AMERICAN SHARED HOSPITAL SERVICES - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

OR

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER 1-8789
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AMERICAN SHARED HOSPITAL SERVICES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 94-2918118
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

FOUR EMBARCADERO CENTER, SUITE 3620, SAN FRANCISCO, CALIFORNIA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (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 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 [X] No [ ]

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. [ ]

As of March 15, 1999, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $3,286,054.

Number of shares of common stock of the registrant outstanding as of March
15, 1999: 3,972,372.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of its shareholders are incorporated by reference into Part III of this
report.

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PART I

ITEM 1. BUSINESS

GENERAL

American Shared Hospital Services ("ASHS" and, together with its
subsidiaries, the "Company") currently provides stereotactic radiosurgery
services to five medical centers in three 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 Elekta
Holdings U.S., Inc., a wholly owned 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.

At present, the Company is developing a business plan for "The Operating
Room for the 21st Century" (sm) concept and owns an insurance services business.
Neither The Operating Room for the 21st Century nor the Company's insurance
services business are expected to generate significant revenues within the next
twelve months.

During November 1998, the Company sold its diagnostic imaging business (the
"Sale") to affiliates of Alliance Imaging, Inc. (the "Purchaser") for
$13,552,000 in cash and the assumption by the Purchaser of substantially all of
the liabilities of the diagnostic imaging business, including approximately
$27.1 million in debt and other liabilities. Prior to this sale, the Company
provided Magnetic Resonance Imaging ("MRI"), Computed Axial Tomography ("CT"),
Ultrasound, Nuclear Medicine and Cardiac Catheterization Laboratory services to
approximately 190 customers in 22 states. The diagnostic imaging business
provided approximately 88%, 94% and 95% of the Company's revenues for the years
ended December 31, 1998, 1997 and 1996, respectively.

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, 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 benign brain tumors (i.e. meningiomas,
pituitary and acoustic neuromas, craniopharyngiomas), malignant tumors (i.e.
gliomas, nasopharyngeal carcinomas, ocular meningiomas and solitary and multiple
metastatic tumors), arteriovenous malformations and trigeminal neuralgia.
Research is being conducted in the treatment of Parkinson's disease, epilepsy,
and other functional disorders.

There are currently 47 Gamma Knife units operating at 46 sites in the
United States and 119 units worldwide. As of December 31, 1998, approximately
100,000 procedures had been performed worldwide. An estimated percentage
breakdown of these 100,000 procedures by indications treated are as follows:
Benign (38%) and malignant (36%) tumors, vascular disorders (22%) and functional
disorders (4%).

The Company currently has five (5) Gamma Knife units at five (5) sites in
the United States. The Company's first Gamma Knife commenced operation in
September 1991. The Company's Gamma Knife units have performed approximately
2,060 procedures through December 31, 1998.

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Gamma Knife revenues for the Company during the five (5) years ended
December 31, 1998, and the percentage of total revenues of the Company
represented by the Gamma Knife for each of the last five years are set forth
below:

TOTAL GAMMA KNIFE GAMMA KNIFE/
YEAR ENDED DECEMBER 31, REVENUES (IN THOUSANDS) TOTAL REVENUES
----------------------- ----------------------- --------------

1998...................... $4,156 11.8%
1997...................... $2,384 6.4%
1996...................... $2,030 5.5%
1995...................... $1,325 3.9%
1994...................... $1,411 3.7%

The Company conducts its Gamma Knife business through its 81% indirect
interest in GKF. The remaining 19% interest is indirectly owned by Elekta. GKF,
a limited liability company, was formed in October 1995. The Company contributed
two customer contracts for its 81% membership interest and Elekta contributed
cash of approximately $700,000 for its 19% membership interest in GKF. At GKF's
inception, Elekta additionally guaranteed a loan in the amount of $1,300,000 by
a third party lender to GKF for deposits on four (4) Gamma Knife units and also
made available a loan in the amount of $1,320,000. The loan for $1,300,000 has
been refinanced by another third party lender without Elekta's guarantee. GKF
never drew down funds on the $1,320,000 loan and the loan commitment has
expired.

GKF is managed by its policy committee. The policy committee is composed of
one representative from the Company, Ernest A. Bates, M.D., 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 all of its
members. The policy committee selects a manger to handle GKF's daily operations.
Craig K. Tagawa, Chief Executive Officer of GKF, serves as the GKF's manager.

GKF profits and/or losses and any cash distributions are allocated based on
membership interests. GKF is required to have a cash reserve of at least $50,000
prior to cash distributions to its members. As of December 31, 1998, $1,176,000
was available for distribution to members. From inception to December 31, 1998,
GKF had distributed in the aggregate $100,000 to the Company.

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. The
Company's cost for a Gamma Knife is approximately $2,900,000. Due to the
structure of its contracts with medical centers, there can be no
assurance that this cost will be fully recovered or that the Company will
earn a satisfactory return on its investment.

- There is a limited market for the Gamma Knife. Due to the substantial
costs of acquiring a Gamma Knife, the Company must identify medical
centers that possess large enough neurosurgery and oncology departments
capable of performing a large number of Gamma Knife procedures. The
Company has identified approximately 200 such medical centers in the
United States as potential future sites. There were 47 operating Gamma
Knife units in the United States at the end of February 1999, five (5) of
which are Company-supplied units. There can be no assurance that the
Company will be successful in placing units at a significant number of
sites in the future.

- There are currently four companies (in addition to the Company) that
supply the Gamma Knife to potential customers. Two of the four companies
have purchased a Gamma Knife within the last twelve months. The Company
does not currently have an exclusive relationship with Elekta and has
lost sales in the past to customers that choose to purchase a Gamma Knife
directly from Elekta. In addition, the Company may continue to lose sales
in the future to such customers and may also lose sales to competitors of
the Company. There can be no assurance that the Company will be able to
successfully compete against others to place units in the future.

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- There are several methods of radiosurgery that compete against the Gamma
Knife, including the modified linear accelerator and microsurgery.
Currently, there are approximately 200 medical centers in the United
States with modified linear accelerators. Each of the medical centers
targeted by the Company could decide to acquire a modified linear
accelerator instead of a Gamma Knife. In addition, surgeons who are
primarily responsible for referring patients for Gamma Knife surgery may
not be willing to make such referrals for various reasons. There can be
no assurance that the Company will be able to secure a sufficient number
of sites or Gamma Knife procedures to attain 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) and other third
party payor groups. A significant amount of the Company's existing
contracts are reimbursed by the medical center to the Company on a
fee-for-service basis. The primary risk to the Company under this type of
contract is that actual volumes of procedures were less than projected.
In July 1998, the Company began a contract on a shared revenue basis.
Revenues under this contract and any future shared revenue basis
contracts will be impacted by any reimbursement rate change. A
significant number of future contracts for Gamma Knife services may be
based on a shared revenue instead of a fee-for-service basis. There can
be no assurance that future changes in healthcare regulations and
reimbursement rates will not adversely affect the Company's Gamma Knife
revenues.

- As with other highly sophisticated medical equipment, there is constant
change and innovation in the market. New and improved medical equipment
can be introduced that could make the Gamma Knife technology obsolete and
that would make its operation uneconomic. It is expected that Elekta will
introduce an upgraded Gamma Knife in the near future. This upgrade is
anticipated to primarily automate the patient positioning process and
therefore involve less health care provider intervention. Three (3) of
the Company's existing Gamma Knife units are upgradeable. The cost for
the new unit or the upgrade package is not known at this time.

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CUSTOMERS

The Company's primary business is the outsourcing of Gamma Knife
stereotactic radiosurgery services. The market for these services primarily
consists of major urban medical centers. The Gamma Knife business is capital
intensive. Purchasing and installing each Gamma Knife costs between $3,200,000
and $4,000,000. Typically, the Company's costs for acquisition are approximately
$2,900,000, with the medical center paying for site and installation costs.

ORIGINAL
CUSTOMER TERM OF CONTRACT BASIS OF PAYMENT
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EXISTING SITES
UCSF-Stanford Health Care 10 years fee per use
San Francisco, California
USC University Hospital 5 years fee per use
Los Angeles, California
Hoag Memorial Hospital Presbyterian 10 years fee per use
Newport Beach, California
Southwest Texas Methodist Hospital 10 years fee per use
San Antonio, Texas
Yale New Haven Ambulatory Services Corporation 10 years revenue sharing
New Haven, Connecticut

SITES UNDER DEVELOPMENT
Kettering Medical Center 10 years fee per use
Kettering, Ohio
New England Medical Center 10 years fee per use
Boston, Massachusetts
JFK Medical Center 10 years fee per use
Edison, New Jersey
University of Arkansas 15 years revenue sharing
Little Rock, Arkansas
Hospital Barra D'Or 10 years fee per use
Rio de Janeiro, Brazil

One of the Company's contracts ends in the third quarter of 1999 and the
Company currently is negotiating an extension with that customer. If the Company
cannot negotiate an extension with that customer, the contract will terminate in
third quarter 1999. The Company estimates that one site under development will
become operational in second quarter 1999 and three additional sites under
development will become operational in third quarter 1999. The Company's
contract with Hospital Barra D'Or is currently being renegotiated with the
customer in light of the changes in the Brazilian economic environment. If the
contract cannot be successfully renegotiated, it will be terminated.

The Company's fee per use agreement is typically for a ten year term. The
fixed fee per use reimbursement amount the Company receives from the customer is
based on the Company's cost to provide the service and the anticipated volumes
of the customer. The contracts signed by the Company typically call for a fee
ranging from $7,500 to $9,500 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 expenses (i.e. personal property
taxes, insurance, equipment maintenance and marketing services). Typically, the
customer is obligated to pay site and installation costs and the costs of
operating the Gamma Knife. Generally, the customer can either renew the
agreement or terminate the agreement upon the termination date of the agreement.
If the customer chooses to terminate the agreement, then GKF removes the
equipment from the medical center.

The Company's revenue sharing agreement is typically for a period of ten to
fifteen years. Instead of receiving a fixed fee, the company receives 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
to any reimbursement rate changes for Gamma Knife services by third party
payors. The Company is also at risk if it

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inefficiently operates its Gamma Knife services. There are no minimum volume
guarantees required of the customer.

No single customer accounted for 10% or more of the Company's total
revenues in 1998 or 1997, but each of the five Gamma Knife customers accounted
for more than 10% of the Company's Gamma Knife services revenues, in those years
of operation.

MARKETING

At the end of 1998, the Company employed one sales executive. The Company
markets its services through its preferred provider status with Elekta and a
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 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.

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 for 100% of the
cost of the 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 and customer contracts and are without recourse to the Company and
Elekta.

GKF currently has loan commitments and has received progress payments from
its primary lender for four (4) of its five (5) Gamma Knife projects under
development. The loan commitments require that GKF has a debt to equity plus
subordinated debt ratio of 5 to 1. After recognition of a $810,000 and $190,000
cash distribution from GKF to the Company and Elekta, respectively, in January
1999, GKF must increase its equity and/or subordinated debt balances by
approximately $1,400,000 to be eligible for full funding of its approximately
$11,000,000 cash requirement for its four (4) projects in development. GKF
currently has the capability for additional borrowings of $3,800,000, which is
adequate to meet its customer obligations through the middle of the second
quarter of 1999.

GKF and the Company are exploring options as to how GKF can best meet its
customer obligations. These options include (i) requesting a waiver of GKF's
debt to equity covenant from GKF's primary lender, (ii) the Company and Elekta
making additional capital contributions when necessary, and (iii) the Company
providing subordinated debt to GKF. The Company has the financial resources to
allow GKF to meet its customer obligations and intends to provide these
financial resources so that GKF can meet its obligations to its customers.

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 comparable 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 modified linear
accelerators to perform radiosurgery.

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

GOVERNMENT REGULATION

The Company's Gamma Knife services customers receive payments for patient
care from federal government and private insurer reimbursement programs.
Currently, Gamma Knife services are performed predominantly on an in-patient
basis, although some are performed on an out-patient basis.

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 reduce medical center revenues from the Medicare DRG program by
approximately 30%. In the future, this reduction may lower reimbursement from
other third party payors.

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 hospital outpatient services. DHHS has proposed a new payment system,
Ambulatory Product Classifications ("APC"), which affects all outpatient
services, including those performed in a hospital based or free-standing
facility. APC were scheduled to take effect January 1, 2000. The implementation
of APC have been delayed due to year 2000 computer issues and the volume of
responses to the proposed APC system.

The APC consist of 346 clinically, homogenous classifications or groupings
of codes that are typically used in outpatient billing. Outpatient services will
be bundled with fixed rates of payment determined according to specific regional
and national factors, similar to that of the in-patient PPS. Overall, the system
is expected to reduce payments for select services and encourage the most
efficient use of resources for outpatient care.

The current APC proposal categorizes radiosurgery under conventional
radiation therapy. Therefore, both procedures would receive the same
reimbursement amounts. This categorization makes no distinction with regard to
the types of resources utilized (e.g. technology) for each procedure
classification. Therefore, regardless of resource consumption and clinical
outcomes, all procedures within a group qualify for equal reimbursement.
Specifically, stereotactic radiosurgery would receive the same reimbursement per
session as conventional radiation therapy. This would result in a significant
reimbursement decrease for Gamma Knife patients covered by Medicare treated on
an outpatient basis. Various groups are informing DHHS of the discrepancies of
these service levels in an attempt to be compensated in line with the intent of
the APC system. It is not the intent of the APC system to compensate providers
similarly for clinically different procedures.

The Company has one shared revenue basis contract that is directly affected
by changes in payment rates by Medicare and other third party payors. A number
of future contracts for Gamma Knife services may be on a shared revenue basis
instead of a fee-for-service basis. As a result of lower reimbursement rates,
profitability from future contracts will be reduced unless the number of Gamma
Knife procedures can be increased or if the costs to provide Gamma Knife
services can be lowered.

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

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(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:
clinical laboratory services, physical therapy services, occupational therapy
services, radiology or other diagnostic services, radiation therapy services,
durable medical equipment, parenteral and enteral nutrients, equipment and
supplies, home health services, outpatient prescription drugs, in-patient and
outpatient 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 diagnostic
nuclear medicine and diagnostic imaging 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.

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. One of the Company's existing
customers was required to obtain a CON. 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.

EMPLOYEES

At December 31, 1998, the Company employed approximately 25 employees on a
full-time basis and approximately 2 employees on a part-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 its employee relations are good. The Company expects
to employ fewer than ten (10) people after it completes its transition service
obligations to the purchaser of its diagnostic imaging business in April 1999.

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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. 62 Chairman of the Board of Directors, Chief
Executive Officer
Craig K. Tagawa 45 Senior Vice President -- Chief Operating
and Financial Officer
Richard Magary 58 Senior Vice President -- Administration,
Assistant Secretary
Gregory Pape 43 Senior Vice President -- Sales and
Marketing

ERNEST A. BATES, M.D., founder of the Company, has served in the positions
listed above since the incorporation of the Company, except for the periods May
1, 1991 through November 6, 1992 and February 1989 through August 1989, during
which time Dr. Bates did not serve in the capacity of President and Chief
Operating Officer. Dr. Bates is a graduate of the Johns Hopkins University and
the University of Rochester School of Medicine. He is currently an Assistant
Clinical Professor of Neurosurgery at the University of California Medical
Center at San Francisco, and a member of the Board of Trustees of the Johns
Hopkins University and the University of Rochester, a Director of the Industrial
Policy Advisory Committee of the Engineering Research Center (CISST) at Johns
Hopkins University, a Member of the State of California High Speed Rail
Authority, and a Member of the Board of Directors of Salzburg Seminar.

CRAIG K. TAGAWA has assumed the additional duties of 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 GK Financing, LLC. From September 1988 through January
1992, Mr. Tagawa served in various positions with the Company. From 1982 through
August 1988, Mr. Tagawa served as Vice President of Finance and Controller of
Medical Ambulatory Care, Inc., the Dialysis division of National Medical
Enterprises, Inc. (now Tenet Healthcare Corporation), an owner and operator of
hospitals and other health care businesses. Mr. Tagawa received his
Undergraduate degree from the University of California at Berkeley and his M.B.A
from Cornell University.

RICHARD MAGARY has served as Senior Vice President -- Administration since
February 28, 1993 and Assistant Secretary since 1985. Mr. Magary will conclude
his current duties in April or May of 1999 and become an advisor to the Company.
From April 1987 through February 1993, Mr. Magary served as a Vice President in
the same capacity. From 1982 through March 1987, he served as Chief Financial
Officer of the Company and its predecessor. Mr. Magary is a graduate of the
University of San Francisco.

GREGORY PAPE has served as Senior Vice President -- Sales and Marketing
since June 1994. From January 1993 through June 1994, Mr. Pape was a Zone Vice
President -- Sales and Marketing for the Company. Mr. Pape served in the
capacity of Regional Sales Manager for the Company for the period from March
1991 through January 1993. From September 1989 through February 1991, Mr. Pape
was a Regional Sales Manager for Medical Imaging Corporation of America, Inc.
Mr. Pape earned his undergraduate degree at the University of Miami, with
postgraduate work in law at the University of Dayton, Ohio.

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ITEM 2. PROPERTIES

The Company's corporate offices are located at Four Embarcadero Center,
Suite 3620, San Francisco, California, where it leases 2,996 square feet for
$9,275 per month. This lease runs through September 1999.

The Company's administrative office is located in Modesto, California,
where it leases 5,413 square feet for $6,135 per month. This lease runs through
May 1999.

For the year ended December 31, 1998, the Company's aggregate net rental
expenses for all properties and equipment were approximately $4,696,000.

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

At a special meeting of shareholders on November 13, 1998, the shareholders
of the Company approved the Sale pursuant to the Securities Purchase Agreement
dated as of March 12, 1998 among the Company and the Purchaser. Holders of
3,494,291 common shares voted in favor of the sale, 13,675 common shares voted
against, and 3,500 shares abstained. The shares voting in favor of the sale
represented 98.6% of the total number of shares present in person or by proxy at
the Special Meeting of Shareholders and 73.3% of the outstanding common shares.
The Sale closed immediately following the Special Meeting.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common shares, no par value (the "Common Shares"), are
currently traded on the American Stock Exchange ("AMEX") and the Pacific
Exchange ("PCX"). The Company's losses and net capital deficiency have caused
the Company to no longer satisfy the minimum criteria with respect to net income
and net worth for continued listing published by the AMEX. The per share trading
price is also below the minimum criteria of such exchange. The closing per share
price of the Common Shares was $1.125 on March 12, 1999. The Company has been
advised that its net capital deficiency is inconsistent with the criteria
applied by the PCX for continued listing on such exchange. The AMEX and the PCX
are continuing to monitor the Company's financial condition in order to
determine whether the Common Shares will continue to be listed for trading
thereon. With the completion of the Sale, the Company believes it now meets
AMEX's and PCX's minimum criteria. The Company will submit its audited financial
statements to AMEX and PCX and believes rulings regarding continued listing will
be issued by AMEX and PCX in second quarter 1999.

The table below sets forth the high and low closing sales 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.

PRICES FOR COMMON SHARES

QUARTER ENDING HIGH LOW
-------------- ------ -----

March 31, 1997......................................... 2 3/16 1 3/8
June 30, 1997.......................................... 1 5/8 3/4
September 30, 1997..................................... 1 7/8 1
December 31, 1997...................................... 2 3/16 1 7/16
March 31, 1998......................................... 1 15/16 1 3/8
June 30, 1998.......................................... 1 7/8 1 1/4
September 30, 1998..................................... 1 1/4 5/8
December 31, 1998...................................... 1 1/4 5/8

The Company estimates that there were approximately 1200 beneficial holders
of its Common Shares as of December 31, 1998. On March 8, 1999, the Company
repurchased substantially all of its remaining securities owned by two major
holders who acquired them in the Company's 1995 restructuring (see "Subsequent
Events").

The Company did not pay cash dividends in 1998 and does not anticipate
paying cash dividends in 1999.

10
12

ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF OPERATIONS

YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

Medical services revenues..................... $35,162 $37,172 $ 36,989 $ 34,077 $ 38,545
======= ======= ======== ======== ========
Costs of operations........................... 25,826 27,044 28,071 32,675 34,145
Selling and administrative expense............ 5,116 5,901 5,309 8,432 5,971
Interest expense.............................. 3,186 3,671 4,199 5,310 7,423
Write-down of intangible assets............... 0 0 0 600 0
------- ------- -------- -------- --------
Total costs and expenses...................... 34,128 36,616 37,579 47,017 47,539
------- ------- -------- -------- --------
1,034 556 (590) (12,940) (8,994)
(Loss) gain on sale of assets and early
termination of capital leases............... (2) 821 3 226 3,294
Gain on disposal of product line.............. 20,478 N/A N/A N/A N/A
Interest and other income..................... 54 155 227 258 183
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... 21,564 1,532 (360) (12,456) (5,517)
Income tax provision (benefit)................ 1,513 10 (7) 3 20
------- ------- -------- -------- --------
Income (loss) before extraordinary item....... 20,051 1,522 (353) (12,549) (5,537)
Extraordinary Item............................ 0 0 0 19,803 362
------- ------- -------- -------- --------
Net income (loss)............................. $20,051 $ 1,522 $ (353) $ 7,344 $ (5,175)
======= ======= ======== ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary item..... $ 4.23 $ 0.32 ($ 0.08) $ (2.96) $ (1.93)
Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13
------- ------- -------- -------- --------
Net income (loss)........................... $ 4.23 $ 0.32 $ (0.08) $ 1.75 $ (1.80)
======= ======= ======== ======== ========
Earnings (loss) per common share assuming
dilution:
Income (loss) before extraordinary item..... $ 3.15 $ 0.24 $ (0.08) $ (2.96) $ (1.93)
Extraordinary item.......................... $ 0.00 $ 0.00 $ 0.00 $ 4.71 $ 0.13
------- ------- -------- -------- --------
Net income (loss)........................... $ 3.15 $ 0.24 $ (0.08) $ 1.75 $ (1.80)
======= ======= ======== ======== ========

YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

BALANCE SHEET DATA
Restricted cash............................... $ 2,226 $ 651 $ 218 $ 493 $ 2,883
Working capital (deficiency).................. 9,088 (8,039) (10,888) (6,793) (33,369)
Total assets.................................. 26,919 30,209 32,969 31,335 47,222
Current portion of long-term debt and
obligations under capitalized leases........ 1,885 10,929 13,182 8,720 11,214
Long-term debt and obligations under
capitalized leases, less current portion.... 8,823 21,569 23,935 26,125 24,244
Senior subordinated notes..................... 0 0 0 773 18,467
Shareholders' equity (Net capital
deficiency)................................. $11,096 $(8,953) $(10,475) $(10,576) $(22,341)

See accompanying notes

(1) In June 1995, ASHS incorporated a new wholly-owned subsidiary, African
American Church Health and Economic Services, Inc. ("ACHES") and ACHES'
wholly-owned subsidiary, ACHES Insurance Services, Inc. ("AIS"), and in
October 1995, 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.
Accordingly, the financial data for the Company presented above include the
results of the establishment of ACHES, AIS, and GK Financing, LLC for 1995
through 1998.
11
13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

During the years ended December 31, 1998, 1997 and 1996, approximately 88%,
94% and 95%, respectively, of the Company's revenues were derived from its
diagnostic imaging business. The Company sold its diagnostic imaging business in
November 1998. Currently, the Company's business consists of the provision of
Gamma Knife services, which accounted for only 12%, 6% and 5% of the Company's
total revenues during the years ended December 31, 1998, 1997 and 1996,
respectively. As a result of the Sale, the Company was relieved of substantially
all of the liabilities of the imaging division, consisting of approximately
$27,100,000 of debt and other obligations, and received approximately
$13,500,000 of cash. The Sale resulted in a one-time gain of $20,478,000, which
eliminated the Company's capital deficiency. Following the Sale, the Company's
operations were significantly reduced and it has substantially reduced its
staff. Accordingly, the discussion below, which largely reflects the Company's
operations prior to the Sale, is not an indication of results anticipated by the
Company for 1999 or future years.

The Company had net income of $20,051,000 ($4.23 per share) on medical
services revenues of $35,162,000 in 1998. Included in net income for 1998 is a
$20,478,000 gain on disposal of product line less Sale-related income taxes of
$1,500,000. The Company had net income of $1,522,000 ($0.32 per share) on
medical services revenues of $37,172,000 in 1997.

TOTAL REVENUES

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------- ---------- -------
(IN THOUSANDS)

Medical Services....................... $35,162 (5.4)% $37,172 0.5% $36,989

Medical services revenues decreased 5.4% in 1998 compared to 1997, and
increased 0.5% in 1997 compared to 1996. The 5.4% decrease in 1998 was primarily
attributable to the Sale, which occurred in November 1998. The 0.5% increase in
1997 compared to 1996 was primarily due to an increase in MRI revenues.

Gamma Knife revenues increased $1,772,000 and $354,000 in 1998 and 1997,
respectively, compared to the prior years. The 1998 increase was primarily due
to the commencement of the Company's fourth Gamma Knife in March 1998 and the
fifth Gamma Knife in July 1998, and full year inclusion of the Company's third
Gamma Knife unit. The 1997 increase was primarily due to the commencement of a
third Gamma Knife unit in September 1997.

MRI revenues decreased 6% ($1,821,000) in 1998 compared to 1997 and
increased 2% ($650,000) in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale. The increase in 1997 was primarily due to
the commencement of new customer contracts and increased utilization from
contracts commenced in prior periods. MRI revenues as a percentage of total
medical services revenues were 75%, 76%, and 75% in years 1998, 1997, and 1996,
respectively.

The Company's non-MRI diagnostic imaging services revenues decreased 35%
($1,763,000) in 1998 compared to 1997 after a 19% ($1,176,000) decrease in 1997
compared to 1996. The 1998 versus 1997 revenue decline was primarily due to the
continued decline of CT and Nuclear Medicine revenues and the Sale. The revenue
decline in 1997, compared to 1996, was primarily attributable to decreased CT
revenue that was due to utilization of two (2) fewer CT units in 1997, and
decreased nuclear medicine revenue due to the termination of an in-house nuclear
medicine contract in March 1997. Revenues from CT operations decreased
$1,147,000 in 1998 and $614,000 in 1997 from 1996 revenues of $3,537,000. The
decrease in Ultrasound and Nuclear Medicine revenues was $616,000 in 1998 and
$562,000 in 1997 from a 1996 revenue base of $2,747,000. Non-MRI diagnostic
imaging services revenues as a percentage of total medical services revenues was
10%, 14% and 17% for the years ended 1998, 1997 and 1996, respectively. The
Company's CT, Ultrasound, and Nuclear Medicine services revenues continued to
decline because customers were increasingly buying their own equipment.

12
14

Contract service revenues consisting of Respiratory Therapy services and
Cardiac Catheterization Laboratory revenues decreased $195,000 in 1998 compared
to 1997 and increased $354,000 in 1997 compared to 1996. The decrease in 1998
was primarily attributable to the Sale. The increase in 1997 was primarily due
to revenues from Cardiac Catheterization Laboratory contracts which commenced in
May 1996 and December 1996, respectively.

COST OF OPERATIONS

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------- ---------- -------
(IN THOUSANDS)

Cost of Operations..................... $25,826 (4.5)% $27,044 (3.7)% $28,071
Percentage of Revenue.................. 73.5% 72.8% 75.9%

The Company's cost of operations, consisting of payroll, maintenance and
supplies, depreciation and amortization, equipment rental and other operating
expenses (such as vehicle fuel, building rents, regional office costs,
insurance, property taxes, bad debt expense, fees and training expenses)
decreased $1,218,000 in 1998 and decreased $1,027,000 in 1997 compared to prior
years.

Medical services payroll costs, the largest component of total cost of
operations, decreased by $446,000 in 1998 compared to 1997 and increased by
$221,000 in 1997 compared to 1996. Medical services payroll costs decreased
primarily due to the Sale. Medical services payroll costs, as a percent of
medical services, remained constant at 20% in years 1998, 1997 and 1996. The
1997 and 1996 increase was primarily due to staffing increases to service
additional MRI customer volumes and an increase in staffed units in 1997. The
Company's Gamma Knife services currently do not involve staffing of its centers.

The Company's maintenance and supplies costs were 15%, 16% and 18% of
medical service revenues in 1998, 1997 and 1996, respectively. Maintenance and
supplies costs decreased $775,000 in 1998 compared to 1997 and decreased
$739,000 in 1997. The 1998 decrease was primarily due to the Sale. The $739,000
decrease in 1997 was primarily attributable to MRI maintenance cost savings.

Depreciation and amortization decreased $842,000 in 1998 compared to 1997
and decreased $233,000 in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale and fewer MRI units accounted for as
capitalized leases in 1998, offset by increases in equipment depreciation due to
the addition of one Gamma Knife unit in late 1997 and two units during 1998. The
decrease in 1997 was primarily attributable to decreased MRI depreciation as a
result of fewer MRI units accounted for as capital leases in 1997.

Equipment rental as a percentage of medical services revenues was 12% in
1998, 7% in 1997 and 9% in 1996. Equipment rental increased $1,378,000 in 1998
compared to 1997 and decreased $763,000 in 1997 compared to 1996. The increase
in 1998 is primarily due to two (2) replacement and three (3) new MRI units
accounted for as operating leases during 1998 and fourth quarter 1997, offset by
decreases associated with the Sale. The decrease in 1997 is primarily
attributable to the return of five (5) MRI rental units that resulted from
mobile route consolidation and customer contract terminations.

Other costs of operations as a percentage of medical services revenues was
11%, 12% and 11% in 1998, 1997 and 1996, respectively. The decrease of $533,000
in 1998 compared to 1997 was primarily attributable to the Sale. The increase of
$487,000 in 1997 compared to 1996 reflects increased fuel, personal property tax
costs, insurance, and bad debt expenses.

SELLING AND ADMINISTRATIVE

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ------ ---------- ------
(IN THOUSANDS)

Selling and Administrative Costs......... $5,116 (13.3)% $5,901 11.2% $5,309
Percentage of Revenue.................... 14.6% 15.9% 14.4%

13
15

The Company's selling and administrative costs decreased $785,000 in 1998
compared to 1997 and increased $592,000 in 1997 compared to 1996. The decrease
in 1998 was primarily due to the Sale and decreased salary, investor relations
and legal expenses. The increase in 1997 was primarily due to increased sales
and administrative payroll costs, building rental costs, audit and tax fees and
legal fees associated with a previously-proposed acquisition of the Company that
was not consummated.

INTEREST EXPENSE

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ------ ---------- ------
(IN THOUSANDS)

Interest Expense.......................... $3,186 (13.2)% $3,671 (12.6)% $4,199
Percentage of Revenue..................... 9.1% 9.9% 11.4%

The Company's interest expense decreased $485,000 in 1998 compared to 1997
and decreased $528,000 in 1997 compared to 1996. The decrease in 1998 was
primarily attributable to the Sale and decreased capitalized lease-related
interest, offset by increased interest related to additional Gamma Knife units.
The decrease in 1997 was primarily attributable to decreased capitalized
lease-related interest.

IMPACT OF YEAR 2000

The Year 2000 ("Y2K") issue results from programs written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.

Due to the Sale, the Company is in the process of downsizing its computer
operations. The Company is in the process of replacing much of its computer
hardware and programs with equipment and programs that are Y2K compatible. This
replacement process is expected to be completed in the second quarter of 1999
and the cost is not expected to exceed $60,000.

The Company's current revenue source, the Gamma Knife, is Y2K compliant.
The Company's five current operational customers, which are large urban medical
centers, all have disbursement systems that are or will be Y2K compliant during
1999.

Should the disbursement systems of the Company's operating customers not be
Y2K compliant, the Company would be materially impacted. The Company would
exercise its contractual rights due to non-payment, if necessary.

The Company believes that the Y2K issue, except for any customer
disbursement systems which are not Y2K compliant on January 1, 2000, and for
which the customer cannot produce manual checks, will not materially affect the
Company's business, results of operations, or financial condition.

OTHER INCOME AND EXPENSE

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ---- ---------- ----
(IN THOUSANDS)

(Loss) gain on sale of assets and early
termination of capital leases............. $ (2) (100.2)% $821 27,267% $ 3
Percentage of revenue....................... 0.0% 2.2% 0.0%
Gain on sale of product line................ $20,478 NM $ 0 NM $ 0
Percentage of revenue....................... 58.2% 0.0% 0.0%
Interest and other income................... $ 54 (65.2)% $155 (31.7)% 227
Percentage of revenue....................... 0.2% 0.4% 0.6%

14
16

The Company's gain on sale of product line increased $20,478,000 in 1998
compared to 1997. Gain on sale of assets and early termination of capital leases
decreased $823,000 in 1998 compared to 1997. The gain on sale of product line
represents the gain associated with the Sale. The gain was net of transaction
costs of approximately $2,700,000. Transaction costs include legal, investment
banking, management bonuses related to the Sale, employee severance costs, and
the costs related to the discontinuance of the Diagnostic Imaging Business. The
gain on sale of assets and early termination of capital leases in 1997 compared
to 1996 was the result of a gain on the early termination of a capital lease
($141,000) when the customer's in-house nuclear medicine contract was terminated
during March 1997, an insurance settlement ($388,000) following the loss of a
mobile MRI unit in an accident during second quarter 1997, a gain on sale of
another MRI unit ($140,000) during third quarter 1997 and a gain on sale of a
mobile SPECT unit ($115,000) in the fourth quarter of 1997. Gain on sale of
equipment fluctuates depending on the timing of asset dispositions.

INCOME TAXES

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ ---------- ---- ---------- -----
(IN THOUSANDS)

Income Tax Provision (Benefit)............... $1,513 15,030.0% $10 243% $ (7)
Percentage of Revenue........................ 4.3% 0% 0%

The Company's income tax provision increased $1,503,000 in 1998 compared to
1997. The increase, approximately $1,500,000, was related to the gain on the
sale of product line and resulted in the Company's use of substantially all of
its available federal and state net operating loss carryforwards. At December
31, 1998, the Company had a net operating loss carryforward for federal income
tax return purposes of approximately $800,000. The Company's income tax
provision of $10,000 in 1997 was after utilization of its federal and state net
operating losses.

NET INCOME (LOSS)

INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------- ---------- ------ ---------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net Income (loss)........................ $20,051 1,217% $1,522 531% $ (353)
Net Income (loss) per share.............. $ 4.23 1,222% $ 0.32 500% $(0.08)

The Company had net income of $20,051,000 in 1998 compared to net income of
$1,522,000 in 1997. Net income for 1998 includes a $18,978,000 gain net of
income taxes ($1,500,000) primarily from the Sale. Net income for 1998,
exclusive of the net gain from the sale of product line was $1,073,000 and
reflects increased operating margins. Net income for 1997 resulted in part from
increased operating margins and in part from gains from early termination of
capital leases and sale of assets.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and cash equivalents of $11,114,000 at December 31,
1998 compared to $17,000 at December 31, 1997. The Company's cash position
increased $11,097,000 due primarily to the proceeds from the Sale. An additional
$1,000,000 is restricted until April 15, 1999 under the terms of the Sale. The
$1,000,000 related to the Sale is included under restricted cash.

Restricted cash of $2,226,000 at December 31, 1998 and $651,000 at December
31, 1997 reflects cash that may only be used for the operations of GK Financing,
LLC and amounts previously described as restricted under terms of the Sale. The
1998 increase in restricted cash of $1,575,000 is due to the $1,000,000 related
to the Sale and cash flow from Gamma Knife operations.

The Sale resulted in the Company receiving approximately $13,500,000 in
cash and the Purchaser assuming $27,100,000 of debt and other liabilities. The
Company estimates that after transaction costs and income taxes, it will retain
approximately $10,000,000 in cash.

15
17

The Sale has resulted in the Company having shareholders' equity of
approximately $11,100,000, working capital of approximately $9,100,000 and total
assets of $26,919,000 as of December 31, 1998 compared to a net capital
deficiency of approximately $9,000,000, a working capital deficit of
approximately $8,000,000 and total assets of $30,209,000 at December 31, 1997.

The Company intends to invest its cash in overnight repurchase agreements
and commercial paper 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 1999.

SUBSEQUENT EVENTS

In 1995, the Company completed a major restructuring of its medical
equipment leases and senior subordinated notes. As part of the restructuring,
the Company issued (a) warrants to acquire 225,000 common shares for $0.01 per
share to its equipment lessor and (b) 1,193,000 common shares and warrants to
acquire 314,000 common shares for $0.75 per share to the holders of
approximately 96% of the senior subordinated notes.

As part of the Sale, the Company re-acquired from its equipment lessor
225,000 common shares for cash consideration of $2,250.

On March 8, 1999, the Company completed the repurchase of substantially all
of its remaining securities owned by two major holders who acquired them in the
Company's 1995 restructuring. Repurchases were made directly from the holders.

The repurchased securities include shares of the Company's common stock,
and warrants to acquire additional shares of common stock. The repurchased
securities represented approximately 12.6% of the Company's issued and
outstanding common shares and about 12.6% of its fully diluted outstanding
shares. The aggregate repurchase price paid by the Company was approximately
$702,000.

Following the repurchases, the Company has 5,929,508 fully diluted shares
outstanding, including 3,972,372 issued and outstanding common shares, 29,107
common shares reserved for warrants and 1,922,200 common shares reserved for
options.

On March 22, 1999, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock from time to time in the
open market at prevailing prices.

On March 22, 1999, the Company adopted a Shareholder Rights Plan ("Plan").
Under the Plan, the Company will make 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.

Prior to the date upon which the Rights would become exercisable under the
Plan, the Company's outstanding stock certificates will represent both the
shares of the Company's common stock and the Rights, and the Rights will trade
only with the shares of common stock.

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 may redeem the Rights at $0.01 per Right at the direction of
the Board prior to the earlier of ten days after the public announcement that
there is an acquiring person and the expiration of the Plan. The Rights will
expire in 10 years unless redeemed earlier or exchanged by the Company.

IMPACT OF INFLATION AND CHANGING PRICES

The Company does not believe inflation has had a significant impact on
operations, because most of its customer contracts included a cost of living
price adjustment provision, or whose costs were primarily fixed at the date of
commencement. The Company believes these factors will be sufficient to offset
the impact of any future inflation on the Company's costs of operation.

16
18

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

The Company on December 14, 1998 engaged Grant Thornton, LLP as its
independent accountant to audit the Company's financial statements for the year
ended December 31, 1998. The Company and Grant Thornton, LLP have a long
established relationship as Grant Thornton has served as the Company's tax
advisor since 1990.

In light of its engagement of Grant Thornton, the Company will no longer
engage Ernst & Young, LLP to audit the Company's financial statements. Ernst &
Young had served as the Company's auditor since 1983.

The Company, during its two prior fiscal years (1997 and 1996) and any
subsequent interim period preceding its change of independent accountant, did
not have any disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

The Company did not have any disagreement with Grant Thornton on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure on the audit of 1998 financial statements.

17
19

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 1999 Annual Meeting of
Shareholders (the "1999 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.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the 1999 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference from the 1999 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the 1999 Proxy Statement.

18
20

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(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 Operations
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.

CONSENT OF INDEPENDENT AUDITORS

(b) EXHIBITS.

The following Exhibits are filed with this Report.

EXHIBIT
NUMBER DESCRIPTION
------- -----------

2.1 Securities Purchase Agreement, dated as of March 12, 1998,
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 for 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)
10.1 The Company's 1984 Stock Option Plan, as amended.(5)
10.2 The Company's 1995 Stock Option Plan, as amended.(6)
10.3 Form of Indemnification Agreement between American Shared
Hospital Services and members of its Board of Directors.(5)
10.4 Ernest A. Bates Stock Option Agreement dated as of August
15, 1995.(7)
10.5 Operating Agreement for GK Financing, LLC, dated as of
October 17, 1995.(3)
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.(4)
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, 1998 ("Fourth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.

19
21

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995.
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995.
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).
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.)
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.)
10.12 Amendment Number Two dated as of February 6, 1998 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 the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)
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.)
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.

20
22

EXHIBIT
NUMBER DESCRIPTION
------- -----------

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.)
10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of December 1, 1998 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.)
10.18 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.)
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.)
21. Subsidiaries of American Shared Hospital Services.
23.1 Consent of Grant Thornton, LLP.
23.2 Consent of Ernst & Young, LLP.
27. Financial Data Schedule for the year ended December 31,
1998.

- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for 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 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.

(5) 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.

(6) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.

(7) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.

21
23

(c) REPORTS ON FORM 8-K:

The Company filed the following reports on Form 8-K during the quarter
ended December 31, 1998:

(i) Report on Form 8-K dated November 13, 1998 reporting shareholder
approval and closing of the Sale.

(ii) Report on Form 8-K dated December 14, 1998 reporting a change in
the Company's independent auditor.

22
24

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 29, 1999 By: /s/ ERNEST A. BATES
------------------------------------
Ernest A. Bates
Chairman 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
--------- ----- ----

/s/ ERNEST A. BATES Chief Executive Officer and March 29, 1999
- --------------------------------------------------- Chairman of the Board
Ernest A. Bates

/s/ WILLIE R. BARNES Director and Secretary March 29, 1999
- ---------------------------------------------------
Willie R. Barnes

/s/ JOHN F. RUFFLE Director March 29, 1999
- ---------------------------------------------------
John F. Ruffle

/s/ STANLEY S. TROTMAN, JR. Director March 29, 1999
- ---------------------------------------------------
Stanley S. Trotman, Jr.

/s/ AUGUSTUS A. WHITE, III Director March 29, 1999
- ---------------------------------------------------
Augustus A. White, III

/s/ CHARLES B. WILSON Director March 29, 1999
- ---------------------------------------------------
Charles B. Wilson

/s/ CRAIG K. TAGAWA Chief Operating Officer and March 29, 1999
- --------------------------------------------------- Chief Financial Officer
Craig K. Tagawa (Principal Accounting Officer)

23
25

CONSOLIDATED FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

AMERICAN SHARED HOSPITAL SERVICES

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
26

CONTENTS

PAGE
----

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS............................................ F-3
STATEMENTS OF OPERATIONS.................................. F-4
STATEMENT OF SHAREHOLDERS' EQUITY......................... F-5
STATEMENTS OF CASH FLOWS.................................. F-6
NOTES TO FINANCIAL STATEMENTS............................. F-7

F-1
27

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders
American Shared Hospital Services

We have audited the accompanying consolidated balance sheet of American
Shared Hospital Services as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides 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, 1998, and the consolidated
results of their operations and consolidated cash flows for the year then ended
in conformity with generally accepted accounting principles.

We have also audited Schedule II for the year ended December 31, 1998. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.

GRANT THORNTON LLP
/s/ Grant Thornton LLP

San Francisco, California
March 12, 1999

F-2
28

AMERICAN SHARED HOSPITAL SERVICES

CONSOLIDATED BALANCE SHEETS

ASSETS

DECEMBER 31
---------------------------
1998 1997
----------- ------------

CURRENT ASSETS
Cash and cash equivalents................................. $11,114,000 $ 17,000
Restricted cash........................................... 2,226,000 651,000
Receivables, less allowance for uncollectible accounts of
$0 ($1,302,000 in 1997):
Trade accounts receivable............................ 1,228,000 6,658,000
Other................................................ 104,000 472,000
----------- ------------
1,332,000 7,130,000
Prepaid expenses, inventories and other current assets.... 285,000 708,000
----------- ------------
Total current assets.............................. 14,957,000 8,506,000
PROPERTY AND EQUIPMENT
Land and building......................................... 247,000 1,572,000
Medical, transportation, and office equipment............. 15,447,000 12,202,000
Capitalized leased medical, transportation, and office
equipment.............................................. 83,000 26,410,000
Deposits and construction in progress..................... 1,079,000 1,901,000
----------- ------------
16,856,000 42,085,000
Accumulated depreciation and amortization................. (5,097,000) (21,983,000)
----------- ------------
Net property and equipment........................ 11,759,000 20,102,000
OTHER ASSETS................................................ 183,000 563,000
INTANGIBLE ASSETS, less accumulated amortization of $30,000
($1,529,000 in 1997)...................................... 20,000 1,038,000
----------- ------------
$26,919,000 $ 30,209,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 338,000 $ 3,693,000
Accrued interest.......................................... 54,000 32,000
Employee compensation and benefits........................ 814,000 1,050,000
Other accrued liabilities................................. 519,000 841,000
Income tax payable........................................ 1,664,000 --
Current portion of accrued exit costs..................... 595,000 --
Current portion of long-term debt......................... 1,873,000 4,784,000
Current portion of obligations under capital leases....... 12,000 6,145,000
----------- ------------
Total current liabilities......................... 5,869,000 16,545,000
LONG-TERM DEBT, less current portion........................ 8,792,000 11,936,000
OBLIGATIONS UNDER CAPITAL LEASES, less current portion...... 31,000 9,633,000
ACCRUED EXIT COSTS, less current portion.................... 400,000 --
DEFERRED GAIN ON EARLY LEASE TERMINATION.................... -- 296,000
DEFERRED INCOME TAXES....................................... -- 164,000
MINORITY INTEREST........................................... 731,000 588,000
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Common stock,
$0 par value Authorized -- 10,000,000 shares Issued and
outstanding shares -- 4,544,000 in 1998 and 4,769,000 in
1997...................................................... 11,087,000 11,089,000
Common stock options issued to officer.................... 2,414,000 2,414,000
Additional paid-in capital................................ 930,000 930,000
Accumulated deficit....................................... (3,335,000) (23,386,000)
----------- ------------
Total shareholders' equity (net capital
deficiency)..................................... 11,096,000 (8,953,000)
----------- ------------
$26,919,000 $ 30,209,000
=========== ============

The accompanying notes are an integral part of these statements.
F-3
29

AMERICAN SHARED HOSPITAL SERVICES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------

REVENUES:
Medical services.................................. $35,162,000 $37,172,000 $36,989,000
COSTS AND EXPENSES:
Costs of operations:
Medical services payroll.......................... 7,087,000 7,533,000 7,312,000
Maintenance and supplies.......................... 5,184,000 5,959,000 6,698,000
Depreciation...................................... 5,556,000 6,398,000 6,631,000
Equipment rental.................................. 4,064,000 2,686,000 3,449,000
Other............................................. 3,935,000 4,468,000 3,981,000
Selling and administrative........................ 5,116,000 5,901,000 5,309,000
Interest.......................................... 3,186,000 3,671,000 4,199,000
----------- ----------- -----------
Total costs and expenses.................. 34,128,000 36,616,000 37,579,000
----------- ----------- -----------
1,034,000 556,000 (590,000)
(Loss) gain on sale of assets and early
termination of capital leases.................. (2,000) 821,000 3,000
Gain on sale of product line...................... 20,478,000 -- --
Interest and other income......................... 54,000 155,000 227,000
----------- ----------- -----------
Income (loss) before income taxes................. 21,564,000 1,532,000 (360,000)
Income tax expense (benefit)...................... 1,513,000 10,000 (7,000)
----------- ----------- -----------
Net income (loss)................................. $20,051,000 $ 1,522,000 $ (353,000)
=========== =========== ===========
Earnings (loss) per common share:
Earnings (loss) per common share -- basic........... $ 4.23 $ 0.32 $ (0.08)
=========== =========== ===========
Earnings (loss) per common share -- assuming
dilution.......................................... $ 3.15 $ 0.24 $ (0.08)
=========== =========== ===========

The accompanying notes are an integral part of these statements.
F-4
30

AMERICAN SHARED HOSPITAL SERVICES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998

COMMON
STOCK
OPTIONS ADDITIONAL
COMMON COMMON ISSUED TO PAID-IN ACCUMULATED
SHARES STOCK OFFICERS CAPITAL DEFICIT TOTAL
--------- ----------- ---------- ---------- ------------ ------------

Balances at December
31, 1995............. 4,244,000 $10,635,000 $2,414,000 $930,000 $(24,555,000) $(10,576,000)
Exercise of warrants
to purchase
225,000 shares of
common stock...... 225,000 2,000 -- -- -- 2,000
Issuance of common
stock to
noteholders....... 287,000 430,000 -- -- -- 430,000
Issuance of common
stock to Board
members........... 13,000 22,000 -- -- -- 22,000
Net loss............. -- -- -- -- (353,000) (353,000)
--------- ----------- ---------- -------- ------------ ------------
Balances at December
31, 1996............. 4,769,000 11,089,000 2,414,000 930,000 (24,908,000) (10,475,000)
Net income........... -- -- -- -- 1,522,000 1,522,000
--------- ----------- ---------- -------- ------------ ------------
Balances at December
31, 1997............. 4,769,000 11,089,000 2,414,000 930,000 (23,386,000) (8,953,000)
Repurchase of Common
Stock............. (225,000) (2,000) -- -- -- (2,000)
Net income........... -- -- -- -- 20,051,000 20,051,000
--------- ----------- ---------- -------- ------------ ------------
Balances at December
31, 1998............. 4,544,000 $11,087,000 $2,414,000 $930,000 $ (3,335,000) $ 11,096,000
========= =========== ========== ======== ============ ============

The accompanying notes are an integral part of this statement.
F-5
31

AMERICAN SHARED HOSPITAL SERVICES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -----------

OPERATING ACTIVITIES
Net income (loss)......................................... $ 20,051,000 $ 1,522,000 $ (353,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of product line............................ (20,478,000) -- --
Loss (gain) on sale of equipment........................ 2,000 (270,000) (3,000)
Gain on early termination of capital leases............. -- (551,000) --
Depreciation and amortization........................... 6,095,000 6,752,000 6,978,000
Deferred income tax benefit............................. (164,000) -- --
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash.................... (1,575,000) (433,000) 275,000
Decrease in receivables................................... (154,000) (582,000) (95,000)
(Increase) decrease in prepaid expenses, inventories and
other assets............................................ 187,000 (10,000) 493,000
Increase in accounts payable, accrued liabilities and
income taxes payable.................................... 3,767,000 843,000 1,563,000
------------ ----------- -----------
Net cash provided by operating activities................... 7,731,000 7,271,000 8,858,000
INVESTING ACTIVITIES
Deposits made to purchase Gamma Knives...................... -- -- (500,000)
Proceeds from sale of product line, net of selling costs.... 12,240,000 -- --
Proceeds from sale and disposition of equipment............. 4,000 331,000 70,000
Increase (decrease) in minority interest.................... 143,000 (37,000) 442,000
Payment for purchase of property and equipment.............. (746,000) (349,000) (293,000)
Distributions received from partnerships.................... -- -- 15,000
Other....................................................... -- (168,000) (84,000)
------------ ----------- -----------
Net cash provided by (used in) investing activities......... 11,641,000 (223,000) (350,000)
FINANCING ACTIVITIES
Principal payments on long-term debt and obligations under
capital leases............................................ (8,291,000) (8,962,000) (8,226,000)
Proceeds from issuance of long-term debt.................... 855,000 -- --
Payment for exercise of warrants............................ -- -- 2,000
Net (payments on) proceeds from revolving line of credit.... (837,000) 1,563,000 (8,000)
Payment for repurchase of senior subordinated notes......... -- -- (360,000)
Repurchase of common stock.................................. (2,000) -- --
------------ ----------- -----------
Net cash used in financing activities....................... (8,275,000) (7,399,000) (8,592,000)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 11,097,000 (351,000) (84,000)
Cash and cash equivalents at beginning of year.............. 17,000 368,000 452,000
------------ ----------- -----------
Cash and cash equivalents at end of year.................... $ 11,114,000 $ 17,000 $ 368,000
============ =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid............................................... $ 3,163,000 $ 3,689,000 $ 4,320,000
============ =========== ===========
Income taxes paid........................................... $ 36,000 $ 29,000 $ 31,000
============ =========== ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment with lease/debt financing.......... $ 6,952,000 $ 3,999,000 $ 9,996,000
(Decrease) increase in medical and capitalized lease
equipment due to lease restructuring...................... -- (1,137,000) (1,461,000)
(Decrease) increase in capitalized lease obligations due to
lease restructuring....................................... -- (2,036,000) (1,461,000)
Accrued interest payable not paid as part of Senior
Subordinated Notes Repurchase............................. -- -- 17,000
Stock and warrants issued to noteholders as part of Senior
Subordinated Notes Repurchase............................. -- -- 430,000
Noncash portion of Senior Subordinated Notes redemption..... -- -- 413,000
Note receivable from officer added to basis of acquired
asset..................................................... -- -- 248,000
Accounts payable converted to notes......................... -- 817,000 1,971,000
Net liabilities, primarily trade accounts receivable and
payable, property and equipment, capital lease
obligations, and long-term debt, assumed by buyer in sale
of product line........................................... 9,808,000 -- --

The accompanying notes are an integral part of these statements.
F-6
32

AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996

NOTE A -- BUSINESS AND BASIS OF PRESENTATION

1. Business

American Shared Hospital Services (the "Company") provides Gamma Knife
units to five medical centers in California, Texas, and Connecticut. The Company
provided shared diagnostic imaging services to health care providers located in
various geographic regions of the United States through November of 1998. The
five diagnostic imaging services provided by the Company were Magnetic Resonance
Imaging, Computed Axial Topography Scanning, Ultrasound, Nuclear Medicine, and
Cardiac Catheterization Laboratory services. On November 13, 1998, the
diagnostic imaging services product line was sold to a third party.

In June 1995, African American Church Health and Economic Services, Inc.
(ACHES) and ACHES Insurance Services, Inc. ("AIS") were incorporated. AIS is a
wholly owned subsidiary of ACHES. AIS is an insurance agency qualified to sell
life, health, and disability insurance in the states of California and New York.
ACHES, through AIS, sells life, health and disability insurance primarily to the
African-American Community.

On October 17, 1995, 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 which formed GK Financing, LLC ("GKF"). GKF
provides alternative financing of Elekta Gamma Knife units and is the preferred
provider for Elekta AB of financing arrangements, such as fee-for-service lease
arrangements with health care institutions in the United States and Brazil.

The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, CuraCare, Inc. ("CuraCare"), MMRI, Inc., European
Shared Medical Services Ltd., ACHES and its wholly-owned subsidiary, AIS, and
ASRS and its majority-owned subsidiary, GK Financing, LLC. The stock of CuraCare
was sold on November 13, 1998 in conjunction with the sale of the diagnostic
imaging services product line.

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

NOTE B -- ACCOUNTING POLICIES

1. Use of Estimates in the Preparation of Financial Statements

In preparing financial statements in conformity with generally accepted
accounting principles, 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.

2. 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. The Company
maintains its cash in depository institutions which offer varying levels of
federal insurance. Restricted cash is not considered a cash equivalent for
purposes of the consolidated statements of cash flows.

3. Restricted Cash

Restricted cash represents cash limited as to use by contractual
arrangement. Of the restricted cash held at December 31, 1998, $1,000,000 is
restricted until April 15, 1999 to satisfy covenants of the securities
F-7
33
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

purchase agreement between American Shared Hospital Services and buyer in
conjunction with the sale of diagnostic imaging services product line. The
remaining restricted cash reflects cash that may only be used for the operations
of GK Financing, LLC.

4. Accounts Receivable

Subsequent to November, 1998, substantially all of the Company's revenue is
provided by five customers. These customers constitute accounts receivable at
December 31, 1998. The Company performs credit evaluations of its customers and
generally does not require collateral. At December 31, 1998, the Company did not
maintain an allowance for doubtful accounts because management believes that
accounts receivable are fully collectible.

5. Accounting for Majority-Owned Subsidiary

The Company accounts for GK Financing, LLC (GKF), as a consolidated entity
due to its 81% majority-equity interest. The minority interest's 19% share of
GKF's earnings (loss) is netted against "Interest and Other Income" in the
consolidated statements of operations.

6. Inventories

Inventories, which consist of minor medical equipment and supplies used in
the Company's business, are valued at the lower of cost or market, using a
valuation method which approximates FIFO (first-in, first-out).

7. Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is determined using the straight-line method over the
estimated useful lives of the assets which for medical and transportation
equipment is generally 2 - 10 years.

Through November of 1998, capitalized leased equipment consisted primarily
of mobile Magnetic Resonance Imaging ("MRI") units, which include scanners and
mobile vans. Following the sale of the diagnostic imaging services product line,
leased equipment consists primarily of office equipment. Capitalized leased
equipment is amortized over the term of the lease, which ranges from 24 to 96
months. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life.

8. Operating Leases

The Company leases Gamma Knife equipment to its customers under
arrangements accounted for as operating leases. Revenue is provided for and
recognized on a fee-for-service or contingent rental basis when the service is
delivered. The lease agreements are generally over ten year terms. At December
31, 1998, the Company held equipment under operating lease contracts with
customers with an original cost of $15,447,000 and accumulated depreciation of
$4,531,000.

9. Intangible Assets

Intangible assets represent the excess of cost of net assets acquired as
the result of the acquisition of businesses and organization costs related to
the initiation of new businesses. Intangible assets are being amortized by the
straight-line method over 5 to 15 years. The Company annually assesses the
recoverability of these intangible assets by determining whether the
amortization of the intangible balance (for each business acquisition) over its
remaining life can be recovered through forecasted future operations using an
undiscounted cash flow methodology.

F-8
34
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

10. Income Taxes

The liability method is used to account 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.

11. Earnings Per Share

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements.

Basic earnings per share has been computed based on the weighted-average
number of common shares outstanding. The Company incurred a net loss for 1996,
therefore, the incremental shares that arise as a result of the stock options
and warrants outstanding are antidilutive as they reduce the loss per share.

The following table sets forth the computation of basic and diluted
earnings (loss) per share:

1998 1997 1996
----------- ---------- ----------

Numerator for basic and diluted earnings (loss) per
share............................................... $20,051,000 $1,522,000 $ (353,000)
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares.......................... 4,735,000 4,769,000 4,498,000
Effect of dilutive securities Employee stock
options/warrants................................. 1,631,000 1,574,000 --
----------- ---------- ----------
Denominator for diluted earnings (loss) per share --
adjusted weighted-average shares................. 6,367,000 6,343,000 4,498,000
=========== ========== ==========
Earning (loss) per share -- basic..................... $ 4.23 $ 0.32 $ (0.08)
=========== ========== ==========
Earning (loss) per share -- assuming dilution......... $ 3.15 $ 0.24 $ (0.08)
=========== ========== ==========

12. Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock. Disclosure
requirements in accordance with SFAS No. 123 are included in Note F.

13. Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable, and other
accrued liabilities approximated their fair value as of December 31, 1998
because of the relatively short maturity of these instruments. The carrying
amounts of the

F-9
35
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

Company's various debt obligations approximated fair value as of December 31,
1998 based upon interest rates that are currently available for the Company for
issuance of instruments with similar terms and remaining maturities. In 1997
management was unable, without incurring excessive costs, to estimate its
incremental borrowing rate, and considered estimation of fair value to be
impracticable.

NOTE C -- OTHER ASSETS

Other assets consist of the following:

1998 1997
-------- --------

Capitalized regulatory licensing fees....................... $ -- $110,000
Prepaid commissions......................................... -- 114,000
Purchased software, less accumulated amortization of
$211,000 and $424,000 in 1998 and 1997, respectively...... -- 50,000
Other deferred charges...................................... 183,000 289,000
-------- --------
$183,000 $563,000
======== ========

NOTE D -- LONG-TERM DEBT

Long-term debt consists of the following:

1998 1997
----------- -----------

Notes Issued in Conjunction with Lease Restructuring
Promissory note payable to primary provider of medical
equipment bearing interest at 5% (effective February
1996) and 4% during 1995, payable in 86 monthly
installments maturing in February 2002, secured by the
Company's accounts receivable and certain medical
equipment............................................... $ -- $ 1,505,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.75%, payable in 60
monthly installments with the remaining balance due in
January 2002............................................ -- 1,341,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 60
monthly installments maturing in February 2000.......... -- 248,000
Promissory note payable to primary provider of medical
equipment bearing interest at 10.75%, payable in 36
monthly installments with the remaining balance due in
January 2000............................................ -- 104,000
Borrowings for Repurchase of Senior Subordinated Notes
Borrowings under $5.5 million Revolving Line of Credit
bearing interest at prime rate plus 3.75% (12.25% at
December 31, 1997) for repurchase of Senior Subordinated
Notes maturing in May 1999.............................. -- 5,438,000
Borrowings under Term Loan for repurchase of Senior
subordinated Notes bearing interest at 15%, payable in
48 monthly installments maturing in June 1999........... -- 1,066,000
Gamma Knife loan payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 40
monthly installments maturing in September 1998......... -- 346,000
Other Notes and Borrowings
Gamma Knife loan payable to primary provider of medical
equipment bearing interest at 10.5%, payable in 60
monthly installments maturing in July 1999,
collateralized by equipment............................. 440,000 1,128,000

F-10
36
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

1998 1997
----------- -----------

Promissory note payable, bearing interest at prime rate
plus 2%, due October, 1998.............................. -- 550,000
Borrowings under term loan bearing interest at 10.6%,
payable in 84 monthly installments maturing in September
2004, collateralized by equipment....................... 2,044,000 2,271,000
Installment notes payable in monthly installments through
March 2003, bearing interest at 9.9% to 22%, secured by
certain medical equipment............................... -- 985,000
Promissory note payable, bearing interest at 10.6%,
payable in 30 monthly installments maturing in March
2000.................................................... -- 738,000
Borrowings under term loan bearing interest at 10.6%,
payable in 84 monthly installments maturing in April
2005, collateralized by equipment....................... 2,926,000 --
Borrowings under term loan bearing interest at 10.6%,
payable in 85 monthly installments maturing in July
2005, collateralized by equipment....................... 3,073,000 --
Borrowings under term loan bearing interest at 10.7%,
payable in 84 monthly installments maturing in September
2005, collateralized by equipment....................... 1,077,000 --
Promissory note payable, bearing interest at prime rate
plus 2% (9.75% at December 1998) due in February 1999,
unsecured............................................... 330,000 --
Promissory note payable, bearing interest at prime rate
plus 2% (9.75% at December 1998) due in November 1999,
unsecured............................................... 25,000 --
Borrowings for Gamma Knife deposits under promissory note,
bearing interest at prime rate plus 2% (9.75% at
December 31, 1998) payable when Gamma Knife units
commence operation, collateralized by equipment......... 750,000 1,000,000
----------- -----------
10,665,000 16,720,000
Less current portion.................................... (1,873,000) (4,784,000)
----------- -----------
$ 8,792,000 $11,936,000
=========== ===========

Annual contracted maturities under the initial terms of long-term debt for
the five years after December 31, 1998 are as follows: $1,873,000 in 1999,
$1,318,000 in 2000, $1,422,000 in 2001, $1,579,000 in 2002, $1,754,000 in 2003
and $2,719,000 thereafter.

F-11
37
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

NOTE E -- INCOME TAXES

Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows:

1998 1997
----------- ----------

Deferred tax liabilities:
Fixed assets............................................. $(1,000,000) $ --
Other -- net............................................. -- (164,000)
----------- ----------
Total deferred tax liabilities................... (1,000,000) (164,000)
Deferred tax assets:
Net operating loss carryforwards......................... 275,000 5,300,000
State income taxes....................................... 450,000 --
Fixed assets............................................. -- 2,200,000
Accrued reserves......................................... 710,000 --
Other -- net............................................. 360,000 500,000
----------- ----------
Total deferred tax assets.................................. 1,795,000 8,000,000
Valuation allowance for deferred tax assets................ (795,000) 8,000,000
----------- ----------
Net deferred tax assets.................................... 1,000,000 --
----------- ----------
Net deferred tax liabilities............................... $ -- $ (164,000)
=========== ==========

The components of the provision (benefit) for income taxes consist of the
following:

1998 1997 1996
---------- ------- -------

Current:
Federal........................................... $ 360,000 $ -- $ --
State............................................. 1,317,000 10,000 (7,000)
---------- ------- -------
Deferred:
Federal........................................... -- -- --
State............................................. (164,000) -- --
---------- ------- -------
$1,513,000 $10,000 $(7,000)
========== ======= =======

The provision (benefit) for income taxes differs from the amount computed
by applying the U.S. federal statutory tax rate (35% in 1998, 1997 and 1996) to
income (loss) before taxes as follows:

1998 1997 1996
----------- ----------- ---------

Computed expected tax........................ $ 7,500,000 $ 536,000 $(126,000)
Change in valuation allowance................ (7,205,000) (1,600,000) (300,000)
State income taxes (benefit), net of federal
benefit.................................... 1,400,000 10,000 (7,000)
Reduction in carryovers and tax attributes... -- 984,000 323,000
Other........................................ (182,000) 80,000 103,000
----------- ----------- ---------
$ 1,513,000 $ 10,000 $ (7,000)
=========== =========== =========

At December 31, 1998 and 1997, the Company had a net operating loss
carryforward for federal income tax return purposes of approximately $800,000
and $13,000,000, respectively, which expires between 1999 and 2011. A
substantial part of this carryforward is subject to separate return limitations.
At December 31, 1997 the Company had state carryforwards of varying amounts.
These state carryforwards were utilized or expired

F-12
38
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

during 1998. 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.

NOTE F -- SHAREHOLDERS' EQUITY

1984 Stock Option Plan

Under the Company's 1984 Stock Option Plan (the "Plan"), as amended, a
total of 475,000 stock options were authorized for grant. The Plan terminated
according to its terms on March 1, 1994. Options granted pursuant to the Plan
generally had lives of 10 years from the date of grant, subject to earlier
expiration in certain cases, such as termination of the grantee's employment.

On August 15, 1995, the Stock Option Committee of the Board of Directors
approved the amendment of the terms of substantially all options outstanding
under the Company's 1984 Stock Option Plan, covering an aggregate of
approximately 165,000 shares, to reduce the initial exercise price to $1.625 per
share, which was the closing price of common shares on such date.

1995 Stock Option Plan

The Company's 1995 Stock Option Plan, providing for nonqualified stock
options and "incentive stock options," was approved by the Company's Board of
Directors on August 15, 1995, subject to shareholder approval, which was given
on October 6, 1995. Under the 1995 Plan, 330,000 common shares are reserved for
awards to officers and other key employees, non-employee directors, and
advisors. Provisions of the 1995 Stock Option 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 Company's
common stock in all Company 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.

Changes in options outstanding under the 1984 and 1995 Stock Option Plans
from January 1, 1996 to December 31, 1998 are as follows:

WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------

Balance at January 1, 1996.................................. 420,000 --
Granted................................................... 19,000 $1.634
Forfeited................................................. (22,000) 1.625
-------
Balance at December 31, 1996................................ 417,000 1.625
Granted................................................... 14,000 1.688
Exercised................................................. -- --
Forfeited................................................. (2,000) 1.596
-------
Balance at December 31, 1997................................ 429,000 1.627
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. (40,000) 1.625
-------
Balance at December 31, 1998................................ 389,000 $1.628
=======

F-13
39
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

At December 31, 1998, 43,000 options were available for grant and 7,000
shares were reserved for future issuance under the 1995 Plan.

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 the new credit facilities and for
continued employment with the Company.

The following table summarizes information about all options outstanding at
December 31, 1998:

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
- --------------- ----------- ------------ -------- ----------- --------

$ 0.01 1,495,000 6.83 $ 0.01 1,495,000 $ 0.01
1.625 - 1.6875 389,000 5.84 1.628 389,000 1.628
- --------------- ----------- ------------ -------- ----------- --------
$ .01 - 1.6875 1,884,000 6.63 $ .344 1,884,000 $ .344
=============== =========== ============ ======== =========== ========

At December 31, 1998 and 1997, 1,884,000 and 1,890,000 options,
respectively, were vested and exercisable.

At December 31, 1998, there were 314,000 warrants outstanding at an
exercise price of $.75 per warrant. These warrants are exercisable through May
2002 (see note L).

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. 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 fair value
of the Company's option grants under the 1984 and 1995 Plans was estimated
assuming no expected dividends and the following weighted-average assumptions:

1998 1997 1996
---- ---- ----

Expected life (years).................................. 9.5 9.5 9.5
Expected volatility.................................... 93.8% 93.8% 99.3%
Risk-free interest rate................................ 6.3 6.3 7.9

F-14
40
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

No options were granted during 1998. The weighted-average fair value of
options granted during 1997 and 1996 was $1.50 and $1.49, respectively. For pro
forma purposes, the estimated fair value of the Company's options is amortized
over the options' vesting period. The Company's pro forma information follows:

1998 1997 1996
----------- ---------- ---------

Net income (loss)
As reported................................. $20,051,000 $1,522,000 $(353,000)
Pro forma................................... 20,040,000 1,458,000 (387,000)
Earnings (loss) per share -- basic
As reported................................. 4.23 .32 (0.08)
Pro forma................................... 4.23 .31 (0.06)
Earnings (loss) per share -- assuming dilution
As reported................................. 3.15 .24 (0.08)
Pro forma................................... 3.15 .23 (0.06)

NOTE G -- RETIREMENT PLAN

The Company has a defined contribution retirement plan for which
substantially all full-time employees are eligible. Under the terms of the plan,
the Company may contribute a discretionary matching contribution on behalf of
each participant, determined each year by the Company, equal to a percentage of
each participant's contributions and applicable to the first 6% of each
participant's salary. The Company made no contributions to the plan in 1998,
1997 or 1996.

NOTE H -- OPERATING LEASES

The Company leases certain office equipment and space under operating
leases expiring at various dates through 2001.

Future minimum payments under noncancelable operating leases having initial
terms of more than one year consisted of the following at December 31, 1998:

1999............................ $157,000
2000............................ 40,000
2001............................ 2,000
--------
$199,000
========

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

Rent expense was $4,696,000, $3,285,000, and $3,841,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, and includes the above operating
leases as well as month-to-month rental and certain capital lease executory
costs.

NOTE I -- COMMITMENTS AND CONTINGENCIES

Under the terms of various Gamma Knife quotation agreements, the Company is
committed to purchase Gamma Knife equipment for $13,838,000 effective when the
equipment is placed in service at each customer location. At December 31, 1998,
the Company had a $1,000,000 deposit related to these purchase commitments which
is classified as construction in progress.

F-15
41
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

NOTE J -- REPORTABLE SEGMENTS

American Shared Hospital Services (ASHS) has two reportable segments:
Diagnostic Imaging Services and Gamma Knife. The Diagnostic Imaging Services
segment uses medical diagnostic imaging systems to facilitate the diagnosis of
diseases and disorders. The Gamma Knife segment treats certain vascular
malformations and intracranial tumors without surgery.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. ASHS evaluates performance based
on profit or loss from operations before income taxes not including nonrecurring
gains and losses. Applicable general and administrative expenses are allocated
to segments based on relative percentage of revenues. Certain corporate expenses
are not allocated to the segments.

ASHS does not have significant intersegment sales transactions. The
segments share common expenses and provide management activities to one another
in which they charge management fees. These management fees are not considered
significant.

ASHS's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.

REPORTABLE SEGMENT INFORMATION

1998 1997 1996
------- ------- -------
(THOUSANDS)

DIAGNOSTIC IMAGING SERVICES
Revenues.............................................. $30,993 $34,772 $34,944
Interest expense...................................... 1,770 2,571 2,972
Depreciation and Amortization......................... 4,514 5,590 5,969
Segment profit (loss)................................. 156 1,208 (192)
Segment assets........................................ -- 20,905 32,547
Other significant noncash items:
Acquisition of equipment with lease/debt
financing........................................ 820 1,767 7,701
Capitalized lease restructuring..................... -- (3,173) (2,922)
Accounts payable converted to notes payable......... -- 817 1,971
GAMMA KNIFE
Revenues.............................................. 4,156 2,384 2,030
Interest expense...................................... 773 303 327
Depreciation and Amortization......................... 1,042 808 661
Segment profit........................................ 1,115 392 305
Segment assets........................................ 15,125 7,859 5,268
Other significant noncash items:
Acquisition of equipment with lease/debt
financing........................................ 6,132 2,232 2,270

F-16
42
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

RECONCILIATION TO CONSOLIDATED AMOUNTS

1998 1997 1996
------- ------- -------
(THOUSANDS)

REVENUES
Total revenues for reportable segments...................... $35,149 $37,156 $36,974
Other revenues.............................................. 13 16 15
------- ------- -------
Total consolidated revenues............................ $35,162 $37,172 $36,989
TOTAL PROFIT FOR REPORTABLE SEGMENTS
Total profit................................................ $ 1,271 $ 1,600 $ 113
Gain on sale of product line................................ 20,478 -- --
Other....................................................... (185) (68) (473)
------- ------- -------
Income before income taxes.................................. $21,564 $ 1,532 $ (360)
ASSETS
Total assets for reportable segments........................ $15,025 $28,764 $37,815
Other assets................................................ 12,042 1,907 845
Elimination of receivables from corporate headquarters...... (148) (462) (5,691)
------- ------- -------
Consolidated total..................................... $26,919 $30,209 $32,969

OTHER SIGNIFICANT ITEMS

SEGMENT CONSOLIDATED
TOTALS ADJUSTMENTS TOTALS
------- ----------- ------------
(THOUSANDS)

1998
Interest expense.......................................... $2,543 $643 $3,186
Expenditures for assets................................... 50 5 55
Depreciation and amortization............................. 5,556 -- 5,556
1997
Interest expense.......................................... $2,874 $797 $3,671
Expenditures for assets................................... 320 26 346
Depreciation and amortization............................. 6,398 -- 6,398
1996
Interest expense.......................................... $3,299 $900 $4,199
Expenditures for assets................................... 293 -- 293
Depreciation and amortization............................. 6,631 -- 6,631

Adjustments to reconcile reportable segment totals to consolidated totals
include unallocated amounts and amounts from non-reportable segments.

MAJOR CUSTOMERS

Revenues from the Company's Gamma Knife segment were provided by five
customers in 1998, three customers in 1997 and two customers in 1996. Revenue
from the Diagnostic Imaging Services segment was provided by various customers
throughout the U.S.

NOTE K -- SALE OF PRODUCT LINE

On November 13, 1998, the Company consummated a sale of their diagnostic
imaging services product line to a third party. The diagnostic imaging services
line included Magnetic Resonance Imaging (MRI),
F-17
43
AMERICAN SHARED HOSPITAL SERVICES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996

Computed Axial Tomography Scanning (CT), Ultrasound, Nuclear Medicine and
Cardiac Catheterization Laboratory services. The Company sold the assets of this
product line for $13.5 million in cash and the assumption by the third party of
approximately $27.1 million in liabilities of the Company. The Company
recognized a gain on disposal of product line of approximately $20 million in
conjunction with this transaction.

In conjunction with the product line sale, one of the Company's facility's
which provides certain administrative and scheduling functions will be closed
during 1999. At December 31, 1998, in accordance with the Emerging Issues Task
Force (EITF) Abstract 94-3, the Company has accrued certain future exit costs
related to the sale of the product line and corresponding facility closure which
totaled $995,000 at December 31, 1998. The accrued costs include employee
compensation of $215,000, tail coverage insurance costs of $500,000, legal and
professional fees of $105,000, administrative costs of $115,000 and other costs
totaling $60,000. Insurance costs of approximately $400,000 have been classified
as long-term as they will be incurred subsequent to 1999. The accrued costs have
been included as a reduction to the gain on sale of product line in the 1998
Statement of Operations.

The revenue and net operating income or losses from the disposed diagnostic
imaging services line for fiscal years ended 1998, 1997, and 1996 are presented
at Note J.

NOTE L -- SUBSEQUENT EVENT

On March 8, 1999, the Company repurchased approximately 572,000 common
shares and approximately 285,000 warrants for an aggregate repurchase price of
approximately $702,000.

F-18
44

AMERICAN SHARED HOSPITAL SERVICES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998, 1997 AND 1996

ADDITIONS ADDITIONS
BALANCE AT CHARGED TO BALANCE AT CHARGED TO BALANCE AT
JANUARY 1, COSTS AND AMOUNTS DECEMBER 31, COSTS AND AMOUNTS DECEMBER 31,
1996 EXPENSES WRITTEN OFF 1996 EXPENSES WRITTEN OFF 1997
----------- ----------- ----------- ------------ ----------- ----------- ------------

Allowance for
uncollectible
accounts........... $(1,448,000) $(1,014,000) $1,222,000 $(1,240,000) $(1,296,000) $1,234,000 $(1,302,000)

ADDITIONS ASSUMED BY
CHARGED TO BUYER IN BALANCE AT
COST AMOUNTS PRODUCT LINE DECEMBER 31,
EXPENSES WRITTEN OFF SALE 1998
----------- ----------- ------------ ------------

Allowance for
uncollectible
accounts........... $(1,095,000) $1,031,000 $1,366,000 $ --

F-19
45

INDEX TO EXHIBITS

EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------

2.1 Securities Purchase Agreement, dated as of March 12, 1998, *
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 for 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).........................................
10.1 The Company's 1984 Stock Option Plan, as amended.(5)........ *
10.2 The Company's 1995 Stock Option Plan, as amended.(6)........ *
10.3 Form of Indemnification Agreement between American Shared *
Hospital Services and members of its Board of
Directors.(5)...............................................
10.4 Ernest A. Bates Stock Option Agreement dated as of August *
15, 1995.(7)................................................
10.5 Operating Agreement for GK Financing, LLC, dated as of *
October 17, 1995.(3)........................................
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.(4)..................................
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, 1998 ("Fourth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995............................................
10.9 Amendment dated as of March 31, 1998 ("Fifth Amendment") to
the GK Financing, LLC Operating Agreement dated as of
October 17, 1995............................................
10.10 Amendment dated as of June 5, 1998 to the GK Financing, LLC
Operating Agreement dated as of October 17, 1995............
10.11a Assignment and Assumption Agreement, dated as of December
31, 1995, between American Shared Radiosurgery Services
(assignor) and GK Financing, LLC (assignee).................
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.).................................................

46

EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------

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.)..............
10.12 Amendment Number Two dated as of February 6, 1998 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 the Securities
and Exchange Act of 1934, as amended. Omitted information
has been replaced with asterisks.)..........................
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.)..........................
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. ...............
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.).................................................

47

EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------

10.17 Addendum to Lease Agreement for a Gamma Knife Unit dated as
of December 1, 1998 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.)..........................
10.18 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.).................................................
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.).................................................
21. Subsidiaries of American Shared Hospital Services. .........
23.1 Consent of Grant Thornton, LLP. ............................
23.2 Consent of Ernst & Young, LLP. .............................
27. Financial Data Schedule for the year ended December 31,
1998. ......................................................

- ---------------
(1) These documents were filed as Exhibits 2.1 and 10.13b, respectively, to the
registrant's Annual Report on Form 10-K for 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 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.

(5) 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.

(6) This document was filed as Exhibit A to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.

(7) This document was filed as Exhibit B to registrant's Proxy Statement, filed
on August 31, 1995, which is incorporated herein by this reference.