_________

^_________

^_________

^_________

NOTE 7 - CONVERTIBLE NOTES PAYABLE

The Company has sold convertible notes payable totaling $212,945 and recorded discounts totaling $212,945 due to the beneficial conversion feature of the notes.  The discounts are being amortized over the term of the respective note.  For the nine months ended September 30, 2004 and 2003, respectively, the Company amortized $138,975 and $7,917 of the discounts on notes payable as interest expense.

The Company has paid a total of $22,178 to consultants for negotiating the notes payable.  These costs have been deferred and are being amortized over the term of the respective note.  For the nine months ended September 30, 2004 and 2003, respectively, the Company amortized $14,480 and $825 of the deferred loan costs as interest expense.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE [Continued]

For the nine months ended September 30, 2004 and 2003, respectively, interest expense on notes payable amounted to $167,904 and $9,137.

The Company has the following one-year 10% convertible notes payable at:

September 30,

December 31,

2004

2003

^{_____________}

^{_____________}

$10,000 note payable due in August 2004 convertible

into common stock at $.29 per share secured by 100,000

shares of the Company’s common stock currently in

default, net of discounts of $0 and $5,832, respectively

$  10,000

$   4,168

$20,000 note payable due in September 2004 convertible

into common stock at $.265 per share secured by

200,000 shares of the Company’s common stock

currently in default, net of discounts of $0 and $13,333,

respectively

20,000

6,667

$10,000 note payable due in September 2004 convertible

into common stock at $.38 per share secured by 100,000

shares of the Company’s common stock currently in

default, net of discounts of $0 and $6,667, respectively

10,000

3,333

$24,000 note payable due in September 2004 convertible

into common stock at $.36 per share secured by 250,000

shares of the Company’s common stock currently in

default, net of discounts of $0 and $16,000, respectively

24,000

8,000

$10,000 note payable due in September 2004 convertible

into common stock at $.37 per share secured by 100,000

shares of the Company’s common stock currently in

default, net of discounts of $0 and $6,667, respectively

10,000

3,333

$11,000 note payable due in September 2004 convertible

into common stock at $.485 per share secured by 150,000

shares of the Company’s common stock currently in

default, net of discounts of $0 and $7,333, respectively

11,000

3,667

$21,345 note payable maturing in October 2004

convertible into common stock at $.435 per share secured

by 213,345 shares of the Company’s common stock, net

of discounts of $0 and $16,009, respectively

21,345

5,336

$10,000 note payable maturing in October 2004

convertible into common stock at $.42 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $0 and $7,500, respectively

10,000

2,500

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE [Continued]

September 30,

December 31,

2004

2003

^{_____________}

^{_____________}

$10,000 note payable maturing in October 2004

convertible into common stock at $.45 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $0 and $7,500, respectively

10,000

2,500

$10,000 note payable maturing in October 2004

convertible into common stock at $.40 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $0 and $7,500, respectively

10,000

2,500

$5,000 note payable maturing in November 2004

convertible into common stock at $.375 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $417 and $4,167, respectively

4,583

833

$2,500 note payable maturing in December 2004

convertible into common stock at $.18 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $417 and $2,292, respectively

2,083

208

$10,000 note payable maturing in February 2005

convertible into common stock at $.23 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $3,333 and $0, respectively

6,667

-

$10,000 note payable maturing in February 2005

convertible into common stock at $.27 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $3,333 and $0, respectively

6,667

-

$10,000 note payable maturing in February 2005

convertible into common stock at $.325 per share secured

by 100,000 shares of the Company’s common stock, net

of discounts of $3,333 and $0, respectively

6,667

-

$16,000 note payable maturing in March 2005 convertible

into common stock at $.51 per share secured by 160,000

shares of the Company’s common stock, net of discounts

of $6,667 and $0, respectively

9,333

-

$10,000 note payable maturing in March 2005 convertible

into common stock at $.425 per share secured by 100,000

shares of the Company’s common stock, net of discounts

of $4,167 and $0, respectively

5,833

-

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 7 - CONVERTIBLE NOTES PAYABLE [Continued]

September 30,

December 31,

2004

2003

^{_____________}

^{_____________}

$4,000 note payable maturing in March 2005 convertible

into common stock at $.50 per share secured by 40,000

shares of the Company’s common stock, net of discounts

of $1,667 and $0, respectively

2,333

-

$9,000 note payable maturing in August 2005 convertible

into common stock at $.15 per share secured by 90,000

shares of the Company’s common stock, net of discounts

of $7,500 and $0, respectively

1,500

-

$100 note payable maturing in September 2005 convertible

into common stock at $.11 per share secured by 1,000

shares of the Company’s common stock, net of discounts

of $91 and $0, respectively

9

-

^{_____________}

^{_____________}

182,020

43,045

Less current portion

(182,020)

(43,045)

^{_____________}

^{_____________}

$             -

$            -

^{_____________}

^{_____________}

NOTE 8 - PREFERRED STOCK

The Company has authorized 10,000,000 shares of preferred stock, no par value, with such rights, preferences and designations and to be issued in such classes and series as determined by the Company’s Board of Directors.  In December 2002, the Company’s Board of Directors designated 5,000,000 shares as Class A and 5,000,000 shares as Class B.  In June 2003, the Company’s Board of Directors modified the preferred stock distributions to designate 2,600,000 shares as Class A, 5,000,000 shares as Class B and 1,200,000 as Class C.  The Class C preferred stock dividends rank senior to the Class A and B preferred stock dividends in liquidation preference and the Class B preferred stock dividends rank senior to the Class A preferred stock dividends in liquidation preference.  In liquidation, Class A, B and C preferred stock have no preferential rights to any distributions other than payment of accrued dividends.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 8 - PREFERRED STOCK [Continued]

Class A Preferred Stock - Class A preferred stock is only available to the Company’s management, directors and existing shareholders.  Each share of Class A preferred stock has the voting rights of five shares of common stock and is convertible at the shareholder’s option into five shares of common stock.  If shares of the Class A preferred stock are required to be converted as part of a sale or merger of the Company, then each share of Class A preferred stock was convertible into 5.5 shares of common stock.  Each share of Class A preferred stock was entitled to receive a $.0575 annual dividend payable monthly.  The total annual dividend for all shares of Class A preferred stock was limited to 50% of the Company’s earnings before interest, taxes, depreciation and amortization for the year and the monthly payments were adjusted accordingly.  For the six months ended June 30, 2003, the Company had negative earnings before interest, taxes, depreciation and amortization; therefore, no dividends were due on the Class A preferred stock through June 30, 2003.  In June 2003, the Company’s Board of Directors modified the mandatory conversion and dividend provisions of the Class A preferred stock.  Effective July 1, 2003, if there is a merger, reorganization, recapitalization or similar event in which the Company is not the surviving entity, then each share of Class A preferred stock will be converted into 5.5 shares of common stock.  Effective July 1, 2003, each share of Class A preferred stock is entitled to receive a cumulative $.0575 annual dividend payable monthly with no limitation based on earnings.  For the nine months ended September 30, 2004 and 2003, respectively, the Company has recorded $96,325 and $30,612 in dividends payable on Class A preferred stock.  At September 30, 2004 and December 31, 2003, respectively, the Company owed $157,549 and $61,224 in dividends payable on Class A preferred stock.

In March 2004, the Company issued 8,108 shares of its previously authorized but unissued Class A preferred stock to a shareholder for cash of $15,000, or approximately $1.85 per share.  Due to the beneficial conversion feature of the shares, the Company recorded a dividend of $14,189 upon the issuance of the shares.  Stock offering costs of $1,563 were netted against the proceeds.

In February 2004, the Company issued 110,000 shares of its previously authorized but unissued Class A preferred stock for services valued at $253,000, or $2.30 per share.

In October 2003, shareholders of the Company converted 353,750 shares of Class A preferred stock into 1,768,750 shares of common stock.

In June 2003, the Company issued 5,300 shares of its previously authorized but unissued Class A preferred stock for cash of $10,000, or approximately $1.887 per share.  Due to the beneficial conversion feature of the shares, the Company recorded a dividend of $9,875 upon the issuance of the shares.  Stock offering costs of $62 were netted against the proceeds.

In May 2003, shareholders of the Company converted 505,010 shares of Class A preferred stock into 2,525,050 shares of common stock.

In April and May 2003, the Company issued 383,000 shares of its previously authorized but unissued Class A preferred stock for cash of $71,500 and services valued at $120,000, or $.50 per share.  Due to the beneficial conversion feature of the shares, the Company recorded a dividend of $314,900 upon the issuance of the shares.  Stock offering costs of $65 were netted against the proceeds.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 8 - PREFERRED STOCK [Continued]

Class B Preferred Stock - Class B preferred stock is only available to parties who sell a business to the Company.  Each share of Class B preferred stock has no voting rights and is convertible into five shares of common stock.  Each share of Class B preferred stock is entitled to receive a cumulative 6% annual dividend payable quarterly based on the purchase price paid to the Company or the consideration received by the Company.  Class B preferred stock may not be transferred without the express written consent of the Company.  At September 30, 2004 and December 31, 2003, no shares of Class B preferred stock had been issued.

Class C Preferred Stock - Each share of Class C preferred stock has no voting rights and is entitled to receive a cumulative $.475 annual dividend payable quarterly.  Each share of Class C preferred stock is convertible at the shareholder’s option into five shares of common stock after a two-year waiting period following issuance.  If there is a merger, reorganization, recapitalization or similar event in which the Company is not the surviving entity, then each share of Class C preferred stock will be converted into five shares of common stock.  Class C preferred stock may not be transferred without the express written consent of the Company.  For the nine months ended September 30, 2004 and 2003, respectively, the Company has recorded $10,284 and $4,188 in dividends payable on Class C preferred stock.  At September 30, 2004 and December 31, 2003, respectively, the Company owed $7,025 and $7,616 in dividends payable on Class C preferred stock.

In October 2003, shareholders of the Company converted 153,680 shares of Class C preferred stock into 768,400 shares of common stock.

In September 2003, the Company issued 173,747 shares of its previously authorized but unissued Class C preferred stock to a third party in exchange for payment of liabilities totaling $868,735 which were then owed to shareholders of the Company, or $5.00 per share.

In June and July 2003, the Company sold 8,800 shares of its previously authorized but unissued Class C preferred stock for cash of $44,000, or $5.00 per share.  Stock offering costs of $5,303 were netted against the proceeds.

NOTE 9 - COMMON STOCK, OPTIONS AND WARRANTS

Common Stock - The Company has authorized 100,000,000 shares of common stock with no par value.

In September 2004, the Company issued 30,000 shares of its previously authorized but unissued common stock for services rendered valued at $6,300, or $.21 per share.

In August 2004, the Company issued 30,000 shares of its previously authorized but unissued common stock for services rendered valued at $9,600, or $.32 per share.

In March 2004, the Company issued 20,000 shares of its previously authorized but unissued common stock for cash of $1,000, or $.05 per share, upon the exercise of options.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 9 - COMMON STOCK, OPTIONS AND WARRANTS [Continued]

In February 2004, the Company issued 1,100,000 shares of its previously authorized but unissued common stock to pay accounts payable of $29,382 and for services valued at $476,618, or $.46 per share.

In December 2003, the Company cancelled 1,065,624 shares of its common stock due to a court order.

In December 2003, the Company repurchased and cancelled 2,131,249 shares of the Company’s issued and outstanding common stock for $85,250, or $.04 per share.

In October 2003, the Company issued 2,537,150 shares of its previously authorized but unissued common stock upon the conversion of 353,750 shares of Class A preferred stock and 153,680 shares of Class C preferred stock.

In October 2003, the Company issued 1,200,000 shares of its previously authorized but unissued common stock to pay a liability of $290,000, or approximately $.2417 per share.

In May 2003, the Company issued 2,525,050 shares of its previously authorized but unissued common stock upon the conversion of 505,010 shares of Class A preferred stock.

In May 2003, the Company issued 20,000 shares of its previously authorized but unissued common stock for services rendered valued at $10,000, or $.50 per share.

In April 2003, the Company issued 550,000 shares of its previously authorized but unissued common stock for services rendered valued at $121,000, or $.22 per share.

In February 2003, the Company issued 40,000 shares of its previously authorized but unissued common stock for cash of $10,000, or $.25 per share.  Stock offering costs of $400 were netted against the proceeds.

Proposed Stock Offering - The Company was proposing to sell up to $10,000,000 of its previously authorized but unissued common stock through an Equity Line of Credit Agreement [See Note 14].  The Company had recorded $1,084,609 in deferred stock offering costs which were to be offset against the proceeds of the offering.  In September 2004, the Company abandoned its plans for a stock offering and expensed the deferred stock offering costs of $1,084,609 as general and administrative expense.

Stock Options - In November 2002, the Company granted 2,000,000 options to purchase common stock at $.50 per share for services rendered valued at $882,400.  The options vested immediately and are exercisable for three years.  At September 30, 2004, none of these options had been exercised, forfeited or cancelled.

In March 2002, the Company granted 20,000 options to purchase common stock at $.05 per share to attract new directors to Company.  The options vested immediately and are exercisable for two years.  In March 2004, all 20,000 options were exercised.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 9 - COMMON STOCK, OPTIONS AND WARRANTS [Continued]

A summary of the status of the options is presented below.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

^{__________________________________}

^{__________________________________}

2004

2003

2004

2003

^{________________}

^{________________}

^{________________}

^{________________}

[Restated]

[Restated]

Weighted

Weighted

Weighted

Weighted

Average

Average

Average

Average

Exercise

Exercise

Exercise

Exercise

Shares

Price

Shares

Price

Shares

Price

Shares

Price

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Outstanding at beginning of period

2,000,000

$     .50

2,020,000

$     .50

2,020,000

$     .50

2,020,000

$     .50

Granted

-

-

-

-

-

-

-

-

Exercised

-

-

-

-

20,000

.05

-

-

Forfeited

-

-

-

-

-

-

-

-

Expired

-

-

-

-

-

-

-

-

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Outstanding at end of period

2,000,000

$     .50

2,020,000

$     .50

2,000,000

$     .50

2,020,000

$     .50

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Weighted average fair value of

  options granted during the period

-

$        -

-

$        -

-

$          -

-

$        -

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

A summary of the status of the options outstanding at September 30, 2004 is presented below:

Options Outstanding

Options Exercisable

^{___________________________________________}

^{_________________________}

Range of

Weighted-Average

Weighted-Average

Weighted-Average

Exercise

Number

Remaining

Exercise

Number

Exercise

Prices

Outstanding

Contractual Life

Price

Exercisable

Price

^___________

^___________

^{______________}

^{______________}

^_________

^{______________}

$    .50

2,000,000

1.1 years

$    .50

2,000,000

$    .50

^___________

^___________

^{______________}

^{______________}

^_________

^{______________}

Incentive Stock Bonus Plan - On December 31, 2002, the Company’s Board of Directors adopted the Incentive Stock Bonus Plan (“the Plan”).  The Plan provides for the granting of 5-year warrants to purchase shares of common stock to directors, senior management and certain key employees.  Awards under the Plan will be granted as determined by the Company’s Board of Directors.

In December 2003, the Company’s Board of Directors authorized the 2004 Stock Bonus Pool which consists of 1,000,000 warrants to purchase common stock at $.25 per share.  Further, the Company granted 200,000 warrants to purchase common stock from the 2004 Stock Bonus Pool to directors for services rendered valued at $4,000.  The warrants vested immediately and are exercisable at $.25 per share for five years.  At September 30, 2004, none of these warrants had been exercised, forfeited or cancelled.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 9 - COMMON STOCK, OPTIONS AND WARRANTS [Continued]

In December 2002, the Company’s Board of Directors authorized the 2003 Stock Bonus Pool which consisted of 1,000,000 warrants to purchase common stock at $.25 per share.  Further, the Company granted 300,000 warrants to purchase common stock from the 2003 Stock Bonus Pool to directors and NIPSI personnel for services rendered valued at $19,577.  The warrants vested immediately and are exercisable at $.25 per share for five years.  In 2004, the Company obtained a court order to cancel 75,000 of the warrants [See Note 14].  At September 30, 2004, none of the remaining 225,000 warrants had been exercised, forfeited or cancelled.

A summary of the status of the warrants granted under the Company’s Incentive Stock Bonus Plan is presented below.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

^{__________________________________}

^{__________________________________}

2004

2003

2004

2003

^{________________}

^{________________}

^{________________}

^{________________}

[Restated]

[Restated]

Weighted

Weighted

Weighted

Weighted

Average

Average

Average

Average

Exercise

Exercise

Exercise

Exercise

Shares

Price

Shares

Price

Shares

Price

Shares

Price

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Outstanding at beginning of period

425,000

$      .25

300,000

$     .25

425,000

$     .25

300,000

$     .25

Granted

-

$         -

-

-

-

$          -

-

$           -

Exercised

-

$         -

-

-

-

$          -

-

$           -

Forfeited

-

$         -

-

-

-

$          -

-

$           -

Expired

-

$         -

-

-

-

$          -

-

$           -

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Outstanding at end of period

425,000

$     .25

300,000

$     .25

425,000

$     .25

300,000

$     .25

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

Weighted average fair value of

  warrants granted during the period

-

$        -

-

$        -

-

$          -

-

$          -

^_______

^_______

^_______

^_______

^_______

^_______

^_______

^_______

The fair value of each warrant granted is estimated on the date granted using the Black-Scholes option pricing model, with the following assumptions used for the grants on December 31, 2003: risk-free interest rate of 3.25%, expected dividend yield of zero, expected lives of 5 years and expected volatility of 222%.

A summary of the status of the warrants outstanding under the Company’s Incentive Stock Bonus Plan at September 30, 2004 is presented below:

Options Outstanding

Options Exercisable

^{___________________________________________}

^{_________________________}

Range of

Weighted-Average

Weighted-Average

Weighted-Average

Exercise

Number

Remaining

Exercise

Number

Exercise

Prices

Outstanding

Contractual Life

Price

Exercisable

Price

^___________

^___________

^{______________}

^{______________}

^_________

^{______________}

$   .25

225,000

3.3 years

$   .25

225,000

$   .25

$   .25

200,000

4.3 years

$   .25

200,000

$   .25

^___________

^___________

^{______________}

^{______________}

^_________

^{______________}

$   .25

425,000

3.8 years

$   .25

425,000

$   .25

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 10 - INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”.  SFAS No. 109 requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards.  At September 30, 2004, the Company has available unused net operating and capital loss carryforwards of approximately $2,747,000 and $294,000, respectively, which may be applied against future taxable income and which expire in various years through 2024 and 2008, respectively.  If certain substantial changes in the Company’s ownership should occur, there will be an annual limitation on the amount of net operating loss carryforwards which can be utilized.

At September 30, 2004, the total of all deferred tax assets is approximately $1,212,000 and the total of all deferred tax liabilities is $0.  The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined.  Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance of approximately $1,212,000 and $417,000 at September 30, 2004 and December 31, 2003, respectively.  The change in the valuation allowance for the nine months ended September 30, 2004 is approximately $795,000.

The temporary differences, tax credits and carryforwards gave rise to the following deferred tax asset (liability) at:

September 30,

2004

^{_____________}

Net operating loss carryover

$  1,094,270

Capital loss carryover

117,253

^{_____________}

Total deferred tax asset

$  1,211,523

^{_____________}

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 10 - INCOME TAXES [Continued]

The components of income tax expense from continuing operations consisted of the following for the nine months ended:

September 30,

September 30,

2004

2003

^{_____________}

^{_____________}

 [Restated]

Current income tax expense:

Federal

$            -

$               -

State

-

-

^{_____________}

^{_____________}

Current tax expense

$            -

$               -

^{_____________}

^{_____________}

Deferred tax expense (benefit) arising from:

Excess of tax over financial

  accounting depreciation

$            -

$          837

Accrued compensation

-

14,186

Net operating loss carryover

(794,617)

(253,735)

Valuation allowance

794,617

238,712

^{_____________}

^{_____________}

Net deferred tax expense

$            -

$               -

^{_____________}

^{_____________}

Deferred income tax expense results primarily from the reversal of temporary timing differences between tax and financial statement income.

The reconciliation of income tax expense from continuing operations computed at the U.S. federal statutory tax rate to the Company’s effective rate is as follows for the nine months ended:

September 30,

September 30,

2004

2003

^{_____________}

^{_____________}

 [Restated]

Computed tax at the expected

  federal statutory rate

34.00%

34.00%

State income taxes, net of federal benefit

5.83

5.83

Other

(2.26)

(.64)

Valuation allowance

(37.57)

(39.19)

^{_____________}

^{_____________}

Effective income tax rates

0.00%

0.00%

^{_____________}

^{_____________}

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 11 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern.  However, the Company has incurred significant losses and has not yet been successful in establishing profitable operations.  Further, the Company has current liabilities in excess of current assets.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through sales of its stock or through a possible business combination with another company.  There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

NOTE 12 - RELATED PARTY TRANSACTIONS

Deposit from NIPSI - In January and February 2003, during the period that the Company operated the assets of NIPSI pursuant to an asset purchase agreement [See Notes 3 and 14], the Company received $70,000 from NIPSI as reimbursement of costs incurred as part of the unsuccessful NIPSI acquisition.  At September 30, 2004, the Company has completely used the deposit to offset expenses of the unsuccessful NIPSI acquisition.

Notes Payable - In August and September 2004, the Company sold notes payable totaling $9,100 to its Chief Executive Officer or entities controlled by him [See Note 7].

Stock Issuances - In March 2004, the Company issued 8,108 shares of Class A preferred stock to a shareholder of the Company for cash of $15,000 [See Note 8].

In September 2003, the Company issued 173,747 shares of Class C preferred stock to a third party in exchange for payment of liabilities totaling $868,735 which were then owed to shareholders of the Company [See Note 8].

In April 2003, the Company issued 240,000 shares of Class A preferred stock to shareholders of the Company for services valued at $120,000 [See Note 8].

Exercise of Options - In March 2004, the Company issued 20,000 shares of common stock to the directors upon the exercise of options [See Note 9].

Warrants - In December 2003, the Company granted 200,000 warrants to purchase common stock to directors of the Company for services rendered valued at $4,000 [See Note 9].

Management Compensation - During the nine months ended September 30, 2004 and 2003, respectively, the Company expensed $0 and $93,750 as compensation to its former Chief Executive Officer.

Office Space - The Company rents office space from its Chief Executive Officer on an as-needed, month-to-month basis.  Total rents to the Chief Executive Officer amounted to $500 and $0 for the nine months ended September 30, 2004 and 2003, respectively.

AMERICAN HOSPITAL RESOURCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 12 - RELATED PARTY TRANSACTIONS [Continued]

Beginning October 1, 2002, the Company paid its former Chief Executive Officer $500 per month on a month-to-month basis for use of his office space.  Total rents to the former Chief Executive Officer amounted to $0 and $4,500 for the nine months ended September 30, 2004 and 2003, respectively.

Purchase and Sale Agreement - In September 2002, the Company signed a Purchase and Sale Agreement with Gaelic Capital Group (“Gaelic”), an entity controlled by the former Chief Executive Officer.  The agreement called for the Company to pay $94,500 to Gaelic for the right to receive all of the receipts that were then owed to Gaelic as part of a February 11, 2002 agreement (“February Agreement”) between Gaelic and Parkview Community Hospital Medical Center (“Parkview”).  The Company had made advances totaling $94,500 in anticipation of the agreement.  Under the February Agreement, the Company would receive 6% of the sales price for the sale of the peripheral assets of Parkview.  In 2004, the Company obtained a court order to cancel the Purchase and Sale Agreement [See Note 14].

NOTE 13 - LOSS PER SHARE

The following data show the amounts used in computing loss per share for the periods:

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

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2004

2003

2004

2003