See accompanying notes

2

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

See accompanying notes

3

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

See accompanying notes

4

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

Note 1. Basis of Presentation

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

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

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

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

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

Note 2. Per Share Amounts

     Per share information has been computed based on the weighted average number of common shares and dilutive common share equivalents outstanding. For the three and six months ended June 30, 2004 basic earnings per share was computed using 3,958,000 and 3,941,000 common shares, respectively, and diluted earnings per share was computed using 5,062,000 and 5,083,000 common shares and equivalents, respectively. For the three and six months ended June 30, 2003 basic earnings per share was computed using 3,822,000 and 3,805,000 common shares, respectively, and diluted earnings per share was computed using 5,064,000 and 5,067,000 common shares and equivalents, respectively.

Note 3. Stock-based Compensation

     The Company has two stock-based employee compensation plans, the 1995 and 2001 Stock Option Plans. The Company accounts for those plans using the intrinsic value method

5

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

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

     This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services, which involve risks and uncertainties including, but not limited to, the risks of the Gamma Knife business and the risks of developing its IMRT and The Operating Room for the 21st Century® programs. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K and 10-KA for the year ended December 31, 2003, the Quarterly Report on Form 10-Q for the three months ended March 31, 2004 and the definitive Proxy Statement for the Annual Meeting of Shareholders held on June 17, 2004.

     Medical services revenue increased $9,000 and $569,000 to $4,114,000 and $8,343,000 for the three month and six month periods ended June 30, 2004, from $4,105,000 and $7,774,000 for the three and six month periods ended June 30, 2003, respectively. The increase for the three month period ended June 30, 2004 was due to revenue from two Gamma Knife centers that began operating during second and third quarters 2003, which was offset by a 20% decrease in revenue at Gamma Knife centers in operation more than one year. The revenue increase for the six month period was due to the inclusion of three additional Gamma Knife units that began operation during 2003, and was partially offset by a 15% revenue decrease at Gamma Knife centers in operation for longer than one year. The Company had 17 Gamma Knife units in operation at June 30, 2004 compared to 16 at June 30, 2003. Thirteen of the Company’s customers are under fee-per-use contracts, and four customers are under revenue sharing

6

agreements (“retail”). For retail units the Company receives all or a percentage of the reimbursement (exclusive of physician fees) received by the customer, and is responsible for all or a percentage of the operating expenses of the Gamma Knife.

     The number of Gamma Knife procedures decreased by 9% to 513 and increased by 2% to 1,076 for the three and six month periods ended June 30, 2004 from 561 and 1051 for the three and six month periods ended June 30, 2003, respectively. Increases in procedures due to three new Gamma Knife units that began operation during 2003 were offset by decreases in procedures performed at Gamma Knife units in operation more than one year of 19% and 12% for the three and six month periods ended June 30, 2004, respectively. Staffing issues at one Gamma Knife center and the bi-annual Leksell Gamma Knife Users meeting that occurred during May 2004 contributed to the drop in both revenue and the number of procedures performed during second quarter 2004, compared to the same quarter in the prior year.

     Total costs of operations increased $113,000 and $612,000 to $1,996,000 and $4,030,000 for the three and six month periods ended June 30, 2004, from $1,883,000 and $3,418,000 for the three and six month periods ended June 30, 2003, respectively. Maintenance and supplies increased by $53,000 and $111,000 for the three and six month periods ended June 30, 2004 compared to the same periods in the prior year, primarily due to an increase in the number of Gamma Knife units covered under maintenance contract. There were 14 Gamma Knife units covered under maintenance contract as of June 30, 2004 compared to 13 as of June 30, 2003. Depreciation and amortization increased by $142,000 and $380,000 for the three and six month periods ended June 30, 2004 compared to the same periods in the prior year due to the inclusion of one new Gamma Knife unit that started during first quarter 2003, one new Gamma Knife unit that started during second quarter 2003, and one new Gamma Knife units that started during third quarter 2003. Other operating costs decreased $82,000 and increased $121,000 for the three and six month periods ended June 30, 2004 compared to the same periods in the prior year. For the three month period the decrease is primarily due to training costs in second quarter 2003 for the Company’s two new Gamma Knife centers and a reduction in operating expenses due to fewer procedures performed at the Company’s retail units. For the six month period, the increase is primarily due to an increase in marketing costs and property taxes, partially offset by a reduction in training costs.

     Selling and administrative costs decreased by $77,000 and $137,000 to $762,000 and $1,528,000 for the three and six month periods ended June 30, 2004 from $839,000 and $1,665,000 for the three and six month periods ended June 30, 2003, respectively. The decrease for the quarter was primarily due to a write-off in second quarter 2003 of approximately $58,000 for previously deferred costs relating to the future placement of a Gamma Knife unit in Brazil, which was reallocated to another location. For the year the decrease was due to lower payroll costs, a reduction in contributions and the write-off in second quarter 2003 of Brazil development costs, and were partially offset by an increase in business development costs.

     Interest expense decreased by $109,000 and $78,000 to $562,000 and $1,174,000 for the three and six month periods ended June 30, 2004 from $671,000 and $1,252,000 for the three and six month periods ended June 30, 2003, respectively. These decreases are primarily due to lower interest expense on the debt relating to the more mature Gamma Knife units, partially

7

offset by additional interest expense on the financing of the three new Gamma Knife units that began operation during first, second and third quarters 2003. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced.

     Interest and other income decreased by $8,000 and $29,000 to $20,000 and $43,000 for the three and six month periods ended June 30, 2004 from $28,000 and $72,000 for the three and six month periods ended June 30, 2003, respectively, primarily due to lower invested cash balances. For the six month period, the reduction is also due to interest income of approximately $17,000 in first quarter 2003 relating to a state sales/use tax refund.

     Minority interest increased by $9,000 and $22,000 to $246,000 and $497,000 for the three and six month periods ended June 30, 2004 from $237,000 and $475,000 for the three and six month periods ended June 30, 2003, respectively, due to increased profitability of GK Financing. Minority interest represents the 19% interest of GK Financing owned by a third party.

     Income tax expense increased by $10,000 and $32,000 to $179,000 and $398,000 for the three and six month periods ended June 30, 2004 compared to $169,000 and $366,000 for the three and six month periods ended June 30, 2003, respectively. The increase was due to increased profitability and a reduction in the effective income tax rate in 2004 compared to 2003. The Company recorded a 40% income tax provision in the three and six month periods ended June 30, in both 2004 and 2003. The effective income tax rate in second quarter 2004 was reduced to approximately 32% due to an income tax benefit of $49,000 that was recorded for the exercise of 75,000 previously expensed options. In second quarter 2003, the effective income tax rate was reduced to 34% due to an income tax benefit of $32,000 that was recorded for the exercise of 50,000 previously expensed options. For the six month period ended June 30, 2004, the effective income tax rate was reduced to 34% compared to 35% for the same period in the prior year. This is due to an income tax benefit on the exercise of previously expensed options of $65,000 (100,000 shares) compared to $48,000 (75,000 shares) in the prior year. These income tax benefits are the result of compensation expense that was recognized when the options were granted in 1995.

     The Company had net income of $389,000 ($0.08 per diluted share) and $759,000 ($0.15 per diluted share) for the three and six month periods ended June 30, 2004 compared to net income of $334,000 ($0.07 per diluted share) and $670,000 ($0.13 per diluted share) in the same period in the prior year. The increase for both the three and six month periods was primarily due to the addition of three new Gamma Knife units that began operation during 2003, lower selling and administrative costs and lower interest expense.

Liquidity and Capital Resources

     The Company had cash and cash equivalents of $9,344,000 at June 30, 2004 compared to $10,312,000 at December 31, 2003. The Company’s cash position decreased by $968,000 primarily due to the payment of dividends of $314,000, net capital expenditures of

8

approximately $501,000 and the payment prior to month end of a large vendor invoice of approximately $555,000 that had historically been paid after the end of the month.

     During first and second quarters 2004 the Company paid quarterly dividends of $157,000 per quarter. In June 2004, the Company declared a quarterly dividend of $0.425 per share to shareholders of record on July 2, 2004, which resulted in a reduction in retained earnings of $171,000 in second quarter 2004. The dividends are payable to shareholders of record on July 16, 2004.

     The Company as of June 30, 2004 had shareholders’ equity of $15,899,000, working capital of $4,461,000 and total assets of approximately $44,399,000.

     The Company has scheduled interest and principal payments under its debt obligations of approximately $8,636,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt obligations during the next 12 months.

     The Company’s primary lender for its Gamma Knife projects, DVI Financial Services Inc. (“DVI”), filed for Chapter 11 bankruptcy protection in August 2003. This will not materially affect the financing that has been committed to existing projects. The Company has secured alternative financing for its pending projects and continues to seek other financing options for future projects. Financing has been secured at lower interest rates than had historically been obtained from DVI, however certain debt covenants are more restrictive than required by DVI. In addition, DVI never required a parent company guarantee, but one alternative financing lender has required a parent guarantee on leasehold improvements.

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

Item 4. Controls and Procedures

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

     (b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last

9

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

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     None.

Item 2. Changes in Securities and Use of Proceeds.

     None.

Item 3. Defaults Upon Senior Securities.

     None.

Item 4. Submission of Matters to a Vote of Securities Holders.
The Company’s Annual Meeting of Shareholders (“Meeting”) was held on June 17, 2004. There were present in person or by proxy at said Meeting shareholders voting 3,640,995 shares that represented 95.3% of the 3,818,203 shares outstanding and entitled to vote at the Meeting, which represented a quorum. At the meeting, the shareholders:

1)

Voted on the Election of Directors as follows:

Dr. Bates, Mr. Bates, Mr. Robison, Mr. Ruffle and Mr. Trotman were elected to the Board of Directors.

2)

Voted on amending the 1995 and 2001 Stock Option Plans to allow the Company’s Chairman and Chief Executive Officer to participate. There were 1,109,913 for, 437,049 votes against and 515,788 votes abstained.

The amendments to the 1995 and 2001 Stock Option Plans were approved.

3)

Voted on the ratification of Moss Adams, LLP as the Company’s independent accountants for the year ending December 31, 2004. There were 3,751,393 votes for, 21,500 votes against and 19,271 votes abstained.

Moss Adams, LLP was ratified as the Company’s independent accountants for the year ending December 31, 2004.

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Item 5. Other Information.

     None.

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

(a)

Exhibits The following exhibits are filed herewith:

(b)

Reports on Form 8-K None.

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SIGNATURES

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

AMERICAN SHARED HOSPITAL SERVICES
Registrant

Date: August 13, 2004	/s/ Ernest A. Bates
	Ernest A. Bates, M.D.
	Chairman of the Board and Chief Executive Officer
Date: August 13, 2004	/s/ Craig K. Tagawa
	Craig K. Tagawa
	Senior Vice President Chief Operating and Financial Officer

12

Exhibit Index

13