AMERICAN SHARED HOSPITAL SERVICES - Annual Report: 2006 (Form 10-K)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

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

For The Fiscal Year Ended December 31, 2006

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

For The Transition Period From                      to                     .

Commission file number 1-08789

American Shared Hospital Services

California (State or other jurisdiction of incorporation or organization)		94-2918118 (IRS Employer Identification No.)
Four Embarcadero Center, Suite 3700, San Francisco, California (Address of Principal Executive Offices)		94111-4107 (Zip Code)

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

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

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

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

As of June 30, 2006, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $22,831,000.

Number of shares of common stock of the registrant outstanding as of March 10, 2006: 5,023,418.

Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

TABLE OF CONTENTS

		Page
PART I:
Item 1 Business			2
Item 1A Risk Factors			12
Item 2 Properties			14
Item 3 Legal Proceedings			14
Item 4 Submission of Matters to a Vote of Security Holders			15
PART II:
Item 5 Market for the Registrant’s Common Equity and Related Stockholder Matters			15
Item 6 Selected Financial Data			18
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A Quantitative and Qualitative Disclosure about Market Risk			28
Item 8 Financial Statements and Supplementary Data			28
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			28
Item 9A Controls and Procedures			28
Item 9B Other Information			29
PART III:
Item 10 Directors, Executive Officers and Corporate Governance			29
Item 11 Executive Compensation			30
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			30
Item 13 Certain Relationships and Related Transactions, and Director Independence			30
Item 14 Principal Accountant Fees and Services			30
PART IV:
Item 15 Exhibits and Financial Statement Schedules			30
EXHIBIT 10.45A
EXHIBIT 10.51
EXHIBIT 10.52
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31(a)
EXHIBIT 31(b)
EXHIBIT 32

PART I

ITEM 1.

BUSINESS

GENERAL

American Shared Hospital Services (“ASHS” and, together with its subsidiaries, the “Company”) provides Gamma Knife stereotactic radiosurgery services to twenty-one (21) medical centers in eighteen (18) states. The Company provides these services through its 81% indirect interest in GK Financing, LLC, a California limited liability company (“GKF”). The remaining 19% of GKF is owned by GKV Investments, Inc., a wholly owned U.S. subsidiary of Elekta AG, a Swedish company (“Elekta”). Elekta is the manufacturer of the Leksell Gamma Knifeâ (the “Gamma Knife”). GKF is a non-exclusive provider of alternative financing services for Elekta Gamma Knife units in the United States and Brazil. Gamma Knife services accounted for 100% of the Company’s revenue in 2006.

In April 2006, the Company invested $2,000,000 for a minority equity interest in Still River Systems, Inc. (“Still River”), a development-stage company based in Littleton, Massachusetts, which in collaboration with scientists from MIT’s Plasma Science and Fusion Center, is developing a medical device for the treatment of cancer patients using proton beam radiation therapy (PBRT). The Company has spent an additional $2,000,000 for the right to purchase two Clinatron 250™ PBRT systems from Still River for anticipated delivery in 2009. The Still River PBRT systems are not currently FDA approved.

The Company is also currently in the process of installing an Image Guided Radiation Therapy (IGRT) system and related equipment at one of its existing Gamma Knife sites which is expected to become operational in late 2007.

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

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

GAMMA KNIFE OPERATIONS

Gamma Knife stereotactic radiosurgery, a non-invasive procedure, is an alternative to conventional brain surgery or can be an adjunct to conventional brain surgery. Compared to conventional surgery, Gamma Knife surgery usually involves shorter patient hospitalization, lower risk of complications and can be provided at a lower cost. Typically, Gamma Knife patients resume their pre-surgical activities one or two days after treatment. The Gamma Knife treats patients with 201 single doses of gamma rays that are focused with great precision on

small and medium size, well circumscribed and critically located structures in the brain. During 2006 Elekta introduced a new Gamma Knife model, the Perfexion™ unit (“Perfexion”), which treats patients with 192 single doses of gamma rays and also provides the ability to perform procedures on areas of the cervical spine. The Gamma Knife delivers the concentrated dose of gamma rays from Cobalt-60 sources housed in the Gamma Knife. The Cobalt-60 sources converge at the target area and deliver a dose that is high enough to destroy the diseased tissue without damaging surrounding healthy tissue.

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

As of December 31, 2006, the Company estimates that there were 111 Gamma Knife sites in the United States and 248 units in operation worldwide. An estimated percentage breakdown of Gamma Knife procedures performed in the U.S. by indications treated is as follows: malignant (45%) and benign (29%) brain tumors, functional disorders (15%) and vascular disorders (11%).

The Company, as of March 9, 2007, has twenty-one (21) Gamma Knife units operating at twenty-one (21) sites in the United States. The Company’s first Gamma Knife commenced operation in September 1991. The Company’s Gamma Knife units performed approximately 2,600 procedures in 2006 for a cumulative total of approximately 17,000 procedures through December 31, 2006.

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

Year Ended		Total Gamma Knife				Gamma Knife/
December 31,		Revenue (in thousands)				Total Revenue
2006		$	20,385				100.0	%
2005		$	18,231				100.0	%
2004		$	16,389				100.0	%
2003		$	16,178				100.0	%
2002		$	13,366				100.0	%

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

GKF’s profits and/or losses and any cash distributions are allocated based on membership interests. GKF’s Operating Agreement requires that it have a cash reserve of at least $50,000 before cash distributions are made to its members. From inception to December 31, 2006, GKF has distributed $20,412,000 to the Company and $4,788,000 to the minority partner.

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

CUSTOMERS

The Company’s current business is the outsourcing of Gamma Knife stereotactic radiosurgery services. The Company typically provides the Gamma Knife equipment, as well as planning, installation, reimbursement and marketing support services. The majority of the Company’s customers pay the Company on a fee per use basis. The market for these services primarily consists of major urban medical centers. The Gamma Knife business is capital intensive. The total cost of a Gamma Knife facility usually ranges from $3 million to $5.5 million, including equipment, site construction and installation. The Company pays for the Gamma Knife and the medical center generally pays for site and installation costs. The following is a listing of the Company’s current sites as of March 9, 2007:

Customer

Original Term

Year Contract

Existing sites

of Contract

Began

Basis of Payment

UCSF Medical Center

10 years

1991

Fee per use

San Francisco, California

Hoag Memorial Hospital Presbyterian

10 years

1997

Fee per use

Newport Beach, California

Southwest Texas Methodist Hospital

10 years

1998

Fee per use

San Antonio, Texas

Yale New Haven Ambulatory Services Corporation

10 years

1998

Fee per use

New Haven, Connecticut

Kettering Medical Center

10 years

1999

Fee per use

Kettering, Ohio

New England Medical Center

10 years

1999

Fee per use

Boston, Massachusetts

University of Arkansas for Medical Sciences

15 years

1999

Revenue sharing

Little Rock, Arkansas

Froedtert Memorial Lutheran Hospital

10 years

1999

Fee per use

Milwaukee, Wisconsin

JFK Medical Center

10 years

2000

Fee per use

Edison, New Jersey

Sunrise Hospital and Medical Center

10 years

2001

Fee per use

Las Vegas, Nevada

Central Mississippi Medical Center

10 years

2001

Fee per use

Jackson, Mississippi

OSF Saint Francis Medical Center

10 years

2001

Fee per use

Peoria, Illinois

Bayfront Medical Center

10 years

2002

Fee per use

St. Petersburg, Florida

Mercy Medical Center

10 years

2002

Fee per use

Rockville Center, New York

The Johns Hopkins Hospital

10 years

2003

Revenue Sharing

Baltimore, Maryland

Baptist Medical Center

8 years

2003

Revenue Sharing

Jacksonville, Florida

Albuquerque Regional Medical Center

10 years

2003

Fee per use

Albuquerque, New Mexico

Lehigh Valley Hospital

10 years

2004

Fee per use

Allentown, Pennsylvania

Baptist Hospital of East Tennessee

10 years

2005

Revenue Sharing

Knoxville, Tennessee

Northern Westchester Hospital

10 years

2005

Fee per use

Mt. Kisco, New York

Mercy Health Center

10 years

2005

Revenue Sharing

Oklahoma City, Oklahoma

The Company currently has no Gamma Knife sites under development, but has a contract to provide IGRT and related equipment services to an existing Gamma Knife customer under a revenue sharing agreement. This site is expected to begin operation in late 2007. One of the Company’s existing Gamma Knife contracts is scheduled to terminate in fall 2007 at the end of its term. Another contract is scheduled to terminate in early 2008 at the end of its term.

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

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

One customer accounted for approximately 13% of the Company’s revenue in 2006. No one individual customer accounted for more than 10% of the Company’s revenue in either 2005 or 2004.

MARKETING

The Company markets its services through its preferred provider status with Elekta and a direct sales effort. From April 2003 to March 2004, the direct sales effort was executed by the Company’s Chief Executive and Chief Operating Officers. Since March 2004, the Company has had a Director of Sales to lead the direct sales effort, and in January 2007 the Company hired a Vice President of Sales and Business Development. 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 otherwise required to purchase and/or finance the Gamma Knife to other projects.

§		The medical center avoids the risk of Gamma Knife under-utilization. The Company does not have minimum volume requirements. The medical center pays the Company only for each Gamma Knife procedure performed on a patient.
§		The medical center transfers the risk of technological obsolescence to the Company. The medical center and its physicians are not under any obligation to utilize technologically obsolete equipment.
§		The Company provides planning, installation, operating and marketing assistance and support to its Gamma Knife customers.

FINANCING

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

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

COMPETITION

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

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

GOVERNMENT REGULATION

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

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

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

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

The Gamma Knife APC rate is modified periodically but the total reimbursement amount has remained fairly constant. However, effective January 1, 2007 the Medicare outpatient reimbursement rate for Gamma Knife procedures was increased approximately 24% compared to the 2006 rate of reimbursement. On January 1, 2006 this rate was increased approximately 28% compared to the 2005 rate. The Company has four contracts from which its revenue is directly affected by changes in payment rates under the APC system.

The payment of remuneration to induce the referral of health care business has been a subject of increasing governmental and regulatory focus in recent years. Section 1128B(b) of the Social Security Act (sometimes referred to as the “federal anti-kickback statute”) provides criminal penalties for individuals or entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services for which payment may be made under the Medicare and Medicaid programs and certain other government funded programs. The Social Security Act provides authority to the Office of Inspector General through civil proceedings to exclude an individual or entity from participation in the Medicare and state health programs if it is determined any such party has violated Section 1128B(b) of the Social Security

Act. The Company believes that it is in compliance with the federal anti-kickback statute. Additionally, the Omnibus Budget Reconciliation Act of 1993, often referred to as “Stark II”, bans physician self-referrals to providers of designated health services with which the physician has a financial relationship. The term “designated health services” includes, among others, radiation therapy services and in-patient and out-patient hospital services. On January 1, 1995, the Physician Ownership and Referral Act of 1993 became effective in California. This legislation prohibits physician self-referrals for covered goods and services, including radiation oncology, if the physician (or the physician’s immediate family) concurrently has a financial interest in the entity receiving the referral. The Company believes that it is in compliance with these rules and regulations.

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

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

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

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

INSURANCE AND INDEMNIFICATION

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

The Company’s customer contracts generally contain mutual indemnification provisions. The Company maintains general and professional liability insurance. The Company is not involved

in the practice of medicine and therefore believes its present insurance coverage and indemnification agreements are adequate for its business.

PROTON BEAM RADIATION THERAPY (PBRT) BUSINESS

Proton beam radiation therapy is an alternative to traditional external beam, photon based radiation delivered by linear accelerators. PBRT, first clinically introduced in the 1950’s, has physics advantages compared to photon based systems which allow PBRT to deliver higher radiation doses to the tumor with less radiation to healthy tissue. PBRT currently treats prostate, eye, cranial-spinal, head & neck, lung, liver and breast tumors. In excess of 55,000 patients have been treated with protons worldwide.

Introduction of PBRT in the United States, until recently, has been limited due to lack of adequate reimbursement and the high capital costs of these projects. The Company believes that the current development of one and two treatment room PBRT systems at lower capital costs, and recent implementation of appropriate reimbursement levels from the Centers for Medicare and Medicaid Services (“CMS”) will help make this technology available to a larger segment of the market. CMS PBRT reimbursement in 2007 increased approximately 20% over 2006 reimbursement levels.

There are several competing manufacturers of proton beam systems, including Still River, IBA Particle Therapy Inc., Hitachi Ltd., Optivus Proton Therapy Inc., Varian Medical Systems, Inc. (Accel) and Mitsubishi Electric. The Company has invested in Still River and has made deposits towards the purchase of two Still River Clinatron 250™ systems. The Still River system potentially provides cancer centers the opportunity to introduce single treatment room PBRT services for approximately $20 million rather than four and five PBRT treatment room programs costing in excess of $100 million. The Still River system is not yet FDA approved and there can be no assurance that it will be approved.

The Company believes the business model it has developed for use in its Gamma Knife business can be tailored for the PBRT market segment. The Company is targeting large, hospital based cancer programs. The Company’s ability to develop a successful PBRT financing entity depends on the decision of cancer centers to self fund or to fund the PBRT through conventional financing vehicles, the Company’s ability to capture market share from competing alternative PBRT financing entities, and the Company’s ability to raise capital to fund PBRT projects.

EMPLOYEES

At December 31, 2006, the Company employed twelve (12) people on a full-time basis. None of these employees is subject to a collective bargaining agreement and there is no union representation within the Company. The Company maintains various employee benefit plans and believes that its employee relations are good.

EXECUTIVE OFFICERS OF THE COMPANY

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

Name:		Age:				Position:
Ernest A. Bates, M.D.			70			Chairman of the Board of Directors and Chief Executive Officer
Craig K. Tagawa			53			Senior Vice President — Chief Operating and Financial Officer
Ernest R. Bates			40			Vice President of Sales and Business Development

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

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

Ernest R. Bates joined the Company in January 2007 as Vice President of Sales and Business Development. He was on the board of directors of the Company from 2004 through February 2007. Prior to joining the Company, he had been Managing Director, Institutional Fixed Income Sales of HSBC Securities (USA), Inc. since 2003. Mr. Bates has also served as Managing Director, Head of Asian Product for HSBC Securities (USA) Inc. from 1999 to 2003. From 1993 through 1999, Mr. Bates held various positions with Merrill Lynch, last serving as Vice President, European Syndicate for Merrill Lynch International. He received his undergraduate degree from Brown University and a M.B.A. degree from The Wharton Business School. Mr. Bates is 40 years old. Ernest R. Bates is the son of Board Member Dr. Ernest A. Bates.

AVAILABLE INFORMATION

Our Internet address is www.ashs.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our Internet website is not part of this document.

ITEM 1A.

RISK FACTORS

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

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

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

The Market for the Gamma Knife is Limited

There is a limited market for the Gamma Knife, and the market may be mature. The Company has not entered into a Gamma Knife contract at a new site since 2004. Due to the substantial costs of acquiring a Gamma Knife unit, we must identify medical centers that possess neurosurgery and radiation oncology departments capable of performing a large number of Gamma Knife procedures. As of December 31, 2006 there were approximately 111 operating Gamma Knife units in the United States, of which 21 units are owned by us, and approximately 248 units in operation worldwide. There can be no assurance that we will be successful in placing additional units at any sites in the future. The Company’s existing contracts with its customers are fixed in length and there can be no assurance that the customers will wish to extend the contract beyond the end of the term.

The Company Has a High Level of Debt

The Company’s business is capital intensive. The Company finances its Gamma Knife units primarily through its GKF subsidiary, and these amounts have been generally non-recourse to ASHS. The combined long term debt and present value of capital leases totals $21,082,000 and is collateralized by the Gamma Knife units and other assets, including accounts receivable and future proceeds from any contract between the Company and any end user of the financed equipment. This high level of debt may adversely affect the Company’s ability to secure additional credit in the future, and as a result may affect operations and profitability. If default on debt occurs in the future, the Company’s creditors would have the ability to accelerate the

defaulted loan, to seize the Gamma Knife unit or other equipment with respect to which default has occurred, and to apply any collateral they may have at the time to cure the default. The Company also has a line of credit with a bank, against which it has drawn $4,000,000 as of December 31, 2006.

The Market is Competitive

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

There Are Alternatives to the Gamma Knife

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

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

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

New Technology and Products Could Result in Equipment Obsolescence

There is constant change and innovation in the market for highly sophisticated medical equipment. New and improved medical equipment can be introduced that could make the Gamma Knife technology obsolete and that would make it uneconomical to operate. During 2000, Elekta introduced an upgraded Gamma Knife which costs approximately $3.6 million plus

applicable tax and duties. This upgrade includes an Automatic Positioning System™ (“APS”), and therefore involves less health care provider intervention. In early 2005, Elekta introduced a new upgrade, the model 4C. Twelve of our existing Gamma Knife units include APS and eight of our existing Gamma Knife units are upgradeable. The cost to upgrade existing units to the new model 4C Gamma Knife with APS is estimated to be approximately $200,000 to $1,000,000, depending on the current Gamma Knife configuration. In 2006 Elekta introduced a new model of the Gamma Knife, the Perfexion, which costs approximately $4.5 million plus applicable taxes and duties. The Perfexion can perform procedures faster than previous Gamma Knife models and also provides the ability to perform procedures on areas of the cervical spine. Existing models of the Gamma Knife are not upgradeable to the Perfexion model. The failure to acquire or use new technology and products could have a material adverse effect on our business and results of operations.

The Company has Invested in a Proton Beam Business that is Developmental and Unproven

We have committed a substantial amount of money to next-generation proton beam technology. The PBRT system being developed by Still River is not commercially proven and cannot be sold or used prior to FDA approval, which may not be obtained until 2009, if at all. Prior to that time, we must make progress payments of $6,000,000 for two Clinatron 250™ systems (The Company has already made deposits of $2,000,000 towards this commitment). There can be no assurance that we will recover this investment, or our $2,000,000 minority investment in Still River. We are unable to enter into firm agreements with hospitals for PBRT systems that we are obligated to purchase. Our current belief is that we will begin to receive revenue for PBRT systems placed and financed by us no earlier than 2010.

ITEM 2.

PROPERTIES

The Company’s corporate offices are located at Four Embarcadero Center, Suite 3700, San Francisco, California, where it leases approximately 4,600 square feet for $23,195 per month. This lease expires in May 2011. A portion of the office space is subleased on a month-to-month basis to two third parties for approximately $1,000 per month.

For the year ended December 31, 2006 the Company’s aggregate net rental expenses for all properties and equipment were approximately $360,000.

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s security holders through the solicitation of proxies or otherwise during the fourth quarter of 2006.

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 and the NYSE Arca Exchange. The Company requested to withdraw from the NYSE Arca exchange in March 2007 and has filed a Form 25 with the Securities and Exchange Commission with respect to this withdrawal request. The table below sets forth the high and low closing sale prices of the Common Shares of the Company on the American Stock Exchange Consolidated Reporting System for each full quarter for the last two fiscal years.

Prices for Common Shares

Quarter Ending		High				Low
March 31, 2005		$	6.23			$	5.40
June 30, 2005		$	6.28			$	5.23
September 30, 2005		$	6.17			$	5.71
December 31, 2005		$	7.35			$	5.80
March 31, 2006		$	6.95			$	5.90
June 30, 2006		$	7.35			$	6.11
September 30, 2006		$	6.56			$	5.50
December 31, 2006		$	6.90			$	6.10

The Company estimates that there were approximately 2,500 beneficial holders of its Common Shares at December 31, 2006.

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

During 2006 holders of options to acquire the Company’s common stock exercised their respective rights pursuant to such securities, resulting in the Company issuing 4,000 new shares of common stock for approximately $5,000.

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

At December 31, 2006 the Company had 5,023,418 issued and outstanding common shares, 149,180 common shares reserved for options, 2,000 restricted stock units issued and 5,175 shares reserved pursuant to the Company’s Shareholder Rights Plan.

In fourth quarter 2006, the Board of Directors declared a quarterly dividend of $.0475 per common share to shareholders of record on January 2, 2007, paid on January 15, 2007. During 2006, shareholders of record as of January 3, 2006, April 3, 2006, July 3, 2006 and October 2, 2006 were paid quarterly dividends of $0.0475 per common share on January 18, 2006, April 17, 2006, July 14, 2006 and October 16, 2006. During 2005, shareholders of record as of January 3, 2005, April 4, 2005, July 1, 2005 and October 3, 2005 were paid quarterly dividends respectively as follows: $0.045 on January 14, 2005 and April 15, 2005, and $0.0475 on July 15, 2005 and October 17, 2005. The Board of Directors evaluates the Company’s level of earnings, balance sheet position, availability of cash and expected future cash requirements on a quarterly basis to determine its dividend policy. The Company did not pay cash dividends prior to 2001.

PERFORMANCE GRAPH, TOTAL RETURN TO SHAREHOLDERS

The following graph and table compares cumulative total shareholder return on the Company’s Common Shares (“ASHS total return”) (i) with the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P500”) and (ii) with the Standard & Poor’s SmallCap 600 Stock Index (“S&P SmallCap600”), in each case during the five years ended December 31, 2006.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American Shared Hospital Services, The S & P 500 Index
And The S & P Smallcap 600 Index

				12/01					12/02					12/03					12/04					12/05					12/06
	American Shared Hospital Services				100.00					141.18					216.06					220.80					240.37					262.07
	S & P 500				100.00					77.90					100.24					111.15					116.61					135.03
	S & P Smallcap 600				100.00					85.37					118.48					145.32					156.48					180.14

ITEM 6.

SELECTED FINANCIAL DATA

Summary of Operations

		Year Ended December 31,
		(Amounts in thousands except per share data)
		2006				2005				2004				2003				2002
Medical services revenue		$	20,385			$	18,231			$	16,389			$	16,178			$	13,366
Costs of operations			10,365				9,072				7,887				7,400				5,399
Selling and administrative expense			3,995				3,613				2,963				3,255				3,313
Interest expense			2,161				2,075				2,261				2,547				2,437
Total costs and expenses			16,521				14,760				13,111				13,202				11,149
Income from operations			3,864				3,471				3,278				2,976				2,217
Interest and other income			308				202				102				121				171
Minority interest expense			(1,314	)			(1,126	)			(983	)			(928	)			(831	)
Income before income taxes			2,858				2,547				2,397				2,169				1,557
Income tax expense			(1,202	)			(780	)			(412	)			(787	)			(455	)
Net income		$	1,656			$	1,767			$	1,985			$	1,382			$	1,102
Net income per common share:
Basic		$	0.33			$	0.36			$	0.46			$	0.36			$	0.30
Diluted		$	0.33			$	0.35			$	0.39			$	0.27			$	0.22
Cash dividend declared per common share		$	0.1900			$	0.1875			$	0.1725			$	0.2000			$	0.1200
Dividend payout ratio (paid and declared)			0.58				0.54				0.44				0.74				0.55

See accompanying note (1)

Balance Sheet Data

		As of December 31,
		(Amounts in thousands)
		2006				2005				2004				2003				2002
Cash and cash equivalents		$	3,952			$	1,298			$	8,121			$	10,312			$	9,924
Securities- current			1,574				4,537				957				—				—
Restricted cash			50				50				50				50				50
Working capital			(541	)			2,423				4,978				5,268				7,175
Securities- long-term			3,380				2,797				—				—				—
Total assets			50,905				48,668				47,367				46,304				44,830
Advances on line of credit			4,000				—				—				—				—
Current portion of long-term debt/capital leases			5,876				6,377				6,562				6,803				5,490
Long-term debt/capital leases, less current portion			15,189				18,705				18,924				20,114				22,006
Shareholders’ equity		$	19,009			$	18,320			$	17,546			$	15,329			$	14,540

See accompanying note (1)

This financial data as of December 31, 2006, 2005 and 2004 and for the years ended December 31, 2006, 2005 and 2004 should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page A-1 of this report and with Item 7–“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 7.

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

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

Revenue Recognition

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

Revenue is recognized when services have been rendered and collectibility is reasonably assured, on either a fee per use or revenue sharing basis. The Company has contracts with 16 fee per use hospitals and five retail hospitals. Under both of these types of agreements, the hospital is responsible for billing patients and collection of fees for services performed. Revenue associated with installation of the Gamma Knife units, if any, is a part of the negotiated lease amount and not a distinctly identifiable amount. The costs, if any, associated with installation of the units are amortized over the period of the related lease to match revenue recognition of these costs.

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

GKF has five agreements that are based on revenue sharing. These can be further classified as either “turn-key” arrangements or “net revenue sharing” arrangements. For the four turn-key sites, GKF is solely responsible for the costs to acquire and install the Gamma Knife. In return, GKF receives payment from the hospital in the amount of its reimbursement from third party payors. Revenue is recognized by the Company during the period in which the procedure is performed, and is estimated based on what can be reasonably expected to be paid by the third party payor to the hospital. The estimate is primarily determined from historical experience and hospital contracts with third party payors. These estimates are reviewed on a regular basis and adjusted as necessary to more accurately reflect the expected payment amount. The Company also records an estimate of operating costs associated with each procedure during the period in which the procedure is performed. Costs are determined primarily based on historical treatment protocols and cost schedules with the hospital. The Company’s estimated operating costs are reviewed on a regular basis and adjusted as necessary to more accurately reflect the actual operating costs. Revenue for turn-key sites is recorded on a gross basis, and the operating expenses the Company reimburses to the hospital are recorded in other operating costs.

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

Revenue from retail arrangements amounted to approximately 34%, 29% and 25% of revenue for the years ended December 31 2006, 2005 and 2004, respectively.

Allowance for Doubtful Accounts

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

If the Company’s net accounts receivable estimates for revenue sharing customers as of December 31, 2006 changed by as much as 10% based on actual collection information, it would have the effect of increasing or decreasing revenue by approximately $235,000.

GENERAL

During the years ended December 31, 2006, 2005 and 2004, 100% of the Company’s medical services revenue was derived from its Gamma Knife business.

TOTAL REVENUE

						Increase								Increase
		2006				(Decrease)				2005				(Decrease)				2004
Medical services revenue (in thousands)		$	20,385				11.8	%		$	18,231				11.2	%		$	16,389
Number of Gamma Knife procedures			2,563				6.3	%			2,410				12.6	%			2,140
Average revenue per procedure		$	7,954				5.1	%		$	7,565				(1.2	)%		$	7,658

Gamma Knife revenue increased $2,154,000 and $1,842,000 in 2006 and 2005, respectively, compared to the prior years. The 2006 increase compared to 2005 was primarily due to the full year inclusion of three new Gamma Knife units that began operation during 2005 and an increase in the average revenue per procedure, primarily at some of the Company’s revenue sharing sites. The 2005 increase was due to three new Gamma Knife units that began operation during 2005 and the full year inclusion of one new Gamma Knife unit that began operation during 2004, which offset a 4% decrease in revenue from Gamma Knife units in operation more than one year. The Company had twenty-one, twenty-one and eighteen Gamma Knife units in operation at December 31, 2006, 2005 and 2004, respectively.

The number of Gamma Knife procedures in 2006 increased by 153 compared to 2005 primarily due to the full year inclusion of three Gamma Knife units that began operation during 2005 and a 2% increase in procedures from Gamma Knife units in operation more than one year. The number of Gamma Knife procedures in 2005 increased by 270 compared to 2004 due to the

increase in the number of Gamma Knife units in operation, as well as a 3% increase in procedures from Gamma Knife units in operation more than one year.

Revenue per procedure increased $389 in 2006 and decreased $93 in 2005 compared to the prior years. The Company’s contracts generally have different procedure rates because their investment basis varies, so revenue per procedure can vary year to year depending primarily on the mix of procedures performed at certain locations. The increase per procedure in 2006 was primarily due to higher average procedure rates at the Company’s turn-key retail sites and a higher mix of revenue generated by the retail sites compared to fee per use sites. The decrease in 2005 was primarily due to lower average procedure rates collected at two of the Company’s retail sites.

COSTS OF OPERATIONS

						Increase								Increase
(In thousands)		2006				(Decrease)				2005				(Decrease)				2004
Costs of operations		$	10,365				14.3	%		$	9,072				15.0	%		$	7,887
Percentage of revenue			50.8	%							49.8	%							48.1	%

The Company’s costs of operations, consisting of maintenance and supplies, depreciation and amortization, and other operating expenses (such as insurance, property taxes, sales taxes, marketing costs and operating costs from the Company’s retail sites) increased $1,293,000 in 2006 compared to 2005, and increased $1,185,000 in 2005 compared to 2004.

The Company’s maintenance and supplies costs were 6%, 6% and 5% of medical service revenue in 2006, 2005 and 2004, respectively. Maintenance and supplies costs increased $260,000 in 2006 compared to 2005, and increased $150,000 in 2005 compared to 2004. The increase in 2006 compared to 2005 was primarily due to the expiration of the warranty period on three Gamma Knife units and the full year inclusion of one Gamma Knife unit where the warranty period expired during 2005. The increase in 2005 compared to 2004 was primarily due to the expiration of the warranty period on one Gamma Knife unit and the full year inclusion of maintenance on two Gamma Knife units where the warranty period expired during the previous year.

Depreciation and amortization increased $470,000 in 2006 compared to 2005, and increased $593,000 in 2005 compared to 2004. The increase in 2006 was primarily due to the full year’s inclusion of depreciation from three Gamma Knife units that started operation during 2005, and the upgrade and/or cobalt reload on two existing Gamma Knife units in 2006. The increase in 2005 was primarily due to the addition of three new Gamma Knife units that commenced operation during first, second and third quarters of 2005 and a full year of depreciation on one new Gamma Knife unit that started operation during 2004.

Other direct operating costs as a percentage of medical services revenue were 16%, 14% and 13% in 2006, 2005 and 2004, respectively. The increase of $563,000 in 2006 compared to 2005 was primarily due to higher operating costs related to an increase in the number of procedures performed at two of the Company’s turn-key retail locations. The increase of $442,000 in 2005

compared to 2004 was primarily due to increased operating costs related to the Company’s two additional retail Gamma Knife units that started operation during 2005 and higher insurance costs due to additional Gamma Knife units in operation, which were partially offset by lower marketing and promotion costs.

SELLING AND ADMINISTRATIVE

						Increase								Increase
(In thousands)		2006				(Decrease)				2005				(Decrease)				2004
Selling and administrative costs		$	3,995				10.6	%		$	3,613				21.9	%		$	2,963
Percentage of revenue			19.6	%							19.8	%							18.1	%

The Company’s selling and administrative costs increased $382,000 in 2006 compared to 2005, and increased $650,000 in 2005 compared to 2004. The increase in 2006 compared to 2005 was due to increased legal, accounting and consulting fees of approximately $234,000 and payroll related costs of approximately $346,000, primarily bonuses paid for the development of the proton beam business. These increases were partially offset by lower business meeting and other business development costs. Costs to develop the Company’s OR21 business decreased $82,000, and there was no Gamma Knife User’s Meeting in 2006, unlike 2005 when the Company spent $42,000 for its second meeting. The increase in 2005 compared to 2004 was primarily due to increased payroll and business development costs of approximately $441,000, which included costs of the Company’s second Gamma Knife User’s Meeting of approximately $42,000 and OR21 business development costs of approximately $151,000. In addition, legal, accounting and consulting fees increased approximately $119,000 and contributions increased approximately $55,000 over the prior year.

INTEREST EXPENSE

						Increase								Increase
(In thousands)		2006				(Decrease)				2005				(Decrease)				2004
Interest expense		$	2,161				4.1	%		$	2,075				(8.2	)%		$	2,261
Percentage of revenue			10.6	%							11.4	%							13.8	%

The Company’s interest expense increased $86,000 in 2006 compared to 2005, and decreased $186,000 in 2005 compared to 2004. The increase in 2006 was primarily due to interest expense from borrowing under the Company’s line of credit with a bank which offset lower interest expense from financing on the Company’s Gamma Knife units. The decrease in 2005 was due to lower interest expense on the Company’s more mature Gamma Knife units and the completion of debt service on two Gamma Knife units. This was partially offset by additional interest expense on the financing of the Company’s three new Gamma Knife units that started operation during 2005, and the refinancing of one Gamma Knife unit that had previously been paid off. Interest expense on the more mature units is lower than newer units because interest expense decreases with each principal payment.

OTHER INCOME AND EXPENSE

						Increase								Increase
(In thousands)		2006				(Decrease)				2005				(Decrease)				2004
Interest and other income		$	308				52.5	%		$	202				98.0	%		$	102
Percentage of revenue			1.5	%							1.1	%							0.6	%
Minority interest expense		$	(1,314	)			16.7	%		$	(1,126	)			14.5	%		$	(983	)
Percentage of revenue			(6.4	)%							(6.2	)%							(6.0	)%

Interest and other income increased $106,000 in 2006 compared to 2005 and increased $100,000 in 2005 compared to 2004. The increases in both 2006 and 2005 were primarily due to investment in longer term holdings with higher interest rates available compared to prior years.

Minority interest increased $188,000 in 2006 and $143,000 in 2005 compared to the prior year, respectively. Minority interest represents the pre-tax income earned by the minority partner’s 19% interest in GKF. The increase in minority interest reflects the increased profitability of GKF.

INCOME TAXES

						Increase								Increase
(In thousands)		2006				(Decrease)				2005				(Decrease)				2004
Income tax expense		$	1,202				54.1	%		$	780				89.3	%		$	412
Percentage of revenue			5.9	%							4.3	%							2.5	%

Income tax expense increased $422,000 in 2006 compared to 2005, and increased $368,000 in 2005 compared to 2004. The Company recorded an estimated 42% effective income tax provision for 2006, a 5% increase over the estimated income tax provision for 2005. The increase is primarily due to an increase in estimated state income taxes in those states where separate state returns are required and net operating loss carryforwards cannot be applied. The Company’s estimated 37% income tax provision for 2005 was reduced to an effective rate of 31% by a $193,000 income tax benefit from the exercise of options to purchase 264,000 common shares. The Company’s estimated 40% income tax provision for 2004 was reduced to an effective rate of approximately 17% by a $547,000 income tax benefit from the exercise of options to purchase 846,000 common shares. The income tax benefits are a result of compensation expense that was recognized when these options for common shares were granted in 1995.

The Company anticipates that it will continue to record income tax expense if it operates profitably in the future. Currently there are state income tax payments required for most states.

However there are minimal federal income tax payments required due to net operating loss carryforwards and other deferred tax assets available for tax purposes.

The Company had a net operating loss carryforward for federal income tax return purposes at December 31, 2006 of approximately $9,498,000.

NET INCOME

(In thousands,						Increase								Increase
except per share amounts)		2006				(Decrease)				2005				(Decrease)				2004
Net income		$	1,656				(6.3	)%		$	1,767				(11.0	)%		$	1,985
Net income per share, diluted		$	0.33				(5.7	)%		$	0.35				(10.3	)%		$	0.39

The Company had net income of $1,656,000 in 2006 compared to $1,767,000 in 2005 and $1,985,000 in 2004. Net income for 2006 included increased operating income of $393,000, an 11.3% increase compared to 2005, which was generated primarily by a revenue increase of 11.8%. An increase of $422,000 in the income tax provision for 2006 compared to 2005 more than offset the operating income increase, causing a decrease in net income of $111,000. Net income for 2005 included increased operating income of $193,000 compared to 2004, which was primarily due to the addition of three new Gamma Knife units during 2005. This was offset by an increase in income tax expense of $368,000 due to reduced income tax benefits available on the exercise of options to purchase common stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash and cash equivalents of $3,952,000 at December 31, 2006 compared to $1,298,000 at December 31, 2005. The increase in cash resulted primarily from a $2,953,000 reduction in short term securities as of December 31, 2006 compared to the prior year. The Company’s expected primary cash needs on both a short and long-term basis are for capital expenditures, business expansion, working capital, payment of quarterly dividends and other general corporate purposes.

Securities represents a portion of the Company’s cash that is invested in high-quality short to long-term fixed income marketable securities in order to maximize income on its available cash. Securities with maturity dates between three and twelve months in the amount of $1,574,000 are classified as current assets. Securities in the amount of $3,380,000 have maturities in excess of one year and are classified as long-term. It is the Company’s intent to hold these securities until maturity.

Restricted cash of $50,000 at December 31, 2006 reflects cash that may only be used for the operations of GKF.

The Company has a $6,000,000 line of credit with a bank, secured by its cash and securities. The line of credit has been in place since June 2004 and is renewable annually. As of December

31, 2006, there was $4,000,000 borrowed against the line of credit. The Company believes it has the ability, and it is the Company’s intention, to renew the line of credit at its maturity in 2007.

Operating activities provided cash of $9,164,000 in 2006. Net income of $1,656,000, depreciation and amortization of $5,963,000 and an increase in the minority interest of $1,314,000 were the primary reasons for the increase in operating cash flow. The Company’s trade accounts receivable increased to $4,248,000 at December 31, 2006 from $3,832,000 at December 31, 2005, primarily due to additional revenue from some of the Company’s retail sites which have a longer collection period than fee per use sites. This resulted in an increase in the number of days revenue (sales) outstanding (“DSO”) in accounts receivable to 81 days from 76 days as of December 31, 2006 compared to the prior year. We expect DSO to fluctuate in the future depending on timing of customer payments received and the mix of fee per use versus retail customers.

Investing activities used $4,746,000 of cash in 2006 primarily due to the acquisition of property and equipment of $5,146,000, which included upgrades to two Gamma Knife units, an option to purchase two proton beam units, and deposits on three Gamma Knife units and an IGRT system.

Financing activities used $1,764,000 of cash during 2006, primarily due to principal payments on long-term debt and capital leases of $6,549,000, distributions to minority owners of $798,000 and the payment of dividends of $954,000. This was partially offset by financing on the acquisition of property and equipment of $2,532,000, and borrowing on the Company’s line of credit with a bank in the amount of $4,000,000, which was used primarily for the Company’s investment in Still River and its option to purchase two proton beam systems.

The Company had negative working capital at December 31, 2006 of $541,000 compared to working capital of $2,423,000 at December 31, 2005 primarily due to borrowing $4,000,000 on its line of credit with a bank. Borrowing under the line of credit is considered a current liability because the line is renewable annually. The borrowed funds were used to invest in equipment and other non-current assets.

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

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

IMPACT OF INFLATION AND CHANGING PRICES

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

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

The following table presents, as of December 31, 2006, the Company’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

		Payments Due by Period
		Total amounts				Less than
Contractual Obligations		committed				1 year				1-3 years				4-5 years				After 5 years
Long-term debt		$	16,245,000			$	4,867,000			$	10,734,000			$	644,000			$	—
Capital leases			4,820,000				1,009,000				2,725,000				1,086,000				—
Line of credit			4,000,000				4,000,000				—				—				—
Future equipment purchases (1)			36,678,000				—				36,678,000				—				—
Operating leases			1,256,000				287,000				853,000				116,000				—
Total contractual obligations		$	62,999,000			$	10,163,000			$	50,990,000			$	1,846,000			$	—

Further discussion of the long-term debt commitment is included in Note 4, capital leases in Note 5, and operating leases in Note 10 of the consolidated financial statements.

The Company has no significant off-balance sheet arrangements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below presents information about certain market-sensitive financial instruments as of December 31, 2006. The fair values were determined based on quoted market prices for the same or similar instruments.

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

		Maturity Date, Year ending December 31
(amounts in thousands)		2007				2008				2009				2010				2011				Thereafter				Total				Fair Value
Fixed-rate long-term debt and present value of capital leases		$	5,876			$	5,944			$	4,782			$	2,734			$	1,281			$	448			$	21,065			$	21,038
Average interest rates			8.4	%			8.2	%			8.1	%			8.0	%			7.9	%			7.9	%			8.2	%

At December 31, 2006, we had no significant long-term, market-sensitive investments.

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

(a)		Evaluation of disclosure controls and procedures.
		Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2006 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and

		procedures (as required by paragraph (b) of the Securities and Exchange Act of 1934 Rules 13a-15 or 15d-15) were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.
(b)		Changes in internal controls over financial reporting.
		There were no significant changes in our internal controls over financial reporting in connection with the evaluation required by paragraph (d) of the Securities Exchange Act of 1934 Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding directors is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders (the “2007 Proxy Statement”). Information regarding executive officers of the Company, included herein under the caption “Executive Officers of the Registrant” in Part I, Item 1 above, is incorporated herein by reference.

Information concerning the identification of our standing audit committee required by this Item is incorporated by reference from the 2007 Proxy Statement.

Information concerning our audit committee financial experts required by this Item is incorporated by reference from the 2007 Proxy Statement.

Information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference from the 2007 Proxy Statement.

We have adopted a Code of Ethics that is incorporated by reference from the 2007 Proxy Statement.

ITEM 11.

EXECUTIVE COMPENSATION

Incorporated herein by reference from the 2007 Proxy Statement.

ITEM 12.

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

Incorporated herein by reference from the 2007 Proxy Statement.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference from the 2007 Proxy Statement.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference from the 2007 Proxy Statement.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements and Schedules.

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

Report of Independent Registered Public Accounting Firm
Audited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules- no schedules are included since the required information is not present or is not present in amounts sufficient to require

submission of the schedule, or because the information required is included in the financial statements and notes thereto.

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

Exhibit
Number:		Description:
2.1		Securities Purchase Agreement, dated as of March 12, 1999, by and among Alliance Imaging, Inc.; Embarcadero Holding Corp. I; Embarcadero Holding Corp. II; American Shared Hospital Services; and MMRI, Inc. (1)
3.1		Articles of Incorporation of the Company, as amended. (2)
3.2		By-laws of the Company, as amended. (3)
4.6		Form of Common Stock Purchase Warrant of American Shared Hospital Services. (3)
4.8		Registration Rights Agreement, dated as of May 17, 1995, by and among American Shared Hospital Services, the Holders referred to in the Note Purchase Agreement, dated as of May 12, 1995 and General Electric Company, acting through GE Medical Systems. (3)
4.9		Rights Agreement dated as of March 22, 1999 between American Shared Hospital Services and American Stock Transfer & Trust Company as Rights Agent. (25)
10.1		The Company’s 1984 Stock Option Plan, as amended. (4)
10.2		The Company’s 1995 Stock Option Plan, as amended. (5)
10.3		Form of Indemnification Agreement between American Shared Hospital Services and members of its Board of Directors. (4)
10.4		Ernest A. Bates Stock Option Agreement dated as of August 15, 1995. (6)
10.5		Operating Agreement for GK Financing, LLC, dated as of October 17, 1995. (3)
10.6		Amendments dated as of October 26, 1995 and as of December 20, 1995 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (7)

Exhibit
Number:		Description:
10.7		Amendment dated as of October 16, 1996 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995. (1)
10.8		Amendment dated as of March 31, 1999 (“Fourth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.9		Amendment dated as of March 31, 1999 (“Fifth Amendment”) to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.10		Amendment dated as of June 5, 1999 to the GK Financing, LLC Operating Agreement dated as of October 17, 1995. (8)
10.11a		Assignment and Assumption Agreement, dated as of December 31, 1995, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (8)
10.11b		Assignment and Assumption Agreement, dated as of November 1, 1995, between American Shared Hospital Services (assignor) and American Shared Radiosurgery Services (assignee). (4)
10.11c		Amendment Number One dated as of August 1, 1995 to the Lease Agreement for a Gamma Knife Unit between The Regents of the University of California and American Shared Hospital Services. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.11d		Lease Agreement dated as of July 3, 1990 for a Gamma Knife Unit between American Shared Hospital Services and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.12		Amendment Number Two dated as of February 6, 1999 to the Lease Agreement for a Gamma Knife Unit between UCSF-Stanford Health Care and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)

Exhibit
Number:		Description:
10.13		Assignment and Assumption Agreement, dated as of February 3, 1996, between American Shared Radiosurgery Services (assignor) and GK Financing, LLC (assignee). (4)
10.14		Lease Agreement for a Gamma Knife Unit dated as of April 6, 1994, between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.15		Assignment and Assumption and Agreement dated as of February 1, 1996 between Ernest A. Bates, M.D. and GK Financing, LLC with respect to the Lease Agreement for a Gamma Knife dated as of April 6, 1994 between Ernest A. Bates, M.D. and NME Hospitals, Inc. dba USC University Hospital. (8)
10.16		Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.17		Addendum to Lease Agreement for a Gamma Knife Unit dated as of December 1, 1999 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.18		Lease Agreement for a Gamma Knife Unit dated as of October 29, 1996 between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.18a		Amendment to Lease Agreement for a Gamma Knife Unit effective December 13, 2003 by and between Methodist Healthcare Systems of San Antonio, Ltd., dba Southwest Texas Methodist Hospital and GK

Exhibit
Number:		Description:
		Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (22)
10.19		Lease agreement for a Gamma Knife Unit dated as of April 10, 1997 between Yale-New Haven Ambulatory Services Corporation and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (8)
10.19a		Amendment to Lease agreement for a Gamma Knife Unit effective October 25, 2005 by and 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.) (27)
10.20		Lease Agreement for a Gamma Knife Unit dated as of June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.21		Addendum to Contract with GKF and KMC/WKNI, dated June 1, 1999 between GK Financing, LLC and Kettering Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.22		Lease Agreement for a Gamma Knife Unit dated as of October 5, 1999 between GK Financing, LLC and New England Medical Center Hospitals, Inc. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.22a		Addendum to Lease Agreement for a Gamma Knife unit effective April 1, 2005 between GK Financing, LLC and New England Medical Center

Exhibit
Number:		Description:
		Hospitals, Inc. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (24)
10.23		Equipment Lease Agreement dated as of October 29, 1999 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.23a		Amendment to Lease Agreement effective as of September 15, 2005 between GK Financing, LLC and the Board of Trustees of the University of Arkansas on behalf of The University of Arkansas for Medical Sciences. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (26)
10.24		First Amendment to Lease Agreement for a Gamma Knife Unit effective as of August 2, 2000 between GK Financing, LLC and Tenet HealthSystems Hospitals, Inc. (formerly known as NME Hospitals, Inc.) dba USC University Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (9)
10.25		Addendum Two, dated as of October 1, 2000, to Lease Agreement for a Gamma Knife Unit dated as of October 31, 1996 between Hoag Memorial Hospital Presbyterian and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (10)
10.26		Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and

Exhibit
Number:		Description:
		Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (10)
10.27		Addendum dated June 24, 2000 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.28		Amendment dated July 12, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.29		Amendment dated August 24, 2000 to Lease Agreement for a Gamma Knife Unit dated May 28, 2000 between Froedtert Memorial Lutheran Hospital and GK Financing, LLC. (10)
10.30		Lease Agreement for a Gamma Knife Unit dated as of December 11, 1996 between The Community Hospital Group, Inc. dba JFK Medical Center and GK Financing, LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (11)
10.31		Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (12)
10.32		Addendum to Lease Agreement for a Gamma Knife Unit dated as of June 3, 1999 between GK Financing, LLC and Sunrise Hospital and Medical Center, LLC dba Sunrise Hospital and Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (12)
10.33		Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (13)

Exhibit
Number:		Description:
10.34		Addendum to Lease Agreement for a Gamma Knife Unit dated as of November 1, 1999 between GK Financing, LLC and Jackson HMA, Inc. dba Central Mississippi Medical Center. (13)
10.35		Lease Agreement for a Gamma Knife Unit dated as of February 18, 2000 between GK Financing, LLC and OSF HealthCare System. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (13)
10.36		American Shared Hospital Services 2001 Stock Option Plan. (14)
10.37		Amendment Number Three to Lease Agreement for a Gamma Knife Unit dated as of June 22, 2001 between GK Financing, LLC and The Regents of the University of California. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (15)
10.38		Addendum Three to Lease Agreement for a Gamma Knife Unit dated as of October 1, 2000 between GK Financing, LLC and Hoag Memorial Hospital Presybterian. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (15)
10.39		Lease Agreement for a Gamma Knife Unit dated as of July 18, 2001 between GK Financing, LLC and Bayfront Medical Center, Inc.. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (16)
10.40		Lease Agreement for a Gamma Knife Unit dated as of September 13, 2001 between GK Financing, LLC and Mercy Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (17)

Exhibit
Number:		Description:
10.41		Addendum Number One to Contract with GKF and Mercy Medical Center, dated September 13, 2001 between GK Financing, LLC and Mercy Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (17)
10.42		Lease Agreement for a Gamma Knife Unit dated as of May 22, 2002 between GK Financing, LLC and The Johns Hopkins Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (18)
10.43		Lease Agreement for a Gamma Knife Unit dated as of July 11, 2002 between GK Financing, LLC and Southern Baptist Hospital of Florida, Inc. D/B/A Baptist Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (19)
10.44		Lease Agreement for a Gamma Knife Unit dated as of February 13, 2003 between GK Financing, LLC and AHS Albuquerque Regional Medical Center LLC. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (20)
10.45		Lease Agreement for a Gamma Knife Unit dated as of May 28, 2003 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (21)
10.45a		First Amendment to Lease Agreement for a Gamma Knife Unit dated November 2006 between GK Financing, LLC and Lehigh Valley Hospital. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)

Exhibit
Number:		Description:
10.46		Lease Agreement for a Gamma Knife Unit dated as of March 21, 2003 between GK Financing, LLC and Northern Westchester Hospital Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (23)
10.47		Amendment Four to Lease Agreement for a Gamma Knife Unit effective as of December 1, 2002 between GK Financing, LLC and Hoag Memorial Hospital Presbyterian. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (23)
10.48		Line of credit agreement between American Shared Hospital Services and Bank of America dated July 1, 2004 and related amendments No. 1 and No. 2 dated June 23, 2005. (23)
10.49		Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Mercy Health Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (24)
10.50		Lease Agreement for a Gamma Knife Unit dated as of August 7, 2003 between GK Financing, LLC and Baptist Hospital of East Tennessee. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2, promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.) (26)
10.50a		Amendment No. 1 to Lease Agreement for a Gamma Knife Unit dated as of May 28, 2004 between GK Financing, LLC and Baptist Hospital of East Tennessee.(26)
10.51		Addendum Two to Lease Agreement for a Gamma Knife Unit dated as of November 6, 2006 between GK Financing, LLC and Jackson HMA, Inc. d/b/a Central Mississippi Medical Center. (Confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 24b-2,

Exhibit
Number:		Description:
		promulgated under the Securities and Exchange Act of 1934, as amended. Omitted information has been replaced with asterisks.)
10.52		Amendment dated as of October 18, 2006 to the GK Financing, LLC Operating Agreement, dated as of October 17, 1995.
21.		Subsidiaries of American Shared Hospital Services.
23.1		Consent of Independent Registered Public Accounting Firm relating to a Form S-8 filed December 18, 2006.
31.		Rule 13a-14(a)/15d-14(a) Certifications.
32.		Section 1350 Certifications (furnished and not to be considered filed as part of the Form 10-K).

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.

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   Ernest A. Bates		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)		April 2, 2007
/s/ Olin C. Robison   Olin C. Robison		Director		April 2, 2007
/s/ John F. Ruffle   John F. Ruffle		Director		April 2, 2007
/s/ Stanley S. Trotman, Jr.   Stanley S. Trotman, Jr.		Director		April 2, 2007
/s/ Craig K. Tagawa   Craig K. Tagawa		Chief Operating Officer and Chief Financial Officer (Principal Accounting Officer)		April 2, 2007

AMERICAN SHARED HOSPITAL SERVICES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
and
CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006, 2005 and 2004

Contents

		PAGE
Report of Independent Registered Public Accounting Firm			1
Consolidated Financial Statements
Balance sheets			2
Statements of income			3
Statement of shareholders’ equity			4
Statements of cash flows			5 – 6
Notes to financial statements			7 – 24

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
American Shared Hospital Services

We have audited the accompanying consolidated balance sheets of American Shared Hospital Services as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Shared Hospital Services at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the financial statements, effective January 1, 2006, the Company changed its method of accounting for share-based payment agreements to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

/S/ MOSS ADAMS LLP

San Francisco, California
March 30, 2007

American Shared Hospital Services

		DECEMBER 31,
		2006				2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	3,952,000			$	1,298,000
Securities			1,574,000				4,537,000
Restricted cash			50,000				50,000
Trade accounts receivable, net of allowance for doubtful accounts of $170,000 in 2006 and 2005			4,248,000				3,832,000
Other receivables			102,000				187,000
Prepaid expenses and other current assets			598,000				464,000
Current deferred tax assets			601,000				341,000
Total current assets			11,125,000				10,709,000
PROPERTY AND EQUIPMENT, net			34,166,000				34,990,000
SECURITIES			3,380,000				2,797,000
INVESTMENT IN PREFERRED STOCK			2,000,000				—
OTHER ASSETS			234,000				172,000
		$	50,905,000			$	48,668,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	340,000			$	555,000
Accrued interest and other liabilities			1,095,000				996,000
Employee compensation and benefits			116,000				120,000
Accrued dividends			239,000				238,000
Advances on line of credit			4,000,000				—
Current portion of long-term debt			4,867,000				5,631,000
Current portion of capital leases			1,009,000				746,000
Total current liabilities			11,666,000				8,286,000
LONG-TERM DEBT, less current portion			11,378,000				15,253,000
LONG-TERM CAPITAL LEASES, less current portion			3,811,000				3,452,000
DEFERRED INCOME TAXES			1,996,000				828,000
MINORITY INTEREST			3,045,000				2,529,000
SHAREHOLDERS’ EQUITY
Common stock, no par value
Authorized — 10,000,000 shares; Issued and outstanding shares — 5,023,000 in 2006 and 5,019,000 in 2005			9,317,000				9,306,000
Additional paid-in capital			4,251,000				4,274,000
Retained earnings			5,441,000				4,740,000
Total shareholders’ equity			19,009,000				18,320,000
		$	50,905,000			$	48,668,000

See accompanying notes

American Shared Hospital Services

Consolidated Statements of Income

		YEARS ENDED DECEMBER 31,
		2006				2005				2004
REVENUE:
Medical services		$	20,385,000			$	18,231,000			$	16,389,000
COSTS AND EXPENSES:
Costs of revenue:
Maintenance and supplies			1,295,000				1,035,000				885,000
Depreciation and amortization			5,865,000				5,395,000				4,802,000
Other direct operating costs			3,205,000				2,642,000				2,200,000
			10,365,000				9,072,000				7,887,000
Gross margin			10,020,000				9,159,000				8,502,000
Selling and administrative expense			3,995,000				3,613,000				2,963,000
Interest expense			2,161,000				2,075,000				2,261,000
Operating income			3,864,000				3,471,000				3,278,000
Interest and other income			308,000				202,000				102,000
Minority interest expense			(1,314,000	)			(1,126,000	)			(983,000	)
Income before income taxes			2,858,000				2,547,000				2,397,000
Income tax expense			(1,202,000	)			(780,000	)			(412,000	)
NET INCOME		$	1,656,000			$	1,767,000			$	1,985,000
Earnings per common share — basic		$	0.33			$	0.36			$	0.46
Earnings per common share — diluted		$	0.33			$	0.35			$	0.39

See accompanying notes

American Shared Hospital Services

		THREE YEARS ENDED DECEMBER 31, 2006
		Common				Common				Additional				Retained
		Shares				Stock				Paid-in Capital				Earnings				Total
Balances at January 1, 2004			3,918,000			$	9,198,000			$	3,461,000			$	2,670,000			$	15,329,000
Options exercised			858,000				40,000				994,000				—				1,034,000
Repurchase of stock options			—				—				(45,000	)			—				(45,000	)
Dividends			—				—				—				(757,000	)			(757,000	)
Net income			—				—				—				1,985,000				1,985,000
Balances at December 31, 2004			4,776,000				9,238,000				4,410,000				3,898,000				17,546,000
Options exercised			357,000				157,000				445,000				—				602,000
Repurchase of stock options			(114,000	)			(89,000	)			(581,000	)			—				(670,000	)
Dividends			—				—				—				(925,000	)			(925,000	)
Net income			—				—				—				1,767,000				1,767,000
Balances at December 31, 2005			5,019,000				9,306,000				4,274,000				4,740,000				18,320,000
Options exercised			5,000				11,000				—				—				11,000
Common stock withheld on option exercises			(1,000	)			—				(6,000	)			—				(6,000	)
Stock-based compensation expense			—				—				39,000				—				39,000
Excess tax benefit from share-based payment arrangements			—				—				(56,000	)			—				(56,000	)
Dividends			—				—				—				(955,000	)			(955,000	)
Net income			—				—				—				1,656,000				1,656,000
Balances at December 31, 2006			5,023,000			$	9,317,000			$	4,251,000			$	5,441,000			$	19,009,000

See accompanying notes

American Shared Hospital Services

		YEARS ENDED DECEMBER 31,
		2006				2005				2004
OPERATING ACTIVITIES
Net income		$	1,656,000			$	1,767,000			$	1,985,000
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			5,963,000				5,502,000				4,892,000
Loss on disposal of assets			3,000				—				—
Deferred income tax			852,000				121,000				264,000
Stock-based compensation expense			39,000				—				—
Minority interest in consolidated subsidiaries			1,314,000				1,126,000				983,000
Changes in operating assets and liabilities:
Receivables			(331,000	)			(1,069,000	)			(483,000	)
Prepaid expenses and other assets			(212,000	)			95,000				(137,000	)
Accounts payable and accrued liabilities			(120,000	)			938,000				104,000
Net cash from operating activities			9,164,000				8,480,000				7,608,000
INVESTING ACTIVITIES
Payment for purchase of property and equipment			(5,146,000	)			(6,195,000	)			(6,308,000	)
Proceeds from sales and maturities of marketable securities			7,728,000				957,000				—
Investment in marketable securities			(7,348,000	)			(7,334,000	)			(957,000	)
Proceeds from sale of assets			20,000				—				—
Net cash from investing activities			(4,746,000	)			(12,572,000	)			(7,265,000	)