Item 8. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report to the Securities and Exchange Commission may be deemed to contain certain forward-looking statements with respect to the financial condition, results of operations and future plans of American Shared Hospital Services, which involve risks and uncertainties including, but not limited to, the risks of the Gamma Knife and radiation therapy businesses, the risks of developing The Operating Room for the 21st Century® program, and the risks of investing in a development-stage company, Mevion Medical Systems, Inc. ("Mevion"), without a proven product. Further information on potential factors that could affect the financial condition, results of operations and future plans of American Shared Hospital Services is included in the filings of the Company with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 7, 2012.

The Company had nineteen Gamma Knife units in operation at both March 31, 2012 and March 31, 2011. Three of the Company's customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Thirteen of the Company's nineteen current Gamma Knife customers are under fee-per-use contracts, and six customers are under retail arrangements. The Company's two contracts to provide radiation therapy and related equipment services to existing Gamma Knife customers are considered retail arrangements. Retail arrangements are further classified as either turn-key or revenue sharing. Revenue from fee per use contracts is recorded on a gross basis as determined by each hospital's contracted rate. Under turn-key arrangements, the Company receives payment from the hospital in the amount of its reimbursement from third party payors, and is responsible for paying all the operating costs of the equipment. Revenue is recorded on a gross basis and estimated based on historical experience of that hospital's contracts with third party payors. For revenue sharing arrangements the Company receives a contracted percentage of the reimbursement received by the hospital. The gross amount the Company expects to receive is recorded as revenue and estimated based on historical experience.

Medical services revenue increased by $36,000 to $4,403,000 for the three month period ended March 31, 2012 from $4,367,000 for the three month period ended March 31, 2011. Revenue from the Company's radiation therapy contracts increased for the three month period by $245,000, to $495,000 from $250,000 for the same period in the prior year. The increase was due to a new contract that began operation in the fourth quarter 2011, and increased volume at its existing radiation therapy site. The increase in revenue from radiation therapy was partially offset by a $209,000 decrease in Gamma Knife revenue to $3,908,000 from $4,117,000 for the same period in the prior year. The decrease in Gamma Knife revenue was primarily due to one Gamma Knife unit being out of service for approximately one month for a cobalt reload and the loss of one unit that was sold to the customer in the third quarter 2011. Both of these units had historically had higher than average per procedure rates. Even though the total procedures performed in the first quarter 2012 were higher than the same period in the prior year, total revenue can fluctuate depending on the procedure mix among customers.

The number of Gamma Knife procedures increased by 25 to 514 in the first quarter 2012 from 489 in the same quarter in the prior year, primarily due to the start of operations at two new Gamma Knife sites that were not in operation during the first quarter 2011. Increases from these new sites were partially offset by the loss of procedures from two sites where the contracts ended during the latter part of 2011. The increase was also partially offset by one site that was out of service for approximately one month during the first quarter 2012 for a cobalt reload, and several other sites that had generally lower volume compared to the same period in the prior year.

Total costs of revenue increased by $123,000 to $2,566,000 for the three month period ended March 31, 2012 from $2,443,000 for the three month period ended March 31, 2011. Maintenance and supplies increased by $46,000 for the three month period ended March 31, 2012 compared to the same period in the prior year, primarily due to higher maintenance contract expense because the warranty period ended for three Gamma Knife units. Depreciation and amortization increased by $118,000 for the three month period ended March 31, 2012 compared to the same period in the prior year primarily because depreciation started on four new sites that began operation since the first quarter 2011. This was partially offset by a reduction in depreciation for three sites where depreciation was stopped because the remaining value of the equipment had reached its salvage value. Other direct operating costs decreased by $41,000 for the three month period ended March 31, 2012 compared to the same period in the prior year primarily due to lower operating costs in connection with the Company's retail sites and lower marketing costs.

Selling and administrative costs decreased by $98,000 to $1,024,000 for the three month period ended March 31, 2012 from $1,122,000 for the three month period ended March 31, 2011. This decrease was primarily due to lower payroll related costs and accounting fees, partially offset by higher legal fees.

Interest expense decreased by $2,000 to $574,000 for the three month period ended March 31, 2012 from $576,000 for the three month period ended March 31, 2011. Higher interest expense on financing from three new Gamma Knife units and one radiation therapy unit was offset by lower interest expense on debt relating to the more mature units. The mature units have lower interest expense because interest expense decreases as the outstanding principal balance of each loan is reduced.

Interest and other income decreased by $15,000 to $1,000 for the three month period ended March 31, 2012 from $16,000 for the three month period ended March 31, 2011 primarily from a reduction in interest income due to low interest rates available on invested cash.

The Company had income tax expense of $11,000 for the three month period ended March 31, 2012 compared to income tax expense of $23,000 for the three month period ended March 31, 2011. The reduction in income tax expense is primarily due to lower taxable income attributable to American Shared Hospital Services. This is partially offset by a higher estimated effective annual income tax rate for 2012 of 56%, based on income attributable to American Shared Hospital Services, compared to an estimated 52% income tax rate used in the first quarter 2011.

Net income attributable to non-controlling interest increased by $22,000 to $220,000 for the three month period ended March 31, 2012 from $198,000 for the three month period ended March 31, 2011. Net income attributable to non-controlling interests represents net income earned by the 19% non-controlling interest in GKF, and net income of the non-controlling interests in various subsidiaries controlled by GKF. The decrease or increase in net income attributable to non-controlling interests reflects the relative profitability of GKF.

The Company had net income of $9,000, or $0.00 per diluted share, for the three month period ended March 31, 2012 compared to net income of $21,000, or $0.00 per diluted share, in the same period in the prior year. The decrease in net income was primarily due to a decrease in gross margin from operations, and was partially offset by lower selling and administrative costs and reduced interest and other income.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $1,788,000 at March 31, 2012 compared to $2,580,000 at December 31, 2011. The Company's cash position decreased by $792,000 due to payments for the purchase of property and equipment of $3,143,000, principal payments on long term debt and capital leases of $1,900,000, net pay downs on the Company's line of credit with a bank of $350,000 and distributions to non-controlling interests of $372,000. These decreases were offset by net cash from operating activities of $1,393,000, long term debt financing on the purchase of equipment of $3,525,000, and an investment by a non-controlling interest of $55,000.

As of March 31, 2012, the Company has a $9,000,000 principal investment in a certificate of deposit with a bank at an interest rate of 0.45% and a maturity date in August 2012.

The Company has a two year renewable $9,000,000 line of credit with a bank, available as needed for equipment purchases and working capital. Amounts drawn against the line of credit are secured by the Company's cash invested with the bank. At March 31, 2012 there was $7,500,000 drawn against the line of credit.

The Company has scheduled interest and principal payments under its debt obligations of approximately $4,896,000 and scheduled capital lease payments of approximately $5,253,000 during the next 12 months. The Company believes that its cash flow from operations and cash resources are adequate to meet its scheduled debt and capital lease obligations during the next 12 months.

The Company as of March 31, 2012 had shareholders' equity of $25,115,000, working capital of $7,523,000 and total assets of $76,069,000.

Commitments

The Company has a $2,656,000 preferred stock investment in Mevion Medical Systems, Inc., a development stage company, which is considered a long-term investment on the balance sheet and is recorded at cost. As of March 31, 2012, the Company also has $2,500,000 in non-refundable deposits toward the purchase of three MEVION S250 proton beam radiation therapy (PBRT) systems from Mevion. For the first two systems, the Company has a commitment to pay total deposits of $3,000,000 per system until FDA approval is received, at which time the remaining balance is committed. For the third system, the Company has a commitment to pay total deposits of $500,000 until FDA approval is received, at which time the remaining balance is committed. The Company has entered into an agreement with a radiation oncology physician group which has contributed $100,000 towards the deposits on the third system. The three PRBT systems have anticipated delivery dates beginning in mid-2013. The Mevion PBRT system is not commercially proven and there is no assurance FDA approval will be received.

The Company has made non-refundable deposits totaling $6,831,000 towards the purchase of a Perfexion unit scheduled to be completed in the second quarter 2012 at a new customer site in Turkey, a LGK Model 4 Gamma Knife unit to be installed at a site in Peru, a Perfexion unit scheduled to be installed at a new customer site in Florida, and two Perfexion units scheduled to be installed at sites yet to be determined.

Including the commitments for the three MEVION S250 systems, the four Perfexion units and the LGK Model 4 Gamma Knife unit, the Company has total remaining commitments to purchase equipment in the amount of approximately $46,000,000. It is the Company's intent to finance the remaining purchase commitments as needed, and financing has been obtained for the units in Peru and Turkey. However due to the current economic and credit market conditions it has been more difficult to obtain financing for the Company's projects. The Company expects that it will be able to obtain financing on the commitments for the remaining Perfexion units, but will not receive financing commitments from a lender for its PBRT systems until Mevion obtains FDA approval on the MEVION S250. There can be no assurance that financing will be available for the Company's current or future projects, or at terms that are acceptable to the Company.