units are upgradeable. The cost to upgrade existing units to the new model C Gamma Knife with APS is estimated to be approximately $1,000,000. The failure to acquire or use new technology and products could have a material adverse effect on our business and results of operations.

Customers

      The Company’s current business is the outsourcing of Gamma Knife stereotactic radiosurgery 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’s historical cost for a Gamma Knife (exclusive of

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      The Company’s second Gamma Knife contract, with the University of Southern California, ended in the third quarter of 1999. The customer exercised its option to purchase the equipment for its net book value,

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      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 2003. Two customers (Yale and UAMS) each accounted for more than 10% of the Company’s revenue in 2002, and four customers (Hoag, STMH, Yale and UAMS) each accounted for more than 10% of the Company’s revenues in 2001.

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. In March 2004, the Company hired 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.
	•	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. GKF has 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. The loans are 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. The Company continues to make payments on the outstanding note balances with DVI. The Company has made cash payments, as needed, toward the

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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 competing 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, the majority of Gamma Knife services are performed on an in-patient basis, although a significant number are performed 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 30% of the total Gamma Knife patients treated.

      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 were reclassified from DRG 1 to either DRG 7 or DRG 8. This reclassification is estimated to have reduced medical center revenue from the Medicare DRG program by approximately 30%.

      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 reimbursement for Medicare patients receiving Gamma Knife services on an out-patient basis is estimated to have decreased approximately 40% under the APC system. The Gamma Knife APC rate was modified effective April 1, 2002 and the total reimbursement amount remains similar to the amount reimbursed by Medicare prior to that date. The Company has two contracts from which its revenue is directly affected by changes in payment rates under the APC system. During 2002, these two contracted hospitals primarily treated Medicare Gamma Knife patients on an in-patient basis and therefore the Company believes that adoption of APC’s has not had a significant impact on the revenue of the Company. In 2003, one of the two hospitals started treating its patients on an outpatient basis and it is estimated that revenue decreased by approximately $100,000 to $150,000. Some of the Company’s fee per use customers treat patients on an out-

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      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 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

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Employees

      At December 31, 2003, the Company employed eight (8) 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.

      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 a member of the Board of Trustees of The Johns Hopkins University and a Senior Trustee 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 State of California High Speed Rail Authority, and a member of the Board of Directors of Salzburg Seminar. Dr. Bates is also a board member of the Center for Accelerating Medical Solutions-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 with or furnished to the SEC.

      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 to two third parties for approximately $2,000 per month. These sub-sublease agreements run through April 2004 and May 2006.

      For the year ended December 31, 2003 the Company’s aggregate net rental expenses for all properties and equipment were approximately $315,000.

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      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.

      None.

PART II

      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.

      The Company estimates that there were approximately 1,470 beneficial holders of its Common Shares at December 31, 2003.

      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 were repurchased during 2002 or 2003. 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 2003 holders of options to acquire the Company’s common stock exercised their respective rights pursuant to such securities, resulting in the Company issuing 135,000 new shares of common stock for approximately $25,000.

      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, 2003 the Company had 3,918,203 issued and outstanding common shares, 1,613,667 common shares reserved for options, and 5,205 shares reserved pursuant to the Company’s Shareholder Rights Plan.

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      The Board of Directors declared a quarterly dividend of $.04 per common share to shareholders of record on January 2, 2004, paid on January 15, 2004, and a quarterly dividend of $0.04 per common shared to shareholders of record on April 2, 2004 payable on April 16, 2004. Shareholders of record on March 14, 2003 were paid an annual dividend of $0.12 per common share on April 4, 2003, and shareholders of record on October 1, 2003 were paid a quarterly dividend of $0.04 per common share on October 15, 2003. 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.

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 and OR21 for 1999 through 2003 and MedLeader for 2000 through 2003.

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General

      During the years ended December 31, 2003, 2002 and 2001, 100% of the Company’s revenue was derived from its Gamma Knife business.

Total Revenue

      Medical services revenue increased 21.0% in 2003 compared to 2002 and increased 13.7% in 2002 compared to 2001. The increase in both 2003 and 2002 is primarily attributable to an increase in revenue at locations in operation for more than one year, as well as an increase in the number of Gamma Knife units in operation.

      Gamma Knife revenue increased $2,812,000 and $1,608,000 in 2003 and 2002, respectively, compared to the prior years. The 2003 increase was primarily due to three new Gamma Knife units that began operation during 2003, the full year inclusion of two Gamma Knife units that began operation during 2002, and a 5% increase in revenue for Gamma Knife units in operation more than one year. The 2002 increase was primarily due to the full year inclusion of two Gamma Knife units that began operation during 2001, two new Gamma Knife units that began operation during 2002, and a 3% increase in revenue for Gamma Knife units in operation more than one year. The Company had seventeen, fourteen and twelve Gamma Knife units in operation at December 31, 2003, 2002 and 2001, respectively.

      The number of Gamma Knife procedures increased 420 in 2003 compared to 2002 due to the increase in the number of Gamma Knife units in operation, as well as a 9% increase in procedures for Gamma Knife units in operation more than one year. The increase of 241 procedures in 2002 compared to 2001 was due to the increase in the number of Gamma Knife units in operation as well as a 7% increase in procedures for Gamma Knife units in operation more than one year.

      Gamma Knife revenue per procedure decreased by $235 in 2003 compared to 2002 primarily because there was an increase in the number of procedures performed at certain Gamma Knife locations that have a lower per procedure rate, as well as a decrease in the amounts received from Medicare at one of the Company’s retail sites. Revenue per procedure decreased $200 in 2002 compared to 2001 because there was an increase in the number of procedures performed at certain Gamma Knife locations that have a lower per procedure rate. The Company’s contracts generally have different procedure rates because their investment basis varies.

Costs of Operations

      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 $2,001,000 in 2003 compared to 2002, and increased $1,114,000 in 2002 compared to 2001.

      The Company’s maintenance and supplies costs were 5%, 3% and 2% of medical service revenue in 2003, 2002 and 2001, respectively. Maintenance and supplies costs increased $301,000 in 2003 compared to 2002, and increased $106,000 in 2002 compared to 2001. The increase in 2003 compared to 2002 was primarily due

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      Depreciation and amortization increased $753,000 in 2003 compared to 2002, and increased $541,000 in 2002 compared to 2001. The increase in 2003 was due to the addition of three new Gamma Knife units that commenced operation during first, second and third quarters of 2003 and a full year of depreciation on two new Gamma Knife units that started operation during 2002. The increase in 2002 was due to the addition of two new Gamma Knife units that commenced operation during second and third quarters of 2002, as well as a full year’s depreciation on two Gamma Knife units that started in second quarter 2001.

      Other costs of operations as a percentage of medical services revenue were 15%, 11% and 9% in 2003, 2002 and 2001, respectively. The increase of $947,000 in 2003 compared to 2002 was primarily due to increased spending for marketing, increased operating costs related to the

      Company’s additional retail units, startup and training costs at the Company’s three new Gamma Knife centers, and higher insurance and taxes due to additional Gamma Knife units in operation. The increase of $467,000 in 2002 compared to 2001 was primarily due to increased spending for marketing, and increased insurance expense because of additional Gamma Knife units and higher insurance rates. These increases were partially offset by a use tax credit of $70,000 and lower property tax expense.

Selling and Administrative

      The Company’s selling and administrative costs decreased $58,000 in 2003 compared to 2002, and increased $68,000 in 2002 compared to 2001. The decrease in 2003 was primarily due to reduced business development costs of approximately $152,000 and legal and accounting fees of $104,000. These reductions were partially offset by increased employment recruiting fees of $60,000, the Company’s Gamma Knife User’s Meeting of approximately $45,000 and a write-off of approximately $58,000 in previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil, which was reallocated to another location. The increase in 2002 was primarily due to increased building rent of approximately $100,000 and increased legal fees of approximately $96,000. These increases were partially offset by reduced business development costs of approximately $75,000 and reduced investor relations costs of approximately $45,000.

Interest Expense

      The Company’s interest expense increased $110,000 in 2003 compared to 2002, and decreased $19,000 in 2002 compared to 2001. The increase in 2003 was due to additional interest expense on the financing of the Company’s three new Gamma Knife units in 2003, which was partially offset by lower interest expense on the Company’s more mature Gamma Knife units. The decrease in 2002 was primarily due to lower interest expense on the Company’s more mature Gamma Knife units, which offset the additional interest expense on the financing of the Company’s two new Gamma Knife units in 2002. All of the Company’s operating Gamma Knife units are financed by means of interest bearing debt. Nine of the Company’s seventeen Gamma Knife units have been in operation for more than three years, and have lower interest expense than newer units because interest expense decreases with each principal payment.

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Other Income and Expense

      Interest and other income decreased $50,000 in 2003 compared to 2002 and decreased $309,000 in 2002 compared to 2001. The decrease in 2003 was primarily due to lower invested cash balances during 2003 and lower interest rates during 2003 compared to 2002. The decrease in 2002 was primarily due to reduced return on cash investments due to the market decline in interest rates that started during 2001 and continued through 2002, as well as lower invested cash balances.

      Minority interest increased $97,000 in 2003 and $80,000 in 2002 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

      Income tax expense increased $332,000 in 2003 compared to 2002, and increased $22,000 in 2002 compared to 2001. The Company’s 40% income tax provision for 2003 was reduced by an $81,000 income tax benefit from the exercise of options to purchase 125,000 common shares. The Company’s 40% income tax provision for 2002 was reduced by a $168,000 income tax benefit from the exercise of options to purchase 260,000 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 began recording a federal and state income tax provision in 2001 as the Company’s deferred tax liability began to exceed its deferred tax assets.

      The valuation allowance that had been provided for the deferred tax asset in excess of the deferred tax liability was eliminated in second quarter 2001.

      The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are minimal actual 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, 2003 of approximately $11,000,000.

Net Income

      The Company had net income of $1,382,000 in 2003 compared to $1,102,000 in 2002 and $1,068,000 in 2001. Net income for 2003 included increased income from operations of $759,000 compared to 2002, which was primarily due to the addition of three new Gamma Knife units and a 5% increase in revenue from Gamma

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Liquidity and Capital Resources

      The Company had cash and cash equivalents of $10,312,000 at December 31, 2003 compared to $9,924,000 at December 31, 2002. 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.

      Restricted cash of $50,000 at December 31, 2003 reflects cash that may only be used for the operations of GKF.

      Operating activities provided cash of $8,140,000 in 2003. Net income of $1,382,000, depreciation and amortization of $4,313,000, an increase in the deferred tax liability of $669,000 and an increase in the minority interest of $928,000 were the primary reasons. The Company’s trade accounts receivable increased to $2,209,000 at December 31, 2003 from $2,089,000 at December 31, 2002. This increase was primarily due to the addition of three new Gamma Knife contracts during 2003 and an increase in the number of days’ revenue outstanding in accounts receivable (“DSO”) for some of the Gamma Knife contracts. The DSO was 64 and 55 days as of December 31, 2003 and December 31, 2002, 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. Other receivables decreased by $224,000 primarily due to receipt of payments and application of credits due on over payment of sales and use taxes.

      Investing activities used $731,000 of cash in 2003 primarily for the purchase of current and future Gamma Knife units and related site costs.

      Financing activities used $7,021,000 of cash during 2003, primarily due to principal payments on long-term debt of $5,777,000, distributions to minority owners of $645,000 and the payment of dividends of $610,000.

      Working capital decreased $1,907,000 to $5,268,000 at December 31, 2003 from $7,175,000 at December 31, 2002 primarily due to an increase in the current portion of long-term debt. The increase in debt was primarily due to the financing of three additional Gamma Knife units during 2003, as well as an increase in the principal portion of debt payments on existing financing as that debt approaches maturity.

      The Company invests its cash in money market funds to minimize the potential for principal erosion. Cash is invested in these short-term 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 2004.

      The Company finances all of its Gamma Knife units, and anticipates that it will continue to do so with future contracts, but there can be no assurance that financing will continue to be available on acceptable terms. The Company’s primary lender, DVI, filed for Chapter 11 bankruptcy protection during 2003. The Company has made claims in DVI’s bankruptcy case for certain unfunded amounts under credit agreements in place at the time of the bankruptcy filing. The principal balance of notes that included the unfunded amounts were transferred by DVI to third parties. The Company believes that it is too early in the process to develop any definitive view regarding the outcome of the claim. The Company continues to make payments on the outstanding note balances with DVI. The Company has made cash payments, as needed, toward projects in progress and is in the process of securing financing for those and future projects from other potential lending sources. The Company meets all debt covenants required under notes with DVI, and expects that any covenants required by future lenders will be acceptable to the Company.

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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 Liabilities and Off Balance Sheet Arrangements

      The following table presents, as of December 31, 2003, 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.

(1)	The Company has deposits toward the purchase of future Gamma Knife units as more fully described in Note 10 of the consolidated financial statements. It is uncertain when these units will be placed in service, so it cannot be determined when the commitment is due. 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, and operating leases in Note 9 of the consolidated financial statements.

      The Company has no significant off-balance sheet arrangements.

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 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

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      Revenue is recognized when services have been rendered and collectability is reasonably assured, on either a fee per use or revenue sharing basis. The Company has thirteen fee per use customers and four revenue sharing customers.

      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 customer’s contracted rate.

      Under revenue sharing agreements, revenue is recognized based on estimates generated from direct billings to patients or their third party payors, and net of any contractual discounts and other arrangements for providing services. Revenue from direct patient billing amounted to approximately 24%, 25% and 28% of revenue for the years ended December 31, 2003, 2002, and 2001, respectively. The revenue estimates are reviewed continuously and adjusted as necessary to ensure that the estimates fairly represent the amounts we expect to realize. While historically payments received have been within our expectations, an inability to accurately estimate revenue from direct billings to patients in the future could have a material impact on operating results.

      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, 2003 changed by as much as 10% based on actual collection information, it would have the effect of increasing or decreasing revenue by approximately $125,000.

      The table below presents information about certain market-sensitive financial instruments as of December 31, 2003. 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.

      At December 31, 2003, we had no significant long-term, market-sensitive investments. Our cash is invested in short-term money market funds to minimize potential for principal erosion.

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      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.

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

      None.

(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 Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2003 (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.

      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, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

      Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders (the “2004 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.

      Incorporated herein by reference from the 2004 Proxy Statement.

      Incorporated herein by reference from the 2004 Proxy Statement.

      Incorporated herein by reference from the 2004 Proxy Statement.

      Incorporated herein by reference from the 2004 Proxy Statement.

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PART IV

      (a) Financial Statements and Schedules.

	The following Financial Statements and Schedules are filed with this Report:

	Report of Independent Auditors
	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

	(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) Reports on Form 8-K:

	The following reports on Form 8-K were filed during the fiscal year ended December 31, 2003:

	Form 8-K dated and filed April 21, 2003 relating to a press release announcing the Company’s preliminary financial results for its first quarter of fiscal year 2003.
	Form 8-K dated and filed July 22, 2003 relating to a press release announcing the Company’s preliminary financial results for its second quarter of fiscal year 2003.
	Form 8-K dated and filed October 22, 2003 relating to a press release announcing the Company’s preliminary financial results for its third quarter of fiscal year 2003.

      (c) Exhibits.

      The following Exhibits are filed with this Report.

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	(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.
	(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.

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	(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.
(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.

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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)

	By:	/s/ ERNEST A. BATES

	Ernest A. Bates
	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.

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AMERICAN SHARED HOSPITAL SERVICES

INDEPENDENT AUDITOR’S REPORT

and

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003, 2002 and 2001

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CONTENTS

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INDEPENDENT AUDITOR’S REPORT

To the Board of Directors and Shareholders

      We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 auditing standards generally accepted in 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. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Shared Hospital Services at December 31, 2003 and 2002, and the consolidated results of their operations and consolidated cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Stockton, California

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AMERICAN SHARED HOSPITAL SERVICES

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AMERICAN SHARED HOSPITAL SERVICES

CONSOLIDATED BALANCE SHEETS