AMERICAN SHARED HOSPITAL SERVICES

Four Embarcadero Center, Suite 3700

San Francisco, California 94111

NOTICE OF 2006 ANNUAL MEETING OF SHAREHOLDERS

To Be Held On June 28, 2006

TO THE SHAREHOLDERS OF AMERICAN SHARED HOSPITAL SERVICES:

      NOTICE IS HEREBY GIVEN that, pursuant to a call of the Board of Directors, the 2006 Annual Meeting of Shareholders (the “Meeting”) of American Shared Hospital Services, a California corporation (the “Company”), will be held at the Ritz Carlton Hotel, 600 Stockton Street (corner of California Street), San Francisco, California 94111 at 9:00 am (Pacific time), on Wednesday, June 28, 2006 to consider and to act upon the following matters, all as set forth in the Proxy Statement.

      The Board of Directors knows of no matters, other than those set forth in paragraphs (1), (2), (3), and (4) above, that will be presented for consideration at the Meeting.

      The Board of Directors has fixed the close of business on May 1, 2006 as the Record Date for the determination of shareholders entitled to vote at the Meeting.

      WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE DATE, SIGN AND MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED AS PROMPTLY AS POSSIBLE. THE PROXY IS REVOCABLE AND WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING. IN ORDER TO FACILITATE THE PROVISION OF ADEQUATE ACCOMMODATIONS, PLEASE INDICATE ON THE PROXY WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON.

Dated: April 28, 2006

San Francisco, California

AMERICAN SHARED HOSPITAL SERVICES

Four Embarcadero Center, Suite 3700

San Francisco, California 94111

PROXY STATEMENT

2006 ANNUAL MEETING OF SHAREHOLDERS

June 28, 2006

INTRODUCTION

      This Proxy Statement is being furnished to shareholders of American Shared Hospital Services, a California corporation (the “Company”), in connection with the solicitation of proxies by the Company’s Board of Directors for use at the 2006 Annual Meeting of Shareholders scheduled to be held at the Ritz Carlton Hotel, 600 Stockton Street (corner of California Street), San Francisco, California 94111 at 9:00 am (Pacific time) on Thursday, June 28, 2006 and at any adjournment or adjournments thereof (the “Meeting”). It is anticipated that this Proxy Statement and the Proxy will first be sent to shareholders on or about May 1, 2006.

      The matters to be considered and voted upon at the Meeting will be:

Only shareholders of record at the close of business on May 1, 2006 (the “Record Date”) are entitled to notice of and to vote at the Meeting.

Revocability of Proxies

      A proxy for use at the Meeting is enclosed. Any shareholder who executes and delivers such proxy may revoke it at any time prior to its use by filing with the Secretary of the Company either written instructions revoking such proxy or a duly executed proxy bearing a later date. Written notice of the death of the person executing a proxy, before the vote is counted, is tantamount to revocation of such proxy. A proxy may also be revoked by attending the Meeting and voting in person.

Solicitation of Proxies

      This proxy solicitation is being made by the Board of Directors of the Company. The expense of the solicitation will be paid by the Company. To the extent necessary to assure sufficient representation at the Meeting, proxies may be solicited by any appropriate means by directors, officers, regular employees of the Company and the stock transfer agent for the Common Shares, who will not receive any additional compensation therefor. The Company will request that banks, brokers and other fiduciaries solicit their customers who own beneficially the Common Shares listed of record in names of nominees and, although there is no formal arrangement to do so, the Company will reimburse such persons the reasonable expenses of such solicitation. In addition, the Company may pay for and utilize the services of individuals or companies not regularly employed by

the Company in connection with the solicitation of proxies, if the Board of Directors of the Company determines that this is advisable.

Outstanding Securities

      The Board of Directors has fixed May 1, 2006 as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the Meeting. At the close of business on the Record Date, there were outstanding and entitled to vote 5,018,885 Common Shares. The Common Shares are the only class of securities entitled to vote at the Meeting.

Vote Required and Voting Procedures

      Each holder of Common Shares will be entitled to one vote, in person or by proxy, for each share standing in its name on the books of the Company as of the Record Date for the Meeting on each of the matters duly presented for vote at the Meeting, except as indicated below in connection with the election of directors.

      In connection with the election of directors, shares are permitted to be voted cumulatively, if (i) a shareholder present at the Meeting has given notice at the Meeting, prior to the voting, of such shareholder’s intention to vote its shares cumulatively and (ii) the names of the candidates for whom such shareholder desires to cumulate votes have been placed in nomination prior to the voting. If a shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. Cumulative voting allows a shareholder to give one nominee as many votes as is equal to the number of directors to be elected, multiplied by the number of shares owned by such shareholder or to distribute votes on the same principle between two or more nominees. Discretionary authority to cumulate votes is hereby solicited by the Board of Directors.

      In connection with the solicitation by the Board of Directors of proxies for use at the Meeting, the Board of Directors has designated Ernest A. Bates, M.D. and Craig K. Tagawa as proxies. Common Shares represented by properly executed proxies will be voted at the Meeting in accordance with the instructions specified thereon. If no instructions are specified, the Common Shares represented by any properly executed proxy will be voted FOR the (1) election of the five nominees for the Board of Directors named herein, (2) approval and adoption for the Company’s 2006 Plan, (3) approval and adoption of the Company’s Long Term Incentive Compensation Plan, and (4) ratification of the appointment of the Company’s Independent Registered Public Accounting Firm.

      The Board of Directors is not aware of any matters that will come before the Meeting other than as described above. However, if such matters are presented, the named proxies will, in the absence of instructions to the contrary, vote such proxies in accordance with the judgment of such named proxies with respect to any such other matter properly coming before the Meeting.

      All outstanding shares of the Company’s Common Stock represented by properly executed and unrevoked proxies received in time for the Meeting will be voted. A shareholder may, with respect to the election of directors, (i) vote for the election of all five nominees named herein as directors, (ii) withhold authority to vote for all such director nominees or (iii) vote for the election of all such director nominees other than any nominee(s) with respect to whom the shareholder withholds authority to vote by so indicating in the appropriate space on the proxy. Withholding authority to vote for a director nominee will not prevent such director nominee from being elected. A shareholder may, with respect to the approval of the Company’s 2006 Plan, (i) vote for the approval, (ii) vote against approval, or (iii) abstain. A shareholder may, with respect to the approval of the Company’s Long Term Incentive Compensation Plan, (i) vote for approval, (ii) vote against approval, or (iii) abstain. A shareholder may, with respect to the proposal to ratify the appointment of the Company’s Independent Registered Public Accounting Firm, (i) vote for the ratification, (ii) vote against the ratification, or (iii) abstain.

      A proxy submitted by a shareholder may indicate that all or a portion of the shares represented by such proxy are not being voted by such shareholder with respect to a particular matter. This could occur, for example, when a broker is not permitted to vote stock held in street name on certain matters in the absence of instructions from the beneficial owner of the stock. The shares subject to any such proxy which are not being voted with respect to a particular matter (the “non-voted shares”) will be considered shares not present and entitled to vote

on such matter, although such shares may be considered present and entitled to vote for other purposes and will count for purposes of determining the presence of a quorum.

      A majority of the Common Shares outstanding on the Record Date must be represented in person or by proxy at the Annual Meeting in order to constitute a quorum for the transaction of business. In the election of directors, the five candidates receiving the highest number of votes will be elected directors of the Company. Proposals Two, Three and Four require for approval an affirmative vote of a majority of the voting power present or represented by proxy and voting on the proposal, assuming a quorum is present and that the affirmatively voting shares also constitute at least a majority of the required quorum. For purposes of these proposals, abstentions and broker non-votes are counted for purposes of determining the quorum and have the effect of a vote AGAINST the proposal.

      The Board of Directors has appointed Geraldine Zarbo of American Stock Transfer & Trust Company, the registrar and transfer agent for the Common Shares, or her designee, as the Inspector of Elections for the Annual Meeting. The Inspector of Elections will determine the number of Common Shares represented in person or by proxy at the Annual Meeting, whether a quorum exists, the authenticity, validity and effect of proxies and will receive and count the votes. The election of directors will not be by ballot unless a shareholder demands election by ballot at the Annual Meeting before the voting begins.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

Board of Directors

      The Company’s Bylaws provide that there shall be no fewer than five nor more than nine directors and that the exact number shall be fixed from time to time by a Resolution of the Board of Directors. The number of directors currently is fixed at five.

      The Board of Directors is proposing the persons named below for election to the Board of Directors. Each of the persons identified below will be nominated for election to serve until the next Annual Meeting of Shareholders and until their successors shall be elected and qualified. Votes will be cast pursuant to the enclosed proxy in such a way as to effect the election of each of the persons named below or as many of them as possible under applicable voting rules. If a nominee shall be unable or unwilling to accept nomination for election as a director, it is intended that the proxy holders will vote for the election of such substitute nominee, if any, as shall be designated by the Board of Directors. Each of the nominees named below has notified the Board of Directors that, if elected, he is willing to serve as a director.

      Set forth below is certain information regarding each of the nominees.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THE NOMINEES NAMED BELOW. PROPERLY EXECUTED PROXIES RETURNED TO THE COMPANY WILL BE VOTED “FOR” THE NOMINEES NAMED BELOW UNLESS OTHERWISE INSTRUCTED.

Nominees

      ERNEST A. BATES, M.D., founder of the Company, has served as Chairman of the Board of Directors and Chief Executive Officer since the incorporation of the Company. He is currently 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 Accelerating Medical Solutions-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. Dr. Bates is 69 years old. Dr. Bates is the father of Board Member Ernest R. Bates.

      ERNEST R. BATES has been a director of the Company since 2004. He has 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 39 years old. Ernest R. Bates is the son of Board Member Dr. Ernest A. Bates.

      OLIN C. ROBISON has been a director of the Company since 2003. He is currently President Emeritus of Middlebury College. Mr. Robison was President and Chief Executive Officer of the Salzburg Seminar from 1991 to 2005. He was President of Middlebury College from 1975 to 1990. He is a Director of The Investment Company of America, American Mutual Fund and AMCAP (all of the American Funds Group) and has served on the Council (Board) of the Royal Institute of International Affairs in London. He received his undergraduate degree from Baylor University and holds the Doctor of Philosophy degree from Oxford University. Mr. Robison is 69 years old.

      JOHN F. RUFFLE has been a director of the Company since 1995. He retired in 1993 as Vice-Chairman of the Board and a Director of J.P. Morgan & Co. Incorporated and Morgan Guaranty Trust Co. of New York. He is also a Director of Reckson Associates Realty Corporation; a member of the Board of Trustees of certain mutual funds in the J.P Morgan family of mutual funds and certain investment funds managed by J.P Morgan Investment

Management, Inc.; and a Trustee of The Johns Hopkins University. He is a graduate of The Johns Hopkins University, with an MBA in finance from Rutgers University, and is a Certified Public Accountant. Mr. Ruffle is 69 years old.

      STANLEY S. TROTMAN, Jr., has been a director of the Company since 1996. He retired in 2000 as a Managing Director with the Health Care Group of PaineWebber Incorporated, an investment banking firm. Mr. Trotman had been with PaineWebber Incorporated since 1995 following the consolidation of Kidder, Peabody, also an investment banking firm, with PaineWebber. He had previously co-directed Kidder, Peabody’s Health Care Group since April 1990. Formerly he had been head of the Health Care Group at Drexel Burnham Lambert, Inc. where he had been employed for approximately 22 years. He is also a Director of Oncure Medical Corp. He received his undergraduate degree from Yale University in 1965 and holds an MBA from Columbia Business School in 1967. Mr. Trotman is 62 years old.

Meetings of the Board of Directors

      The Board of Directors of the Company held four regular meetings during 2005. All directors attended at least 75% of the aggregate number of meetings of both the Board of Directors and of the Committees of the Board on which such director served during the year.

      Shareholders may communicate with the Board by writing to: Four Embarcadero Center, Suite 3700; San Francisco, CA 94111-4107, Attention: Ernest A. Bates. We encourage directors to attend our annual meeting and all directors attended the 2005 Annual Meeting in person. All shareholder communications to directors are forwarded to them.

Committees of the Board of Directors

      The Company has standing Compensation, Nominating and Corporate Governance and Audit Committees, each of which is described below. The American Stock Exchange (“AMEX”) adopted enhanced board and board committee independence requirements that became fully applicable to the Company on July 31, 2005. The Company was in compliance with these enhanced requirements prior to July 31, 2005. Thus, a majority of our directors (Messrs. Robison, Ruffle and Trotman) are independent under the AMEX rules and Rule 10A-3 under the Securities Exchange Act and each of the Committees described above is comprised of these three independent directors. Each of the Audit, Compensation and Nominating and Corporate Governance Committees has adopted a formal written charter. These, as well as our Code of Professional Conduct and Ethics, are available on our website at www.ashs.com. You may also request a copy of these documents free of charge by writing our Corporate Secretary. We intend to post on our website any amendments to our Code of Professional Conduct and Ethics, as well as any waivers for directors or executive officers (including our chief accounting officer and controller and anyone else performing similar functions) within five business days after the date of any amendment or waiver. The information on our website is not part of this proxy statement. The Company’s independent directors meet at least annually without management and the non-independent directors, as required by the AMEX rules.

      The function of the Compensation Committee is to recommend to the Board of Directors the compensation of the Company’s executive officers. The Compensation Committee did not meet during 2005. The Compensation Committee consists of Mr. Robison, Mr. Ruffle, and Mr. Trotman. Mr. Trotman is Chair of the Compensation Committee.

      The purpose of the Nominating and Corporate Governance Committee is to recommend candidates for election to the Board of Directors. The Company adopted a Nominating and Corporate Governance Committee Charter during the past year which is available on our website. The Nominating and Corporate Governance Committee met once during 2005. In 2006, the Nominating and Corporate Governance Committee by unanimous written consent nominated Dr. Bates, Mr. Bates, Mr. Robison, Mr. Ruffle and Mr. Trotman for election to the Board. Mr. Robison, Mr. Ruffle and Mr. Trotman serve on the Nominating and Corporate Governance Committee. Mr. Trotman is Chair of the Nominating and Corporate Governance Committee.

      The purpose of the Audit Committee is to review the financial reporting and internal controls of the Company, to appoint the independent auditors, and to review the reports of such auditors. The Audit Committee consists of Mr. Robison, Mr. Ruffle, and Mr. Trotman. Mr. Ruffle is Chair of the Audit Committee. During the year 2005 the Audit Committee held four regular meetings and four telephonic meetings. For further information concerning the Audit Committee, refer to the “Audit Committee Report.” Mr. Ruffle is a “financial expert” and meets the applicable independence requirements of AMEX and Rule 10-A-3 under the Securities Exchange Act.

      In addition, the Company has a Stock Option Committee whose purpose is to administer the Company’s 1995 Stock Option Plan and 2001 Stock Option Plan, and to determine recipients of awards pursuant to such plans and the terms of such awards. During 2005 the functions of the Stock Option Committee were performed by the Board as a whole.

Identifying and Evaluating Director Nominees

      The Nominating and Corporate Governance Committee uses various methods to identify director nominees. The Nominating and Corporate Governance Committee assesses the appropriate size and composition of the Board and the particular needs of the Board based on whether any vacancies are expected due to retirement or otherwise. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current board members, shareholders, or other sources. All candidates are evaluated based on a review of the individual’s qualifications, skills, independence and expertise.

      The Nominating and Corporate Governance Committee will consider director candidates submitted by shareholders to: Four Embarcadero Center, Suite 3700, San Francisco, CA 94111-4107, Attention: Nominating and Corporate Governance Committee. Such recommendations should be accompanied by (i) evidence of the shareholder’s stock ownership over the last year, (ii) a statement that the shareholder is not a competitor of the Company, (iii) a resume and contact information for the director candidate, as well as a description of the candidate’s qualifications and (iv) a statement whether the candidate has expressed interest in serving as a director. The Nominating and Corporate Governance Committee follows the same process and uses the same criteria for evaluating candidates proposed by shareholders as it does for candidates proposed by other parties. The Nominating and Corporate Governance Committee will consider such candidacy and will advise the recommending shareholder of its final decision. A shareholder who wishes to nominate a person for director must provide the nomination in writing to the Secretary at the Company’s principal offices pursuant to the notice provisions in the By-laws. Such notice must be received not less than 60 nor more than 90 days prior to the Annual Meeting or, if less than 70 days’ notice of the date of such meeting has been given, then within 10 business days following the first public disclosure of the meeting date or the mailing of the Company’s notice. Any such notice must contain information regarding the nominee and the proponent. Details concerning the nature of such information are available without charge from the Company.

Director Compensation

      In 2005, non-employee directors were paid an annual retainer of $20,000, payable quarterly. In addition, under the Company’s 2001 Plan, non-employee directors automatically receive an option grant on the date of the Company’s Annual Shareholder Meeting each year to acquire up to 4,000 shares of the Company’s common stock at the market price on the date of grant, until a director has received options to purchase an aggregate of 12,000 shares. Each 4,000 share option grant vests on the first anniversary of the option grant date provided the non-employee director is in the Company’s service on such date. Pursuant to such program, Ernest R. Bates and Olin C. Robison, each received in 2005 an option to purchase 4,000 shares of the Company’s common stock at an exercise price per share of $6.16. In addition, during 2005 all non-employee directors received a discretionary option grant to purchase 4,000 shares of the Company’s common stock at an exercise price per share of $6.16, the fair market value of the Company’s common stock on the option grant date. These discretionary option grants vest at the rate of 20% per year beginning with the first anniversary of the option grant date. Non-employee directors also received reimbursement of expenses incurred in attending meetings. No payment is made for attendance at meetings by any director who is a full time employee of the Company.

      Our stockholders are being asked to vote on a proposal to approve the implementation of the 2006 Stock Incentive Plan (the “2006 Plan”). If the 2006 Plan is approved, each individual who first becomes a non-employee director on or after the date of the 2006 Annual Meeting will, at the time of his or her election to the board, receive an option grant to purchase a specified number of shares of our common stock and a restricted stock unit award covering an additional number of shares of our common stock, provided that such individual has not previously been in the employ of the Company or any of its parents or subsidiaries. The specific number of shares subject to the initial award will be determined by the Compensation Committee of our Board of Directors, but will not exceed 10,000 shares for the option component or more than 3,000 shares for the restricted stock unit component. In addition, on the date of each Annual Shareholders Meeting, beginning with the 2006 Annual Meeting, each individual who will continue to serve as a non-employee director will automatically be granted an option to purchase a specified number of shares of our common stock and a restricted stock unit award covering an additional number of shares of our common stock, provided such individual has served as a non-employee director for at least six (6) months. The specific number of shares subject to the initial award will be determined by the Compensation Committee of our Board of Directors, but will not exceed 3,000 shares for the option component or more than 750 shares for the restricted stock unit component. There will be no limit on the number of such annual awards any one eligible non-employee director may receive over his or her period of continued service on the Board of Directors, and non-employee directors who have previously been in the Company’s employ will be eligible to receive one or more such annual awards over their period of service on the Board of Directors. Each initial stock option and restricted stock unit award will vest in 4 equal annual installments upon the individual’s completion of each year of service. Each annual stock option and restricted stock award will vest in one installment upon the individual’s completion of one year of board service. It is currently anticipated that the annual award to the non-employee directors at the 2006 Annual Meeting will be comprised of an option grant for 2,000 shares and a restricted stock unit award for an additional 500 shares. In the event stockholder approval of the 2006 Plan is obtained at the Annual Meeting, the following non-employee directors will each receive an option grant for up to 3,000 shares of common stock under the Automatic Option Grant Program under the 2006 Plan and a restricted stock unit award covering up to 750 shares of common stock: Messrs. Bates, Robinson, Ruffle and Trotman. In the event stockholder approval of the 2006 Plan is not obtained, then Mr. Bates will receive an option grant for 4,000 shares under the 2001 Plan’s automatic grant program, as described above. In either case, the grants will be made on the date of the 2006 Annual Meeting, and each option will have an exercise price per share equal to the closing selling price per share of common stock on such date.

      In addition to the equity compensation award(s), non-employee directors will receive in 2006 a $20,000 annual retainer fee payable quarterly, and reimbursement of expenses incurred in attending meetings.

CERTAIN ADDITIONAL INFORMATION

Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Shares as of April 10, 2006, of (i) each person known to the Company to own beneficially 5% or more of the Common Shares, (ii) each nominee for director of the Company, (iii) the chief executive officer and the

chief operating and financial officer named in the Summary Compensation Table, and (iv) all directors and executive officers as a group.

Compensation of Executive Officers

      The following table sets forth the compensation paid by the Company for the fiscal years ending December 31, 2003, December 31, 2004 and December 31, 2005 in those years for services rendered in all capacities during 2003, 2004 and 2005, respectively, to the Chief Executive Officer and each executive officer

other than the Chief Executive Officer who served as an officer at December 31, 2005 and earned cash compensation of $100,000 or more during 2005.

Summary Compensation Table

Long Term Compensation Awards

      The “Long Term Compensation Awards” Table has been omitted because no long term compensation awards were made during the relevant years to the Company’s executive officers named in the Summary Compensation Table.

Option Grants in Last Fiscal Year

      The following table sets forth stock options granted in 2005 to each of the Company’s executive officers named in the Summary Compensation Table. The table also sets forth the hypothetical grant date present value, assuming the weighted average assumptions noted below. The actual future value of the options will depend on the market value of the Company’s Common Stock.

Shares Authorized for Issuance Under Equity Compensation Plans

      The following table summarizes, as of December 31, 2005, the total shares of our common stock that may be received by holders of options upon the vesting and exercise of currently outstanding options, the weighted average exercise price of those outstanding options and the number of shares of our common stock that are still available for future issuance under our equity compensation plans after considering the stock options currently outstanding.

Long-Term Incentive Plan Awards in Last Fiscal Year

      The “Long-term Incentive Plan Awards” (“LTIP Awards”) table has been omitted because no LTIP Awards were made during 2005 to the Company’s executive officers named in the Summary Compensation Table.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

      The following table sets forth the number of shares acquired on exercise of stock options and the aggregate gains realized upon exercise of such options during 2005, by the Company’s executive officers named in the Summary Compensation Table. The following table also sets forth the number of shares underlying exercisable and unexercisable options held by such executive officers on December 31, 2005.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES

Employment Agreements

      The Company had no employment contracts with its directors or executive officers named in the Summary Compensation Table in 2005.

Board of Directors Report on Executive Compensation

      The following Report of the Board of Directors shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act or under the Exchange Act, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

      This Report of the Board of Directors describes the Company’s method of compensating its executive officers, and describes the basis on which 2005 compensation was paid to such executive officers, including those named in the Summary Compensation Table.

      During 2005, the Board of Directors met once to determine that compensation paid in 2005 by the Company to its Chief Executive Officer and other executive officers would be based on policies in effect in recent prior years.

      The Company’s compensation program seeks to establish compensation that is competitive in both the healthcare industry and among entrepreneurial, growth-oriented companies in order to attract and retain high quality employees. Compensation is linked to each employee’s level of responsibility and personal achievements with respect to operational and financial goals established by the Chief Executive Officer and the Board of Directors. Depending on the individual officer’s area of responsibility, such goals may include new business and revenue acquisition, operating expense reduction and control, operating efficiencies, etc. In addition, the compensation system seeks to develop and encourage employee ownership of the Company’s stock through stock options.

      The primary component of executive compensation for the Company in 2005 was base salary and bonus. Discretionary bonuses may be paid, based on a formula, if financial and other results of the individual executive’s area of responsibility meet or exceed financial and operational targets established at the beginning of the fiscal year. A bonus of $50,000 for Craig K. Tagawa was paid for the year 2005, based on continued growth in the Gamma Knife business.

      In addition to base compensation, the Company has used grants of stock options to retain senior executives and to motivate them to improve long-term stock market performance. The number of options granted in the past was determined by reference to the level of responsibility of the particular executive in the Company and such executive’s proposed role in the Company’s future operations. In addition, during 1995 the Shareholders approved a grant of options to acquire 1,495,000 Common Shares at an initial exercise price of $0.01 per share to the Company’s Chairman and Chief Executive Officer, in consideration of his continued service to the Company and his personal guarantee of $6,500,000 of indebtedness of the Company. The Company’s Chairman and Chief Executive Officer exercised options to acquire 204,513 Common Shares in 2005. All options awarded under this grant have now been exercised.

Board of Directors

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Willie R. Barnes, the Secretary of the Company, is a partner in the law firm of Musick, Peeler & Garrett LLP. That law firm performed legal services for the Company in 2005. The management of the Company is of the opinion that the fees paid to Mr. Barnes’ law firm are comparable to those fees that would have been paid for comparable legal services from a law firm not affiliated with the Company. Mr. Barnes served during 2004 on the Compensation, Stock Option and Nominating Committees of the Board of Directors until his term expired on June 17th 2004.

Compliance with Section 16(a) under the Securities Exchange Act of 1934

      Reports filed under the Exchange Act and received by the Company on or after January 1, 2005, indicate that during 2005 directors, officers and 10% shareholders of the Company filed all required reports within the periods established by applicable rules, with the following exception: On June 16, 2005, the following individuals acquired options to purchase shares of the Company’s common stock: Willie R. Barnes (4,000 shares), John F. Ruffle (4,000 shares), Stanley S. Trotman (4,000 shares), Ernest R. Bates (8,000 shares), Olin C. Robinson (8,000 shares) and Craig K. Tagawa (14,500 shares). The acquisition of these options was not reported to the Securities and Exchange Commission until December 12, 2005.

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, 2005.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

AMONG AMERICAN SHARED HOSPITAL SERVICES, THE S&P 500 INDEX

AND THE S&P SMALLCAP 600 INDEX

AUDIT COMMITTEE REPORT

      The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the Report by reference therein.

      The Audit Committee of the Board of Directors consists of three directors, all of whom are ‘independent’ as defined in the listing standards of the American Stock Exchange. The primary purpose of the Audit Committee is to review the financial reporting and internal controls of the Company, to appoint independent auditors, to review the reports of such auditors, and to review annually the Audit Committee charter. During 2005, the Audit Committee held eight meetings, four of which were held telephonically. Mr. Ruffle is Chair of the Audit Committee.

      The Audit Committee reviewed and held discussions with management and the independent auditors regarding the financial statements of the Company for the fiscal year ended December 31, 2005. These discussions included the quality of the Company’s internal controls, the audit plans, audit scope and identification of audit risks. In addition, the Committee assured that the independent auditors reviewed and discussed with management the interim financial reports prior to each quarterly earnings announcement.

      The Company’s independent auditors provided a formal written statement that described all relationships between the auditors and the Company with respect to the auditors’ independence as required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and the Audit Committee satisfied itself as to the auditors’ independence.

      The Audit Committee discussed with the Independent Registered Public Accounting Firm all matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees” and, with and without the presence of management, reviewed and discussed the results of the independent auditors’ examination of the Company’s financial statements. Management, being responsible for the Company’s financial statements, represented that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles. The independent auditors are responsible for the examination of those statements.

      Based on the Audit Committee’s discussions with management and the independent auditors, and the Audit Committee’s review as described previously, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission.

      Submitted by the Audit Committee of the Board of Directors:

PROPOSAL NO. 2

APPROVAL OF 2006 STOCK INCENTIVE PLAN

      The shareholders are being asked to vote on a proposal to approve the implementation of the 2006 Stock Incentive Plan (the “2006 Plan”) under which 750,000 shares of our common stock will initially be reserved for issuance. The 2006 Plan was adopted by our board of directors on February 23, 2006, subject to shareholder approval at the 2006 Annual Meeting. The 2006 Plan is intended to serve as a successor to our 1995 Stock Option Plan (the “1995 Plan”) which expired on August 15, 2005 and our 2001 Stock Option Plan (the “2001 Plan”). The share reserve under those two plans, including the shares of common stock subject to currently outstanding options under the plans, will be transferred to the 2006 Plan upon shareholder approval of the 2006 Plan and no further option grants or share issuances will be made under the 1995 Plan or the 2001 Plan following such shareholder approval of the 2006 Plan. The share reserve under the 2006 Plan will be comprised of the following components: (i) approximately 140,000 shares subject to outstanding options under the 1995 Plan which are to be transferred to the 2006 Plan, (ii) the 250,000 shares reserved for issuance under the 2001 Plan, including approximately 6,500 shares subject to currently outstanding options under that plan and (iii) an additional share increase of approximately 360,000 shares. Accordingly, the approval of the 2006 Plan increases the number of shares available for issuance as equity compensation by approximately 360,000 shares.

      We believe that equity-based incentives have played a pivotal role in our efforts to attract and retain key personnel essential to our long-term growth and financial success. For that reason, we have structured the 2006 Plan to provide us with more flexibility in designing equity incentives in an environment where a number of companies have moved from traditional option grants to other stock or stock-based awards, such as stock appreciation rights, restricted stock and restricted stock units. Accordingly, with the 2006 Plan, we will have a broader array of equity incentives to utilize for purposes of attracting and retaining the services of key individuals. We will continue to rely significantly on equity incentives because we believe that such incentives are necessary for us to remain competitive in the marketplace for executive talent and other key employees.

      The 2006 Plan differs from the 1995 Plan and 2001 Plan in the following principal respects:

Summary Description of 2006 Stock Incentive Plan

      The principal terms and provisions of the 2006 Plan are summarized below. The summary, however, is not intended to be a complete description of all the terms of the 2006 Plan and is qualified in its entirety by reference to the complete text of the 2006 Plan. Any shareholder who wishes to obtain a copy of the actual plan documents may do so upon written request to our Corporate Secretary at our principal offices at Four Embarcadero Center, Suite 3700, San Francisco, CA 94111.

      Incentive Programs. The 2006 Plan consists of three separate equity incentive programs: (i) the discretionary grant program, (ii) the stock issuance program and (iii) the automatic grant program for the non-employee members of our board of directors. The principal features of each program are described below.

      Types of Awards. The various types of equity incentives which may be issued under the 2006 Plan (collectively, the “Awards”) are as follows: (i) stock options and stock appreciation rights under the discretionary grant program, (ii) direct stock issuances, stock bonuses and stock issuances pursuant to restricted stock units and other share-right awards and (iii) and stock options and restricted stock unit awards under the automatic grant program.

      Administration. The compensation committee of our board of directors will have the exclusive authority to administer the discretionary grant and stock issuance programs with respect to Awards made to our executive officers and board members and will also have the authority to make Awards under those programs to all other eligible individuals. However, our board of directors may at any time appoint a secondary committee of one or more board members to have separate but concurrent authority with the compensation committee to make Awards under those two programs to individuals other than executive officers and board members.

      The term “plan administrator,” as used in this summary, will mean our compensation committee and any secondary committee, to the extent each such entity is acting within the scope of its administrative authority under the 2006 Plan.

      The compensation committee will have the limited discretion under the automatic grant program to determine the number of shares subject to each option grant and restricted stock unit award made under that program, up to the maximum number of shares permissible per grant or award, but all option grants and restricted stock unit awards will otherwise be made in strict compliance with the express terms of that program.

      Eligibility. Officers and employees, as well as independent consultants and contractors, in our employ or in the employ of our parent or subsidiary companies (whether now existing or subsequently established) will be eligible to participate in the discretionary grant and stock issuance programs. The non-employee members of our board of directors will also be eligible to participate in those two programs as well as the automatic grant program. As of April 10, 2006, approximately 13 persons (including three (3) executive officers) were eligible to participate in the discretionary grant and stock issuance programs, and four (4) non-employee board members were eligible to participate in those programs and the automatic grant program.

      Securities Subject to 2006 Plan. If the 2006 Plan is approved by our shareholders, 750,000 shares of our common stock will initially be reserved for issuance over the term of the plan. Such share reserve will be comprised of the following components: (i) approximately 140,000 shares subject to outstanding options under the 1995 Plan which are to be transferred to the 2006 Plan, (ii) the 250,000 shares reserved for issuance under the 2001 Plan, including approximately 6,500 shares subject to currently outstanding options under that plan and (iii) an additional share increase of approximately 360,000 shares. Accordingly, the approval of the 2006 Plan increases the number of shares available for issuance as equity compensation by approximately 360,000 shares.

      If the shareholders approve the 2006 Plan, no further stock option grants or stock issuances will be made under either our 1995 Plan or our 2001 Plan. However, the outstanding options under the 1995 Plan and the 2001 will continue in full force in accordance with their terms, and nothing in the 2006 Plan will affect those options.

      No participant in the 2006 Plan may receive option grants, stand-alone stock appreciation rights, direct stock issuances (whether vested or unvested) or other stock-based awards for more than 150,000 shares of our common stock in any single calendar year, subject to adjustment for subsequent stock splits, stock dividends and similar transactions. Shareholder approval of this proposal will also constitute approval of that 150,000-share limitation for purposes of Internal Revenue Code Section 162(m). This limitation will assure that any deductions to which we would otherwise be entitled upon the exercise of stock options or stock appreciation rights granted under the discretionary grant program will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per executive officer imposed under Section 162(m). In addition, one or more shares issued under the stock issuance program may also qualify as performance-based compensation that is not subject to the Section 162(m) limitation, if the vesting of those shares is tied solely to the attainment of the corporate performance milestones discussed below in the summary description of that program.

      The shares of common stock issuable under the 2006 Plan may be drawn from shares of our authorized but unissued common stock or from shares of our common stock that we acquire, including shares purchased on the open market or in private transactions.

      Shares subject to Awards under the 2006 Plan which remain unissued upon the expiration or termination of those Awards will be available for subsequent grants under the 2006 Plan. Any unvested shares issued under the 2006 Plan that are subsequently forfeited or that we repurchase, at a price not greater than the original issue price paid per share, pursuant to our repurchase rights under the 2006 Plan will be added back to the number of shares reserved for issuance under the 2006 Plan and will accordingly be available for subsequent issuance.

      There are no net counting provisions in effect under the 2006 Plan. Accordingly, the following share counting procedures will apply:

Equity Incentive Programs

      Discretionary Grant Program. Under the discretionary grant program, eligible persons may be granted options to purchase shares of our common stock or stock appreciation rights tied to the value of our common stock. The plan administrator will have complete discretion to determine which eligible individuals are to receive such Awards, the time or times when those Awards are to be made, the number of shares subject to each such Award, the vesting schedule (if any) to be in effect for the Award, the maximum term for which the Award is to remain outstanding and the status of any granted option as either an incentive stock option or a non-statutory option under the federal tax laws.

      Each granted option will have an exercise price per share determined by the plan administrator, but the exercise price will not be less than one hundred percent of the fair market value of the option shares on the grant date. No granted option will have a term in excess of seven years. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date. However, one or more options may be structured so that they will be immediately exercisable for any or all of the option shares. The shares acquired under such immediately exercisable options will be subject to repurchase by us, at the lower of the exercise price paid per share or the fair market value per share, if the optionee ceases service prior to vesting in those shares.

      Upon cessation of service, the optionee will have a limited period of time in which to exercise his or her outstanding options to the extent exercisable for vested shares. The plan administrator will have complete discretion to extend the period following the optionee’s cessation of service during which his or her outstanding options may be exercised and/or to accelerate the exercisability or vesting of such options in whole or in part. Such discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee’s actual cessation of service.

      The 2006 Plan will allow the issuance of two types of stock appreciation rights under the discretionary grant program:

      The distribution with respect to any exercised tandem or stand-alone stock appreciation right will be made in shares of our common stock. Stock appreciation rights will remain exercisable for a limited period following the holder’s cessation of service, but only to the extent those rights are exercisable at the time of such cessation of service. The plan administrator will have complete discretion to extend the period following the holder’s cessation of service during which his or her outstanding stock appreciation rights may be exercised and/or to accelerate the exercisability or vesting of those stock appreciation rights in whole or in part. Such discretion may be exercised at any time while the stock appreciation right remains outstanding, whether before or after the holder’s actual cessation of service.

      Repricing Prohibition. The plan administrator may not implement any of the following repricing programs without obtaining shareholder approval: (i) the cancellation of outstanding options or stock appreciation rights in return for new options or stock appreciation rights with a lower exercise price per share, (ii) the cancellation of outstanding options or stock appreciation rights with exercise prices per share in excess of the then current fair market value per share of our common stock for consideration payable in our equity securities or (iii) the direct reduction of the exercise price in effect for outstanding options or stock appreciation rights.

      Stock Issuance Program. Shares may be issued under the stock issuance program at a price per share not less than their fair market value, payable in cash or other valid consideration under the California Corporations Code. Shares may also be issued as a bonus for past services without any cash purchase price required of the recipient. Shares of our common stock may also be issued under the program pursuant to share right awards or restricted stock units which entitle the recipients to receive those shares, without payment of any cash purchase price, upon the attainment of designated performance goals or the completion of a prescribed service period or upon the expiration of a designated time period following the vesting of those awards or units, including (without limitation), a deferred distribution date following the termination of the recipient’s service with us.

      The plan administrator will have complete discretion to determine which eligible individuals are to receive Awards under the stock issuance program, the time or times when those Awards are to be made, the number of shares subject to each such Award, the vesting schedule to be in effect for the issuance or award and the cash consideration (if any) payable per share. The shares issued may be fully and immediately vested upon issuance or may vest upon the completion of a designated service period or the attainment of pre-established performance goals.

      In order to assure that the compensation attributable to one or more Awards under the program will qualify as performance-based compensation which will not be subject to the $1 million limitation on the income tax deductibility of the compensation paid per executive officer which is imposed under Internal Revenue Code

Section 162(m), the plan administrator will also have the discretionary authority to structure one or more of those Awards so that the underlying shares of common stock will vest only upon the achievement of certain pre-established corporate performance goals based on one or more of the following criteria: (1) return on total shareholder equity; (2) earnings per share; (3) net income or operating income (before or after taxes); (4) earnings before interest, taxes, depreciation and amortization; (5) earnings before interest, taxes, depreciation, amortization and charges for stock-based compensation, (6) sales or revenue targets; (7) return on assets, capital or investment; (8) cash flow; (9) market share; (10) cost reduction goals; (11) budget comparisons; (12) measures of customer satisfaction; (13) any combination of, or a specified increase in, any of the foregoing; (14) new product development or successful completion of research and development projects; and (15) the formation of joint ventures, research or development collaborations, or the completion of other corporate transactions intended to increase our revenue or profitability or enhance our customer base. In addition, such performance goals may be based upon the attainment of specified levels of our performance under one or more of the measures described above relative to the performance of other entities and may also be based on the performance of any of our business units or divisions or any parent or subsidiary. Performance goals may include a minimum threshold level of performance below which no award will be earned, levels of performance at which specified portions of an award will be earned and a maximum level of performance at which an award will be fully earned. In addition, the performance goals may be subject to adjustment for one or more of the following items: extraordinary, unusual or non-recurring items of gain, loss or expense; items of gain, loss or expense related to (a) the disposal of a business or discontinued operations or (b) the operations of any acquired business; accruals for reorganization and restructuring cost and expenses; and items of gain, loss or expense attributable to changes in tax laws and regulations, accounting principles or other applicable laws or regulations.

      The plan administrator will have the discretionary authority at any time to accelerate the vesting of any and all shares of restricted stock or other unvested shares outstanding under the stock issuance program. However, no vesting requirements tied to the attainment of performance objectives may be waived with respect to shares which were intended at the time of issuance to qualify as performance-based compensation under Section 162(m), except in the event of certain involuntary terminations or changes in control or ownership.

      Outstanding restricted stock units or other stock-based awards under the stock issuance program will automatically terminate, and no shares of our common stock will actually be issued in satisfaction of those units or awards, if the performance goals or service requirements established for such units or awards are not attained. The plan administrator, however, will have the discretionary authority to issue shares of our common stock in satisfaction of one or more outstanding restricted stock units or other stock-based right awards as to which the designated performance goals or service requirements are not attained. However, no vesting requirements tied to the attainment of performance objectives may be waived with respect to units or awards which were intended at the time of issuance to qualify as performance-based compensation under Section 162(m), except in the event of certain involuntary terminations or changes in control or ownership.

      Automatic Grant Program. Under the automatic grant program, non-employee board members will receive a series of automatic grants of stock options and restricted stock unit awards over their period of board service. All grants under the Automatic Grant Program will be made in strict compliance with the express provisions of such program, and shareholder approval of this Proposal will also constitute pre-approval of each option grant and restricted stock unit award made under the Automatic Grant Program on or after the date of the Annual Meeting and the subsequent exercise of those options and the subsequent issuance of the shares subject to those restricted stock unit awards in accordance with the terms of the program summarized below.

      Two types of awards will be made under the program:

      It is currently anticipated that the annual award to the non-employee board members at the Annual Meeting will be comprise of an option grant for 2,000 shares and a restricted stock unit award for an additional 500 shares.

      Each option grant under the program will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of seven years, subject to earlier termination following the optionee’s cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the lower of the exercise price paid per share or the fair market value per share, any shares purchased under the option which are not vested at the time of the optionee’s cessation of board service. The shares subject to each initial 10,000-or-less-share automatic option grant will vest in four successive equal annual installments upon the optionee’s completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual automatic option grant made to a continuing board member will vest upon the earlier of (i) that individual’s completion of one year of board service measured from the grant date or (ii) such individual’s continuation in board service through the day immediately preceding the date of the next annual shareholders meeting following such grant date. However, the shares will immediately vest in full upon the optionee’s death or disability while a board member or upon the occurrence of certain changes in ownership or control.

      The option grants under the automatic option grant program will be taxable as non-statutory options under the Federal income tax laws.

      The initial restricted stock unit award made to a newly elected or appointed non-employee board member will vest in a series of four (4) successive equal annual installments upon his or her completion of each year of board service over the four (4)-year period measured from the award date. Each annual restricted stock unit award made to a continuing non-employee board member will vest upon his or her continuation in board service through the earlier of (i) the completion of the one (1)-year period of service measured from the award date or (ii) the individual’s continuation in such service capacity through the day immediately preceding the next annual shareholders meeting following such award date. However, each restricted stock unit award held by a non-employee director under the automatic grant program will immediately vest in full upon certain changes in control or ownership or his or her cessation of board service by reason of death or disability. As the restricted stock units vest in one or more installments, the shares of common stock underlying those vested units will be promptly issued.

Stock Awards — Predecessor Plan

      The following table sets forth, as to our Chief Executive Officer, our other most highly compensated executive officers (with base salary and bonus for the 2005 fiscal year in excess of $100,000) and the other individuals and groups indicated, the number of shares of our common stock subject to option grants made under

the 1995 and 2001 predecessor plans from January 1, 2005 through April 10, 2006, together with the weighted average exercise price per share in effect for such option grants.

New Plan Benefits

      No Awards will be made under the 2006 Plan at any time prior to shareholder approval of the plan at the Annual Meeting. If such shareholder approval is obtained, then the following non-employee members of our board will each receive an automatic option grant for 2,000 shares of our common stock and a restricted stock unit award covering an additional 500 shares upon his election to the board at the Annual Meeting: Ernest R. Bates, Olin Robison, John Ruffle and Stanley Trotman, Jr. Each such option grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date.

General Provisions

      Vesting Acceleration. In the event we should experience a change in control, the following special vesting acceleration provisions will be in effect for all options, stock appreciation rights and other awards granted or made under the discretionary grant and stock issuance programs:

      The acceleration of vesting in the event of a change in the ownership or control may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of us.

      Changes in Capitalization. In the event any change is made to the outstanding shares of our common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without our receipt of consideration, appropriate adjustments will be made to: (i) the maximum number and/or class of securities issuable under the 2006 Plan; (ii) the maximum number and/or class of securities for which any one person may be granted Awards (whether vested or unvested) under the 2006 Plan per calendar year; (iii) the number and/or class of securities and the exercise price or base price per share in effect under each outstanding option or stock appreciation right; (iv) the number and/or class of securities subject to each outstanding restricted stock unit or other stock based award and the cash consideration (if any) payable per share; and (v) the maximum number and/or class of securities for which grants may subsequently be made under the automatic grant program to new and continuing non-employee board members. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the 2006 Plan or the outstanding Awards there under.

      Valuation. The fair market value per share of our common stock on any relevant date under the 2006 Plan will be deemed to be equal to the closing selling price per share on that date on the American Stock Exchange. On April 10, 2006, the fair market value per share of our common stock determined on such basis was $7.00.

      Shareholder Rights and Transferability. No optionee will have any shareholder rights with respect to the option shares until such optionee has exercised the option and paid the exercise price for the purchased shares. The holder of a stock appreciation right will not have any shareholder rights with respect to the shares subject to that right unless and until such person exercises the right and becomes the holder of record of any shares of our common stock distributed upon such exercise. Options are not assignable or transferable other than by will or the laws of inheritance following optionee’s death, and during the optionee’s lifetime, the option may only be exercised by the optionee. However, the plan administrator may structure one or more non-statutory options under

the 2006 Plan so that those options will be transferable during optionee’s lifetime to one or more members of the optionee’s family or to a trust established for the optionee and/or one or more such family members or to the optionee’s former spouse, to the extent such transfer is in connection with the optionee’s estate plan or pursuant to a domestic relations order. Stand alone stock appreciation rights will be subject to the same transferability restrictions applicable to non-statutory options.

      A participant will have certain shareholder rights with respect to any shares of common stock issued to him or her under the 2006 Plan, whether or not his or her interest in those shares is vested. Accordingly, the participant will have the right to vote such shares and to receive any regular cash dividends paid on such shares, but will not have the right to transfer such shares prior to vesting. A participant will not have any shareholder rights with respect to the shares of common stock subject to a restricted stock unit or other share right award until that unit or award vests and the shares of common stock are actually issued thereunder. However, dividend-equivalent units may be paid or credited, either in cash or in actual or phantom shares of common stock, on outstanding restricted stock units or other share-right awards, subject to such terms and conditions as the plan administrator may deem appropriate.

      Special Tax Election. The plan administrator may provide one or more holders of Awards under the 2006 Plan with the right to have us withhold a portion of the shares otherwise issuable to such individuals in satisfaction of the withholding taxes to which they become subject in connection with the exercise, vesting or issuance of those Awards. Alternatively, the plan administrator may allow such individuals to deliver previously acquired shares of our common stock in payment of such withholding tax liability.

      Amendment and Termination. Our board of directors may amend or modify the 2006 Plan at any time, subject to any shareholder approval requirements under applicable law or regulation or pursuant to the listing standards of the stock exchange (or the American Stock Exchange) on which our shares of common stock are at the time primarily traded. Unless sooner terminated by our board of directors, the 2006 Plan will terminate on the earliest of (i) February 22, 2016 (ii) the date on which all shares available for issuance under the 2006 Plan have been issued as fully-vested shares or (iii) the termination of all outstanding Awards in connection with certain changes in control or ownership.

Summary of Federal Income Tax Consequences

      The following is a summary of the Federal income taxation treatment applicable to us and the participants who receive awards under the 2006 Plan.

      Option Grants. Options granted under the discretionary grant program may be either incentive stock options which satisfy the requirements of Section 422 of the Internal Revenue Code or non-statutory options which are not intended to meet such requirements. The Federal income tax treatment for the two types of options differs as follows:

      Incentive Options. No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is recognized for regular tax purposes at the time the option is exercised, although taxable income may arise at that time for alternative minimum tax purposes. The optionee will recognize taxable income in the year in which the purchased shares are sold or otherwise made the subject of certain other dispositions. For Federal tax purposes, dispositions are divided into two categories: (i) qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale or other disposition is made more than two (2) years after the date the option for the shares involved in such sale or disposition is granted and more than one (1) year after the date the option is exercised for those shares. If the sale or disposition occurs before these two periods are satisfied, then a disqualifying disposition will result.

      Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to the excess of (i) the amount realized upon the sale or other disposition of the purchased shares over (ii) the exercise price paid for the shares. If there is a disqualifying disposition of the shares, then the excess of (i) the fair market value of those shares on the exercise date or (if less) the amount realized upon such sale or disposition over (ii) the exercise price paid for the shares will be taxable as ordinary income to the optionee. Any additional gain recognized upon the disposition will be a capital gain.

      If the optionee makes a disqualifying disposition of the purchased shares, then we will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal to the amount of ordinary income recognized by the optionee as a result of the disposition. We will not be entitled to any income tax deduction if the optionee makes a qualifying disposition of the shares.

      Non-Statutory Options. No taxable income is recognized by an optionee upon the grant of a non-statutory option. The optionee will in general recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and we will be required to collect the withholding taxes applicable to such income from the optionee.

      If the shares acquired upon exercise of the non-statutory option are unvested and subject to repurchase by us in the event of the optionee’s termination of service prior to vesting in those shares, then the optionee will not recognize any taxable income at the time of exercise but will have to report as ordinary income, as and when our repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses over (ii) the exercise price paid for the shares. The optionee may, however, elect under Section 83(b) of the Internal Revenue Code to include as ordinary income in the year of exercise of the option an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date over (ii) the exercise price paid for such shares. If the Section 83(b) election is made, the optionee will not recognize any additional income as and when the repurchase right lapses.

      We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the optionee with respect to the exercised non-statutory option. The deduction will in general be allowed for our taxable year in which such ordinary income is recognized by the optionee.

      Stock Appreciation Rights. No taxable income is recognized upon receipt of a stock appreciation right. The holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the base price in effect for the exercised right, and we will be required to collect the withholding taxes applicable to such income from the holder.

      We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder in connection with the exercise of the stock appreciation right. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

      Direct Stock Issuances. The tax principles applicable to direct stock issuances under the 2006 Plan will be substantially the same as those summarized above for the exercise of non-statutory option grants.

      Restricted Stock Units. No taxable income is recognized upon receipt of a restricted stock unit. The holder will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the holder. The amount of that income will be equal to the fair market value of the shares on the date of issuance, and we will be required to collect the withholding taxes applicable to such income from the holder.

      We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued. The deduction will be allowed for the taxable year in which such ordinary income is recognized.

      Deductibility of Executive Compensation. We anticipate that any compensation deemed paid by us in connection with the disqualifying disposition of incentive stock option shares or the exercise of non-statutory options or stock appreciation rights will qualify as performance-based compensation for purposes of Internal Revenue Code Section 162(m) and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain of our executive officers. Accordingly, the compensation deemed paid with respect to options and stock appreciation rights granted under the 2006 Plan will remain deductible by us without limitation under Section 162(m). However, any compensation deemed paid by us in connection with shares issued under the stock issuance program will be subject to the $1 million limitation, unless the vesting of the shares is tied solely to one or more of the performance milestones described above.

Accounting Treatment

      Pursuant to the accounting standards established by Statement of Financial Accounting Standards No. 123R, Share-Based Payment, or SFAS 123R, we will be required to expense all share-based payments, including grants of stock options, stock appreciation rights, restricted stock units and all other awards under the 2006 Plan. Accordingly, stock options and stock appreciation rights which are granted to our employees and non-employee Board members will have to be valued at fair value as of the grant date under an appropriate valuation formula, and that value will then have to be charged as a direct compensation expense against our reported earnings over the designated service period of the award, which is generally the vesting period. Similar option expensing will be required for any unvested options outstanding on the January 1, 2006 effective date of the new accounting standards, with the grant date fair value of those unvested options to be expensed against our reported earnings over the remaining vesting period. For shares issuable upon the vesting of restricted stock units awarded under the 2006 Plan, we will be required to amortize over the service period, which is generally the vesting period, a compensation cost equal to the fair market value of the underlying shares on the date of the award. If any other shares are unvested at the time of their direct issuance, then the fair market value of those shares at that time will be charged to our reported earnings ratably over the vesting period. Such accounting treatment for restricted stock units and direct stock issuances will be applicable whether vesting is tied to service periods or performance goals. The issuance of a fully-vested stock bonus will result in an immediate charge to our earnings equal to the fair market value of the bonus shares on the issuance date.

      Option grants and other awards made under the 2006 Plan to non-employee consultants will result in a direct charge to our reported earnings based on the fair value of each such award as measured on each vesting date for that award. Accordingly, such charge will include the appreciation in the fair value of the award over the period between the grant date and each applicable vesting date.

Required Vote and Board Recommendation

      The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and voting on Proposal No. 2, provided that affirmative vote also represents at least majority of the voting power required to constitute a quorum at the Annual Meeting, is required for approval of the 2006 Plan. Should such approval not be obtained, then the 2006 Plan will not be implemented. However, the existing 2001 Stock Option Plan will continue in full force and effect until its May 17, 2011 expiration date and option grants may continue to be made under that plan until such expiration date.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 2. PROPERLY EXECUTED PROXIES RETURNED TO THE COMPANY WILL BE VOTED “FOR” THE APPROVAL OF THE COMPANY’S 2006 STOCK INCENTIVE PLAN.

PROPOSAL 3 — APPROVAL OF THE LONG TERM INCENTIVE COMPENSATION PLAN

Background and Reasons for Adoption

      Our Board of Directors adopted the Long-Term Incentive Compensation Plan (the “Plan”) on February 23, 2006 in order to provide our executive officers and other individuals in our employ who are essential to our financial growth and success with the opportunity to earn additional incentive compensation contingent upon our attainment of pre-established performance objectives and to defer any compensation so earned until a specified date or termination of employment. The implementation of the Plan is subject to shareholder approval at the Annual Meeting.

      The Plan is designed to advance our “pay for performance” policy by creating a substantial bonus potential for each participant tied solely to our achievement of financial objectives designed to expand our business operations and create shareholder value. We believe that the Plan will help us attain such goals and also provide us with an important compensation vehicle to attract and retain high performing executives on a competitive basis. The Plan will serve as a long-term performance incentive program that will be in addition to our annual bonus program for executive officers and other key management personnel.

      The payments under the Plan are intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”). In general, Section 162(m) limits the amount of compensation we can deduct for federal income tax purposes per covered individual to $1 million per year. The individuals subject to this limitation include our Chief Executive Officer and each of our other four highly compensation executive officers for the year. However, the Section 162(m) limit does not apply to any compensation which qualifies as “performance based.” One of the principal requirements for such performance-based compensation is that the compensation be paid pursuant to a shareholder-approved plan which sets forth the types of performance milestones which will serve as the basis for bonus payments under the Plan, the class of employees eligible to participate in the Plan, the maximum bonus amount payable per participant and the other material features of the Plan.

      Accordingly, if the shareholders approve this Proposal, we anticipate that all payments under the Plan upon the attainment of the established performance milestones will be deductible by us for federal income tax purposes without any limitation under Section 162(m) of the Code.

      The following is a summary of the principal features of the Plan. However, such summary is not intended to be a complete description of all provisions of the Plan. Any shareholder who wishes to obtain a copy of the actual plan document may do so upon written request to Investor Relations, American Shared Hospital Services, Four Embarcadero Center, Suite 3700, San Francisco, California 94111.

      Administration. The Plan will be administered by the compensation committee of our Board of Directors, so long as that committee is comprised of two or more non-employee Board members who qualify as “outside directors” under Code Section 162(m). Otherwise, a Board committee meeting that requirement will be appointed as the plan administrator. For purposes of this summary, the Board committee serving as administrator will be referred to as the plan administrator.

      Authority. The plan administrator will have full and complete authority to administer the Plan and select the eligible employees who are to participate in the Plan. The plan administrator will also be responsible for the interpretation and construction of any provision of the Plan and the adoption of rules and regulations for plan administration. The plan administrator will make all decisions relating to an individual’s eligibility for participation in the Plan, his or her entitlement to benefits there under and the amount of any such benefit entitlement.

      Eligibility. Participation in the Plan is limited to our executive officers and any other individuals with management responsibilities who are determined by the plan administrator to be eligible for participation. As of April 10, 2006, two executive officers and one other key employee were eligible to participate in the Plan.

      Establishment of Performance Period and Performance Objectives. The plan administrator will have complete discretion to implement one or more performance periods under the Plan in accordance with the following parameters:

      Bonus Formula. The plan administrator will also, within the first ninety (90) days of the performance period, establish for each participant the formula for calculating the bonus to which he or she may become entitled for that performance period based on the level at which each performance milestone is actually attained. Accordingly, for each performance milestone, the formula will designate a threshold, target and above-target dollar contribution to the participant’s bonus entitlement, with the actual dollar amount of such contribution to be based on the actual level of attainment of each performance objective. The various levels of contribution designated for each performance objective may be tied to percentages or multiples of the average of the annual rates of base salary in effect for the participant at the start of each calendar year within the applicable performance period.

      Maximum Bonus Amount. The maximum bonus payable per participant will be limited to the dollar amount determined by multiplying the number of calendar years in the performance period by Two Hundred Fifty Thousand Dollars ($250,000). Such maximum amount will be pro-rated for any participant entitled only to a pro-rata bonus for the period.

      Service Requirement. A participant will not become entitled to a bonus for a particular performance period unless he or she continues in our employ through the completion of that performance period or ceases employment by reason of retirement, death, disability or an involuntary termination (other than for cause). However, a participant who ceases, for any of the foregoing reasons, to remain in our employ prior to the completion of the performance period will only be entitled to a pro-rated bonus. Should a participant leave our employ for any other reason prior the completion of the performance period, then he or she will not be entitled to any bonus for that period.

      Determination of Individual Bonus Amount. The actual bonus amount for each participant will be determined pursuant to the following procedure:

      Deferral Election. A participant may make an advance election to defer the receipt of all or part of the bonus he or she earns. The participant may designate certain dates or events (such as separation from service or a change in control) for the payment of the deferred bonus and may elect to receive the payment at that time in either a lump sum or an installment distribution over a period not to exceed five years. In the absence of such a deferral election, the bonus will be paid in a lump sum on or about March 15 of the calendar year following the completion of the performance period.

      Deferred Balance. The amount of the deferred bonus will be credited to an account established for the participant on our books. The account will be adjusted periodically to reflect the earnings, gains and losses tied to one or more investment funds selected by the participant from the alternatives under the plan. The investment choices will mirror the investment funds available under our employee 401(k) savings plan, but no actual investments will be made on the participant’s behalf. The investment return will be solely in the form of book entries to the participant’s account.

      Effective Date. The Plan will not become effective unless approved by the shareholders at the Annual Shareholders Meeting. In the event of such shareholder approval, the first performance period may commence with the 2007 or any subsequent calendar year.

      Power to Amend. The Board may at any time amend the provisions of the Plan to any extent and in any manner the Board deems advisable, subject to any shareholder approval requirements under Code Section 162(m) or any other applicable law or regulation. No amendment will be made which would cause bonuses payable under the Plan to fail to qualify for the performance-based compensation exemption from the deduction limitations of Section 162(m).

New Plan Benefits

      As of April 10, 2006, no performance period has been established under the Plan, and no bonus awards have been made.

Tax Summary

      The participant will recognize ordinary income in the year in which the bonus is paid to such individual, and we will be required to collect certain withholding taxes applicable to such income from him or her. We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the bonus is paid. The deduction will in general be allowed for our taxable year in which such ordinary income is recognized by the participant.

      We anticipate that any bonuses paid by us under the Plan will qualify as performance-based compensation for purposes of Code Section 162(m) and will not have to be taken into account for purposes of the $1.0 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers.

Voting on the Proposal

      The affirmative vote of the holders of a majority of the shares of Common Stock present in person or by proxy and voting thereon, is required for approval of the Plan, provided with the shares voting affirmatively must also constitute at least a majority of the voting power required to constitute a quorum at the Annual Meeting. In the event stockholders do not approve this proposal, the Plan will not be implemented.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 3. PROPERLY EXECUTED PROXIES RETURNED TO THE COMPANY WILL BE VOTED “FOR” THE APPROVAL OF THE COMPANY’S LONG TERM INCENTIVE COMPENSATION PLAN.

PROPOSAL NO. 4

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      The Company’s consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 have been audited by Moss Adams LLP. The Audit Committee has appointed Moss Adams LLP to be the

Company’s Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2006, subject to Shareholder ratification at the Meeting (see Proposal No. 4).

      Representatives of Moss Adams LLP are expected to be present at the Annual Meeting to respond to appropriate questions and will be given an opportunity to make a statement if they so desire.

      The aggregate fees billed by Moss Adams LLP and their respective affiliates for professional services performed for 2005 and 2004 are as follows:

      All of the above services were approved by the Audit Committee. The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm

      The Audit Committee pre-approves services performed by the Company’s independent registered public accounting firm in order to assure that the provision of such services and related fees do not impair the Independent Registered Public Accounting Firm’s independence. The Independent Registered Public Accounting Firm must provide the Audit Committee with an engagement letter outlining the scope of the audit services proposed to be performed during the applicable calendar year and the proposed fees for such audit services. If agreed to by the Audit Committee, the engagement letter will be formally accepted by the Audit Committee as evidenced by the execution of the engagement letter by the Chair of the Audit Committee. The Audit Committee approves, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Company structure or other matters. The Audit Committee may grant pre-approval for those permissible non-audit services that it believes are services that would not impair the independence of the Independent Registered Public Accounting Firm. The Audit Committee may not grant approval for any services categorized as “Prohibited Non-Audit Services” by the Securities and Exchange Commission. Certain non-audit services have been pre-approved by the Audit Committee, and all other non-audit services must be separately approved by the Audit Committee.

      THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF PROPOSAL NO. 4. PROPERLY EXECUTED PROXIES RETURNED TO THE COMPANY WILL BE VOTED “FOR” THE RATIFICATION OF THE APPOINTMENT OF MOSS ADAMS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2006.

SHAREHOLDER PROPOSALS

      Under certain circumstances, shareholders are entitled to present proposals at shareholders’ meetings. To be eligible for inclusion in the Proxy Statement for the Company’s next Annual Meeting of Shareholders, a

shareholder proposal must be received at the Company’s principal executive offices prior to February 1, 2007. A Shareholder’s notice should list each proposal and contain a brief description of the business to be brought before the meeting; the name and address of the shareholder proposing such business; the number of shares held by the shareholder; and any material interest of the shareholder in the business.

ANNUAL REPORT

      The Company’s 2005 Annual Report, which includes financial statements, but which does not constitute a part of the proxy solicitation material, accompanies this proxy statement.

Dated: April 28, 2006

San Francisco, California

 

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