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 held on June 7, 2012.

The Company had nineteen Gamma Knife units in operation at June 30, 2012 compared to twenty Gamma Knife units at June 30, 2011. Three of the Company's customer contracts are through subsidiaries where GKF or its subsidiary is the majority owner and managing partner. Twelve of the Company's nineteen current Gamma Knife customers are under fee-per-use contracts, and seven 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 $78,000 and $114,000 to $4,284,000 and $8,687,000 for the three and six month periods ended June 30, 2012 from $4,206,000 and $8,573,000 for the three and six month periods ended June 30, 2011, respectively. The increases for both the three and six month periods are primarily due to an increase in revenue from the Company's radiation therapy sites, partially offset by a decrease in revenue from its Gamma Knife sites compared to the same periods in the prior year. The increase in radiation therapy revenue was due to a new contract that began operation in the fourth quarter 2011, and increased volume at its existing radiation therapy site. The decrease in Gamma Knife revenue for both the three and six month periods compared to the same periods in the prior year was primarily due to lost revenue from one unit that was sold to the customer in the third quarter 2011. For the three month period the decrease was also partially due to one site where the contract ended in the second quarter 2012 at the end of its term. For the six month period the revenue decrease was also partially due to a site that was out of service for one month for a cobalt reload during the first quarter 2012.

The number of Gamma Knife procedures increased by 77 and increased by 102 to 527 and 1,041 for the three and six month periods ended June 30, 2012 from 450 and 939 in the same periods in the prior year, respectively. For both the three and six month periods, the primary reason for the increase is the addition of a new Gamma Knife unit that began operation in Turkey in late second quarter 2011. For both the three and six month periods, volume at the Company's sites where Perfexion units have been installed increased by 4% compared to the prior year. The increase in the second quarter was offset by the loss of volume from a Gamma Knife site where the contract ended in the second quarter 2012.

Total costs of revenue increased by $41,000 and $164,000 to $2,411,000 and $4,977,000 for the three and six month periods ended June 30, 2012 from $2,370,000 and $4,813,000 for the three and six month periods ended June 30, 2011, respectively. Maintenance and supplies decreased by $8,000 and increased by $38,000 for the three and six month periods ended June 30, 2012 compared to the same periods in the prior year. The variance for the three month period was due to lower costs for maintenance contracts, offset by higher costs for maintenance and repairs not covered under maintenance contracts. For the six month period the increase was due to higher maintenance contract expense because the warranty period ended for three Gamma Knife units and higher costs for maintenance and repairs not covered under maintenance contracts, partially offset by lower contract maintenance at several other sites. Depreciation and amortization increased by $1,000 and $119,000 for the three and six month periods ended June 30, 2012 compared to the same periods 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, and one site where the depreciable life was extended due to a customer contract extension. Other direct operating costs increased by $48,000 and $7,000 for the three and six month periods ended June 30, 2012 compared to the same periods in the prior year. For both the three and six month periods, the increase is primarily due to higher operating costs in connection with the Company's retail sites, partially offset by lower marketing costs.

Selling and administrative costs increased by $68,000 and decreased by $30,000 to $1,109,000 and $2,133,000 for the three and six month periods ended June 30, 2012 from $1,041,000 and $2,163,000 for the same periods in the prior year, respectively. For the three month period, the increase was due to higher payroll related costs and travel expense. The decrease for the six month period was primarily due to lower payroll related costs.

Interest expense decreased by $31,000 and $33,000 to $539,000 and $1,113,000 for the three and six month periods ended June 30, 2012 from $570,000 and $1,146,000 for the three and six month periods ended June 30, 2011, respectively. For both the three and six month periods, this was primarily due to lower interest expense on borrowing under the Company's line of credit with a bank. 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 $54,000 and $69,000 to $14,000 and $15,000 for the three and six month periods ended June 30, 2012 from $68,000 and $84,000 for the three and six month periods ended June 30, 2011, respectively. For both the three and six month periods, the decrease was primarily due to a gain on the sale of equipment of $53,000 in second quarter 2011.

The Company had income tax expense of $13,000 and $24,000 for the three and six month periods ended June 30, 2012 compared to income tax expense of $22,000 and $45,000 for the three and six month periods ended June 30, 2011, respectively. The reduction in income tax expense for both the three and six month periods is primarily due to lower taxable income attributable to American Shared Hospital Services. In addition, the Company is estimating a lower effective annual income tax rate for 2012 of 46% and 50% for the three and six month periods ended June 30, 2012, based on income attributable to American Shared Hospital Services, compared to an estimated 52% income tax rate used for the same periods in the prior year.

Net income attributable to non-controlling interest decreased by $39,000 and $17,000 to $211,000 and $431,000 for the three and six month periods ended June 30, 2012 from $250,000 and $448,000 for the three and six month periods ended June 30, 2011. Non-controlling interest primarily represents the 19% interest of GK Financing owned by a third party, as well as non-controlling interests in subsidiaries of GK Financing owned by third parties that began operations in 2011. Variances in net income attributable to non-controlling interest represents the relative increase or decrease in profitability of GKF and these ventures.

The Company had net income of $15,000, or $0.00 per diluted share, and $24,000, or $0.01 per diluted share, for the three and six month periods ended June 30, 2012, compared to net income of $21,000, or $0.00 per diluted share, and $42,000, or $0.01 per diluted share, in the same periods in the prior year, respectively. The decrease in net income for the three month period was primarily due to higher selling and administrative costs and a decrease in interest and other income, partially offset by a higher gross margin and lower interest expense. The decrease in net income for the six month period was primarily due to a decrease in interest and other income and reduced gross margin, partially offset by lower selling and administrative costs and interest expense.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $997,000 at June 30, 2012 compared to $2,580,000 at December 31, 2011. The Company's cash position decreased by $1,583,000 due to payments for the purchase of property and equipment of $3,709,000, principal payments on long term debt and capital leases of $3,783,000, net pay downs on the Company's line of credit with a bank of $250,000, distributions to non-controlling interests of $539,000, investment in convertible preferred stock of $31,000 and the repurchase of the Company's common stock of $29,000. These decreases were offset by net cash from operating activities of $2,754,000, long term debt financing on the purchase of equipment of $3,925,000, and an investment by a non-controlling interest of $79,000.

As of June 30, 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 June 30, 2012 there was $7,600,000 drawn against the line of credit, compared to $7,850,000 at December 31, 2011.

The Company has scheduled interest and principal payments under its debt obligations of approximately $5,228,000 and scheduled capital lease payments of approximately $5,149,000 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 June 30, 2012 had shareholders' equity of $25,196,000, working capital of $6,262,000 and total assets of $74,365,000.

Commitments

The Company has a $2,687,000 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 June 30, 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. The Company has entered into an agreement with a radiation oncology physician group which has contributed $100,000 towards the deposit on one of these PRBT systems. The three PRBT systems have anticipated delivery dates beginning in mid-2013.

The Company has made non-refundable deposits totaling $2,924,000 towards the purchase of a LGK Model 4 Gamma Knife unit to be installed at a site in Peru, a radiation therapy unit to be installed in Brazil, a Perfexion unit scheduled to be installed at a new customer site in Florida, a Perfexion unit to be installed at an existing customer, and another Perfexion unit scheduled to be installed at a site yet to be determined.

Including the commitments for the three MEVION S250 systems, the three Perfexion units, the LGK Model 4 Gamma Knife unit and the radiation therapy 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 Florida and Peru. However, due to the current economic and credit market conditions it has been more difficult to obtain financing for some of the Company's projects. The Company expects that it will be able to obtain financing on the commitments for the remaining Perfexion units and the radiation therapy unit. The Company also expects that it will be able to obtain financing commitments from lenders for its PBRT systems now that Mevion has obtained FDA approval on the MEVION S250. However, 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.